UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 550-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

BUSINESS & ENTERPRISE COMMITTEE

 

AUTOMOTIVE ASSISTANCE PROGRAMME

 

 

Wednesday 20 May 2009

Advantage West Midlands Head Office, Birmingham

 

 

MR DAVID SMITH, MR PAUL EVERITT and MR GRAHAM SMITH

MR PAUL WILLIAMS

Evidence heard in Public Questions 53 - 172

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Oral Evidence

Taken before the Business & Enterprise Committee

on Wednesday 20 May 2009

Members present

Peter Luff, in the Chair

Mr Lindsay Hoyle

Lembit Öpik

Miss Julie Kirkbride

Mr Anthony Wright

________________

 

Examination of Witnesses

 

Witnesses: Mr David Smith, Chief Executive, Jaguar Land Rover; Mr Paul Everitt, Chief Executive, Society of Motor Manufacturers & Traders, and Mr Graham Smith, Senior Vice President, External Affairs, Toyota Motor Europe, gave evidence.

Q53 Chairman: Gentlemen, welcome to this second evidence session of our Committee's inquiry into the Government's support for the automotive sector. We are grateful to some of you for making journeys to Birmingham, which we have done today. We took evidence on Monday from Professor Richard Parry-Jones from the New Automotive and Innovation Growth Team which reported last week and that was very useful evidence. We are going to Chorley tomorrow to take evidence in the Northwest from a variety of interests, particularly the truck and parts sectors. We are very grateful to have you with us. Thank you for your written evidence. Can I ask you, as I always do, to begin by introducing yourselves for the record?

Mr David Smith: David Smith, the Chief Executive of Jaguar Land Rover.

Mr Everitt: My name is Paul Everitt. I am the Chief Executive of the Society of Motor Manufacturers & Traders.

Mr Graham Smith: My name is Graham Smith. I am Senior Vice-President of External Affairs for Toyota Motor Europe.

Q54 Chairman: Thank you. I think it is fair to say when we began our investigation it was quite narrowly focused on the Automotive Assistance Package and the other measures the SMMT were calling for, like scrappage, but the debate has moved on and the publication of the NAIGT report has broadened the focus of this inquiry. I just want to begin by asking you two strategic questions about the automotive sector in the UK. I quote from the report. It says: "over the past decade the industry's contribution to the UK economy has been declining as the industry has not been expanding as fast as the overall economy. This reduction is not due to temporary economic downturn, but a long-term trend as the consequence of competing in a mature industry which has seen a drastic shift in a manufacturing footprint over the past decade towards sourcing from low-cost countries". Can I ask that strategic question to you, Paul, first? If this expansion is happening elsewhere, if manufacturing is moving elsewhere, if expansion in the consumer markets is happening in Eastern Europe, China and India, for example, are we right to even try to secure the automotive sector in the UK? Are we fighting a losing battle?

Mr Everitt: No, I do not think we are fighting a losing battle. It is absolutely key for the UK and the UK economy going forward that we do have a productive and highly competitive automotive industry. One of the limited number of very positive outcomes from the current crisis is a recognition that we cannot live by financial services alone and that to succeed long-term and to generate wealth, prosperity and jobs in this country we need the manufacturing sector. The reality is there are relatively few globally competitive manufacturing sectors in the UK: automotive, aerospace and pharmaceuticals are absolute leaders. Not acting, and particularly not acting in a strategic and long-term way, is a huge risk for us as a country.

Q55 Chairman: Both to address the short-term issues and the longer term ones which the NAIGT report identifies?

Mr Everitt: Absolutely.

Q56 Chairman: I do not know whether either of you want to add anything because you are both foreign companies now. I want to ask Graham in particular what it is that can make the UK continually attractive for foreign automotive businesses to invest here, particularly to invest in enhanced R&D.

Mr Graham Smith: There is a range of issues that determine manufacturing and R&D locations. We certainly like to manufacture and establish a footprint within the region where the vehicles are sold. Our region is not just all of Europe, it goes all the way to Russia, to the Urals, and therefore we locate our manufacturing facilities, and we have a number across Europe, strategically in relation to that total market. Serving the market, serving the customer, being close to the customer, is issue number one. Secondly, the availability of skilled and educated workforces is also a very, very important factor as well. The UK, when we established here in the Derbyshire area, provided that workforce. We have settled our operation here successfully. We employ over 4,000 people between Burnaston in Derbyshire and North Wales. We do not undertake R&D in the UK. We do in Europe, but it is outside of the UK, so I cannot really comment on factors in relation to R&D. The last thing I do want to say is how important the supply infrastructure is. Manufacturing operations depend on large numbers of components. We have approximately 250 suppliers across Europe, a good number in the UK, and without that supply infrastructure, and, again, close to the manufacturing operations where logistics make sense, we would not be as successful and would not have the same capability and that is part of it.

Q57 Chairman: We will be asking you at some length about the supply chain a little later on as you would expect. David, your company is the single largest investor in R&D in the UK automotive sector. That is correct, is it not?

Mr David Smith: Yes. We invest about £400 million a year in R&D, so we are actually in the top ten UK R&D investors. What I would say about the industry is that over the last 20 years we have seen good and bad news. The industry has improved its quality and productivity hugely in the UK and now has some important strengths especially at the premium end of the business. Jaguar Land Rover is probably one of the biggest firms in that part of the market in the world. Very importantly, the UK has the second biggest premium car industry in the world after Germany. We also have a strength in engine manufacturing with our plants in the UK and still very good capability on research in our universities. There are important strengths in the UK industry that have not gone away and, in fact, have been strengthened over the last 20 years. What we have seen, however, is a hollowing out of the supply base and I know you want to come back to that.

Q58 Chairman: We will come to that, yes.

Mr David Smith: In my view, what the NAIGT report is really all about is saying given those trends what can we do moving forward to take advantage of the strengths and actually create some new capability. We are in a very, very important period now where we are just about on the transition to low carbon vehicles and if the UK does not take the opportunity now to invest in industrialising that technology we will find over time that there is a very significant negative impact on our balance of payments, on employment and value-added in the UK. This really is an essential period where we have to make that investment. Very consistent with the Government's view on industrial activism, the NAIGT report has essentially laid out a roadmap for how to make that investment in the future.

Q59 Chairman: If we have time at the end we will be able to explore the NAIGT report at some length. It depends how fast the other questioning goes on the shorter term issues. Paul, there are companies planning to bring new models to the UK, and Toyota is one of them indeed, is it not. There is still good news for us in the automotive sector in the medium-term, is there not?

Mr Everitt: Absolutely. The key for us like the rest of the global automotive industry is we have faced an unprecedented set of circumstances. The global credit crunch and the contraction of credit allied to significant reduction in demand has created unusual circumstances that we are doing our best to cope with. Picking up on what David said earlier, certainly over the recent period UK facilities have been well invested in, the workforce have demonstrated a capability, flexibility and determination to win business when up against plants across Europe and elsewhere, and we have succeeded on a number of occasions in a number of competitions to retain, and indeed grow, the model line-up here in the UK. I believe we entered this period probably stronger and more resilient than at any time in the past. The key issue for us is being able to sustain our industrial capability through the recession so that we are able to take advantage of the upturn as and when it comes.

Chairman: Thank you for that scene setting, as it were.

Q60 Lembit Öpik: Just one question. On R&D, without sharing any competitive secrets, do you have a narrative to that research? Do you decide, for example, to focus on the environment and try to be a world leader on that or on improving added-value on the premium range? I am interested in how you organise that R&D and the purpose for asking that is because it seems to me that by doing so one can create a particular specialism and maintain an advantage.

Mr David Smith: Clearly Jaguar Land Rover has been successful in operating at the premium end of the business and we will continue to do that. Our investment is certainly about developing design capability, technology and features at that end of the business. There is a huge commitment over the next few years, over £800 million, which for us is a large investment in the future, in green technologies. As a business we have made a commitment that will improve our fuel economy and reduce our CO2 tailpipe emissions by 25% over the next few years. That is a very big commitment that we are making jointly with our suppliers and the universities in the UK. Environmental innovation is absolutely critical to our future, which is why in this very difficult economic situation that we find ourselves in anything that reduces our ability to make those environmental innovations is quite serious for the long-term future of the business.

Q61 Lembit Öpik: In terms of electric technology, is that something which (a) you are considering and (b) is it feasible for you to do as an individual manufacturer?

Mr David Smith: By the time we get towards the end of the next decade, so 2025, we will increasingly see electrified vehicles as pretty commonplace. Clearly it is well-known that we have to make big improvements to the electrical infrastructure, to renewables and distribution, but on the vehicle side there is a lot of technology coming that over the next few years will probably be more focused on improving conventional technologies. Increasingly we will see further hybridisation, the use of plug-in hybrids and then a move over time towards more electric vehicles as well.

Chairman: This is an issue we might return to at the end if we have the opportunity to do so.

Q62 Mr Wright: At the back end of last year and certainly the beginning of this year the automotive industry would say it was very grim in terms of the short-time working and extended Christmas period. Is it still as bleak as it was at the beginning of the year or are there initial signs of recovery? Indeed, are there any proposals to reduce production even further?

Mr Everitt: Certainly at this particular moment in time you would not find too many people who think things are getting better. Probably as we finish the first quarter of the year the sense is that things are not getting worse and that is a positive development. We are all looking at what is going to be probably a very long and slow recovery. What we have seen the industry try to manage during the last quarter of 2008 and first quarter of 2009 is to adjust to these unusual circumstances and, as a consequence, we have been working through some of the things you have mentioned. Sadly, a lot of people have let go of their temporary and agency workers, people have introduced extended shut-downs and short-time working. We have seen some voluntary but also, sadly, some compulsory redundancy schemes and, what has been unprecedented, we have seen pay freezes, indeed pay cuts, from the top to the bottom of businesses. I would say the sole focus for most companies is ensuring that they keep the valuable staff they have, or as many of them as they can, because we are confident that we can succeed into the future and the only way we can do that is by having that industrial capability and the people are a key part of it. What we have endured is a very difficult time and we continue to face major challenges but perhaps things have stopped getting worse.

Mr Graham Smith: If I could reinforce that. Approximately 85% of what we produce in the UK is exported, so it is not just the state of the UK market but the state of the wider European market that drives the level of demand. Where there have been scrappage schemes, like in Germany, the market is actually up year-on-year. Overall, particularly our version of Europe, which does include, as I have already mentioned, Russia, is down about 25%, very similar to the UK experience. 25% decline in demand inevitably means adjustment to manufacturing processes. We have attempted to do all the things that Paul has said. First and foremost we want to retain the skills and the understanding of our production processes. The Toyota production system has got, if you like, global recognition. It is something that is not just about process, it is also about culture so, therefore, it is about the people, the relationship, the way we work with member representatives, which we do very positively and successfully. We have tried to manage our adjustments whilst retaining all of our permanent employees, as we have in other parts of the world. That is absolutely critical and is very painful. Across all of our operations we are sharing that burden. I and all of my colleagues, certainly in terms of pay freezes, no bonuses, not being paid for certain days during the course of the year when we are not manufacturing vehicles, et cetera, and then we have got days that are either collective shutdown or whatever, have taken many, many steps to make the adjustment and do it in such a way that we retain our capability. The other aspect of the European situation is when the market starts to decline of course you attempt to review the situation, understand how far that decline is going to go, how serious will it be, and that is very difficult to forecast so, therefore, there is a tendency to maintain for a period of time levels of manufacturing, levels of output. The result of that was there was a rise in inventory and that has probably been fairly universal across all vehicle manufacturers across all of Europe to a greater or lesser extent. That has been managed down and it is probably fair to say there is a closer fit between levels of inventory and the current reduced level of the marketplace. Again, reinforcing Paul's point, it is not getting better but when you are reducing inventory you are building at a lower rate than the market demand, you are below the level of demand to bring down your inventory. It is that process that is, to some extent, beginning to be worked through but it has been desperately difficult and painful, hence the production adjustment. That is the condition for Toyota. It affects not just the UK operations but our wider European and global operations as well.

Mr David Smith: I agree with Graham. We are an export business at heart. We export about 80% of our production. We are seeing our world markets down about a third overall. In fact, the premium end of the business has been impacted generally a bit harder than the volume end. As a consequence, in the first part of last year we were riding high, we had some strong sales, we were making money and then we were hit very, very hard in the second part of last year. We have seen those conditions unabated through the first part of this year. Apart from maybe China and the UK being slightly stronger than we expected a little while back, we are still seeing a lot of weakness. Germany and the Continent are very, very weak. The US market is very fragile as well. We have made the same inventory adjustments as all other manufacturers which has resulted in production down 50/60% over the last few months. That has hit the supply base very hard and it has hit our employees very hard. We have had all of our plants now on single shifts with significant impacts on working time, four day weeks for months now. The average guy on the line has probably seen his pay impacted by anything up to 20%. It has been a very severe impact across the business. I do believe that Graham is right that we are through, or very close to being through, this de-stocking period now. Fundamentally, demand is still about a third below where it was a couple of years ago and I do not see that improving that quickly. I think we are going to see these market conditions continue through this year into next year and it will probably be two or three years before we return to more normal market conditions.

Q63 Mr Wright: Do you think we are at the bottom of the trough at the moment and are just going along waiting?

Mr David Smith: I would say individual markets are going in different directions. There are still some markets, especially on continental Europe, which are going backwards if you allow for the scrappage schemes, looking at the underlying trends. Others may be improving a bit. We are going to bump along the bottom from here. This is not just about consumer demand and volume. The big impact on the industry as well as having to cope with that has been having to cope with almost a complete withdrawal of funding into the sector and, therefore, the whole issue around availability of credit from banks for the industry, suppliers and consumers, has made this very painful adjustment period extremely difficult to cope with. All manufacturers are having work very cautiously at the moment with their cash flow.

Chairman: I want to take up this question in some detail a little later on, so can we bank that thought for the time being.

Q64 Mr Wright: My last question is in relation to Nissan. Just recently they announced they were taking on 150 extra staff because of the increase in demand that they saw. Do you think they have jumped the gun or is their situation somewhat different from everybody else?

Mr David Smith: As I understand it that was partly due to the scrappage schemes that they are supplying especially on the Continent and now we have the UK scheme starting. As a business we will start increasing our production as we get through this de-stocking period but, as I say, it is still running at very low levels and, therefore, we will not move off the short-time working until we are confident that we see strong demand coming back into the market.

Q65 Mr Hoyle: David, obviously you are getting rid of your stock and production is going to increase. Is that across the two sites? That is the first part of the question. The second is recognising how important the market is, all the evidence we used to receive from you was the problem with the UK is the pound is too strong and the euro too weak, now that has reversed are you seeing the benefits of that coming through? Have you changed your stance? Toyota was always very strong on the euro in the past. Have you seen any benefits now we have seen that reversed and Britain is actually a good place to do business?

Mr David Smith: I am a great believer in Britain being a good place to do business.

Q66 Mr Hoyle: Hear, hear!

Mr David Smith: In answer to the first question, yes, all of our plants will start seeing some improvement in production because we are through the de-stocking period. This is an important year for both Land Rover and Jaguar. We have seven major product launches this year and we are just beginning to launch our products at Solihull and the new XJ at the end of the year at Castle Bromwich, so important new products. I will let Paul comment on the sterling issue, but for us it is an improvement in our margins certainly and the critical issue is the demand is not there at the moment and until that returns in key export markets like the US, Europe and the Middle East then the impact is going to be subdued for us. We are also seeing an increase in import prices rolling through still. I know it may seem like the commodity price boom peaked last year but a lot of those price increases are still coming through the supply base, so there are still a lot of import base cost increases coming through as well.

Mr Everitt: The general point on exchange rates is from a manufacturing point of view, yes, it makes things slightly better, the problem is at the moment the levels of demand globally are not great so you do not get a great deal of benefit from it. The key is about stability and the longer term outlook for exchange rates. One of the reasons in the first question about why has there been this hollowing out has been because of the sustained level of relative high disadvantage in terms of exchange rates. We all know today that the pound has hit the highest level for some considerable time and apparently that is because everyone is in favour of feeling confident about the banking sector.

Q67 Mr Hoyle: I thought you were going to say the Speaker!

Mr Everitt: I will leave that for you. The short-term issues are directly intertwined with the longer term strategy that the country wants to have in terms of manufacturing because that longer term is what people need, the certainty and stability going forward is what is going to determine how attractive the UK is for increased investment.

Mr Graham Smith: If I could just pick up on your comment, Mr Hoyle, about us being fairly strong about the exchange rate. Let us be very clear, we have been very strong about the benefits of stability in relation to exchange rates and if you are part of a currency union or currency zone then that stability is guaranteed. What we have always said, however, is that the pound, the euro and all of that is a matter for the UK Government and UK citizens, not a matter for Toyota. We have not commented on whether there should or should not be any realignment, so let us be clear about that. Having said that, again I refer to the integrated nature of our operations. We have a wide model range and we do not manufacture all of that range in the UK. We have very, very important manufacturing in relation to two models and a major engine plant. Things are moving in both directions: we are importing certain components and exporting vehicles, et cetera. There are swings and roundabouts in relation to the exchange rate. Stability planning and degrees of certainty are what are helpful to manufacturing and we could not run our business based on, if you like, opportunistic responses to a particular exchange rate for a period of time that could easily swing in a different direction and cause a judgment to be inappropriate.

Q68 Mr Hoyle: So I could say you are smiling a little more now than you were two years ago.

Mr Graham Smith: The instability in the exchange rate remains unhelpful, that is all.

Mr Hoyle: I understand.

Chairman: You have got what you want, but not when you can use it basically.

Q69 Miss Kirkbride: The Automotive Assistance Programme is obviously something we want to talk about and perhaps all of you would like to comment on my first question. Are loans and loan guarantee schemes the right way forward for your industry?

Mr Everitt: When we set out the package of measures that we were looking for in October/November time of last year, loans and loan guarantees were absolutely what we were looking for. The industry has always sought the ability to help itself through this difficult situation and for us the problems were getting access to credit and finance to allow us to sustain our businesses. The loans and loan guarantees were specific requests that we made to Government both in terms of supporting European Investment Bank funding that was being made available but also funding directly here in the UK. The Automotive Assistance Programme and its line was as close to being what we had asked for.

Mr Graham Smith: From our point of view, the important comment is first of all we are members of the SMMT and absolutely subscribe to the position taken by the SMMT and are very supportive of it. Indeed, during this period I was President of the SMMT, so I was very engaged with Paul in all of those discussions. I am here today as Toyota Motor Europe and the comment I think I must make is that the particular situation of every company is different. Some are regional companies and others, like my company, are globally established and, of course, there is a range of financial strength, of balance sheet strength, credit rating, et cetera, and that will depend on access to the availability and cost of funding. Not every company has needed to access the schemes that we have been calling for - EIB, Automotive Assistance - and often is able to secure funding possibly at the lowest costs as well. To be fair, my company falls into that category but what I want to do is to speak up for the supply base. I know we are going to come back to that, but this is an issue that is particularly relevant to the supply base and it is for the smaller companies, the supply infrastructure. We have heard the words "hollowing out" as a description of the trend that has taken place but, however you want to describe it, it is fragile in the UK at the present time and strategically is probably the biggest single threat to the world class industry and the world class manufacturing operations that we have here at the vehicle assembly and engine manufacture level.

Q70 Chairman: I do want to stop you there on the supply chain because we will have questions on that later.

Mr Graham Smith: It is relative to the availability of credit. There is a range of issues for the supply chain companies but availability of finance and credit is one of them. The final thing I would say is that unfortunately there was a tendency, not necessarily by Members of this Parliament and not necessarily universally, to characterise the requests that we were making as some kind of a bail-out. This is commercial funding from banks, a guarantee facilitates that but it is not a grant, it is not cash to us, it is money that is borrowed on commercial terms that has to be repaid. We view lines of financing in that context: commercially available, it costs money and we try to minimise the cost of our borrowing obviously. It is not under any circumstances, as far as we are concerned, a bail-out or anything like that. That is the way all of the companies in the UK view it.

Q71 Miss Kirkbride: JLR is the jewel in the crown of our region. How do you feel about that?

Mr David Smith: Let us go back for a second to why I think the industry drew attention to this. We said two things in October/November. Firstly, we needed demand boosting methods and, secondly, we needed to address the issue that we could see coming very quickly in the supply chain liquidity. Two things happened. Firstly, the commercial banks were very cautious about lending into the sector, if lending at all. Secondly, we saw the withdrawal of trade credit insurance, which had been an important part of the factoring arrangements that suppliers made between themselves. The Government responded to that with the announcement of the AAP which has two parts to it. It has the support, as Paul was saying, for the EIB clean transport facility and, secondly, support for commercial lending into the sector, both through loan guarantees. At the time that was announced the industry identified some potential issues with that and we can come back to those in some more detail. At the time the Government addressed those saying they would try and be as flexible as possible in the operation of the scheme and accelerate its implementation. The frustration for everybody, and I am not saying this is just manufacturers because I think the supply chain and Government as well are somewhat frustrated with the pace at which we have been able to implement this. We have done a lot of things in our supply chain. For instance, a couple of weeks ago we had a summit in the West Midlands with our suppliers supported by the SMMT and BERR and others trying to go through the principles of the scheme again. We are still suffering difficulties getting it moving though.

Q72 Chairman: When you say "we", do you mean JLR or the industry?

Mr David Smith: JLR certainly but the whole industry. I am not aware of anybody having received any support through the AAP yet. I do not think anything has come out at the end of the pipeline.

Q73 Miss Kirkbride: The start date was when?

Mr David Smith: The scheme was launched at the end of February and received European clearance at about that time as well.

Q74 Miss Kirkbride: So it has been ten weeks.

Mr David Smith: This is really about how we can accelerate this and get it moving more swiftly. This was an urgent need back in October/November and this is what we need. For JLR in particular, we have already received loan approval from the EIB for a substantial facility, £340 million, against our future technology investments. To unlock that we have to have the loan guarantees in place from the Government and, unfortunately, I am not able to discuss too much about those negotiations with the Committee but ---

Q75 Miss Kirkbride: Can you give us a flavour as to why it is taking so long?

Mr David Smith: Until we can unlock those loan guarantees we cannot get access to the EIB money and, therefore, we need that to happen as swiftly as possible and that is why we are asking the Government to conclude those discussions as quickly as we can.

Q76 Miss Kirkbride: Those discussions are taking place between you and the Treasury?

Mr David Smith: Between ourselves and BERR, yes.

Q77 Miss Kirkbride: So those are the only two parties at the table who are having difficulty agreeing?

Mr David Smith: The negotiations are happening between ourselves and BERR.

Q78 Miss Kirkbride: It is ten weeks on, an urgent situation, and it still has not happened?

Mr David Smith: That is correct.

Q79 Miss Kirkbride: The money that will be forthcoming, hopefully at the end of this period, what will be used for and how vital is it to JLR?

Mr David Smith: As I said, we are investing about £800 million over the next few years in green technologies and that is a wide range of things: lightweight vehicle structures; new engine technologies; hybrid technologies; a whole variety of different things. The money is against those individual projects. It is very important to us because clearly we need to make those investments to be competitive. To be honest, if JLR does not make that research and development and industrialisation commitment in the UK we probably will not have a low carbon vehicle industry in the UK which will have very severe implications down the road for the ability of the UK to sustain a viable industry. It is essential that we do make those investments. Unfortunately, there will be severe consequences down the road if we cannot make them now. The sooner we can get this money unlocked, the better.

Q80 Miss Kirkbride: I understand the sensitivity of what you are saying because the company's future clearly is quite dependent upon this and the green technology aspect is very important for UK plc, but given what we have heard from ministers recently about the need to invest in new green technology and given that you are going to be at the hub of all this I find it incomprehensible that this is taking such a long time. This conflicts with everything we hear from ministers at the Despatch Box. Is there a tetchy civil servant or something?

Mr David Smith: I cannot discuss the details of the negotiations but we want it wrapped up as quickly as we can.

Q81 Miss Kirkbride: Do you think it is right that the Government has gone down the road that this money, in its own words, is about, "Projects that deliver demonstrably new activity and investment that would not otherwise happen without the provision of Government support"? Has that also been the right way forward for these loan guarantees?

Mr Everitt: Perhaps I could address that from an industry perspective.

Q82 Miss Kirkbride: By all means.

Mr Everitt: This is the key question of what is termed as additionality and it does create some significant problems. As we have already alluded to, the problem for most companies is not having the available finance to invest or sustain their businesses. In those circumstances, without the loan guarantees the investment would not happen. One of the challenges is that is not always as fully understood or as flexibly interpreted as we would like and perhaps the approach is adopted in other countries. For us, without the loan guarantees most projects will not happen but that is not necessarily the approach adopted once you get into the details of schemes or individual projects. I would caution here that certainly our understanding from the feedback we have is that Government by and large, and the civil servants, do try to interpret as flexibly as they can but sometimes issues still arise. One of the difficulties obviously is we are in a pressured situation and people want to get these things done.

Q83 Chairman: Can I just interrupt Julie's questioning for a second? We had very compelling evidence on Monday from Professor Richard Parry-Jones. I know all your members are important to you, Paul, but his compelling evidence was that JLR is the key to the future of high value-added automotive manufacturing in the UK and that without JLR the game is basically up. I have heard very big Tier 1 component suppliers also say to me that their business in the UK depends on JLR. Do you share that view?

Mr Everitt: Clearly JLR's Chief Executive is sitting next to me! It is very important. However, I would also say there are a number of other significant investors, particularly in R&D here in the UK and potential investors in R&D. It is large and very important because it is perhaps the largest single one, but Ford, as an example, is a very significant investor in R&D here in the UK and Nissan, whilst not quite as substantial, is a company that is growing in terms of its investment and potential investment here in the UK, and there are a variety of others. I would not want to give the impression that only one company matters. David will be able to talk for himself, but I do not think it is helpful in some respects to focus all of our hopes on one single company. It is probably an unhelpful burden for any one company to bear and we have been there before, as you will probably recall, particularly here in the West Midlands where we focused all attention on one particular company. We are a strong and diverse sector here in the UK and we need everybody to be playing at the top of their game to make progress, but I think that is doable.

Q84 Chairman: I was asking that question to ask you, David, what more you think Government could do. I suspect that the BERR ministers are very frustrated - this is a comment in general terms - about the relations with the Treasury, which is often the way. What recommendation would you have us make to Government about your current negotiations?

Mr David Smith: Beyond trying to get them wrapped up as quickly as possible I cannot be too specific. I see Jaguar Land Rover at the hub of a lot of things in the UK in terms of technology investments, but we do need other partners. For instance, we are working with 20 universities in the UK at the moment and we have a very good research base still in automotive technologies in the UK.

Q85 Chairman: As your ultimate boss, Mr Tata, observed recently in the Sunday Times.

Mr David Smith: Right. Equally, there are a lot of other smaller companies, research institutes, that are involved in our projects: Nissan, Lotus, Ricardo, other companies as well. It is not just about us alone, it is about our partners and us. The whole point about the technology recommendations that were made in the NAIGT is if we want to seriously have a low carbon vehicle industry in the UK we are going to have to invest in it. The Germans are investing hundreds of millions of pounds in their vehicle technologies and there are similar investments from the Japanese, the US and certainly the French. We either choose to make these investments now or we do not. Jaguar Land Rover is a big integrator of that investment in the UK. That is really essential. If there is one message I would get across it is that the reason the industry in the UK asked for help was because it does not just want to survive and decline over the next period, it actually wants to get itself through this period and invest strongly in the future, and that is what we are trying to do, maintain the skill base, and innovation and technology investment can give us a good future.

Q86 Miss Kirkbride: You were happy with the way it was structured with the emphasis on green technologies?

Mr David Smith: I think the emphasis on green technologies is very important. As I think I indicated, there were different aspects, and Paul mentioned one of them around additionality, which is always a difficult issue. There were other aspects about the size of companies. There is a little bit of a gap between the various Government schemes at the moment. The AAP applies to companies with a £25 million turnover and above, and at the moment the minimum size project is £5 million.

Q87 Chairman: We will come to that in more detail later as well. I like to keep a structure to these sessions, I apologise.

Mr David Smith: There is a gap between some of the schemes that needs more flexibility.

Q88 Miss Kirkbride: How effective has the programme been in stopping things that you all might be doing from moving abroad or just being abandoned altogether?

Mr Everitt: It is still in the process, if you like, but everywhere else across Europe and certainly the world is facing very similar circumstances. The judgment is in a number of other countries it has been easier for companies to access finance and perhaps whilst at the moment that may not be such a huge issue, it certainly sends a very conflicting signal to the global investors who are important both in terms of vehicle manufacturers but also, as you mentioned, the Tier 1 and Tier 2 companies as well.

Mr Graham Smith: If I could add a couple of comments. First of all, there is no company more focused on environmental technology on a global basis than Toyota and our full hybrid technology has been in the market for ten years-plus as an indication of that. The development of low carbon markets is important to the future. It is important in relation to higher level emission targets that this country and others have to meet and from wider societal points of view. Therefore, the focus on green technologies and the development of low carbon intensity products of the future is vital. I come back to the supply base. The environmental focus is also important in the supply infrastructure, but the balance between the environmental focus and specific projects, new investment - again, the additionality issue - versus working capital and funding to maintain operations despite the 25% reduction, often more, in terms of level of demand they have experienced is equally pressing. I am not saying that the environmental focus is not appropriate in the supply chain; what I am saying is that they have got possibly more basic needs in terms of working capital to enable them, frankly, to survive, funding to enable some of them to consolidate to maintain a presence in the UK and to not end up restructuring around sister plants in other countries. Quite a lot of the supply base has an international dimension to it.

Q89 Miss Kirkbride: My last question was should it just have been based on green technologies and in a way your answer was that it could have done with looking a bit wider in other respects.

Mr Graham Smith: In relation to the supply chain especially some of their needs are more basic for working capital, et cetera, without necessarily the green technology link, that is the point I am making.

Q90 Miss Kirkbride: Would the others agree or have another dimension that it should have gone down?

Mr Everitt: Our understanding, and certainly in practice, is that there is a reasonable level of flexibility in how that is interpreted which by and large should be okay. There are probably some bigger issues to do with the effectiveness of the programme than the focus on green technologies.

Miss Kirkbride: Like how long it takes.

Chairman: We are coming /to that very shortly.

Q91 Mr Hoyle: Obviously Julie has said the jewel in the crown is JLR, and you are one of the jewels of the crown in the Northwest and what we have got to do is look at the four regions, Northwest, Northeast, East Midlands and West Midlands. What we are talking about is green technology and JLR, and it is very important, but I think you would reflect as well you are the premier division in the motor industry and there are other parts that are just as important in the UK. With what you have said today, and I am not trying to push you, David, I understand everything is very sensitive, what one message do you believe we should put into the report and take back to Government that has not come out yet to help you?

Mr David Smith: It is about accelerating the release of the EIB and the other cash that is required by the industry and us.

Q92 Mr Hoyle: Paul, have you a message?

Mr Everitt: I have got several probably. For me, the key is Government needs to remain focused on the existing mechanisms and ensure that sufficient resources are put into them so they do deliver. What we do not want is another mechanism, if you like. We have some that could be effective, we just need to work them.

Q93 Miss Kirkbride: What do you mean by "resources" there? Are you talking about manpower to do it or the amount of money in the pot?

Mr Everitt: Everything. Certainly to ensure that they are adequately resourced and where there are needs they are addressed.

Q94 Chairman: This is an important point. Are you saying you think there may be a shortage of Civil Service resources actually dealing with the scheme?

Mr Everitt: My impression ---

Chairman: Do not be shy, please. This is an important point.

Q95 Miss Kirkbride: This is your chance to put the point.

Mr Everitt: It is true that the Automotive Unit is relatively small and dealing now with a significant number of major schemes. Equally, they have been allocated new resources but it is as and when they can as opposed to, "This is a key and essential series of programmes that have to be resourced as soon as we can to the best that we can". They are trying their best within the resources that they have.

Q96 Mr Hoyle: Do you think expertise could have been brought out of the Development Agencies and put into Government to help this situation? I just wonder because there is good expertise in these Development Agencies, the RDAs, and there is a shortage of understanding within Government whether we could have brought some of that in to speed up the delivery.

Mr Everitt: I made a number of comments that people did or did not agree with. I characterised the situation towards the end of last year and the beginning of this year as a national emergency. From an SMMT point of view we offered our resources to Government to assist them in the areas that they needed and we ran a number of seminars and other things to try and communicate what was available to people who needed it. Certainly more of that has been required in a variety of different aspects to try and get things done.

Q97 Mr Hoyle: Have you got a message, Graham, or are you happy with the message?

Mr Graham Smith: I have repeated it enough times. Our concern is the integrity of the supply chain and the application of the schemes to the smaller companies often of international parentage.

Chairman: Before I move on to Tony Wright, Lembit has a supplementary and I have a point to make. We are going to the Northwest Development Agency tomorrow. I should say we are very grateful to Advantage West Midlands for their hospitality and facilities. I did not say it when we began and I should have.

Q98 Lembit Öpik: I do not want to push you on this, Paul, but it is really for the avoidance of doubt. Our objective is to do something useful for your business. I would like to pin you down on this, and you are not going to be making enemies either in this Committee or the Government. Is it your view that if the Government invested in greater human resources to apply this scheme the cost of that investment would be paid back in the net return economically to the country?

Mr Everitt: That is quite a difficult judgment. We have moved on quite a bit in the process, so we are talking about how quickly did a team get established, how resourced were they and are they able to deal with the issues. It is not a straightforward issue because some of the concerns that we have with the programme actually have nothing to do with Government and are really to do with the appetite within the banking sector to do business with the automotive industry. We certainly have a number of examples where the Government and team have done their job in getting a project through the various mechanisms only to find there is not a bank willing to support the business.

Lembit Öpik: We do not want to make a recommendation that is pointless. We will be coming back to credit later on, Chairman.

Q99 Chairman: Funnily enough, that was the entrée to my question. One of the major themes of your written evidence, and I think this is the right moment to ask you, was this catch-22 situation, the circularity of the programme. You emphasise it is a guarantee, you have got to have commercial lending in place, or the EIB lending, yet the banks are not lending you the money, so if there is nothing to lend there is no guarantee available. Talk to me about the situation with the banks.

Mr Everitt: I can only give you the impressions that I have had from a number of companies particularly within the supply chain who have worked the process who do feel they have viable propositions to make only to find that their banks are not interested in coming forward. This is a broader theme, it is not just around the Automotive Assistance Programme because a number of the other more general schemes that Government have also effectively rely on the bank coming forward to support the company and to be involved. Certainly the feedback we have had is that it is not even a question of how much it costs, the impression companies have is that banks at large have taken a view to reduce their exposure in the automotive sector and irrespective of the viability of the business they are not going to be involved.

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.

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.


 

Examination of Witnesses

Witness: Mr Paul Williams, Chairman, Retail Motor Industry Federation, gave evidence.

Q131 Chairman: Welcome. We have met informally in the past but I think this is the first time you have given formal evidence under my chairmanship. Can I ask you to introduce yourself, please?

Mr Williams: Yes. I am Paul Williams. I am Chairman of the Retail Motor Industry Federation which represents the retail arm of the industry representing some 10,000 or 12,000 bodies. It is an industry that has 60,000 businesses and 600,000 people employed within it. In terms of its size it has twice the number of employees that the manufacturers have and contributes £33 billion a year to the Treasury in the form of taxes, so quite a large segment.

Q132 Chairman: It would be helpful to know your personal involvement in the industry.

Mr Williams: I am here as Chairman of the RMIF but I am personally the non-executive chairman of a large dealer group.

Q133 Miss Kirkbride: A very, very important sector. This week we have seen the introduction of the Car Scrappage Scheme and I wonder if you think that is the answer to the problems of your retail sector at the moment?

Mr Williams: No, I do not. It was never meant to be the panacea for the industry. I introduced it as an idea in November to Lord Mandelson when he came to see both the manufacturers and retailers. The scheme that I outlined to him that has since gathered momentum in various trade bodies was that there should be a contribution of £2,000 from Government and it should include nearly new cars, which are effectively demonstrator cars which are the same as new cars in terms of the advantages it would have. The aim of the scheme is to reduce the possibility of downsizing within the manufacturing industry and the retail industry so that we could possibly save some jobs. If there was an increase in sales then we could hopefully save some more jobs both in manufacturing and retailing. When the scheme actually came to fruition, and having accepted the concept it has taken rather a long time to come in, almost a week before the Budget, maybe even hours before the Budget, it was watered down to £1,000 from the Government and £1,000 from the manufacturers. The hope was that were it £2,000 from Government the manufacturer would put £1,000 in or thereabouts, and therefore it would be far more exciting to the consumer. I am somewhat mystified that it was watered down and, I have to say, somewhat disappointed. It will have an effect, and it has already had an effect. It has been a long time since any dealership in this country has had customers ringing them asking if they can come in and see them. I can categorically assure you that is not common. It has worked, but it is mystifying as to why instead of just taking the German scheme the decision was to reinvent the wheel. It was never intended to be the panacea. It has given a lift to the industry and it will continue to give a lift to the industry, it is just a little mystifying as to why it was changed.

Q134 Miss Kirkbride: Did you know that they were going to have the German scheme to begin with? Had you got it on good authority? Do you have any idea why it was changed, as you say, within hours or days of the Budget?

Mr Williams: I do not.

Q135 Miss Kirkbride: What is your speculation on it?

Mr Williams: One of the points Paul Everitt made was that the BERR Auto Unit had to second some people in there to get the scheme together, the actual process. I believe it was the Treasury, and I do not know this, I have no more knowledge than you do of this, that actively watered it down somewhat, which still gives us something we can go to market with but it is just a shame that it did not get a little bit extra and, as Mr Hoyle has pointed out, had a structured tier to it so it is not just middle and smaller volume products that get going.

Q136 Miss Kirkbride: You do say that the good news is that the phones have started ringing since it was introduced.

Mr Williams: Yes.

Q137 Miss Kirkbride: Can you give us more evidence as to what has happened and the quality of what has happened with its introduction this week?

Mr Williams: I just happen to know because of various contacts I have got. My own company has been incredibly busy.

Q138 Miss Kirkbride: Incredibly busy?

Mr Williams: Yes, incredibly busy. Our Hyundai dealerships are reported to be working seven days a week, they have to come in on Sundays to cater for the sales. They have products at the lower end of the market. They have some luxury saloons as well but predominantly it is the lower end of the market.

Q139 Chairman: Is this enquiries or sales we are talking about?

Mr Williams: Actual sales. To deal with the enquiries and they are selling more and more product. Bear in mind, it was only introduced officially and we could only release cars on Monday and even that got jeopardised somewhat for 38 hours, but nevertheless that is now happening. I know my own company had a great number of vehicles ready for release that we could not actually release because of the various manufacturers involved. Actual sales have been made. These are incremental sales, which is important.

Q140 Miss Kirkbride: The German scheme has been seen to be a big success. Do you think there is hope that it might be as good as that here in the smaller car sector?

Mr Williams: It has been a great success; so great they have actually extended it. This government said, "When the money runs out that is it", but it has been so successful in lots of different areas that they have said, "We will continue it now". You still have queues in dealerships over in Germany. When we did our original estimates for Government we based the Scrappage Scheme on their details. I do not think it will be as successful as the German one because it does not have the same size of offer, sadly. We will review it within three months and if we feel it is not capturing the imagination as it should we shall go back to Government and say, "Look, you really do need to have another look at this". They accepted the concept, which is the annoying feature, but they have not actually done the rest of it.

Q141 Miss Kirkbride: In terms of helping the very important sector that you set out in your opening remarks, is this what it is all about? In this climate, in this recession, the only thing that Government can do is something like a Car Scrappage Scheme and they have done it but just not as well as you would have liked.

Mr Williams: It is quite a resolute part of the sector. We have various operations - new cars, used cars, servicing operations, parts, wholesaling, et cetera - so we have one or two trading arms, but if you continue to drain profit from those companies then they will have to have a look at their expenses and we all know in the real world when you look at expenses the first expense that is downsized is people, always. It was for that reason that we have been looking at things. Certainly when I later wrote to Lord Mandelson after the scrappage incentive scheme we raised issues on vehicle excise duty, which came in in April of this year, which has cost the industry over £80 million. That was never intended.

Q142 Chairman: This is the refunds on expired licences, is it?

Mr Williams: Yes. I do not think DVLC or Customs & Excise would turn round and say, "We'll penalise the motor industry for this amount", but that is a consequence of what they have done. They did it to stop people cashing in their licences just before a Budget so they could have a cheaper licence. It has resulted in our industry losing up to £80 million because we can no longer cash in a tax disc as we used to, you can only do that if you are the registered owner and obviously to go through the whole trauma of becoming a registered owner would be a nonsense. We asked for that to be deferred to 12 months. Not scrapped, we knew the Government would not do that, but to be deferred, and we were told quite politely, but I am still in correspondence I hasten to add, that would not be possible. Not scrap it, just defer it for 12 months to give this very important sector some breathing space. Business rates relief is a debacle in terms of our industry because all companies have had to close dealerships - small, medium - and those sites used to get business rates relief.

Q143 Chairman: It is the void rate relief.

Mr Williams: That no longer occurs. Government and the Treasury seem to be of the view they have cured that problem, but when I gave them the information that the average cost of a site to a motor dealer is about £1.2 million, £1.3 million, the increase they gave in the last Budget is not worth the paper it is printed on. We have suffered quite significantly as a result of that.

Q144 Miss Kirkbride: So the exceptions that they made on void rate relief are not viable for you because your properties are more valuable?

Mr Williams: I will not mention names, but the minister I spoke to on this had no idea whatsoever on the average value of a motor dealership, which is why this Automotive Unit needs to gather some momentum so we can make people aware of what an enormously large industry it is in terms of employment more than anything else and GDP. The automotive industry contributes something like almost 6% in GDP to this country, which is vast. The guys before told you what would happen if attention is not paid to that. Make no mistake that the retail arm is equally as important because without somebody to sell the product they manufacture they might as well shut the shops and we shall not have any manufacturing base at all then. The other item that we spoke about was capital allowances where we asked for a 12 month period and would the Government look at giving 100% capital allowances on medium vans and trucks. We have been in correspondence and they tend to believe the action they have taken has done that. We are in continuing dialogue with them but I think we have missed the boat because it would have been ideal to have introduced that in April. The overall point I am trying to make is we did not ask for these things to be knocked on the head or to be abandoned, we asked for 12 months' respite just while the industry sees its way through. All that will happen is if companies continue to lose money on this basis they will actually lose staff and the cost of people when they leave us and take on state benefit will be far greater than any one of the capital allowances or, indeed, the reintroduction of business rate relief. There are one or two other issues that we have been taking up as well.

Q145 Mr Hoyle: Thank you for what you have said, I think we are both on the same idea that this is about helping industry and helping ourselves in the UK. You said that you agreed it was a bit short-term, one-size-fits-all on the subsidy and we could have done better if we could have had a bit more idea about the small car, family car, maybe even larger car, so we could have helped right across the industry. If we look at where we produce most cars it is in the middle, the family size cars.

Mr Williams: Yes.

Q146 Mr Hoyle: We can agree on that. Should we have gone for ten years? I know you could pick any year, but would eight or six have been better? The benefits are you are getting rid of all the cars and for the environment it is a win-win and the fact that we can have younger cars in the country operating has got to be good for business but also for the environment. Do you agree with that?

Mr Williams: I think if you had a room of five people and asked that you would probably get five different responses: seven, six, five, nine, ten. I think the nine or ten year-old car was about right in as much as it is not just the CO2 scenario but the one thing we kept on reminding politicians and ministers alike was the safety features. If you look at the road safety features on a ten year-old car compared to what they are now, it is light years on. If somebody is trading in a car that does not have those safety features it must be good for the death rate on roads, et cetera, one would have thought. Whether or not that would be the same for an eight year-old car, a six year-old car or whatever, obviously it would not because they were a bit better designed. I think about nine or ten years was about right.

Q147 Chairman: Just a couple of questions from me on the Scrappage Scheme. When do you think the money is going to run out at current rates of demand?

Mr Williams: I think they have said February next year or before if the pot runs out. They have put 300-odd million into the pot and I suspect it will not actually run out before next February.

Q148 Chairman: You think it is probably enough money to sustain itself?

Mr Williams: I think it is. It will not have the impact that the German scheme had. The paper we did actually said it would cost about £170 million to Government over an 18 month period. If you work out the sums that does not automatically tie up, but what you need to take into account is we believe there will be something in the region of 225,000 extra vehicles sold in that 18 months incrementally so there would be a VAT revenue, but if you then took the cost of the scheme, you take off the VAT increment, the cost is about £160 million over 18 months, which I would suggest is a lot cheaper than retailers and manufacturers having to lay people off over an 18 month period, the cost to the UK.

Q149 Chairman: To what extent are you worried that the scheme may simply bring forward purchases that would have been made in the future anyhow and in February next year could lead to a new dip in the market?

Mr Williams: That is one of the reasons why we said 18 months, so it did not become too protracted. It will give a demand dip, there is no question about that, but I do not think that is really likely. Anyone with a ten year-old motorcar up to February next year, or when the pot runs out, will find it a little more difficult, I would suggest, to go and buy a new car on the basis that they will not have the £2,000/£3,000 discount. It is a market that we never had a great impact on anyway. I suspect that the dip will not be as great. There will be one, there is no question, but that is why we have kept it to 18 months.

Lembit Öpik: I have to confess no amount of incentive will get me to part with my 15 year-old Vauxhall Cavalier 1.7 diesel; probably the finest car every built. I make that as a rhetorical observation.

Chairman: It is a challenging thought and we will take you up on it later.

Mr Hoyle: You polluter!

Q150 Lembit Öpik: 59 miles per gallon. There are others, of course, who are involved who will be considering issues of credit. To what extent are sales being constrained by the availability of credit? We have heard a different aspect of it from the manufacturers and now we are looking at the consumers. What is your experience of that?

Mr Williams: I am glad because the media seem to have got this whole issue of credit totally wrong. There were one or two headlines some months ago now and our members were really suffering from it because people stayed away from the showrooms. One of the headlines was "No credit in the showroom" because they had picked up from an SMMT briefing or a briefing from somewhere that credit was very, very difficult. I think what they get confused with is the different lines of credit. Certainly the motor manufacturers who were meeting with Lord Mandelson asked, as they have already told you, about this line of credit. What the media did not seem to realise was that there are these different forms and what we are talking about is consumer credit. I was amazed at the furore that came from the dealerships because consumer credit is still readily available. As we speak today it is readily available. When I say "readily available", if you have got a lot of county court judgments or something like that then maybe you will find it as difficult now as you did then. In terms of obtaining credit for a new or used car you are probably asked for a bigger deposit now, 5% may now be 10% and 10% may be 15%. Although the finance companies will tell you that they have not actually altered their scoring mechanism on which they base their loans, I would like to tell you I am pretty sure they have, but I do not think it has been dramatic because bear in mind they still need to do business. From within the dealership network the exterior sources, ie not the manufacturers like Ford Credit, GMAC, those associated with the manufacturers, there is no shortage of credit availability.

Lembit Öpik: That prompts a final question really. Do you think the Government needs to do something to improve credit flow? From what you have said there it sounds to me that the industry is not overly concerned about consumer credit because while the deposits are slightly higher it is not a controlling issue in the market.

Q151 Chairman: The previous witnesses said inventory credit was an important issue.

Mr Williams: I am talking about consumer credit now, for somebody to go in and buy a car on a conditional sale over two or three years. When you look at the manufacturers' side I think that is a totally different story. The way that it affects our industry, as Graham may have pointed out, is that the retail motor industry is quite dependent on the manufacturers for stocking loans, and I mean quite dependent. If a manufacturer, because of its inability to get funds, had to withdraw those stocking loans then a lot of retailers would struggle badly.

Q152 Lembit Öpik: Can I impose upon you just to explain how that works.

Mr Williams: The manufacturer actually stocks the used car for you effectively. You have the car on sale or return. Effectively they build a car, they release it and you have the vehicle on sale or return for X number of days depending on the manufacturer. That is one form of credit you are getting effectively. By far the bigger one is most manufacturers will offer you the facility - not everybody takes it up, they go elsewhere - to fund your used car stock up to 80% of its value.

Q153 Lembit Öpik: How do they do that?

Mr Williams: They take the value of your used car stock and give you 80% as a loan. It is quite a large amount of stock holding and most dealerships will need that and always have taken advantage. A lot of companies do not use the manufacturers for that, they go to exterior banks or lending sources. If these manufacturers' sources of credit dries up, as these guys alluded to, then that could cause a major problem to our industry because the dealerships would then have to go to the banks and say, "Can we have a stocking loan, please?" and a great number would face a lot of difficulty in doing that. Their problem is our problem in that field.

Q154 Lembit Öpik: You are talking about it as a future situation. Have you seen anything like that happening to date in terms of the used car stocking loans?

Mr Williams: Not to date, no.

Q155 Lembit Öpik: Is there anything you think the Government specifically needs to do now to improve credit flow or is it a watch and wait situation?

Mr Williams: Anything the Government can do in terms of the manufacturer loan guarantee scheme can only help them which in turn will help us. I think the guys have been incredibly politically correct and, having accepted the concept of it, the Government needs to get on and do it. The longer they wait, the more difficult things get and if it does it will be too late both for the manufacturing sector and the retail sector in that particular area of credit.

Q156 Lembit Öpik: It is upstream, but as far as the consumer directly is concerned that is not an issue that particularly affects them?

Mr Williams: At this point in time, no, it is not.

Q157 Chairman: Manufacturers offer this facility to you for your inventories, new and used.

Mr Williams: Yes.

Q158 Chairman: Presumably you would not have to rely on manufacturers' support for that, you could get it from other sources of finance. Is that other source of finance readily available and, if so, is it on significantly different terms from those offered by manufacturers?

Mr Williams: I think in a past life it used to be but I suspect you would not find many retailers now who would like the source of funding for manufacture chopped up and say, "Right, you now need to go into the open market to borrow" because I suggest they would find it very difficult.

Q159 Chairman: Finally from me, you listed some other issues concerning the Retail Motor Industry Federation in your answers to Julie Kirkbride just now but there were a number of issues you did not touch on. We have not had the oral evidence on this, we are going to see Bentley privately tomorrow, but they are very concerned about the Budget change in terms of company car taxation, for example. At the margin that is another issue of concern. Are there any of these issues that you would like to share with us or do you think you have got everything off your chest that you wanted to?

Mr Williams: The guys here mentioned the Automotive Unit within BERR and that is quite important, recognition within Government that this industry is as big as it is and wields the influence that it does in terms of employment.

Q160 Chairman: How big did you say your industry was compared to the manufacturing sector?

Mr Williams: We employ twice as many people.

Q161 Chairman: I have got a bigger figure than that. The SMMT said you were over three times bigger than manufacturing, three and a half times bigger probably.

Mr Williams: Maybe manufacturing has shrunk a lot more than I thought.

Q162 Chairman: You are getting some new figures from behind you.

Mr Williams: About 600,000 people that the retail sector employs.

Q163 Chairman: And less than 200,000 in manufacturing.

Mr Williams: Is it less than 200,000 now?

Q164 Chairman: Yes, so you are a really very huge part of the total picture.

Mr Williams: In terms of GDP, which is perhaps the most important factor, it is almost twice that. Again, the amount of taxation that is poured into the coffers is very important from our sector too because all of the people employed in this country pay income tax and the companies pay corporation tax whereas a lot of the profits the manufacturers get are siphoned off to Europe or wherever else the cars are manufactured.

Q165 Chairman: The ones they make here that get exported.

Mr Williams: That is right.

Q166 Chairman: I think as far as the Committee is concerned we have covered the issues we wanted. Do you feel there is anything you have not said?

Mr Williams: No, I do not think so. The other issue that causes an awful degree of angst within our membership is the reaction of the banks and the relationship with banks.

Q167 Chairman: We heard the SMMT say they thought there was a general reluctance by banks to lend to the automotive sector. Do you see that or do you think you are experiencing the same problems other small and medium-sized businesses are experiencing?

Mr Williams: Again, I think they are masters of understatement. The behaviour of the banks has been quite atrocious. I have to say both myself and a lot of the members I represent are quite mystified, if you take into account the amount of power that the Government now have over the clearing banks, that more is not done to persuade the banks to give more assistance. Every time I go to a seminar of a firm of accountants or economists or whatever else, somebody in the room stands up and outlines an horrific incident they have had with a clearing bank in terms of their overdraft review or something else. That is every time I go. It really is a national scandal.

Q168 Chairman: Let me just put the case for the defence briefly before we finish off. I was meeting a chairman of a major high street bank only this morning and he said two very important things. First, there is the same amount of money, more money out there available to lend, they have got the money, and, second, 85% of their renewed arrangements are on the same terms as their existing arrangements, only 15% are going out on more adverse terms. Then he said the real difficulty is finding high quality businesses and sustainable businesses that want the money from them. Is that perhaps where the difficulty arises, the definition of what viable businesses actually are?

Mr Williams: I do not think it is. I do not know who you were speaking to but I would challenge that and I would like to be in a room with this gentleman on my own because I could cite him at least two or three practical examples.

Q169 Chairman: With 15% you would get a lot of examples. 85% is fine but 15% is still quite a lot of businesses.

Mr Williams: The experience I am getting back from the membership and people I speak to with very profitable, very, very low geared companies is horrific in terms of overdraft reviews where the fees for the overdraft review have gone up three or four times without any explanation. Forget the taking away of overdrafts, which has happened, this is just the overdraft review, "Yes, we'll do it, but instead of the £10,000 it was last year it is now £30,000 or £40,000".

Q170 Chairman: You do not buy the argument that (a) the cost of capital of the banks has gone up because they have to put capital aside under Basel II now to fund overdrafts not drawn down by the clients, for example, so their cost base has gone up, and (b) the withdrawal of foreign banks from the British market means British banks are lending more than ever but the total pot has reduced in size because of the withdrawal of those foreign banks from the market?

Mr Williams: There may be a valid argument there. You asked me what I believe Government can do and look at and I am saying the groundswell of opinion in this part of the industry is exactly that.

Chairman: Bankers, politicians and used car salesmen are three of the most unpopular people in the country at present.

Lembit Öpik: And some journalists.

Q171 Chairman: Many journalists too. I do not want to be too unfair on the banks because we are all in this together.

Mr Williams: I am telling you that the people on the ground floor are telling me this and I am passing it on for you to bear in mind when you put your report together. Indeed, if you want to make any personal enquiries of these people, please feel free to do so.

Chairman: Thank you. We might take you up on that.

Lembit Öpik: It might be useful to get a couple of case studies.

Q172 Chairman: If you can provide hard-edged evidence of the claims you have made, that would be helpful.

Mr Williams: As long as they are kept very, very private and confidential and not raised.

Chairman: Anonymised if necessary. Redacted, to use the phrase of the moment. Thank you very much. We are very grateful to you and we are very grateful to Advantage West Midlands for making this event possible.