Examination of Witnesses (Questions 100-119)
MR DAVID
SMITH, MR
PAUL EVERITT,
AND MR
GRAHAM SMITH
20 MAY 2009
Q100 Chairman: That is very important,
irrespective of the viability of the business they have taken
a view, and this is a short-term view they have taken or a medium-term
view of the sector?
Mr Everitt: It is difficult for
me to know. My sense is it is certainly a medium-term view. It
is not a question that they might come back in a couple of months
and see if you are still there, they are saying, "This is
not the sort of business we want".
Q101 Chairman: That is quite a big
statement actually.
Mr Everitt: I have had a number
of conversations with RBS and Lloyds who genuinely say, "We
want to do what we can. We want to help, it is part of our lending
commitment", but on the ground that is not how people see
it. They either see a reluctance or a set of conditions that they
cannot fulfil. Even to sustain their existing arrangements most
companies have to become involved in getting independent business
reviews done to verify to the bank they are a going concern or
their situation is okay, which costs a huge amount of money.
Q102 Chairman: I had probably a Tier
2 supplier in my constituency facing precisely that problem, very
expensive bills for the business review, and the bank pulled the
plug anyhow.
Mr Everitt: This is bad enough,
if you like, but the strategic consequences of that are that vehicle
manufacturers have to step in one way or another to actually finance
those companies. That puts an added burden on the company, but
also from a competitive and internationally competitive situation
if it is cheaper and finance is more accessible in other countries
then it is much more doable to support your supply chain in those
countries rather than here in the UK. A strategic concern for
us is that as the economy begins to grow and demand is created
that situation will get worse because, in order to fulfil orders
for vehicle manufacturers, companies are going to have to incur
significant costs. They need working capital, as Graham has mentioned,
and if that is not available then their ability to support the
industry's growth is going to be undermined.
Q103 Chairman: Given the importance
you attached to this in your written evidence I wanted to give
you a chance to talk about it in public. I hope you feel that
puts your concerns on the record adequately.
Mr Everitt: Yes.
Q104 Mr Wright: I just turn back
to the AAP loan and loan guarantee scheme. Do you think the eligibility
criteria excludes too many companies? Should the required turnover
be less or more than the £25 million and the project investment
be less or more than the £5 million? Mr Smith, you briefly
touched on that earlier.
Mr David Smith: I mentioned it
and we did raise that issue right on the very first day with Ian
Pearson and the answer we got was that they would be flexible
around those things. There is a gap also between what the EFG
scheme and AAP scheme covers.
Q105 Chairman: That is the Enterprise
Finance Guarantee scheme.
Mr David Smith: Thank you. I was
struggling with the acronym. There is potentially a group of companies
stuck in the middle between those two as well, which is why we
asked for the flexibility.
Q106 Chairman: It is quite a big
gap, is it not?
Mr David Smith: It is. Basically
the maximum under the EFG scheme is £1 million and the minimum
under the AAP scheme is £5 million for projects, so there
is a gap, which is quite an important gap because there are not
that many suppliers with £5 million environmental projects.
That is an area of flexibility we have asked for. I believe that
the Government is responding to that in the way that it is looking
at the applications. I just want to come back to a couple of things
that Paul said. This issue of bank funding is a much broader issue
still. If you look at the statistics for approvals under the EFG
scheme, there are relatively fewer manufacturing companies getting
approved than you would expect given the impact on the economy
of manufacturing. I believe that is also because the banks are
still quite reluctant more generally to lend into manufacturing.
Plus, we have had this withdrawal of trade credit insurance that
also takes away the other leg. I know the Government tried to
address that in the Budget with their scheme but the problem is
that only applies to companies that have not had their trade credit
insurance withdrawn before 1 April, so probably most companies
in the automotive sector cannot use that top-up trade credit insurance.
It really is a very difficult situation for smaller suppliers.
As Paul says, we and others—I am sure Toyota and others—are
trying our best to help those that we can but it is putting strain
on the whole system as we try and do that.
Q107 Mr Wright: Just returning to
the flexibility of the AAP scheme. Is the industry happy that
the Government is accepting that there is going to be flexibility,
they are not going to stick rigidly to the £25 million and
£5 million figures?
Mr David Smith: I am happy about
that. I do not see the individual applications going through and
as we have not really seen any come out the other end yet it is
unclear what flexibility is being applied in practice. They have
certainly made that commitment.
Mr Everitt: My understanding is
that is being followed through, there is some flexibility there.
Mr Graham Smith: My message is
that is very important, this whole issue of the flow through of
funding and financing into the supply base by finding the flexibilities
that are necessary, by encouraging banks as far as that is possible
to be a little more positive towards the sector, to not penalise
in terms of number of bases points of costs to an unreasonable
extent. There are a number of different ways where either access
to availability of credit, cost of credit, even with flexibility,
is not necessarily hitting precisely the right mark in relation
to the various issues that exist across the supply chain. I think
you are hearing a fairly consistent theme about where the fragility
is and it is in the supply infrastructure as much as anywhere
else in the industry.
Q108 Mr Wright: The CBI were quite
scathing over the length and complexity of the application form
for the AAP. Is that a particular difficulty in terms of the application,
the form, or is it the discussion after the form and the application
has gone in?
Mr Everitt: For large companies
that do have plenty of resources it is not a major problem, frankly,
but as you go down into smaller companies the more complex it
looks, the more difficult it feels and the less likely they are
to get involved. One of the problems is getting in enough people
to take it seriously enough to be able to get some results out
of the process. There should be hundreds of companies looking
to take up the opportunity. Our understanding is there have been
60-plus expressions of interest and there are probably somewhere
in the mid-teens or early 20s of companies who have started that
process and are likely to be at the larger end of the scale. Things
that help people get through that process are quite important.
Q109 Chairman: Before I hand over
to Lindsay, and to change subjects slightly and look at the other
things Government could be doing, can I wrap up about the Automotive
Assistance Programme. You are three very urbane, civilised gentlemen,
very anxious not to rock the boat, but I just want to get a sense
of the urgency. At the end of JLR's submission to this Committee
inquiry you say: "However, it is crucial that funding under
the AAP now be delivered swiftly and with maximum flexibility
in order to address the urgency of the situation and ensure that
UK vehicle manufacturers and suppliers are properly equipped to
invest for the economic upturn when it comes." I heard more
urgency and passion in those words than I have heard so far today.
Do you feel you have communicated that sense of urgency adequately
to the Committee in what you have said so far?
Mr David Smith: Whether I have
or not, it is an urgent situation. Paul used the words "national
emergency" before Christmas and that is where we are and
that has not changed unfortunately.
Q110 Chairman: Six months ago it
was urgent and nothing has happened in terms of loans and guarantees.
Mr David Smith: There is a huge
amount of tension in the system and everybody is trying to help
where we can. We are very concerned about the reluctance of the
banks to step forward here. I do not think it is because of a
lack of communication or lack of processes. I mentioned the forums
that we have been having with our supply chain and I know other
manufacturers have done the same thing, but the help is not getting
through quickly enough. One thing I was going to mention is RDAs
do still have an important role. You will be aware that I am a
member of AWM and it is very important because they do have people
on the ground and often they are better linked into the local
banks and local banking representatives. That may be one of the
reasons why the thing has been a bit slow off the ground because
the banks have been handling it centrally rather than through
their local offices. That is something the RDAs are trying to
help with at the moment, certainly in the West Midlands.
Q111 Mr Hoyle: That was the point
I was trying to get across. I believe they have played an important
role so far as we have gone into this deep slide into recession.
Without the Development Agencies I think we would have really
sunk. I appreciate what you said because I believe the Northwest
Development Agency do a very, very good job. It is a well-run
organisation and the chief exec is excellent. We have touched
on some of these schemes already, the AAP, TCI, but can I try
another one on you, the CSS—the Car Scrappage Scheme. Just
take a look at the Car Scrappage Scheme. I have been a big supporter;
I got an early day motion down in Parliament and wanted to push
for this. Am I bothered? Yes. Why am I bothered? I think it was
too little and should have been greater, but also the incentive
is for small cars, I understand that, but the fact is if you take
a typical family in my constituency they could have two adults,
two children, a dog and tow a small trailer or caravan and you
cannot do that with a Nissan Micra. While I believe in backing
UK manufacturing and the UK car industry, my view is I think we
could have gone further and harder, a little bit more incentive
than £2,000, maybe £4,000, but also to have something
for family cars so that we suit the needs and requirements of
the people we represent. Do you think we have missed a trick there?
Mr Everitt: Clearly we made quite
a detailed proposition to Government around the Scrappage Scheme
that mirrored more closely the scheme that runs in Germany which
at €2,500 is a more generous scheme. In the end that was
not deliverable and we can understand a range of reasons why that
might be because we are facing a difficult set of financial circumstances
for the Government as well as major industry. Our task is to make
the best use of the scheme that we have. I think if your constituents
look across the vehicle manufacturers who are now all signed up
and participating in the Scrappage Scheme they will find some
very, very attractive offers in all segments of the marketplace.
Most companies are offering far in excess of the £2,000 minimum
on larger products and certainly on products manufactured here
in the UK. We can spend a lot of time worrying about what has
happened but we have a scrappage incentive scheme and that is
incredibly important for our industry. I believe it will be effective.
Early indications in terms of the uplift in consumer traffic through
dealerships has been very positive. From my anecdotal conversations
with various vehicle manufacturers there are significant orders
already and, indeed, as we know, in some cases people have already
had delivery of their new car and the scrapping of their old one.
Mr Hoyle: That is good. Thank you for
that. Yes it is good and we could have made it a bit better if
the Treasury had the finances, but in the end you are beginning
to see the benefits.
Q112 Chairman: And the VAT problems
are all resolved?
Mr Everitt: All problems are resolved.
Q113 Mr Hoyle: Let us leave it at
that. I will say I went out to support my own dealership, Chorley
Nissan in Chorley, because they said this is a real boost for
our area, and I can see the benefits of that. Can I take you on
to something that I have been a big supporter of? We have got
short-time working and I believe we should actually subsidise
short-time working because you are better off keeping people in
jobs, doing the training within there ready for the upturn in
the market rather than subsidising people at the JobCentre. I
believe in training people at the JobCentre completely but we
could have kept jobs in line if we had allowed companies to do
more with short-time working and use the money we spend on those
people who have gone to the JobCentre to keep them in employment.
Do you think that could have been a winner and a big plus for
UK manufacturing, such as Germany, France and even Wales have
managed to achieve?
Mr Everitt: As part of the strategic
package that we put to Government towards the end of last year,
support for short-time working was a key element of it. We took
the view that the balance should be towards using the time to
upskill the workforce so that we could do everything we can to
prepare people for the longer term both in the successful industry
that hopefully we are going to have but also equipping people
with more and better skills so that if the worst outturn happened
they would be better prepared individually to have opportunities
into the future. We still remain committed to some form of effort.
It is interesting that the two most effective schemes that Government
has introduced are the Time to Pay from HMRC, a good opportunity
there, but the other was the Train to Gain programme. In our sector
it has been taken up very widely and has been very easy to use.
It is of itself not the answer but it did provide valuable input.
We had hoped that we would be able to build on that and increase
both the value and volume of people to whom it was open.
Q114 Chairman: Would it be fair to
say the Train to Gain scheme worked because it was a pre-existing
programme that could be rolled out and applied, the experience
was already there and had been road-tested already?
Mr Graham Smith: That certainly
helps. There was knowledge of the scheme within our manufacturing
operations; we were already using it. Additional funding or the
criteria for applying it was widening and we were able to take
almost immediate benefit from that. I have already expressed how
important retention of the skills within our manufacturing operation
was, is and will remain. Any step that facilitates that would
be worthwhile. I made the point that we have not renewed some
temporary contracts. Obviously we are adjusting to demand but
the more skills, the more capability that we can return for when
the upturn comes, the better. The extent to which some recognition
of the cost of doing that and preparing for, if you like, a viable,
vibrant future come the increase in demand, and it will come,
that is not just an investment in skills and people and retention,
it is also an investment in preparing for that future and being
in the best possible shape to exploit it. That is something we
think is important and why we were strong supporters of that kind
of provision from Government when it was included within the submission
put in by the SMMT.
Mr David Smith: Can I just add
a couple of comments on short-time working. I believe it is very
important that we have a scheme like this in the UK and Peter's
comment about there was not a pre-existing scheme being a problem
was right. It is essentially embedded in the social security arrangements
in other countries. The reason it is important is right now we
have a very difficult situation where essentially UK manufacturers
are competing against products that have been subsidised in their
production in the domestic industries of Germany and other countries.
We have got a situation where individual suppliers are taking
a decision to shut down or close production in the UK and move
production to overseas countries. It is the reverse of the thing
that we pride ourselves on, which is flexible working practices
in the UK, and in this situation makes industry more vulnerable.
I would like to say I think over the past few months, certainly
in Jaguar Land Rover and across the industry, we have seen a remarkable
realism and pragmatism from the workforce and the unions and companies
together trying to find their way to alternative arrangements
around short-time working. Essentially we have all reached slightly
different conclusions, but a great deal of credit to the unions
and industrial relations improvement in this country in getting
to those agreements, but at the end of the day unfortunately those
agreements have hit the worker in the pocket and it is the workers
in the companies that have taken the full brunt of this. I do
think if we could have some sort of social security arrangement
in place, at least if we cannot do it this time for the future,
it is a very important thing that needs to be part of our labour
practice and social security arrangements.
Q115 Chairman: This is a new point
to me. Perhaps it should not be, but it is and it is best to admit
it. Paul, I think we might talk to you about how we get some more
detail about that arrangement. It may be a question of the EIF
and the CBI and others, not just an automotive point.
Mr Everitt: No, it is a broader
issue. Certainly we are happy to provide you with the information
that we have.
Chairman: That would be very helpful.
Q116 Mr Hoyle: Obviously we are all
of the same mind that something built around a short-time working
subsidy would have been good for the industry. Do you think there
is still time? I believe now is the time to actually bring it
in and I am trying to keep the pressure on the Treasury. Is that
the right thing for me to be doing?
Mr David Smith: Yes, I think you
should keep that pressure up.
Q117 Chairman: Before I move on to
Lembit on the supply chain, I am conscious of the fact that your
memorandum to us, Paul, contains many detailed issues which we
have not gone through orally today: port rates, capital allowances,
the impact on the luxury market of the tax changes to company
cars in the Budget and so on. I do not particularly want to go
through those unless there is something you want to highlight.
The one I wanted to ask you about, and feel free to broaden out
your answer a bit, was I was puzzled that the Government's memorandum
to us on this inquiry refers to the "other wider automotive
interventions" apart from the AAP itself: the Enterprise
Finance Guarantee Scheme, trade credit insurance top-up, which
we have discussed, scrappage and Automotive Access to Finance,
as if it were a scheme, AAF, in capitals. I know that Lord Davies
you and were working on this, but I was not aware of any coherent
system or scheme being in placed. Have I missed something?
Mr Everitt: No, you have not missed
anything. The access of the vehicle manufacturing finance arms
to more and better priced finance was part of the strategic package
of measures we put to Government towards the end of last year.
It is a topic that has consumed a huge amount of time and energy
from a variety of specialist people in the vehicle manufacturers,
within BERR and shareholder executive, the Treasury and, indeed,
the Bank of England. At this point in time we have not made any
substantive progress.
Q118 Chairman: Graham, did you want
to come in with Toyota's perspective on the availability of finance
and what that means in practice?
Mr Graham Smith: Yes. Many—not
all but many—of the vehicle manufacturers have associated
finance companies, so alongside Toyota GB there is Toyota Financial
Services GB. They provide finance in two areas: one, retail consumer
finance at the point of sale, but they also provide funding and
finance for our retailer networks, in our case Toyota and Lexus.
It is not just about the availability of retail finance. There
are a number of competing organisations. This is an open and competitive
market, it is not captive to one finance company, there are independent
finance companies and banks active in this area, but rather fewer
now and some have withdrawn. I think it is fair to say that consumers
are able to access finance and there are, indeed, some subvented
finance schemes in the marketplace as part of the retail offer.
The bigger picture also includes the funding for inventory and
other funding lines towards the dealers. They employ large numbers
of people, they are businesses too and they are independent, not
owned in the main by the vehicle manufacturers. The ability of
those finance companies to gain access to funding at competitive
rates in the wholesale market, and these are complex areas around
all of the issues that have been covered in the press about banks
generally, where we have ended up is the banks have access to
a Bank of England Special Liquidity Scheme which gives them availability
of funding lines at lower cost in the main than the vehicle finance
companies, so the playing field is no longer level. That is part
of the issue. Of course, the quantity of funding available to
the vehicle finance arms is constrained as well. We are into near
bank organisations, they are not banks in the true sense of the
word and are providing loans at the point of sale. It used to
be hire purchase or various different loans or leasing arrangements,
et cetera. There is a tremendous amount of finance and
funding provided through that mechanism. That is what is continuing
to be discussed with the Bank of England.
Mr Everitt: This is to clarify
one of the points that Graham made. It should be a competitive
business and obviously a number of people can borrow. One of the
things that is of particular concern to us is one of the outcomes
of the Lloyds-HBOS merger/takeover is that the HBOS Motor Finance
Division is now basically shut for business and there is one less
competitor in the marketplace which means from our industry position
if we are trying to access finance from commercial banks they
are our direct competitors when we are trying to supply to consumers
and if there are fewer of them in the marketplace that puts us
at a disadvantage.
Chairman: You could explain at greater
length, but that is a helpful summation. Thank you very much indeed.
Q119 Lembit Öpik: One question
for the sake of the record and it is apropos a conversation we
were having earlier. Are you saying that you, as large companies,
are experiencing the same credit squeeze from the banks as the
SMEs in my constituency who are suffering because their overdraft
facilities have been withdrawn? Effectively, is that what you
are saying?
Mr David Smith: I can only speak
for Jaguar Land Rover, but clearly that is what we have been saying
from last October. Essentially this is about getting access to
normal commercial facilities and what we have been asking for
as a company is loan guarantees and Government help to facilitate
that. It really is because banks have taken a commercial view
that they are extremely cautious now about any lending into the
sector, even if it is collateralised or securitised. It is a problem
that is fairly widespread and for us as a company it has been
our big inhibitor and the thing that we have been trying to solve.
Mr Everitt: You will get a different
picture from different vehicle manufacturers because of their
individual structures and either global or regional nature. What
is clear is that the price and volume of finance is unquestionably
not as competitive as it once was and it is more difficult than
it needs to be.
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