Examination of Witnesses (Questions 280
- 299)
WEDNESDAY 17 MARCH 2004
AYKROYD & SONS
AND ANGLESEY
ALUMINIUM METAL
LIMITED
Q280 Julie Morgan: Do you face competition
from countries outside the EU, with lower wage levels?
Mr Aykroyd: It is all outside
the EU, to be honest with you. Portugal used to be one of the
only countries within the EU that had a clothing-manufacturing
base, as such. Obviously, since they joined the EU their wages
have risen and their various on-costs have risen as well. So I
think you will find there is quite a decline in the Portuguese
industry as well. You are talking about, mainly, places like Turkey,
some of the new Eastern Bloc countries and then, further afield,
India, (Bangladesh, especially, is becoming a huge exporter of
clothing) and then Thailand and China. I was only in China the
week before last and it is quite amazing the standards that they
are working to and that we are having to compete against. I am
afraid there is very little we can do about that.
Q281 Mr Edwards: Can I ask who your
main customers are? Do they include the major supermarkets?
Mr Aykroyd: Absolutely, yes. We
supply nearly everybody in the clothing business on the high street
except for Marks & Spencer. We do not supply Marks' but people
like BHS, Woolworth, Tesco, Asda, Mothercare, Adams, Dunn Stores,
Littlewoods, GUS, Argos.
Q282 Mr Edwards: Do you have contracts
with all these customers?
Mr Aykroyd: Yes, we only manufacture
to contract.
Q283 Mr Edwards: Are you bound by
the code of practice which the supermarkets have with suppliers?
Mr Aykroyd: Absolutely. There
is a huge ethical trading initiative that has been brought on
board fairly recently, and also with our licences, with us having
Disney and Warner Brothers licences—these global companies—they
all insist on auditing factories for ethical and full standards
for the workforce.
Q284 Mr Edwards: You might know there
has been some debate at the moment about whether the code of practice
between four major supermarkets and the suppliers should become
a statutory code of practice and whether there ought to be a retail
regulator. This has been something which has been largely to do
with agriculture supply, especially the dairy sector, but have
you a view on it?
Mr Aykroyd: I am not really, totally,
fully au fait with what it is. If you could explain a bit more
I might have a bit of a better view.
Q285 Mr Edwards: Actually, it was
a code of practice which was introduced following the recommendations
of this Committee to get a fairer deal for suppliers, mainly livestock
suppliers, because the markets were so small, in the way that
they work, supplying to supermarkets. There has been controversy
that has been revealed recently that supermarkets do not even
have contracts with certain suppliers, and even threaten that
"If you supply anybody else apart from us we will take away
that contract, whether it was written or not".
Mr Aykroyd: Certainly, on the
taking away of the contract, the people that we deal with are
totally aware that we supply their competitors, as such—especially,
as you can imagine, the Asda/Walmart situation and Tescos. They
are totally aware of that. There is not a shadow of doubt that
the general pressure that we are under as manufacturers is being
led by big supermarkets; they are constantly, constantly wanting
to lower retail prices but increase margins. Yes, they have got
a huge hammer to hit you over the head with and it is very difficult.
If there was some sort of initiative between suppliers and those
retailers, I would personally welcome it with open arms, I really
would. They do think they can totally control your business. I
used to give costings. I know it sounds a ridiculous thing but
giving them a costing these days does not make a jot of difference;
they tell me what they want to buy it for.
Q286 Chairman: We certainly found
that in the agricultural sector.
Mr Aykroyd: In fairness, in the
clothing business we do get contracts. Every order I take, whether
a Tesco or an Asda, has a contract, which they will honour unless
they do not want to honour it. I do not want to go any further
into that, but there are ways and means of them getting out of
contracts.
Q287 Julie Morgan: Perhaps I can
ask Mr Barbagallo now the same question about what are the key
business factors which give your company a competitive advantage
in its marketplace? What do you expect to happen over the next
five years?
Mr Barbagallo: We have been operating
as a smelter since 1971 so we have evolved through time and continue
to drive process efficiencies. Looking at the reason why we are
still in business, we are a fully depreciated business so we do
not carry any debt, which obviously helps in terms of cash production
costs. Within our workforce of 554 full-time employees over 100
of them have been with us for over 30 years, so we have a very
established workforce, which is very committed and does a very
good job for us. We continue to improve our efficiencies. For
our technology that we employ we are now operating "best-in-class"
across the world. The quality of the products that we produce
is well received by our customers. We have a large number of established
customers who continue to buy from us because there are not too
many options unless they import either from the EU or from other
countries. Moving on to the question, on the next five years,
we are seeing a shift in our customer base and if you talk to
some of our downstream customers they are closing, whether they
be rolling mills or extruders, so we are seeing an increase in
the amount of product we are sending into Europe to maintain our
market share. Within the next five years I would suggest that
our 28% to Europe would continue to grow, and our price is purely
dependent upon the business being able to survive in the UK. Turning
to the customer side, if we look forward to the next five years,
we will continue to have to fight on costs; aluminium is trading
on the World market so, essentially, we compete on the world stage
against all companies, so cost of production is very important.
We have got to look at increasing the value of our products to
incrementally increase revenue, and we have got to continue working
on our efficiencies to make sure we remain viable in the future,
but we are operating on fairly narrow margins and will continue
to do so in the future.
Mr Aykroyd: Can I add to that?
John mentioned a committed workforce, and I must say that we too
have a tremendously committed workforce. We would not be in the
position where we are without that committed workforce in North
Wales. The other thing, regarding the five-years as far as Aykroyd
& Sons are concerned, is that one of our major concerns is
not only what I have already gone over but it is also the general
infrastructure within our supply source within the UK—in
other words, fabric suppliers, printers etc. We are finding that
they are going out of business at the same sort of rate, obviously,
as the actual manufacturers themselves are going out of business.
We could very well be faced with us having a product to make but
not being able to buy the raw materials in from locally or UK-sourced
products. We will have to go into importation for that as well.
Q288 Julie Morgan: I wanted to ask
Mr Barbagallo about China, because you mentioned that in your
submission. You already compete directly with the Chinese in markets.
For example, we are seeing Chinese products entering the UK at
competitive prices despite the higher transport costs. What are
the factors, do you think, that give China the advantage over
other parts of the world?
Mr Barbagallo: I will answer that
but it might be better from David because he has been there recently,
and he can probably contribute a little bit more as well. In terms
of aluminium manufacture, we have seen in the world there is about
28 million tonnes of aluminium produced and in 2000 2.8 million
tonnes were from China, which was about 10%; this year it is forecast
to be 6.5 million tonnes out of China, which is almost 25% of
all the world's aluminium production. So the rate of growth in
aluminium production from China has been enormous. That is obviously
putting large pressures on supply and demand throughout the world.
Why is this happening? China has access to competitive power and
there are low labour costs. If you look at a study done recently,
the percentage of our costs on labour is 13%, but in China it
is less than 2%, so there is an 11% margin before you even talk
about anything else by producing aluminium in China. There are
very low levels of regulation, and this whole concept of environment
and health and safety, which is so important to western world
producers, is not placed at the same level of priority in the
Chinese situation. I do not encourage that for one moment but
that is a real concern. Greenhouse gas is a heavy contributor
to our controls and will be a contributor to costs if you are
going to continue to operate in the UK and, indeed, in the EU
in future. The other one is the Chinese economy continues to grow
at about 10% per annum. If you are going to supply an engine like
that there you have also got to go here smelters that produce
that volume of products to meet the economic activity. The thing
that concerns us, though, is that even with increased demand China
has gone from a net importer of aluminium to now a net exporter
of aluminium, so if internal demand for aluminium slows in China
there is going to be a lot of aluminium available for the world,
which could soon flood the market and create extreme cost pressures
for businesses operating in western world societies.
Mr Aykroyd: I totally agree with
what John is saying, having literally just come back from there.
The health and safety aspects of what they do out there, I am
afraid, are just quite unbelievable. It is non-existent; they
just throw workers at whatever job is necessary with a total disregard.
One of the gentlemen there obviously mentioned the ethical trading
initiatives that our retailers are asking to ensure and, again,
we are having on-costs involved in getting factories ethically
audited. That, obviously, is a good thing because it does mean,
at least, that you are dealing with people who have got some sort
of general sense of welfare for the workforce. I think the other
worrying thing about China is the fact that at the moment it is
a hugely, hugely growing market as far as clothing is concerned,
and you are only touching the sides of the potential there. It
is really only the east coast side of China that has even remotely
started any development, as far as this is concerned. If you go
back 20 or 25 years, Hong Kong was the chief base in the world
to source clothing, nobody now is manufacturing in Hong Kong any
more or even in the closed territories in the southern part of
China. Their costs have risen and now it is Shanghai and up to
Beijing, but it is still only very, very much over on that eastern
side. The middle/west of China is totally unexploited country
with billions of people there to manufacture clothing—till
it comes out of their ears. It is not an easy scenario.
Q289 Dr Francis: Good afternoon.
These are more general questions and you may have answered them
in part, but I still pose them to you in relation to customers.
Do you see the pattern of your customers changing over time, either
geographically or in terms of what is supplied? If you do, what
are the drivers for those changes?
Mr Barbagallo: I think, in the
aluminium industry, there has been a real consolidation of companies
over the last ten years. So the industry now is made up of a small
number of significant players, such as Alcoa, Alcan and Hydro.
There is a second tier group of companies, like Rio Tinto, BHP
and Russian Aluminium which make up the rest of the world. As
a result, a lot of these companies are getting integrated upstream
or downstream, so it is very hard for smaller companies or independent
companies to break into particular customer niches. Anglesey Aluminium
is probably considered one of the niche producers. We are 51%
owned by Rio Tinto. Rio Tinto have no downstream facilities in
the UK or the EU. Many of our customers are also niche players,
so the independents tend to join the independents, and the major
groups—the Alcoa's and so on—tend to have smelters,
rolling mills and extrusion plants. If you actually look at the
pattern for customers in the future, I think the smaller companies
are finding it more difficult, and we are seeing a number of closures
of smaller businesses within the UK and, also, the EU. Anglesey
has a strong customer base and there is enough market opportunity
in the continent for us to survive well into the future, but it
actually is getting harder. In terms of price, Anglesey Aluminium
sells its products in US dollars. About 60% of our costs are in
pounds, and 40% of our costs are in US dollars. So the strong
pound over the last 12 to 18 months is obviously squeezing margins
further. So I think there are a couple of issues: it is around
the exchange rate, it is around electricity prices and it is around
metal prices and the competition throughout the world.
Q290 Dr Francis: Mr Aykroyd?
Mr Aykroyd: As far as my product
area is concerned in the near future, or the next five or six
years, I cannot see any real change. I think we are in a marketplace
where children will always want pyjamas and there is so much character
now going on with the TV channels and whatever that I cannot see
our product area changing at all. What I can see changing, as
far as our retailers are concerned, is that I do get a very significant
feeling that now that Walmart have moved into the UK with their
purchase of Asda stores, and Tesco's continuing dominance, really,
the fact is the supermarkets do seem to be starting to dominate
not only the grocery business that they obviously were initially
in but they certainly consider that their non-food items, where
they obviously make bigger margins than they do on food retailing,
are the way forward. In my view, they seem to be starting to dominate
the high street in all aspects of retail, not only the selling
of food. So that, really, is a change that I foresee. As far as
the way clothing is sold in the UK, there will be much more dominance
of it in supermarkets. As far as the change as to countries of
origin, well I think I have really answered that with the fact
that China is only touching the sides of what the potential is
there, let alone various other countries. The retailers will always
want to buy a product at the cheapest he possibly can and that
is, I think, the way forward. The more power they have and the
bigger they are, obviously, the easier it is for them to do that.
The exchange rate does have significance as far as our UK side
of the business is concerned. Obviously we would much prefer the
pound to be considerably weaker against the dollar because that
makes imports that much more expensive, which obviously makes
our UK side of it that little bit more competitive, but that is
not a hugely significant part of it.
Q291 Dr Francis: That leads me nicely
into the next question. Are either of you or both of you in favour
of joining the Euro? What do you consider to be the benefits and
costs of the present UK Government's position?
Mr Barbagallo: I have got a very
simple statement on that. We do our business in US dollars and
pounds and do very little business in Euros, so as a business
I do not have a positive or a negative view on the move towards
the Euro. So it is probably best I do not comment any further.
Mr Aykroyd: Again we have next
to no dealings in euro except for dealing with a couple of Irish
customers, so really, no, it will not make a difference to Aykroyd
& Sons if we went in to the euro. I do not think it would
make a great deal of difference, it depends on the strength of
the euro against the US dollar as relevant to the pound against
the US dollar.
Q292 Dr Francis: What would you say
would be the top of your wish list if the Government could assist
you in terms of making you more competitive?
Mr Aykroyd: Certainly less legislation.
We moved to Wales back in 1961 when there was selective employment,
tax and whatever, that went out of existence many, many years
ago and I am sure it will not come back. If the Government is
serious about keeping manufacturing going in the United Kingdom
it is going to have to do something to allow us to compete with
other countries who are giving huge help to their manufacturing
industries.
Mr Barbagallo: When I first got
this question I said "you beauty" but it is not an easy
one to answer. I have made four points: You need to listen to
the industry, the manufacturing sector is suffering and things
are getting harder; the second one is slow down the amount of
regulation growth which is happening through both the United Kingdom
and the EU. We need to implement sensible, low-cost legislation
that drives and delivers good sustainable outcomes. For businesses
we need to find a balance between the competing social, environment
and economic pillars of sustainable development; thirdly, there
is a difference in the EU between the different Members States
in terms of the time frames for implementation of the new regulation
of legislation, the level of prescription and the regulations
of the different Member States, the level of gold-plating of legislation
in certain countries—I do refer to the United Kingdom in
this instance—and the high level of compliance costs. Everything
that has come through recently has had an enormous impact on our
costs to comply with new regulations; fourthly, make manufacturing
important. It is important to develop skills and education, it
is important to safeguard jobs at the moment and it is an opportunity
to look at technology for the future. I do believe we are sliding
on that front. They are my four comments. I attended a meeting
hosted by the CBI recently when one of the Cabinet members publicly
stated to a group of industry representatives, "It is inevitable
that manufacturing will close in the United Kingdom and be relocated
else where", his inference being China. That was a little
disappointing. I asked the question, "Why?, why do we have
to say these things".
Q293 Mr Edwards: To which Cabinet
are you referring and to who in that Cabinet?
Mr Barbagallo: I would prefer
not to say, it was Westminster, not the Welsh Assembly.
Q294 Mr Edwards: That leads on to
the last few questions to do with your relationship with Government,
can you tell us how you find your relationship with DTI and Whitehall
compared to your relation with the Welsh Assembly and the Welsh
Development Agency? Since we have had democratic devolution in
Wales has this helped or hindered your businesses?
Mr Aykroyd: Personally Aykroyd
have absolutely no contact with the DTI or Whitehall in any shape
or form. We have a great deal of contact with the Welsh Development
Agency and various other bodies, certainly the county council
have been helpful to us.
Q295 Mr Edwards: RDS: Has devolution
helped or hindered you?
Mr Aykroyd: I can honestly say
I do not really think it has made a great deal of difference.
It has certainly not been a hindrance to us in any shape or form.
Aykroyd & Sons have not really got involved at a governmental
level for me to give you a great deal of insight into that I am
afraid.
Q296 Mr Barbagallo: I do think the
DTI try quite hard, they are prepared to listen, which I am pleased
about. Can they make a difference? Sometimes I question that.
In terms of Whitehall I actually sit back and think they have
a very difficult job to do trying to balance all domains of the
various industry sectors out there. Trying to get one piece of
legislation which benefits all parties is not a very easy situation.
I do feel the demands on Whitehall are quite large but I do not
think they understand the pressures associated with what they
introduce and what it means to the business, because it really
is tough. Every time something is introduced it does take us a
long time to consume it, to implement it and to embed it. Over
the last three years there has been so much it is very difficult
for business. In terms of the Welsh Assembly I do not have many
views, I have a few comments. I actually think the Welsh Assembly
does try, it has been a good supporter of industry, particularly
in aluminium. They are prepared to listen and they are prepared
to help on the important issues. The level of influence they have
is probably called into question at times given the powers that
they have at this stage. I think the Welsh Development Agency
is a good example of where government bodies are in touch with
industry and are attempting to make a real difference at the coal
face. For local issues the direct contact with the Government
in the Welsh Assembly has been refreshing and a good thing because
it is a smaller Assembly compared to the DTI and Whitehall, so
to speak. On balance it has helped Anglesey.
Q297 Mr Edwards: This is not a trick
question, Anglesey and Bala are represented by five Assembly Members,
do you know who they are?
Mr Barbagallo: Five Assembly Members!
Q298 Dr Francis: The regional list.
Mr Barbagallo: I obviously knew
the people on the island, well the one on the island and the second
one who was on the island. The two people I thought were with
the Welsh Assembly I used to have meetings with as I do with the
MP probably once or twice a year, the other three or four escape
me.
Q299 Mr Edwards: Okay, thank you
Mr Aykroyd: No, I am sorry.
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