INTRODUCTION

  The Society of Motor Manufacturers and Traders (SMMT) is the leading trade association for the UK automotive industry. SMMT provides expert advice and information to members as well as to external organisations. It represents some 600 member companies ranging from vehicle manufacturers, component and material suppliers to power train providers and design engineers. The motor industry is a key sector of the UK economy, generating a manufacturing turnover of around £45 billion and supporting approximately 800,000 jobs.

  SMMT welcomes the opportunity to contribute to the Committee's inquiry into the reasons for success and failure in the UK automotive industry, and recognises the contribution the Committee's 2004 inquiry into the automotive sector had in evaluating the challenges and achievements of the sector.

  SMMT feels that it would be inappropriate to comment on the individual commercial performances of our members in the UK automotive industry. However, with contributions from our members and associates, we have evaluated the current marketplace in the context of trends in the wider automotive industry.

1.  EXECUTIVE SUMMARY

  1.1  In 2004 SMMT responded to the Committee's inquiry into the UK automotive industry and broadly welcomed the Committee's final report. Our industry has made good progress in responding to its recommendations, some of which are highlighted in this paper.

  1.2  UK manufacturing matters and is crucial to the success of the UK economy. The UK is home to the most diverse range of vehicle manufacturers in the world and our industry is a significant contributor to the economy and the labour market. Automotive manufacturing and its supply chain creates wealth and is a source of significant UK investment. Intense and sustained R&D investment helps ensure that the UK keeps pace with technological developments and helps maintain its international competitiveness as a centre for automotive investment and high-calibre employment.

  1.3  The inclination of the media and other observers is to comment almost exclusively on the operations of global brand vehicle manufacturers (and within this, chiefly passenger cars). This is understandable given that brands and marques are household names, but the industry is much broader and diverse than is commonly understood.

  1.4  Our sector has had to respond to the commercial realities of operating within a global manufacturing market and the increased intensity of competition from abroad. Manufacturing in the UK continues to face challenging trading conditions both at home and especially in an increasingly competitive global market. Its role within the UK economy has changed. It accounts for a smaller share of value-added and employment and this trend is expected to continue as organisations source a range of components from plants in developing nations and new EU Member States.

  1.5  Business and plant restructuring have been persistent features of the automotive manufacturing business model, reflecting the global nature of the sector, stiff competition, and cost pressures. The long-term challenge for the industry in the UK (within the global market) will be to focus on high added-value processes and products and to utilise the UK's significant strength in automotive design and innovation and its skilled and flexible labour force. Competition on the basis of low cost, semi-skilled workers and low value-added processes will be increasingly challenged and become non-viable as globalisation—increased international economic integration—sees lower cost countries challenge established markets, firms and goods traded across the world economy.

  1.6  One of the most significant costs to our industry comes from energy supply. The forthcoming Energy Review is timely, coming as it does in the context of price volatility and forecasts for increasing dependency on imported supplies. Security of supply is by far the most important concern for the automotive industry. Continuity of production and cost stability are of crucial importance to the competitiveness of all manufacturers, particularly within the UK automotive industry, which is composed of multinational companies that relate first and foremost to their "home/mother" countries for strategic decisions, including on energy.

  1.7  Our industry is concerned by the Government's decision not to implement proposed grant programmes, despite all of them receiving State Aid approval. An opportunity has been lost to progress the UK market for clean, low carbon vehicles and technology. We hope that the DfT's proposed consumer communication programme will involve our industry from the beginning and will acknowledge the full role that the "integrated approach" can now play.

  1.8  The UK automotive industry, like all modern industrial sectors, seeks certainty and the ability to work in a flexible and competitive environment. It is therefore important to ensure that EU legislation is transposed into national law in a consistent manner and it is the task of the UK Government to reduce the financial impact of legislation and regulation on industry whilst creating market conditions that allow business to grow and innovate and work towards environmental and safety objectives. Similarly, fiscal certainty and stability are crucial for our industry. Appropriate fiscal measures and incentives are needed to promote certainty and planning for business investment and to ensure the long-term competitiveness of the sector.

  1.9  It is vital that government works closely with industry to address these challenges. There are many positive announcements from the automotive sector as outlined within this submission but government support is necessary to maintain long-term competitiveness and investment. Our industry looks forward to working in partnership with government and continuing dialogue on issues of mutual concern.

2.  MAIN COMMENTS

The state of the UK automotive industry (since the 2004 inquiry in particular)

  2.1  The Trade and Industry Select Committee looked at the UK automotive industry in 2004 (in its Eighth Report of Session 2003-04). The final report concluded that the UK was still a competitive place to manufacture vehicles but that the threat of closures remained.

  2.2  In April 2005 MG Rover, went into administration with the loss of around 5,000 jobs. The announcement had a massive impact on the local community surrounding the Longbridge plant and the companies within the MG Rover supply chain. In April 2006, Peugeot (PSA Group) announced that it would be ceasing car production at its Ryton facility from summer 2007. And in May, Vauxhall announced its decision to reduce production of the Astra model at Ellesmere Port from three shifts to two with the loss of around 900 jobs.

  2.3  However, despite these particular setbacks, SMMT believes that automotive manufacturing will continue to be a key aspect to manufacturing activity in the UK. The UK automotive industry remains wide and diverse in nature with a larger number of global brands located here than in any other European country. The sector generates an annual turnover approaching £45 billion and directly supports almost 200,000 and indirectly approximately 600,000 employees. The inclination of the media and other observers is to comment almost exclusively on the operations of global brand vehicle manufacturers (and within this, chiefly passenger cars). This is understandable given that brands and marques are household names, but the industry is much broader and diverse than is commonly understood.

  2.4  In this context, it is worthwhile considering a summary of positive announcements to have come from our industry since the 2004 inquiry, and particularly in 2006 alone.

  2.5  UK automotive industry announcements:

—    Nissan has announced that a fifth model is to be built in Sunderland following an investment of £125 million. Total investment in Sunderland now stands at £2.3 billion.

—    Honda has just opened their £24 million logistics operation in Swindon.

—    Ford has invested £129 million at its Southampton facility for the production of the new Ford Transit which has been completely designed and developed in the UK.

—    Leyland Trucks—multi-million pound investment at Leyland, the most productive CV plant in Europe. Production is now up to almost 15,000 units a year.

—    Production of the New Honda Civic at Swindon will be the first time that the plant has progressed a new model to mass production in the UK, without the car being produced in a Japanese parent plant. Total investment at Swindon now stands at £1.33 billion.

—    Cobra UK Ltd recently secured £7 million of orders from Volvo, CNH Tractors and Ford, despite the closure of MG Rover in 2005 which resulted in a turnover loss of 25%.

—    Optare has invested £2 million in an expansion programme at its Rotherham plant—making it the most modern UK production centre for small buses.

—    Bentley will manufacture the Continental Flying Spur in Crewe following a £63 million investment.

—    In 2004 Toyota invested £50 million in its Burnaston factory, in Derbyshire, to boost production capacity from 220,000 to 285,000 cars a year. Toyota has invested more than £1.75 billion in the UK to date.

—    Ford's PAG has invested £250 million at Solihull for the Land Rover Discovery 3 and Range Rover Sport, and £435 million at Castle Bromwich for the Jaguar XJ and new XK.

—    Nissan's European engineering and technical centre is located in the UK in Cranfield. The Micra C+C was Nissan's first fully designed, engineered and built in the UK vehicle.

—    MINI has manufactured 500,000 units since 2001 at Oxford. Total investment between 2000-04 stands at £280 million. Investment between 2005-07 is expected at £100 million plus.

—    In the last four years, the BMW Group has spent around £900 million in upgrading its production facilities in the UK. This includes expansion of the production facilities for the new MINI; a renewed commitment to training following the success of its Hams Hall engine plant; and a revitalised Rolls-Royce Cars Ltd operation with an investment of £65 million at Goodwood, which supports 500 employees.

—    A convertible version of the successful Phantom model will be launched in 2007 and manufactured at Goodwood (Rolls-Royce cars are manufactured solely in the UK).

—    Ford's Dagenham plant, which was opened in November 2003 by the Prime Minister, has been redeveloped. Now it is home to the company's diesel engine design and manufacture operations, with £650 million invested over the past three years. Ford will soon be supplying 25% of its global engine requirements from its UK plants.

UK manufacturing

  2.6  In 2002, the Government launched its UK manufacturing strategy, which identified seven pillars to support a successful, knowledge intense, highly-skilled manufacturing sector. This was followed in 2004 by the manufacturing strategy review and the introduction of the Manufacturing Forum. The introduction of the practical Manufacturing Advisory Service (MAS) is a welcome addition to DTI's manufacturing support services, particularly for smaller businesses that benefit from the hands-on advice.

  2.7  SMMT and its members have welcomed the greater commitment shown by Government to the manufacturing sector, particularly in helping to improve the public perception of manufacturing, and to increase both sector skills and public procurement. We believe manufacturing matters and is crucial to the success of the UK economy.

  2.8  However, it is clear that manufacturing in the UK continues to face challenging trading conditions both at home and especially in an increasingly competitive global market. Its role within the UK economy has changed. It accounts for a smaller share of value-added and employment. This trend is expected to continue as organisations source a range of components from plants in developing nations and new EU Member States. The Committee's 2004 report concluded that industry's preference for building vehicles close to their intended market means that, whilst worldwide production may not move to markets such as India or China, the introduction of the new EU Member States will increase competition in this regard, particularly if relative labour and other costs are compared. This will impact upon the whole of our industry and one of the major casualties of low cost sourcing are small SME's who lack the resources to effectively manage offshore outsourcing internally.

  2.9  In a globalised industry costs vary considerably between nations. A comparative "Index of Effective Costs" published by the Manufacturing Institute of the United States in 2003 provides a composite of labour costs, corporation taxes, employee benefits, energy costs and pollution abatement costs (see Annex 1). The Index clearly shows that these effective costs in Western Europe (the UK, France and Germany are listed) and North America and Canada are broadly comparable, but Asia/Pacific states and developing nations are significantly lower (China, Japan, Taiwan and Mexico). The German VDA (Verband der Automobilindustrie) in its 2005 Annual Report states that production facilities in emerging nations offer labour rates that are considerably lower than established producers. The VDA also reports that the differential between the highest and the lowest labour costs countries is actually increasing rather than decreasing. This is caused by differing levels of corporation and income tax between Western and Eastern Europe.

  2.10  Nevertheless, UK manufacturing remains a significant driver of innovation, investment, trade and employment. With an extensive number of businesses involved in the manufacturing supply chain and the transport services sector, automotive manufacturing is linked very closely to the UK's overall prosperity as a trading nation. In recent years the sector in the UK has accounted for almost 10% of annual total manufacturing turnover value, seen an export value of £20 billion (10% of total UK export value) and net capital investment of £1.9 billion.

  2.11  Most independent forecasts expect overall manufacturing output in the UK to remain broadly stable in 2006. Private surveys and forecasts from organisations such as the Engineering Employers Federation (EEF) paint a more optimistic picture with the June 2006 engineering outlook survey suggesting that output indicators have been at their most positive for 10 years. The EEF forecast engineering growth of 2% in 2006, rising to 2.5% in 2007. Manufacturing should also show slight improvements, at 0.5% in 2006 and one per cent in 2007. However, the June survey concludes that employment in vehicle manufacturing should "see some of the steepest job cuts as production is relocated outside of the UK".

A diverse sector

  2.12  It is Europe, not just the UK, that now provides the "home" market for vehicle producers. In contrast to the UK, where growth has existed, new passenger car registrations in the EU15 (and EFTA) have fluctuated around 14.5 million since 2000. The Western European market is mature, with many underlying economies dominated by slow growth. A table illustrating new passenger car registrations in Western Europe can be found at Annex 2. The Western European heavy commercial vehicle market is equally competitive with around two million new vehicles above 3.5 tonnes having been registered annually in recent years.

  2.13  Nevertheless, this diverse industry, like others, is facing some considerable challenges, but within each section of the industry there are equally diverse reasons to anticipate more success stories.

  2.14  Passenger cars—The UK is Europe's second largest new car market, second only to Germany, with 2.440 million new registrations in 2005. Growth in the new car market has cooled over the past two years, reflecting the slowdown in economic growth, but volumes remain high—surpassing 2.4 million units in each of the past five years. Despite changes in the composition of UK producers, car production in the UK has remained resilient and significantly higher than output during the 1980's, when fewer than one million cars were produced. Output in 2005 hit 1.596 million units despite the loss of MG Rover, whilst in the same year exports accounted for 74.2% of output. Output in 2006 is projected to reach 1.535 million units.

  2.15  Commercial vehicles (CVs)—registrations edged down 1% in 2005 to 385,969 units, just 3,954 units shy of record volumes recorded in 2004. The CV market has benefited from a stable and robust UK economy and increased demand for home deliveries. Between 1994 and 2004 the market rose by over 70% or 160,000 units, and in 2004, CV production moved back over the 200,000 unit level for the first time since 1998. 2005 saw this rate being sustained with 206,753 CV units produced, whilst growth of some three per cent is forecast for 2006.

  2.16  Buses and coaches—the UK is home to a thriving bus and coach sector. Manufacturers in the sector supply chassis and bodywork to the operators of bus services across the UK. Annual production in 2005 was at 1,431 units with registrations at 12,498 and there has been modest year-on-year growth in new bus registrations. However, there has been no real change in the underlying trends; buying patterns seem mostly affected by regulatory changes than other factors.

  2.17  Motor homes—One of the biggest growth areas in recent years has been the motor home section. Exciting products have captured the imagination of an ever-growing leisure market and the motor home market has grown in every year since 1996. Between 1996 and 2005 the market increased by 250% and further growth is expected in 2006.

  2.18  Specialist vehicles—(sports cars, motor bikes, mobility vehicles, taxis). The UK has a deep and well rooted tradition of making a diverse array of vehicles and in recent years, household names such as Aston Martin, Bentley, Noble and Lotus are well-known in the marketplace. LTI Limited has also manufactured over 100,000 of the iconic "black cabs" in the UK, and is expanding its sales internationally. But the industry is also host to an array of less famous names that deliver niche products to meet demands from across the globe. This section of the industry does, however, face some key challenges, not least from increasing regulation and niche product developments from the larger global volume manufacturers. Accelerate and Advantage West Midlands operate the Niche Vehicle Network, which looks to represent the companies in this sector and provide best practice and inter-trading opportunities.

  2.19  Engines—Engine manufacturing is a core contributor to the UK automotive sector, with the UK home to eight automotive engine manufacturers. Engines represent 17% of the total value of a passenger car and are therefore a lucrative form of automotive manufacturing. The manufacturing of engines in the UK increased by 22.6% between 1999-2004, from 2.4 million units to 3.1 million. The DTI's 2005 report "A study of the UK Automotive Engine Industry," concluded that the UK was a significant net exporter of engines and had achieved impressive growth thanks to significant investment by manufacturers. For example, Ford, which has recently announced a £100 million investment in its Bridgend facility, will oversee the creation of 250 new jobs to produce the new 3.2 litre short in-line six cylinder engine, marking the completion of a £245 million two-year investment programme at the plant. The DTI report also noted the significant UK activity in engine design and testing. R&D is therefore essential to ensure long-term competitiveness.

  2.20  Supply chain—within the automotive sector supply chain, there are estimated to be 7,000 manufacturing sites operating in the UK. SMMT research suggests that there are close to 2,000 companies for whom the majority of their business is in the automotive sector. It is estimated that these companies provide some 140,000 jobs and have a combined turnover of £12 billion. About 50% of these companies fall into the Small and Medium-sized Enterprise (SME) category. Alongside the famous British names, 17 of the world's top 20 component manufacturers have operations here. There are also companies who supply products such as rubber, plastics, tyres, electronic and electrical components, and prefabricated metal products into the automotive industry. SMMT estimates that these companies have an automotive turnover of £3 billion and employ up to 50,000 people.

  2.21  Vehicle servicing and repair—as the second largest new car market in Europe the UK is clearly a desirable European market for vehicle manufacturers who must compete with rivals on choice, quality and value for money to attract consumers. SMMT is currently heavily involved in delivering a Code of Practice for the repair and servicing sector through the Retail Motor Strategy Group to ensure consumers always receive the highest standard of customer service and value for money in a transparent manner.

Retail motor industry

  2.22  SMMT was disappointed with the Committee's conclusions in its 2004 inquiry concerning the retail and servicing side of the industry. New car prices within the UK have fallen by 9.2% over the last five years and the "Supply of New Cars Order", introduced in 2000, already requires manufacturers to offer equivalent discounts to both the fleet and retail sectors.

  2.23  SMMT rejects the claim that restrictive practices are used within the servicing and repair sector to prevent access to the market. In May 2004, the OFT praised vehicle manufacturers for removing the franchised dealer servicing condition of new car warranties. Investment criteria for "authorised repairer" status may vary across brands but core criteria ensures that minimum standards of safety and staff competence are in place.

  2.24  In addition, comments made by the Committee about the availability of technical information contradict those made by the Motor Vehicle Repairers Association (MVRA) who congratulated manufacturers for access to technical data and claimed to be "delighted" by the improvements made since the introduction of new block exemption rules.

  2.25  In March 2006 the National Consumer Council (NCC) announced the suspension of an Office of Fair Trading (OFT) super-complaint against the automotive service and repair sector following the work undertaken by industry to address consumer detriment through a proposed service and repair Code of Practice. The NCC has set a new time line of September 2006 for the industry Code of Practice to gain OFT stage one approval and September 2007 to gain stage two full approval status. The Retail Motor Strategy Group (RMSG) has endorsed the work plan and next steps of the Code Sherpa group and SMMT, our members and other industry stakeholders are fully committed to delivering, through the RMSG, a workable Code that further improves the standard of service and the overall consumer experience.

Skills and training

  2.26  The UK Manufacturing Strategy acknowledged that skills were high upon the political agenda but called for more to be done to encourage high calibre young people into manufacturing and to improve the public perception of manufacturing. The Committee's report on the automotive industry outlined the need for the sector to address its basic skills deficiencies to safeguard future investment decisions.

  2.27  The priorities of the automotive sector are to raise the standard of basic skills, improve the role of vocational education, and increase the guidance available to young people about careers in the industry. The DTI's Science and Engineering Ambassador scheme supports and encourages engagement between schools and industry and provides role models for young people.

  2.28  The newly formed Automotive Academy is a positive example of industry working alongside government to enhance the skills base of the sector. The Academy has been created with the backing of £12 million of Government funds. It operates from a central administrative hub in Birmingham, with delivery spokes in Scotland, Wales, Northern Ireland and six English regions.

  2.29  The Academy promotes skills improvements at all levels, from shop floor, right through to the boardroom. Its core programmes concentrate on lean manufacturing tools and techniques but increasingly it will encompass technical, leadership, management and general business support programmes. It reviews and agrees training needs in partnership with industry before commissioning the design of globally competitive training programmes that are delivered through a national network of best practice, Academy validated, training providers. NVQ assessors are subject to similar validation procedures. Over 1,000 individuals were trained in 2005, the first full year of operation. In 2006 the target, which is presently being exceeded, is for 7,000. The Academy also works closely with funding bodies such as the Learning and Skills Council to ensure that industry at all levels, from multi-nationals to the smallest SMEs, have access to adequate funding support for training.

  2.30  The importance of high-quality education and development in the automotive sector is reflected in the significant investment made by companies in developing their own training facilities and institutes. For example, in 2005, Toyota opened its £11.2 million European Global Production Centre at its Burnaston Plant in the UK. The centre will provide skills and training for up to 1,000 Toyota employees each year.

  2.31  Graduate recruitment into automotive manufacturing remains difficult, as in the wider manufacturing sector, especially in smaller companies. Government and local RDA programmes do exist to support the placement and recruitment of graduates, but more needs to be done to ensure young, bright employees are attracted to the sector.

Research and Development

  2.32  The Select Committee's 2004 report showed concern that UK automotive research and development was failing behind that of its global rivals. SMMT and ACEA (the association of the European automobile manufacturers) recognise that total R&D expenditure is around €20 billion per annum for the European automotive industry which equates to five per cent of European automotive turnover and around 25% of all EU expenditure on R&D. The Government's R&D Tax Credits have been a successful incentive to support UK R&D investment from SME and larger automotive businesses. A further enhancement to the base rate of the Credit would add further value to the incentive, although we recognise that this would lead to an additional burden from the Treasury.

  2.33  The European Commission's 2004 EU Industrial R&D Investment Scoreboard recognised that the EU's single largest R&D investment is within automobiles and parts, and within this SME investment. The 2005 Scoreboard assessed R&D spend by individual companies and on a global scale. Automobiles and parts accounted for the largest proportion of R&D spend in Europe (26%) and Japan (26.1%). Automotive R&D accounts for 12% of total spend in the USA and 6.2% for the rest of the world.

  2.34  The Select Committee's report also criticised the progress made towards the AIGT's recommendation for a Centre of Excellence for Low Carbon and Fuel Cell Technology. Since the introduction of the Low Carbon Vehicle Partnership (LowCVP) in 2003, another AIGT recommendation, the partnership has been influential in accelerating the shift to low carbon vehicles and fuels in the UK. Within the LowCVP's Innovation Working Group the business case and specifications for the new Centre of Automotive Excellence for Low Carbon and Fuel Cell Technologies (CENEX) were developed.

  2.35  CENEX, housed within Loughborough University, aims to assist industry in developing a UK competitive advantage from the global shift to a low carbon economy. One particular objective of CENEX is to influence the creation and deployment of fleet-scale demonstrators in the UK passenger vehicle, public transport and commercial vehicle sectors. This has been identified to help curb the highly-expensive development of prototype models that are subsequently scrapped and the commercialisation of low carbon vehicle prototypes to the market. CENEX and SMMT's Foresight Vehicle, together with Fuel Cells UK and Fuel Cells Today, are supporting innovation in the UK automotive industry through a Knowledge Transfer Network (KTN) dedicated to low carbon and fuel cell technologies. This KTN and the LowCVP's Innovation Working Group are brokering a programme of activities focused on technology demonstration, targeting early market adoption and supply chain development.

  2.36  SMMT Foresight Vehicle is a UK Government initiative set up to identify and fund appropriate research projects and, through collaboration projects between academia and industry, develop and demonstrate appropriate product and process technologies for use in road transport for the future. Launched in 1995, the programme has involved over 100 projects, of which 19 are still live. Over 400 participating organisations have been involved, with the total value spent on the programme approaching £150 million. Over £50 million of Government funding has already been made available with industry contributing the remainder. Foresight Vehicle is currently investigating ways of securing new innovation funding through the DTI.

  2.37  Within Foresight Vehicle, the HEAFV (Hybrid, Electric and Alternatively Fuelled Vehicles) Thematic Group is undertaking important work towards developing sustainable, low carbon vehicles for the future. For example, within this group, the ZESTFUL (Zero Emission Small Vehicle with Integrated High Temperature Battery and Fuel Cell) project aims to provide a complete power source for the traction and heating/cooling of a passenger car and deliver the associated environmental savings of a fuel cell/battery power source. Another group within Foresight Vehicle, the EPT (Engine and Powertrain) Thematic Group, is developing increasingly fuel efficient demonstrator vehicles by maximising the conversion of energy in fuel. The 2/4 Sight project won the Safety and Technology category at the 2005 Autocar awards after being recognised for its potential to deliver an improvement of up to 30% in fuel consumption and CO2 emissions.

  2.38  In 2004, SMMT Foresight Vehicle published a revised version of its Technology Roadmap to identify technology and research themes for road transport, with the aim of supporting UK industry in the globally competitive market for transport products and to provide sustainable mobility for UK citizens. The Technology Roadmap is important in providing a broad direction for the future technology and research agenda in the UK automotive sector. The report confirms that emissions, recycling, pedestrian protection, vehicle design, manufacturing processes and road infrastructure are all vital areas of research. The directions highlighted in the report will help researchers in the UK automotive industry remain world leaders.

Productivity

  2.39  With increased global competition and competition within global brands between different countries, productivity within the UK sector is crucial. Some positive examples of automotive productivity include:

—    In 2004, Jaguar's Halewood plant became Ford's best performing plant in the world.

—    Nissan's Sunderland plant, which manufacturers the Almera, Note, Micra and Primera models, has been named the most productive car plant in Europe for the seventh consecutive year, producing 315,297 units in 2005.

—    Honda's facility in Swindon and Toyota's Burnaston plant are within the top 10 most productive car plants in Europe.

—    Aston Martin, BMW, Land Rover, Toyota and Vauxhall all achieved record car production output volumes in 2005.

  2.40  This level of achievement is delivered through a commitment to innovation, investment, dynamic new products, new processes and highly-skilled, highly-motivated British workers.

  2.41  The SMMT Industry Forum was launched in 1994 and has had a significant impact on the competitiveness of the UK-based supply chain within the sector. Since 1996, the SMMT Industry Forum has worked with over 450 vehicle and components manufacturers to improve performance, equip engineers with the tools and techniques of modern practices, and to train engineers from a number of other sectors ranging from aerospace and construction equipment through to the food sector. The links between skills, productivity, competitiveness and profitability are clear and SMMT Industry Forum continues to work very closely with SEMTA, the Learning and Skills Council and the Automotive Academy on these and other issues. The DTI recently praised the SMMT Industry Forum in its Report on The Industry Forum Adapter Programme in March 2006. The Committee 2004 report also noted the effectiveness of its role.

  2.42  In October 2005, the Government approved SEMTA's Expression of Interest to develop a National Manufacturing Skills Academy. SEMTA and its partners (including SMMT and the SMMT Industry Forum) is expected to launch the NMSA in September 2006. Through the commitment of its partners, the NMSA will develop national standards for skills to ensure the sector is globally competitive and aligned to the new NVQ framework. Regional involvement is crucial to ensure that the specific skill needs of regions are met.

Competitiveness and restructuring

  2.43  Business and plant restructuring have been persistent features of the automotive manufacturing business model, reflecting the global nature of the sector, stiff competition, and cost pressures. The long-term challenge for the industry in the UK (within the global market) will be to focus on high added-value processes and products and to utilise the UK's significant strength in automotive design and innovation and its skilled and flexible labour force. Competition on the basis of low cost, semi-skilled workers and low value-added processes will be increasingly challenged and become non-viable as globalisation—increased international economic integration—sees lower cost countries challenge established markets, firms and goods traded across the world economy. For example, despite a backdrop of increasing energy and raw material prices, the charges levied by automotive component suppliers have fallen in real terms by as much as 20% in order to remain competitive and attractive to manufacturers.

  2.44  The Government's much-anticipated Energy Review will be vital to establishing a clean, secure and sustainable energy supply for the UK and its industries. Its publication is timely, coming as it does in the context of price volatility and forecasts for increasing dependency on imported supplies. The extent to which manufacturing locates in the UK is affected by the cost and reliability of energy supplies as compared with other countries and it is crucial that the UK has access to secure, reliable, affordable, and clean energy supplies at the same or better price than our competitors. SMMT and our members would urge the Government to embrace the widest possible range of technologies that support CO2-efficient power generation and use, ie to adopt a technology-neutral approach to energy supply and demand.

  2.45  Security of supply is by far the most important concern for the automotive industry. Continuity of production and cost stability are of crucial importance to the competitiveness of all manufacturers, particularly within the UK automotive industry, which is composed of multinational companies that relate first and foremost to their "home/mother" countries for strategic decisions, including on energy. For example, as multinationals, all the major vehicle manufacturers in the UK have production capacity elsewhere in Europe or the world, and UK plants therefore have to compete for business within their own companies. This means that cost stability and security of energy supply is a competitive consideration when awarding contracts internally.

  2.46  If gas supplies are interrupted, vehicle manufacturing has to stop. Even a momentary interruption means several hours would pass before being able to return to full production and if, for example, process tank chemicals are not maintained at temperature they can precipitate and would require disposal with the tanks cleaned fully and then refilled. The result would be wasted staffing costs through lost production as well as a knock-on effect for the component and assembly suppliers. "Just in time" production techniques result in lean and efficient manufacturing, which has obvious advantages but reliable energy supply is crucial to its success. This is likely to cost somewhere in the region of £1 million to £2 million per day plus the costs of lost production.

  2.47  In 2001, a need for collective action and priorities was recognised in the work of the DTI's Automotive Innovation and Growth Team (AIGT). The decision to give priority to setting up an Innovation and Growth Team for the automotive sector reflected particular problems in Government's relations with the sector. The AIGT's conclusions were reported in 2002 and significant progress has been made on all seven of its core recommendations. Government pledged a total of £45 million to achieve the AIGT recommendations and our industry continues to recognise this commitment shown by Government.

Better regulation

  2.48  A key concern of the automotive sector is the ability to respond to the many, and at times contradictory, regulatory demands whilst remaining competitive both internationally and in the UK. It is important to ensure that EU legislation is transposed into national law in a consistent manner throughout the EU. The task of Government is to reduce the financial impact of legislation and regulation on industry whilst creating market conditions that allow business to grow and innovate and work towards environmental and safety objectives. To highlight this point, at Annex 3 you will find a chart highlighting environmental improvements delivered through modern technology versus the impact of legislation and safety requirements.

  2.49  SMEs, in particular, do not have the resources to keep abreast with the latest legal requirements and so are dependent on information from regional support programmes, such as Business Links and Chambers of Commerce.

  2.50  The Government's UK Manufacturing Strategy identified the need to reduce the cost and administrative burden of new regulation. The Bill for Better Regulation included proposals for the UK Government's Better Regulation agenda that would remove unnecessary regulation, simplify existing regulation and reduce administrative costs. SMMT and the motor industry welcomed the proposals and have been extensively involved in the Better Regulation agenda in partnership with the key Government departments that influence our work, as well as the Cabinet Office, which is leading on the issue.

  2.51  SMMT has responded to the Davidson Review's call for evidence on the over-implementation of EU legislation, highlighting that the UK needs to meet its competitiveness challenges with a lighter regulatory touch, building on an integrated approach to smarter regulation.

  2.52  The automotive industry fully supports the focus on better regulation both in the UK and the EU. A risk based, co-ordinated approach must be taken forward in the UK to deliver maximum quality achievements on the better regulation initiative. SMMT and its members regard a lean and pro-competitive regulatory framework in the UK and EU as one of the key determinants for the competitiveness of our industry.

Regional government and support programmes

  2.53  The automotive industry benefits from a wide range of Government support. These range from European state aid assistance to local support provided by the Learning and Skills Council (LSC) and Regional Development Agencies (RDAs). However, some initiatives remain difficult to access and the criteria for such initiatives difficult to understand. For instance, the Small Engineering Firms Investment Scheme (SEFIS) has a simple ethos and simple application but we remain disappointed that major capital allowance for manufacturing and engineering SMEs is now predominantly linked to information technology (IT) instead of manufacturing investment in general.

  2.54  The AIGT recommended the creation of a National Supply Chain Group funding programme to encourage large UK-based manufacturers to improve the competitiveness of their UK-based suppliers. This programme has been successful with over 40 such supply chain groups embarked upon improvement activities. The scheme has proven to be a very good example of how regions can and must work together with national Government departments (in this case the DTI) in order to present a coherent or "joined up" picture to the major multinationals who are based in the UK.

  2.55  Some of the businesses who are acting as "host companies" within this programme are in discussion with SMMT Industry Forum and the Learning and Skills Council to explore how to build upon these Supply Chain Group activities to also encourage businesses to up-skill their employees in line with the NVQ framework. It is anticipated that qualifications which improve the productivity, competitiveness and profitability of the company, along with employability of the individual, will be promoted along the supply chain.

  2.56  Individual companies have at times received direct support from government. For instance, according to DTI figures, around £5 million was committed to MG Rover between May 2000 and April 2005. When the company went into administration the Government quickly established the MG Rover Task Force to provide assistance to redundant workers, the local community and companies within the supply chain with the £40 million fund. This investment and the quick response helped to ensure that suppliers were able to quickly access financial support and expert information on business restructuring. Such was the success of the support that only two SME suppliers in the West Midlands closed as a direct result of the closure of MG Rover. The Task Force's Final Report concluded that excellent progress had been made with 4,000 of the 5,000 redundant employees returning to work. The DTI also announced ongoing support in the form of a new £2 million Employability Support Package to provide intensive back-to-work support. The initiative will be run by Jobcentre Plus and the Learning and Skills Council and continue until March 2008.

  2.57  The Automotive Academy has also launched a new Re-Employment Training Programme aimed at those made redundant from MG Rover, including its supply chain. After an initial pilot programme funded by the Learning and Skills Council, further programmes, which are free to candidates, may be rolled out nationally. SMMT would urge the LSC and local Government authorities to support this valuable programme.

UK fiscal and grants policy

  2.58  Ahead of the 2006 Budget statement SMMT called for fiscal certainty and stability. Appropriate fiscal measures and incentives are needed to promote certainty and planning for business investment and to ensure the long-term competitiveness of the sector.

  2.59  SMMT's third annual "Automotive Executive Survey" reported cost pressures, worries about regulatory burdens, rising energy costs and pensions. Clearly these concerns will continue to impact on the competitiveness of UK business.

  2.60  The UK's current strategy of three year planning compares unfavourably with the likes of Germany, whose 10 year fiscal regime provides much more certainty for investment and confidence in the end product. It is Government's role to create a fiscal environment where businesses can grow within a thriving UK economy. For example, vehicle manufacturers base their planning decisions for new vehicle/platform investment on a seven year cycle.

  2.61  Nevertheless, the Government's decision to continue with the Low Carbon Research and Development programme and Infrastructure Development programme will encourage the development and wider-availability of low carbon vehicles and fuels as industry looks to fulfill its responsibilities under the Government's revised target of a 15% to 18% reduction in CO2 emissions by 2010 from 1990 levels.

  2.62  However, our industry has been frustrated at the disjointed nature of grant funding for clean vehicles and fuels under the DfT's Transport Energy programme. In 2005, the grant funding programmes for clean vehicles and fuels ceased without replacement programmes being put in place, following previous years of "stop-start" in grant funding. The lack of certainty since 2005 has disrupted the market and hindered further potential CO2 savings as industry strives to meet environmental targets.

  2.63  The Minister of State for Transport announced on 7 June 2006 that the Government will not be implementing the Low Carbon Car, Low Carbon Bus, Air Quality Retrofit and Enhanced Environmental Vehicle grant programmes, despite all receiving state aid approval from the European Commission. The essence of any funding programme is to ensure long-term planning and investment to kick-start the market, but they also aim to deliver the associated environmental benefits of a cleaner UK car parc. SMMT and its members are therefore highly disappointed with the Government's decision and we believe an opportunity has been lost to progress the UK market for clean, low carbon vehicles and technology. We hope that the channeling of these funds towards the consumer communication programme that is now proposed along the lines of the TH!NK campaign on safety, will involve our industry from the beginning and will acknowledge the full role that the integrated approach can now play.

CONCLUSION

  2.64  Since the Committee's 2004 report on the UK automotive sector, our industry has continued to face many challenges to its competitiveness. The influence of the sector on the UK economy is threatened in light of increased international competition, over-capacity and a mature Western European new vehicle market. Margins are being continually squeezed as a result of volatile energy, oil and raw material prices.

  2.65  However, the UK automotive sector is incredibly diverse and continues to innovate. SMMT members are investing heavily in R&D in the UK and this should ensure that the UK, as a manufacturing location, remains competitive and a centre for innovation and highly-skilled employees.

  2.66  It is essential that the Government continues to work closely with our industry so that the UK remains a competitive location for automotive manufacturing and investment. Recognising the diversity of the sector, as outlined in the positive announcements within this submission, will ensure that the industry as a whole is given support. Our industry looks forward to working in partnership with Government and continuing dialogue on issues of mutual concern.

June 2006