NEW YORK TIMES
INTERNATIONAL BUSINESS; With the Pound Up, Exports Suffer
By ALAN COWELL
Published: Saturday, July 25, 1998
What price the pound?
As the British currency has risen 30 percent in value against the German mark over the last two years, so, too, have British exporters bemoaned the pain they say this has caused. And nowhere has that been so apparent as at the Rover Group P.L.C., the money-losing British auto maker that BMW acquired four years ago.
Walter Hasselkus, the BMW-appointed chairman of Rover, on Thursday announced 1,500 job cuts among Rover’s 39,500 workers, blaming the strength of the pound for hurting the export sales that account for 57 percent of the company’s business. ”Government, please note and understand: the pound is overvalued,” Mr. Hasselkus told the BBC.
Rover’s move has touched off a far wider debate over monetary policy and other issues, raising questions about the Government’s decision last year to shift control of interest rates to the Bank of England, which in turn has raised rates to the highest level in more than five years.
Gordon Brown, the Chancellor of the Exchequer, Britain’s equivalent of Treasury Secretary, attributed Rover’s problems to deficient productivity.
Within the Bank of England’s Monetary Policy Committee, one committee member, DeAnne Julius, openly challenged the decision last month to again raise interest rates by a quarter-point, to 7.5 percent. She said the rate increases, intended to restrain inflation, might be contributing to an economic slowdown.
The higher rates, which make deposits denominated in sterling more attractive, are an important force driving the pound higher, particularly against the mark. It now costs nearly three marks to buy a pound, compared with about 2.1 marks to the pound in 1996.
”It’s simply too high for industry to bear,” said Nick Argent, a Rover spokesman. Mr. Argent acknowledged that, as Mr. Brown said in a published interview today, ”productivity is an issue” for the Rover Group, which, along with Rover cars, produces the Mini, the MG and various models under the Land Rover line. But, Mr. Argent said, it was not the only issue.
Some commentators suggested that Rover, like other British exporters facing recession, was using arguments about the currency’s strength to cloak its own failures to increase productivity. Others pointed out that Rover cars, over the years, have had a reputation for expensive maintenance.
Mr. Argent said that Rover’s work force had improved its productivity by 18 percent in the last few years. But that improvement has been undermined, he said, by the pound’s strength. This has not only made imported cars more affordable in Britain, he said, but Rover’s cars more expensive abroad.
‘The time has come when we must take action,” said Mr. Hasselkus, the the Rover Group’s chairman, who is also a member of the BMW board.
On Thursday, Rover announced that, apart from eliminating 1,500 jobs, it would move to a four-day workweek at some plants and increase purchases from less expensive foreign suppliers.
The jobs are to be shed initially through early retirement and attrition. But these 1,500 positions will not be the only casualties. The increase in foreign-made parts will cost British suppliers more than $1 billion in sales and thousands of jobs, contributing to a manufacturing malaise affecting roughly one-fifth of the British economy.
The main British labor union representing workers at Rover, the Transport and General Workers Union, said it would challenge the job cuts on the ground that it was unjust to penalize the work force for the strength of the pound.
At a time when Volkswagen A.G. is planning to enter the British car market through the purchase of Rolls-Royce, Rover’s troubles highlighted the perils of sterling’s strength for foreign investors as well as domestic exporters.
BMW’s shares fell 6.3 percent on Thursday in Frankfurt, despite the parent company’s announcement of an 18 percent increase in its first-half profit. Some analysts ascribed the drop to the problems at Rover, but Christopher Will, European auto analyst with Lehman Brothers here, said the slide reflected broader weakness in European auto shares. Today, BMW’s stock regained a little of that loss, rising 14 marks to close at 1,719 marks, or $966.
BMW has said it does not expect to turn a profit at Rover until 2000. The first results of its investments in Rover are expected later this year with the introduction of two models developed fully under BMW tutelage — a new Land Rover Discovery all-terrain vehicle and a luxury car.