Why Rolls-Royce is axing thousands of jobs

  • Video report by ITV News Business Editor Joel Hills

4,600 jobs are going at Rolls-Royce, two thirds of them in the UK, most of them from the company’s principle site in Derby. This is a disaster for the city. The jobs will be highly paid, proudly held and difficult to replace.

“This is not about returns to investors, this is about making the business fit for the future”, says the chief executive, Warren East. He acknowledges this is a “horrible” but “necessary” decision.

The roles are “non-manufacturing” - corporate and support and staff whose responsibilities often “over-lap and duplicate.”

What’s puzzling is that it’s taken Warren East three years to realise Rolls-Royce is carrying a legion of middle-managers it doesn’t need.

He announced a series of redundancies, shortly after taking over in 2015, declaring the business “bloated and cumbersome”. The assumption was that Rolls Royce is now in better shape.

One quarter of the UK workforce is going. The decision will obviously be unpopular with the unions who won’t easily buy the message there’s still fat that needs burning.

Chief executive, Warren East says the decision is a 'horrible' but 'necessary' one. Credit: PA

The string of profit-warnings of 2014/15 seem a distant memory, the order book is heaving, aircraft engine production is shifting up through the gears. Rolls-Royce is not in any trouble, it’s just not as efficient or as profitable as chief executive believes it should be.

Britain bears the brunt of the jobs cuts so this is unwelcome news for the government too. Rolls-Royce excels at precisely the sort of highly skilled engineering that the government wants us to sell ruthlessly to the rest of the world. Rolls Royce is global but two thirds of its annual £1.3 billion research and development budget gets spent in Britain.

So whose idea was this? In 2015, ValueAct Capital, a foreign investor from the US built a 10% stake in the company (a pretty aggressive act) and successfully demanded a seat on the board.

Rolls-Royce has traditionally taken the long view, hedge funds have shorter horizons and will look for a return on their investments. On the homepage of its website ValueAct Capital gives prominence to a quote from Warren Buffet: "True independence is a willingness to challenge a forceful CEO when something is wrong or foolish".

It's hard not to warm to that kind of swashbuckling spirit but it may be the driving force behind today’s announcement. At time of writing, Rolls-Royce’s shareprice has risen.