Select Committee on Trade and Industry First Special Report


Government response

Introduction

We believe the report to be an objective analysis of the UK Automotive Industry, which has successfully embraced the challenges and opportunities of globalisation and not only survived, but thrived. DTI is committed to building on this success, developing the work of the Automotive Academy, to address the skills issue, and we continue to work with other Government departments and others to ensure that the regulatory environment is balanced in its approach towards UK manufacturing. This response follows the summary of conclusions and recommendations as set out in the Committee's Report.

UK Vehicle Production

1. The UK is still a competitive place to make vehicles, but, regardless of this, individual plants may still close. However, the risk of this will be reduced, and the prospects of continued investment in the remaining plant will be maximised, if constraints on competitiveness are identified and minimised. Whilst the UK is acknowledged to be a good venue for automotive production, our witnesses identified a number of areas of concern in the course of our inquiry. (Paragraph 22)

We believe this to be an objective assessment of the situation, and the Government are taking a number of initiatives to ensure UK remains a competitive location for automotive production, described in more detail below. Illustrating our continued success, car production is around 1.6% up on 2003's figure, with exports representing 71% of the last 12 months output. Commercial vehicle output is also strong, with the last 12-month total increasing to 208,433 representing an annualised growth of 10.8%. CV export figures continue to rise with over 59% exported. 12-month UK vehicle production is approaching 1.87 million, of which nearly 70% is exported.

Migration of Production

2. The industry's preference for building close to market means that significant vehicle production is currently unlikely to shift from the UK to low-cost economies such as India or China. Companies that have production facilities in the UK are increasingly involved in these markets, frequently through joint ventures with indigenous companies. But we were told that these are generally to gain access to markets that are anticipated to grow substantially in coming years. Vehicle production in these locations is not aimed at producing cars for export back into Europe and the UK. (Paragraph 55)

3. It seems that UK production is unlikely to migrate to the EU accession countries in the short term. Car companies work on an international basis and have been investing heavily in the accession countries for some time so there seems little prospect of an immediate 'shock' to UK vehicle production. However, there will inevitably be more intensification of competition between EU members, old and new, for future investment in manufacturing and this will increase the competitive pressure on the UK. (Paragraph 61)

This accords with DTI's assessment of the situation. Competition is intense between EU members both to attract potential new investment, and to retain existing investments when companies find they have excess capacity. DTI continues to work with other Government departments to ensure UK's competitiveness in such areas as taxation policy, environmental legislation, and employment legislation, and this has yielded impressive results. BMW is investing in their engine plant to take production from 140,000 to over 300,000 units per annum. Toyota have just announced a £50m investment to increase production by 65,000 units, resulting in 500 new jobs. Nissan have announced that the new 'Tone' will be built at Sunderland, safeguarding 650 jobs. Ford are investing £115m to produce a new generation of 6-speed gearboxes at Halewood, with Government agreeing to provide £5m under the Selective Finance of Investment in England (SFIE) framework. The European Commission has approved an SFIE grant for improvements to Peugeot's Ryton plant for production of the successor to the highly successful 206. There are numerous other examples of significant investments around the UK in car and commercial vehicle assembly plants and component manufacturers.

Components Sector

4. The automotive components sector is a difficult market to operate in. There is considerable pressure from the vehicle manufacturers to both innovate and to reduce costs on a continuing basis. Margins are tight, yet investment is clearly required: our evidence suggests that those companies that do not focus on high value added products will find it hard to survive. Yet it is important that the UK retains, and, indeed, grows its automotive supply base. With vehicle manufacturers purchasing entire systems and passing an increased amount of the burden for R&D on to their suppliers, an increasing proportion of the value added of the car is accounted for by its components. This is a trend that is likely to continue with developments such as telematics. Consequently, it is vital that Government and industry representatives continue to collaborate to boost skills and investment in the sector. (Paragraph 44)

The UK remains a good place for the industry to do business, and the best UK automotive component companies are world-class performers. But there is a wide spread of capability in the supply base as a whole and Government is committed to work with industry through organisations including SMMT Industry Forum and the Automotive Academy to help all companies raise their performance to the level of the best. We agree with the committee that a globally competitive supply base is essential if the industry is to survive and grow and that collaboration between industry and Government can help bring this about. One example is the Supply Chain Groups programme, which helps fund improvement activities and skills development in the automotive supply base. Funding for this activity was a recommendation of the Automotive Innovation and Growth Team in 2002.

Skills

5. Unless the UK is seen to have solved the basic skills problem rapidly, the comparative advantage enjoyed by our competitors may be a significant factor in decisions by companies on where to locate production. (Paragraph 29).

6. We are pleased to see that the issue of skills is being taken seriously by both industry and Government. The Automotive Academy is an innovative solution to the problem in an industry where processes are increasingly high-tech and innovation and adaptability are crucial and where persistent skills shortages could threaten the UK's continued success. As well as the involvement and support from Government and unions, it is encouraging that, in an intensely competitive industry, the individual companies have been able to collaborate, as they have done in the Industry Forum, in establishing the Automotive Academy. With skills a problem throughout the industry and with a shared interest in improving the situation, collective effort would seem to have the best chance of success. (Paragraph 28)

Both the 2003 White Paper: 21st Century Skills, Realising Our Potential, Individuals, Employers, Nation and the DTI review of the Government's manufacturing strategy published in July 2004, recognise skills as a key driver of productivity. An automotive Sector Skills Agreement is under development by SEMTA, one of the pathfinder Sector Skills Councils, aiming to reshape public and private skills investment in the sector and its supply chains. The Automotive Academy established under the auspices of SMMT, with funding from DTI, is working closely with SEMTA and the Industry Forum to implement change programmes. We recognise that launching the Academy is a means to an end and officials from DTI's Automotive Unit will continue to work in close partnership with industry, both on the Board of the Academy and through day-to-day contacts, to maximise the chances of success.

Around half of the £16m public investment in the motorsport sector, announced in July 2003, is earmarked for work on skills. In motorsport as in automotive, responsive and high-quality providers of training are essential if the UK's competitive position is to be maintained. The Motorsport Academy is a collaborative venture between Government, industry and training providers to raise standards and ensure that courses are tailored to industry needs. In addition, the motorsport sector is working with automotive, aerospace and allied sectors to promote engineering to young people through the 'Learning Grid', a range of activities and competitions which allow students to gain practical experience of technology, team-working and competition.

On the retail side, the new sector skills council, Automotive Skills Ltd (ASL), is developing strategies for improving skills and training in the automotive retail sector.

Regulation

7. UK-based firms should not be disadvantaged by the way in which regulations are interpreted and implemented. A central plank of the Government's policy on Europe should be to ensure the consistent implementation of regulations throughout member countries. In this context, we note the recent statements by Ministers of their intention to scrutinise the National Allocation Plans of other Member States in relation to the European Union Emissions Trading Scheme and to raise any doubts about insufficiently rigorous proposals in such plans with the European Commission. We also urge any company with evidence that other Member States are not playing by the rules on regulation to bring this evidence formally to the attention of the Commission—otherwise there will be no action to rectify the situation. (Paragraph 87)

8. For environmental reasons, it is unlikely that the pace of regulations affecting the automotive industry will ease. Promoting investment in R&D to maximise opportunities for Britain to get the competitive advantage in producing the technologies to meet these challenges is therefore crucial. It is important that the Government plays an active role in supporting this and does not allow either national or European bureaucracy to inhibit such support being given. (Paragraph 85)

The DTI has been working hard, through the Vehicle Industry Policy and European Regulation Group (VIPER) to ensure a consistently enforced level playing field that will not disadvantage UK-based firms. Equally important is the need to influence the development of new regulation and policy across Government and in Brussels so that it takes full account of the impact on the competitiveness of the industry in the UK, and that it achieves its policy objectives with the minimum burden on the companies concerned. This can only be done if detailed consultation takes place with companies from the very earliest stage in the development of policy, and if policy-makers in one area are aware of the cumulative impact not only of their own regulations but also of other forms of regulation on this particularly highly regulated sector.

The handling of the recent proposals on fluorinated gases, which included air conditioning in vehicles, is a good example of the VIPER process at work and we have received positive feedback from industry on our approach. This involved early and open consultation between stakeholders and joined-up Government departments, to achieve a coherent strategic approach and a robust Regulatory Impact Assessment. This resulted in a more informed debate leading to a positive and better-refined proposal that better balanced the competitiveness issues with the economic, social and environmental ones.

We are seeking to replicate the consultative processes established by the VIPER group in Whitehall at the European level, and we have been working with other Member States and with the European Commission to bring this about. The UK has also been leading work across Europe on Competitiveness Testing, which is expected to deliver a more rigorous and robust impact assessment process when considering new legislation. In the context of the European Union's Emissions Trading Scheme, we will continue to do all we can to ensure that it does not damage the competitiveness of UK industry. We will continue to push for stringent analysis to ensure ambitious National Allocation Plans (NAP) from those few countries yet to be assessed. We are also requesting the Commission to supply more information on how its analysis, based on the projected emissions from installations covered, has been carried out. This is a key aspect of the NAP assessment process. Transparency on this point would therefore ensure that the basis of the Commission decisions is demonstrably robust, consistent and transparent. Throughout this process we have maintained a strong dialogue with the automotive sector on this issue, which we feed into Whitehall policy making.

Notwithstanding the role of regulation, we recognise the opportunities for innovation in response to environmental and other drivers for change. We are strongly promoting greater investment in R&D, through various channels including tax credits and DTI's technology strategy, to ensure our industries are at the leading edge of global technology developments.

A recent OECD international survey put the UK at the forefront of regulatory reform, whilst a recent KPMG study of 7 European countries ranked the UK first in competitiveness. A World Bank study of 145 countries placed the UK top in the EU and 7th in the top 20 economies in the world with the best business conditions, stating of the UK: "all the top countries regulate, but they do so in less costly and burdensome ways".

R&D

9. Research and Development is fundamental to the continued success of the UK automotive sector, but we heard concerns that the UK is falling behind its competitors. With industry input, it is hoped that the Centres of Excellence can successfully commercialise research in the key areas of low carbon and fuel cell technology and telematics and sustainable mobility. We are, however, concerned at the apparent delays in establishing the centres. The announcement of their location is now overdue and the SMMT told us that, whilst progress was being made, "a kick up the backside" for those involved was required. (Paragraph 81)

We agree that the creation of the Centres of Excellence represents a significant opportunity for UK businesses to prosper from knowledge transfer and the application of key technologies relevant to the future of the car and other road vehicles. Success of the project, however, depends on clustering and co-ordinating the strengths that already exist in the UK across a number of organisations and sectors. We fully recognise there have been delays brought about by the challenge of marshalling this critical mass at national level, but it is important that we do not compromise the objectives through inappropriate haste. We are pleased that work for both Centres has now entered the launch phase supported by DTI funding. Expert launch Directors backed by a project management team are in place, with the key task of signing up members. It is intended that the Centres will be established as independent legal entities by March 2005 with details of location, staffing and deliverables to be determined by the Business Plans, which are being finalised in parallel. This work is aligned with the development of the DTI's broader Technology Strategy aiming to improve the take up of key underpinning and potentially disruptive technologies with widespread and clearly defined applications, not least where the UK is likely to be able to exploit such developments in the supply chain.

10. It may be too early for the Government to back a specific cleaner fuel technology but leadership may ultimately be required in order to stimulate the roll-out of the infrastructure required to make cleaner fuel cars commercially viable. (Paragraph 82)

The Government's ambition of achieving a significant shift towards low-carbon road vehicles and fuels in the UK, with our own industries at the cutting edge of these developments, is laid out in the Powering Future Vehicles Strategy. A joint Ministerial Low Carbon Group of key Ministers from across Government oversees the implementation of the strategy with key stakeholders engaged through interactions with the Low Carbon Vehicle Partnership. The strategy, which is deliberately fuel and technology neutral, focuses on actions and not just words. For example, over 22% of the R&D spend in the £100m Foresight Vehicle Programme has been directed at powertrain innovations. Presently the Government has a number of grant programmes, such as the New Vehicle Technology Fund, to help fund the research, development and demonstration of future, low carbon vehicles. The total amount that the Government spends on this area is in excess of £100m per annum. This is more fully described in the PFV second annual report, published in October 2004. This demonstrates firm commitment by Government to the goals of the original strategy and a determination to ensure they are achieved.

11. It is also important that research is not excessively concentrated on alternative fuels. The internal combustion engine will continue to be the means of powering the majority of cars for the foreseeable future. Considerable improvements have been made and will continue to be made in the environmental and economic efficiency of such engines—both petrol and, especially, diesel—so it is important that research in this area is not neglected by the UK. Again we were made aware of the potential of the UK's performance engineering and motorsports sectors in developing more environmentally efficient propulsion systems. (Paragraph 83)

Powertrain is a major UK strength, both in terms of engine development and manufacture. DTI has supported R&D by the powertrain sector, until recently through the Foresight Vehicle LINK programme and currently through the DTI's technology programme where Environmentally Friendly Transport was a key theme in the April 2004 call. Here, six new R&D projects with an automotive interest and a bid value of £6.5 million have been invited by the Department into contract negotiations. In addition, DTI has approved £0.75m for the Low Carbon and Fuel Cells Centre of Excellence to host a Knowledge Transfer Network in this area. The Government's Carbon to Hydrogen Roadmap for passenger cars, prepared by Ricardo, shows a stepwise progression of powertrain systems through higher voltage systems, increased electrification of the drivetrain, mild and full hybridisation leading ultimately to the application of fuel cells over 30 years. This evolutionary trajectory presents opportunities for today's industry, including design engineering and motorsports sectors. A DTI study on the powertrain sector is expected to be completed later in the year, highlighting the opportunities and threats.

The Government agrees that the UK's world-leading motorsport sector has a role to play in developing more environmentally friendly powertrains and is investing in this area. At present, motorsport regulations give little incentive for fuel-efficiency since engine power is typically limited by an air restrictor, with no limit on the amount of fuel that may be used. Drawing on £16m of Government investment in the sector, the Motorsport Development Board, is developing new regulations that will limit fuel flow and hence provide teams with an incentive to develop and test new technologies. As well as promoting efficiency, the regulations will allow the use of alternative fuels such as bioethanol, biodiesel and hydrogen.

The Euro

12. There can be little doubt that non-membership of the Euro has created difficulties for the UK automotive sector. Initially, the high value of Sterling against the Euro meant that UK exports were particularly expensive. With the value of the Euro having appreciated against Sterling in the intervening period, the rate of the two currencies is less of a concern now. Whilst the vehicle manufacturers would mostly prefer the value of the Euro to be higher still, the issue of predictability is of greater concern at the moment; exchange rate fluctuations can significantly reduce margins, which are already tight. Whilst large vehicle manufacturers and tier 1 suppliers may be better equipped to cope with these fluctuations than smaller companies further down the supply chain, it is an issue for even the biggest manufacturers. (Paragraph 52)

In principle, the Government is in favour of UK membership of EMU; in practice, the economic conditions must be right. The determining factor underpinning any Government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. The automotive sector is one of many aspects that have to be considered when deciding whether the national economic interest is best served by UK membership of EMU.

Government procurement

13. All Government departments and agencies should examine their own methods to satisfy themselves that they are not operating procurement rules too inflexibly and that they take full account of the importance of their own role in promoting and safeguarding the UK manufacturing base. (Paragraph 86)

DTI is working actively with other government departments to drive forward an ambitious programme of reform to increase professionalism in procurement. Work is also underway to develop a view of UK business's experiences of competing for public procurement contracts in other EU countries—including concerns about unfair discrimination.

The Government is committed to British manufacturing, and helping manufacturers gear up for procurement in the UK is part of our Manufacturing Strategy. DTI wants to see British companies winning business wherever they are competitive, within the framework of EC rules (as well as government policy) that all public procurement decisions must be taken on grounds of value for money. To this end, the Government will be following up a report by Alan Wood, commissioned by the Treasury, which found evidence of discrimination by some EU countries in favour of home-based companies, to the disadvantage of UK firms. The Chancellor will be raising this with EU finance ministers on Tuesday 16th November.

MG Rover

14. We were assured that MG Rover's proposed joint ventures and its investment in plant abroad would not impact detrimentally on the prospects for future production at Longbridge. For example, Mr Towers assured us that production of the Rover 75 would continue at Longbridge, even if negotiations to acquire a plant in Poland are successful. (Paragraph 18)

15. Some press reports have suggested that PVH has little interest in continuing production at Longbridge and that MG Rover is being starved of funds to the benefit of the owners of PVH. We found no evidence to suggest that its owners have any intention other than trying to compete as best they can. The fact is, however, that both the history of MG Rover and its continuing role as the only UK-owned manufacturer mean that its affairs are likely to remain in the spotlight of public attention. We are also conscious that the trade unions and others have expressed concerns about some of the decisions that the PVH directors have made, including the scale of the benefits awarded. It is important that PVH finds ways of transparently promoting good governance, to dispel any doubts about the way in which its assets could be used in the future and to underline that sustainable car production at Longbridge remains its core focus. We therefore welcome Mr Towers' commitment to introduce a covenanting arrangement and/or appoint independent representation on the PVH board by the end of the year. (Paragraphs 15, 18, 19 and 20)

MG Rover is an important part of the automotive industry, with many jobs not only at Longbridge but also throughout the supply chain dependent on the success of their products. We note with interest the progress being made on negotiations regarding the company's alliance with Shanghai Automotive Industry Corporation, and hope that a deal will help to secure the future of manufacturing at Longbridge.

We will continue to look closely at MG Rover's performance and believe that all of the employees should benefit from the Company's performance.

The Government has noted that a non-executive director has been appointed to the board of Phoenix Venture Holdings, in line with good corporate governance and meeting a promise made by the Company earlier this year.

Car Prices and the Consumer

16. Car prices have fallen since this issue was last considered by our predecessor Committee. However, it seems clear that there is still scope for individual consumers to pay less for their cars. If the discounts offered to fleet purchasers were not as large, the margins with which dealers could trade with individual customers would not be as slim. We can see no reason why the discounts offered to fleet purchasers should be greater than those offered to any other bulk buyer such as a large retailer. There has been consolidation in the car retailing market. If bulk purchases by dealers were discounted in a similar way to fleet purchases of a similar size, consumers might benefit from this consolidation. At the moment that does not appear to be the case. Under these circumstances we would recommend that the Office of Fair Trading re-examine this area. (Paragraph 68)

The Supply of New Cars Order 2000 already regulates the discounts that can be offered to fleet customers. Article 2 on non-discrimination between fleet customers and dealers states that: (i) it shall be unlawful for a supplier to discriminate unjustifiably between fleet customers and dealers who purchase new cars outright in respect of discounts given for the supply of the same or similar number of new cars supplied over the same or similar period of time; and (ii) in determining whether discrimination is justifiable in any particular case regard shall be had as to whether the value of the terms and conditions agreed with a dealer is broadly similar to the value of fleet supply agreements recently entered into by that supplier, taking into account the nature of the dealer agreement and fleet supply agreements in question and any additional benefits given or agreed which are financed by the supplier.

In January 2002 the OFT reported on its investigation of three major car suppliers following complaints from the National Franchised Dealer Association and the Consumers' Association that the Order was being breached. It found that: overall, the value of the terms and conditions offered to dealers were broadly similar to those offered to fleet purchasers, when all additional benefits were taken into account; and, although dealers were unable to obtain, in general, the very best offers made to fleet customers, they were offered—in keeping with the Order—at least the equivalent of the average fleet customer discount for a particular model after taking into account all the benefits. The OFT concluded that there was no evidence of unjustifiable discrimination between discounts for fleet customers and dealers for the supply of similar volumes of new cars. Since this investigation we understand the OFT has received no substantive evidence from the National Franchised Dealers Association or individual dealers that Article 2 of the Order is being breached.

In addition, the Competition Commission in its report on New Cars[2] viewed its recommendations subsequently embodied in the Order, as being of an interim nature while the combined selective and exclusive distribution system operated by car suppliers under the old motor vehicles block exemption regulation[3] was being brought to an end. Under the new block exemption regulation,[4] from October 2003 car suppliers have been required to opt for either a selective or exclusive distribution system. A prohibition on a manufacturer's ability to place limits on where sales outlets can be located across the EU also comes into force in October 2005. We agree with the OFT, therefore, that it would be premature to launch a new investigation into car prices before the changes introduced by the new regulation are fully in force and the expected greater competition in the sale of new cars has had time to develop.

Servicing and Repair

17. It seems that the aim of creating greater competition in the market for servicing and repairing cars is having limited impact. Vehicle manufacturers can now give independent garages 'Authorised Repairer' Status. However, the criteria set by the manufacturers to achieve this status vary widely, with some manufacturers effectively requiring investment of tens of thousands of pounds. Others have set significantly easier criteria. This would seem to indicate that the level of investment required by those that have set them higher is a barrier to entry rather than a genuine requirement for being able to service their vehicle properly. We fail to see, for instance, how specifying the type of carpet tiles required in the reception areas can have any impact on the quality of servicing and repair that a garage offers. (Paragraphs 72 and 74)

18. It also seems that the market for aftermarket spares is being limited by the difficulty in accessing the technical specifications of the cars. (Paragraph 73)

19. The CarWise scheme is to be welcomed. If it sets standards for both the level of training that technicians have and for their conduct then it will be beneficial for consumers both in terms of ensuring a minimum level of skills and promoting competition. However, this will not address the shortcomings with the Authorised Repairer status discussed above nor the need for franchised dealers to try to cross-subsidise their car sales from their servicing and repair work. (Paragraph 76)

20. The car market is clearly highly competitive and sales margins are tight. However, we see no reason why consumers should suffer restrictive practices in the servicing and repair of their cars. We believe that some of the conditions imposed on those wishing to become Authorised Repairers are anti-competitive, and we recommend that the Office of Fair Trading (OFT) investigate these practices. (Paragraph 76)

The OFT confirm that they have already investigated a number of complaints relating to the network selection criteria set by vehicle manufacturers for new car sales and also for servicing and repair, with some success. For example, the OFT investigated Peugeot's "Blue Box" corporate branding requirement that the exterior of buildings had to be clad in blue, since it was considered to have the potential to prevent dealers from selling different makes of car. Although it was found that the requirement was not compulsory, contrary to dealer perceptions, Peugeot was asked to remind its dealers that the requirement was indeed optional in order to dispel any remaining doubts amongst its dealers.[5] The OFT has also intervened to ensure that technical information is made available to independent garages.

Improved consumer choice and the development of more effective competition in the servicing and repair market has also been brought about by the OFT persuading car manufacturers to lift servicing restrictions in new car warranties.[6] This has effectively widened the market so that consumers now have a choice between using independent garages or the vehicle manufacturers' authorised repairers for new car servicing as well as used. As a consequence, authorised repairer selection criteria do not present a barrier to entry into this wider market. Potential competition between some 18,000 independent garages and 6,000 authorised repairers should ensure a reduction in the relatively higher cost of servicing and repair that the OFT has found at authorised repairers.[7] The conditions that manufacturers can impose on their authorised repairers will therefore be subject to competitive constraints.

More generally, the European Commission, when drafting the new motor vehicles block exemption, recognised that in view of the investment which has to be made by an authorised repairer, apart from existing dealers whose contract has been ended, it cannot be expected that many independent repairers will qualify to become official repairers.[8] Nevertheless, we understand the OFT will continue to investigate practices in the servicing and repair market where there are appreciable actual or potential anti-competitive effects.


2   Competition Commission',New cars: A report on the supply of new motor cars within the UK, April 2000, Cm 4660, paragraph 2.479 Back

3   Commission Regulation 1475/1995/EEC on the application of Article 85(3) of the Treaty to categories of motor vehicle distribution and servicing agreements Back

4   Commission Regulation 1400/2002/EEC on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicles sector Back

5   OFT News Release 124/04 'OFT steps in over confusion on corporate branding for Peugeot dealers', 10 August 2004 Back

6   OFT News Release 85/04 'Servicing ties removed from new car warranties', 14 May 2004 Back

7   New Car Warranties, December 2003, OFT683 Back

8   Official Journal C 67, 16 March 2002, page 20, paragraph 39 Back


 
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