The pace of change in the world automotive industry was both quickened and slowed in a few short days in March. On the one hand there was the willing liaison between General Motors and Fiat, and on the other there was the decision by BMW to drop Rover like a hot brick, and in between were Volvo and Scania truck manufacturers who have been told that their proposed merger has been denied by the EU Commission.
BMW – War of words
The sudden announcement of the fait accompli whereby BMW has effectively given its troubled and troublesome Rover Group subsidiary away sparked an unprecedented verbal attack from the British Government. Trade and Industry Minister Stephen Byers branded BMW management as liars after revealing that he had been told categorically that there were no plans to dispose of Rover just four days before the announcement came. BMW responded by trying to blame the UK Government for making the job of restructuring Rover impossible due to the high strength of the Pound and the uncertainty concerning membership of the Euro. But the truth is that if Rover was an albatross around the necks of BMW, it was entirely their own fault.
When BMW announced six years ago that they were taking over the entire Rover set-up, Peter Schmidt of Automotive Industry Data wrote that BMW needed Rover like they needed a hole in the head. That brought a furious response from BMW, but Schmidt’s view has clearly been vindicated. BMW should have known better. They’d seen the problems and the costs involved with the Ford take-over of Jaguar. They must have known that Rover needed a severe shake, needed the control of an iron fist in order to make them accept that their quality was of Third World standard and that massive improvements were needed if Rover was ever to become successful and profitable. Volkswagen achieved that feat with both Skoda and SEAT, and Ford eventually got Jaguar to the point where the marque was finally being taken seriously. Not so with Rover. It speaks volumes that the only model BMW wants to keep is one that isn’t being built yet. That BMW doesn’t want the new Rover 75 simply confirms what automotive journalists have known all along.
It is well known that the press offices of all of the vehicle manufacturers regularly meet and often discuss individual journalists. What the VMs might be interested to know is that the
journalists also meet together and discuss the vehicle manufacturers. It has long been the collective opinion of the Midland Group of Motoring Writers that the Rover Press Office has for several years been the most difficult to deal with, often uncooperative, frequently stand-offish and at times arrogant. You learn a great deal about a company from its PR staff, and the vibes given off at Rover have at times been alarming.
Every now and again BMW threatened to take remedial action. But instead of an iron fist they wore kid gloves, and nobody took very much notice of them. Even when heads rolled and Pischetsrieder and Reintzle became casualties of the debacle, still there was no visible change. Now BMW are handing the Rover operations over to Alchemy Partners, who will trim at least half of the workforce and reduce output to around 85,000 units pa. By writing off the debts, Alchemy has effectively picked up Rover for nothing. With no intention to design models for the future, Alchemy will milk Rover for four years, after which there will be nothing left.
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BMW will recoup some of its loss by selling Land Rover to Ford for around $3 billion. This decision has surprised many because Land Rover is often touted as being the jewel in the Rover group crown, but those with a close association with Land Rover products will testify that it is a flawed gemstone in a rather tarnished crown. Ford will be aware that Land Rover products offered to the North American market have come under fierce criticism because of sloppy quality standards, but will put its experiences with Jaguar into good use.
So what of Rover? Solihull employs around 10,000 people, and as already mentioned this will now become part of the Ford empire, and should prove to be a good fit once a few evident problems have been tackled. Swindon employs 3,000 making panels, and nobody wants this operation, so it will be sold off, possibly to Mayflower. Hams Hall is still being built and will be kept by BMW, although capacity for 450,000pa engines is clearly twice the required rate if Rover are not to source engines on that concern. Work on the new plant has visibly slowed and may even have been put on hold. Oxford employs 3,500 people building the Rover 75. BMW will keep Oxford and will continue to build the Rover 75 for supply to Alchemy until stocks have built up to the point where the tooling can be transferred to Abingdon without disrupting supplies. That may not take long, given the current sales achievements, but Alchemy might decide they don’t want that model either. Oxford will build the new Mini, which BMW clearly does want, but they will have to hope that memories in the Midlands are short, because as the mood stands today, they couldn’t give their cars away anywhere within striking distance of Birmingham.
That leaves Longbridge with 8,500 workers and capacity for 180,000 cars a year. Alchemy say that they have paid $80 million for the MG brand name, and have licensed the Rover name for seven years. They say they will continue with the Rover 25 and 45, plus the MGF and the old Mini, and possibly the R75. But the workforce will be chopped to around 4,000 and maybe even lower. A huge chunk of the Longbridge site will probably be sold and will generate handsome profits.
The British Government says that it will do everything in its power to find a more sensible buyer for Rover, one who will invest in future models rather than just run with what is there for as long as there are profits and then just throw the company away. We cannot see that they have any hope of finding such a buyer in the next six years, let alone within six weeks. Sad to say after all these years, but Rover is doomed and there will be those feeling relieved to see them go because it will briefly ease some of the pressures caused by rampant over production and over capacity in Europe.
Fiat – GM rides in like the 7th cavalry
No one would admit it, but Fiat have been making heavy weather of it of late and now they have been thrown a lifeline that they would be crazy to reject. It came as something of a surprise to many observers that it was General Motors who came over the hill with bugles blaring, but in fact the fit is quite good, providing that Latin temperament doesn’t get in the way.
General Motors has swapped shares worth $2.4 billion that sees the world’s number one manufacturer take a 20% shareholding in Fiat, who in turn get 5% of GM. General Motors can do very little with 20%, but the deal calls for the option to take the remaining 80% anytime over the next five years. So much will depend on the attitude of the Agnelli family. Once before Fiat almost got to the altar, on that occasion it was with Ford, but the deal fell through when Fiat refused to acknowledge that they were the lesser partner. They were the bride but they wanted to lead the dance. General Motors won’t stand for that.
In the short term the only benefit to the two new partners will be that purchasing costs can be trimmed, and that can add up to a lot of money, and there is also the fact that GM is strong in North America and Northern Europe whilst Fiat is stronger in South America and Southern Europe. But the real savings will be made when platforms and engines can be shared, and that will take a few years to organise. GM won’t go down that route unless they can dictate policy. If Fiat this time concedes that it is the lesser of the two, then the GM Group will be all that much bigger and will reap the benefits from cost savings. If Fiat refuses to play ball, GM could starve them out of existence and those that remain would benefit from the disappearance of excess production capacity.
With Fiat joining the GM camp, that creates a group that is twice the size of the next competitor and gives the group awesome firepower. Saab is already fully on board, as is Isuzu. Subaru and Suzuki have strong links and so GM is filling in the gaps all round.
Early statements from both Fiat and GM say that it is the lack of ceding control that makes the deal attractive, but that can only be a short-term standpoint as far as GM is concerned. GM says that it is happy to have loose alliances rather than outright control, but that doesn’t sit well with the facts. GM raised its stake in Isuzu to 49% as soon as it could and has also recently announced that it was buying the 50% in Saab that it did not own. When Suzuki in particular went to lengths to state emphatically that they are an independent company and not part of the GM family, that was known to sting. GM clearly does have patience, but will certainly want more control, even more so if they also buy Daewoo sometime in the near future. GM has seen from the BMW debacle what happens when a partner is wilful. The company has shown in its current dealings with Daewoo that it has learned from bitter experience. The ultimate goal has to be total control if the other emerging mega groups are to be kept at bay.
Volvo Truck – European Commission rejects Scania take-over
The European Commission has rejected the bid by AB Volvo to take over Scania AB. Volvo is now stuck with 45.5% of the capital of Scania and a very uncertain future. Whilst Volvo has a massive cash mountain following the sale of the car division to Ford, the Swedish truck and bus builder is nevertheless now more a potential prey than a predator.
Significantly, perhaps, although expressing dismay and anger at the decision by the EU Commission, Volvo says that it has no plans at this stage to divest itself of the shares that it holds in Scania. This raises a question. When Volvo first made a move for Scania it was seen as a hostile bid and Scania management reacted angrily. However, time has allowed for talks to take place and it is entirely possible that many of the ideas that Volvo had for cost savings through involvement with Scania can still be achieved through joint co-operation, especially on the sharing of parts and marketing costs.
Also significant, Scania decried the strain and uncertainty that had resulted from these latest developments, but did not rule out future co-operation with Volvo, particularly with regard to non-strategic areas.
United Kingdom – Car output in 1999 highest for 27 years
It seems ironic that now that the UK car producing industry has clawed its way back to its highest level of output for 27 very long years, all of that is likely to count for nothing and the sector is about to be smacked back down again. Rover built 225,772 cars in 1999, but will be lucky to see 100,000 roll off the lines in 2000, and Ford is firmly in reverse and there is a huge question mark over the prospects for Dagenham. Before the year started we had urged some caution with regard to future prospects. We had expected the sector to finish at around 1.75 million and it duly ended at 1.79 million.
We then said that the opening months of 2000 could be a bit shaky, but that the sector should then recover to about 1.80 million in 2000 and rise still further to 1.86 million in 2001. Now it looks as if at least 150,000 of those units can be wiped off the forecast. There is still time for a dramatic rescue attempt, but it is extremely unlikely, but nevertheless we will wait another month before revising the short term forecast.
Even before the latest upset there had been disappointment from Rover. Output in 1999 had finished 31.3% down on 1998 at 225,772 from 328,611. Land Rover had contributed a more respectable 141,946, up 3.7% from the 136,885, taking the group output to a 21.0% deficit at
367,718 from 465,496. That was bad enough. In 1997 the Rover Group had at one time seemed to be on course to hit 500,000 units for the year. What a reversal. Peugeot has a factory not a hundred miles from Rover, but the sun shines in that part of the country. Peugeot lifted output by 127.5% to 162,554 from 71,441, and that was before they had finished recruiting extra workers and instigating a third shift at the throbbing Ryton plant. When the name Talbot decorated the side of the Ryton plant, the atmosphere there was doom and gloom. What a contrast to the factory now where the workers show obvious pride in what they are doing and achieving.