Examination of Witness (Question 1-19)
PROFESSOR PETER
NC COOKE KPMG AND
MR ERIC
WALLBANK
11 DECEMBER 2007
Q1 Chairman: Can I thank you both very
much indeed for agreeing to come to the Committee and share your
wisdom with us today? This is in fact the first evidence session
of quite a major inquiry by the Committee into creating a higher-value
added economy. We decided to look at some cases as we begin the
inquiry and the sale by Ford of Land Rover and Jaguar seemed to
raise potentially some very important questions in relation to
the bigger subject of the inquiry. We also hope to look at Rolls
Royce Aerospace at a later stage—another example of what
is happening to higher value-added industry in the UK. And we
may have other case histories too to inform us of the theoretical
background which needs to be done to ensure that the UK can continue
to have a higher value-added economy in the face of a growing
globalised threat or competitive challenge. It is also perhaps
worth saying for the record that it is our intention after the
deal has gone through to ask both Ford and the new owners of Land
Rover and Jaguar to come in and explain in more detail what their
intentions are and why the sale was made. We had hoped to have
Ford earlier but we respected the commercial confidentiality of
what is going on at present and accepted that it would be at best
a distraction from a delicate and busy stage and process and at
worse perhaps damaging commercially to the process. But we are
very grateful to Ford for to be able to share some of their thinking.
So with that preamble can I again repeat my thanks to you both,
gentlemen, and to ask, as I always do, to introduce yourselves
for the record.
Professor Cooke: Good morning,
ladies and gentlemen. My name is Peter Cooke; I am KPMG Professor
of Automotive Management at the University of Buckingham. I spent
20 years in the motor industry. I worked for Ford Motor Company;
I have worked in the oil sector; I have worked in high technology.
I spent 20 years roughly as an academic at Henley Management College,
at Nottingham Business School and now latterly at Buckingham.
My by-line is 20 years in the industry trying to escape, 20 years
as an academic poking my nose back into it. Having said that,
yes, I work right the way across the automotive sector—components,
manufactures, distribution, fleet, used vehicle disposal. My particular
areas of interest, frankly, are further down the supply chain
in terms of the markets where those things are developing. I do
quite a lot of work also across Europe and across the rest of
the world. In fact this afternoon I am going to Warsaw, talking
to an automotive practice there; and I am doing, as I say, quite
a lot of work in Central and Eastern Europe as well.
Mr Wallbank: Good morning. I am
Eric Wallbank; I am with Ernst & Young, based here in London.
I lead all the work we do in the automotive sector. Ernst &
Young is a firm of accountants and advisers. We get involved in
companies where we are the statutory auditor, companies where
we provide risk advice; companies where we provide contractual
advice and companies where we provide business advisory services.
My clients and those of our firm include almost all of our car
makers, almost all of the large component manufacturers and many
of the dealers and distributors that then retail cars to the consumer.
My work is not exclusively just for the UK; I spend about a third
of my time working with our global automated networks, so I get
to travel and see what is happening in the industry in many other
countries, including India and China—but particularly India,
which is of interest.
Q2 Chairman: That is very helpful.
Together we will hopefully learn a lot from you. Can I begin by
asking you a blindingly obvious question, but I would be interested
to know what your perspective is on it? Why do you think Ford
is selling Land Rover and Jaguar?
Mr Wallbank: Let me just play
back some of the things that I think are important. From the Ford
side, Ford the parent company in the US is in a degree of financial
difficulty; it lost something like $12 billion last year. Most
of that loss was incurred in its business in North America. So
it has a major business turnaround underway to turn the business
in North America from one that has been losing significant sums
of money to one where it has to be profitable, and to do that
it has to downsize and close factories, shed labour and invest
in new products. So the focus of Ford is on turning round the
business in North America. To help fund that turnaround it raised
a significant amount of money, loans against assets of the company.
The turnaround in North America is by no means certain. The Chief
Executive Officer of the company, Alan Mulally, has said the business
is in a race between can it turn the North American business round
before the cash runs out? So Ford is in a position in the US where,
from a financial point of view, it needs to raise money. So that
is the first point: it needs the cash. The second point is from
a strategic point of view they seem to have decided that many
of their investments into the premium brands have been something
of a diversion and they have said that they wish to get back to
focusing on the core business. It is worth remembering that Ford
not only bought Jaguar and Land Rover but they bought Volvo and
Aston Martin, and have already disposed of Aston Martin. So there
is a strategic shift back to the core business, which is, I think,
the second thread to this. From a Jaguar and Land Rover point
of view Ford have said that because they need money in North America
to continue to turn the business around in North America they
cannot afford the investments in new products that are so critical
to Jaguar and Land Rover if it is to continue to be successful
in the market place.
Professor Cooke: I would echo
that exactly. I think one of the important things is that Ford
started building its premium division of Jaguar, Land Rover, Aston
Martin and Volvo, and I think it was under the assumption that
would actually have the senior management time to be able to spend
on developing that. A new area as far as the company was concerned
when they moved into it, and the strategy was that Ford would
have products from the top of the market right down to the absolute
base, and of course theoretically the profitability would be in
those premium products. But, as my colleague said, Ford has problems;
they have not been able to focus the amount of management time
that they would have liked to on those premium products, so the
logical thing to do is to sell it, and I think that is what Ford
has done. They are now looking to retrench. Ford, if you think
about it, historically has been a volume manufacturer and volume
is very different to higher value-added premium properties—a
very, very different approach to marketing; you are not necessarily
looking for volume, you are looking for value-added. I think that
has been the Ford strategy and they have made the almost inevitable
business decision in terms of retrenching.
Q3 Chairman: Why are they not selling
Volvo at present? Why is Volvo not on the table?
Professor Cooke: I think that
is a moot point. From a manufacturer point of view, yes, they
have sold Aston Martin, they have sold the smallest one; they
are now in the process of selling Land Rover Jaguar, who knows
what they will do with Volvo further down the line.
Mr Wallbank: I think that is uncertain
but one thing I would add in terms of a difference between Jaguar
and Land Rover and Volvo, with Volvo and Ford in Europe they have
created some very high levels of synergy between the product that
they produce, so the platforms and the power train used in Volvo
products are increasingly common with those used in the Ford products
that are produced and sold in Europe. So there are some very significant
synergies between those two brands in the technical sense that
gives them economies of scale that are very important financially.
Those synergies do not exist between Jaguar and Land Rover and
the Ford products. By and large—and there are one or two
exceptions—the Land Rover products and the Jaguar products
are on unique platforms with unique engineering that is not shared
with a Ford family product. So Ford is not benefiting from the
synergies of working with Jaguar Land Rover, and neither has Jaguar
Land Rover benefited from the synergies of the Ford ownership
structure.
Q4 Chairman: Before I hand over to
my colleagues, just changing the subject slightly, the transfer
of the Freelander production to Halewood is seen as a great success
and I believe that the Freelander has an enviable record now for
reliability and build-quality from the Halewood plant. Do you
think that perception is true and what does that mean for Solihull?
Mr Wallbank: There are at least
a couple of factors behind the decision to move the Freelander
production from Solihull to Halewood. One is that Solihull, even
without the Freelander, is an extraordinary complex production
operation. It produces the Range Rover, the Discovery, the Range
Rover Sport and the Defender, and that in its own right means
that it is a very complex production operation, and to continue
to produce the Freelander in that would introduce a further level
of complexity that would make it—I will not say impossible
to manage, but very difficult to manage.
Professor Cooke: It almost brings
us back, Chairman, to the volume situation. Freelander is very
much more of a volume product, therefore put it through a volume
plant, i.e. Halewood; whilst the West Midlands operation is much
more—I think I have described it as being bespoke, in terms
of being able to build relatively small numbers. With something
like the Freelander volume is all.
Mr Wallbank: On the other hand,
the Halewood plant was sitting there producing the X Type but
not fully utilised, with a very good track record for producing
quality product. So, on the one hand Solihull, as you say, is
producing smaller volumes of top end vehicles and not best suited
to a volume product; and on the other hand a volume plant sitting
there under-utilised. I would not say it was a no-brainer but
it was not a difficult decision to make, I do not think.
Q5 Mr Wright: Continuing on the theme
of the sale of Land Rover, at the moment it is generating record
sales and, as we understand it, it is on course to post record
profits this year. You mentioned about the difficulties in North
America; is it true to say that the sale of Land Rover is really
to generate more funds for the North American side? I think to
sell a company at the height of its profitability when the workforce
has worked extremely hard and they have turned around their fortunes,
it seems to be a kick in the teeth to the workers. So why at the
height of the profitability would they consider selling Land Rover
when they have been through the difficulties?
Mr Wallbank: It is a good point
and I believe there was significant debate and even potentially
disagreement amongst all the executives as to whether the sale
should go through exactly for the point that you made, that Ford
had been through the pain of turning the company around. Although
Ford does not publish the profitability data for its brands separately,
the belief is that Land Rover lost money at the time that Ford
bought in 2000 and the turnaround has been quite a success story
to one where it is now profitable. From Ford's point of view,
selling a company at the current peak of its volume and profitability
means that they are more likely to get more for it; in other words,
you are more likely to get a decent price for a profitable business
than an unprofitable business.
Q6 Mr Wright: In your opinion would
you suggest, for instance, that it was the main aim of the company
to put all the effort in to make it profitable, to increase the
sale price at that time. Was that the intention in the first place?
Mr Wallbank: I think the first
intention was to turn the company around so that it was profitable,
and I know that Ford publicly said that they expected a significant
proportion of company profits to come from the premium brands.
Professor Cooke: This was the
long-term strategy. When Ford 10, 12 years ago started to build
its premium product division the intention was that that would
be a major generator of profit in the future, but the market has
turned—the market turned against Ford so they have made
what I think has to be seen as a logical decision in terms of
focusing on what they are good at, which is volume.
Mr Wallbank: In terms of what
this means for the employees of the firm, I think you would have
to wait and see what a new owner does. But I think the picture
I have painted of the current ownership, where the parent company
is in financial difficulty and where it has publicly said that
it cannot afford to invest in the new products that Land Rover
and Jaguar need, means that the current ownership is not necessarily
a very comfortable place to be for the company or for its employees.
Q7 Mr Wright: In terms of the sale
price would you consider that the likely sale price would really
reflect the company's current position in terms of their future
prospects?
Mr Wallbank: That is a commercial
discussion between Ford and the people who might buy the company.
I think we also have to realise that Ford is selling Jaguar and
Land Rover as two companies and whilst Land Rover is believed
to be highly profitable Jaguar is not and has still been making
a loss and has done for many years.
Q8 Mr Wright: But Jaguar is showing
signs of a recovery at the moment, is it not?
Mr Wallbank: It is, and there
are all sorts of reasons why Jaguar has lost money, which I am
sure we could spend an entire hour or two debating on its own.
But you are right, Jaguar is believed to be losing less than it
was, and with future products about to be launched it could easily
turn itself around to a point where it is no longer losing money.
Q9 Mr Wright: And could actually
be profitable such as Land Rover.
Mr Wallbank: Could be.
Q10 Mr Wright: On that basis, to
sell the two companies together, what would have been the implication
if they were to split the two products, Jaguar and Land Rover,
and sell them independently of each other?
Professor Cooke: I think that
would be very complicated, simply because of the integration of
the two operations. There is a lot of shared development between
the two companies and to try and split those two you would always
run the risk of dropping below a critical mass in terms of research
and development and all the things that go with it on the purchase.
Q11 Mr Wright: That would have been
a non-starter; they did not even consider that?
Professor Cooke: I am sure they
considered; I am sure they considered on the way through, and
looking at it from the outside, yes, they appeal to two different
sectors of the market; but from an internal point of view, from
a manufacturing point of view, from a product development point
of view a lot of shared activities go on. So if you try to break
those you could well finish up with two less than viable organisations.
Mr Wallbank: Which is why they
put them together in the first place, to take advantage of synergies
between the companies.
Q12 Chairman: Before I bring in my
colleague Julie Kirkbride, there is something I perhaps should
have said at the beginning, that we are having to ask a lot of
questions about what Ford's strategy is, but our objective is
to find what government policy should be, but we have to understand
their logic.
Mr Wallbank: Agreed.
Chairman: Before we can address issues
of research and development skills and other matters, so we are
asking questions to inform our view on public policy not on the
commercial judgment at Ford and it is an important point to bear
in mind. Julie Kirkbride.
Q13 Miss Kirkbride: What do you think
are the implications of the weak dollar at the moment for the
UK premium industry and for Ford in general?
Professor Cooke: Quite a concern
at present, I think. Jaguar in particular exports a lot of product
to North America, so from that point of view yes, the company
has to be incredibly efficient, incredibly effective in the way
that it produces its products and the way that it markets its
products in North America, and the weak dollar is obviously going
to hit the profit levels which it can make. Having said that,
Chairman, I think it is perhaps marginally—and I stress
the word marginally—less important for a premium product
manufacturer than for a volume product manufacturer because you
can squeeze that little bit more in terms of the pricing on the
vehicles. If one was looking to sell a totally price conscious
vehicle into North America it would be very, very different. I
think if one looks across the European manufacturers that export
vehicles to North America they are all premium products that are
being exported at this stage.
Mr Wallbank: I have nothing to
add to that.
Q14 Miss Kirkbride: Does that have
implications for innovation from the weakening dollar?
Mr Wallbank: Not in particular,
no.
Professor Cooke: I suppose always
the risk is that if a disproportionate amount of the market is
in North America then one moves manufacturing to North America
to be able to get away from that currency exchange situation.
Mr Wallbank: It is worth noting
that at least two of the German premium car companies have put
factories in North America, but I would point out that the first
decision they made was that they needed more capacity because
the companies were growing; and the second decision was where
would that capacity be added, and the US was an obvious place.
Jaguar and Land Rover is not in the fortunate position—at
least not yet—of having grown its business to the point
where it needs to think about additional factories for production
capacity.
Q15 Roger Berry: Can I turn to one
public policy issue that crops up from time to time in relation
to these discussions, namely that of public procurement? Quite
interestingly in the written submissions we have received the
SSMT does not mention it at all, Ford touches upon it and Unite
the Union regards it as a big issue. In a sense one might have
expected those to be different contributions. How important do
you think that public procurement is as a policy issue here, particularly
perhaps in relation to military vehicles, the Land Rover Defender?
Professor Cooke: I think it is
interesting at present. Maybe the military are not buying as many
vehicles from Land Rover as they used to, but from what I can
see there appears to be a greater use of more specialist vehicles.
Yes, the old Defender was bought in very large numbers, but I
think the Defender is now coming to the end of its product life
cycle. So public procurement, yes, certainly an important step
but perhaps not as important as it used to be. I think perhaps
from that point of view maybe the police forces are of more relevance
than the military at this stage, with relatively large numbers
of 4 x 4s being used in that sector, and of course Jaguars being
quite popular with police forces.
Q16 Roger Berry: What do you think
should be the public procurement policy in relation to companies
like this? And what do you think that governments can locally
do to improve procurement?
Professor Cooke: Obviously I would
certainly support the use of British vehicles or British manufactured
vehicles as much as possible and certainly Land Rover and Jaguar
have a public sector sales group, which is very effective in terms
of what it does. But, again, there is a limit as to the absolute
numbers of vehicles that, for example, police and government departments
are going to use.
Mr Wallbank: I suspect in volume
terms that the numbers are small compared to the overall production
and sales numbers, but very important in terms of public perception
and the visibility it gives those vehicles to the consumer.
Roger Berry: Other colleagues will ask
perhaps about the climate change issues, but in terms of procurement
interestingly the Ford submission to the Committee basically says
that the Government in comparing purchasing domestically and purchasing
imports should really look at life cycle CO2 emissions generated
as a comparator in making these decisions. How practical do you
think that would be? Do you think it would make any difference?
It is interesting that Ford has mentioned that—it is about
their only specific recommendation in relation to public procurement.
Q17 Chairman: It is worth saying
that we did ask Ford to comment on their views on public procurement,
so we led the witness a bit, as it were, but Mr Berry makes an
important point.
Professor Cooke: Personally I
do not have any comment on it.
Mr Wallbank: I can only suspect
that what they are saying is that in procurement decisions the
government should look at not just the cost and the emissions
created by a vehicle during its life but also created from its
manufacture. There is certainly some evidence that some vehicles,
particularly hybrid vehicles, which can be very economical in
use, in fact create more pollutants and more emissions during
their manufacture because of the nature of some of the components
that go into them. There are some studies to which I do not know
that I would attach any credence, or I have not studied in detail,
but there are some studies which suggest that hybrid vehicles,
which everyone says are fantastically economical and environmentally
friendly, if you look at the whole life cost, including the damage
caused by the production of some of the components, are in fact
much lower down the scale in terms of their environmental impact
across the whole life.
Q18 Roger Berry: Would it be fair
to summarise your views as being that in volume terms public procurement
is not a very significant issue, but clearly in terms of the perception
of the market out there that if there are not significant UK buyers
of the products then it is not actually a good sales pitch?
Professor Cooke: Yes, I would
agree with you there that that perception in the market place
is perhaps very, very important as far as the players are concerned,
and of course government procurement means that the manufacturers
actually are getting a very low price compared with selling them
in a wider market place. So I think one always has to bear that
in mind, from a purely commercial point of view, how much of the
product do you want to sell into government or into various public
agencies where you know that you are going to make a very small
margin? So one always has to balance off the commercial side against
the other side.
Q19 Mark Hunter: A supplementary
on this same issue about public procurement and the perception
of the significance of it. Would it be your view then that even
if the British Government were using Land Rovers, were buying
Land Rovers through the Ministry of Defence, were using Range
Rover police cars and ambulances, fire engines, that it would
make no difference at all in terms of Ford's decision over the
future of the company? If all of those things had been happening,
as they do in other countries in Europe, where they buy their
own from their own country, you do not think that would have made
the slightest bit of difference to Ford?
Professor Cooke: I do not think
it would make any difference, in all honesty. The sheer numbers
that we bought would be relatively small compared with the viable
volumes that they would require.
Mr Wallbank: Just to scale it,
between them Jaguar and Land Rover produce about 250,000 vehicles
a year. I do not know what volumes are bought by the various government
agencies but I suspect that it is a very, very, very small number
in comparison with their overall production.
Mr Binley: I am concerned not only about
the impact for Ford of government procurement, but I am concerned
about government-speak having an impact on the market generally,
because it seems to me that those poor people who perhaps most
advocate change because of climate change would be the ones that
picket first outside the two gates, quite frankly. So I have a
concern about what Government says in relation to the impact of
that upon sales of premium cars and particularly Jaguar and Land
Rover.
Chairman: Is it a climate change point,
Brian? We were talking about climate change specifically.
Mr Binley: I am asking about that
in terms of the Government's attitude to procurement itself.
Chairman: We want to pursue climate change
in some detail later on.
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