Government response
Introduction
The Government welcomes the Committee's
report on the UK automotive manufacturing sector which presents
a balanced assessment of the key issues relating to the future
of automotive manufacturing in the UK. It has been particularly
useful to have the Committee's views to help with the development
of Government policy in this area as we strive to ensure the success
and sustainability of this important industry in a challenging
global environment.
Responses to Conclusions and Recommendations
Below we have set out our responses
to those conclusions and recommendations directed at Government
where we believe it is appropriate for Government to respond.
The conclusions and recommendations are numbered as they appear
in the report.
FUTURE OF THE UK CAR MANUFACTURING INDUSTRY
1. Like our predecessors we see mixed prospects
for companies manufacturing passenger cars in this country, and
for individual plants. There were particular reasons why Longbridge
and Ryton closed and for the loss of the third shift at Ellesmere
Port. However, though the combination of problems experienced
by these plants may have been especially acute, we heard nothing
to make us believe that they were unique to these plants or their
parent companies. It is therefore all the more important that
both the industry and Government put extra effort into improving
skill sets throughout the sector, increasing the commitment to
R&D, adopting lean manufacturing techniques and strengthening
the local supply chain. (Paragraph 85)
Government agrees with the Committee that the challenges
faced by the UK automotive industry in maintaining global competitiveness
are around skills, business processes, the efficiency of the supply
chain and constant investment in R&D. The Government also
believes that the UK automotive industry is well placed to succeed.
Recent excellent news such as the decision by General Motors to
build the 'New Astra' at Ellesmere Port from 2009 in the face
of stiff European competition, and Toyota's decision to build
a foundry for engine production in Deeside, shows that the UK
industry is in good shape.
But we cannot be complacent. The areas identified
by the Committee for extra effort are those highlighted for action
by the Automotive Innovation and Growth Team (AIGT) in 2002, reaffirming
that Government and industry efforts are focused on the right
issues.
As indicated in the Government's
written and oral evidence to the Committee's Inquiry on "The
Future of UK Manufacturing: Skills Shortages", we accept
the need to actively address skills issues through a wide range
of activities. The Committee acknowledges the important role played
by the Automotive Academy. Work to improve automotive-focused
skills will continue through the recently launched successor—the
National Skills Academy for Manufacturing (NSAM).
We are committed to supporting
innovation and the introduction of new automotive technologies.
The Energy Review announced the development of the Low Carbon
Transport Innovation Strategy (LCTIS) and the Energy White Paper
will shortly be published giving details of a new Low Carbon Vehicle
Innovation Platform. The recent Budget Statement also announced
a review of new technologies which could help decarbonise road
transport over the next 25 years (see Recommendation 8 for further
details).
The Supply Chain Groups programme
includes automotive sector projects. According to the latest assessment,
this approach has made significant improvements in quality and
delivery performances at virtually every host and supplier under
the twelve projects reviewed. Returns show productivity improvements
of 30-40%, with many companies at the second and third tier level
being exposed to the tools and techniques of process improvement
for the first time.
A competitiveness analysis of the Japanese component
manufacturers who invest in the UK is underway which will help
our understanding of their current challenges and how we can support
their future success. We anticipate that this study may also be
useful in terms of improving the supply chain more generally.
The Government recently announced
the extension of the Manufacturing Advisory Service (MAS) to support
the development of lean manufacturing techniques further. The
new phase of MAS—to be launched in April 2008—will
offer an extended range of help and advice to small and medium
sized manufacturers—covering, for instance, strategic planning
and skills development, and improving the performance and operation
of the supply chain.
In addition to these initiatives,
we will be giving consideration over the coming months to the
merits and timeliness of updating the work of the AIGT and taking
a new strategic forward look at the automotive industry in the
UK over the next 15 to 20 years.
The automotive industry is of massive
importance for jobs, growth and prosperity in the UK and we remain
committed to doing everything we can to help ensure the sector
has a successful future here.
WORLDWIDE AUTOMOTIVE INDUSTRY
2. At present the automotive industry still seems
to be wedded to a regional approach to its markets, expanding
or contracting capacity to meet regional demand. Logistical costs
and the need to reflect local tastes are important factors in
limiting the scope for supplying customers from plants outside
the region. While we do not believe that a shift in production
from Western Europe to the cheaper Asian economies is imminent,
like our predecessors we believe that the closure of car plants
in Western Europe and the opening of up-to-date facilities in
Eastern Europe, using cheaper labour, will continue. (Paragraph
12)
We agree that the success of Eastern
Europe in attracting inward investment is likely to continue in
the short to medium term. There are suggestions that the 'low
cost' advantage of producers in this region is beginning to erode
as wage inflation takes hold but we recognise that, in turn, new
low cost regions will emerge elsewhere. Ultimately, the plants
that survive will be the ones with a strong focus on cost management
and, crucially, with the right products for the market. Demand
for UK-made vehicles and parts is robust and with a strong partnership
between Industry and Government, the UK automotive industry should
have a solid future ahead.
The recent investment decisions
by Toyota and General Motors have demonstrated that UK remains
a competitive manufacturing location for automotive products,
thanks to our competitive labour market, and an ability to adapt
to new challenges; in addition to the natural advantage of proximity
to a substantial UK and European customer base. When taking account
of the full cost of moving manufacture to 'low cost' countries,
many companies are finding that a comprehensive analysis of cost,
quality and timely delivery renders the UK as the best place to
manufacture their products.
As the Committee will be aware
from the Department's submission to its current inquiry into the
future of UK manufacturing, the Government is taking action through
its Manufacturing Strategy to encourage the development of a strong,
high value added manufacturing sector with the ability to compete
successfully in world markets.
FACTORS AFFECTING INDIVIDUAL PLANTS
3. Unsurprisingly, the age of plants influences
decisions on which factories to run down or close where there
is over-production. However, it is not simply the case that if
a facility is old, it will close. Some companies have invested
large sums of money in developing and upgrading factories—for
example, neither BMW's Cowley plant nor Ford's Dagenham one is
a new facility on a greenfield site. It is also arguable that,
after more than 20 years of operation, Nissan's factory in Sunderland
is hardly "new" Of more importance than simple age is
the degree to which plants are capable of adaptation to modern
manufacturing equipment and practices, and the cost of adapting
them relative to building or upgrading facilities elsewhere. (Paragraph
20)
Government agrees with the Committee's
assessment that competitiveness depends on a wide range of factors.
For instance, manufacturing the right products for which there
is a demand is critical to success—without this no amount
of investment will render any plant viable; whatever its age.
As Ellesmere Port has recently shown, even long established UK
car plants can still win investment against the stiffest of competition
and here, the UK's success can be directly attributed to industry's
capacity and willingness to adapt to change.
This flexible approach is fundamental
if plants are to succeed in securing new investment. Of course,
Government support is vital. This can include financial support.
In the period 2000-2006, some £100 million was offered in
regional grants under the Regional Selective Assistance (RSA)
and Selective Financial Investment in England (SFIE) schemes to
automotive manufacturers and suppliers in England. In the same
period, nearly £150 million was paid out, including stage
payments on offers made prior to 2000. Government will continue
to consider applications for grants under the SFIE product for
businesses that are looking at the possibility of investing in
an Assisted Area and need financial help to go ahead—including
existing businesses that wish to expand, modernise or rationalise
activities.
4. It is clear that the logistical models adopted
by GM and PSA have contributed to the cost disadvantages faced
by Ellesmere Port and Ryton. However, other car companies are
also importing significant proportions of their components and
exporting most of their finished products, while still managing
to manufacture profitably in the UK. (Paragraph 28)
Clearly it is not for Government
to comment on any company's logistical model. This is a commercial
matter. Each plant is different, and the balance of which parts
to make locally and which to buy in, can vary considerably depending
on how a company manages its logistics. The logistics model employed
by PSA at Ryton was only one factor in the plant's closure.
Ellesmere Port was one of five European plants competing
for the next-generation 'New Astra' model. The plant's management,
Trades Unions and workforce, together with Government and the
local agencies, worked co-operatively to ensure that Ellesmere
Port was in the very best competitive position. Great gains have
been made at Ellesmere Port over the last eighteen months and—as
noted above—on 17 April, GM Vauxhall announced that the
UK site had succeeded in its bid to produce the New Astra, thereby
securing the longer term future of the plant.
5. We were surprised to learn that PSA considered
labour costs higher in the UK than in France. We recommend that
the Government study this potentially significant claim to see
whether there is such an incentive to cut manufacturing jobs in
the UK, and we would like to be informed of the Government's conclusions.
We are also concerned about the more predictable labour cost disadvantage
vis-à-vis Eastern Europe. We have recently started an inquiry
into the impact on UK business of the recent expansion of the
EU to Eastern and Central Europe, and intend to consider, amongst
other things, the synergies that UK companies could achieve through
working better with their equivalents in Eastern Europe. (Paragraph
31)
We agree that it is important to try to gain a better
understanding of the implications of wider social costs on UK
competitiveness and, in this respect, the Government will be interested
to see the conclusions of the Committee's inquiry into the impact
of the expansion of the European Union on UK businesses. Competitive
threats clearly exist, but there are also major opportunities
in this growing part of the European regional market, which UKTI
is actively promoting to relevant UK companies.
In consideration of labour costs alone, data show
these are higher than in France, but lower than in some
other EU-15 competitors, such as Germany, and the USA. In 2004
(latest data available), the normalised hourly wage of production
workers in the motor vehicle and parts manufacturing industry
were:
Czech Republic 22%
Italy 74%
France 90%
UK 100%
USA 115%
Germany 149%[3]
However, labour costs are only
one factor in determining investment decisions and hourly wage
rates are just one indicator of employment cost. Productivity
is measured by the value generated by an hour's work. As noted
above, a full analysis of all the cost, quality and delivery aspects
of procurement is needed to determine the optimum manufacturing
location. Analysis of available statistics indicates that UK automotive
industry productivity is growing (up by 58% from 2000 to 2005
in terms of value added per person), and that UK manufactured
automotive products are commanding a higher price in the market.
6. Analysis of international energy costs suggests
that the UK is not necessarily disadvantaged by the level of electricity
and gas prices faced by large industrial users like automotive
companies, although there was understandable concern about the
volatility of UK prices. We also note that the European Competition
Commissioner seems determined to continue to put pressure on Member
State Governments to remove such barriers to competition in the
energy market as price caps for industrial consumers. This, and
the recent signs of decreases in UK gas and electricity prices,
may reduce or eliminate the cost disadvantage recently felt by
companies with manufacturing operations in the UK. (Paragraph
38)
We note the Committee's comments
on energy costs and understand the concerns of industry about
recent higher prices and price volatility. The Government works
to ensure the continuity and security of energy supply at affordable
prices through competitive markets, whilst minimising environmental
impacts and delivering social objectives. We have been encouraging
the European Commission to implement energy market liberalisation
across the EU, and warmly welcomed the robust actions in 2006,
such as anti-trust action and infraction proceedings.
7. As our predecessors suggested, skills and training
are critical issues "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". The two and a half years since our predecessors'
Report is, perhaps, too short a timeframe to expect much improvement
in a longstanding problem like the skills shortages in the automotive
industry. The Automotive Academy, opened in 2004, was eagerly
anticipated as an innovative approach to the problem, and it seems
that it has represented a new commitment from all parties—the
individual companies, trade unions and Government—to addressing
skills needs. In fact, the Government regards it as being such
a success that it has decided to build on this model for a National
Manufacturing Skills Academy. The Automotive Academy is being
merged into the new body. It is not clear to us what, if any,
implications this has for the future of training for the automotive
industry. We would welcome an explanation from the Government
of the reasons for this surprisingly early change to the structure
of training for the industry, with its associated risk of a loss
of focus on the needs of the automotive sector. (Paragraph 43)
Almost 3,000 people received training under the auspices
of the Automotive Academy (AA), leading to over 6,000 improvement
programmes in the workplace. The 2005 Skills White Paper, Getting
on in business, getting on at work, identified the
Automotive Academy as a good model for a National Skills Academy.
Government took the view that it was important to expand this
model sooner rather than later across other manufacturing sectors.
Clearly it would not be sensible to have two Government-sponsored
bodies competing and potentially duplicating activities. It was
felt that integrating the Academy as part of the National Skills
Academy for Manufacturing (NSAM) would enable the wider manufacturing
base in the UK to benefit from the successes gained in establishing
and running the Academy and delivering demand-led training materials—including
capitalising on the experience of operating a central hub and
regional spoke business model.
The automotive sector is one of the cornerstones
of NSAM and automotive companies are playing a key role. In particular,
Nissan is the lead company for the North East region and Ford
is the lead for London. Toyota is also closely involved in the
Academy. All sectors will gain from access to a wider range of
resources and transfer of best practice from related sectors.
Economies of scale should also mean that any funding is more focused
on training rather than administration. Overall, our objective
is that the merger of the AA into the NSAM should have no negative
effect for training in the automotive sector.
8. We note that the whole issue of 'low carbon'
transport is being addressed again in the context of the Government's
Energy Review. We hope that this will lead to a consistent and
long-term approach to research funding. We also seek the Government's
views on GM's and Ford's suggestions about how to improve the
R&D base. These are subjects to which we intend to return
in a future inquiry. (Paragraph 46)
We fully agree that the development
of low carbon transport should be seen as a priority both in terms
of environmental improvements and business opportunities which
is why we announced the Low Carbon Transport Innovation Strategy
(LCTIS) in the Energy Review. In terms of funding, the Budget
announced that the Technology Strategy Board, in partnership with
Department for Transport (DfT) and the Engineering and Physical
Sciences Research Council (EPSRC), is planning to launch a Low
Carbon Vehicle Innovation Platform. Further details will be contained
in the Energy White Paper which will be published this month.
The LCTIS will be published alongside the Energy White Paper.
In addition, we have also announced that Professors Julia King
and Sir Nicholas Stern will conduct a review on new vehicle and
fuel technologies which could help decarbonise road transport,
particularly cars over the next 25 years. The initial report of
this work will be published at the time of the 2007 Pre-Budget
Report.
GM mentioned the West Midlands
in particular. Advantage West Midlands' (AWM) Premium Automotive
R&D (PARD) Programme is aimed at enhancing the manufacturing
and design capabilities of automotive supplier companies particularly
in the Midlands. 50 R&D work streams, aimed at catalysing
R&D and transferring new technologies to the premium automotive
supply base, have been carried out since 2003 with a total cost
of £61.7 million (£32.7m from AWM and £29m of industry
match funding) and the involvement of over 150 companies in the
supply chain. The programme is on target to achieve the government-defined
economic outputs agreed with AWM (e.g. over 150 new products and
processes; over 5000 jobs safeguarded) and has also achieved additional
benefits.
With regard to Ford's suggestion of linking payments
for R&D tax credits more closely with the PAYE/NIC payments,
Government considered this issue in the 2005 R&D Tax
Credits discussion paper exercise. Having considered the
experience of other countries with similar systems (e.g. Netherlands),
we concluded that a linkage with the PAYE/NICS system would add
too much complexity to the scheme. The Government will keep
policies under review based on evidence from across the economy.
9. We are delighted that the industry wishes to
build on the highly-regarded research facilities in this country,
and note that even companies which have been closing production
facilities, such as Ford and GM, are using the UK as a research
base for their worldwide operations. We note that the Ford Motor
Company claims to account for 'some 80% of UK automotive R&D'—whether
by staff numbers or value is not specified. While welcoming Ford's
commitment to the UK, this does make the efforts of the rest of
the sector appear less impressive. We recommend the Government
to review whether the UK is really still at the forefront of innovative
design and technology in the automotive sector, or whether research
facilities are being used for work to support technological developments
elsewhere in the world. Again, this is a subject to which we intend
to return. (Paragraph 47)
The Government acknowledges Ford's
major contribution to R&D in the UK automotive sector which
goes back many years. The scale of their commitment to the UK
is very welcome and is exactly the kind of investment that Government
is determined to work with other companies to nurture.
But this is not the whole story.
Nissan's decision to relocate its European design Headquarters
from Germany to London enabled its latest UK model—the Qashqai—to
be designed in Paddington, engineered in Cranfield and built in
Sunderland. In addition, the UK's long-established independent
design engineering sector works with Vehicle Manufacturers from
around the globe and offers the full spectrum of services from
concept design to limited-series vehicle production. This sector,
which includes companies like Lotus, MIRA, Prodrive, Ricardo and
Zytec, is recognised internationally for its flexibility, responsiveness
and track record of innovation. The UK's design engineering sector
is regarded as a world leader in engine and powertrain
design and a major contributor of know-how in promising
niche-vehicle start-ups such as the Modec range of battery electric
vehicles. These facts provide compelling evidence of the breadth
of the UK's automotive development base.
But we cannot rest on our laurels. Under UKTI's 5-year
strategy 'Prosperity in a Changing World' (launched in July 2006),
the Government is working to encourage innovative and knowledge-driven
business growth, not least by R&D intensive companies, in
selected sectors including automotive. Under this, UKTI seeks
to attract innovative, foreign-owned companies in the automotive
sector to the UK, or those already with a UK presence, to undertake
R&D at the cutting edge of technological innovation. Active
promotion of the UK's world-class position in automotive R&D
is at the forefront of this work. Such investment and growth—as
well as the potential for collaborations with the science base
and global manufacturers—increases the sector's diversity,
including in R&D, and adds to its overall competitiveness.
DTI has commissioned a Sector Competitiveness
Analysis on the 'Competitiveness and Productivity of the UK Independent
Design Engineering Sector' serving the automotive and electronics
industries. The report is nearing completion and is expected to
be published on the DTI website in the near future.
10. There is a lingering suspicion that companies
strongly connected by ownership, management headquarters or production
capacity with a particular country will, unless countervailing
arguments are overwhelming, choose to err in the direction of
axing jobs overseas rather than at home. It is possible that the
Japanese companies which have shown such strong commitment to
the UK have been, at least in part, motivated by the fact that
the UK has been their 'home base' within Europe. (Paragraph 48)
The presence of seven of the global top ten vehicle
manufacturers in the UK demonstrates the sustained commitment
and value accorded to the UK by overseas investors. These companies
make hard commercial decisions on the basis of a range of factors
including productivity, the skills and flexibility of the workforce
etc and a committed, supportive Government. We have seen that
a number of these companies have had to take tough decisions affecting
employment in their home countries over recent years. For example,
Nissan are looking to cut 1,500 jobs in Japan, and PSA are to
cut up to 5,000 jobs in France, as the companies look to realign
capacity with demand. And as noted above, decisions like the one
on Ellesmere Port demonstrate the continuing relevance of the
UK as a major automotive manufacturing location.
RYTON AND ELLESMERE PORT
11. The job losses at Ryton and Ellesmere Port
appear to have resulted from a combination of causes. The fundamental
one, for volume car producers, is the excess production capacity
in areas of the world (including Western Europe) where demand
is stagnant or falling. This does not mean that the UK automotive
industry is doomed; but it does indicate that individual plants
which are old-fashioned and inflexible, are simple assembly plants,
are remote from the company's supply chain, produce only one main
model, and have productivity or skills problems will be vulnerable.
There may be large-scale job losses, such as those seen at Ryton
and Ellesmere Port, in the UK automotive industry in future. It
is therefore all the more important that lessons are learned from
the experiences of dealing with the mass redundancies arising
from the collapse of MG Rover. (Paragraph 52)
The Government believes that there
are very significant differences between the loss of the third
shift at Ellesmere Port and the closure of Ryton. As HMG made
clear at the time, PSA's decision to close Ryton was very much
to be regretted. It was, of course, ultimately a matter for the
company and was taken for a range of reasons. But it should be
noted that the CEO of Peugeot said at the time that "the
decision is in no way a reflection of the quality of either the
Ryton workforce or the UK as a place to do business". It
is also notable that the further investment destined for Slovakia
rather than Ryton will not now proceed.
In the case of GM Vauxhall's Ellesmere
Port site, the loss of the third shift was necessary to adjust
Astra production volumes as the current model aged and demand
waned. Significantly, the loss of the third-shift was generally
seen as positive within the context of the plant's long-term future—to
improving productivity and enhancing the competitive position
as Ellesmere Port competed for the 'New Astra'. Although one shift
was removed at Ellesmere Port, production did not fall by a corresponding
third, suggesting that the plant's efficiency increased; an important
factor in the plant successfully securing a place as one of the
production sites for the 'New Astra' model. That decision demonstrates,
of course, that it is possible for UK plants to overcome disadvantages
such as logistical costs when competing for investment, even against
the stiffest of competition.
The Government's response to the Committee's comments
on lessons from the MG Rover Task Force is given below.
LESSONS FROM THE MG ROVER TASK FORCE
12. We note the differences in estimates of the
employment rate of former MG Rover workers. Some former employees
never claimed benefit or used any of the Task Force services,
'disappearing' into the general population. Even amongst those
who did take advantage of support, advice or training, there was
no requirement for them to keep the Task Force, or subsequently
Advantage West Midlands, informed of their situation. Leaving
aside actual numbers, it seems reasonable to conclude that the
majority of those made redundant have found new jobs, but many
have had to take a cut in salary, and some are doing less skilled
work than they did at Longbridge. However, some of those forced
to choose entirely new careers have found greater job satisfaction,
even though the pay is lower. (Paragraph 68)
13. The NAO's report made recommendations on a
number of issues, including the need for those providing training
and employment advice to take into account the experience and
requirements of all staff employed (managerial, unskilled, shopfloor,
technical, office and support) and not to concentrate on one section
(in the case of MG Rover, on manufacturing and engineering staff)
rather than the others; and the need to ensure that the support
and information provided on training and employment opportunities
is "made available at a time and is delivered in a manner
which is most beneficial to the recipients". We endorse these
recommendations. (Paragraph 78)
14. On balance, the Task Force was a success,
though, as with most disaster management, a number of areas—in
particular, training provision—could have been improved
if more time had been available. Useful lessons have been learned
in how to address large-scale redundancies in future, and we detected
that the relevant public bodies and PSA and GM appeared to have
absorbed some of them in their longer-planned approach to the
job losses at Ryton and Ellesmere Port. We look forward to hearing
from the Government how it intends to address the specific weaknesses
raised by our witnesses, especially those resulting from conflicts
between training and benefit policies, such as the 16 hour rule.
(Paragraph 84)
It is important to remember
that redundancies in the UK are at a historically low level and
make up a small part of all job separations—the vast majority being
those who leave work voluntarily. Most redundancies happen in
small numbers and events such as those at MG Rover remain the
exception. Nevertheless, valuable lessons have been learnt. DTI
has been working closely with the Department of Work and Pensions
on a framework for redundancies to set out best practice in handling
major redundancy events, drawing on the experience gained from
MG Rover and other examples of large-scale redundancies.
The Government wishes to acknowledge the
important contribution of the MG Rover Task Force, Advantage West
Midlands, Job Centre Plus, Birmingham City Council and other local
agencies in responding to the events at Longbridge. A number of
these organisations are engaged in continuing activities to help
individuals and the communities affected.
The MG Rover Task Force report recommended
a review of the 28-day rule where a large-scale redundancy has
put pressure on training places and a redundant person might need
to look for temporary work lasting more than 28 days whilst waiting
for a course to start. In the case of MG Rover, this rule was
waived. The redundancy framework will be considering issues such
as the 28 day rule.
There is a long-standing requirement for those claiming
unemployment-related benefit to be available for and actively
seek work—an issue commonly referred to as the "16-hour
rule". The MG Rover Task Force report recommended a targeted
approach to allow individuals to undertake vocational training
of more than 16 hours a week by accessing a training allowance
from Jobcentre Plus. Opportunities already exist for claimants
of Jobseekers Allowance (JSA) to access full-time provision funded
by a training allowance, though this support is concentrated on
the most disadvantaged, including those with basic skills needs.
Access to allowance-funded training provision will be considered
within the work to progress the Leitch skills agenda.
Advantage West Midlands continues
to monitor employment statistics. The latest figures available
indicate that 92% of former employees of MG Rover have now left
benefit (5,846 out of 6,346), with 84% known to be in work. An
evaluation of the MG Rover Phase 1 activity has been initiated.
Ecotec Consultants have been engaged to look at the economic impact
of the activity undertaken in Phase 1 and the report will be publicly
available in July 2007.
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