Leading manufacturers make employment case for EMU

In July 1999, senior management representatives from two leading manufacturing companies in the UK - Unilever and Vauxhall Motors - gave evidence to the House of Commons employment subcommittee about the employment and industrial relations implications of Economic and Monetary Union. Both companies made a case for UK entry on business and employment grounds, providing that sterling was locked in at a "more realistic" rate. They also argued that, by focusing attention on international comparisons of productivity, the euro will place even more of a premium on labour flexibility and "partnership" with employees.

In July 1999, as part of an investigation into the employment and industrial relations implications for the UK of EU Economic and Monetary Union (EMU), and specifically the single currency, the House of Commons employment subcommittee heard evidence from senior management representatives of two leading manufacturing companies in the UK - Unilever and Vauxhall Motors. Following a meeting with the governor and deputy governor of the Bank of England in May, which explored the macroeconomic implications of EMU, the Members of Parliament (MP s) on the subcommittee were keen to discuss the practical implications for firms in the UK. The witnesses invited to give evidence were Bruce Warman, director of personnel at GM Vauxhall Motors UK, Richard Greenhalgh, chair of Unilever-UK Ltd, and Michael Samuel, UK national finance director of Unilever plc.

Company backgrounds and pressures

Although in very different markets, the two companies share a number of common characteristics which are relevant to their approach to the single currency. Unilever is an Anglo-Dutch conglomerate directly employing 17,500 people at 21 plants in the UK. The UK operations form part of a corporate network of 110 European plants, manufacturing food and personal and domestic hygiene products, with around 75,000 employees in total. Vauxhall is the UK subsidiary of the US-owned car giant General Motors (GM), and employs around 10,500 workers at two manufacturing sites, out of a total Europe an workforce of 86,000. Both companies are therefore part of much larger multinational groups which approach Europe as a single region in terms of manufacturing capacity as well as markets. This means that they have to compete within their corporate groups for investment funds.

The context for this has not been favourable in recent years as both parent companies are streamlining their European manufacturing operations. Between 1991 and 1997, Unilever closed 57 of its factories in Europe (over 25%), which reduced employment levels by 10,000 (EU9902153N). This was partly due to a change of strategy to shift to single-site sourcing of products for the single European market. Similarly, reflecting overcapacity, rising materials costs and increasing competition in the European car market, GM announced moves in early 1998 to cut its European workforce by 20%-30% over the next five years. So far, the British plants of both companies have largely escaped rationalisation, although the threat of closure was a factor in Vauxhall's 1998 pay negotiations.

The single currency has already had a direct impact on the UK operations of both companies even though the UK remains outside of the "euro zone". In all, around 75% of Unilever's sales are in the euro zone, and 20% in the UK. For the UK subsidiary, around 12% of production is for export to euro zone countries, and a similar proportion is imported from the euro zone to the UK. For Vauxhall, out of an annual expenditure of GBP 2.2 billion on components, around 61% is supplied from euro zone countries. Internal accounting systems have therefore had to be revised to be made ready for the euro. Unilever UK encourages suppliers to invoice in euros and has issued two briefings to employees on the significance of the euro for the company. The parent company also plans to report to its investors in euros when, from 2000, all internal transactions and reporting will be itemised in euros. At Vauxhall, the internal implications have not been so significant, reflecting the importance of the dollar as GM's international currency unit. However, accounting systems have been prepared in advance, and suppliers, retailers and employees have been informed of the possible implications, as have customers who now have the option to purchase vehicles in the euro denomination.

The case for euro entry

Being outside the euro zone has had a number of increasingly serious implications for the UK divisions of Unilever and GM. This is because they are part of closely integrated European companies which are looking to reduce production sites or capacity. Each of the parent corporations has a very well-developed internal market within which constituent companies must bid for investment funds. Outside of the euro zone, the UK subsidiaries carry additional transaction cost burdens in terms of currency exchange and hedging against risk and, although some of this can be mitigated by internal currency cash flows, currency uncertainty remains an unwelcome additional factor in investment decisions. In addition, they are also faced with base interest rates twice that of the euro zone (5%).

Inside the euro zone, these costs would be reduced, and the UK companies feel that they would be able to make more competitive claims for investment funds given the price transparency introduced by the euro. Not surprisingly, however, both companies would prefer a lower sterling-to-euro exchange rate. For Vauxhall, any rate above DEM 2.7 (the rate incorporated into its 1998 wage settlement) would cause problems. The UK has lower labour costs than the other leading plants in GM Europe, but higher freight costs: DEM 2.7 is viewed by the company as an "equalising" rate taking all such factors into account. Unilever does not give a figure, but a prefers a "more competitive" rate. Both UK companies feel that currency stability and transparency would enable them to benefit further from the improvements in productivity made in recent years.

Focus on productivity and flexibility

Both UK subsidiaries have been disadvantaged relative to many continental plants by operating within long-established "brownfield" sites. Within the UK, the two Vauxhall plants were said to be in the middle of the GM Europe pack in terms of productivity. The leading plants were the "greenfield" sites at Eisenach, established only seven years ago, which vies with Nissan Sunderland as the most productive car plant in Europe, and Zaragossa which produces half a million cars a year from three shifts. As the parent companies have sought to rationalise capacity, this has led to an even greater focus on costs and productivity in the UK operations in order to compete internally for investment.

In Vauxhall, this culminated in a radical three-year pay deal in 1998 (UK9805127N), which was made with an implicit threat to the future of the Luton plant. The agreement committed the workforce to various productivity-enhancing changes as part of a commitment to "continuous improvement" and "world-class standards". Significantly, Vauxhall tied part of the pay award (an additional 0.5% in year three) to the euro exchange rate. This was intended to reinforce the message of internal competitiveness, and was justified on the basis that, allied to the introduction of new working practices, a fall in the value of sterling would sufficiently narrow the costs differential between the Vauxhall and continental Opel plants to allow extra compensation for the UK workforce. In Unilever, the renewed focus on plant productivity has been associated with continued decentralisation to establishment-level bargaining, which has facilitated initiatives such as annualised hours working.

The integration of the euro zone had already reduced currency risk and transaction costs, but those subsidiaries within the euro zone have obviously benefited the most. According to both companies, however, future investment decisions are increasingly dependent on productivity, and the rate of productivity growth, as well as the exchange rate. Any convergence of prices as a result of euro transparency would only put additional pressures on inputs. However, this did not have to imply a "sweating" of human assets, as both companies referred to the growing importance of employee skills, retention and motivation as well as labour flexibility in forming a total picture of unit labour costs. "At the end of the day it's the productivity of our factories that counts," Mr Greenhalgh told the MPs. "If there are fewer people more highly paid but producing at a lower cost, that is fine by us."

In fact, the plants apparently most under pressure to change working practices have so far been the higher-cost ones in continental Europe. These have had to introduce new practices such as flexible working time in order to reduce costs and improve productivity performance. Mr Greenhalgh cited the example of one of Unilever's ice cream factories in Germany which had moved to variable four- or six-day basic working as required (around a 40-hour average), introduced annualised hours contracts for part-timers, and experimented with zero-hours contracts. However, these developments were expected to place additional pressures on the UK operations. In GM Europe, it was flexibility agreements reached with the Opel subsidiaries in Germany (DE9802247F) and Belgium which forced Vauxhall's hand in the 1998 pay round.

Commentary

The introduction of the single currency in January 1999 has had major implications for multinational subsidiaries in the UK, which remains outside the euro zone. Firstly, these companies are subject to greater currency risk and transaction costs compared with their counterpart plants in the 11 participating Member States. Together with the relatively high value of sterling, this has added to the perception of the UK as an increasingly high-cost country. This is likely to add to pressures on productivity and could have negative implications for investment decisions over the longer term. Arguably, EMU has already had an indirect effect on the UK subsidiaries by accelerating the process of change. Managements' efforts to increase productivity and labour flexibility have been facilitated and legitimated by reference to the added disadvantages of lying outside of the euro zone in terms of internal competition for vital investment funds.

However, this has not necessarily led to a straightforward assault on labour by domestic management. In fact, recognising that continuous improvements to quality and productivity require a well-motivated as well as a flexible workforce, Vauxhall, for example, has been trying to build closer relationships with the trade unions. This began with a commitment to no compulsory redundancies as part of the first major round of productivity changes in 1988, and was reconfirmed in the 1998 settlement. According to personnel director Bruce Warman: "We feel the benefits of United Kingdom membership of the EMU would be very important for Vauxhall but they remain just one of a number of factors which need to be considered in making investment decisions. Of crucial importance to us in addition is the partnership with our employees to deliver a quality product with maximum efficiency."

However, in a context of increasing pressures for rationalisation of European capacity, it remains to be seen for how long a "partnership" approach can be sustained within these multinational subsidiaries if the UK continues to remain outside EMU (J Arrowsmith, IRRU).

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