Examination of Witnesses (Questions 120-130)
MR DAVID
SMITH, MR
PAUL EVERITT,
AND MR
GRAHAM SMITH
20 MAY 2009
Q120 Lembit Öpik: Thank you
for that. Moving on now to the supply chain, and it has come up
a few times already, to focus on this explicitly. My vested interest
here is there are quite a lot of supply chain related businesses
in Montgomeryshire and they are not looking great. From your perspective,
how healthy is that supply chain?
Mr Everitt: From an industry position
this has been a very difficult period and the greater vulnerability
is clearly within the supply chain because the scale of the businesses
is smaller, their ability to access finance that much more difficult
and their reliance on a limited range of companies creates a number
of strategic vulnerabilities for them. There is no doubt that
the supply chain is in a difficult set of circumstances but, having
said that, I am also aware of a number of companies that are clearly
fighting their corner and staying in business. I do not want to
be part of a further undermining of confidence in the sector but
it is tough for everybody.
Q121 Lembit Öpik: Is the Government
doing enough to support the supply chain?
Mr Everitt: The two issues we
have been talking about are linked. There are a variety of schemes
out there with reasonable flexibility. There are things to help
and support the supply chain but it needs quite a lot of coordination
and in most cases needs a bank, or banks, to be proactive in supporting
individual companies. There are some good things out there, but
the cohesiveness of the collective effort, if you like, is not
always where we need it to be.
Mr Graham Smith: If I could just
add, as far as we are concerned the supply chain is clearly more
vulnerable and fragile now than it was two or three years ago.
That is point number one. Number two, they have struggled in relation
to access to funding and finance for a wide range of reasons and
I do not want to get repetitive. All of the flexibility that Paul
has referred to is going to be necessary to assist them in their
really strong efforts to find a way through this downturn in demand,
and for them it is very significant, and remain in the UK investing
in employing people here in the UK. I am speaking now in relation
to those of our suppliers who are based here. We have to recognise
that many of them are international companies, not necessarily
British plc organisations. Often it is a plant of an international
company which has plants in other locations in Europe and, indeed,
globally. The downturn in demand has taken place across the planet
in our sector and so, therefore, degrees of consolidation are
necessary as part of that survival. I am sure they will also quickly
rebuild capacity and capability as demand starts to increase.
The risk is constraints on availability of funding, difficulty
in restructuring and increased costs associated with the challenge
of maintaining their funding lines. These are the kinds of issues
they have to confront and some, unfortunately, will go into administration,
one or two have already, and some will consolidate and it may
not be here in the UK. In other words, they remain in business,
they continue to make the component but they might have three
plants supplying a number of manufacturers in Europe, one of those
plants may go and the risk, given the challenges they are facing,
is it could be a UK-based plant. It is for these reasons that
we call for maximum effort from the Government around the announced
schemes, and I do agree that we do not want any more initiatives,
we just want the current arrangements to focus very specifically.
I do not want to get in the way of discussions that JLR are having,
but from our point of view our emphasis is towards precisely your
constituents and others who are in this sector supplying our vehicle
and engine assembly plants in the UK.
Q122 Lembit Öpik: That is a
very interesting analysis. It sounds to me that those are geographical
considerations. Having a reasonably close supplier, is that a
consideration? What other influences do you have when you choose
your suppliers?
Mr Graham Smith: Once again there
are very many considerations. Geography is a consideration, although
I would not want to say it is the dominant consideration. In our
company it would be around consistent quality, consistent delivery,
in other words meeting schedules on time every time because just-in-time
manufacturing does not operate otherwise. Clearly it is around
price and value. It is in all of those areas. If all those three
were negative in relation to a particular supplier then being
close to a manufacturing plant would not overcome that negativity.
In other words, on logistics alone there is not enough variability
in the cost. Bringing a part a little further will not overcome
inadequate quality as far as we are concerned.
Q123 Lembit Öpik: Does that
go for JLR?
Mr David Smith: Clearly there
are different kinds of supply arrangements in place and, as Graham
was indicating, there are suppliers who are global who are providing
us with technology as well as components and there are other suppliers
who are much more localised and will be supporting a just-in-time
delivery system. There is both a short and a long-term issue here.
The longer term issue is the kind of things we have been talking
about in the NAIGT report, which is unfortunately we have very
few Tier 1 suppliers in this country who are doing R&D now.
A relatively small amount of the total R&D is done by suppliers,
and we can come back to that. The short-term issue is much more
acute and there are two aspects. Firstly, can suppliers survive
through this period? Suppliers with poor businesses probably will
not and unfortunately I think there has to be some restructuring,
and Graham alluded to that. We will try and facilitate that to
happen in the best way that we can as a vehicle manufacturer.
What I worry about is those who have basically good business models
who are really suffering through this slow period and then will
have difficulties as we start ramping up because they have not
got the credit lines to actually increase their production again.
Clearly that is a major threat for us if we cannot do that. I
do come back to trade credit insurance because it is not just
about bank lending, it really is a pretty significant factor,
especially when you get into the Tier 2 and Tier 3 supply base.
Unfortunately, although the Government has tried to take action
there, I know, the action that it has taken is not really going
to help the automotive sector. The one thing I would like it to
look at again is whether it can do something more on the trade
credit insurance side for the automotive sector.
Q124 Lembit Öpik: It sounds
to me you are saying the supply chain is suffering from the same
bank aversion to lending that you as the large macro manufacturers
are experiencing. Would that be a fair comment?
Mr Graham Smith: In many cases
more acute.
Q125 Lembit Öpik: That is useful.
Finally, obviously if some of these go to the wall you are going
to carry on needing the parts, so would you consciously foster
the relocation to near you of companies that were supplying you
previously or would you simply outsource that from abroad, for
example?
Mr Graham Smith: I do not think
there is any vehicle manufacturer that would not try to find a
way to help a quality consistent supply partner. David has alluded
to it and I will say it for my company as well: we intervene,
we try and help, we will even send some of our people to try and
overcome particular issues and offer particular advice. We are
not alone, others do the same thing. They are strategic partners
and without that supply infrastructure, whether it is component
supply, technology supply, or a combination of the two, they are
absolutely critical to the successful continuation and rebuilding
of the volume in our own assembly operation. From that point of
view we would not lightly abandon, we will assist. We will try
and find solutions that make the most economic sense for both
the supply partner and ourselves. Logistics and proximity will
be a factor but, as I have already said, not the only factor.
Q126 Lembit Öpik: I guess that
goes for you too?
Mr David Smith: Yes, absolutely.
We have already seen several examples over the last six months.
Even where suppliers have gone into administration, vehicle manufacturers
have worked together to try and find the right solution to those
situations. It is very important that we do that. Clearly there
are competitive considerations, there always have to be. We need
to make sure that we come out of this recession with a very intact
supply base or else the vehicle manufacturers who are here producing
1.8 million units in peak years will simply not have the support
they need in the local supply base and we will end up importing
a lot more components.
Q127 Mr Hoyle: Part of this has been
about losing the supply chain but what can you do? I know that
joint projects have been done in the past and it is about R&D.
Do you work on R&D joint projects for the supply chain? Also,
is now the opportunity to do that because just prior to the downturn
the pound was weakening and there were signs that some companies
were willing to come back to the UK, and have you seen any evidence
of that?
Mr Everitt: I do not think I can
say that I have seen a huge amount of evidence but what I will
say is during the course of last year and certainly around the
work that we were doing on the NAIGT I went to all of the vehicle
manufacturers around the country and was quite surprised at the
number of people on the ground who said, "Actually, if we
could find some people or more local sourcing that would help
us for a variety of reasons". One of the strong recommendations
out of the NAIGT is a greater sense of collaboration with Government
but also across industry to take a more strategic view of what
might be both short and long-term and more viable to be sourcing
in the UK, but I do not think it is going to happen on its own.
Q128 Chairman: That leads me on to
my last question very nicely. We took evidence from the Chairman
of the NAIGT on Monday and all three of you in different capacities
served on that, one on the expert group and one on the steering
board, so you are all part of it. One of our absent friends today,
Brian Binley, gave the Professor a bit of a rough time and if
I can characterise what he said, he said that this is a huge bureaucracy
to committee structures set up to pick winners going against all
the conventional wisdoms of the last 30/40 years, a bureaucracy
with a government involved when you should be doing it yourselves,
just picking winners. What would your John Humphrys sound bite
answer be to that accusation?
Mr Everitt: My response to that
is if you have identified a strategically important industry it
is essential that Government and industry work collaboratively
to identify the right things to support and allow that industry
to bring wealth and prosperity to the country. I do not believe
that is about picking winners and I do not believe that is about
setting up a bureaucracy, but it is about having a strategic relationship
and long-term commitment to create an environment where that sector
can grow and prosper.
Q129 Chairman: I would not want to
lead my witness, but you would say presumably also that if we
do not do it then others will.
Mr Everitt: Others already have.
Mr Graham Smith: Have and are.
Q130 Chairman: Name names.
Mr Everitt: If you go to Germany,
France, Italy, Spain or Japan there is a much closer relationship.
Indeed, in the US there is a much closer relationship between
industry and government, not to try and pick winners or favour
particular companies but to create an environment where all companies
can prosper. We are in a race. On the way up I took the time on
the train to read the recent announcement from President Obama.
In Europe and the UK we are ahead of the US in terms of fuel efficient
vehicles and fuel efficient technologies. On one level that will
not last long and on another level it is a huge opportunity. It
is a huge market in the US and if we have got the right products
and technology we can win substantial business in that and other
markets. It is about saying in the future we need to be making
things, that is physically manufacture but also the design, technology
and intellectual property that goes alongside that. There is no
reason why we cannot retain and, indeed, grow the value of the
global automotive industry that we have, but it will not happen
on its own, it will only happen because there is a genuine commitment
from industry and Government and, indeed, the finance sector to
make it happen.
Chairman: I think that is a very good
note on which to end this very constructive evidence session.
Gentlemen, thank you very much indeed. If there are things that
you wish you had said which are not covered in your written evidence,
please drop a note to us afterwards. We are very grateful to you.
Thank you very much.
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