Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 245 - 259)




  245. Can I first welcome you, Mr Reilly and your colleague, Mr Warman. We have met in the not too distant past, Mr Reilly, in what in those days were happier circumstances. I think when we spoke to you in the early and late summer we were at that time all under the impression that the new Vectra was going to come to Luton. Could you perhaps explain to us the position as regards the sales of Vectra? What is the significance of the picture as far as sales are concerned? Maybe you could tell us the position in continental Europe and in the UK in relation to Vectra sales.

  (Mr Reilly) The situation we are talking about has got a lot to do with sales and particularly the segment that the Vectra operates in as well as the Vectra itself. It is certainly a pan-European situation, not just a UK situation here. The Vectra segment has dropped by approximately five points of the total market, from 22 per cent to around 17 per cent, across Europe in a four year period, and within that the Vectra has obviously also shared that loss across Europe. In fact the Vectra has lost a little market share but the main story is in the overall period, particularly just recently, the Vectra segment has significantly shrunk. The reason for that is that people are moving to smaller cars in most countries and they are also moving to different types of vehicles—people movers as they are sometimes called—but also the premium manufacturers, as they are referred to, such as BMW and Mercedes, have brought out products which now compete in that sort of segment. So the segment has shrunk and it has become much more competitive.

  246. But surely we would expect an ageing car to fall in sales? This is something that you could have anticipated. You do not really need a very clear crystal ball to realise the demand for a car in the fifth or sixth year of its life, even if it has had a minor re-vamp, would be reducing.
  (Mr Reilly) Yes, I am not talking about the cyclical demand for a product as it gets towards the end of its life when of course it does tend to have lower sales, although actually the Vectra in its segment has done quite well. Yes, that would happen but that is not really pertinent to what we are talking about here. We are talking about what has happened to the overall segment and the future of that segment.

  247. At one time we were talking not just about the son-of-Vectra, the Epsilon, but also the Corsa coming to Luton. What happened to that pipedream?
  (Mr Reilly) That was actually before my time but there was a consideration when the Corsa was being planned to potentially bring it into this country, into Luton, because it would have been desirable to have what we call a flex-plant, ie a plant with two different models, and that was considered as well for the derivative of the Corsa, which could quite possibly have come here, but in the end the volumes for the Corsa did not require another plant and it stayed in the plants which were already producing it.

  248. Given, as you said, there was a shrinking in your share of a shrinking sector, how do the third quarter losses for GM Europe impact on the choice of a site for a new car, in this case the Vectra? Can you explain to us how there is this linkage? Am I correct in saying that we really have to talk about it as a European operation rather than a European company, because GM Europe does not really produce books as such and financial returns? Is that correct?
  (Mr Reilly) GM Europe does but it is essentially a cost centre. Yes, you are right, it is made up of several legal entities in different countries, of which Vauxhall is one. If I can get to your question about losses and how they impact, the major issue that we are dealing with here is a capacity issue across Europe and there is over-capacity in the industry generally and we have also over-capacity in GM Europe. When you are making significant profits then you can afford to have some flexibility in terms of your capacity and your capacity utilisation just in case you are very successful in the market or the market suddenly turns up, but clearly when you are in Europe making losses you cannot afford to run plants at below capacity if you can avoid it. The very severe deterioration in the automotive industry in Europe which has caused most companies to go into losses therefore calls for a different sort of action than might be appropriate if there was a lot of money being made. That, together with the decline in the segment of the Vectra, has meant that GM Europe needed to look at where it put its capacity for the Vectra.

  249. This seemed to happen overnight, this awareness of the character of the problem. When we met it was probably late September but the garden was looking fairly rosy then. It took us virtually up to Christmas for things to change. The reason we are here, frankly, is we would have had a report produced on the car industry and in the case of GM we would have been reasonably optimistic. The reason that stopped us producing the report was the uncertainty over Nissan and we thought we should wait for the main board decision about their new Micra vehicle. We just cannot see how things changed so dramatically, and if they did not change dramatically had you anticipated this earlier than December?
  (Mr Reilly) No, we did not anticipate this earlier than December, and it did change rapidly, although we had obviously had signs that the segment was declining because the sales forecasts are updated regularly not just for here but for the whole of Europe. We had in fact already started to take some action a couple of months before, which was to try to move some people from the Luton Vectra plant to the neighbouring IBC plant, recognising this decline, at least as a short-term measure, and it was actually during those preparations that the data became clearer, and it was then clear that GM Europe had gone from a state of needing two Vectra plants to needing effectively one and a half, or one plus a flex-plant.

Mr Butterfill

  250. Could I press you on this decline in demand. It has been put to us that the decline in demand in the UK for the Vectra segment was much less than it was in the rest of Europe, and that also the profitability in the UK operation was rather better than it was elsewhere. If that is true, and perhaps you could let us know whether it is, does it not seem ironic that it is the UK plant which ends up suffering?
  (Mr Reilly) If I can address the first question, it is not true the UK is not feeling the reduction of this segment.

  251. But not to the same extent.
  (Mr Reilly) Yes, to the same extent, by about four to five points of market share, from a somewhat higher level, from about 25 per cent down, to about 20 per cent, but nevertheless the same sort of decline in that same period. As for profitability, the rapid decline in profitability in GM Europe has been mirrored here in Vauxhall. I cannot give you the results yet because they are going to be announced in the not too distant future, so obviously I cannot indicate that, other than to say that we are not trading profitably. So the picture of some time ago has deteriorated significantly, for various different reasons.

  252. You are a member of the board in Europe, presumably you therefore were involved in these discussions which culminated in this decision?
  (Mr Reilly) I was.

  253. Did you defend your patch here vigorously?
  (Mr Reilly) I did, very vigorously, yes. In fact it was my suggestion to try to move some people from the Luton passenger plant to IBC to try to contribute towards an improvement in profitability and a reduction in the costs for both Vauxhall and GM Europe. The next thing we considered was to go to a single shift. But, in the end, the data that I was presented with indicated that the only way that GM Europe could take this sort of capacity out, which it needed to do long-term, not just short-term, was this move, and it was technically possibly to move the tools which had been planned for Luton to another plant.

  254. It seems extraordinary that the decision was taken so late. Up until a month or two ago you were busy investing huge sums of money in the Vauxhall plant and telling us everything was lovely.
  (Mr Reilly) I do not think I told you everything was lovely. I have read the report I gave and it clearly said at any time plants are vulnerable. We certainly thought we were bringing the Vectra to Luton at that time but if you read what I said it was pretty pessimistic about the industry in total, and we had to fight very hard to maintain what we had. We still have to do that for what we have got left. If I can come back to the earlier part of your question, is this the UK paying for a problem in Europe? First of all, as I said, the segment is declining here as well but you have to take the swings and roundabouts unfortunately, and we have been very successful in recent years. We have got, going back some time, the Frontera investment here which we produce for the whole of Europe in Luton, and in Luton also we have the investment to produce a commercial van for the whole of Europe. Both of those investments could have easily gone elsewhere which would have meant we would have had 3,000 less jobs in Luton than we are going to have. Very regrettably, this proposal we are talking about is one we did not win.

Mr Laxton

  255. Just looking at the profitability of GM Europe, how big a factor was what I understand was a pretty hefty fine levied against Opel in the Netherlands as a result of its pricing policy in the loss of profitability for GM Europe?
  (Mr Reilly) I am afraid I cannot remember the exact amount of money but it is very minor in terms of the situation. It is immaterial.

  256. You said a moment ago you are not able to give us any figures for profits either within GM Europe or General Motors UK as yet.
  (Mr Reilly) Well, we have not released them and obviously the Stock Exchange rules mean we cannot indicate where we are, other than to say that GM Europe lost 180 million dollars in the third quarter of the year 2000 and has said that it will lose more than that in the fourth quarter of the year 2000.

  257. There have been some comments about what is termed the transfer pricing policy of General Motors Europe in terms of components. In other words, a premium price for components being paid in the UK in comparison with the same components going into plants in Germany. Is that accurate? Has that been happening in terms of transfer pricing policy? Clearly, if that was to be the case, that would have a pretty detrimental effect on the profitability of plants here in the UK.
  (Mr Reilly) No, not at all. What has happened though is that we, as Vauxhall, tend to source rather more components in the UK for the same car produced in Germany, for example, or Belgium, because of local logistics. Those components are sourced at the beginning of the model life and of course at the beginning of the model life the pound was considerably lower than it is today, so in relative terms as the pound has increased it means some of those components have got relatively more expensive for us than the same components being purchased in Deutschmarks or indeed in euros. So we have been penalised a little in those component costs by the high pound.

  258. But there is no policy within General Motors Europe of starting to have a transfer pricing policy that would impact upon one country within Europe as opposed to another?
  (Mr Reilly) Not at all, we have to have a very transparent transfer pricing policy. The tax people in the tax authorities in every country insist on that and we have not changed our transfer pricing policy.

Ms Perham

  259. To continue on this business about the euro and the sterling rate, and you have just talked about the components, has that been a real factor in the decision? If sterling were not so high or if we were linked to the euro or in the ERM would that have been a factor in the decision?
  (Mr Reilly) Not in this particular decision, although I have to say that investment sentiment towards the UK is not as favourable as it would be if we were either in the euro or if we declared we were going to get into the euro at some stage.

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