Rolls-Royce: The Trap of Technological Pride

THE financial and emotional shock waves started by the Rolls-Royce Ltd. bankruptcy two weeks ago are continuing to build in intensity. Last week there was considerable hindsight analysis of just how the calamity had happened --and a string of man-bites-dog oddities. The Guardian bannered a warning to foreigners: BETTER NOT BUY BRITISH. In Parliament, Socialists assailed the Conservative government for shabby treatment of a giant U.S. company, Lockheed Aircraft--a theme echoed on the placards of 1,000 Rolls workers who marched outside in one of the world's rare pro-American demonstrations. On the London Stock Exchange, some investors bought Rolls-Royce shares as souvenirs of bygone industrial glory. Cheap souvenirs, at that: the shares sold for as little as 4-c- each v. 88 1/2-c- before the bankruptcy.

Transatlantic Layoffs. By week's end the Rolls crash had cost the jobs of almost 10,000 workers in two countries, including 6,500 laid off by Lockheed in Burbank and Palmdale, Calif. There, Lockheed had been building the TriStar superjet, for which Rolls was supposed to supply the engines. The bitter joke on both sides of the Atlantic was that the Rolls crash has made the 256-passenger TriStar "the world's largest glider."

Many more Anglo-American layoffs could follow, even though most of Rolls seems likely to survive in one form or another. The profitable auto division will probably be sold by the company's receiver to another firm; at least three British automakers are preparing to bid for it. The government has introduced legislation to nationalize most of the engine divisions. Tory spokesmen, however, have been insisting that a nationalized Rolls will have "no obligation" to keep building RB-211 engines under the Lockheed contract, which proved Rolls' undoing.

If the RB-211 is washed out, it is conceivable--though highly unlikely--that Lockheed would have to cancel the TriStar and follow Rolls into bankruptcy; in that case, the Pentagon would doubtless find some way to keep Lockheed producing C-5A cargo planes and Poseidon missiles. The issues are serious enough to have prompted at least one transatlantic telephone conversation between President Nixon and British Prime Minister Edward Heath.

Moral Victory. There were signs at week's end that the worst may yet be averted. The British government announced that it will put up money to keep RB-211 work going for at least four weeks while it tries to renegotiate the Lockheed contract. Lockheed executives dropped hints that they would discuss a higher price for the engines and might forget about charging Rolls penalties for late delivery. In Britain, union members worried about the loss of jobs, and some Laborites, who had pushed Rolls to sign the Lockheed contract, were putting heavy pressure on the government to keep making the engines. Their most telling point: if Rolls defaults on the Lockheed contract, no foreign customer will trust a British bid on a high-technology product again. Anthony Wedgwood Benn, who as minister of technology had hailed the RB-211 contract as an export coup, noted last week that Rolls is also building engines for the British-French Concorde supersonic transport. What reception, he asked, will the world's airlines accord to salesmen who say, "We have a marvelous supersonic aircraft with a Rolls-Royce engine"?

On the other hand, Prime Minister Heath last week managed to make the Rolls bankruptcy and the prospective default on the engine contract sound almost like a moral victory. "For too long, our apparent prosperity has been based on illusions," he said in a speech to young Tories. "Management must rid itself of the illusion that it can go on indefinitely running a business in conditions that do not pay and governments must rid themselves of the illusion that prosperity can be found by pouring out taxpayers' money in perpetual subsidies for uneconomic ventures."

Heath may have been plucking virtue from necessity, but he put his finger on the primary cause of the destruction of a great company. The Rolls-Royce collapse is a tale of illusions on every side --illusions of technological omnicompetence by Rolls-Royce, of export grandeur by the British government, and of driving a hard bargain by Lockheed.

Rolls-Royce was founded in 1906 by F. Henry Royce, a miner's son who started building cars in his home workshop when he became fed up with repairing a French-made auto that he had II bought, and C. Stewart Rolls, an aristocratic auto buff and pioneer salesman who gave King George V his first ride in a car. The company soon diversified into airplane engines and scored an enviable series of firsts: Rolls engines powered the first transatlantic flight in 1919 and the Spitfires and Hurricanes that helped to defeat the Luftwaffe in World War II. It seemed fitting enough that the Spirit of Ecstasy, a statue that is the company's symbol, should be reproduced in miniature and affixed to the hood of every Rolls-Royce auto.

Even without the Lockheed contract, however, Rolls was heading for trouble; for years it had been committing itself to too many costly development projects simultaneously. At the time of the collapse, it was developing engines not only for the Lockheed TriStar and the Concorde, but for a proposed British-West German-Italian combat aircraft. Some 30,000 of its 80,000 employees were working on engines that were not yet profitable.

Sitting Duck. The downfall really began in 1966. The Labor government, desperate for export earnings as the pound staggered toward its 1967 devaluation, prodded Rolls to go all out to win an international competition for the engines for the Lockheed TriStar. Rolls responded enthusiastically, spending an estimated $1,000,000 on its sales campaign, including $192,000 on transatlantic air fares alone. In 1968 the company won an order to build 540 engines for $840,000 each. Lockheed executives crowed that it was "the best price deal we ever made." David Huddie, then head of Rolls' aero-engine division, was knighted for winning such a giant export contract. "The secret," he said, "is to be like a duck--smooth and unruffled on top but paddling like hell underneath."

Actually, the secret was that Rolls had been unrealistic enough to become a sitting duck. In its eagerness to underbid its U.S. competitors (General Electric and Pratt & Whitney), Rolls accepted a fixed price for an engine that demanded technological breakthroughs to produce--and this in an inflationary age. It also committed itself to deliver all the engines by November 1971 or pay stiff penalties. The penalty provisions have never been disclosed, but are believed to oblige Rolls to pay up to $300 million --more than 60% of its last reported net worth. Presumably, the penalties rise as deliveries become later.

Late and Broke. The development problems quickly escalated beyond Rolls' calculations. To keep the engine's weight down. Rolls engineers planned to make the RB-211's fan blades out of lightweight carbon fibers. But the fibers could not stand the crunch when hail or birds were sucked into the 7-ft. fans. Last April, Rolls managers decided to keep working on the fibers but to forge the fan blades for the first few engines from titanium; this meant that they had two expensive development programs going. As time to deliver the engines ran short, Rolls started cutting corners on production, putting parts into manufacture without giving itself time to modify faulty components.

By now, Rolls has solved most of the technical problems, but at the cost of financial exhaustion. Latest estimates are that each RB-211 will cost $1.1 million to produce, so that Rolls faces a loss of $260,000 on every engine. By last November, Rolls was appealing to the government for help. The government responded by promising to contribute $100 million but imposing a management reshuffle that installed Lord Cole, former chairman of Unilever, as chairman.

In board meetings on Jan. 18 and 26, the new managers got technical and financial reports. The technical report was that Rolls would be six months to a year late in delivering engines to Lockheed. The financial report was that the company was running out of money to meet its payroll. Two weeks ago, Rolls once more took its plight tp the government. This time, the Tory Cabinet declined to put up any more money. Instead, it decided to let Rolls-Royce declare bankruptcy, nationalize most of the remains and abandon the engine contract if it could not be renegotiated.

The ultimate effects of that decision --on Lockheed, its airline customers, British industry and Britain's commercial credibility--will take months to become clear. Some lessons of the Rolls-Royce debacle are already apparent. A government can be too eager for exports. For a buyer like Lockheed, the lowest price is not necessarily the best deal, because a delivery failure by a crucial supplier can involve both in calamity. Most important, perhaps, men who think themselves so much the masters of complex technology that they can control its costs and timing may be riding for a shattering fall.

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