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.