Doubt was cast yesterday on the chances of saving 2,500 engineering jobs on Tyneside and in Derby, as Rolls-Royce put a for-sale sign over Parsons Power Generation. The decision, which came as a surprise to workers and union officials, will cost the company pounds 248m - significantly more than the pounds 175m taxable profit the whole of the Rolls-Royce group made last year.
Rolls-Royce's recently appointed chief executive, John Rose, blamed the move on intense international competition. "Parsons is a very small player in steam-power generation with less than 1 per cent of the market ... we didn't see a way of it making a material contribution."
Mr Rose gave Rolls-Royce until Christmas to find a buyer for the two factories. But one City analyst, who didn't want to be named, said: "It's going to be very tricky to sell. To be honest, I just don't think it will find a buyer."
Parsons Power Generation Systems, which makes steam turbines for larger power stations, employs 1,600 people at the site it has occupied in Newcastle- Upon-Tyne for more than a century. The workforce has steadily declined since the 1960s when the company had more than 12,000 staff. In 1985 Parsons employed 5,300 people. Some 900 of the 2,500 jobs that are now under threat are at Rolls-Royce International Combustion in Derby.
Unions condemned the sell-off. According to Barney McGill from the AEEU, Parsons had until recently been taking on temporary staff to finish contracts. He said: "The news was heard quietly by the workforce. Everyone is shocked and devastated."
The two companies lost pounds 30m last year on a combined turnover of pounds 280m. This represents 23 per cent of the sales of Rolls-Royce Industrial Power, the half of the company which has increasingly been overshadowed in recent years by the higher profile aerospace division.
It is the biggest strategic decision so far taken by Mr Rose since he became chief executive in May. His predecessor, Sir Terrence Harrison, who spent much of his working life in the power generation industry with Northern Engineering Industries (NEI), which Rolls-Royce acquired in 1989, was last night unavailable for comment.
Analysts expressed surprise at the scale of the pounds 248m write-offs which will hit the results for the half-year to the end of June. Some pounds 78m of this relates to goodwill from the pounds 304m takeover of NEI in 1989. In addition, pounds 70m will pay for the possible closure of the two factories, of which pounds 35m represents redundancy costs, should they arise. A further pounds 100m covers the costs of finishing existing contracts.
"That's a huge number," said Chris Avery from Paribas Capital Markets. "Inevitably, productivity will suffer as staff try to make the work last longer, but it also suggest several contacts have gone sour."
Next year Parsons will complete a pounds 450m order for a gas-fired power station in Andhrapradesh, India. But two larger Indian coal-fired contracts have not materialised.
The power generation business has become increasingly global as guaranteed large-scale supply contracts with the UK electricity industry dried up after privatisation. In the switch to gas-fired generation, contracts have tended to go to bigger players, including Siemens, ABB of Sweden, General Electric of the US and Mitsubishi.
Babcock led the way last autumn by selling its 100-year-old boiler-making factory in Glasgow to Mitsui of Japan for pounds 56m.
Rolls-Royce,was keen to stress the chances of selling the two plants. This could take the form of joint venture where it would retain a minority stake, or a deal to continue supplying research and development know-how to the purchaser.
In its statement the company pledged to concentrate on smaller power generation equipment of up to 150 megawatts based on gas turbines. These use aerospace technology such as the Trent engine, which is being used to heat and power other Rolls-Royce sites in Derby in a joint venture with National Power.
Asked about two business put up for sale, Mr Rose explained: "International Combustion has over time been quite profitable and it's very saleable." But he admitted the chances of selling Parsons were less good.
The decision casts doubt on Rolls-Royce's 15-year alliance to share expertise in power generation with Westinghouse, which began with high hopes in 1992. Westinghouse has long-standing partnerships with Mitsubishi and Fiat.
The announcement appeared to have caught Westinghouse by suprise. Reg McIntyre, a director involved with the relationship, first knew of it by reading a faxed press release. He said: "We weren't aware of this ... it is a surprise." Rolls-Royce shares ended the day up 2.5p, to 227p.
Comment, page 19
Rise and fall of a world power
1889: The company is begun by Sir Charles Parsons, the inventor of the first practical steam turbine.
1890: The Newcastle and District Electricity Supply Company lights the streets of the City using Parsons equipment. The first such use of steam turbines.
1897: The Turbinia, the world's first steam turbine powered ship, is demonstrated at the Diamond Jubilee Naval Review at Spithead.
1912: The world marvels at the Titanic, powered by a huge Parsons turbine.
1937: HMS Anson launched, a battleship fitted with Parsons machinery.
1960s: Parsons employs 12,000 people at the factory in Heaton, Newcastle- Upon-Tyne.
1968: Merger with Reyrolle, maker of electrical switchgear.
1977: Parsons merges with Northern Engineering Industries (NEI), another Newcastle-based manufacturer of power generation equipment.
1989: Rolls Royce PLC (no longer connected with the car company) takes over NEI. It pays pounds 304 million.
1996: the last part of the Parsons empire faces possible closure.