Rolls – Royce is cutting 400 management jobs in its flagging marine division in an attempt to shore up confidence in a diversification strategy being challenged by investors.
The job cuts were announced on Monday as part of an operational review by Warren East, whose arrival as chief executive in July was marred by the engineering group’s fourth profit warning in 18 months.
Full details of the review will be published at the end of November, and will be scrutinised by investors such as ValueAct, the US activist that emerged as one of the British blue-chip’s biggest shareholders in July with a 5.4 per cent stake. ValueAct has indicated that it wants Rolls-Royce to focus on the civil aero-engine business that is surfing a boom in aircraft orders.
But Mr East has already declared his support for Rolls-Royce’s diversification into land and sea propulsion as “broadly correct” to counter the group’s dependency on aerospace.
His aim with the marine restructuring will be to strip out management layers and rebase costs in a business heavily dependent on an oil and gas industry struggling with low oil prices.
The restructuring comes just five months after Rolls-Royce announced it would cut 600 factory jobs in the marine division, mainly in Norway, and takes the total planned reduction of the 6,000-strong workforce to 17 per cent. Together the two moves are expected to cut annual costs in the marine business by more than £50m within 18 months. Last year marine accounted for £1.7bn of Rolls-Royce’s £14.6bn annual sales and generated an underlying profit of £138m, down from £262m in 2010.
Rolls-Royce refused to comment on the restructuring. However, people with knowledge of the situation said an announcement was expected early this week.
The cuts are part of a longer-term plan to shift the marine operations’ centre of gravity away from high-cost Scandinavian countries towards Asia, where labour is cheaper and the market is still growing. Rolls-Royce also intends to outsource more of its manufacturing in marine, while retaining high-value research and systems integration in northern Europe.
Mr East is expected to set out this vision at the end of November. However, he is also expected to argue that once the marine business has been stabilised there will be a case for increased spending on technology in the division after years of under-investment.
This could prove controversial with some investors, including ValueAct.
Mr East will have to demonstrate that the diversification will not soak up the resources needed to invest in new generation aero-engines.
Rolls-Royce’s decision to withdraw from the market for smaller engines for single-aisle aircraft to focus on engines for bigger, widebody aircraft — a move instigated by the group’s former chief executive Sir John Rose — has been seen by many investors as a serious strategic error.
Although Rolls-Royce now has 50 per cent of the market for widebody aircraft engines, it has missed out on the boom in short-haul aircraft orders, opening the door for rival Pratt & Whitney to make a comeback.