BLMC runs out of road

THE OBSERVER
BRITISH LEYLAND RUNS OUT OF ROAD
In the first of a two-part inquiry , MICHAEL BRAHAM loo ks at the plight of Britain 's biggest exporter.

The three day week has knocked a £30 million dent in British Leyland's profits and the Budget has only compounded the damage. The group, which seemed to be moving smoothly into the fast lane at last, has been thrust back on to a narrow, twisting road with, precipices on either side. Valuable export customers have been lost:, some of them for good.

"They haven't been prepared to sit and wait for our cars and will now tend to stay with their new suppliers,"says deputy chairman and managing director John Barber. He concedes that British Leyland's bank balances have drained away during the prolonged crisis. Heavy borrowings are believed to have taken their place and there could be serious problems finding the £500 million needed to finance new plant and equipment. Without this investment, the competitive position of the only major British-owned motor manufacturer will be further eroded.

And that could, ultimately jeopardise 170,000 jobs and exports ;of well over £400 million a year. Mr Healey's Budget, far from providing relief , has piled on further problems. The increase in National Insurance contributions alone will cost British Leyland nearly £4 million a year. The 30 per cent increase in electricity charges and 15 per cent rise in rail freight rates will add significantly to the group's costs. And sales are bound to be affected by the new tax on petrol and the 25 per cent increase in steel prices. The latter will add at least £50 to the cost of a £1,000 car and it is little more than a month since prices went up by about 10 per cent.

If the company does manage to finish the year with a profit , after a first half loss of perhaps £10 million , compared with a profit of £22.8 million last time , it will then have to pay corporation tax at the new, higher rate of 52 per cent. All this would be discouraging enough if British Leyland could , now look forward to a prolonged period of normal working and a sustained demand for vehicles. But the world market is fraught with uncertainties in the wake of the fuel crisis and the signs are that the companv will continue to be plagued by the labour disputes, that are the bane of the British motor industry.

Only last week, production of the Morris Marina ground to a halt at Cowley and 1,000 workers were sent home when 12 men walked out. This was on the very day that British Leyland's chairman, Lord Stokes, was telling 500 anxious shareholders at the annual meeting in London about the heavy loss caused by three day working. The group lost 100,000 vehicles and £100 million in revenue because output was only 60 per cent of normal. Most plants are now back to five-day working, but the lost production can never be made up. The slowest recovery is in low volume areas like heavy trucks, which also happen to be among the most profitable: So the company is unlikely to get back into the black until May at the earliest. Even this prospect is threatened by the engineering workers ban on overtime, due to start at Easter. Lord Stokes fears it will have "disastrous results." British Leyland's maintenance work is bound to be affected and its 2,000 suppliers could be hit even harder. Once again there is the prospect of component shortages upsetting production schedules:

This is a reminder of just how vulnerable British Leyland is to the effects of disruptive action outside the group. The company has gone a long way in recent years to putting its own house in order. 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 wage-rate system. Lord Stokes points out proudly that the number of man-hours lost through internal disputes fell 41 per cent last year. But the group is losing millions of man-hours a year through external disputes like the miners strike, last year's gas strike and stoppages at major suppliers like Rubery Owen.

Even in today's depressed conditions, the company cannot produce enough vehicles to meet demand in the home market and overseas.

"We can sell all the vehicles we can make," says Barber, now heir-apparent to Stokes. "The first thing is to restock our dealers and refill the export pipelines."

Production problems been a constant headache since Leyland Motors merged, with British Motor Holdings to form British Leyland in 1968. Long waiting lists built up in the boom years of 1972 and 1973, giving car importers the chance to grab a third of the market. The production difficulties; largely attributable to strikes, help explain why British Leyland, has slipped down the world league since it was formed. In 1968 it was the second-biggest motor manufacturer outside the United States. Now there are four companies - Volkswagen, Fiat, Toyota and Datsun , which produce twice as many cars as British Leyland. This must be a disappointment to those who hoped that bringing together Austin, Morris, Triumph, Rover and Jaguar -a move blessed by the last Labour Government - would ensure that Britain stayed in the first division. But Barber insists that the group, "has never been in the super-high volume business. We don't have any aspirations to be big for the sake of being big," he says.

"We think we have our own special niche in the market with good quality, reasonable volume cars. We plan to expand output by about 40 per cent over the next few years and with this modest expansion we will remain viable and profitable."

It is certainly true that, before the latest setback the group was in better shape than at any time since the merger. After more than five years of hard , slog, the model range had been trimmed and strengthened, the home market was buoyant, profit margins were improving and labour relations were taking a turn for the better. At the end of the 1972-73 financial year ,last September , there was a best-ever profit of £51 million before tax and ,the group had £51 million cash in hand. Most important of all, the high volume car assembly plants at Longbridge and Cowley had been modernised for Marina and Allegro production at a cost of over £60 million. In the early years, these outdated plants had been millstones round the corporation's neck and dragged down profitability. The old BMC management had simply not invested enough money in re-equipment.

"When I walked into the Cowley works in 1968 . I couldn't believe my eyes", says one industrialist closely concerned with the Leyland-BMH merger.

"There were belt-driven lathes at a time when some firms were already using numerically controlled machine tools."

But Lord Stokes has not been able to invest as much as he would like because of the group's poor profitability prior to last year. The upshot is that each British Leyland worker is still backed by less than half the capital that backs each man at Fiat, Volkswagen and Ford of Britain. This in turn makes it difficult to bring productivity up to the level of other companies—the value added by each employee is 75 per cent lower here than in Gerrnany—and profits are held back. That means there is less money to invest in plant and equipment and the company stays stuck in the slow lane. That is why British Leyland's expansion programme announced a year ago, is of vital significance. For the first time priority can be given to the specialist car division ,Rover-Triumph and Jaguar and to truck and bus production. Jaguar output for example, is to be doubled to 60,000 a year

The original plan to spend £100 million a, year was quite modest by world standards . Ford of Britain, which is far smaller and did not suffer years of neglect is now spending £65 million a year but at least the money is going into high profit areas. But British Leyland has already admitted that the body-blow to profits will force it to spread the programme over seven years instead of five, which is equivalent to trimming the annual rate by 30 per cent. And the idea of selecting a 'green-fields ' site for a completely new assembly plant by the end of the decade has been quietly dropped.

The big question remains: How will British Leyland finance even this ' stretched ' programme, which involves finding £70 million a year at current prices ? The British market seems likely to shrink 30 per cent this year, the German market 50 per cent. British Leyland analysts are downgrading their forecast for Europe as a whole from 10,250,000 units to 8,250,000 units for 1974-75. It is true that the group will not suffer immediately, since it cannot produce enough to meet demand at the moment. But the gloomy projections make it clear that other major manufacturers will be stuck with spare capacity and that competition is likely to be cut-throat.

British Leyland cars like the Allegro are highly competitive at present thanks to the downward float of the pound. But the company has been unable to take advantage of this to penetrate European markets because of supply difficulties. Barber concedes that British Leylands progress has "slipped a couple of years" because of the cash outflow during the miners strike, the fuel situation and the economic downturn in Europe. But he adds firmly: "We're convinced that the motor industry is still a growth industry though our forecasts suggest that growth is about three years in arrears"

Lord Stokes maintains that "given even a reasonable industrial and economic background to operate in, British Leyland could prove very profitable and rewarding business."

But some observers see little chance of that climate emerging and are seriously worried about the implications for the group.

"We know the profit potential is £100 million", says one motor industry analyst. "But the company is still very vulnerable to outside strikes and even if the market holds up, the group will never get a chance to produce that kind of profit on a consistent basis."

He believes that over the next three years British Leyland will need more money than it can hope to generate. After all, with stocks of £400 million in the last balance sheet, it will need an extra £40-£50 million a year just to finance stocks if inflation continues at the present rate. The latest published figures suggest that the group could borrow about £150 million without getting overstretched. But borrowings are expensive and may already be well on the way to this figure.

And there must be a limit to the amount the banks will be prepared to lend to a company making little or no profit on sales at £1,500 million. It would hardly be possible to ask shareholders to put up more cash because it is only two years since the company raised over £50 million through a rights issue at 45p. The share price Is now down to 14p and the whole company has a market value of only £80 million. That compares with £320 million soon after the merger.

"If you worried too much about the short-term share price I think you'd have a nervous breakdown" says Barber. "We can still see that our cash needs are covered for the next two to three years."

The proposed sale of the Spanish offshoot to General Motors for £27.6 million, will ease the immediate pressure, so long as the deal is sanctioned by the Spanish Government. If and when British Leyland does run short of money, the Government could certainly not stand by and see Britain's biggest exporter go under. The funds would have to be found to preserve both export sales and jobs, though this might mean nationalisation or State participation on the lines of the BP shareholding.

That might seem revolutionary, but there are good precedents in Europe, including Renault which is entirely Government-owned. It maybe only a matter of time before Fiat, which made an operating los of £45 million last year, goes the same way. So there is no reason why the British Government of the day should be abashed about standing behind Britain's biggest motor company. After all the industry as a whole provides one in eight, households with their family incomes.