Rover cars: The problem is selling them

 

In 1994 Rover sold 362,876 cars worldwide. That was the year Rover was bought by BMW. In the next three years, the number sold remained fairly steady. In 1997 364,350 Rover cars were sold. But since then, sales have plummeted, by 18% to 299,839 in 1998 and by another 32% to 203,755 in 1999.

 

In crude volume terms, Rover sales are now running at not much more than 50% of their 1994 level, which is why several months sales are parked, unsold, on disused airfields.

 

When BMW bought Rover in 1994, its share of the UK car market was about 12%, in 1999 it was less than 5%, an all-time low. Even British car buyers have deserted Rover and the vast bulk of Rover sales are in the UK. Unlike the French who still buy mostly French built cars, British car buyers have little loyalty to home built products.

 

These appalling sales figures, and the resulting financial losses, have forced BMWs decision to divest itself of Rover. But they have been almost entirely absent from public discussion since the decision was finally announced on 17th March. They may have been cited in some news item on Rover in the past six weeks but I havent come across it. (I got them from BMWs 1999 Annual Report, which is available on the BMWs web site, www.bmwgroup.com).

 

The bulk of Rover sales are Series 200 and Series 400 middle range models built at Longbridge. They are the problem. The sales of Series 75 executive model, the first Rover model totally designed and engineered by BMW and built at Cowley in Oxford, is selling well but occupying as it does a niche market it can never compensate for the failure of the mass market Series 200 and 400.

 

How can Phoenix succeed?

Great hopes are being placed on the Phoenix consortium, led by John Towers, a former managing director of Rover, because the story is that it plans to continue volume car production at Longbridge. A figure of 200,000 units a year has been mentioned (which is small by todays standards for an independent carmaker in that segment of the car market). But, making Rover cars is not the problem. Selling them is the problem, and turning a profit while doing so. The question is: how can the Phoenix consortium succeed where BMW, with all its technical knowledge and financial strength, has failed?

 

Since several months sales of Series 200 and 400 are parked unsold on disused airfields, it is obvious that the current level of production far outstrips sales, perhaps by as much as a third in the past year. So, if the Phoenix consortium does take over Rover, the first thing it will have to do is cut production of Series 200 and 400 models at Longbridge. This means that large numbers of workers will have to be laid off, either temporarily or permanently, or put on very short time. It is inconceivable that the present level of employment can be maintained in the short term at Longbridge or in the firms which supply Rover at Longbridge.

 

It can be taken for granted that, at the moment, Rover sales are at rock bottom given the uncertainty surrounding its future. Who wants to buy a car, which might not be maintainable because its manufacturer may be going out of business, particularly when there are so many excellent cars available from other manufacturers?

 

It may not be possible to revive the sales of Series 200 and 400 models at all. But if it is, a necessary condition is that the car buying public be convinced that Rover will still be in business in 5 to 10 years. And even then it will take cost cutting on a grand scale, to levels way below the cost of production, to shift them. If the Phoenix consortium does take over Rover, then in the short term substantial losses are inevitable.

 

What about the long term?

But what about the long term, assuming it can survive the short term? BMW intended to replace the Series 200 and 400 models in 3 years time with a new BMW designed and engineered range, to be built with 150m of state aid at Longbridge. The target was to produce 350,000 units of these annually plus 150,000 of the new Mini to be introduced this year and also to be built at Longbridge.

 

These plans have been overtaken by events. Sales have plummeted, in part because of the high value of sterling against the Euro, which means that UK built cars with a high UK-made content like Rovers are at a competitive disadvantage both at home and in the Euro zone, compared with cars built within the Euro zone. BMWs 1999 Annual Report contains a graph, which shows a high degree of correlation between falling Rover sales and rising sterling value. But I suspect that is not the whole story. The Rover brand was weak when BMW bought it in 1994 and they havent managed to strengthen it against its competitors in the interim by the introduction of new models.

 

But the rising value of sterling has had a dramatically negative impact on the BMW balance sheet, simply because losses and investment in Rover operations in the UK cost the BMW group more Deutschmarks. Expected losses and planned investment in Rover operations in the UK which were manageable with the pound at DM2.80 have become next to impossible to bear with the pound at DM3.20. According to BMWs 1999 Annual Report, the rise in sterling in 1999 cost BMW an extra DM1 billion, that is, around 300m in 1999. (The pound is now at a 15-year high against the Deutschmark at DM3.36 compared with DM2.78 when it crashed out of the ERM in 1992, because currency traders believed it to be overvalued).

 

If the Phoenix consortium does take over Rover, then it will have to have sufficient reserves to cover the substantial losses, which are inevitable until new models have been developed, and to cover the development costs of the new models. It is a tall order. The question remains: how can the Phoenix consortium succeed where BMW, with all its technical knowledge and financial strength, has failed?

 

Alchemy plans

The details of any arrangement between BMW and the Phoenix consortium remain to be worked out. The original plan was for venture capitalists Alchemy Partners to take over the Longbridge plant and the Rover brand, while BMW retained the Cowley plant, where the Rover 75 would continue to be made by BMW for Alchemy. Also, the manufacture of the new Mini would be moved from Longbridge to Cowley and marketed under the BMW brand. This at least seemed to offer job security to the 3,000 or so Cowley workers. But, Alchemy intended to cease manufacture of Series 200 and 400 Rovers at Longbridge and sack more than half the 9,000 workforce, which would cause many more thousands of redundancies in firms which supply Rover at Longbridge. (The total number of jobs involved in this is estimated at 24,000).

 

With the remaining workforce at Longbridge, Alchemy said it was going to build sports cars and sports saloons under the MG brand, with a production target of between 50,000 and 100,000 units. In recent weeks Alchemy have been portrayed as the villains in the affair second only to BMW itself, which has a head start because its German because it intended to cease volume production at Longbridge and sack half the workforce. There has therefore been general rejoicing that the Alchemy deal has collapsed and, at the time of writing, negotiations between BMW and the Phoenix consortium have commenced.

 

But the Alchemy plan, or some variant of it, may turn out to be the only viable game in town. The Rover cars built at Longbridge are difficult to sell, and after the recent unprecedented uncertainty, may prove next to impossible to sell. There may be sentimental attachment in Britain to the Longbridge car plant, but it doesnt extend to buying the cars produced there. In those circumstances, to cease building them, and to build something else which might be more saleable is not an unreasonable plan. The alternative is to support massive losses on the existing models until new models arrive, and to pay for the development of the new models, in the hope that in perhaps 5 years time you will be able to recoup some of the losses. Its a tall order and Phoenix needs to have very deep pockets to undertake it.

 

Land Rover

One part of the Rover Group, Land Rover, has prospered since it was bought by BMW in 1994. Land Rover sold 166,101 units in 1999, unbelievably nearly as many as Rover cars, compared with 94,472 units in 1994. Whatever happens to the Rover Group in general, it looks as if Land Rover is going to be sold to Ford, ostensibly because of the success of BMWs own off road vehicle, the X5. This is the story in the BMW 1999 Annual Report, but the Land Rover sale is probably motivated by the need to raise cash to set off against the appalling losses which are going to be incurred in getting rid of the rest of the Rover Group.

 

Rover has a plant at Swindon, employing about 3,000 people, which makes body panels for the whole Rover group including Land Rover. Its future is also in doubt (a) because of the inevitable decline in Rover car production, and (b) because Ford may choose to source body panels for Land Rover from its own plants.

 

BMWS misjudgement

BMW made a serious misjudgement in 1994 when it bought the Rover Group. Why it decided to buy an ailing British carmaker, which wasnt even a major player in its home market, is a bit of a mystery. It appears to have been driven by the belief that, unless it entered the mass car market, it would be taken over by one of the major carmakers. This doesnt make much sense since the Quandt family owns 48% of BMW, and is therefore effectively in a position to decide whether or not BMW remains independent. Having said that, it is no coincidence that the architect of the deal no longer works for BMW.

 

At the time BMW was operating very successfully at the high end of the car market, selling nearly 600,000 units a year. The BMW marque has continued to prosper since with 755,000 units sold in 1999. Meanwhile, the Rover Group, apart from Land Rover, has become a millstone round its neck.

 

It is a sorry tail both for BMW and for Rover cars, which would probably have done better if it had been bought by Honda, with which it worked in partnership in the 1980s with reasonable success.

 

 

Labour & Trade Union Review

May 2000