A few days ago Warren East, chief executive of Rolls-Royce, announced that the company plans to make 4,600 workers redundant; 3,000 in the UK of which most are in Derby.
Warren East has been boss of RR for three years in which period the share price has lifted from under £6 to nearly £10. You may recall that most of his business life was spent at ARM Holdings that grew from a small company in Cambridge designing microchips to a world leader in the field. It cannot be much fun for him to be at the helm of RR. ARM was such a success because the company was innovative in designing ever smaller chips in a market that grew exponentially. He never had to deal with bad news or sack people on this sort of scale.
The job losses he announced are almost all in management and he reckons will save £500 million a year. It makes business sense but on a human scale there aren’t 3,000 jobs in Derby for those redundant workers to go to. There will be some voluntary redundancies but a lot of individuals and families will be deeply concerned about their future. It will not have given Warren East any pleasure to mete out this misery.
But I am a hard-hearted investor, so should I buy shares in RR? Emphatically no because there are too many things that can go wrong; things outside the control of Warren East. As at ARM the trick is to keep designing a better product and there is a risk that foreign competitors learn to do it better and/or cheaper. Indeed a former RR employee was arrested near Derby a few days ago on suspicion of selling RR technology in China. Leaving the EU may disrupt RR’s exports. Richard North, in his EU Referendum blog, writes:
The issues addressed centre on the points I have raised in my posts – that, in the absence of a Withdrawal Agreement, approvals of aircraft and components made or maintained (or designed) in the UK will no longer be valid.
As a result, “any aircraft containing engines, parts and spares manufactured in the UK will not be able to fly under EASA’s jurisdiction”, and UK businesses “would not be able to deliver products such as engines and propellers to EU manufacturers, thereby stopping aircraft production in the EU”.
One has to step back to take in the full implications of what is being said here, not only will thousands of aircraft be grounded but also no further aircraft in the entire EU area can be built or maintained using parts manufactured in the UK, closing down an industry turning over in excess of £70 billion a year.
He goes on to say that this will probably be avoided by the UK’s withdrawal being deferred beyond March 2019 but nevertheless there will be disruption to the aviation industry in Europe.
Suppose there is no Brexit disruption? Then the Pound will strengthen, damaging RR’s competitiveness. Another key risk is RR’s ability to win overseas contracts. In the not-so-distant past the technique was apparently to bribe key officials and RR may find it hard to develop a new marketing strategy that is squeaky-clean and successful.
The one thing Rolls-Royce has going for it is its leadership. Warren East has surrounded himself with a good team that can deliver good outcomes but I am concerned that there are too many factors outside their control that may impede their recovery plans.
Some of you will be aware that Warren East ran in the Venice marathon a few years ago – I was watching with an Aperol spritz in hand – so this is apt for Warre East, SGE (super-good-egg).
You failed to mention that Warren East is the fine organist for St Peter’s Boxworth where we have both heard him play; a very grounded individual which in my book is a positive ( and rare) attribute for a CEO.