Rover: The end of the line?
In
May 2000, Rover was “saved” as a volume carmaker, when it was taken over by
four Midlands businessmen (John Towers, Nick Stephenson, John Edwards and Peter
Beale) calling themselves the Phoenix group.
That was the story at the time.
But, as I wrote then,
it was never obvious how Phoenix would be able to make a go of Rover as a
volume carmaker, when BMW with its vast financial resources and technical skills
had failed to do so.
The problem then was that Rover
sales were plummeting. In 1994, the
year it was bought by BMW, Rover sold 362,876 cars worldwide.
In the next three years, the number sold remained fairly steady. But after that, sales dropped to 299,839 in
1998 and to 203,755 in 1999. In 1994,
its share of the UK car market was about 12%; in 1999 it was less than 5%. By the time BMW threw in the towel there
were 60,000 cars parked, unsold, on disused airfields.
BMW had planned to rescue the
situation by launching new models. The
first – the Series 75 executive car – had been launched, and was selling
well. It was to be followed with the
new Mini later in 2000, and then with replacements for the bread and butter
Series 200 and 400 within a few years.
These plans were aborted in May
2000, when BMW baled out, having decided that it could no longer bear the
financial losses it was sustaining.
However, it retained ownership of the new Mini project, and the Cowley plant
in which to produce it, and it has been a roaring success. However, this deprived Rover of a new model
with which to claw its way back to profitability, making its survival separate
from BMW more problematic – and emphasising the urgent need to develop replacements
for the Series 200 and 400.
BMW did provide Rover with a
lifeline. The most widely known “fact”
about the deal between Phoenix and BMW in May 2000 is that Phoenix paid BMW £10
for Rover. That is somewhat less than the whole truth. In fact, BMW paid Phoenix nearly £1 billion
to take Rover off its hands. The
details of this dowry, and other cash that Phoenix has received from other
sources, were given in an article by Ian Griffiths, entitled Crucial
factor of £215m gap in the balance sheet, in the Guardian on 9 April
2005.
The Phoenix four’s initial dowry
from BMW consisted of
(a) 60,000
cars, which realised £385 million
(b) a £427
million interest free loan repayable in 2049, and
(c) £112
million cash
Understandably, BMW don’t expect
the loan to be repaid, and have written it off.
Later, Phoenix received another
£65 million as part of a deal concerned with the Powertrain engine and gearbox
plant.
In all, therefore, the Phoenix
four received £989 million from BMW, plus the Longbridge plant (and BMW paid
for moving the Series 75 production line from Cowley to Longbridge). Four private individuals, who came in off
the street, were handed total control of a car business (albeit an ailing one)
plus a billion pounds. They got it
without breaking sweat and without risking any money.
And they got it, with the
blessing of the Government and of the trade unions representing Rover
workers. Tony Woodley of the TGWU, now
the union’s General Secretary, was the prime mover in scuppering the original
proposal from Alchemy and advocating a deal with John Towers and his three
colleagues, which, unlike the Alchemy proposal, was supposed to preserve 9,000
jobs (and volume carmaking) at Longbridge and many more jobs in Rover
suppliers.
Subsequently, the Phoenix four
acquired more cash: £100 million for the sale of the parts business; £58
million by selling the Longbridge plant and land (which had to be leased back);
and last autumn £67 million from the Shanghai Automotive Industry Corporation
(of which more later). In total, the
Phoenix directors have had about £1,200 million cash at their disposal, on top
of the revenue from car sales.
What did they do with it, and why
do they need a £100 million loan to stay in business? Basically, they built cars at a loss, and ran through the money,
and failed to put the business on a viable long-term footing, in particular,
they failed to find a partner with whom to share the cost of development of new
models.
In addition, they restructured the
business such that, if the car and engine end of the business went bust, they
would still own considerable assets; they also paid themselves large salaries
and they put a few million pounds into a pension fund for themselves. These actions have been held against them,
but why shouldn’t they do these things, since it was all their own money,
handed to them in May 2000, with the blessing of the Government and the trade
unions?
Patricia Hewitt, the Trade &
Industry Secretary, defended their action as follows:
“Company directors who take big risks and achieve big
success deserve big rewards. There were
big risks involved in the starting-up of Rover again when it looked as though
it was the end of the road for the company.” (Birmingham Motor Show, 25 May
2004)
If
she had defended their actions on the grounds that they it was their own money,
one couldn’t have faulted her. But her
remarks betray an astounding ignorance of the facts of the case, on the part of
the Minister whose department was responsible for the deal in May 2000, and
which was surely keeping a watching brief on how the deal was working out.
The
only risk taken by the Phoenix four when they took over Rover was that they
might get a headache from counting the money that had fallen into their hands
like manna from heaven. And, not even
their best friends would say they achieved “big success”.
From time to time over the past
five years, there were stories in the press of an imminent deal with a foreign
carmaker, which in some undefined way would be the saving of Rover, but each in
turn melted away. Meanwhile, car sales
continued to fall, from around 204,000 in 1999 before Phoenix took over to
114,000 in 2004, despite the fact that they were being sold at a loss,
subsidised out of the BMW dowry and other monies. The money has now run out.
Like the earlier deals that were
supposed to save carmaking at Longbridge, it was never clear how the one with
the Shanghai Automotive was going to achieve it. Nobody has ever explained what possible interest a Chinese
carmaker could have in maintaining car production in Longbridge, or how they
would do so at a profit, given that BMW and Phoenix had manifestly failed to do
so, and the new models promised five years ago were as far away as ever.
What Shanghai Automotive wanted,
and got, for £67 million last autumn was intellectual property rights over the
K Series engine and the Rover 75 and 25 models, so that it could make them in
China. It is reasonable to suppose that
Shanghai Automotive held out the prospect of some kind of additional
partnership, in order to get a good deal on what they really wanted, and got,
last autumn.
In 1994, British Aerospace sold
Rover to BMW and not a volume carmaker like Honda, with whom it had worked in
partnership previously, and who would have been in a better position to provide
the new models the business required.
That was Rover’s best hope of survival.
When BMW threw in the towel, there wasn’t a volume carmaker willing to
take it over, or later to enter into partnership with the Phoenix four, who
were gifted it. There was no chance of
it surviving indefinitely on its own as a volume carmaker against the might of
the giant international car companies.
The dowry provided by BMW has
enabled it to survive for nearly five years.
For that, the workers of Longbridge and its supplier companies have the
former German owners of Rover to thank.
The Phoenix four have millions of
reasons to thank them.
David Morrison
April 2005