INTRODUCTION

  The Department welcomes this Inquiry. This memorandum should be read in conjunction with DTI's memorandum in response to the Committee's inquiry into the Collapse of MG Rover (announced January 2006) and DTI's memorandum in response to the Committee's inquiry into the UK Automotive Sector (held in 2004).

  The UK automotive sector is very diverse, with a wide range of car and commercial vehicle makers, together with a vibrant component industry. Seven of the global top 10 vehicle makers, and 19 of the top 20 component makers, have a manufacturing presence in UK. DTI recently published a brochure summarising the state of the UK automotive sector "Driving Force: Success and sustainability in the UK Automotive Industry".

  Altogether, around 222,000[26] people are employed in the manufacture of vehicles and components in some 3,300 businesses. The sector contributes around £9.9 billion value added to the UK economy, and accounts for 1% of GDP, 6.6% of manufacturing value added and 12.7% of UK manufactured exports. The statistics for the performance of the sector over the last 10 years are set out in Annex A. This understates the full scope of the industry, as many components are manufactured by businesses classified to other industries.

  UK car production peaked in 1972 at just over 1.9 million cars, but within 10 years production had fallen to under 900,000 units. However, growth has returned, and in 2005, 1.6 million cars and 207,000 commercial vehicles were produced in the UK. This represents 3% of global vehicle output, ranking UK fourth in Europe behind Germany, France and Spain, and ninth globally.

  The UK industry operates in a complex and integrated EU market. Over 70% of UK-made vehicles are exported, mainly to Europe but with premium products sold around the world. In 2005 the UK saw a record level of car exports, 73% of production. This record looks set to be broken in 2006 as the very latest rolling 12-month data (12 months to March 2006) shows that UK is now exporting over 75% of the cars made here.

  There is a large and diverse cross European trade in car components. Engine development and manufacture are major strengths of the UK automotive sector and have undergone a period of impressive growth in recent years.[27] In 2004 production exceeded three million. Substantial new investments have been made at a number of locations both in developing existing facilities and establishing new ones. The UK is a significant net exporter of automotive engines, mainly to car plants around Europe. For example:

—    Ford sources 25% of its entire global engine production from the UK, with over 80% of Dagenham and Bridgend's production being exported.[28] Ford has recently announced a further £100 million investment in the Bridgend plant and is committed to make Dagenham its global "Centre of Diesel Excellence". This will entail further expansion of Dagenham's role to include not just the manufacture of the engines but also their advanced design (in collaboration with Dunton). The Government has been highly supportive of this strategy, agreeing in December 2004 to provide grant aid of £5.1 million in support of a £220 million project by Ford to build its new DV4/DV6 engine series at the site.

—    Honda have announced that they plan to build an in-house diesel-engine production plant at Swindon within two years.

  Both the UK's domestic and main export markets are relatively mature, with individual company growth mainly achieved by winning market share from other manufacturers. The diversity of the UK auto industry is such that some companies have grown, some have failed, and many have continued to do well. VAT registration statistics show that the total number of companies has remained stable over the last 10 years: as some companies have closed, others have started up. Meanwhile, headline vehicle production is also relatively stable.

  Employment is on a downward trend due to new technology and improving productivity; up by 44% from 2000 to 2004 in value terms, as UK companies address the challenges of globalisation.[29] The balance between employment and productivity is being felt across many major automotive companies in Europe, for example Volkswagen have said that it is looking to reduce the workforce in its six western German plants by 20,000 (about one in eight) to make them more competitive.

  The outlook for the UK auto industry is positive. Manufacturing close to retail markets remains attractive, as it minimises logistics cost and allows responsiveness to customer demands. Global companies are demonstrating a long-term commitment to UK manufacturing by investing in new models. UK suppliers are winning key contracts, demonstrating that UK can still be a competitive place to do business with the right investments, the right workforce and the right products.

THE PRINCIPAL REASONS FOR THE DIFFERENT RECORDS OF SUCCESS

  The UK automotive sector is made up of a diverse collection of over 3,000 individual sites. Records of success and failure vary and the reasons vary too.

  For example, it is generally accepted that MG Rover failed because it both lacked the resources and capability to develop new models to replace its ageing product range (eg Rover 25 and Rover 45) and failed to find an external partner to provide this expertise. In contrast, Bentley has benefited from a £500 million investment from the VW Group, which helped the company to return to profit in 2005.[30]

  These examples and the consolidation of the car industry over recent decades demonstrate that economies of scale and the ability to generate large sums for reinvestment are generally regarded as a requirement for anything other than the smallest niche car manufacturers. The component industry has a wider spread of viable company sizes depending on the complexity of the components being produced.

  Within the car industry, there are some general features associated with company success. Many of the business approaches were originally introduced by Japanese car manufacturers, they now apply to a similar degree in both volume car production and in premium brands and the lessons learned are being applied in other sectors.

  Most importantly, successful companies have a good understanding of the market and are able to design, produce and market a product that the customer sees as desirable and good value. Value is not just about price and technical specification but also includes sustained high quality and a reputation for product reliability. Branding is an important element in the customers' perception of quality and value and successful companies make long-term investments in acquiring and promoting a good reputation and building strong brands.

  Leading automotive companies share other attributes that deliver value and quality. They tend to have a business culture which emphasises working with employees and valuing their contribution to process improvement. Particular emphasis is given to dealing with problems at their source and relying heavily on the workforce both as the identifier of the problem, and the source that can offer the best solution. The more successful companies also focus on supply chain management, with buyer and seller working together as a knowledge-sharing, problem-solving partnership. This approach of trusting the workforce, emphasising quality, and deep integration with the supply chain contrasts to the more traditional command and control management practices of the past.

  Finally, recent management focus has been on taking waste out of the business and reducing costs. Some of this is saving on raw materials, some is configuration on factory floor space so that there is minimal handling of components between machines and operations, some is to ensure that products are made to the required quality first time and that rework is kept to a minimum. To deliver these savings the companies need to invest in and operate complex systems of information management and analysis to accelerate decision-making.

HOW COMPANIES ARRIVE AT INVESTMENT AND CLOSURE DECISIONS IN THIS COUNTRY AND ABROAD

  Investment decisions can be complex, involving the consideration of many geographical factors (such as the availability of economical land, raw materials, labour force, suppliers and customer markets). Other important influences may be more dependent on government policy: tax regimes, transport infrastructure, employment law, R&D infrastructure and government support. Less tangible factors such as quality of life, attitudes of locals towards business, and quality of public services may also influence a firm's decision.

  A global corporation choosing between different sites in different countries will have to consider many more issues than a smaller, single-site engineering company. But even in the largest investment decisions, "soft" factors have a part to play, and there is rarely one, clear-cut, incontrovertible answer to any individual decision that is not open to debate.

  When considering whether to relocate, firms face a range of other issues. The costs and opportunity costs associated with moving are high. Many plants cannot be profitably sold, as many past investments are product or firm specific. Planning, building, and operating at an entirely new location is expensive and risky. It may take a long time to cover the costs of a large relocation or new location investment. Other issues may emerge: we are aware of a company which relocated 20 miles away from its original location and 75% of the employees resigned, resulting in a significant loss of experience, and an unexpected recruitment and training cost.

  Individual location decisions are the result of detailed discussions within companies. These are often private to them, and not shared with Government. The precise way different location factors are balanced cannot always be known. Nor can we know for certain how these decisions interrelate to the wider strategy of the firm.

  In general terms, empirical studies show that location decisions of large-scale manufacturing firms are driven by tangible economic variables like proximity to market or raw materials, transportation costs, and the availability of an appropriately skilled workforce. Many studies have found that productivity, education, taxes, and quality of life factors have become increasingly influential.

  Research from UKTI identifies the following recent key issues for the automotive sector that impact on retention:

—    Labour (principally costs, skills and availability),

—    Site (mostly the location of older facilities—often requiring significant investment to update aging plant—and issues around access and transport infrastructure), and

—    Business Costs (including energy costs).

  The empirical evidence sheds some light on the historical pattern of automotive plant closures.[31] Many studies show that plant size, age and productivity affect the likelihood of plant closure. Overall, larger, well-established and more efficient plants are less likely to be closed than small, less efficient plants. Within these studies the evidence suggests that foreign-owned plants are no more likely to close than UK-owned companies. However, evidence shows that any change of ownership increases the risk of subsequent plant closure but this effect is less pronounced for larger and/or more productive plants.

  The research evidence covers the full range of plant sizes over a considerable time period. However, well-established, larger plants are sometimes closed. When this happens the closures tend to attract a greater public interest and they have a major impact on the local community and supply chain.

  What is clear is that in a diverse industry, there is no "one size fits all" rationale as to why plants are opened or closed. The UK has an excellent track record for inward investment over many years and the government are determined to maintain that record in an increasingly competitive global market. Government's most important role is to maintain an overall regulatory environment that encourages high-value investments and a competitive economy.

Labour Market Regulation

  The UK has a dynamic, high-performing and flexible labour market, which makes the UK an attractive location for inward investors. Across the economy 75,000 new jobs were created by direct inward investment into the UK in 2004-05. Overall, the employment rate in UK is the highest in the G7,[32] much higher than the EU and OECD averages.[33] The number of temporary employees who could not find a permanent job and of part-time workers who could not find full-time work have both fallen by about a third over the past 10 years.[34]

  It has been suggested that this labour market flexibility makes UK workers more vulnerable than their European counterparts. However, UK employees enjoy significant protections when redundancy threatens. For example, employers are obliged to consult and provide information on redundancies involving 20 or more employees at one establishment. The consultation must include ways of:

—    avoiding the redundancy situation or dismissals;

—    reducing the number of dismissals involved; and

—    mitigating the effects of the dismissals.

  In addition, where redundancies take place, the employer is required by statute to make redundancy payments to the affected employees. The maximum statutory redundancy pay is £8,900 and many companies top up the statutory amounts with voluntary severance payments (often set at around twice the statutory levels).

  The statutory requirements on employers vary across the 25 EU member states but the UK's arrangements are not untypical of those applying in many member states. The UK Government believes that UK law strikes the right balance between employee protection and labour market flexibility. It is not accidental that in France where there is a more rigid regulatory regime for the labour market, French youth unemployment is around 25% and their labour market regulation is widely regarded as discouraging employers from taking on new employees.

  Nissan at Sunderland is Europe's most productive car plant,[35] and is a global benchmark for other Nissan plants. Toyota at Burnaston and Honda at Swindon are also in the European top 10 most productive car plants. Much of the success of these plants is predicated on labour market flexibility enabling them to increase levels of production to meet market demands.

  Clearly the overall test is the relative success of the UK in attracting and retaining inward investors. Here the UK's overall record speaks for itself as the UK attracts more inward investment than any other EU country. The latest European Investment Monitor figures show that in 2004 the UK was the top inward investment destination in Europe securing 563 investment projects (20% of the European total) ahead of France (17%), Germany (6%), Poland (5%) and Hungary (5%). The UK also attracted more investment projects by car manufacturers (15% of European total) than any other destination. The UK did less well in attracting inward investment in the automotive components sub-sector, but jobs in this sector offer significantly lower added value than for vehicle and engine production.[36]

THE ROLE PLAYED BY TRADE UNIONS IN THE INDUSTRY

  Trade unions have an important role to play in the motor industry. Trade union membership in the sector is relatively high and all the large motor companies recognise at least one trade union.

  Unions in the motor industry, in common with all unions, are concerned about workplace issues such as terms and conditions of employment and health and safety. However, their interests are much broader. Modern trade unions serve their members' interests by ensuring that the employers with whom they work are successful and adapt to changing market conditions because such employers are best able to sustain employment and provide quality jobs.

  The motor industry is dominated by large multinational companies, and globalisation is therefore a well-established phenomenon in the sector. Unions have a strong incentive to develop a dialogue with the motor employers about the implications of globalisation for their members.

  The legal framework supports unions in that endeavour:

(a)  A statutory procedure whereby a trade union can be recognised for collective bargaining purposes took effect in June 2000. Amicus achieved recognition at Honda as a result of an application under the statutory procedure.

(b)  The Information and Consultation of Employees Regulations 2004, which came into effect on 6 April 2005, provide routes for employees and their representatives to be consulted and informed on an ongoing structured basis about the performance and strategic direction of their employer's business. Most of the motor companies had consultative arrangements in place before the 2004 Regulations came into effect, but the Regulations provide employees with a means to develop those arrangements if necessary to ensure that suitable consultation takes place.

(c)  The Transnational Information and Consultation of Employees Regulations 1999 provide arrangements for European Works Councils to be established, thereby enabling representatives from the UK arms of major multinational companies operating in the EU to join colleagues from other member states in discussions with their employer about the strategic outlook for their business. Several motor multinationals operating in the UK, including Peugeot, General Motors and Ford, have established a European Works Council.

(d)  There are long-standing arrangements in place for recognised trade unions to be informed and consulted when large-scale redundancies are being proposed. Where employers propose to dismiss 100 or more employees they must consult with representatives of the affected employees at least 90 days before the first dismissals take effect. The consultation should include discussing ways of (i) avoiding the dismissal, (ii) reducing the numbers to be dismissed and (iii) mitigating the consequences of the dismissals and be run with a view to reaching agreement with trade union representatives.

  The Government recognises that different skills and expertise are required if trade unions are to make best use of opportunities to widen their dialogue with employers. In order to ensure that trade unions are well placed to undertake this partnership role the Government established its Union Modernisation Fund to support unions in improving their efficiency and effectiveness. One theme of the UMF is to assist trade unions in equipping themselves to engage in a dialogue with employers within the framework of information and consultation arrangements. The Government has between £5 and £10 million for UMF projects, which will be allocated to successful projects over a number of years.

  Union support can be an important element of any transformation process to save a plant that might otherwise have an uncertain future. For example the Ford Halewood plant was transformed from a mass-production assembly plant into a new integrated plant for the production of the Jaguar X-TYPE. As well as the investment in physical infrastructure this transformation was complemented by a culture change that required a partnership between management, workforce and Trades Unions (see below).

Jaguar's Halewood Plant manufactures the Jaguar X-TYPE and employs around 2,500 people. It is recognised throughout the industry as a centre of excellence for Lean Manufacturing and has won several awards for its best practice production processes and excellent quality record.

In 2000, a significant investment transformed Halewood from a mass-production assembly plant for the Ford Escort to a world class manufacturing facility for the Jaguar X-TYPE. It meant that for the first time Jaguar would have all four stages of the production process under one roof—totally new body construction and final assembly facilities, along with refurbished press and paint shops.

The transformation of the manufacturing facility was complemented by a culture change strategy, which ensured Halewood's people and processes were ready to build a luxury vehicle. Jaguar invested in over a million hours of training in the Halewood workforce.

The relationship between Halewood management and Trade Unions was central to this culture change activity and it was quickly realised that in order to achieve the plant's quality and skills targets, a partnership approach would need to be taken. A series of "Gateway" agreements were jointly proposed to the workforce by Management and Unions and all employees were asked sign up and commit to achieving these targets. Gateway agreements included quality and productivity goals as well as commitments around workforce flexibility and attendance.

Management and Trade Unions have continued to maintain a positive relationship with a focus on honest and regular communication. Halewood has achieved much since the transition, including the J.D Power European Plant Gold Award for Quality and has been chosen to manufacture the next generation Land Rover Freelander. These achievements would not have been realised without the support and commitment of the plant Trade Unions.

THE APPROPRIATE RESPONSE OF GOVERNMENT TO CLOSURE ANNOUNCEMENTS OR SPECULATION

  DTI's Automotive Unit is responsible for managing Government's relationship with the automotive industry and working with the sector to enhance its competitiveness. The Unit works to attract and maintain investment, drive up innovation and skills performance and help shape a positive policy and regulatory framework. In this way we try to maximise the potential for investment in UK and therefore minimise the chances of plant closures.

  A range of Government initiatives are in place to support successful business strategies. For example:

—    Selective Finance for Investment in England (SFIE, with Regional Selective Assistance, or RSA, in Wales and Scotland) is available in designated geographic areas to help with various costs associated with business location and development.

—    The Supply Chain Group programme (set up following the Automotive Innovation and Growth Team)[37] is being given £15 million of government funding over five years to help suppliers and customers work together to improve working relationships, and improve efficiency to the benefit of the whole supply chain. In some cases this is simply to improve efficiency and cut cost, but most projects are driven by a need for improved efficiency to cope with growth. Already 27 Supply Chain Group projects are under way covering automotive companies that employ over 50,000 people and generate over £2.5 billion of added value.

—    The Automotive Academy was established in 2004 as a partnership between Government and industry and with over £13 million backing from the DTI. It provides firms and individuals (from the shop floor through to senior boardroom directors) with easy access to training focused on lean production and business improvement.

  The Automotive Unit assigns Relationship Managers to the major firms in the industry. A key role for the Relationship Managers is to work with companies so that we have early warning of company plans that may impact on jobs and plants. We encourage companies to seek our help in supporting new projects or expansions—and to involve us at a sufficiently early stage to enable us to add maximum value.

  The Department regularly commissions independently run surveys of companies with which we have a relationship. These surveys show that the large majority of companies, particularly in the automotive sector, are satisfied with their relationship with DTI. In 2005, 83% of the companies responded to the survey. When asked, some 77% of these (87% for automotive companies) said they were satisfied with the "quality of the dialogue" with DTI.

  Regional Development Agencies also have a strong interest in establishing relationships with the companies who have significant operations in their regions. This is particularly true where the company in question is part of a cluster or has a strong regional supply chain.

  The DTI will always look to sustain and increase investment in the UK where possible. There is a range of options open to us:

—    persuasion and encouragement of the company at all levels (including by Ministers)—marketing the UK's strengths as a business environment;

—    helping companies put their arguments to other parts of government—where issues may be energy or transport infrastructure, planning consents, regulations or training provision;

—    mediation with third parties (eg Unions, other companies)—as we did in the case of MG Rover; and

—    direct financial support—primarily through existing schemes such as SFIE.

  When vehicle production ceased at Dagenham in 2000, many thought that manufacturing at the site would also end. But instead a remarkable transformation was wrought. This was achieved through Ford identifying that a sustainable future could best be secured through making advanced, high valued added diesel engines in Dagenham. The strategy has been extraordinarily successful, with Dagenham now the largest producer of Ford diesel engines anywhere in the world and set to take on an increased role in advanced diesel engine design. This investment has been helped by both SFIE grant and the establishment of the nearby Centre for Engineering and Manufacturing Excellence with some £37 million from a unique private/public partnership led by Ford and the London Development Agency.

  There will inevitably be some occasions when a company or plant no longer has a viable future. The role of the Government is not to prop up failing operations by restricting competition or through Government handouts, but to respond to the social and economic issues incurred by the loss of jobs and the impact on the supply chains. We provide support and retraining to the individuals affected, assess the impact on the supply chain and respond accordingly and we take a strategic view of the need for longer term support for the regeneration of the local area and community. Early warning obviously allows the respective agencies including: RDAs; Jobcentre Plus; Learning and Skills Councils; and where necessary the Redundancy Payments Directorate of the Insolvency Service to plan a coordinated and evidence-based response.

WHAT THE GOVERNMENT CAN DO TO HELP THE WORKFORCE AND THE SUPPLY CHAIN IF PLANTS CLOSE

  The best recent example of how Government can help the workforce and supply chain following the closure of a plant is the response to MG Rover. This was covered in some detail in the memoranda submitted by the Department of Trade and Industry and Advantage West Midlands to the Trade and Industry Committee Inquiry into the Government and MG Rover.

  There are statutory schemes that the Government will use to support the workforce in all major redundancies. These include the services provided by Jobcentre Plus (in particular their Rapid Response Service) and the Learning and Skills Council. There are also statutory schemes that will apply in specific circumstances (such as the collapse of MG Rover) where an entire company has failed and cannot therefore meet the normal redundancy support and ongoing pension commitment. Here the Redundancy Payments Directorate of the Insolvency Service and the Pension Protection Fund may have an important role to play.

  The largest redundancies may also require additional intervention. This will depend in part on the particular circumstances as redundancy situations differ in size, timing (redundancies are often spread over a matter of months), the skills of the workforce and the opportunities offered by the local labour market. Clearly the collapse of MG Rover which resulted in over 5,000 workers being made redundant in a short period from one site was a more extreme case which required a greater than usual level of individual support. The MG Rover experience showed that people with few transferable skills need appropriate up-skilling to meet the minimum threshold for new, sustainable employment. Many of those affected, for example, were able to secure employment in the construction industry where there is significant evidence of skills shortages.

  Most redundancy decisions affect fewer people or affect a number of different sites and the company can release workers in a phased process, provide more support in retraining staff and offer redundancy packages that are large enough to reduce the financial impact of a period of unemployment on individuals. In these cases the need for Government to provide exceptional direct support to workers is reduced.

  Similar arguments apply to the question of Government support for the companies in a supply chain. In the case of MG Rover there had historically been a large number of companies in the West Midlands who had been almost entirely dependent on Rover as a customer for their products. This number had been reduced over the period from 2000 to 2005 in part due to the work of the first Rover Task Force. However by 2005 there were still 74 first tier suppliers who had a high-level of exposure to MG Rover. This was exacerbated by the bad debt that many of them faced. For this reason the Government believes that the support package made available in 2005 was appropriate. The purpose of the package was not to prop up companies with no feasible alternative business plan, but to help those who otherwise had a viable future to make the adjustment over the short to medium term.

  In most plant closures either manufacturing of the same product is being moved elsewhere in which case there may be little impact on the supply chain,[38] or there will be a more gradual and planned reduction in the activity at the site and therefore more time for the suppliers to adjust their business plans and look for new customers or diversify their activities more generally. Where they need to adjust their business model, suppliers will be able to do this in the relative certainty that they will be paid for the goods that they have supplied over the transition period.

CONCLUSION

  The UK is part of a larger European market, which is essentially mature, and individual companies are competing strongly for market share. This is driving increased productivity, which in a mature market tends to lead to reductions in the number of people employed and some plant closures. Government's role is to help provide a business and regulatory environment which enables companies and individual plants to be competitive, to attract investment into the UK and where closures do occur to manage the social costs and economic regeneration in a cost-effective manner.

  Much of the UK automotive industry is rising to this challenge and will need to continue to do so. The Government will continue to support the sector and provide a business environment in which efficient companies can succeed.

27   DTI report (June 2005) "A study of the UK Automotive Engine Industry". Back

28   The exports are used in Ford vehicles manufactured in mainland Europe, Volvo vehicles made in Sweden, and Mazda cars produced in Japan. The remaining 20% is used in Ford's Jaguar, Land Rover and Aston Martin models, made here in the UK. Back

29   For example BMW has increased productivity at Cowley (where they make the new MINI) from 36 cars per worker per year at launch to 45 a transformation that the Deputy Managing Director attributed to "The level of technical innovation and excellence and just the level of skill and education that you find in BMW..." (Panorama, 25 September 2005). Back

30   Driving Force: Success and sustainability in the UK Automotive Industry, p 8. Back

31   See, for example: a recent paper by leading academics Harris and Hassaszadeh (2002) Exits in UK manufacturing, 1974-1995: evidence from the Motor Vehicle Industry. Back

32   OECD 2006. Data for 2005: UK 72.6%, Canada 72.5%, USA 71.5%, Japan, 69.3%, Germany 65.5%, France 62.3%, Italy 57.5%. Figures are for those aged 16-64 in UK and US and those aged 15-64 in the rest. Latest UK Employment rate is 74.7% (ONS data for February to April 2006). Back

33   OECD data: UK 72.6%, OECD 65.5%, EU15 65.4%. Back

34   DTI Employment Relations Research Series No 56: How have employees Fared? Recent UK Trends. Back

35   European Automotive Productivity Index 2003, published by WMRC. This is the most recent edition, based on data for 2002. Nissan ranked first in terms of cars per employee, and second in terms of hours per vehicle behind Renault Valladolid. Back

36   DTI analysis of ONS data. Back

37   For background see DTI Memorandum to 2004 Trade and Industry Inquiry into the Automotive Sector. Back

38   For example when vehicle manufacturing ceased at Jaguar's Browns Lane facility the existing supply chain was relatively unaffected because production of the XJ and XK models was consolidated at nearby Castle Bromwich. Back