Examination of Witness (Question 40-59)
PROFESSOR PETER
NC COOKE KPMG AND
MR ERIC
WALLBANK
11 DECEMBER 2007
Q40 Mr Binley: It is important. Thank
you.
Mr Wallbank: It is because as
a premium manufacturer you tend to be less cost conscious and
also you rely more on innovation so you are more likely to use
strong, innovative and local suppliers, and that is certainly
a strong characteristic of the German industry. Lots of German
mid-size component suppliers are highly innovative, very dependent
on the German premium brand car companies.
Q41 Mr Binley: So a good argument
in terms of added value?
Mr Wallbank: A very good argument
in terms of added value.
Q42 Mark Hunter: Can I ask you what,
in your opinion, the sale of Land Rover and Jaguar tells us about
Ford's future long-term strategy in the UK?
Mr Wallbank: I will deal with
the context of that and see if it answers the question. Ford no
longer produces passenger cars in the UK but it does in the UK
have two of its largest engine plants: a plant at Bridgend which
produces petrol engines and a plant at Dagenham that is its main
plant globally that produces diesel engines, and they carry out
diesel engine R&D also in Essex at a slightly different location,
in Dunton, and all of those are there to support Ford of Europe's
volume passenger car business and some of those engines also end
up in Volvo products incidentally. Ford in Europe is reported
to be profitable and when I describe the difficulties that Ford
has financially those difficulties are almost uniquely down to
its North American business rather than its European business.
Professor Cooke: I think one also
has to look at the market situation. The UK is one of Ford's major
markets in Europe, so from that point of view manufacturers like
to manufacture, whether it is vehicles, whether it is major component
activities, in the markets where they are going to sell vehicles.
So from that point of view the Ford engine plant in South Wales,
supremely efficient, and there is a very strong Ford supply base,
which is actually based in Dagenham where components from across
the UK are gathered and shipped across to Europe on a regular
basis. So Ford's position in the UK, even if it is not assembling
passenger cars, is still a major source of purchase in terms of
components, in terms of its specialist engine plants, and I do
not see that changing.
Mr Wallbank: I do not know whether
it is Ford's policy but many car companies have a policy where
they try to naturally hedge against exchange rate differences
by if they sell a certain value of cars in the UK, even if those
cars are imported, they try and export in components roughly the
same value as the vehicles that they import, to try and give that
natural hedge.
Q43 Mark Hunter: I understand the
point but you do not think that the sale of Land Rover and Jaguar
per se has any overall impact on the viability of Ford's
remaining operations in the UK? You would not read anything into
it as being a sign that they are any more or less committed perhaps?
Professor Cooke: Dare I say it,
almost a fine-tuning! That Ford treats Europe as one market, as
one manufacturing unit, as one market, and from that point of
view, yes, Jaguar and Land Rover at this stage maybe does not
fit; but in terms of the rest of the activities, yes, they are
developing. The UK is as major market, the UK is very effective
in terms of the particular Ford supply chain, so from that point
of view we will see changes but we will see fine-tuning the whole
time with any dynamic competitive industry.
Q44 Mark Hunter: Do you think Ford's
intentions are indicative of the industry generally?
Mr Wallbank: When you look at
what is happening in the UK and you look at the manufacturing
plants that we have for cars in the UK, the ones that are here
are ones that are owned by car companies that are being successful
in the market place. So if you look at Toyota, Honda, Nissan,
BMW with the Mini plant, they are all brands that are growing
sales in Europe so they need to increase the number of cars they
make in Europe and not decrease. Every time we see a plant closure—and
not just in the UK but in other Western European countries—it
has been a closure done by a car brand that is simply not selling
enough cars and therefore has too much capacity. In other words,
when plants get shut it is because a car company is making too
many cars for the local market, and very, very rarely—I
cannot think of an example—a plant closed in Western Europe
with the explicit intention to replace it with a plant in Eastern
Europe or some other low cost country.
Professor Cooke: We have seen
something like that with Peugeot, have we not?
Mr Wallbank: Peugeot did not set
out, I am sure, with the intention that they were going to close
capacity in Western Europe; they simply were not selling enough
cars versus their plan, so they had too much capacity, so they
closed what for them was the easiest and most cost effective plant
to close, but it was not their plan and I am sure it was not Ford's
plan to close capacity in the UK nor GM's intention either. Closing
a plant is quite a difficult thing to do and a very expensive
process to go through and I do not think any car company sets
out with that as part of its strategy; it is a result of failing
to sell enough cars for that brand.
Professor Cooke: I think we have
to remember that on a global basis there may be as much as 20%
excess in store manufacturing capacity in the industry so manufacturers
all the time have to fine-tune and have to balance.
Mr Wallbank: On the other hand,
if you ask many of the car brands that are produced in the UK,
do they have excess capacity in Europe they would say absolutely
not, they need to install more capacity in Europe because their
sales are growing.
Chairman: For the last half hour I want
to move on to policy questions, having had that very useful examination
of the market in which Ford and Land Rover Jaguar are operating.
Mick Clapham.
Q45 Mr Clapham: If I could turn to
Research and Development. We know that the Ford motor company
is responsible for about 80% of our automotive R&D. Bearing
in mind what you said a little earlier, Mr Wallbank, about the
German market and the way in which we see smaller innovative companies
developing around the production premium models, what are the
implications for research and development in the UK of the sale?
Are we likely, for example, to see some of those more innovative
small companies to lose out as a result of the sale?
Mr Wallbank: It is hard to predict.
Instinctively my answer is I suspect not. If the company is innovating
and producing a component or a technology that is attractive to
Jaguar and Land Rover then that gives the company, if you like,
a right to exist and a right to continue to supply. The comment
I would make about R&D is that as in other global trends in
the industry, increasingly large global car companies and global
suppliers are having R&D done in more cost effective locations.
So a company I met in India two weeks ago said, "We can do
engineering on a subcontract basis at $25 an hour versus $75 an
hour as a cost in Europe." The experience of companies doing
that has been fairly mixed and whilst the labour cost is less
the efficiency is lower and there are the inevitable communication
issues. But there is a trend, certainly by larger companies in
the industry, to have some, if you like, of the lower level R&D
design work done in lower cost economies because it is a significant
part of the cost of the company.
Professor Cooke: That will continue;
that will develop. One of the challenges is to be able to get
that innovative R&D actually into the product because it will
get it into production very quickly because the market is so competitive.
Yes, a lot of that is coming out of the Far East and one thing
of course with the Far East is that it has really grabbed the
bull by the horns in terms of electronics, if you look at it an
awful lot of developments in terms of motor vehicles, enhanced
electronics. So almost inevitably more and more of that is probably
going to come from the Far East.
Q46 Mr Clapham: Given that Ford announced
only last year that they were going to put £1 billion of
investment into a number of aspects of their engines—and
I am reading here from their submission—light weight vehicles,
so we see the innovation in light weight vehicles—new advanced
diesel and petrol vehicles, hybrid engines, bio fuels and advanced
transmissions and a range of other driving efficiency improvements,
that is a hell of a concentration of R&D. Why is it that it
is so concentrated in and around one particular company and is
it because of university linkages or?
Professor Cooke: You will find
that all the manufacturers are doing the same sort of thing.
Q47 Chairman: We are making a point
about the UK. Ford is doing it in the UK, the others are not,
that is the point.
Professor Cooke: Ford happens
to have its operations at Dunton, which is Ford's very large R&D
activity. Money is being spent there; they have the people, they
have the support services that go with it, which is hugely important.
The same sort of thing in Germany. It is really where those companies
have started, where they have built those resources, where they
have the support facilities, where they have the educational facilities
that go with it, in terms of R&D—all of those other
things that link into it. R&D, yes, Ford is spending the money
at Dunton, but they are also outsourcing it to all sorts of specialist
companies in the area, hence the universities. It is a very complex
animal that one is dealing with. To move that to another country
is very, very difficult.
Q48 Mr Clapham: So you do not see
that as happening at all?
Professor Cooke: I think as long
as we remain an innovative nation, as long as we deliver it, yes,
it will stay there, because all the time when we look at manufacturers
we have to look at them not just on a European basis but on a
global basis. I think that is hugely important and we tend to
forget that at times. It is where can the manufacturers get best
value for what they are looking for?
Q49 Mr Clapham: There is another
aspect here, and that is that Ford are the leaders in the development
of fuel cells and if that technology were to be transferred because
of the purchase it would have an enormous impact on innovation
and of course the technological advancement here in the UK. Do
you see at all that future of the engine linking to the fuel cells
being under threat as a result of the sale, or do you think that
the future development of engines is also stable?
Mr Wallbank: I would differentiate
it in terms of the money Ford spend on R&D between the money
it spends on power train and engines, which is done by Ford under
the Ford global badge at their engineering centre in Essex, and
the other spend would be the R&D spend on new vehicles at
Jaguar and Land Rover, which is obviously part of what would go
with the sale. But I do not believe that there is any inclusion
in the sale of any of the engine development capability that Ford
has. I think quite the opposite, it absolutely needs to keep that.
Professor Cooke: My suspicion
is that when the final sale goes through there will be very complex
agreements in terms of sharing of R&D, in terms of Ford providing
R&D facilities, R&D support for Land Rover and Jaguar.
If one looks across the whole range of automotive manufacturers
the biggest competitors share facilities, share R&D, simply
because of the cost of doing it. Fundamental R&D is shared
on an increasing basis.
Q50 Mr Clapham: My final question
relates to the diesel engines. We know that in the UK Ford is
producing roughly about 50% of the diesel engines that they use
worldwide, 80% of the engines that they use in Europe, and a lot
of the new technology now is going into the development of diesel
engines. Do you feel that that technology is safe, that it is
likely to remain based here? Because again we see that there is
something like 9,500 people involved directly in research and
development of the engines and it is very important for the UK
economy.
Professor Cooke: My feeling is
that it will stay to continue developing those engines. Again,
it is one of those things where people are very important, particularly
when you are looking at R&D—people are very, very important.
So as long as we are delivering the people that can do it, yes.
Q51 Chairman: Can I just challenge
you on precisely that point because this is one of the major areas
of concerns, the high value of research and development and innovation
in the UK. Two submissions we have received as part of this inquiry—one
from the SSMT and one from Ford itself—give me very great
concern. The SSMT talk about the really much greater commitment
in Europe as a whole from Daimler, Chrysler, VW, Bosch and BMW
to research and development than automotive research and development
in the UK because Ford are on their own virtually in the UK. In
Ford's memorandum to us they talk about the UK being an unattractive
place to the automotive sector to do R&D. The SSMT say that
the UK needs to foster the right environment for such levels of
research and development investment to take place and ensure that
the UK does not lose out to other EU Member States, and Ford say
that a debate is urgently required to address ways in which UK
automotive R&D can be stimulated. So there is quite a serious
warning there from the SSMT and from Ford about the future of
research and development in the UK.
Professor Cooke: Coming back to
my point just now, I think you have lifted it much more to the
macroeconomic level than I was talking about, and what you are
saying there in terms of quoting Ford and the SSMT, yes, I would
agree. But in terms of the microeconomic level, in terms of actually
making it happen at this stage, yes, I see the UK as being a major
player.
Q52 Chairman: Let us go to the macro
level. Let us look at the post sale of Ford. Ford as a freestanding
company, Land Rover and Jaguar as a freestanding company owned
by Tata, or whoever it is, what can we do to ensure that those
two companies keep their R&D activities going in the UK strongly
and we build a more attractive environment to enable us to catch
up with other companies bringing their R&D here with the rest
of Europe when we are falling behind? Do you have any views on
what we can do to make it more attractive for the automotive sector
to invest in the UK?
Mr Wallbank: I would make an observation
because you drew the parallel with some of the German manufacturers.
They are much larger companies than Jaguar and Land Rover. Jaguar
and Land Rover together produces a quarter of a million cars and
Mercedes Benz is closer to a million. So they have a much larger
organisation and they have a much greater ability to need to spend
on R&D which they will inevitably do close to home with German
institutions rather than overseas institutions. So there is a
challenge here. Although we produce lots of cars—we produce
one and a half million cars a year roughly in this country—the
R&D on those cars traditionally has been done elsewhere, and
I think one of the challenges is how to attract R&D of those
vehicles into the UK by the companies that produce the vehicles
here.
Q53 Chairman: We say to ourselves
that we are brilliant at this. We say design, research and development
we are brilliant—Formula 1 relies entirely on the UK.
Mr Wallbank: We have the whole
bit.
Q54 Chairman: So why can we not translate
that to other premium brand and indeed volume car manufacturing?
What are we missing out on that we could do?
Professor Cooke: I think one issue
which Eric picked up on is the proximity to the head offices of
organisations. I think that is very important, that there is a
natural feedback between the driving force of the organisation,
R&D, and all the things that go with it.
Q55 Chairman: They should be worried
about selling to an Indian company in the long-term then?
Mr Wallbank: I am less bothered
about that because one of the reasons that any company—particularly
Indians—might acquire Jaguar and Land Rover is because of
their technical expertise. It is more a fact of Jaguar and Land
Rover, as I say, produces about one-sixth of the cars produced
in the UK. I think the challenge is how to attract more R&D
here for the other five-sixths.
Q56 Chairman: I will not push you
on this point as there are other questions to ask you, but if
after this you can think of things you think we should be pushing
on—because this is a major theme for this Committee, we
are looking at the implications for the long-term future of research
and development in high-value manufacture.
Mr Wallbank: And it is interesting
that some of the companies that have come here over the last 20
years to produce cars are now starting to do more of the engineering
here, so I think there is a very valuable question.
Q57 Chairman: Tata themselves have
set up—
Mr Wallbank: I was going to say,
Tata have an engineering centre here and at least one of the Chinese
companies has an engineering centre here in the UK because of
the UK engineering expertise in the sector. Some of the companies
that produce here are now starting to engineer vehicles here and
I think there is more of that that could be done. So, yes, I will
exercise my brain on that point.
Q58 Chairman: Do not feel under an
obligation but you share my concern.
Mr Wallbank: Absolutely.
Q59 Chairman: The other gypsy's warning
from Ford in their memorandum is on skills in the sector where
they gave us evidence just over a year ago and expressed concerns
about the availability of suitable skills for their companies
is skills in the automotive sector. I am leading you very heavily
here as witnesses, for which I apologise, but are we right to
be concerned about that too in terms of the long-term future of
high-value manufacture in the UK?
Professor Cooke: Yes. We need
to keep our skills base going, and particularly in terms of high
value where the skills are perhaps different in terms of the skills
that one needs to assemble volume products. Volume products are
perhaps much more of a discipline—we have cracked that one.
We have, if you like, almost a vestige of skills in terms of the
high value-added product, and we have to develop that, and that
is part training and part education, and government support to
do that through the various Skills Councils. Yes, it has to happen
and it has to be driven forward. I think we need much more of
an ethos of training; not just flexibility but specialist training
as well, for people to be able to work on those intricate products,
the high value-added, relatively no volume products.
Mr Wallbank: The people I have
talked to in other countries, skill shortages in this sector are
not unique to the UK. It is one of the biggest issues facing the
emerging markets, such as India and Eastern Europe; it is also
a big issue that my German colleagues tell me is facing the industry
in Germany. They tell me that the best academic people in Germany
are no longer going into engineering; if they go into engineering
they know that they will go into the car industry. I heard things
from my colleagues in Germany that I used to hear in the UK 20
years ago, so we are not alone in this, I have to say.
Chairman: We might come back to this
but there is a very important area that we have not questioned
yet. Ford's memorandum highlights skills, R&D and one other
issue which Mike Weir wants to explore.
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