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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