Last big spender faces the music: Is the survival strategy of Lucas Industries the best in Britain or just an ill-fated gamble? Terence Wilkinson and David Bowen assess its chances
Sunday 06 September 1992
His job will be to convince analysts that the immense gamble he has taken with the future of Lucas, its employees and shareholders will pay off. If he fails, one of the most distinguished names in UK automotive and aerospace engineering will be in for a rough ride; even, at the extreme, the loss of its independence, although no one is yet suggesting this is a serious prospect.
The gamble is this. During the 1980-81 recession, Lucas went into loss for the first time and reacted by slashing its spending. It subsequently rued the day, finding it had lost positions in markets where increased efficiency and product innovation were essential.
The company did not intend to make the same mistake twice. Unlike its fellow vehicle component makers GKN and BBA, and to a lesser extent T & N, Lucas is striding through this recession with all guns blazing.
Despite collapsing profits, it has so far set its face against taking an axe to its budgets for research and development and capital investment. They have been running only slightly below the record levels of pounds 104m and pounds 138m spent in the 1990-91 financial year.
While GKN, BBA and T & N have been ruthlessly running their businesses for cash, by pulling tens of millions out of working capital, Lucas has kept stock levels up, in order to hit the ground running when demand recovers.
This is despite the fact that Lucas, which at the peak in 1989-90 made pre-tax profits of pounds 191.2m, may have made only token profits or even an underlying loss last year, before exceptional items. The most notable of these was pounds 90m drawn from its pension fund. This is now being challenged in the High Court by disgruntled Lucas pensioners, but it has been the only thing preventing the high-spending balance sheet from flying completely out of control. At the year-end, debt was about 40 per cent of shareholders' funds, after a massive underlying cash outflow.
Sir Anthony is a passionate advocate of the long-term attitude that industrialists argue is indispensable if the UK is to have a manufacturing role in the world. But the City, which has stumped up pounds 260.3m for two rights issues in seven years, is getting increasingly worried. Lucas says it believes long-termism should be extended to its shareholders, and has so far maintained its dividend payments. But now that the automotive scene in Europe is getting, if anything, worse, and aerospace component demand remains flat, there are worries that 12 October will finally bring news of a cut.
'Something will have to give,' says Ed Wright of the stockbrokers Kleinwort Benson, although he is not forecasting a dividend cut. Another crucial element in the City's picture of Lucas will be the restructuring programme.
Details of what is likely to be a two- to-three-year exercise are thin, but the emphasis is likely to be on eliminating duplication of facilities in the core brakes, engine controls and actuation activities. Disposals of military communications companies and some applied technology businesses are also on the cards. There may be book losses on some disposals and money will be spent on factory relocation and investment. Redundancies are inevitable - some expect at least a thousand - on top of the hefty cuts Lucas has made, if somewhat belatedly, in day-to-day operations.
To some extent the City has voted with its feet. Since May the shares have plunged from 155p to 87p; as a result the dividend yield has jumped to 10.6 per cent. Worries that the pensioners may scupper Lucas's pounds 90m pension credit drove the shares down as low as 77p last week.
If Lucas does come a cropper, many in industry will be distressed. For although its stock was never high in the City, management consultants frequently pointed to it as a company that was, from a strategic point of view, doing things right. Indeed, some would say it was one of the few British companies with a chance of becoming 'world-class' - meaning it could take on and even beat the German and Japanese giants. The problem was that it was trying to do this without German or Japanese levels of financial backing.
Like much of the British engineering sector, Lucas was booted into action by the recession of the early Eighties. It was still a famous name in electrical bits for cars, but no longer a respected one: its American nickname, Prince of Darkness, told the story.
Although the aerospace side it had started to assemble in the Seventies provided a cushion, the group announced its first loss in January 1981. This, according to Sir Anthony, 'had a shattering effect on management'. It reacted in the same panic-stricken way as many companies - slashing 10,000 jobs and closing several factories.
Having survived the initial shock, however, its chairman, Sir Godfrey Messervy, along with Sir Anthony and the manufacturing director, John Parnaby, set about reshaping the company to make it more resilient. Individual businesses were told to identify their competitors, see how they matched up, and demonstrate how they could bridge the productivity gap. If a plan was practicable, it would be approved; if not, the business would be sold or closed down.
Of the 150 businesses, 35 failed the test. By this self-selecting procedure, the company reshaped itself towards more advanced and more international activities. Aerospace and advanced automotive products were bolstered, basic car components were discarded (Lucas's foundation stone, car lighting, was sold in 1987). To achieve 'critical mass' - the size needed to generate adequate funds to sustain R & D spending - Lucas started to buy companies, especially in US aerospace. As a result of the reshaping, the company's geographical spread shifted: employment overall has slipped modestly, but in the UK it has tumbled from 65,000 to about 25,000.
But the activities that most impressed the manufacturing world were Dr Parnaby's. Although many British companies were paying lip service to Japanese-style working practices, he got on with the business of installing them. Lucas's unions, which had had a fearsome reputation in the Seventies, accepted the changes.
During the latter half of the Eighties, the plan seemed to be paying off. Profits rose steadily. Lucas had or was building strong positions in several high-tech areas, including diesel injection systems, petrol engine management systems, anti-lock braking and actuators: the Patriot missile was guided by Lucas-made flaps. The group also had more than 30 per cent of the European car brake market.
Sir Anthony's decision to keep on spending through this recession was in one sense logical, given the long-term nature of the restructuring. The process had its own momentum, and even had the recession not arrived, it would have been several years before Lucas could possibly have matched the biggest Germans and Japanese.
The group did, however, run into serious problems, not all of which could be blamed on the new recession. First, the revival plan was going slowly: even now Dr Parnaby's group is no more than half-way through its task. The British factories were in worse shape than was at first thought, and old-fashioned cost-cutting was neglected. Only this year has Lucas started slashing: 3,000 redundancies have already been announced.
Secondly, some of the American acquisitions needed overhauls. The starter engine plant in Cleveland, for example, was made of wood and was heated by coal: Lucas had to build a brand-new factory nearby.
In retrospect, it seems the company bit off more than it could chew: had it made fewer purchases, progress would have been much faster. The group will certainly announce disposals next month - including some recent acquisitions.
Thirdly, some of the activities in which it has invested most heavily have failed to live up to expectations. Lucas, like many component makers, believed anti-lock braking (ABS) would spread rapidly, and possibly become mandatory. It invested heavily in ABS, assuming that the price per unit would drop from pounds 1,000 to pounds 600 as sales increased. In the event, the recession meant that people stopped asking for ABS, and Bosch aggressively cut the price of its systems to snatch the lion's share of the market. Lucas, without the massive financial backing of a private German company, was unable to compete.
Finally, and most seriously for the City, cracks started to appear at the top of the Lucas hierarchy. David Hankinson, who had been finance director for only three years, resigned in March. Lucas said it was because he did not fit into the team: this was true, but reinforced the impression that this was a company dominated by engineers who do not have the interests of the financial community uppermost in their minds. Mr Hankinson was not replaced for six months; then John Grant took over.
It may, in fact, be personalities that decide how the City treats Lucas now. Sir Anthony is highly capable, but is no showman. Mr Grant is an unknown quantity. The best bet is undoubtedly Sir Anthony's designated successor, Tony Edwards, who spent much of his career in the US and has fluency to match. To him will fall much of the task of explaining how Lucas intends to drag itself out of the quagmire, and set course once again for the heavens. He will need all the fluency he can muster.
(Photographs and graph omitted)
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