ROLLS-ROYCE GOVERNMENT BAILS OUT U.K. INDUSTRY’S FALLEN IDOL

Press, Volume CX, Issue 32460, 21 November 1970, Page 16

ROLLS-ROYCE GOVERNMENT BAILS OUT U.K. INDUSTRY’S FALLEN IDOL

(Reprinted from the "Economist" by arrangement)

In 1968, Rolls-Royce made a major and catastrophic error of judgment, for which the chairman and chief executive, Sir Denning Pearson, paid this month with his job. The company took on a fixed price contract to supply Lockheed with engines, engine pods and all the associated controls for the Tristar air bus. It then estimated the cost of enveloping the engine as £65 million. It now puts the figure at £135 million Having miscalculated by a margin of more than 100 per cent, the company also failed to judge the way manufacturing costs were going. As a result it is going to lose something like £35 million on the first 600 engines built and delivered between now and 1975.

There were only two things the Government could have done in these circumstances, when Rolls-Royce had declared a loss of nearly £5O million for the first half of the year, and the City had turned down its request for a further £3O million even though it was backed by the full prestige of the Governor of the Bank of England. One would have been to stop work on the engine. That was hardly feasible; it would almost certainly have bankrupted Lockheed in America, within days of the Tristar’s first flight this month, and Washington, for one,' would never had forgiven us. Continuing story This left no alternative but to give Rolls-Royce the money it needed to stay in business and finish the engine. The hand-out amounts to another £42 million from the Government and £lB million from . the City, or £6O million in all. Add the £47 million the Government was already paying towards the cost of the engine, and the £lO million promised by the Industrial Reorganisation Corporation, and the total advance comes to nearly £l2O million, almost all of it from public funds. And what will this do? Merely allow Rolls-Royce to meet its contractual obligations to Lockheed. But this is not the end of the story. The RB-211 is not the only engine with which Rolls-Royce is having trouble; it is merely the one that has brought it to the brink of bankruptcy. Every single Rolls-Royce engine under development, from the Olympus in the Concorde downwards, is falling behind schedule or below performance. This is giving rise to an anguished stream of complaints from aircraft manufacturers all over Europe whose projects depend for their success on the engines forking properly.

lever is not going to set the Rolls - Royce management right. Who will take over? What the company needs now, in its present shattered state of morale, is to be linked with another, large engineering group: whose managers could straighten out not only the boardroom, but also departments like the stress office, which are the life blood of a technol-ogy-based . company like Rolls-Royce. But who, this side of the Atlantic, would take it over? The obvious solution of tying the company to Hawker Siddeley will not work. Rolls-Royce sells engines to aircraft makers who are

I deadly competitors of Hawker Siddeley. European gov|emments, whose aircraft industries are dependent on Rolls-Royce for many of their engines, have suggested turning it into the nucleus of an all-Europe aero-engine group, into which their own engine companies would be merged as well. But they were motivated more by the desire to have some leverage in Derby, in order to get the engines they were using put right, than by a real feeling that this was technically the right and sensible thing to do. Short of a take-over, perhaps even an American one, the way out of the wood will be slow, expensive, and not necessarily successful.

Fundamental error A great deal of money, extending over several years, will be needed to put all the projects right. This is more serious than coming an isolated cropper over some proected costs. Better companies than Rolls-Royce have done that before, although not necessarily on such a scale, both the American air buses will cost at least a third more than budgeted. But a company that takes on more projects than it has engineers to tackle makes a much more fundamental error of judgment. RollsRoyce has repeated that fundamental error, persistently over the years. The RB-211 might not be in such , a mess today if the manage- . ment had not already got ■ more engines under development than any American engine company would attempt to tackle. And RollsRoyce is attempting, still, to get government support for yet another radically new engine for the air bus market. This is not something for which Sir Denning Pearson can carry the sole blame. The errors reflected the attitude of his entire management team. It follows that merely replacing Sir Denning by Lord Cole of Uni-