Back in 1994, BMW’s acquisition of Rover’s car-making operations appeared to make good business sense. At a stroke, a major element of BMW’s long term strategy for survival and growth was in place. The move was generally viewed as highly positive, taking BMW away from what was seen as an over-reliance on the relatively low-growth executive and luxury car segments of the car market. For Rover, starved of funding under its previous owner, much-needed funding for investment in new models would now be forthcoming. The company was also made available at what was widely viewed as an extremely attractive price. Win-win all round. Or so it seemed at the time.
The experience so far has been a little bumpy, to say the least. Persistent quality and reliability problems have dogged some models (for example, the Land Rover Discovery) and the launch of the 75 executive saloon was delayed for around six months while ‘unacceptable’ quality deficiencies in early production cars were rectified. In the marketplace, pitching Rover as a premium rather than value brand appears to have failed. The 75 – a car that sits well with the competition – faces an uphill struggle to establish itself in a part of the market where brand image is all important. The models it replaced – the bland 600 and woefully dated 800 – were not very highly regarded. As a brand trail blazer preparing the way for the renewal of the entire Rover range – and the first car developed by Rover under BMW’s stewardship – the model’s poor sales performance is cause for concern.
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More worryingly still, it has now – somewhat belatedly perhaps – dawned on BMW executives that the 25 and 45 model ranges (which account for over 50% of Rover’s car volume) look very exposed in a highly competitive, high-volume sector of the car market. Simple economies of scale mean that companies like Volkswagen, Ford and GM can make cars in that segment much more cheaply than Rover – utilising its own unique platform – ever can. Volkswagen achieves volume on its Golf platform approaching 2 million units which compares with combined 25/45 output by Rover of around 250,000 units. Using premium pricing to overcome the adverse production economics won’t work with ageing products that are not exactly at the cutting edge (the current models date back to Rover’s now defunct technology tie-up with Honda). Indeed, the models are not scheduled for full replacement until 2002, as part of the pending plans for additional investment at the Longbridge plant.
On top of that, sterling appreciation versus the euro over the past year – about 15% – has had a devastating impact on profitability. Mounting financial losses appear to have brought an added urgency to BMW’s consideration of the available options for its Rover operations. One thing seems certain: BMW will not want to lose the very things that attracted it to Rover in the first place. There is some light in the gloom. Land Rover, for example, is performing very well and there has been substantial investment at the Solihull factory in recent years associated with the Freelander model. The four-wheel-drive technology that BMW acquired with Land Rover undoubtedly helped in the development of the BMW off-roader, the X5. Also, the new Mini range is due to be launched at the end of this year and that will bring a recovery to group sales; encouragingly, the new Mini model will be launched with its own Mini branding. An MG brand is also planned for the future.
However, the crunch issue facing BMW is the future of the key volume 25 and 45 ranges. The European Commission is currently investigating a proposed UK government grant to help with the required investment at Longbridge associated with the new models. Even if BMW were to improve the unit costs position by spinning off a small BMW (a ‘2 Series’) competing with the Mercedes A-class, the basic problem of poor production economics remains. It places a large question-mark over Rover’s continuing status as a full-line producer. With its low volume and highly UK-based market geography, the case for a slimmed down producer with a smaller model line-up is compelling. Realistically, it is difficult to see how another manufacturer would be attracted to Rover without its more attractive elements – especially Land Rover and the Mini.
This all points very strongly to the dropping of the 25 and 45 ranges, something which would lead to the eventual demise of the Rover brand. If BMW can sell the Rover brand and some manufacturing capacity to another maker, it should. If it cannot, it should rationalise anyway. The future of other brands within the Rover Group, serving niche segments of the market, looks a lot brighter. But in the interests of BMW’s shareholders, BMW should accept that Rover cannot successfully compete in mass-market segments. Rover’s brand image is poor in the UK and almost non-existent outside. Times have changed. Few will really mourn the passing away of the lifeless Rover brand – like so many others before it.
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By GlobalDataFor further information on the Economist Intelligence Unit’s Automotive portfolio click here ( http://store.eiu.com/auto.asp).
