Examination of Witnesses (Questions 540
- 559)
MONDAY 29 MARCH 2004
GENERAL DYNAMICS
AND OUTOKUMPU
STAINLESS LTD
Q540 Chairman: Yes.
Mr Allan: Stainless steel, like
other steel products, is a cyclical business. We have gone through
recently a very tough time, but because of the extensive demand
and huge growth, particularly in China, metals are making a very
rapid recovery; and we have seen that since the end of the third
quarter of last year and we are now moving into a phase where
the European economies are starting to take up some of the capacity,
some of the flows are being diverted from the far east. So demand
is very good, prices are rising and we are anticipating, at least
this year, a very good year. So we are on the way up in our normal
cycle of profitability. In terms of where we are in the UK, we
are sharing that. Our main markets are looking good. From a Welsh
point of view, you will be aware that we made a decision in October
to close the Panteg site, so from a health point of view that
is not very good for their health. I do not know whether you want
to go into the detail of that closure at this point. I will come
back to it.
Q541 Chairman: Just general questions
at the moment.
Mr Allan: Okay.
Q542 Chairman: Can I ask you, you
mentioned China. Up to now China has been a problem, has it not,
in terms of steel production and the rising cost of raw materials?
Mr Allan: Yes.
Q543 Chairman: But you are saying,
in fact you confirm now, that you are actually supplying China
with steel. Is that right? Did I read that right?
Mr Allan: We always have supplied
some material to the Far East, but currently the demand is so
good in the West that we are not shipping that much volume out
there. The point I was making is that the demand for raw materials
is extremely strong to satisfy the internal demand in China, so
it is starving the rest of the world of raw materials, so prices
are rising rapidly.
Q544 Chairman: That is something
we have heard before. Mr Johnson.
Mr Johnson: Fortunately General
Dynamics are in very good shape. Worldwide we will do this year
about US$20 billion. We are the fourth largest of the major defence
contractors in the United States but the most profitable of them
all. In fact the profits of General Dynamics outpace those of
the top three all combined, so we are very healthy. We are also
making money in the UK. The forecasted profit from our programmes
is all coming to fruition. I just mention that we are a fairly
diversified corporation. We have four branches, one that builds
ships, one that builds armoured vehicles, and the only problem
we have there is the high price of steel driven up by the worldwide
demand.
Mr Allan: It is extremely good
value.
Mr Johnson: So that is a risk
for the future.
Q545 Mr Caton: Mr Allan, I would
like to come on to the closure of Panteg. Your memorandum sets
out the rationale. Were there any options available to a partial
closure?
Mr Allan: I took over as SVP of
this business last June. On one of my first activities was to
implement a strategic review of the business, and Panteg Operations
was one of those areas that were looked at. The strategy of Coil
Products Sheffield up to then had been to maintain operation in
Panteg and to try to minimise the losses so all the work that
had gone into that site had been to reduce costs as much as possible,
take out administrative costs and basically to end up with it
purely as a rolling operation, in other words to bring it to minimal
cost. The idea was that we still knew that that would be either
a break-even or a small loss, but from a strategic point of view
the products that we manufacture are products that we want to
be in in the future. We knew we had to make a significant investment
to be able to compete in those products and the investment environment
last year and this year was such that we knew that we were looking
further and further into the future to be able to make that very
significant investment which might be made in the UK or it might
be made at one of the other locations of the Group. The investment
would be some 135 million Euros or so, and so, without pushing
out into the future and the losses not being curtailed, the closure
decision was based purely on the financial performance of the
plant, and it is a matter of record that the business lost 50
million Euros in a seven-year period. For a relatively small plant
that was unsustainable and, given the financial situation for
the group last year, we were unable to sustain it, so, regrettably,
the decision was made to close the plant.
Q546 Mr Caton: Was there anything
that government, UK Government or National Assembly Government,
could have done to change that decision?
Mr Allan: I do not think so. Because
of the European steel and coal directives we know that there is
no direct intervention allowed in steel manufacturing, and we
have seen the rationalisation of the steel industry and the consolidation
of the steel industry throughout Europe; and that has been caused
by that. So there was nothing we could do. We looked at every
opportunity to try and reduce the costs and keep the plant going.
In the end the strategic value just was not there and we had to
make that decision. So, no, I do not think there is anything we
could have done with governmental help.
Q547 Mr Caton: Were government agencies
or departments involved in managing the closure?
Mr Allan: Yes. We used the Steel
Partnership Training Ltd, which is an ISTC project and the Educational
Learning Skills Council. The SPT draws money for training from
a European social fund and the National Assembly via the Welsh
European Office, so we used them to help us for retraining until
we got potential relocation of employees. So we use that facility.
We were able to procure £2,500 per employee via REACT towards
training, and we also ran, in conjunction with the SPT, training
courses for employees during the last four months of the plant's
operations and allowed trainers and employees to train on and
off the site for their future welfare and employment. So that
is the sort of work we did, and that was very helpful.
Q548 Mr Edwards: You say in your
memorandum that 60% of those workers are no longer looking for
work now. Can you tell us why that might be? What proportion of
them might be taking early retirement and how do you monitor this?
Mr Allan: I do not know the answer
to that. I think . . . No, I would be speculating. I do not know
the detail of that question. I cannot answer that in terms of
who has taken early retirement and who has not. I do not have
that information.
Q549 Mr Edwards: How do you monitor
it then?
Mr Allan: Our personnel department
would be monitoring that.
Q550 Mr Edwards: Would they be able
to give us some further information?
Mr Allan: They would, yes, be
able to respond with that information.[2]
Q551 Dr Francis: This is a question
for General Dynamics. Mr Johnson, your website highlights the
fact that you located your headquarters in South Wales. Can you
explain how you came to choose South Wales, and Oakdale in particular?
Mr Johnson: Yes, that wasn't a
very difficult question really. We determined earlier in the bid
for the Bowman Programme that we would want to locate close to
the primary customer, which is the Defence Procurement Agency
in Bristol, and we drew a one-hour circle around Bristol and we
had a choice of Swindon, Taunton, Gloucester or Wales, so it was
a fairly easy decision for us, and when we struck up relationships
with WDA they were very helpful and introduced us to the fact
that it would be a good quality of life for our employees. I think
that is one of the driving factors, because our capital is in
our employees we wanted a place that would attract them, where
they would be happy to work and happy to live, and Wales appeared
to be that situation for us, and it turned out to be true.
Q552 Dr Francis: Are there any benefits
to being located in Wales, other than that it is some distance
from Whitehall and London. Is that not a factor?
Mr Johnson: It is not a factor.
We actually keep an office in London. I spend about one day a
week in London, so we are close to that part of the customer base
if we want to be. Probably the biggest disadvantage for us being
in Wales is not to do with relativity to Whitehall but relative
to Heathrow. Because we are an international company and we have
many suppliers and customers around the world, we find the inactivity
at Cardiff Airport and the inability get to Cardiff Airport without
a struggle to be a severe disadvantage.
Q553 Chairman: That is something
we have heard about before, Mr Johnson.
Mr Johnson: I am sure you have.
Q554 Mr Evans: So have we. The European
Union. This is to both companies. What is your experience of the
impact of European Union regulations on your company and whether
you are able to air your concerns, and who do you air your concerns
to, about the regulations?
Mr Hayward-Browne: Can I answer
for Outokumpu Stainless. We do have some concerns that there is
not actually a level playing field within the European Union,
and really these fall into two main areas, first of all, how the
UK implement the directives and, secondly, how other countries
are implementing the directives. So we start, first of all, with
the UK. First of all, I would like to say we do acknowledge that
there is a desire to avoid gold-plating of these directives as
they are brought into force. Nevertheless, we do still see some
examples that fall into that category or which could be considered
to be an over bureaucratic way of implementing the directives.
I will mention just two examples here. The first one would be
the way the UK is implementing the Emissions Trading Scheme. This
is the scheme for controlling greenhouse gas releases from certain
designated industries. It has been reported that the UK is the
only country that is proposing to go beyond—this is going
beyond the Kyoto protocol terms with their own national levels.
We have drawn your attention to comments that the CBI, amongst
others, have made about this in their representations on this
matter and how this will actually disadvantage industry. As a
company we have made our own representations in the consultation
process, and we do acknowledge that the Government has delayed
the submission of the national allocation plan to allow all the
results of the consultation process to be taken into account,
and we would urge that the voice of industry is taken into account
in this matter. Secondly, another example of the way that EU directives
are being implemented in the UK, we would draw attention to the
way that the packaging waste regulations are being implemented;
and these are regulations that do result from EU directives. There
have been some recent changes made to how the regulations are
being implemented and these have resulted in an over bureaucratic
method of compliance. There is further information in our written
submission on this, and we do understand that the Cabinet Office's
Better Regulation Taskforce and the Office of Fair Trading are
investigating this at the moment and we do endorse the need for
such an investigation. If I can then move to how other countries
are actually implementing the legislation. It is our perception
that there are differences in how the other EU Member States do
implement regulations. For example, one of the key pieces of environmental
legislation, the directive on Integrated Pollution Prevention
and Control, a study commissioned by the EU last year, looked
into the implementation within the Member States. Could I just
quote one small part from that report? It said: "In all countries
investigated, except for the UK, the Commission has identified
major suspected or confirmed short-comings in the legislation."
I think it is also pertinent to point out that here in the UK
the Environment Agency is currently gearing up to deal with a
significant number of applications from industry for environmental
permits; but in Holland there is a different agenda at the moment,
and industrial environmental permitting in the Netherlands is
due to be cut back and simplified. There is a government plan
now in place to reduce the administrative burdens on industry.
Their overall ambition is to slash some 130 different measures,
and they are aiming to save business 3 billion Euros as part of
a process of rationalising environmental legislation.
Q555 Mr Evans: All that is within
the current rules? They are doing this legally?
Mr Hayward-Browne: Yes. So there
is a perception of a difference between how things are done in
the UK and elsewhere within the EU.
Q556 Mr Evans: Compared to some of
your other companies in other European Union countries as well.
Does that give you information as to perhaps the competitive disadvantage
that you are operating under?
Mr Hayward-Browne: We do see my
colleagues in other parts of the business, we do discuss these
issues, and there are different ways of interpreting and implementing
the regulations. Yes, it does happen.
Mr Bentley: I will answer, if
I may. In two words: very little. We are not, as Mr Johnson has
explained, a manufacturing entity. The whole raft of environmental
directives coming out of the European Community, although we observe
them, they are not really relevant in the sense of primary concern.
I do not think the Commission has yet got round to defence system
integration directives, so we hope that will be long delayed.
Q557 Mr Evans: I would not hold your
breath. There is one other thing: in your submission you talk
about the National Insurance problems as well. You feature that
as another issue and that definitely will affect both of you.
Can you add something to that?
Mr Allan: It is just an increase
in the tax that we have to pay within this organisation. I think
it is something which is additional to our salary bill on an annual
basis, and that is another burden that our competitors do not
have.
Q558 Mr Evans: So it is an extra
half a million pounds?
Mr Allan: Yes.
Mr Bentley: It is an additional
cost to the business against a primary contract that we took two
and a half years ago. So it will affect our profitability, but
to a limited extent.
Q559 Julie Morgan: I apologise, I
missed the beginning of your evidence. I want to ask both of you
really how important are EU and UK grant monies in investment
or in reinvestment decisions compared to other factors?
Mr Johnson: Maybe I can talk about
that, because we were the beneficiary of some small grants from
WDA to help us get started with our facility, and we have some
ongoing grants to cover a small part of our research and development
area. I would say that the grants in themselves were not motivators
to decide on a location but they were one part of a total package
and that package really included being welcomed into the community,
giving assistance and being introduced around and helping with
everything from where you can lease cars and do business on a
smaller scale to how we could hire employees. So, relatively speaking,
it was not important but it was part of the package.
Mr Allan: I mentioned earlier
that the European Steel and Coal Directive prevent us from getting
any direct assistance, and I think this falls into the same sort
of category. We cannot get any assistance for sales and marketing,
we cannot get any assistance for training and certainly not for
investment. So I think we are all bound by that legislation.
2 See Evi Page 200. Back
| 
