Vickers, which owns Rolls-Royce, could not wait any longer for the upturn. Despite cutting 1,700 jobs in recent years, the luxury car maker lost between pounds 12m and pounds 15m in the first half of the year, taking the group into the red with a pounds 4.1m pre-tax loss and prompting it to cut the interim payout from 3.7p to 0.5p, following a cut in the final from 6.2p to 2.3p.
Even this latest round of redundancies has failed to bring Rolls-Royce back to profits. Break-even has come down to 1,400 cars but the company expects to sell only 1,250 to 1,350 this year. It will need a recovery next year to bring it into the black.
In the City the question being asked was whether Vickers should have taken this tough action earlier. Should Sir David Plastow, when he was chairman, have cut jobs and moved to buying in more components? To be fair to Sir David, now at Inchcape, demand has slumped so suddenly that it was difficult to predict. And the decision to use bought-in components - the company promises to continue working its own leather and walnut wood finishes, and making radiators - remains risky given Rolls-Royce's reputation for craftsmanship. Dealers' reactions will be watched carefully.
Rolls-Royce remains the key to Vickers, even though its other operations, ranging from Challenger tanks to incubator units, are performing well in the circumstances. Losses at Rolls, together with redundancy and others costs that will be charged in a pounds 12m exceptional item in the full year, will push borrowings up from 22 per cent to 45 per cent by the year end. If there are no large defence orders, the company may well have to consider disposals next year. Its decision to cut the dividend makes good financial sense.
The criticism is that Vickers should have sold Rolls when the going was good, before recession took its toll. Shareholders must hope that Vickers finds a way of selling Rolls in the next upturn, having failed in the downturn.
Recovery potential is enormous - automotive made profits of pounds 41m in 1990 - but for the time being it is elusive. The shares have underperformed by 57 per cent in the past year but now offer an attractive punt on the upturn.
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