Examination of Witness (Questions 1-19)
PROFESSOR RICHARD
PARRY-JONES
18 MAY 2009
Chairman: Thank you very much indeed
for coming and kicking off this whole inquiry into the automotive
sector. We are going on Wednesday to Birmingham and the North
West on Thursday, and then taking evidence from the Minister after
the recess. So it is a small and compact but useful inquiry.
Q1 Mr Hoyle: The idea behind this is
to establish and put on record why the automotive sector needs
to be supported. You have done the NAIGT report and it includes
an assessment of the current state of the automotive industry
and its relative strengths and weaknesses. I wonder if you could
develop that.
Professor Parry-Jones: The auto
industry needs help and collaborative work with the government
because currently, although it is relatively healthy, it is not
able to compete for investment with major overseas competitors
in the sector such as Germany, France and Japan. Over the last
10 years, although it has been assembling about the same number
of vehicles, if you look at the assembly number headlines, the
industry has been hollowing out. What I mean by that is that any
industry that is increasing productivity for the constant number
of cars produced there will be less employment. That explains
part of the hollowing out. We have been losing 10,000 jobs a year
for the last 10 years and that cannot be explained by productivity
improvement alone even though the improvement has been very good
and has placed Britain fully competitive with all major industrial
competitors on productivity. In addition to the productivity job
losses we have seen the hollowing out factor. By that I mean that
the suppliers are fewer in number with fewer T01 suppliers employing
people to do core component manufacturing and development her
and more and more suppliers are doing "just in time"
assembly of complex, sub-assemblies close to the final production
line. All the stuff that is in those sub-assemblies comes from
abroad. That outsourcing of work has contributed to the job losses
in the industry. It is our contention that unless we do something
different we are going to continue to see job losses.
Q2 Mr Hoyle: In general, do you think
there is an opportunity because of the pound reducing in its value
and the euro strengthening and whether we could see a new car
plant being established in the UK or a return of some of the businesses
we have lost?
Professor Parry-Jones: I think
it is extremely unlikely because it requires you to be a good
forecaster of foreign exchange rates. If you were really good
at that you probably would not be in the car industry. You have
to be robust in your industrial investment decisions to a variety
of different exchange rate and interest rate outcomes. The industry
would not be confident enough that the exchange rate situation
we have today will last long enough to justify an investment which
is really one that will last at least 20 years. What Britain needs
to do is to produce a compelling case to investors that goes beyond
the short term, tactical opportunity, which is only a window,
of the exchange rate. The exchange rate could act as a lubricant
or catalyst but it is not powerful enough to change fundamentally
investment decisions. Britain unfortunately, fairly or unfairly,
has a poor reputation internationally for manufacturing investments
amongst international investors and particularly poor in the automotive
industry. Why is that? Because the history of British Leyland,
the more recent history of Rover, the perception that the UK government
is at best ambivalent and not particularly supportive to the industry
and the fact that historically productivity, reliability and Labour
relations have been challenges in the UK. That history lasts a
long time in international investors' minds, even though today
it is out of date. Today we have the most reliable cars in the
world. We have world class productivity. We have extremely good
labour relations but of course international investors are sceptical
because of the history.
Q3 Mr Hoyle: When I look round, we
seem to be at the top end of the market. The middle market seems
to be disappearing and yet the lower end, like Nissan and people
like that, seems to be holding its own. I do not know where you
quite put Mini but it is a small rather than a mid range car.
Where do you see the future of those two going, the small to medium
and then the large? I think the large will remain. I do not know
what your views but do we have a future in small and medium production
long-term?
Professor Parry-Jones: If you
look at what the industry in the UK does, we make three million
engines a year which is as good as you could ever hope for in
any given country. Most of those are small engines for small cars
and most of them are exported. We are in a strong position and
that is an opportunity for further strengthening. On the vehicle
assembly itself, that you are right. Because of the historical
problems I have described, we have kind of re treated to an assembler
of global, mass-market vehicles and a developer of niche premium
products such as Land Rover, Jaguar and Aston Martin. Interestingly
enough, we are still the second largest manufacturer and developer
of premium vehicles in the world. Germany it dominates but number
two, surprisingly, is Britain and after that Japan and America.
We have strengths in the premium sector but they are a little
fragile at the moment and the sooner we get through the current
challenges there will be a significant opportunity for those to
be part of the long-term picture and on the smaller vehicles it
is how can we claw back more of the value chain.
Q4 Mr Hoyle: Within your report,
you quite rightly say we are very strong in construction plant
but in fairness JCB have opened in India, with two in China. Looking
around the world, is it a consequence that we could lose that
strength within the construction market or do you believe that
we will be able to hold that percentage share?
Professor Parry-Jones: I think
we will be able to hold the percentage share because the growth
rates in the market in the areas where JCB is investing are very,
very rapid and most of the investments being made they satisfy
local demand. There is a degree of portfolio balancing. I am sure
that smaller excavators will be made in India and exported elsewhere
but the complex ones will probably still continue to be made in
the established economies.
Q5 Mr Hoyle: Do you think the construction
market is replicating the car industry where we were a volume
small/medium sized manufacturer? More or less the prestige market
is going very well and that is where a lot of jobs are. Is the
construction market replicating what we have seen in the car industry?
Professor Parry-Jones: At this
stage I need to issue a health warning. I am not an expert in
the construction industry. Although we took evidence, we did not
take anything like as much detailed evidence in that sector as
we did in other sectors simply because of their relative size.
However, we did have a member of JCB on the group and I did acquire
sufficient knowledge to know that international competition in
the construction industry market is not as brutal and fierce as
it is in cars and trucks. I do not think the pattern will be replicated
in anything like the same way or at the same speed.
Q6 Mr Hoyle: It does not look like
we are going to get another volume manufacturer in the UK so can
we exist as a major car player with what we have? I think I am
right in saying that we are about 12th in the league of car manufacture.
What are we in sales into the UK? What is the percentage of the
market in global terms? It seems to me everybody wants to deliver
cars to the UK so it is obviously a good place to do business.
What percentage do we fill of the UK market from the UK?
Professor Parry-Jones: The UK
market is about 3% of global demand, around two million units,
and global demand is around 60 million at the moment, going on
towards 80 million over the next few years. We manufacture 1.7
million so we are in deficit by 300,000 at the moment. That deficit
of course will increase if the hollowing out that I have described
continues. Does that answer your question?
Q7 Mr Hoyle: It does. Is there anything
we can do?
Professor Parry-Jones: Yes.
Q8 Miss Kirkbride: I wanted to ask
you about R&D and what your views are on it which appear to
be largely that there has to be a significant, indigenous carmaker
in order to attract sufficient international foreign investment.
I wondered if you could expand those views.
Professor Parry-Jones: I believe
the relatively lower levels of R&D in the UK within the automotive
sector are contributors to the hollowing out process. What we
absolutely need to do to make the industry more robust as a contributor
to the UK economy and a source of employment is to reverse the
trend in reducing R&D in the UK. One of the main areas where
we have lost R&D is the T01 and the T02 supply base. By a
T01 supply base, I mean of course the people who deliver directly
to the vehicle manufacturers. T02 are the people who deliver to
T01s. We have lost a lot of those R&D facilities. The reason
why they tend to agglomerate in Germany and Japan is that if you
are a T01 supplier like Bosch or Continental EU will basically
look at your investment portfolio, your R&D locations, and
you will say, "Where are the centres of gravity where cars
are developed?" America, Germany and Japan. I have exaggerated
slightly to make my point. Obviously there are a few in Italy
and France but the big centres of agglomerated production where
the trends get set are where people follow and they tend to be
in those three areas. If you have limited resources and you want
economies of scale, you will tend to put your core R&D facilities
close to the majority of designer facilities and then you might
want satellites to support less important customers remotely.
You have to have satellites because many engineers need in day
to day contact. The high value added R&D is the core staff,
not the satellite staff. That is the picture we found in our study.
The reason we proposed some countermeasures is to try and provide
these large T01 suppliers with really compelling reasons to come
back and invest in the UK.
Q9 Miss Kirkbride: It is not too
late then?
Professor Parry-Jones: I do not
believe it is too late at all. The window of opportunity is the
electrification of the car. In the process of technology, incumbents
will have less of an obvious advantage than they have over the
existing technology where the incumbents are so well entrenched
it is almost impossible to dislodge them. Where the technology
is changing significantly, new skills are required and the incumbents
do not have as strong a position. They still have a strong position
but at least it is somewhat weakened compared with the traditional
technology.
Q10 Miss Kirkbride: What do we need
to do? You say the electric car is the chance for that.
Professor Parry-Jones: I did not
say that. A small correction: the electrification of the car.
That is a very different concept to an electric car.
Q11 Miss Kirkbride: What do we need
to do to get that R&D here based on that electrification?
Professor Parry-Jones: In our
report we have developed a technology road map for the industry.
This is a first. This technology road map is the consensus view
of all the major players in the UK industry and the automotive
sector. For the first time there is a coherent, single answer
to any question a researcher or a government resource allocator
wants to ask about what the industry needs to work on. Instead
of Nissan saying this, Ford saying that and BMW saying something
else, we are as an industry saying, "This is the important
stuff." What we would like is to have this technology road
map used as the guide by all the different bodies—and there
are rather a lot of them—in charge of dispensing government
allocated resources on particular projects. We have already started
working very closely with the TSB who joined our group half way
through to start to pick up some of the ideas that we have been
developing, so that they could use our technology road map in
selecting projects that are going to be funded under the various
programmes. That is one example and within that you will find
a lot of electrification technologies. We have identified most
of them. What we are currently in the process of doing—because
although we have issued our report we want to carry on working
until we hear the government response to make sure that we do
not lose momentum—is working together with the department
and Ricardo to identify, of these technologies, which ones are
the most sticky.
Q12 Miss Kirkbride: The indigenous
car industry here is of course Jaguar Land Rover. How do you feel
they fit into your R&D plans and what the government might
do given that there are some negotiations going on with JLR?
Professor Parry-Jones: Jaguar
Land Rover were members of our team and played an important role.
The large car sector in many ways is an even more important sector
to develop the technology for lower carbon vehicles than the small
car sector. That may sound surprising and counter-intuitive. Large
car customers are more affluent than small car customers. In the
early stages of deploying new technology it is inevitably more
expensive for two reasons. One is because it is early we have
not learned how to make it cheap yet and the second is it is small
scale so we have not benefited from economies of scale. Initially,
this low carbon technology is too expensive for Fiesta, Focus
and even Passat customers to afford. The industry will have to
deploy it on the premium vehicles. Britain really only has Jaguar
Land Rover and Aston Martin as opportunities to be the pioneers
and pilots for this new technology. Jaguar Land Rover first of
all needs to reduce the carbon emissions in its fleet to be competitive
with Mercedes, BMW and Lexus and, secondly, it provides the industrial
base opportunity for Britain to participate in that in real time
with regard to piloting in the premium sector. If we miss that
opportunity it will be really difficult to piggy-back on it for
the volume applications later.
Q13 Chairman: It was put to me by
a major tier one supplier for this industry and other industries
too that JLR is of fundamental importance to the automotive supply
sector here in the UK. To lose JLR would be a devastating blow
to the major suppliers. Do you share that view?
Professor Parry-Jones: Completely.
A lot of suppliers that have deeper competences that go beyond
the just in time assembly of final assemblies close to the line
site are dependent very heavily on Jaguar Land Rover business.
If Jaguar Land Rover goes under, they have no business model.
It is important in its own right but it has additional, hidden
implications. If you are a big, global investor like Toyota or
Nissan or Ford, one of the criteria you are looking for to continue
making investments in a host country is a capable supply base.
If the answer is, "Whoops, it looks like it is hollowing
out or collapsing" the hurdle over which the investment decision
makers have to jump will be that much higher. I do not think it
is an exaggeration to say that the loss of Jaguar Land Rover might
well be a tipping point in tipping a critical mass of supply base
in this country into a situation where it is very difficult for
other major manufacturers to continue to operate at the same level
they do today.
Q14 Chairman: We are taking evidence
in Birmingham from JLR on Wednesday. We are doing another inquiry
and we shall be writing up the report soon on the higher value
added economy. There are only three industries in the UK of significant
scale which offer higher value added opportunities: aerospace,
pharmaceuticals and the automotive sector. I know your background
is automotive but do you think the automotive sector is that important
any longer in the UK? Is it one of the three? Is it that important
in broader, macro terms?
Professor Parry-Jones: Naturally,
I have a slightly coloured view of this having spent 38 years
in the industry. If you can set that aside for the moment, the
facts speak for themselves. The gross value added per capita of
the auto industry compares very well with other industries. I
would not argue whether it is in the top three or four but it
is certainly in the top five. Within that, the R&D portion
and core components are a critical contributor to the high value
added position it enjoys.
Q15 Chairman: I mean the manufacturing
sectors.
Professor Parry-Jones: It is very
hard to separate manufacturing and R&D. What are the core
processes in any manufacturing industry? Stamping metal, forming
it, joining it, machining it, forging it and casting it. If you
do not have those five competencies in your country, it is very
hard to be an internationally effective manufacturing economy.
Those five core processes of manufacturing are al underpinned
by the auto industry. The auto industry has been the innovator
in all five of those over the last 100 years. Most other manufacturing
industries have piggy-backed on the innovation developed by the
auto industry.
Q16 Mr Oaten: Your report talks about
this ambitious road map. In terms of how that is going to be brought
to life, it is going to require a fair amount of government investment
according to the report. Are you concerned at all about the level
of government involvement and the danger presumably that, if the
government does get involved, the government will have to decide
where to invest and the government will be picking winners?
Professor Parry-Jones: Yes, I
am. That does not mean we should not be doing it. It just means
we have to be very careful how we do it. One over-arching principle
is the government cannot avoid picking winners. It just has to
be careful how it does it. In the environment and transport area,
they should only pick outcomes. They should incentivise design
outcomes. A design outcome is how much carbon do you emit per
passenger kilometre. How it is done the planet does not care.
When it comes to business and science and education, we do not
have the luxury of only worrying about outcomes. We have to worry
about which areas we decide to support. At the moment I see government
confusing the issue too much and we see leakage between thinking
about desired technologies back into the transport and environmental
agendas. That is not a good idea.
Q17 Mr Oaten: The government sets
the outcomes that it is hoping to achieve. The government then
has to put the money in to obtain those outcomes but it has to
decide who is best suited to achieve those outcomes, which is
where the difficult judgments come in picking the winners.
Professor Parry-Jones: Exactly,
but that is not picking winners for delivering the outcomes. The
outcomes will happen anyway. The Germans will supply the low carbon
cars if we do not.
Q18 Mr Oaten: I am not following
you.
Professor Parry-Jones: If the
government says that in the future carbon emissions have to be
100 rather than 160 grams, at the moment we import about 80% of
our cars. If we do not provide the answers, customers will buy
cars with fiscal and other incentives from government that achieve
100 grams. They will just do it because they will have to. The
separate question of how does the British economy participate
in that transformation is where you have to pick some winners.
The transport and environmental objectives can be met completely
without any involvement from British industry.
Q19 Mr Oaten: What you are saying
is, if we hit some outcomes as a government, in effect we may
not be helping our industry. We may be helping some other country's
industry who can better achieve meeting those outcomes.
Professor Parry-Jones: Absolutely.
For example, if we legislate for too rapid and too punitive a
reduction of carbon on premium vehicles, we will not give time
for our indigenous manufacturers to respond to the international
agenda. We may exacerbate their difficulties.
| 
