Archive : Automakers’ Rough Road Ahead

BMW’s Purchase of Rover Starts to Look Questionable : Automakers’ Rough Road Ahead
By Erik Ipsen

The entrance to the Land Rover plant here has become more like an obstacle course. Spanking new Range Rovers line the driveway — two deep in places — and extend in irregular lines up the muddy hillside. The plant, which last year churned out 95,000 vehicles, passed the 100,000 mark this month and is expected to produce arecord 110,000 units by year-end.

At the head office of Rover’s Munich-based owner, Bayerische Motoren Werke AG, however, that success is increasingly lost in a growing thicket of doubts. BMW’s acquisition of Rover in 1994 from under the nose of Honda Motor Co.,originally praised as a brilliant buy,now looks more like a risky long-term beton whether Rover can escape two decades of marginal profitability in an extendedand costly charge up-market.

“For us it is a shift from very high volume — ‘pile ’em high and sell ’em cheap’ marketing — to an international operation with a broad base in the upper reaches of the sectors in which we operate,” said John Towers, Rover’s chief executive.

Mr. Towers concedes that Rover’s new hard line on discounting, and the steady erosion of its European market share that this policy has caused, have raised concerns. Rover’s European car sales in the first 10 months of the year slumped 8.6 percent from a year earlier, cutting its market share to just 3 percent. In the face of such numbers, Mr. Towers said, “There is a temptation to say, ‘Oh my God, go ahead and sell some at a discount.”‘

Officials at both Rover and BMW say, however, that this is a multiyear strategy that will not be blown off course by short-term setbacks.Mr. Towers predicts that strong sales outside Europe will power the company to an overall gain in sales this year in spite of problems closer to home.

Moreover, BMW’s new chairman, Wolfgang Reitzle, has talked of converting Rover into another Audi, the upscale unit of Volkswagen AG, something he has acknowledged willcome neither cheaply nor quickly. Signs of the hardships still to come abound. “People are not yet ready to buy the notion of Rover as a prestigious brand,” said Karl Ludvigsen, an auto industry consultant. “It is acting like an Audi or a BMW, but it isn’t one yet, and that is a fundamental problem.”

Despite the “stay-the-course” rhetoric at BMW, analysts detect a growing frustration there. “Their initial attempts to run Rover as a separate subsidiary have clearly unraveled,” said John Lawson, an analyst with DRI/McGraw Hill.

One of Rover’s biggest burdens, according to analysts, is the diversity of its products. They include Land Rover’s threedistinct models and a welter of Rover carmodels ranging from the small 100 series to the executive 800 seriesnot to mention itsMinis, Metros and MGs.

There are far too few common parts to achieve any economies of scale. If Rover is ever to be solidly profitable, analysts say, BMW will have to take a meat cleaver to its lineup.

Early hopes have faded that the combination of Rover and BMW would quickly yield cost savings on larger orders of common components or on joint product development. BMW won plaudits for its early decision to keep the identities of its German and its British companies separate —avoiding such practices as slapping BMW badges on Rover cars sold on the Continent. But that policyhas made itharder to save on product-development costs.

One of Rover’s key attractions for BMW was the opportunity it gave the German company to escape its dangerously narrow niche. But as much as BMW would like to see new smallcars from Rover, it is not in a position to help design them, given its own lack of experience.

Analysts say it would have been far easier and faster for BMW to put its stamp on Rover by rushing out areplacement for its aging executive model, the Rover 800. The problem with that seems to have been the opposite: BMW knew all too much about that kind of car. “I don’t think BMW was keen to see a new competitor to its own 5-series cars,” said Mr. Lawson of DRI.

What is more, as a result of plans laid long before the acquisition, BMW now finds itself in the embarrassing position of having two new, well-reviewed sports cars in direct competition with each other – its own plus Rover’s new MGF. Hans Koenig, an analyst with BHF-Bank in Frankfurt,predicts that it will take as many as eight years before BMW has a full impact on Rover’s product lineup.

As part of that makeover, sources close to Rover say that BMW has sanctioned a doubling in the company’s spending on new plant and product development. Once a new lineup finally is in hand, they say, the stage will be set for Rover to finally re-enter the U.S. market, whereit now only sells Land Rovers, perhaps by the year 2000.

Keith Adams

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