It takes a long time to turn around a supertanker – but it also takes a long time for a supertanker to manoeuvre itself into position in the first place. And that’s why Sir John Rose, the former head of Rolls-Royce, must shoulder some of the blame for the predicament in which the engineering giant now finds itself.
Its shares have halved in value in less than two years, battered by a series of five grim profit warnings. And yesterday, its new boss, Warren East, made an extraordinary admission: such is the complexity and lack of clarity within the business, he cannot rule out yet another warning on profits.
East, the highly-regarded former head of microchip designer and Apple supplier ARM Holdings, has been in the Rolls-Royce hotseat only since July; long enough, however, to have presided over two of those profit warnings himself. The first of these came on his second day at the Derby-based defence and aerospace engineer.
Setting out his strategy to investors yesterday, East made it clear that radical restructuring will be required to restore Rolls to its former glory. He inherited a bloated management structure and accounting practices that are so opaque it is impossible to tell exactly how the business is performing.
Redundancies
Cutbacks and possibly disposals are coming although East declined to give specifics. But it is clear is that many more jobs will go at the group, on top of the several thousand redundancies already announced, as it simplifies its structure.
Rolls-Royce’s engineers can rest relatively easy, as East (himself an engineer by training) made it clear that management would be the target for the axe. “What I want to do is make it easier for those engineers to do their jobs,” East said. Overall, he is planning to slash costs at the group by up to £200 million a year, although the benefits will not start to flow through until 2017.
There was no overt blame laid at the feet of previous management but, with masterful understatement, the new boss said: “Previous disclosure has undermined confidence in the business model.”
A company does not go from being the pride of British manufacturing to basket-case overnight, nor even in the space of a few years.
East’s immediate predecessor was John Rishton, who quit in the summer after four awful years at the helm.
Rishton had taken over from the legendary Sir John Rose, who had presided over Rolls-Royce for a golden decade and a half. When the low-profile Rose announced his retirement in the autumn of 2010, he was lavished with plaudits, led by the then UK business secretary Vince Cable, who thanked the Rolls-Royce boss for his “huge contribution” to British manufacturing.
It was indeed a huge contribution – when Rose stepped up as chief executive, the group’s order books were standing at £7.6 billion; by the time he left they were almost £60 billion. Sales surged from £3.6 billion to more than £10 billion and profits were five times higher at £915 million.
Unwillingness
But Sir John left another, less welcome legacy, one that East must now unravel. His unwillingness to engage with the City set the tone for a lack of transparency that must now be addressed as a matter of urgency. The bloated management structure and what East yesterday described as an “accounting fog” must be dealt with in double-quick time.
It’s not just the City that East needs to convince. Sitting on his shoulder with a 10 per cent stake is the US activist hedge fund, ValueAct Capital, which wants the marine division to be sold off and is demanding a seat on the board. ValueAct has shaken up a number of companies, including Microsoft, in a move that led to the departure of Steve Ballmer.
As he promised changes, East stressed that Rolls-Royce is still fundamentally strong. And despite all the warnings, its profits will still top £1 billion this year and its order book stands at a massive £76 billion. Fiona Walsh is business editor of theguardian.com
