History : Rover Group and BAe – Part One, the background
In 1988, the Rover Group finally moved out of Government control, being bought by British Aerospace in a controversial £150m deal. At the time, it was hailed as a great outcome for the troubled carmaker, but should it have been?
Keith Adams separates the facts from the fiction.
Since coming into power in May 1979, Margaret Thatcher’s Conservative Government had been vexed with the issue of continuing to fund the existence of Government-controlled BL. The 1980s had been interesting times for the company – with its Honda Joint Venture products’ fortunes contrasting with those of the ‘true Brit’ Maestro and Montego.
A return to profitability had proven elusive for BL. Although the blame for this lies firmly at the door of the Maestro and Montego – as spelled out by Ian Nicholls’ excellent story – it was not through want of trying. The Conservatives had invested in BL in 1979 and again, heavily, in 1982, and made no bones about the fact it wanted to offload the carmaker to the private sector at the earliest opportunity.
- The BMC>MG Rover Story: Part Six – The 1980s, a decade of lost opportunities
- The BMC>MG Rover Story: Part Seven – Life under British Aerospace
Throughout 1984 and 1985, and with Maestro and Montego sales proving disappointing, the Government made overtures towards acquisitive overseas rivals, who were interested in buying parts of BL. The first to step forward was General Motors, and it was the Chief Executive of Leyland Vehicles, David Andrews, who ended up sitting at the table with the US company at the end of 1985.
GM and Ford rebuffed. What next?
GM may have wanted Leyland Trucks to offset losses in its Bedford Trucks division, but the main reason it wanted to talk to Andrews was to get hold of Land Rover, one of the jewels in BL’s crown. A deal worth £275m was nutted out between GM and BL executives and the Trade and Industry Secretary, Paul Channon – but, at the last minute, Mrs Thatcher decided Land Rover was not for sale and the deal for the rump of the Leyland division dissolved quickly.
Ford was also at the table. Austin Rover Chairman Ray Horrocks had been led into talks with his opposite number at Ford of Great Britain, Sam Toy, with a view to a US takeover of the remaining part of the business. The Americans might have wanted the K-Series and M-Series engines, as well as BL’s potential 500,000 per annum production capacity, but there was still much value in the Rover, Mini, Triumph and MG marques – and Ford wanted to make the most of them.
However, this deal, too, would melt away despite looking odds on for success. When news of the failed GM deal and Ford’s ongoing negotiations became public knowledge in February 1986, Midlands MPs revolted and, under immense pressure following the Westland Crisis, Mrs Thatcher instructed Channon to tell the Americans that BL was no longer for sale. It was later confirmed that Austin Rover was required to give confidential commercial information to Ford at the height of merger talks.
Labour MPs revealed to the Commons that Ford saw the production costs of every Austin Rover model. Terry Davis, a Shadow Trade and Industry spokesman, described the decision as amounting to industrial sabotage. The forceful disclosure of information to a competitor amounted to negligence of the national interest, complained Labour MPs. It was a huge moment in BL history – and set the company on a tangental course that would lead it into the arms of British Aerospace little more than two years later.
Getting BL into shape for sale
The upshot of the failed attempts to get BL into private ownership would result in a management (and cultural) upheaval in the company. Margaret Thatcher chose former head of British Shipbuilders, Graham Day, to make BL efficient and ready to be privatised. He was a hard-headed realist, and wasn’t shy to bring in his own men, at the expense of the BL old guard.
The casualties came thick and fast. David Andrews resigned – following his unsuccessful Leyland-led management buy-out of Land Rover – and Ray Horrocks joined him in quitting a month later after criticising the incoming Chairman. Within days, BL became known as the Rover Group, part of a concerted effort to rid the company of past baggage and concentrate on a bright, Rover-badged future (although Austin Rover continued as the car division’s branding throughout 1987).
In July 1986, the newly-branded Rover Group rolled out the new Rover 800. This vitally important new executive car was the third Joint Venture project with Honda to make it into production (following the Triumph Acclaim and Rover 200) and was a far more British-flavoured car than the other two – even if its development had not been without issues.
Harold Musgrove talks up the 800 – and then goes
At its launch, the 800 met with a warm, if not over-enthusiastic response from the press. It was not as if its predecessor, the Rover SD1 was exactly loved by the trade at the time. Too many tales of build quality woes, depressed resale values and the rampant march of the importers, meant this now ageing hatchback had been left behind by the opposition.
In terms of technology and drivetrains, the 800 put that situation right, but its four- and V6-cylinder engines weren’t considered torquey enough for the job in hand. Harold Musgrove defended the company’s new car and, quite rightly, stated: ‘I cannot over-emphasise just how important this car is, not only to the company but to the country.
Where the Metro was the car for our survival, the Rover 800 is the car for our future prosperity.’ What he didn’t say outright was that the profits it was hoped to generate would place the company in perfect health for a return to private ownership – away from the Americans.
Big losses announced
It didn’t start well. Alongside a £204m half-year loss by the company in September 1986, Graham Day announced that Harold Musgrove would be taking early retirement. That meant that the three key players from the old BL management regime were now gone – and Graham Day was clear to adopt his plan to rejuvenate Rover, and get it ready for sale, as a slimmer, less volume-focused company.
At the announcement of the loss, Graham Day told The Guardian, ‘We have to work hard, keep our noses clean and hope like hell we have jobs tomorrow.’ He added, ‘I can’t guarantee anyone’s job, not even my own. I am not a miracle worker. In this business it may take five years to develop and introduce a new product.’
The clock was ticking: £2.2bn had been ploughed into BL since the then Labour Government had taken control in 1975, and the current Conservative Government’s patience had run out, a fact confirmed when one Thatcher aide told the Daily Mail, ‘It is the black hole of the nationalised industries into which a fortune has been poured, with no visible effect on it whatsoever.’
Rationalisation begins in earnest
Heading into November, and the news of a damaging strike by Lucas workers was counteracted by an agreement over pay at Rover. The company’s response was clear: come back to work or we’ll find a new supplier. It worked. At Rover, 27,000 hourly-paid workers voted to accept a new two-year pay deal, with the union’s blessing. It included bonus earnings, and streamlined the company’s pay structure, while helping stabilise its huge outgoings.
Graham Day’s plan to ready Rover for sale was rapidly emerging, too. He was very effectively carving the company into a smaller operation by hiving off non-mainstream car businesses. First to go in that rationalisation programme was its components subsidiary, Llanelli Radiators. That would be followed up by Istel, the computer arm of the Rover car group, which was privatised through a management buy-out.
Meanwhile, the product development plan was up in the air – with reports in the press that Graham Day was considering scrapping development of the Austin AR6 (above) to make way for a Honda-based car instead. It confirmed moves that Honda was now seen as a preferred partner for Rover, with additional reports that Day was looking at plans to give Honda a slice of Rover equity with a seat on the board.
ASTMS union leader Doug Hoyle described this as ‘shameful news,’ adding: ‘If this happens there would no longer be an all-British small car designed and built in this country. The results of this would mean a Honda-designed small car range built in Britain instead.’
Into 1987 and the grand sell-off continues
It wasn’t all bad news, though. The closing weeks of 1986 saw Rover and Honda publicly confirm the deal, which would eventually lead to the introduction of the second-generation 200. The AR8, as it was known then, would compete in the middle market, where thanks to the collapse of the Maestro and Montego, the company was at its weakest. Graham Day said: ‘It is a measure of the strength of the relationship and the confidence that has built up between Austin Rover and Honda over the years.’
The final nail in Austin’s coffin was hammered came on 29 December. Rover put out a simple announcement that stated flatly that it would be dropping the ‘Austin’ badges from the Montego as soon as the updated versions were due to go on sale later in the New Year. The Maestro and Metro would also follow suit – ‘Young people do not want to drive an Austin,’ said Graham Day, when asked by CAR Magazine (below).
In truth, Rover wasn’t looking remotely ready for sale – not without sweeteners anyway. Andy Barr, the Head of Manufacturing Operations, put it very succinctly: ‘We’ve got capacity to build 750,000 cars a year and are selling only 450,000. That is the key question we have to address.’ With 38,000 people still working for the company, this was big news – and Graham Day’s team still faced an uphill task.
That said, it wasn’t all bad news. Quality had improved dramatically with warranty claims halved since 1982. Moreover, despite problems with Lucas, 1986 had been virtually strike-free, with absenteeism levels below the industry average at five per cent a year. John Briffitt, the Manufacturing Director in day-to-day control of the Rover’s factories, said that at the height of union militancy to Sir Michael Edwardes’ tenure at the head of the company, he spent 70 per cent of his time dealing with industrial relations problems. ‘These days,’ he said, ‘it is about 20 per cent.’
The Corporate Plan is handed to the Government
In January 1987, Graham Day handed over his Corporate Plan to the Government. It spelled out what Rover needed to do in order to get in shape ahead of its intended privatisation. Central to these plans were a number of job losses, the sell-off of various subsidiary companies and a move to make the model range more appealing – primarily by extending the Joint Venture with Honda.
The first 1000 job losses of 1987 were announced in January. Many more would follow. In terms of product, The Money Programme revealed that the AR6 project was on the Corporate Plan’s hit list, with the K-Series engine surviving to go into the Metro and AR8. It also revealed that Day was working to a ‘privatisation by 1990’ timetable.
In February, the extent of the sell-off became clear. After the aborted talks with General Motors over the future of Leyland Trucks, the future of the heavy end of the company had been under close scrutiny from senior management. So it came as no surprise when the Government announced it was selling off Leyland Trucks and Freight Rover to DAF on 19 February.
Goodbye to the Trucks
It was a painful sale – and Graham Day tried to put a positive spin on things by saying that, had the deal not gone through, the only other option was to close Leyland Trucks. About 1700 jobs went with the closure of the Scammell plant at Watford and the engine and foundry plant at Leyland. A further 560 went through slimming down operations at Leyland and Albion. Freight Rover continued manufacturing in Birmingham.
DAF picked up 60 per cent of the Truck operation, with Rover – initially – maintaining a 40 per cent shareholding in the new merged company. It was part of Rover Group’s five-year plan spelled out in Graham Day’s Corporate Plan. Trade Secretary Paul Channon denied the Government planned to merge Austin Rover with Honda, and said Land Rover would be sold to the private sector, ’within reasonable time.’ It’s fair to say few expected it would come as quickly as it did.
Labour’s industry spokesman, John Smith, said in response to the sale: ‘We are witnessing the effective surrendering of control of the British truck and van industry and that is something no Government should be proud of. Why is Freight Rover being included in the sale? Is Freight Rover being included as a sweetener for DAF? We appear to be surrendering control of Leyland vehicles because it makes a loss and surrendering control of Freight Rover because it makes a profit.’
‘Everything including the kitchen sink’
Was Rover getting closer to being fit for sale? On 15 May 1987, it certainly didn’t look that way. It was on this day that Rover announced record losses of more than £892m for 1986. Most of this included restructuring costs, such as the £539m written off when Leyland Trucks was taken over by DAF in an act of accountancy that Graham Day described as throwing every loss maker into the equation, including the kitchen sink.
Austin Rover’s losses amounted to £166.6m (up from £19.3m in 1985, and down to a punishing price war with Ford and Vauxhall in the showrooms), while Land Rover made a modest profit of £3.3m – the same as in 1985. Graham Day said: ‘I believe the actions taken in 1986 are such that the year will be seen as a turning point. Against the background of substantial losses in 1986, the first quarter of 1987 has shown encouraging improvement.’
It couldn’t get any worse. The number of vehicles built fell from 557,000 to 476,000 in 1986, while the number sold fell from 542,000 to 494,000. Day pointed out that exports were up 17 per cent and that operating losses for Austin Rover and Land Rover for the first quarter of 1987 were ‘less than half the £30 million incurred in the comparable period in 1986.’
Rover turns the corner
He was right. Although UK sales remained flat, profitability was on the up – so much so that the Government was finally able to set out a timetable for Rover’s sale. The Trade and Industry Secretary, Lord Young, set 1992 as the date during a tour of Longbridge in September. After the dreadful 1986 financial results, this was a shot in the arm, where he added, ‘Rover will be profitable and attractive to investors by the time the business is ready for privatisation.’
By the end of 1987, Rover’s miraculous transformation was beginning to look possible. In an interview with the Daily Express, Graham Day was sounding remarkably bullish – like a man who knew more than he was letting on. He said: ‘For me the ideology is not the private sector. It is the avoidance of people eating at the public trough.’
Austin Rover set the Rover Group back into profit through increased sales, exports and higher production. In 1987 production at Cowley and Longbrldge rose by 14.5 per cent. Some 468,300 cars were manufactured compared with 408,600 in 1986 – extra production worth nearly £500 million in the showrooms of the world. Exports were up in Europe, the Mini and Sterling were selling well in Japan and 20,000 Sterlings found new homes in the USA in its first full year. Day put it this way: ‘If you love your customer to death you can’t go far wrong.’
British Aerospace steps forward
On 2 March 1988, the unexpected announcement came from the Trade and Industry Secretary, Lord Young – British Aerospace, the UK’s largest aircraft manufacturer, was preparing to make an exclusive bid for the Government’s 99.8 per cent shareholding of the Rover Group at the end of April. He said, ‘BAe declared a serious interest in acquiring the Government shareholding in Rover, and have asked that the negotiations be on an exclusive basis. If other parties come along and the negotiations did not succeed, then we will be free to look at the other options at the end of that time.’
The initially odd pairing came about through a mutual desire from Government, Rover, the Unions, their workers and BAe for Rover not to fall into foreign hands. This was probably a reaction to the failed attempt to break BL in two and sell it to GM and Ford two years previously.
Many industry analysts did not see the benefit for British Aerospace in a merger with Rover, even if it had only recently edged back to profitability. However, Graham Day would have none of it. ‘This is an ideal solution for our company , our employees, suppliers and our dealers,’ he said. ‘It will enable us to develop our technologies along new lines.’
The unions weren’t so positive. The Transport and General Workers issued a statement stating: ‘We remain convinced Rover should stay in the public sector and are against any move to privatisation.’ In the Commons, Labour’s Shadow Industry spokesman, Bryan Gould, criticised the move: ‘Is this not a further example of the sort of conglomerate merger that has served British industry so ill in the past? What can British Aerospace bring to this merger? It has no expertise in making motor and commercial vehicles. What hand did the Minister have in urging both of them to the negotiating table?’
Conservative MP Richard Page echoed the feelings of his Cabinet peers: ‘The Rover Group does not have a cat in hell’s chance of succeeding as a separate company. It will only succeed under the umbrella of another company or otherwise face the prospect of being irrevocably linked to the taxpayers purse.’
In the USA, the New York Times concluded that most analysts saw BAe’s proposed purchase of Rover as a big gamble with few obvious benefits. Even though BAe officials told the newspaper that the two companies can share design and manufacturing technologies, it didn’t seem convincing enough a reason without sweeteners – a write-off of Rover’s debts would be a good start.
The newspaper concluded that the purchase could give BAe a needed buffer against the steep development costs of its jet fighters and Airbus commercial airliners. However, John Lawson of the Nomura Research Institute in London, nailed it: ‘Politically, this is an ideal solution because it keeps Rover British. But there is not much industrial logic to it.’
Automotive Analyst Krish Bhaskar added that, in order to survive meaningfully, Rover would need to go upmarket. ‘Unless it can do something like Jaguar, carve out a niche and a healthy export market, Rover will have trouble,’ he said. ‘Rover is heading in the right direction, but it’s still uncertain how successful they will be.’