Essay : Why did BMW buy Rover?
BMW made much of the losses that Rover “forced” upon them during their period of stewardship, but it is clear that the German Company also gained a great deal from the ill-fated partnership.
In this article written for the site by Leslie Button, it is explained that, if anything, BMW walked away from their British adventure with a new factories, a shiny new small-car brand, their own four wheel drive vehicle and a £1.8 billion payout from Ford. And one less rival…
Why did BMW buy Rover?
This is a very interesting question. For a company with the prestige of BMW to have purchased a car company and then dumped Rover after such a short time, questions must be raised as to why exactly did they buy the company in the first place, and did they ever really intend to keep it?
BMW had a highly developed and nurtured image. However, they also had a very limited market into which they sold cars. BMW had been described as a company that ‘made only one saloon, but in three different sizes’. Although their market was expanding, global consolidation of the motor industry threatened either their independence or their ability to continue to make cars competitively, depending on how you viewed it.
BMW therefore needed to expand their market, and thus their product base. However, to do this threatened to destroy their carefully nurtured image. If they were to develop a cheaper range of cars to compete with VW, Ford, Fiat and other mass market players, surely this would devalue the BMW brand. Other companies had already seen it become increasingly difficult to have a brand stretched between the extremes of a small budget car and a large luxury car. Ford failed to achieve a quality reputation with their Scorpio when they also produced the Fiesta. Fiat’s Croma was a dismal market failure, whereas their small cars like the Uno were market successes that sold extremely well. Where companies have had successes in both of these market areas, they have achieved this with multiple brands, such as the VW Group’s use of Skoda at the lower end of the market, going through Seat and VW up to Audi at the premium end of the marketplace – as well as owning exclusive brands like Bentley. Ford now have multiple brands as part of their ‘Premier Automotive Group’ (Jaguar, Lincoln, Aston Martin, Volvo and Land Rover) and have all-but abandoned the high end of the market under the Ford badge.
The options that faced BMW were to either buy an existing brand (or brands), or to build a new brand from scratch. The latter option, the route taken by the Japanese with Toyota creating Lexus, Honda creating Acura for the American market and Nissan creating Infiniti, also for the North Americans, was initially the route that BMW appeared to be taking. Spy shots and leaked information showed that BMW were at least investigating, if not actually developing for production, front-wheel-drive technology. Front-wheel-drive is something that would never appear in a BMW-badged car, as rear-wheel-drive is a core value of the brand. However, this is not the route that BMW eventually took.
The opportunity arose to look at Rover when BMW were to supply diesel engines to the Rover Group for the new Range Rover. The Rover Group had recently had a huge upswing in sales to continental Europe when the market there was contracting, Rover being the only company to actually grow their sales at that time. Furthermore, their sales were actually on course to overtake BMW’s.
When BMW looked at Rover, they were impressed. Their opinion was that in terms of quality, Rover were as good as, if not in some cases better than, BMW. Rover appeared to fit perfectly with BMW. There was very little in the way of overlap. Rover cars would be able to fit below BMW in the line-up. Land Rover did not compete with BMW at all, and yet had a luxury image that complemented BMW’s perfectly, and an under-developed, ‘latent’ brand of Mini (Bernd Pischetsrieder, BMW’s chairman was the nephew of Sir Alec Issigonis, the Mini’s designer). However, best of all, there was a cupboard-full of heritage that BMW could exploit (MG, Riley, Austin-Healey, Triumph, etc) – and to an Anglophile like Pischetsrieder, this was manna from Heaven.
The deal to buy the Rover Group from British Aerospace was completed in a whirlwind 10 days. BAe were keen to dispose of Rover, as the company did not fit well with their core interests of Aerospace and defence. The high capital-consuming business of long-run, mass production of low-cost consumer products had little synergy with the low capital-consuming, build-to-order, niche production of high-value items such as Airbus wings or military jets. BAe were keen to sell, BMW wanted to buy.
Honda were the only problem. Honda, Rover’s partner for over a decade, were deeply entwined with Rover’s fortunes. Rover cars were not only heavily dependent on Honda for their engineering, but the company was 20% owned by Honda (the Rover Group owning the remaining 80%) and the Rover Group owned 20% of Honda’s UK manufacturing facility in Swindon. Honda, however, were not interested in working with BMW. They did not want to retain their equity stake in a Rover now owned by a competitor and they wanted their 20% of Swindon back. The cross-holding was quickly unwound.
However, this background does not tell us exactly why BMW shelled out so much to purchase Rover. Did BMW buy to expand their portfolio and manufacturing base or to thwart their competitors? Although at the time, it was seen as the former, the latter objective cannot easily be dismissed as fantasy. If, as was believed at the time, Rover were on course, with their Honda-derived vehicles, to overtake BMW in terms of sales volume in Europe – and Rover were definitely trying to become “Britain’s BMW” – was strangulation from inside the only way of stopping this threat? It was also the case that killing the Honda-Rover partnership would set back the European plans of Honda – another “quality competitor”, as viewed by BMW.
Did BMW ever really mean to keep Rover?
Since Day One, BMW were very specific about where they spent money on investment. Those areas in which they invested were either kept after the sale of Rover (Cowley, Swindon, Hamms Hall etc) or sold for a big profit (Land Rover). The cars they were developing, but which were not launched, were retained. As was the Triumph marque. There will be massive capacity at Cowley for making these cars, as there will be at other BMW plants around the world.
The engine for the new Mini was never intended to be built by Rover. Very early on, it was decided that it would be made for BMW by Chrysler, in South America, so BMW was never going to be dependent on Rover facilities for making this vital part of the new Mini. At the time, the strange decision not to use the K-series engine was never explained or understood. In the light of later developments, a possible explanation becomes clear. It was also possible that BMW viewed Chrysler (prior to its takeover by Daimler-Benz) as a possible purchaser of the parts of Rover that it did not want to retain.
Under BMW, Rover’s dealership base was drastically cut. There was very little in the way of new models coming out (The 400, 200 and MGF were already substantially developed when BMW purchased Rover. Only the Rover 75 was developed and launched under BMW, in a period of five years.) With this in mind, is it surprising that there was a sales decline – induced by BMW’s management?
Rover was Honda’s partner and also its foothold into the European marketplace. By killing that partnership overnight, Honda were set back in Europe by anything up to four years. Did BMW see Honda as a significant threat that had to be stopped?
It could be argued that BMW wanted a quick start in 4×4 to be able to compete with Mercedes-Benz. Once the X5 had been developed and launched (with Land Rover technology, know-how, etc for sure), BMW no longer needed Land Rover. It has been said that Land Rover was raped and pillaged by BMW and that without it BMW could not have produced the X5. It was also questionable at the time as to why BMW developed the X5 when they had the Land Rover brand in their portfolio. Looking back, it could be argued that they never intended to keep Land Rover, only to gain the knowledge that this world leader possessed.
The Rover 75 was launched – a car that competed with BMWs, remember – with the same high-tech diesel engine as the BMW 3 and 5 series. However, it was in a lower spec than that available to BMW customers. BMW launched this car and then tied one arm behind its back. They would not allow it to take sales from BMW.
When the Rover 75 was launched at the Motor Show, BMW executives stood up in front of the new car and said that they were thinking of closing down the Longbridge plant. As marketing initiatives go, this was a pretty bloody stupid one. It was no wonder that the car – What Car?‘s car of the year – was a slow seller. However, despite how it might appear on the surface, BMW are not stupid. They are masters of the marketing machine. This can only have been a deliberate ploy to give BMW the ability to exit with the assets they had invested in.
So let’s have a look at exactly where BMW invested, and ask the question:
Did BMW lose money on Rover?
Publicly, yes. Privately, probably not.
BMW did invest in Rover during it’s ownership. However, the vast majority of that investment they either still own or sold at a fair value or a vast profit.
· They purchased the whole Group for £800,000,000, then sold Land Rover alone for £1,800,000,000. That is a £1bn increase on its own.
· The vast majority of the investment in plant went to Cowley (or Rover Oxford as BMW called it). BMW retained this plant.
· BMW invested in a new engine facility (Hamms Hall). BMW have retained this plant.
· BMW retained the Longbridge Engine & Transmissions facility, thereby forcing Rover to buy components from BMW to be able to make cars. The same goes for the Swindon panel pressing plant. BMW made money out of Rover car sales, even if Rover were making a loss. Eventually, they sold these facilities to Phoenix, but it was for a fair value, and not included in the £10.
New models developed or in development were:
· The Rover 75
· The Rover Rover 400/45 replacement – development retained by BMW
· The Rover Rover 200/25 replacement – development retained by BMW
· The Land Rover Freelander
· The new Mini – retained by BMW
· The Range Rover replacement
During BMW’s ownership, it is questionable that Rover were making the huge losses that BMW claimed. Since Rover’s accounts were not open to public inspection, several questions remain unanswered:
· How much was Rover charged for BMW’s management time?
· How much was Rover charged for ‘BMW Training’ of Rover technicians in Germany, when in reality, Rover employees were put on the production lines to make BMWs.
· How much work did Rover do on BMW products, like the BMW X5 4×4, which was not cross-charged back to BMW?
If all of these factors were in BMW’s favour within the BMW Group, Rover would have been a dumping ground within the BMW Group for excess costs to inflate the BMW side of the business’s apparent fortunes.
When BMW sold Rover, they included the following assets…
· Most of the Longbridge plant (anything that had received investment, BMW retained to sell later on.)
· The Austin brand
· The MG brand
· A licence to use the Rover name (but not to own it)
· The stock of unsold cars
· The drastically weakened dealer network.
…plus the rights to produce:
· The Rover 75, 45 and 25.
· The old Mini for a short while
· The MG-F
But this lot is still cheaper than making everyone at Rover redundant and paying severance payments etc. Also, actually closing Rover would have been very unpopular – and the UK is BMW’s second-biggest market, after all.
BMW have retained the following:
· The Rover brand (this was a condition by Ford to stop Rover producing a 4×4 and branding it as a Rover, thus confusing the marketplace with regard to Land Rover)
· The Triumph brand
· The Riley brand
· The Mini brand
· All of the cash in Rover, as well as the debtors and creditors
· The Cowley facility
· Parts of Longbridge (engine & transmissions production – even though these engines and transmissions are not used by BMW). This was sold later to Phoenix.
· The Swindon pressings facility
· The Hamms Hall engine plant
BMW sold the following to Ford:
· Land Rover, including its dealer network
· The Rover Group’s development facility at Gaydon
· The Heritage Motor Muesum at Gaydon (including Rover’s Heritage Collection)
It could be argued that BMW purchased Rover for a bargain-basement price in order to stop it from becoming a competitor to BMW itself. They also put back Honda by four years, preventing another competitor from stepping on their toes. They invested selectively, only in the areas that they could sell on at a profit once they had acquired capability in those areas themselves. The crippled Rover that was left was ‘set free’ as a manufacturer with no development facilities or on-going development to use, with a largely outdated model range and, initially at least, dependent on BMW for the purchase of components (engines and panels) without which they could not build any cars. Leaving BMW with the modern facilities, the products in the pipe-line that it had wanted all along (ie: those which complemented the BMWs rather than competed with them), and a marque that they could resurrect – Triumph – and were not dependent on an outside supplier to be able make.
The overall cost of the excercise, once fully adjusted, was possibly minimal. Certainly a lot cheaper than creating a new marque from scatch. And a new marque would not have had the world-known abilities of the “MINI” brand which BMW are now actively exploiting.
This could be seen as a cynical view. However, in the cold light of day, the facts fit the theory. Personally, I am inclined towards this theory more than against it. BMW learnt a lot from Rover about what they can and cannot do in the mass market.
It is still to be seen whether BMW will launch a new product range by resurrecting ‘Triumph’. There is no other reason for having the Hamms Hall engine and transmission facility built (especially if the currency issue was as bad as they tried to claim when they ditched Rover); for retaining the Triumph brand; or for retaining the new model developments and continuing to work on them as was reported after the abandonment of Rover.
It is also possible that the events that took place were an exit-strategy that BMW had planned all along. It may have been one route out of many that they considered (ie, if Rover was a success, they might have continued with it.)