Lights out at BAT factory?

IT WAS not quite the celebratory party British American Tobacco had hoped for. When the cigarette giant announced yesterday that annual global pre-tax profits were up £300m to £1.9 billion, management in London was fairly confident the results would be welcomed by staff.

But closer scrutiny revealed that the seed-to-smoke group wants to make £320m of cost cuts over the next 33 months. That has raised the prospect of factory closures.

That cost savings bit of the corporate news went down like a lead balloon yesterday at BAT's Southampton factory - the company's one and only remaining manufacturing facility in the UK.

For the 1,200 local people whose livelihoods depend on producing up to 25 billion cigarettes a year, the spectre of job cuts has unexpectedly surfaced.

At least 85 of them have experienced such uncertainty. They transferred here from Darlington, the outdated sister factory which closed down two years ago with the loss of 500 jobs.

BAT, on the back foot, stressed that the £320m of savings - nearly one-third of a billion pounds - will be shouldered across its empire of 87 factories in 66 countries.

The reassurance might not be enough, however, to soothe the nagging worries of the employees at the 26-acre production plant in Regents Park, Millbrook. For the axe hangs over the century-old site - and everyone there is aware of it.

Firstly, there are concerns that BAT might ultimately pull the plug on Southampton in favour of cheaper labour markets abroad.

It is no secret that management and unions locally have discussed the threat posed by low-cost alternative manufacturing bases like the BAT one in Nigeria.

A BAT spokesman admitted the African factory had "taken some business off Southampton".

Even head of UK operations Allan Short, a familiar figure at business events in Southampton, yesterday spoke of an environment that "continues to be challenging" - management-speak for costs.

With £4 of the £5 price of a packet of 20 cigarettes going straight to the taxman, along with hefty import duties, the profit margins in Britain are slimmer - and wage costs substantially higher.

It's the same balance sheet logic that has seen scores of big-name companies across the UK outsource their call centres and paper processing to India, where an employee costs £3,000 a year, as opposed to £15,000.

There are already hundreds of manufacturing workers in south Hampshire who have suffered the fallout from being replaced by cheap labour.

Ocular Sciences shifted production from Chandler's Ford to Puerto Rico, with the loss of 900 jobs, and local cablemaker Pirelli upped sticks to Italy, with the loss of 312 jobs.

APW Electronics, the American-owned firm which has seen more than 1,000 pension fund members stripped of their retirement funds, hived off its Hedge End operations two years ago to Poland, with the loss of 112 jobs.

Vivek Paul, president of Wipro Technologies, India's largest IT company, memorably said: "It's a basic economic law that companies will seek lower costs."

Mike Budd, the regional officer for union Amicus, which represents some 400 workers at the BAT factory here, said: "There is always a fear of relocation - manufacturing is increasingly disappearing in this country.

"It's easy to dismiss people in Britain than in other parts of Europe, where there is more protection for workers.

"We would have to be given a 90-day consultation period, but in Europe it would be up to a year.

"We are prepared to meet the challenges of manufacturing here, and we would want to be engaged in the process early on, rather than having to react, like yesterday, when we were told in a company report that savings have to be made."

The average salary of BAT workers in Southampton is £26,000 - tens of thousands of pounds more than their Nigerian counterparts.

Last year BAT, which has its cigarettes puffed by one in every seven of the world's estimated one billion smokers, took the axe to some of its western European operations, including Germany and Holland, because of rising costs and falling sales. Canada, too, was affected.

Meanwhile, an all-encompassing EU directive stills hangs over the Southampton plant, which makes brands for export outside the EU, such as Dunhill, Lucky Strike and Rothmans.

Brussels wants all EU countries to phase out the production and export of high-tar cigarettes by the end of 2007.

But these stronger cigarettes are exactly what the Southampton factory produces and exports to eager markets like China, where customers prefer the taste.

This ruling could ultimately spell trouble for Southampton, although BAT bosses are fighting a rearguard action.

If the worst comes to the worst and Southampton does one day fall prey to market forces and political diktats, the impact would be felt by an estimated 7,000 people in the regional supply chain.

They include hauliers, plant machinery manufacturers, engineers, security guards and the port of Southampton - BAT is its biggest customer.

Karen Bladen, spokesman for the Federation of Small Businesses in Hampshire and the Isle of Wight, said: "Any loss of a big business in Southampton would inevitably have a knock-on effect on other businesses, from people delivering to them to the corner shop selling sandwiches."

Another unknown quantity is whether BAT will be hit in the pocket by a lawsuit filed by the US government against a number of cigarette-makers in 1999.

One of the targeted firms is BAT unit British American Tobacco Investments.

The lawsuit is still ongoing and charges the tobacco industry with "racketeering" and deliberately deceiving the public about the risks of smoking since the 1950s.

Southampton's BAT factory is not just about producing "sticks" which deliver shots of nicotine.

It is also at the cutting-edge of research and development for the company globally.

Some 220 people are employed, among other things, to work out the complex relationship between hundreds of cigarette toxins and specific diseases such as lung cancer.

Through a process of elimination and discovery they hope to find the tobacco equivalent of the "Holy Grail" - a safe cigarette that is not harmful to health.

That, amid all the unsettling talk of cost-cutting and relocation speculation, would be BAT Southampton's "eureka" moment.

ALLAN Short, the boss at Southampton and the head of BAT'S UK operations, said in a statement today: "There are no plans to close the Southampton factory, and we are not going to speculate.

"Our focus is on continuing to improve our competitiveness.

"Matters such as overcapacity and cost competitiveness are constantly under review and people are bound to speculate, but we have to focus on delivering to our customers.

"Globally, there is overcapacity, and western Europe is an expensive place to manufacture. That means we have to work all the harder to provide a level of service for which our customers are willing to pay.

"Some previously UK-manufactured product has already transferred overseas and, regrettably, we had to close our Darlington factory, with all UK manufacture being consolidated in Southampton.

"A ban on export of high-tar cigarettes outside the EU will come in to effect on January 1, 2007.

"This means we will no longer be able to manufacture cigarettes containing more than 10mg of tar, even for export to countries outside the EU.

"Half of our production is already within the required levels. We are working to ensure that the vast majority of the remaining production falls within the required levels before 2007.

"Tar levels are reducing in many markets around the world and the impact of this remains under review."