It’s been quite a year for the management team who took over at Rover Cars after BMW made its undignified exit and left the company in a state of crisis. A period of consolidation followed and things have been largely kept on an even keel. So far, the doomsayers’ predictions have been confounded, but major challenges lay ahead writes Dave Leggett.

One year has passed since BMW and Rover parted company

It’s hard to believe that a year has passed since BMW’s panicky and undignified exit from Rover. Normal business seems to have been resumed at BMW. The company has announced profits for last year that will have calmed the frayed nerves of the company’s owners. Profits were up 50% helped by the fair wind of strong North American sales and favourable exchange rates. BMW is concentrating on what it does best: making executive, sports and luxury cars. The strategy that led BMW to buy Rover in the first place has been binned. BMW can prosper without covering all the bases. Mass-market segments of the market are best left alone. Plans for a BMW ‘1 Series’ that will use a front-wheel drive small car (ironically, extensively worked on by Rover engineers) should be treated with caution. It will be a BMW and positioned accordingly. It should be seen as a niche competitor for DaimlerChrysler’s A-class, positioned below the 3-Series compact, but not a serious mass-market proposition to bother Ford and GM. That would dilute the BMW brand unacceptably. BMW walked away from Rover with the rights to that car and the new Mini (but, amazingly, not Land Rover). In some ways that perhaps looks rather clever now, but it’s not enough to hide the embarrassment of the Rover fiasco and six years of wasted effort and a fundamentally flawed strategy.

While BMW concentrates on its core business, what is happening to what was Rover Cars? Well, let’s begin by casting our minds back. A year ago, BMW wanted a sale and could easily have sold the company to John Moulton of the Alchemy Group (a venture capitalist). His plans were to turn the company into a niche sports car maker, based around the MG brand. Working with Lotus on a new range of performance MG cars was being aired as a possibility. It would have meant slashing car output and withdrawing altogether from volume areas of the market. Large areas of the Longbridge site were being eyed for real estate value. Understandably, Rover’s workforce was horrified. Shock waves went out through the Rover supplier community. This would have been the final nail in the coffin of the last remnant of indigenous volume car making in Britain. There was a certain amount of ‘acceptance’. How could Rover survive on its own in a global industry governed by massive scale economies? It was simply another chapter in Britain’s terminal industrial decline.

John Towers

Almost out of nowhere, John Towers, a former Rover executive, emerged with a bid that was based on retaining a presence in volume car manufacturing. Appropriately, he headed a consortium of interests gathered together under the name ‘Phoenix’. Some restructuring was inevitable, but it would be limited. The drama intensified: there was a funding question mark against the Towers bid. That was sorted out and eventually, to the euphoria of the Longbridge workforce, BMW accepted the Towers bid.

Since formation, the company has managed to stay afloat. That is perhaps its single biggest achievement, disproving the forecasts that it would soon be in terminal crisis and would not survive beyond the autumn of 2000. Beyond that is a list of accomplishments that is moderately impressive. The Rover 75 line was successfully moved from its original Oxford home to Longbridge. Production disruption was minimal. At the Geneva show, the company showed an estate (wagon) version of the car that was generally well received by auto journalists. A new range of MG saloons has also broken cover, indicating that, at least, the company has a brand and product strategy that goes beyond simply treading water. The company has been renamed MG Rover, emphasising the importance of the MG heritage to the company’s future. But the volume segments are not being abandoned either. The 25 and 45 models have continued to sell, helped by aggressive pricing in the British marketplace. They may be relatively old designs, but they seem to have a found a home at the ‘value-driven’ end of the UK vehicle market. There is also, it seems, a reservoir of patriotic buyers who are drawn to Rover.

At present, it appears that the financial position of the company is relatively secure. Costs have been reduced considerably and the parting terms from BMW appear to have been financially favourable to the new owners. The management plans to break-even in 2002 on current plans. If that is achieved, it will indeed, be a quite startling achievement given the starting point for the company last year.

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MG Rover is launching a new range of saloons, including the MG ZT (above)

Something else to watch out for is MG Rover’s plans to buyback its engine plant (left in the hands of BMW after the sale). It is in some ways an anomaly from the divorce (90% of the engines made at the facility are destined for MG Rover), but it needs to be sorted out.

Looking further out, there are some major challenges ahead for the company. In total, MG Rover makes around 200,000 units per annum. That is small beer in an industry where scale and global presence undoubtedly count for a lot (for example: according to CSM Worldwide, Volkswagen Group produced around 3.75 million light vehicles in Europe last year and global VW Group production on the generic Golf-sized platform was over 2 million units). Developing the MG brand is a no-brainer, but the 25/45 ranges cannot continue forever. If those models are not updated, MG Rover can look forward to steadily diminishing sales, which will mean deteriorating profitability. The most obvious way forward is through a tie-up with a larger maker. In retrospect, the technology deal with Honda, which began in the 1980s, worked well for the company. A similar arrangement would enable the company to update its volume segment range in a comprehensive manner and at a fraction of the cost involved with going-it-alone. Perhaps another manufacturer may be prepared to help MG Rover in a technology deal. Possibly, there is a manufacturer that has its eye on the MG Rover marques and distribution network in the UK.

Maybe there is room for a resuscitated brand(s) promoting traditional or new ‘British’ values. What might ‘British’ values be in the context of automobile design and image? There is certainly plenty of positive heritage to play with, but a more modern interpretation could be even more exciting. There is a vibrancy in British design culture right now that is very encouraging. Industrial products like cars can and should be a part of that. The success of Jaguar, especially in the US, illustrates that ‘made in Britain’ can be a positive label. Brands in the mire can be rescued, although it takes massive investment and time. Look at Skoda ten years ago and look at it now.

VW may be interested in MG Rover

One of the chief architects and supporters of the BMW policy to acquire Rover back in 1994 was Bernd Pischetsreider, a self-confessed anglophile and noted admirer of certain aspects of British automotive history. He lost his job at BMW when things started to turn sour with Rover but now is in a position of influence at Volkswagen. Perhaps Volkswagen’s considerable industrial strength combined with Piech’s Midas touch with brands is just what MG Rover needs. Stick the next 25/45 on the VW A platform and it starts to make real commercial sense. There could be emotional factors at work that would keep VW away from MG Rover (after BMW’s noisy and messy exit, the image of MG Rover in Germany is not great), but I would be surprised if they’re not seriously interested. The conditions are ideal. Now could be a good time to strike a deal. In a few years time, VW wants to extend Bentley into higher volume territory (‘baby’ Bentley). It cannot easily do that at the company’s plant in Crewe. Making it in Germany would be senseless. A stronger manufacturing presence in the UK could be advantageous then. The much-discussed sterling exchange rate problem is on a long-term correction path too.

MG Rover’s executives know that some form of tie-up to secure the renewal of product is crucial to long-term survival. Another vehicle manufacturer is the obvious option. However, at a time when Tier 1 suppliers are generally becoming increasingly active and vocal higher up the automotive value chain, working more closely with key suppliers, like Mayflower, presents an alternative strategy. If an announcement is not forthcoming soon, disquiet about the company’s longer-term survival prospects can be expected to build. MG Rover is not out of the woods yet perhaps, but one year on the ‘English patient’* is breathing.

* An off-the-record term reportedly used by exasperated BMW executives to describe the ailing Rover Cars unit of its operation during the latter stages of 1999 and early 2000.

‘Problems’ in the British auto industry: a brief history lesson

Industrial strategy in the UK has long concentrated on creating the ‘right conditions’ for inward investment. Back in the early 1980s, the government of the time was extremely unsympathetic to the plight of the then British Leyland (BL). Poor quality cars, industrial troubles and a strong belief in the legitimacy of the free market, meant that little support was available for the ailing company. (Although Nissan received substantial grants to tempt the company in.) At the same time, the French and Italian governments poured huge subsidies into their own national companies. They also decided to keep Japanese imports out. Rightly or wrongly, it was largely through these measures that Renault and Fiat kept their shape through a very turbulent period. BL’s successor, Austin Rover, contracted further. Michael Edwardes slashed costs, but exports suffered through the loss of distribution capacity.

In the UK, Nissan, Toyota and Honda were attracted to assembly in the UK in the 1980s and built up capacity in the 1990s. From the UK they could export freely to other countries in the EU area and not be hit by the Common External Tariff. Moreover, the pressure would be on the French, Italians and Spanish to let these European-built ‘Japanese’ cars in. The French were furious but there was nothing they could do if European parts content was there. From the beginning, Nissan set out to reach the key 80% European Community local content threshold as quickly as it could. It went largely according to plan.

Along with the existing operations of Ford and GM (Vauxhall), the arrival of the Japanese makers gave the UK’s auto industry a new look. Nissan’s Sunderland (north-east England) plant became the most productive in Europe. The operations of Rover became an increasingly small part of the picture. Output and employment in the British auto industry climbed sharply to near 2 million units by the end of the 1990s. But the industry’s structure had changed profoundly: the talk now was of ‘the motor industry in Britain’, rather than ‘The British motor industry’.

Rover was sold by British Aerospace to BMW in 1994 amidst high hopes of a dream combination. Rover would unlock new market segments for BMW to exploit and BMW’s quality tag would rub off on Rover’s poor image. In the event, BMW’s initially largely laissez-faire approach to its Rover unit seems to have built up problems. Strategically, several mistakes were made. In terms of product action, opting to develop an executive saloon first left the volume products to soldier on for too long, as well as heightening tensions between BMW and Rover (the front drive Rover 75 effectively competing against BMW). Worse, marketing policy got out of hand, with ‘Roverisation’ asking customers to pay a substantial premium for Rover cars. How had the cars changed? It wouldn’t wash.

By 2000, changes to the sterling-euro exchange rate reinforced a financial crisis of epic proportions that tipped the balance for BMW: it was time to cut losses and get out.

UK New Car Market by Make, 1999-2000

fgwqgW	2000	%	1999	%	%CH
FORD	374,342	16.85	387,985	17.65	-3.52
VAUXHALL	296,519	13.35	291,598	13.27	1.69
PEUGEOT	189,145	8.51	180,676	8.22	4.69
RENAULT	161,142	7.25	165,144	7.51	-2.42
VOLKSWAGEN	155,657	7.01	154,610	7.04	0.68
ROVER CARS	103,663	4.67	110,122	5.01	-5.87
FIAT	93,877	4.23	77,080	3.51	21.79
NISSAN	84,947	3.82	94,994	4.32	-10.58
CITROEN	84,491	3.80	72,286	3.29	16.88
TOYOTA	83,621	3.76	77,799	3.54	7.48
HONDA	68,718	3.09	65,290	2.97	5.25
BMW	67,676	3.05	70,932	3.23	-4.59
MERCEDES BENZ	63,754	2.87	62,368	2.84	2.22
AUDI	43,168	1.94	40,615	1.85	6.29
VOLVO	36,943	1.66	39,217	1.78	-5.80
DAEWOO	34,692	1.56	32,544	1.48	6.60
OTHERS	279,292	12.57	274,355	12.48	1.80
GRAND TOTAL	2,221,647	100.00	2,197,615	100.00	1.09
Source: SMMT

2000 West European Car Market and Shares by Group and Brand

fqfdcqafd	%Sh	%Sh	Units	Units	% Ch
fqfdcqafd	’00	’99	2000	1999	S\G
ALL BRANDS	BV	SV	14,739,302	15,066,357	-2.2
ROVER	1.3	1.5	197,335	227,582	-13.3
VW Group	18.7	18.8	2,754,623	2,837,006	-2.9
VOLKSWAGEN	11.0	11.5	1,619,124	1,730,725	-6.4
AUDI	3.3	3.4	488,633	514,835	-5.1
SEAT	2.9	2.7	429,588	412,574	+4.1
SKODA	1.5	1.2	217,278	178,872	+21.5
PSA Group	13.1	12.1	1,929,339	1,823,884	+5.8
PEUGEOT	7.9	7.4	1,164,907	1,119,037	+4.1
CITROEN	5.2	4.7	764,432	704,847	+8.5
JAPANESE	11.4	11.5	1,674,204	1,733,618	-3.4
TOYOTA	3.7	3.2	541,893	480,003	+12.9
NISSAN	2.7	2.6	393,389	387,503	+1.5
HONDA	1.2	1.4	181,219	208,560	-13.1
MAZDA	1.2	1.4	181,616	215,548	-15.7
MITSUBISHI	1.1	1.2	160,036	184,798	-13.4
OTHERS	1.5	1.7	216,051	257,206	-16.0
GM Group	10.8	11.5	1,597,246	1,736,479	-8.0
OPEL/VAUXHALL	10.2	10.9	1,508,115	1,644,847	-8.3
SAAB	0.5	0.5	78,787	79,896	-1.4
OTHERS	0.1	0.1	10,344	11,736	-11.9
FORD Group	10.8	11.7	1,589,140	1,760,612	-9.7
FORD	8.5	9.3	1,246,903	1,406,766	-11.4
VOLVO	1.6	1.6	230,406	241,064	-4.4
LAND ROVER	0.5	0.5	77,615	81,658	-5.0
JAGUAR	0.2	0.2	34,216	31,124	+9.9
RENAULT	10.6	11.0	1,558,641	1,655,588	-5.9
FIAT Group	10.0	9.5	1,475,787	1,433,744	+2.9
FIAT	7.6	7.4	1,123,361	1,108,707	+1.3
LANCIA	1.2	0.9	173,644	142,621	+21.8
ALFA ROMEO	1.2	1.2	175,088	179,381	-2.4
OTHERS	0.0	0.0	3,694	3,035	+21.7
DAIMLERCHRYSLER	6.2	5.6	908,661	845,841	+7.4
MERCEDES-BENZ	4.8	4.5	709,293	685,517	+3.5
SMART	0.7	0.5	101,674	68,466	+48.5
CHRYSLER	0.7	0.6	97,694	91,858	+6.4
KOREAN	3.4	3.2	506,121	478,747	+5.7
HYUNDAI	1.5	1.4	226,901	217,109	+4.5
DAEWOO	1.4	1.3	201,077	195,248	+3.0
OTHERS	0.5	0.4	78,143	66,390	+17.7
BMW	3.4	3.2	498,974	485,130	+2.9
Source: ACEA