Select Committee on Trade and Industry Minutes of Evidence


APPENDIX 2

Memorandum by Toyota Motor Manufacturing (UK) Ltd

EXECUTIVE SUMMARY

  Toyota UK is part of Toyota Motor Corporation (TMC) which is the third largest automobile manufacturer in the world. In 2001, TMC produced more than 5.5 million vehicles—equivalent to one every six seconds—in more than 50 plants in 25 countries and marketed in over 160 countries.

  As part of TMC's philosophy of building quality cars where and when they are needed, the company decided to establish a manufacturing facility in Europe. Toyota UK was established in 1989 and production started in 1992. There are two major UK production facilities:

    —  Burnaston, Derbyshire. Car manufacturing plant producing Avensis and Corolla models with operations comprising pressing, welding, painting, plastics moulding and full car assembly facilities. Expected 2002 volume production: 220,000 vehicles. Second most productive car manufacturing plant in Europe.

    —  Deeside, North Wales. Engine manufacturing plant, producing petrol engines for Burnaston and exported to France and other affiliate plants in regions such as South Africa and South America. Complete engine manufacturing site, comprising aluminium casting, machining and assembly facilities. Expected 2002 production volume: 300,000 units.

  Approximately 80 per cent of Toyota UK's production is exported. Of that export volume, 75 per cent is exported into Europe and the remaining 5 per cent to over 100 destinations across the world. The vehicles for the UK market are distributed by Toyota (GB), who are responsible for sales, marketing and customer services across the whole range of Toyota vehicles. Toyota/Lexus sales in the UK for 2001 amounted to around 115,000 giving a market share of approximately 4 per cent.

  Total inward investment as a result of establishing Toyota UK is currently £1.6 billion, the single largest investment of its type. However, the current situation for UK manufacturing is desperate and without government help will quickly worsen. There are three key areas:

    —  The severe and sustained imbalance between the £ sterling and the Euro. The UK should join the Euro system (at an appropriate exchange rate) to gain the business advantages such a move would bring.

    —  The huge amount of regulation and legislation that businesses face. This is fast becoming a very large and real burden, which the Government should strive to reduce.

    —  The shrinking skill base available to the manufacturing sector. This is already causing difficulties across a broad range of occupational classifications. The UK government, working with the manufacturing sector, must create a comprehensive programme of training and development that meets current and future industry needs.

  The success of the UK manufacturing sector depends not on Government subsidy but the creation of a level playing field. Competitiveness will only be achieved when the Government takes the necessary practical measures to address these key issues and highlights the vital role the sector plays within the UK economy. In particular, the Government should promote UK car manufacturing as a success story, a world class industry facing up to the economic, social and environmental challenges it currently faces.

1.   Background to Toyota Motor Manufacturing (UK) Ltd

  1.1  Toyota UK is part of Toyota Motor Corporation (TMC), which is the third largest automobile manufacturer in the world. In 2001, TMC produced more than 5.5 million vehicles—equivalent to one every six seconds—in more than 50 plants in 25 countries and marketed in over 160 countries.

  1.2  As part of TMC's philosophy of building quality cars where and when they are needed, the creation of a European manufacturing facility was considered essential. To meet that need, Toyota UK was established in 1989 and production started in 1992. The Company has two major production facilities:

    —  Burnaston, Derbyshire. Car manufacturing plant producing Avensis and Corolla models. In 2001, production volume totalled 156,000 vehicles (down from the 2000 output of 171,000 units due to a model change as production of the new Corolla came on stream). The Burnaston plant is a true car manufacturing site, with operations comprising pressing, welding, painting, plastics moulding and full car assembly facilities. Expected production for 2002 is 220,000 vehicles. It is now the second most productive car manufacturing plant in Europe.

    —  Deeside, North Wales. Engine manufacturing plant, producing petrol engines for supply to Burnaston site and to the Toyota plant in France (currently building Yaris models). It also exports engines to other Toyota affiliate plants in major regions such as South Africa and South America. The Deeside plant is a complete engine manufacturing site, comprising aluminium casting, machining and assembly facilities. Expected production for 2002 is 300,000 units.

  1.3  In total the inward investment into the UK as a result of establishing Toyota UK is currently £1.6 billion, the single largest investment of its type.

  1.4  Approximately 80 per cent of Toyota UK's production is exported. Of that export volume, 75 per cent is exported into Europe and the remaining 5 per cent to over 100 destinations across the world. The vehicles for the UK market are distributed by Toyota (GB), who are responsible for sales, marketing and customer services across the whole range of Toyota vehicles. Toyota/Lexus sales in the UK for 2001 amounted to around 115,000 giving a market share of approximately 4 per cent.

  1.5  Toyota is expanding operations in Europe. Burnaston was the first Toyota manufacturing plant to be established in Europe but since then, additional manufacturing facilities have been constructed or announced:

    —  Toyota Motor Manufacturing France (Valenciennes) commenced operations in 2001.

    —  Toyota Motor Manufacturing Poland (a transmissions plant) commences operations in 2002 at Walbrzych Dolnoslaskie.

    —  A joint manufacturing project with Peugeot-Citroen was announced last year and will commence operation in 2005. The plant will be located in Kolin in the Czech Republic.

  1.6  All of the manufacturing facilities based in Europe will be controlled via Toyota Motor Europe Manufacturing (TMEM), a company established by TMC in 2000 to co-ordinate and streamline manufacturing operations throughout Europe. TMEM has its headquarters in Brussels.

  1.7  Since its establishment, Toyota UK has incorporated the ideals of sustainability within its operating practices. This can be seen across a range of factors:

The Economic Factor

  1.8  Toyota UK is a major employer in Derby and Deeside. Our current number of employees (as at December 2001) is 3,772 (3,216 at Burnaston and 556 at Deeside). However, the economic impact of Toyota UK on the local and regional economies goes well beyond this.

  1.9  First, in terms of the component industries, we estimate our spend with UK suppliers to be in the region of £450 million this year. Secondly, local communities benefit from this large pool of stable, highly skilled employment. Apart from the obvious benefits of injecting around £80 million of salaries into the local communities, we help create other job opportunities in the areas of security, catering, hotels and other supply sectors.

  1.10  Toyota UK also makes a significant contribution to the UK's balance of payments. Given that 80 per cent of our output is exported, we anticipate that our contribution to the UK balance of payments for 2001 will be around £815 million.

The Social factor

  1.11  Our commitment to our community—at local, regional and national level is consistently high. We have established close links at every level and our desire to be a good corporate citizen is genuine.

  1.12  We have an ongoing programme of financial contributions (currently totalling over £1.6 million) focussed on four primary areas:

    —  Environment

    —  Children/Education

    —  Medical/Health

    —  Sport.

  1.13  We also take great pride in our Members (employees). We recognise the mutuality of the ideals of the Company and its people and ensure that a common understanding and therefore shared benefit approach is in place. Mutual trust and respect is the cornerstone of our operating philosophy.

  1.14  In 2001 the cost of member training and development for Toyota UK was in excess of £12 million.

The Environment factor

  1.15  Since start of production 1992, we have striven for excellence in manufacturing practices, minimising any potential adverse effects on the environment. Our operating principles underpin our approach to environmental issues. The Toyota Production System (TPS) has an in-built philosophy to eliminate waste in all business areas. In recognition of our well-established environmental management systems, we were awarded ISO 14001 in 1996 (the first UK-based car manufacturer to do so).

  1.16  It is evident therefore, that Toyota's commitment to the UK is, and will continue to be, extremely strong. We shall continue to pursue our polices of building quality cars for our customers and, at the same time, act as a good corporate citizen. However, this is only possible if we are a profitable organisation.

2.   The Competitiveness of Toyota Motor Manufacturing (UK) Ltd

  2.1  The original decision by Toyota Motor Corporation (TMC) to establish its first European manufacturing base in the UK was influenced by many factors:

    —  large domestic car market;

    —  long tradition of engineering and vehicle manufacturing;

    —  good communication infrastructure;

    —  close links to continental Europe;

    —  excellent supplier base; and

    —  skillled workforce.

  2.2  All these factors combined to make the UK an appealing location for investment. However, the critical issue was that the UK had a positive and flexible economic climate in which to do business.

  2.3  That favourable economic climate no longer exists. To demonstrate this, two seemingly contradictory facts regarding the operations of Toyota UK are highlighted:

    (a)  Over the nearly 10 years of its operation, Toyota UK has increased production volumes and increase productivity. It is now the second most productive car manufacturing plant in Europe.

    (b)  Since 1998, when TMUK last turned a profit, we have registered losses each and every year. The last year for when reports are available (2000), we posted a record loss of £130.2 million on our commercial operation. Since then, economic conditions have not changed and we do not anticipate moving out of that loss-making situation for financial year 2001.

  2.4  In an effort to reduce these losses, we have sought to improve our operations still further. We have instigated a plan of sensible and pragmatic measures to reduce costs and exert closer control over those areas of the business that we can influence.

  2.5  More radically however, we have introduced our "survival plan". This means increasing production volumes—maximising the utilisation of fixed assets at our disposal and therefore reducing fixed costs per vehicle (the so called "sweating the assets" approach). This will result in production increases from 170,000 to 220,000 vehicles per year at Burnaston and increased engine production at Deeside. Deeside will become a "centre of manufacturing excellence" and provide engines and components to a much wider customer base across the world.

  2.6  These seemingly large expansion plans do not amount to further investment in the UK by Toyota. They rely on maximising existing facilities to ensure that full productivity and efficiency is achieved in all areas of our business.

  2.7  Toyota UK is therefore doing all that it can to become a profitable and successful manufacturing company operating in the UK. What we cannot do is influence those areas that are outside of our control yet which have a major impact. These are issues affecting all of UK manufacturing and are clearly areas for Government intervention. This submission highlights the impact those issues are having on TMUK's operations.

3.   Issues affecting manufacturing in the UK

  3.1  It is widely known that the manufacturing industry in the UK has been in decline over a number of years. It is a gloomy picture:

    —  A record low in the numbers employed in the manufacturing sector—just 3.7 million. Sadly, the current forecasts are for further reductions as the sector contracts;

    —  Since 1995 the UK's manufacturing output has increased, but significantly slower than competitors. UK output rose just 1.2 per cent against "Euroland" growth of 18 per cent;

    —  The current year on year rate of output actually declined by 5.4 per cent—it's fastest rate of fall for three years.

  3.2  Something is seriously wrong for "UK Manufacturing plc". Some areas for consideration by the Committee are detailed below. Whilst some of the examples relate solely to our experiences in the automotive industry, they reflect wider difficulties experienced across the manufacturing sector.

Manufacturing and the Strength of Sterling v the Euro

  3.3  This issue is by far the biggest contributory factor to our loss-making situation. It is of course an abnormal situation in that the conventionally cyclical nature of economies and exchange rates has not applied. We are in, and will continue to face, an unusually lengthy and sustained period of serious economic imbalance.

  3.4  It is clear that from a business viewpoint, the UK should join the Euro system. However in doing so, it must be at a rate of exchange that will allow UK manufacturing to compete fairly with (not have advantage over) our overseas competitors. Apart from removing the exchange rate factor (critical for exporting manufacturers), joining the Euro will have other considerable advantages for exporting business such as long term financial planning, consistency in dealing with suppliers etc.

Business Rates and Taxes

  3.5  Over a period of several years, the financial burden and the complexity of managing, auditing and reporting has increased significantly. The Climate Change Levy, a charge on businesses' use of energy, is one obvious example, but there are others also, such as the introduction of regulations affecting pension funds, commercial rates etc.

  3.6  We accept that business must contribute its share to the public purse—after all, we all stand to gain both as individuals and companies from the investments Governments make in the economy and the public services. However, our concern is that business rates and taxes should be simple, easy to administer and not punish any sector—particularly large scale manufacturing—any harder than other sectors. This is critical where industries are competing on a global scale. Investment will be difficult in markets where the taxation or compliance conditions are particularly onerous.

Regulatory Pressure

  3.7  To be successful, business needs the ability to be flexible and responsive to its own particular commercial environment. The amount of business regulation currently in place is vast. Whilst many of these regulations have at their heart laudable objectives—for instance, parental leave, working time, data protection—it is the pace with which these are being implemented that is most disappointing.

  3.8  Each regulation, in its own way, restricts the flexibility that is essential for businesses to be genuinely competitive. The situation is often compounded by a tendency to "gold plate" the regulations or bring them in early. We recognise that many of the new regulations are based on European law and that the UK government has no option but to comply. However, as their impact on UK businesses is so great, such regulations should not be introduced early or with greater force than our competitor countries.

  3.9  Ensuring compliance with this wealth of regulations is a difficult and time-consuming task, taking up valuable resources. The cost of managing and administering the additional regulatory requirements is inexorable.

  3.10  The cumulative effect of this burden had been to constrain the ability of business to operate at a profitable level. Whilst this was clearly never the intention of these regulations the result has been to dampen the economic competitiveness of the UK manufacturing sector as a whole.

Training and Skills

  3.11  This is an area of concern for all manufacturing companies. There is no doubt that as a business sector, the engineering skills base across all disciplines both traditional and in the new technologies, is eroding and that insufficient numbers of trained and experienced engineers are available.

  3.12  This situation is serious now, but will become critical in the not too distant future unless proactive countermeasures are introduced rapidly.

  3.13  There is an urgent need for the introduction of a co-ordinated framework to be established, aimed at developing a trained, skilled and motivated workforce that will be ready to take its place in the challenging workplace of the future.

Creating the Environment for Business Success

  3.14  The Government can help reverse the fortunes of the UK manufacturing sector by encouraging a sea change in attitude and perception. For too long manufacturing has suffered as the poor relation of the service sector. Rather than the industrial laggard, manufacturing should be seen as the driver of growth and prosperity for the country as a whole.

  3.15  Some initiatives give cause for hope. The recently announced "R&D Tax Credits" scheme and the DTI's "Centres of Manufacturing Excellence" are positive signals of a growing realisation that manufacturing cannot be abandoned. Whilst it is adapting to face increasing challenges on a number of fronts, it needs the support of Government to achieve and sustain a profitable future.

The Automotive Manufacturing Sector

  3.16  For the automotive industry, there are a number of specific issues to be addressed, many of which are associated with environmental pressures and regulations. Toyota supports the objectives of many of these regulations—for instance, in improving the safety of our vehicles for drivers, occupants and pedestrians. We are equally committed to protecting our environment and our record on environmental issues—both globally and regionally—confirms that commitment.

  3.17  Much of the regulation emanating from Brussels inevitably has an impact on our products and on how they are manufactured. Toyota UK endeavours to ensure these issues are addressed at each stage of development—from R&D, design, production engineering and manufacture. However, these changes take time to implement. Regulatory Impact Assessments frequently fail to take account of the whole costs especially when regulations are implemented in advance of deadlines or with greater force than is required under the Directives. The impact on our business as a result of this tampering is huge.

  3.18  We are seeking more of a partnership with Government. We are fully prepared to meet our regulatory obligations but are equally looking to the Government for support. We should like greater dialogue with Government in advance of the implementation of many of these regulations. Such discussions would help us alert officials to the effect ill-considered, advanced or over-restrictive regulations will have on our business competitiveness.

4.  CONCLUSION

  4.1  The motor car is habitually cited as an "evil" of society. It should not be. People depend on it for their mobility—over two thirds of the world's population does not have that mobility and looks on enviously at its benefits.

  4.2  We are investing heavily in new technologies which will reduce further the impact the car has on the environment. Developments such as hybrid vehicles are already a commercial reality and the fuel cell vehicle is clearly on the horizon.

  4.3  However, the necessary investment required in developing these new technologies will only be achieved if motor companies are profitable. Profitability is directly related to competitiveness.

  4.4  Toyota Motor Manufacturing (UK) Ltd is already extremely productive—we are one of the most efficient plants in the world. We can also be much more competitive too but require some sympathetic changes in the current business framework. The Government accepts the important contribution the automotive sector makes to the UK economy and has been increasingly active in promoting the sector abroad. It can, however, do more to make it internationally competitive by looking at some of the key issues the sector faces.


 
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