British Leyland's race to catch up

THE OBSERVER
BRITISH LEYLAND'S RACE TO CATCH UP
MICHAEL BRAHAM looks at a group that turns out six cars where some make sixty.

British Leyland celebrated its fifth birthday fine style last week with a promise that heavy spending would boost output by 35 per cent in five years and the launch of a brand new model, the Austin Allegro.

No wonder Lord Stokes, ebuliant boss of Britain's biggest motor manufacturer, was in high spirits as he left for Madrid, to inspect the groups growin Spanish interests. After five years hard slog, he has at last felt able to lighten his load by making finance chief John Barber his deputy and heir-apparent. Unfortunately, this sign of growing confidence doesn't signal the end of British Leyland's troubles.

Even last week there were some sharp reminders of the problems that Barber will soon inherit. Geoffrey Rippon, Secretary of State for the Environment, chose the very day of British Leyland's birthday shindig to warn that cars will soon have to be curbed in British cities. The Greater London Council promptly put a further damper on the celebrations with a plan to fine first time parking offenders £20. And if these growing pressures on the car were not troublesome enough, maintenance men at the Austin plant in Birmingham threatened to disrupt production of the expensively promoted Austin Allegro

But these headaches are nothing compared with the lingering worry that British Leyland is still not investing enough for its own good. Lord Stokes spoke last week about a five-year plan that would be 'the biggest expansion programme in our history.'

But he was careful not to put forward a firm figure for the total cost. All he did was point out that the largest sum spent in a single year so far was £67 million.

'We see no reason why this annual rate should not he comfortably exceeded,' he said. This was taken to mean that British Leyland had suddenly decided to invest between £400 million and £500 million by 1978. The popular newspapers dutifully rolled out the cliches about boosts for Britain and massive acts of faith. Such euphoric interpretations must be very welcome to the Government but are seriously misleading, not least because 20 per cent of the money will be spent overseas.

As long ago as last January, Lord Stokes made it clear that British Leyland would invest about £70 million this year, rising to around £80 million in 1974. The clear implication was that this rite would be at least maintained in subsequent years. There has been no change of plan or stepping up of the investment programme since then.

'All this excitement about a £500 million boost is a big PR stunt really.' says one industry insider.

Spending at the rate of, say £100 million, a year would certainly be impressive in relation to British Leyland' s net capital employed of £450 million and a stock market value of only £200 million. But by most other yardsticks it is still too little.

'A company that size needs to spend £60 million a year just to stand still,' says a motor industry economist. Fiat and Renault spend about £140 million a year while Volkswagen, British Leyland's other main European competitor, has reluctantly had to cut back its programme from £400 million to £250 million. The Japanese manufacturers expect to invest more than £600 million between them this year and even Ford of Britain, much smaller than British Leyland, is spending £65 million this year and £67 million in 1974. To make matters worse, British Leyland has a lot of ground to make up before it can start competing on equal terms.

'We inherited an awful lot of old. scattered plants,' says Barber, who, at 54, is five years Stokes's junior. The group has made great strides, slashing the number of plants from 74 to 59 and modernising the Cowley works at a cost of £42 million. But it simply has not had enough money to spend. In the last three years pre-tax profits have averaged a meagre £22 million of sales of around £1,200 million. The upshot is that each British Leyland worker is backed by only £2,179 of capital, compared with £6,766 at Fiat and £7,412 at Volkswagen.

The figure for Ford of Britain is about £8,100. The under-investment in new factories and machinery shows up most clearly in British Leyland's productivity record, which by international standards is pathetic. Its employees produce fewer than six vehicles a year each compared with 59 at Toyota. Barber points out quite reasonably, that the picture is not quite as grim as its looks because Toyota buys in more components and concentrates on high volume cars, while British Leyland also builds many luxury cars, like Jaguars, with a disproportionately high labour content. And Leyland does not aim to mechanise to the same extent as Volkswagen for example.

'I think we shall probably end up with a little more labour and a little less equipment than some of the others,' says Barber. 'But I agree that we haven't got the right ration yet by any means'.

Barber, who has no formal financial qualifications but learnt his trade at Ford and AEI is not to worried about finding the money for the planned expansion. 'As far as we can forsee we've got enough cash for quite a few years,' he says.

British Leyland is in no shape to raise fresh funds on the capital market. Last year's £50 million rights issue flopped badly and the shares, now languish near their all time low at 34p. The stock market is deeply disillusioned about the company, partly because of the rights issue, partly because profits declined slightly to £32 million pre-tax last year, £8 million less than in 1968-69, despite booming demand. Investors want to see whether the current year fulfils the promise of the first half, when pre-tax profits soared from £7.2 million to £22.8 million. This improvement owed a great deal to the relative peace on the labour front.

Strikes in the group and among its suppliers, including British Road Services, cost British Leyland only 60,000 vehicles, or 10 per cent of its planned production. In recent years the ratio of losses has usually been nearer 15 per cent. Much of the credit goes to the group's labour relations chief, Pat Lowry, who has masterminded the switch from piece rates to the far less contentious fixed daily wage rate system. This now covers 66 per cent of all British Leyland workers and 85 per cent of those in car plants.

'We are closer than ever before to an acceptable form of industrial peace,' says Lord Stokes. 'Most of our current problems result from disputes which are beyond the control of British Leyland.'

Unhappily, such external disputes, such as the recent strike at Rubery Owen, are still costing the group dearly. 'Where feasible and not unduly uneconomic, we have introduced double sourcing, ' says Barber.

But he blamed supply problems tor the group's sagging market share – it accounted for only 32 per cent of UK registrations in the first four months of this year, compared with 37 per cent in the same period of 1972. 'Whenever the supply improves, our penetration goes up.' says Barber.

Exports are also suffering, as they did last year. 'We're starving everybody to some extent, it 's better than letting some die and others live well.'

The shortage of cars for export is particularly unfortunate as British Leyland has been putting a lot of work into building up and improving its network of dealers overseas. 'People criticise us for not making enough effort abroad,' says Barber.

'The trouble is that if we started being aggressive, we'd only embarrass ourselves because we couldn't supply the damn thing.'

The prime target now is Europe, which is expected to become a 12 million car-ayear market – as big as North America--within few years.

The new Allegro will spearhead British Leyland' s attack, taking on cars like the Renault 12 and Fiat 128. The Japanese, who will soon be wallowing in spare capacity, are expected to make a strong challenge. But British Leyland's penetration in Europe is so pitifully low at present that it can hardly fail to double or treble its sales there, especially if the £21 million investment in the Allegro lives up to expectations. In the UK the Allegro will win some sales from the Morris Marina, with which it overlaps in price. But Barber is confident that the new range, which covers 60 per cent of the home market, will increase British Leyland's overall share significantly.

'I hope we can sustain a 35 per cent market share, but I expect imports to increase their share from 25 per cent to 30 net cent quite quickly'.

He denies that the Allegro is a giant gamble for British Leyland that will make or break the group. Even ignoring the specialist car companies, truck and bus interests and major offshoots in South Africa and Australia, it is still merely one of the four main lines made by Austin-Morris. But the Allegro does carry a lot of prayers in that it is the first entirely new car to emerge from the group since Leyland got together with British Motor Holdings. And it has been designed from scratch to be significantly more profitable than previous high-volume models. As such, it could do wonders for British Leyland's profitability and its image in the financial community.

'I've always said I don't think we can reach anything like our profit potential until about 1976,' says Barber. 'By then we will have a fully rationalised product range.'

He likes to compare the group to a species of tree that takes several years to develop a strong root system but then grows extraordinarily fast. It is called Cupressocyparis Leylandii.