Examination of Witnesses (Questions 100-119)
ROLLS-ROYCE
GROUP
21 FEBRUARY 2008
Q100 Mr Hoyle: We can all have a
view and, quite rightly, you have your view and you would expect
me to have my view. My view is that British workers count for
a little bit more. Allowing for that, with a British company who
have, quite rightly—and you have gone through it—a
global footprint, that does not mean to say that you close the
footprint in the UK. What I wonder is, if you have a commitment
to shareholders, surely it would be wrong of you not to look at
the offer that has been put on the table, that has not been considered,
that has not been evaluated, and I think it would be wrong for
Rolls-Royce—and, as you say, you do not want to throw a
deaf ear and I would not like to think you ever would, that there
is just a chance. I do not believe it will take a long time but
I think it would be wrong of you not to just give that chance
to the workers of Liverpool, who are represented here today, that
commitment that has been loyal to you and will continue to be
loyal. All they are saying is just a little look at it just to
give a further consideration to see whether it is feasible.
Sir John Rose: I think if we are
going to talk about high-value added manufacturing, we need to
understand what the implications of that are. This notion of "a
little look" and "it won't take very long" is perhaps
part of the issue. These things are not "little looks".
We have looked in the past at whether or not it was appropriate
to be in Mount Vernon or in other locations. These are major decisions.
They take a long time. The decision to site assembly in Virginia
and Singapore took over a year. These are not trivial exercises.
They are not trivial exercises for the company to evaluate and
they are not trivial exercises for the company to embark on. They
bring with them all sorts of risks in order to get the benefits.
Q101 Mr Hoyle: If it takes a long
time, a little bit longer will not matter then, will it?
Sir John Rose: I am not sure that
I agree with you.
Q102 Mr Hoyle: I would not expect
you to because some of us are concerned. The North-West and Liverpool,
whatever we might think, deserves that manufacturing chance. All
I am saying is, why not just give up some time to have a look
at what is on offer?
Sir John Rose: We are going to
go through the process, as we have agreed and as we have agreed
with the workforce, on closing Bootle. If at some time in the
future we look at a relocation of our energy business, I am sure
that we will, as part of that, look at the UK as well as other
locations around the world to see which is the best site for the
company.
Q103 Mr Hoyle: Sir John, that is
not very good, is it? You and I know that when you have apprentices
that you are training at the moment, you have a highly skilled
workforce, what you are saying is "We may come back some
time in the future." What you want is the skills, the apprenticeships
that are in place to continue. That is not serious, is it, to
pretend that at some time in the future you can pick that up?
It just does not happen. What I am saying is at the moment you
have an opportunity. What you have in Liverpool can replicate
what goes on in Mount Vernon because work has been interchanged
between the two. It is a growing market. It is a strategic market
and that is why I believe the Government should have a little
bit more involvement. This is talking about moving oil and gas
around the world and something so strategic should have a capability
of manufacturing within the UK. Quite rightly, you replicate,
as you say, whether it is big engines, small engines, on different
sites in the world. Surely what we ought to be saying is we should
replicate the energy market. If you cannot do it on a single site
in the UK, what we ought to be doing is continuing with two sides
and what we ought to be asking is why you cannot give that little
extra time. Whether it is a little bit longer it does not matter
but just to consider the fact that you are willing to turn away
from a brand new facility, turn away from grants that would help
shareholders, because that is what drives you at the end of the
day. I cannot understand. You may be willing to turn your back
on the workforce but please do not turn your back on an actual
new facility at the same time.
Sir John Rose: I am not sure that
you fully understand what we do in Bootle.
Q104 Mr Hoyle: I do understand. What
I do not understand is, I was promised some figures as well. You
lost £80 million and I still have not seen the breakdown.
I was promised those figures.
Sir John Rose: Bootle is an assembly
plant. Mount Vernon has total capability. We have come to a conclusion
on the right answer. It is perfectly feasible some time in the
future, as our energy business develops, that we might consider
other opportunities, at which point we will consider the UK along
with all the other locations we have but, as we said at the beginning,
we are here to establish what the potential mechanisms are that
allow the UK to continue to develop its high value-added manufacturing
capability and one of the mechanisms is that we focus on the facts,
I think, and I think it would be helpful, if you do not mind,
if we did focus on high value-added manufacturing.
Q105 Mr Hoyle: Yes, maybe in the
UK. Can I as my final question ask what message do you have for
the Rolls-Royce workers in Liverpool?
Sir John Rose: We have had a very
constructive conversation with the workforce in Liverpool. We
are, as they are, disappointed at the outcome but it is the right
outcome for the company and we are grateful for their co-operation
and support as we go forward through the closure.
Chairman: I have let Mr Hoyle explore
that issue in some detail because it is a useful illustration
of the kind of dilemmas that are faced by companies like yours
in a high-value added manufacturing environment. Thank you for
your answers to that.
Q106 Mr Clapham: Just a very quick
question before we leave Bootle. I understand that the trade unions
put forward an alternative economic case. Did the company look
at that in a serious way and consider it?
Sir John Rose: We looked at it
in a very serious way. The business case did not close and people
make arguments about the quantum of the differential but the truth
is we make decisions like this all the time. If you took a series
of sub-optimal decisions, in aggregate they become very large
numbers. We are always being given the argument, and I think it
is reasonable to make it on a case-by-case basis, that it is only
a certain amount of money that is the difference but the reality
is, if we made every difficult decision on that basis, we would
make no money. So we have come to the conclusion in what we consider
to be the best interests of the company and the larger number
of employees and the shareholders, and we think it is the right
thing to do.
Chairman: We must move on.
Mr Hoyle: There is a big contradiction,
I think, Chairman.
Chairman: I did not hear any contradiction.
We must move on to the broader issues we want to talk about manufacturing.
We have a slightly difficult challenge here because all the issues
overlap. We particularly want to come to research and development
and research and technology a little later on. As Mr Wright asks
his questions, perhaps you could try and remember we want to deal
with R&D a little later on in more detail.
Q107 Mr Wright: This is a continuation
from the previous discussion because I have some concerns, obviously,
over the question of manufacturing. I come from an area which,
when I started as an engineering apprentice, had thousands of
manufacturing jobs and now probably has 3,500 to 4,000 manufacturing
jobs. As a skilled engineer, obviously that causes me concern.
The UK now is considered to be very prominent in financial services
and obviously the increase in the national wealth comes from those
services but what I am really concerned about is this. What is
the business case for reviving manufacturing? After all, you have
always given the view that there should be a resurgence in UK
high value-added manufacturing. It just seems to me that you have
gone in the opposite direction by looking elsewhere in the market
and obviously turned your back on it.
Sir John Rose: I do not think
I ever made the case that we would be solely responsible for it.
I think the case is made as well as I can make it in a speech
I gave to Imperial last year. I think there are huge benefits
to having a significant component of manufacturing in any economy.
The reasons are many. One of them is that financial services itself
tends to concentrate and the evidence of the imbalance in the
economy is in a lot of aspects. It is evident in the differential
growth in GDP in the South East versus the north. It is evident
in the sorts of skills and local characteristics that exist where
there is manufacturing. I made the point in the speech that in
Derby, where there is a significant high-value added manufacturing
presence, firstly, you have the highest exports per head anywhere
in the UK; we have the highest number of skilled jobs; you get
a larger proportion than other local cities in children getting
five GCSEs or better; 20% of the population is at degree level;
we have the highest level of high-value, high-technology jobs
of any city in the country, nearly twice Aldershot and more than
twice Cambridge. Financial services are not going to provide that
to Derby but manufacturing does. Manufacturing also appeals to
intelligent people who do not want to do other sorts of jobs,
so it has a significant impact in terms of distributing wealth
as well as creating it. It distributes it geographically very
effectively because it does not necessarily concentrate in the
same way but if you are below a critical mass, you lose the collateral
benefits associated with having other high value-added manufacturing
around and, as a consequence, we are finding that if you are recruiting
in mid-career, for instance, we have to go wider and wider afield
to get the sorts of skills that we think are going to add value
to us. You tend to have to go to nations where there is a strong
manufacturing presence, and that could be America or Germany or
France or Singapore, or other countries where there is a significant
commitment to manufacturing and where there is an explicit government
commitment to manufacturing representing a larger part of their
economy. In Singapore they will say they think high value-added
manufacturing ought to be a quarter of the economy and they believe
that manufacturing drives half the service jobs—it is closer
to 30% in Germany—and the consequence of that is that you
have a significant infrastructure that is supportive of manufacturing.
It is easier to be a manufacturer there.
Q108 Mr Wright: Is it not the case,
even if you are talking about 2,000 jobs in a company of your
size, for an area such as Bootle to lose that amount of jobs is
another nail in the coffin for the future as far as manufacturing
in that particular area. You might as well concentrate in Derby.
It causes a knock-on effect for years ahead when a company like
yours—and you just mentioned the fact that you may well
look in the future some time at probably coming back if a particular
sector of yours takes off. What would you look at then in terms
of the attraction of the UK for you to come back to the area?
One of the areas I would suggest you would look at is the skills
base in a particular area.
Sir John Rose: Absolutely. That
is clearly part of the case. I think that is the point I am making.
Let us just get the facts correct: it is 200 jobs in Bootle, it
is 2,300 jobs globally, of which a proportion would be in the
UK. They are two different numbers, and we recruited 2,500 last
year. Of course, the point I am making is that there will be a
number of factors that influence our decisions about where we
are. Firstly, do we understand what the country wants? Have they
articulated effectively their priorities? If they have, that makes
it very easy for us to make decisions. Either their priorities
fit ours or they do not. When I go to Singapore or to the US or
to Germany, I know what their objectives are and we can see whether
they fit ours. Secondly, the point I was making was that in choosing
locations, you look for a hinterland of manufacturing because
that is going to be your feedstock of people and skills, and whether
there is manufacturing there or not will affect the sort of educational
output you get. So there are ways of qualitatively evaluating
whether or not this is going to be a good place for us to do business,
and it is important therefore that the UK is equally as transparent
about its objectives and its commitment as other places. I can
give you many illustrations of the distinctive differences between
some of the countries where we have chosen to put our facilities
and the UK.
Q109 Mr Wright: In terms of the skills
base, obviously you have expressed concern, as many of us have,
about the decline in the skills base. What would you consider
is the major reason behind the decline? Would you say it was the
decline in manufacturing in the Eighties leading up to the Nineties
and obviously the loss of the skills that were required for then?
How can you arrest that decline?
Sir John Rose: I will refer you
to an anecdote in the speech. Boris Johnson wrote an article in
the Telegraph bemoaning the fact that there were not any
nuclear physicists being trained and I wrote him a letter and
said, "Dear Boris, it is really simple. If you are smart
enough to be a nuclear physicist, you are smart enough to know
there is not a nuclear industry." People respond to demand
signals, people in the education system. If you are a young person,
you are going to respond to the signals that you get from industry
and from government about where the opportunities are likely to
lie. This is not just a supply issue; this is a demand issue.
The reason that there is a different make-up in Derby is that
there are those sorts of jobs available and people aspire to them
because on the whole they are very well paid and they provide
longevity of employment. The average length of service is close
to 20 years in our company. We keep 90% plus of our apprentices.
On the whole we pay 130% or 140% of the local average and therefore
people aspire to having those jobs. If they are not there, they
do not aspire to them or if there is a culture that says, "This
doesn't matter. This is yesterday's job. We are a post-industrial
nation", people will aspire to do things that are defined
as being the jobs of the future. I think it is a multiplicity
of factors. If you are in a country where manufacturing represents
a bigger proportion of the workforce, you get a richer seam of
skills and capabilities.
Q110 Mr Wright: Do you think the
Government's approach to addressing the skills shortage is having
a positive effect?
Sir John Rose: I think there are
some very good signs. However, I think there is still an under-estimate
of the demand side. You cannot train people for a vacuum, so aspiring
to have more apprentices is a good thing. The truth is that apprentices
typically come from five or six miles away from the location of
the job because they live at home, young people, on the whole.
We recruit a lot of apprentices. They come from local to our facilities
and we have a huge retention rate. We create a skills set that
is relevant to high value-added manufacturing and a large number
of our apprentices, having been stimulated by the combination
of an interesting job and the opportunity that better qualifications
represent, go on to higher levels of qualification, sometimes
to degree level, and that is a good thing. The notion that we
should have more apprenticeships is a good thing but you have
to have somewhere for them to be. There was a former Minister
in the Government who went back to his old university in Birmingham
and asked whether they were still doing the internships with industrial
companies that they did when he was at university, and the Dean
said "No." He said, "Why not?" He said, "Well,
there is no industry." I think we have to be clear about
the combination of the demand and supply.
Q111 Mr Wright: What you are saying
then is in areas of a very low manufacturing base or areas with
no manufacturing base, the Government is wasting its resource
on providing skills for the youngsters?
Sir John Rose: No, I am just saying
that, for people to want to do apprenticeships or for those apprenticeships
to be relevant, they have to be closely aligned with industry.
Therefore it is likely to be more effective where industry exists.
The fact that we have a smaller proportion of our economy involved
in industry now means that there are fewer opportunities. However,
there are lots of opportunities to rebuild, I think, a high-value
manufacturing base around some of the new opportunities that exist
globally, but we have to want to do it and we have to focus on
meeting those opportunities, and that will mean some change in
the prioritisation of how government spends its money to incentivise
industry, whether it is UK industry or international industries
who see the opportunity in the UK to put their money there as
well.
Q112 Mr Wright: Do you accept then,
albeit the 200 jobs, the closure of the factory in Bootle will
have a knock-on effect to discourage young people to go into skills
because they will not have that manufacturing base in Bootle,
which I know is the effect it has had on my area?
Sir John Rose: I think it is bound
to have an impact locally but I do not think that Rolls-Royce
can be held responsible for regenerating manufacturing. What we
can do is try and help governments define their agenda so that
it meets the priorities of industry.
Chairman: That leads us very neatly
on. I am going to have to move on because we only have 20 minutes
or so more of Sir John's time and a lot of ground still to cover.
Mike Weir's question really flows very naturally from what you
just said, Sir John.
Q113 Mr Weir: In October of last
year it was reported that John Hutton and John Denham met with
you to reassure Rolls-Royce that the Government remained committed
to the aerospace sector. Did they succeed in doing so?
Sir John Rose: There is certainly
a high level of engagement and we are seeing some evidence of
change, which is really good. It is really important that there
is. One of the points that I made when we met was that we had
taken a lot of trouble as an industry and as a government through
the Aerospace Innovation and Growth team to define some of things
that were necessary in order to keep the aerospace industry in
the UK vigorous, and up to that point progress was not being made
rapidly enough towards the sorts of levels of support and engagement
that had been envisaged by that report and that had been signed
off by both industry and government.
Q114 Mr Weir: I will take that as
a qualified "yes" then.
Sir John Rose: No. There are certainly
positive signs but I think it is really important. Decisions are
made daily and they are made in the context of that day, and therefore
you need evidence of change in order to change the decision framework.
Q115 Mr Weir: In an earlier answer
to Anthony Wright you said, I think referring to Germany in particular,
that a country needed clearly stated objectives. Do you feel that
the UK has clearly stated objectives in relation, firstly, to
aerospace and generally to the manufacturing industry?
Sir John Rose: Not yet.
Mr Weir: What is your assessment of government
policy then towards manufacturing? What more do you think they
need to do?
Q116 Mr Hoyle: New sites?
Sir John Rose: As I said in the
speech, I think we have got to not be frightened of having a strategy
and having a view of the outcomes that we want, and that would
be helpful for industry because then we can bid against that strategy.
The reassurance for Government will be that, if companies bid
against it and are prepared to put their own money in it, there
is a reasonable probability that they believe that there is a
market opportunity, because they are making an investment, and
the corollary will be that they will undertake the activity in
the UK, whether they are UK companies or companies from overseas.
I would contrast some recent experience of ours. We have been
pursuing an important research programme in the UK, and it had
an environmental background to it; the essential approach was
that we defined the project and then we had to convince a number
of different agencies and RDAs of the value of the proposition
and get decisions from all of them—they all had slightly
different criteria—and ultimately we reached a conclusion.
It took a couple of years. The other part of the anecdote is that
in the US, against a set of criteria that were set by the Government
on the research programme, we could decide whether or not it mattered
to us whether it was going to develop important technologies for
us. We bid competitively against local US companies, GE, Pratt
and Whitney, and Honeywell. The process took two months. We had
a very clear idea of the outcome they wanted. They did not mind
whether it was a US company or a non-US company that won. They
were clear, they got endorsement, as it were, of the validity
of their requirements because people were prepared to put their
own money into it because, whether we are providing 50% of the
money or 100% of the money, it is still real money and we do not
take a less good business case because we are putting half the
money in because our half is 100% of our money. There was just
a profound difference in the clarity and it is very important
now we have had clear reassurance from John Denham and John Hutton
that they are keen to change the sorts of timescales that are
involved in this process and that is really encouraging because
it is very important. Talking about the years is not helpful and
we tend to be relatively slow, so the lack of clarity actually
leads to slowness because you are having to go through an iterative
process of convincing each other that it is a very good thing,
and we are seeing a similar lack of pace at the moment with the
ETI where that was announced in 2006 and we are still waiting,
we are making progress, but we still have not had the first funding
from that mechanism. I think one of the key things in developing
a response to this is to understand where we are good and where
we are not and where we need to change, and there is plenty of
evidence around. We can provide, and have provided, the details
of how these other countries approach things because we are there,
we are in Canada, we are in the US, we are in Germany, we are
in Singapore and, therefore, we can provide detail about how those
things are different.
Mr Blundell: Chairman, if I could
perhaps add to Sir John's reply, I think the important point is
that there has been some movement on the part of the Government
on this strategy issue. The new Technology Strategy Board has
said that it is going to develop a strategy for guiding future
research and technology. That is very important because, as Sir
John says, when we go round the world and we actually see some
of the R&T programmes that are already in place, it is very
noticeable that they are highly focused and highly specific. If
I go to Canada, I will encounter something called the `Strategic
Aerospace Defence Initiative', if I go to the United States, I
will encounter DARPA, if I go to Germany, I will encounter something
called `LUFO IV and V'. All of these programmes are very clear,
they are very clearly focused and that makes it much easier for
companies like Rolls-Royce because we can actually develop our
R&D programmes in the knowledge that these multi-year programmes
will be available for us to bid into, so I think this development
on the TSB is a very important and a very welcome one.
Sir John Rose: I would absolutely
endorse that. Your question started with, "Has there been
change?" Yes, there has been change and it is positive.
Q117 Mr Weir: So, if I am picking
it up correctly, you would see the role of government of changing
procedures as the best way, if you like, to create a resurgence
in the manufacturing industry?
Sir John Rose: I think it is more
than changing procedures. It is also having a clear idea about
what their own priorities are so that we know where they fit ours.
Basically, there are issues of priorities, quantum, mechanisms
and then pace and we have got some way to go as a nation to reach
the targets that the EU has for the proportion of our GDP that
is spent on R&D, and we spend quite a lot of money in the
UK, but within that I suspect we concentrate more than we should
on the research side rather than the application side. You know
the equation: innovation is invention plus application. If you
only have the invention, you do not actually create the wealth,
but you have to have the application and, if that invention, perhaps
one that is developed in the university system, gets commercialised
by a non-UK company, the wealth will be created somewhere else.
I think there has been a disproportionate concentration on the
non-application part of the R&D equation historically, so
there needs to be some prioritisation and rebalancing done within
the larger amounts of money that (a) are being contemplated, but
I hope (b) will be committed; I think it is really important.
People underestimate the challenge associated from taking innovation
to market. If you look at what we are doing with fuel cells, for
instance, if we get it to market in the timescales we are talking
about, it will have been a 20-year journey. These are non-trivial
activities and they require a huge range of skills, and the consequence
of getting it right is that you create something that adds a lot
of value and has very high barriers to entry, but you do need
to recognise the challenges associated with it. Only a small number
of these journeys that are started get to their end, so the role
of government as being an enabler at the early stage by having
a view about where they are prepared to put their money is really
important.
Chairman: Inevitably, in that very interesting
answer you have just given to Mike Weir, you have touched on some
of the issues colleagues wanted to ask about later, so it is the
clerks' ingenuity and we can blame some of their questions, I
think.
Q118 Mr Bailey: Perhaps I can just
paraphrase a couple of comments that you have made and then we
will try and put them in context. First of all, you said, obviously
correctly, that demand for skills is a pre-requisite for developing.
You also said that in a global world there were plenty of opportunities
to develop new technologies, and I am sorry if I have paraphrased
that rather loosely. Really, how does the UK compare with its
major competitors as a business environment in which a company
can undertake innovative work?
Sir John Rose: I think I am probably
in danger of going over ground we have already covered in answering
that. I think there are areas where we are extremely good. However,
I think there has been enough evidence today to say that there
are areas where we have allowed ourselves to become quite uncompetitive
and unfortunately the areas where we have allowed ourselves to
be uncompetitive are in the areas of R&T and R&D support
and responsiveness. If decisions are made to conduct those activities
in other countries, the inevitable consequence is that you will
build capability and supply chain around those decisions over
time and they have a long-term and generational effect, so I think
we have probably covered in a sense your question earlier. There
is the opportunity to focus R&T priority around the industrial
response to climate change and we have some of the industrial
capability to respond to that. Rolls-Royce is a highly technical
company with huge engineering and technical assets, project management
skills, the ability to deliver significant programmes and the
ability to understand the applicability or otherwise of technologies,
and there will be other companies who have some of those skills
in the UK. If you think of the sort of industrial revolutions
that have occurred, we were around in the first one, we were the
genesis of it, but we, as a country, have not been huge beneficiaries
of the recent industrial revolutions around electronics and systems
and so on, but there is no reason why we cannot be a significant
beneficiary of the industrial response to climate change and we
think there are significant opportunities around that, but they
are, on the whole, of a scale and of a complexity where you are
going to need partnership between government and industry in order
to realise them.
Q119 Mr Bailey: Yes, interesting,
but the reason that we were not covering them was because we thought
we were more time-constrained than we actually are, so perhaps
I can develop that. My next question was going to be: do you think
that the UK has been quick enough in identifying potential there?
You have obviously outlined the potential that you think Rolls-Royce
has. In general, what do you think the Government should be doing
to identify areas where companies, such as yourselves, can exploit
these emerging opportunities?
Sir John Rose: I think we have
been at the forefront of understanding the importance of the issue.
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