Post-Brexit reports indicate that manufacturers in Britain are benefitting from the drop in sterling but that hasn’t been the case for Rolls Royce, which recently posted a £4.6bn loss.
The engineering giant announced its biggest pre-tax loss on February 14, 2017 with the decline of sterling accounting for a £4.4bn hit on the value of the investments that it uses to protect itself from currency fluctuations.
With most international aerospace contracts priced in dollars, these hedges were primarily designed to protect the company from falls in the value of US currency. However, since the 2016 Brexit vote, the pound has fallen by around 19 per cent against the dollar.
Analysts are predicting further drops in the value of sterling once the formal process of leaving the EU begins, prompting The Engineer to ask what industry should do to adapt to the new reality of a weaker pound.
Just over half (52 per cent) of respondents agreed that a focus on quality will ensure continued success in business, whilst just under a quarter (23 per cent) thought that industry should do nothing because the weak pound is a fillip for exports.
The remaining 25 per cent were divided by those seeking protection via efficiency cuts (nine per cent) and 16 per cent who chose ‘none of the above’ as their preferred option.
Engineer reader Chris van Schaijik commented: “It wasn’t the cost of materials that has affected profits to such a degree, just a poorly thought-out system of currency hedging. Rolls Royce has (had) some £30B invested to hedge against fluctuations in the dollar. The pound dropped 19%, so they saw a paper loss proportionately. They had the right idea, to hedge for currency movement, but their strategy backfired. This hit doesn’t need to affect the way they do business with suppliers, or necessitate massive cutbacks in staffing to make up the loss. A change in strategy from the finance team and they will recover in time.”