MONDAY 26 JUNE 2006

GENERAL MOTORS

  Q120  Mark Hunter: My question was about the operating costs specifically at Ellesmere Port, and how they compare with other Astra plants, and you have just said they are the highest. Would you say, briefly, what the specific factors are that make production costs at Ellesmere Port the highest, compared with other Astra sites?

  Mr Browning: I am not able to go into the specifics of the numbers, as I hope you will recognise they are commercially-sensitive numbers, in terms of going into a line item detail. Let me say, however, that there are a number of elements that give the UK operation some specific disadvantages.

  Q121  Chairman: If I can intervene, just to help. The purpose of this investigation is to find out what Government can do to maintain the competitiveness and to help the UK manufacturing sector, so that may help you shape your reply. We do not want the details of your finances, just what we can do actually to make the environment better for you and your competitors?

  Mr Browning: Thank you. I would say there were three areas, in particular. One is in the areas of energy costs, so, for example, the energy costs that Ellesmere Port specifically are facing this year are in the region of 30 to 35% higher than the energy costs for last year, so a tremendous surge in energy prices into UK manufacturing. This is not unique to Ellesmere Port, it is not unique to the automotive sector, but it is something that we are facing more aggressively in the UK than we are in other European markets; so energy costs. Secondly, clearly, by its geographical location, the UK faces some disadvantages from a logistics point of view. We would calculate those on an annual basis to be in the region of €19 million disadvantage for Ellesmere Port versus other similar plants in Europe, so a further impact. Then also, when you look at some local taxation, local rate burdens, we see a heavier burden in the UK than we do in other European locations; so three very specific areas where Government actions can affect the competitiveness, or otherwise, of our facilities.

  Q122  Mark Hunter: Right; well, yes and no. Government cannot really do an awful lot about the geographical location of the plant, can they?

  Mr Browning: Clearly, that would be truly waving a magic wand. I think what can be done though is in terms of easing the costs of managing those logistics, whether it be in terms of the costs of operating transport activities, the speed of moving goods through the processing, the administrative side, so whilst the physicals cannot be changed, some of the ways in which the logistics are handled could be helped.

  Q123  Mr Clapham: Mr Browning, first of all, may I ask, because you were sitting in when Mr Osborne gave his evidence and you heard him refer to a review procedure, do you think, if a review procedure were built into your agreements with the trade unions, that may impact in a way which would result in you thinking differently when it came to closures?

  Mr Browning: I think, first of all, I should emphasise, there is a constant dialogue that goes on with our trade union partners, in any case, so that is part of what I would call regular management discussion, review, both at a local and a national level, in terms of the current state of the business and the future plans. Coming back to the specifics of the review, my view would be that anything that makes doing business in the UK more cumbersome, more difficult, whether that be in the sense of starting up new business operations or resizing existing business operations, generally would be a negative for the vibrancy of the economy in the UK. I think you have to balance any formal review process with the extra administration and the burden that would place on a vibrant economy.

  Q124  Mr Clapham: Turning to your productivity figures, between 2002 and 2005 you indicate in your submission that you increased the productivity of your factories in the European area by 23.5%; implicitly you make a comparison with the UK, but the words you use in the submission refer to challenges in the UK to bring the UK up to world-class standards. You say also that you have achieved these improvements by virtue of better agreements, better agreements with the trade unions and flexible working. Could you say whether the plants in Europe are indeed up to a world-class standard?

  Mr Browning: I think it is important, when you look at variances of performance, rates of improvement, to understand the starting-point on which you are basing those rates of improvement. It is true to say that both the operations in Luton and the operations at Ellesmere Port have shown very significant improvement over the recent past, and I think it is a credit to the local teams, all of the people involved, that we have seen that rate of progress. The reality remains, if we talk about Ellesmere Port specifically, that plant is still the highest-cost Astra assembly facility that we have in Europe; so whilst the gap has closed it has not yet closed far enough. As we look forward to future investment, a couple of the areas we have to work on are very specifically in terms of the configuration of the plant, because a brownfield plant is always much more of a challenge in terms of getting to the ideal, `best in class' status of a plant layout in operation, so both the physical infrastructure of a plant and in terms of the working practices, the terms and conditions operating in that plant at a given point in time. As a general rule of thumb, we would see a brownfield investment generally having between 20 and 25% disadvantage versus a greenfield start, when you can start with the current `best practice' implementation, whether it be in terms of the physical or in terms of the operating practices in that plant.

  Q125  Mr Clapham: You would say that the way of travel is in the right direction?

  Mr Browning: Very much so.

  Q126  Mr Clapham: In terms of the sticking points that you find, in trying to search for greater labour flexibility, are you able to work with the unions to achieve what you want to achieve, or are there any problems which do seem they are going to be obstacles that are difficult to get hold of?

  Mr Browning: If you talk about the recent past, the trade union partners have been a very fundamental piece of the collaboration that has gone on in the plant to make the progress that I just quoted. The discussions are ongoing now, in terms of the proposal we have to put forward for the next generation Astra, and the collaboration, again, with the trade unions, in terms of putting the right proposal forward, the endorsement of that proposal from all of the employees within the plant, is going to be critical to the success of that proposal going into the broader GM system.

  Chairman: We will move on now to perhaps the key question.

  Q127  Judy Mallaber: Yes, and the change in the terms of reference of our inquiry since we got going really. From your experience, there have been so many changes, can you tell us what are the main reasons why some companies are expanding production in the UK and others are cutting production, because if we do not know that, we do not know what we can do to encourage the one and discourage the other?

  Mr Browning: If you strip it down to its barest bones, the companies which have the longest-established history in the UK are the ones which have had to address some of the issues I have just been talking about, in terms of brownfield sites, in terms of legacy working practice agreements, terms and conditions, and also bearing a large legacy cost in terms of retirees and the benefits to support those retirees. When you have an industry which is mature, in a market which is mature but still with productivity improvements, if you have got mature industries, mature markets, mature companies and a stable demand, then to find ways to generate the productivity you need really you can look in only two places; either by right-sizing the capacity of your operations, or finding new avenues for growth and extra volume in the system. If you look at GM's position, what we have done recently at Ellesmere Port is look to get the employment base at Ellesmere Port to the right size for potential future investment, so an adjustment for future growth, future employment in the area. If you compare that with some of our competitors, who have been more recently established, they have not had to make the changes, the updates, they have been able to come in with a fresh set of facilities, a fresh set of working practices and the ability to start from a clean sheet. I think it is always more difficult to sustain a business than to start one up, and, I would say, in a nutshell, that is the difference.

  Q128  Judy Mallaber: That would explain why many of my constituents go to Burnaston, to the Toyota plant, and that would be precisely the advantage you would be saying they had, starting from scratch?

  Mr Browning: For example, we have just over 23,000 retirees of Vauxhall Motors in the UK; the costs associated with those clearly are not borne by the companies which have started up more recently. Those companies also have been able to implement state of the art working practices and facilities, which we are looking to do progressively and, for example, in the case of Ellesmere Port as we move towards investment in the new Astra.

  Q129  Judy Mallaber: Are you seeking to learn from those experiences of the newer companies then, quite explicitly, or are you setting down a slightly different path from the one that they have gone down?

  Mr Browning: I think, around the world, everybody is looking to establish the best practices and the things that make businesses successful, and so when we are approaching the Astra investment at Ellesmere Port we are looking to put in place what we believe are the best practices for quality, productivity and the performance of the operation in case.

  Q130  Rob Marris: Leaving aside the question of 23,000 pensioners, or whatever—which is just an indication that GM apparently has cocked up its pension scheme in the US, and in the UK, we find out now—in terms of brownfield/greenfield, Sunderland, for Nissan, is one of if not the most productive car plant in the world, certainly in Europe, I think it is, and it has always been at one or two for the last few years. It has been over 20 years; for how long does a plant count as greenfield?

  Mr Browning: When you look at the history, I think the history over 100 years is very different from the history of 20 years. When you look at what is going on, in terms of the steps to improve and bring our operations to the necessary level of competitiveness and productivity, you would find, I think, that when you implement the actions that we are looking to implement for the next generation Astra, the productivity of the Ellesmere Port plant can be at a very competitive level, but it takes agreements from all the parties concerned to implement those and make sure they actually become an operating reality.

  Q131  Chairman: How much is it a question of, I cannot think of a better word than, sentiment? The Japanese now, I suppose, see the UK as their base in Western Europe and Europe, and it is almost like their second HQ, whereas companies like yours, which are much more diverse, you have this huge history in the UK but are based in the United States with production all over Europe, have a much less emotional attachment, almost, to the UK?

  Mr Browning: As I said earlier, there is a strong desire to see us maintain our manufacturing operations in the UK, not just from an economic point of view, a financial point of view, but also because we do believe the Vauxhall brand is seen as a domestic UK brand, it does have this very large customer base here. We think that it is right to have our footprint here, from a manufacturing point of view, as well as from a sales point of view. Obviously we have to meet certain business criteria to do that, but it is something that we would like to maintain.

  Chairman: Back to some of the specifics, Judy.

  Q132  Judy Mallaber: Where we have successful companies, like some of the Japanese companies, for the reasons you stated, are they managing to maintain that momentum, in your view, or are there ways in which they then start to become stale and even to refresh themselves?

  Mr Browning: I would not claim to be an expert on the internal workings of those competitive companies. I think every competitor, as I say, as they mature, in a maturing market, has those challenges to deal with, and I think the pressures today are such that they have to be dealt with very quickly. Just going back to the basic point that I mentioned at the beginning, if you have got a fixed capacity in place in a market, that market is not growing but normal productivity improvements are running at the rate of between eight and ten per cent, then you have pressure on restructuring literally as you go through the maturing of that company on a year-to-year basis. Every company has to continue to improve their operations to remain competitive in the marketplace.

  Q133  Judy Mallaber: Can we just go back to what you referred to a while ago and was in your evidence, about the disadvantage of the UK in comparison with the rest of Western Europe, and you identified earlier particularly energy costs and logistical costs. We have done quite a lot of work on the differences in energy costs and you mentioned those factors as being things for which the Government could give assistance. First of all, what evidence have you got actually of other comparable plants in the EU which do have lower energy costs?

  Mr Browning: Again, forgive me if I do not give specific numbers, as they are sensitive, but when we compare Ellesmere Port specifically with its sister plants across Europe, you see higher energy costs for the UK than for other Western European facilities, and so it is a direct comparison between Ellesmere Port and its sister plants in Europe.

  Q134  Judy Mallaber: You have not been seeing increases in their energy price rises? We were being led to believe, because of rises in worldwide prices for oil, gas and coal, that we would be seeing substantial increases in prices for the European competitors. You have not been seeing that?

  Mr Browning: Our experience is the opposite; we have seen greater increases in the UK than those specific sister plants.

  Q135  Judy Mallaber: What would you expect that the Government should be able to do to assist in that; are there specific things that you would be looking for from Government?

  Mr Browning: I think the important thing to maintain is a very open, transparent and competitive market for energy in the UK.

  Q136  Judy Mallaber: One of the arguments has been about the lack of liberalisation of the energy market in other European countries, so how are you seeing that reflected?

  Mr Browning: Clearly, with the EU as a single market, in that sense, it is not just in terms of the UK it is also in terms of across Europe in total.

  Q137  Chairman: I wonder, Mr Browning, I know that we are getting into the realms of confidentiality and I do not want to press you too much, but could you give us an idea of the order of magnitude for the energy price differentials, because the Committee is on your side here and has expressed this view in writing in previous reports? It would help us if we could have just a little bit more colour on the very helpful picture you have painted?

  Mr Browning: What I would like to do is take that request away and look at what we might be able to provide you with, as additional input.

  Chairman: That would be very helpful, Mr Browning, thank you very much indeed.

  Q138  Mr Hoyle: You have just been going on about the different issues, about plants, but can we look at logistic costs, because, obviously, as you say quite rightly, energy has been a big worry. Presumably, what you worry about is the UK plants which produce actually for export, therefore it is the additional costs; were you trying to bring the plant size down to where they match the UK requirement, in car sales?

  Mr Browning: No, because if you look at the numbers, again, in the case of Ellesmere Port, actually we export quite a large proportion of the vehicles assembled there. In fact, when you look at our UK operations in total, between Luton and Ellesmere Port, around slightly less than two-thirds, but around two-thirds, is for export, so there is a lot of movement of components into the UK and finished vehicles out of the UK as well.

  Q139  Mr Hoyle: That brings me on to the very important question, so is production costs also the issue of components, because, presumably, you look for continental supplies of components and the factory is a long way from the component production, or are you still using quite a large amount of UK components? I am not quite sure.

  Mr Browning: When you look at our purchasing of components and supplies in the UK, we purchase over £500 million worth of components in the UK each year.