The Automotive Industry in the UK - Business and Enterprise Committee Contents


Examination of Witnesses (Questions 60-79)

MR DAVID SMITH, MR PAUL EVERITT, AND MR GRAHAM SMITH

20 MAY 2009

  Q60  Lembit Öpik: Just one question. On R&D, without sharing any competitive secrets, do you have a narrative to that research? Do you decide, for example, to focus on the environment and try to be a world leader on that or on improving added-value on the premium range? I am interested in how you organise that R&D and the purpose for asking that is because it seems to me that by doing so one can create a particular specialism and maintain an advantage.

  Mr David Smith: Clearly Jaguar Land Rover has been successful in operating at the premium end of the business and we will continue to do that. Our investment is certainly about developing design capability, technology and features at that end of the business. There is a huge commitment over the next few years, over £800 million, which for us is a large investment in the future, in green technologies. As a business we have made a commitment that will improve our fuel economy and reduce our CO2 tailpipe emissions by 25% over the next few years. That is a very big commitment that we are making jointly with our suppliers and the universities in the UK. Environmental innovation is absolutely critical to our future, which is why in this very difficult economic situation that we find ourselves in anything that reduces our ability to make those environmental innovations is quite serious for the long-term future of the business.

  Q61  Lembit Öpik: In terms of electric technology, is that something which (a) you are considering and (b) is it feasible for you to do as an individual manufacturer?

  Mr David Smith: By the time we get towards the end of the next decade, so 2025, we will increasingly see electrified vehicles as pretty commonplace. Clearly it is well-known that we have to make big improvements to the electrical infrastructure, to renewables and distribution, but on the vehicle side there is a lot of technology coming that over the next few years will probably be more focused on improving conventional technologies. Increasingly we will see further hybridisation, the use of plug-in hybrids and then a move over time towards more electric vehicles as well.

  Chairman: This is an issue we might return to at the end if we have the opportunity to do so.

  Q62  Mr Wright: At the back end of last year and certainly the beginning of this year the automotive industry would say it was very grim in terms of the short-time working and extended Christmas period. Is it still as bleak as it was at the beginning of the year or are there initial signs of recovery? Indeed, are there any proposals to reduce production even further?

  Mr Everitt: Certainly at this particular moment in time you would not find too many people who think things are getting better. Probably as we finish the first quarter of the year the sense is that things are not getting worse and that is a positive development. We are all looking at what is going to be probably a very long and slow recovery. What we have seen the industry try to manage during the last quarter of 2008 and first quarter of 2009 is to adjust to these unusual circumstances and, as a consequence, we have been working through some of the things you have mentioned. Sadly, a lot of people have let go of their temporary and agency workers, people have introduced extended shut-downs and short-time working. We have seen some voluntary but also, sadly, some compulsory redundancy schemes and, what has been unprecedented, we have seen pay freezes, indeed pay cuts, from the top to the bottom of businesses. I would say the sole focus for most companies is ensuring that they keep the valuable staff they have, or as many of them as they can, because we are confident that we can succeed into the future and the only way we can do that is by having that industrial capability and the people are a key part of it. What we have endured is a very difficult time and we continue to face major challenges but perhaps things have stopped getting worse.

  Mr Graham Smith: If I could reinforce that. Approximately 85% of what we produce in the UK is exported, so it is not just the state of the UK market but the state of the wider European market that drives the level of demand. Where there have been scrappage schemes, like in Germany, the market is actually up year-on-year. Overall, particularly our version of Europe, which does include, as I have already mentioned, Russia, is down about 25%, very similar to the UK experience. 25% decline in demand inevitably means adjustment to manufacturing processes. We have attempted to do all the things that Paul has said. First and foremost we want to retain the skills and the understanding of our production processes. The Toyota production system has got, if you like, global recognition. It is something that is not just about process, it is also about culture so, therefore, it is about the people, the relationship, the way we work with member representatives, which we do very positively and successfully. We have tried to manage our adjustments whilst retaining all of our permanent employees, as we have in other parts of the world. That is absolutely critical and is very painful. Across all of our operations we are sharing that burden. I and all of my colleagues, certainly in terms of pay freezes, no bonuses, not being paid for certain days during the course of the year when we are not manufacturing vehicles, et cetera, and then we have got days that are either collective shutdown or whatever, have taken many, many steps to make the adjustment and do it in such a way that we retain our capability. The other aspect of the European situation is when the market starts to decline of course you attempt to review the situation, understand how far that decline is going to go, how serious will it be, and that is very difficult to forecast so, therefore, there is a tendency to maintain for a period of time levels of manufacturing, levels of output. The result of that was there was a rise in inventory and that has probably been fairly universal across all vehicle manufacturers across all of Europe to a greater or lesser extent. That has been managed down and it is probably fair to say there is a closer fit between levels of inventory and the current reduced level of the marketplace. Again, reinforcing Paul's point, it is not getting better but when you are reducing inventory you are building at a lower rate than the market demand, you are below the level of demand to bring down your inventory. It is that process that is, to some extent, beginning to be worked through but it has been desperately difficult and painful, hence the production adjustment. That is the condition for Toyota. It affects not just the UK operations but our wider European and global operations as well.

  Mr David Smith: I agree with Graham. We are an export business at heart. We export about 80% of our production. We are seeing our world markets down about a third overall. In fact, the premium end of the business has been impacted generally a bit harder than the volume end. As a consequence, in the first part of last year we were riding high, we had some strong sales, we were making money and then we were hit very, very hard in the second part of last year. We have seen those conditions unabated through the first part of this year. Apart from maybe China and the UK being slightly stronger than we expected a little while back, we are still seeing a lot of weakness. Germany and the Continent are very, very weak. The US market is very fragile as well. We have made the same inventory adjustments as all other manufacturers which has resulted in production down 50/60% over the last few months. That has hit the supply base very hard and it has hit our employees very hard. We have had all of our plants now on single shifts with significant impacts on working time, four day weeks for months now. The average guy on the line has probably seen his pay impacted by anything up to 20%. It has been a very severe impact across the business. I do believe that Graham is right that we are through, or very close to being through, this de-stocking period now. Fundamentally, demand is still about a third below where it was a couple of years ago and I do not see that improving that quickly. I think we are going to see these market conditions continue through this year into next year and it will probably be two or three years before we return to more normal market conditions.

  Q63  Mr Wright: Do you think we are at the bottom of the trough at the moment and are just going along waiting?

  Mr David Smith: I would say individual markets are going in different directions. There are still some markets, especially on continental Europe, which are going backwards if you allow for the scrappage schemes, looking at the underlying trends. Others may be improving a bit. We are going to bump along the bottom from here. This is not just about consumer demand and volume. The big impact on the industry as well as having to cope with that has been having to cope with almost a complete withdrawal of funding into the sector and, therefore, the whole issue around availability of credit from banks for the industry, suppliers and consumers, has made this very painful adjustment period extremely difficult to cope with. All manufacturers are having work very cautiously at the moment with their cash flow.

  Chairman: I want to take up this question in some detail a little later on, so can we bank that thought for the time being.

  Q64  Mr Wright: My last question is in relation to Nissan. Just recently they announced they were taking on 150 extra staff because of the increase in demand that they saw. Do you think they have jumped the gun or is their situation somewhat different from everybody else?

  Mr David Smith: As I understand it that was partly due to the scrappage schemes that they are supplying especially on the Continent and now we have the UK scheme starting. As a business we will start increasing our production as we get through this de-stocking period but, as I say, it is still running at very low levels and, therefore, we will not move off the short-time working until we are confident that we see strong demand coming back into the market.

  Q65  Mr Hoyle: David, obviously you are getting rid of your stock and production is going to increase. Is that across the two sites? That is the first part of the question. The second is recognising how important the market is, all the evidence we used to receive from you was the problem with the UK is the pound is too strong and the euro too weak, now that has reversed are you seeing the benefits of that coming through? Have you changed your stance? Toyota was always very strong on the euro in the past. Have you seen any benefits now we have seen that reversed and Britain is actually a good place to do business?

  Mr David Smith: I am a great believer in Britain being a good place to do business.

  Q66  Mr Hoyle: Hear, hear!

  Mr David Smith: In answer to the first question, yes, all of our plants will start seeing some improvement in production because we are through the de-stocking period. This is an important year for both Land Rover and Jaguar. We have seven major product launches this year and we are just beginning to launch our products at Solihull and the new XJ at the end of the year at Castle Bromwich, so important new products. I will let Paul comment on the sterling issue, but for us it is an improvement in our margins certainly and the critical issue is the demand is not there at the moment and until that returns in key export markets like the US, Europe and the Middle East then the impact is going to be subdued for us. We are also seeing an increase in import prices rolling through still. I know it may seem like the commodity price boom peaked last year but a lot of those price increases are still coming through the supply base, so there are still a lot of import base cost increases coming through as well.

  Mr Everitt: The general point on exchange rates is from a manufacturing point of view, yes, it makes things slightly better, the problem is at the moment the levels of demand globally are not great so you do not get a great deal of benefit from it. The key is about stability and the longer term outlook for exchange rates. One of the reasons in the first question about why has there been this hollowing out has been because of the sustained level of relative high disadvantage in terms of exchange rates. We all know today that the pound has hit the highest level for some considerable time and apparently that is because everyone is in favour of feeling confident about the banking sector.

  Q67  Mr Hoyle: I thought you were going to say the Speaker!

  Mr Everitt: I will leave that for you. The short-term issues are directly intertwined with the longer term strategy that the country wants to have in terms of manufacturing because that longer term is what people need, the certainty and stability going forward is what is going to determine how attractive the UK is for increased investment.

  Mr Graham Smith: If I could just pick up on your comment, Mr Hoyle, about us being fairly strong about the exchange rate. Let us be very clear, we have been very strong about the benefits of stability in relation to exchange rates and if you are part of a currency union or currency zone then that stability is guaranteed. What we have always said, however, is that the pound, the euro and all of that is a matter for the UK Government and UK citizens, not a matter for Toyota. We have not commented on whether there should or should not be any realignment, so let us be clear about that. Having said that, again I refer to the integrated nature of our operations. We have a wide model range and we do not manufacture all of that range in the UK. We have very, very important manufacturing in relation to two models and a major engine plant. Things are moving in both directions: we are importing certain components and exporting vehicles, et cetera. There are swings and roundabouts in relation to the exchange rate. Stability planning and degrees of certainty are what are helpful to manufacturing and we could not run our business based on, if you like, opportunistic responses to a particular exchange rate for a period of time that could easily swing in a different direction and cause a judgment to be inappropriate.

  Q68  Mr Hoyle: So I could say you are smiling a little more now than you were two years ago.

  Mr Graham Smith: The instability in the exchange rate remains unhelpful, that is all.

  Mr Hoyle: I understand.

  Chairman: You have got what you want, but not when you can use it basically.

  Q69  Miss Kirkbride: The Automotive Assistance Programme is obviously something we want to talk about and perhaps all of you would like to comment on my first question. Are loans and loan guarantee schemes the right way forward for your industry?

  Mr Everitt: When we set out the package of measures that we were looking for in October/November time of last year, loans and loan guarantees were absolutely what we were looking for. The industry has always sought the ability to help itself through this difficult situation and for us the problems were getting access to credit and finance to allow us to sustain our businesses. The loans and loan guarantees were specific requests that we made to Government both in terms of supporting European Investment Bank funding that was being made available but also funding directly here in the UK. The Automotive Assistance Programme and its line was as close to being what we had asked for.

  Mr Graham Smith: From our point of view, the important comment is first of all we are members of the SMMT and absolutely subscribe to the position taken by the SMMT and are very supportive of it. Indeed, during this period I was President of the SMMT, so I was very engaged with Paul in all of those discussions. I am here today as Toyota Motor Europe and the comment I think I must make is that the particular situation of every company is different. Some are regional companies and others, like my company, are globally established and, of course, there is a range of financial strength, of balance sheet strength, credit rating, et cetera, and that will depend on access to the availability and cost of funding. Not every company has needed to access the schemes that we have been calling for—EIB, Automotive Assistance—and often is able to secure funding possibly at the lowest costs as well. To be fair, my company falls into that category but what I want to do is to speak up for the supply base. I know we are going to come back to that, but this is an issue that is particularly relevant to the supply base and it is for the smaller companies, the supply infrastructure. We have heard the words "hollowing out" as a description of the trend that has taken place but, however you want to describe it, it is fragile in the UK at the present time and strategically is probably the biggest single threat to the world class industry and the world class manufacturing operations that we have here at the vehicle assembly and engine manufacture level.

  Q70  Chairman: I do want to stop you there on the supply chain because we will have questions on that later.

  Mr Graham Smith: It is relative to the availability of credit. There is a range of issues for the supply chain companies but availability of finance and credit is one of them. The final thing I would say is that unfortunately there was a tendency, not necessarily by Members of this Parliament and not necessarily universally, to characterise the requests that we were making as some kind of a bail-out. This is commercial funding from banks, a guarantee facilitates that but it is not a grant, it is not cash to us, it is money that is borrowed on commercial terms that has to be repaid. We view lines of financing in that context: commercially available, it costs money and we try to minimise the cost of our borrowing obviously. It is not under any circumstances, as far as we are concerned, a bail-out or anything like that. That is the way all of the companies in the UK view it.

  Q71  Miss Kirkbride: JLR is the jewel in the crown of our region. How do you feel about that?

  Mr David Smith: Let us go back for a second to why I think the industry drew attention to this. We said two things in October/November. Firstly, we needed demand boosting methods and, secondly, we needed to address the issue that we could see coming very quickly in the supply chain liquidity. Two things happened. Firstly, the commercial banks were very cautious about lending into the sector, if lending at all. Secondly, we saw the withdrawal of trade credit insurance, which had been an important part of the factoring arrangements that suppliers made between themselves. The Government responded to that with the announcement of the AAP which has two parts to it. It has the support, as Paul was saying, for the EIB clean transport facility and, secondly, support for commercial lending into the sector, both through loan guarantees. At the time that was announced the industry identified some potential issues with that and we can come back to those in some more detail. At the time the Government addressed those saying they would try and be as flexible as possible in the operation of the scheme and accelerate its implementation. The frustration for everybody, and I am not saying this is just manufacturers because I think the supply chain and Government as well are somewhat frustrated with the pace at which we have been able to implement this. We have done a lot of things in our supply chain. For instance, a couple of weeks ago we had a summit in the West Midlands with our suppliers supported by the SMMT and BERR and others trying to go through the principles of the scheme again. We are still suffering difficulties getting it moving though.

  Q72  Chairman: When you say "we", do you mean JLR or the industry?

  Mr David Smith: JLR certainly but the whole industry. I am not aware of anybody having received any support through the AAP yet. I do not think anything has come out at the end of the pipeline.

  Q73  Miss Kirkbride: The start date was when?

  Mr David Smith: The scheme was launched at the end of February and received European clearance at about that time as well.

  Q74  Miss Kirkbride: So it has been 10 weeks.

  Mr David Smith: This is really about how we can accelerate this and get it moving more swiftly. This was an urgent need back in October/November and this is what we need. For JLR in particular, we have already received loan approval from the EIB for a substantial facility, £340 million, against our future technology investments. To unlock that we have to have the loan guarantees in place from the Government and, unfortunately, I am not able to discuss too much about those negotiations with the Committee but—

  Q75  Miss Kirkbride: Can you give us a flavour as to why it is taking so long?

  Mr David Smith: Until we can unlock those loan guarantees we cannot get access to the EIB money and, therefore, we need that to happen as swiftly as possible and that is why we are asking the Government to conclude those discussions as quickly as we can.

  Q76  Miss Kirkbride: Those discussions are taking place between you and the Treasury?

  Mr David Smith: Between ourselves and BERR, yes.

  Q77  Miss Kirkbride: So those are the only two parties at the table who are having difficulty agreeing?

  Mr David Smith: The negotiations are happening between ourselves and BERR.

  Q78  Miss Kirkbride: It is 10 weeks on, an urgent situation, and it still has not happened?

  Mr David Smith: That is correct.

  Q79  Miss Kirkbride: The money that will be forthcoming, hopefully at the end of this period, what will be used for and how vital is it to JLR?

  Mr David Smith: As I said, we are investing about £800 million over the next few years in green technologies and that is a wide range of things: lightweight vehicle structures; new engine technologies; hybrid technologies; a whole variety of different things. The money is against those individual projects. It is very important to us because clearly we need to make those investments to be competitive. To be honest, if JLR does not make that research and development and industrialisation commitment in the UK we probably will not have a low carbon vehicle industry in the UK which will have very severe implications down the road for the ability of the UK to sustain a viable industry. It is essential that we do make those investments. Unfortunately, there will be severe consequences down the road if we cannot make them now. The sooner we can get this money unlocked, the better.


 
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