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Rolls-Royce – Of Strange New Myths and Damaging Uncertainties By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

rollslogAs others probably also have been this morning I was quite shocked to read the front page Financial Times headline hype suggesting that “the Cabinet is weighing nationalisation of Rolls-Royce submarine business” and that David Cameron’s office “has had plans drawn up to protect UK interests as Rolls-Royce seeks to recover from five profits warnings in less than two years”.

Adding fuel to the flames The FT article suggests that “other scenarios include [a possibility] of a merger of all or part of Rolls-Royce with BAE Systems, the UK’s biggest defence group”. What absolute nonsense this is!

My first thought on reading this was where on earth did all this come from and my second, who might be behind the attempt to stir up even more trouble and damage what Rolls-Royce management are attempting to do in the radical and necessary overhaul aimed at seriously reducing the fixed cost base?

Yes, it is true that issues over readiness of production engineering plus some other matters have been expressed by Defence Equipment & Support (DE&S) and which as I am sure you know is the MOD procurement unit based at Abbey Wood and that happens to be responsible amongst many other things for Successor programme delivery.

And it is probably also true that the Treasury has been looking at various possible options for future delivery reporting structures to ensure that when production is started that the Successor nuclear submarine programme is delivered on schedule and, following the achievement of ‘Main Gate’, on whatever costs are finally agreed.

Neither am I in any doubt that skills shortage in this very specialist nuclear area of activity are almost bound to be real but then I am content that along with the other ‘Successor’ partners, all will meet the objectives set not only on current development programme development objectives but also, no matter who is chosen to oversee eventual delivery responsibility, that it will be delivered on schedule and on budget.

In my view to confuse the ‘Successor’ nuclear development issues, as this unfortunate article appears to do, with those that new CEO Warren East talked to investors about just three weeks ago when he attempted set out problems and a range of solutions as to how Rolls-Royce intended to get its fixed costs under control is as regrettable as it is potentially damaging to confidence of all concerned.

To suggest that nationalisation is even a thought process in the minds of anyone currently let alone that it may become a possible issue and irresponsible in the extreme. Yes, Rolls-Royce may have a US shareholder breathing down its neck and that has been reported as wishing to see parts of the group hived off. I doubt that will occur and I very much hope that it will not. The sum of the parts is what makes Rolls-Royce what it is and provides it with global strength.

As to nationalisation all I can do is to repeat that such notions are as ridiculous and they are unnecessary and hugely damaging. As to the suggestions of a possible takeover from a hostile source let me remind that Rolls-Royce has a ‘golden government share’ that safeguards the company from a foreign takeover through a permission based overall (25%) limitation restriction on foreign shareholding and that also restricts individual foreign shareholders to 15%.

At this stage let me again repeat what I wrote three weeks ago when Warren East set out plans to reduce fixed costs and for the laying new foundations for long term success. I said then that ‘clearly, the next two years would be torrid and that it goes without saying that the company is in for a period of huge uncertainty and change. Warren East and David Smith will do whatever needs to be done without fear or favour’. I pointed out that despite the various problems that it needs to resolve Rolls-Royce has a forward order book of £76.5bn and also, that in just a few more years’ time, it will be able to claim to have 50% of the global wide bodied engine market’. I accepted that ‘mistakes have been made and the company is certainly top heavy on management’ but I chose to remark that ‘those engaged in engineering should have no concerns through this important and necessary period of change’. I reminded also that vast amounts of Investment has gone into product, manufacturing and achieving high global market share positions in Commercial, Defence, Diesel and Marine activities’. Finally I provided my view that ‘now is the time to respond to the challenges the company is faced with, to reduce its complexity, to streamline senior management and to lose expensive and unnecessary people. That is just what I believe Rolls-Royce is now undertaking to do and while I accept that the process of change may take even three years before real bottom line results show through this is the correct and only action to tale.

Back to the FT article today and not only am I bound to wonder where this ‘story’ has come from but more importantly why? Yes, there is a possibility that the Government has fired the odd warning across the bow of Rolls-Royce senior management from time to time of late following concerns that I would imagine have been expressed by DE&S in relation to production engineering and investment requirement. But I can hardly ignore that such a dangerous and potentially damaging outburst at this time and one that is potentially the worst I have ever seen expressed against one of the most important engineering and manufacturing companies that Britain has ever had might have had some kind of ulterior motive behind it.

Yes, it would not surprise me in the least had Minister of State for Defence Procurement, Mr. Philip Dunne in light of the various issues that led CEO Warren East to issue a further profit warning some weeks ago not engaged with Rolls-Royce and expressed concern to ensure that the company is capable of performing all of its nuclear obligations. That is what is supposed to occur and I suspect that if he did then he will also have been reassured by the company that it is determined to carry out all of its obligations which include the design and servicing of nuclear reactors that power the existing Vanguard class submarines and those under development for the Successor class submarines.

Yes, as I have already suggested, Rolls-Royce may well be behind the curve on some of the preparation and pre-production engineering work and possibly slow in putting in place the various testing and other equipment required for such a massive project. But from my perspective and knowledge of how these things I am in no doubt whatsoever that the company will get the job satisfactorily done. I accept also that skills shortages may be an issue here and that these too could well have played a part in any development delays. Warren East is by the way quoted in the article as saying, “I am well aware of the dissatisfaction and of what we need to do to address it” adding that “we will be addressing it”.

Concerns expressed in the FT article this morning and in other publications late last month led to suggestions that the Government may be intent on finding new ways of managing the ‘Successor’ nuclear submarine project. The idea, if my understanding is correct, is that the Successor programme should be moved from direct MOD DE&S responsibility to that of a new delivery body headed by an experienced commercial specialist who would act as the single sponsor for all aspects of the defence nuclear enterprise covering procurement to disposal and that this should report to the Treasury as opposed to the MOD.

Clearly huge amounts of work are going on both in Governments, MOD and by all those involved in the Successor development partnership. So they should and from a delivery reporting structure who knows, it may be that the notional idea being put forward by (I assume the Treasury) may have merit. Currently, management of the Successor Programme is the responsibility of the Ministry of Defence Future Submarines Project Team for which I believe the Senior Responsible Owner for the programme within the MoD structure also happens to be to be Chief of Materiel (Fleet) Royal Navy and Chief of Fleet Support on the Navy Board.

In relation to any possible development delays at Rolls-Royce it is also worth noting that separately in what is called the ‘Core Production Capability’ Project there has been a related 11 year plan to refurbish the Rolls-Royce submarine reactor production plant at Raynesway, Derby, to ensure that it can continue to produce reactors for all future Royal Navy submarines, including Successor over the next forty years.

No one should underestimate the huge amount of work required and currently going on and for the record the structure of the Successor programme is being run as a number of sub-programmes covering submarine design, design of a new PWR3 nuclear propulsion plant, and design of a ‘common missile compartment’ which will house the Trident missile launch tubes in collaboration with US submarine designers. The sub-programmes are as follows:

  • Future Submarines.
  • Next Generation Nuclear Propulsion Plant.
  • Nuclear Propulsion Critical Technology.
  • Common Missile Compartment (Non-Recurring Costs / Assessment Phase).

 

Within these sub-programmes work is broken down further into different projects and contracts covering specific areas of work.

 

CHW (London – 14th December 2015)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710 779785

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