98. The evidence presented to us confirms that the
UK still has a successful automotive component industry, ranked
third in Europe behind Germany and France. The scale and nature
of component suppliers vary widely. At one end of the spectrum
are a handful of multinational firms, one or two of them of UK
origin, employing thousands of people around the world and supplying
all the major assemblers, usually from a plant near the point
of final assembly. These so-called "first-tier" suppliers
are increasingly engaged in production of complete sub-assemblies,
comprising a range of individual components, and are engaged in
research and engineering design independently or in partnership
They are in turn supplied from a second-tier of medium-sized firms.
At the other end is a mass of SMEs with a single plant, dependent
on sales to a first or second tier supplier, and
with a small range of products. Some of these may be wholly dependent
on sales to vehicle component manufacturers. Others also supply
the aerospace or general engineering industry and are sufficiently
flexible to be able to change their products to meet market demand.
99. The continuing presence of vehicle assembly
operations in the UK is a crucial condition for the survival of
the UK component industry. It is theoretically conceivable
that a component industry could rely largely on exports. Some
UK component firms are indeed successful exporters. But in reality
any reduction in assembly operations in the UK has an impact on
component design and manufacture. Investment by major first-tier
suppliers is highly mobile and follows the point of final assembly.
Components are often bulky or difficult to transport safely and
undamaged. First-tier suppliers as well as assemblers use "just-in-time"
delivery methods to reduce the expense and space of holding large
stocks. Some contracts therefore specify a maximum distance in
terms of delivery times to the point of final assembly.
The loss of a plant or a reduction in output can have what the
IME called "an avalanche effect", as the first-tier
supplier moves the point of production outside the UK and in turn
requires supply from that new location.
100. There have been many reports of car manufacturers
threatening to change their suppliers because of the euro:sterling
rate, or of asking their existing suppliers to quote in euros
or to lower their sterling prices to be able to compete with prices
in the eurozone. There is no doubt that some component suppliers
are in difficulty and that assemblers are seeking to reduce their
costs in this way. It is in practice unusual and inconvenient
for a manufacturer to change supplier in the middle of a model
production run. We were told on our visits that a change takes
months rather than weeks to bring to fruition, involving inspection
of a new supplier's premises and transfer of the necessary technology
and proprietary information.
However, the respecification or redesign of a component during
the life of a model offers one opportunity to seek a new supplier
or at the least to seek a reduction in its cost.
101. It is also possible for a large first-tier supplier
- to shift supply of a sub-assembly from its plant
in the UK to its plant in another country where the same sub-assemblies
are already being produced for the same or a related model, subject
of course to capacity constraints there and the logistics of transport
from that plant to the UK; or
- to seek in turn to reduce its costs by sourcing
its components from the eurozone, particularly where they are
not technically complex and readily available from a reputable
source. As the Managing Director of Peugeot UK put it " ..it
is quite often the first- tier supplier making the decision that
he will supply us from a continental market...those suppliers
increasingly are able to supply us with more competitive products
by sourcing those components from European countries...".
The assemblers may not have any objection to the
first course of action and have no good reason to be aware of
the second course.
102. It is not easy to ascertain the UK content of
vehicles assembled in the UK, by which we and most others mean
the proportion by value of the content which is produced in the
UK, whatever the ultimate ownership of the producing company.
EU rules do not allow for overt or covert discrimination between
EU suppliers. Assemblers record EU content by value, and are able
if pressed to produce an approximate figure for UK content based
on the proportion of supplies invoiced in sterling. Assemblies
and sub-assemblies, including engines and powertrain, which themselves
comprise components from different countries, will be recorded
as UK content if that is the place of their assembly. The figures
can also include non-physical content expenditure, on advertising
103. The three Japanese manufacturers were committed
by a gentleman's agreement to minimum levels of UK content when
setting up in the UK. These have been quietly dropped. Vauxhall
told us that the current Vectra and Astra models had around 60/70%
UK content by value, and that the new Epsilon would have around
Peugeot's new derivative of the 206 to be introduced at the end
of 2001 will have UK content as low as 20%.
104. From our discussions and from evidence presented
to us, it is indeed evident that the UK content of vehicles assembled
in the UK has fallen, is falling and is likely to fall further,
almost entirely as a result of the weakness of the euro. Those
in an advanced stage of planning for new models or who have recently
introduced such models have shifted towards sourcing from elsewhere
in the eurozone or outside it. The danger with this trend
is that it is not readily reversible, even if and when the euro
strengthens against sterling or if the UK were to join the euro
in due course. The loss of component manufacturing capacity cannot
always be replaced, in particular in small firms with insufficient
other markets for their products.