The BMC>MG Rover Story : Part Eight – Night of The Long Knives

Many within the media and the British Government saw Honda as being the saviours of Rover; a logical conclusion to draw when one considers the amount of collaborative work that they and Rover had undertaken, but sadly, this to prove not to be the case. British Aerospace as stewards of the Rover car company had been going through financial woes of their own during the early 1990s – many of which had been caused by the expansionist policies that the Chairman of BAe himself, Professor Sir Roland Smith had pursued during his tenancy at the helm of the company.

Returning back to basics was obviously the ambition of his successor, and primary in achieving that goal would be the removal of all non-core businesses, the biggest of which was Rover. So during 1993, and by then, headed by new a chairman, John Cahill, the company began to decide upon a strategy that involved the disposal of Rover, but at the same time making sure that it did not look like they were keen to sell – for the obvious reason that it could devalue the company’s worth in the minds of potential suitors.

Luckily for BAe bigwigs, the issue of how to put the company up for sale did not arise, because over in Munich, BMW were deliberating on how to survive in the long term given that at the time, they were producing somewhat less than a million cars a year – which meant that they were a minnow on the world’s stage. Headed by the new company’s new CEO, Bernd Pischetsrieder, it was clear that BMW would need to expand in order to survive.

Being what was considered to be a small player in the international arena left the company under threat of being engulfed by an acquisitive rival – and at the time, there was a general direction towards mergers and takeovers in order to survive. BMW’s position was something of a unique one, however: the company possessed a formidable reputation for producing executive cars, but it left the company with something of a dilemma – how to increase volume significantly without diluting the brand’s strong image?

The answer was obvious: buy or collaborate with a volume producer! Of course, it was not as simple as that: BMW were an ambitious company and given this, the corporate ideal would be to possess a portfolio of premium brands in which to cover all sectors of the market. The options at the pinnacle of the market were obvious: Rolls Royce and Porsche. Below that, was more difficult – Land Rover possessed a world beating image, and would be an ideal addition to the dream ticket that BMW so desired – on the volume front, it was not so clear cut.

Most suitable volume producers were already tied in with collaborative partners – and so, the choice of available independents was somewhat limited. BMW reached a similar conclusion to Sir Michael Edwardes some fifteen years previously, by targeting Honda, but this time their advances were firmly rebuffed by the Japanese – Honda had a suitable European presence already and they did not wish to enter into partnership with anyone.

BMW Group seals the Rover deal

Following Honda’s rebuttal, the only real choice left to BMW was Rover. Still controlled by BAe, it seemed that there would be an opportunity for BMW to gain access to the volume market by buying up Rover – assuming that their masters would sell, of course. In June 1993, Pischetsrieder approached George Simpson and sounded him out about the possibility of BAe selling Rover. The response was positive, but only if the German company were to buy the entire organization – which of course was exactly what Pischetsrieder wanted: a volume production marque to slot in beneath BMW.

So, in what seemed an ideal match, BMW approached BAe with a view to buying Rover. With Rover, not only would they acquire the volume arm of the company, represented by the products of Longbridge and Cowley, but they would also gain Land Rover, the prestigious marque MG, and the unique retail opportunity of Mini. Needless to say, given BAe’s desire to sell and BMW’s desire to buy, it seemed that there would be little to stop the partnership being formed.

As it became clear within the company, that BAe were gearing up to sell Rover, concerns were raised by management that an outside company could cause a loss of stability – and jobs could be lost, and factories could be closed. It was obvious to management, particularly John Towers, that the preferred partner for Rover would be Honda – and given the fact that they already possessed a twenty per cent stake in Rover, it was hoped that Honda might want to take up a further, controlling interest.

In the closing months of 1993, Rover tried to persuade Honda to do just that – but the Japanese company were not interested in taking up the ownership of Rover, but they did offer to increase their stake in the company to 47.5 per cent. Honda’s CEO, Nobuhiko Kawamoto explained Honda’s stance by stating, ‘After Honda was offered the opportunity to increase its share in Rover, we made a proposal. Part of the proposal was to acquire less than half the total shares in Rover, based on our desire that Rover continues as an independent British company… one which would then be able to offer shares publicly. We believed this proposed arrangement would strengthen our long term relationship with Rover, as well as strengthening Rover itself.’

When it became clear that Honda did not wish to take ownership of Rover, and BAe had an offer on the table from BMW, it became clear to Rover’s management that the parent company would not be able to resist the £800 million tabled personally by BMW’s director of corporate planning, Dr Hagen Luderitz. That did not stop the management from lobbying Honda hard – and right until the last moment, they tried to get Honda to match BMW’s offer – on the eve of the BMW purchase, George Simpson himself flew out to Tokyo and tried to get Honda to change its mind.

Much to his chagrin, Kawamoto, did not even meet him personally; it was left to their finance director to reiterate Honda’s offer to take a minority stake in Rover. At this point, the dye was cast – and on the 31st January 1994, the Rover Group was sold to BMW: The UK’s only remaining indigenous volume producer of cars was now in foreign hands.

Industry watchers were surprised by the move, to say the least – it had always been assumed that Rover and Honda would move closer together, and given time, for better or worse, this may have been the case. But given the fact that BAe wanted to disentangle themselves from Rover and look after the interests of their own shareholders, the cash offer of £800 million from BMW looked a great deal more appealing than joint ownership of Rover with Honda.

On the 1st February 1994, Bernd Pischetsrieder announced his company’s purchase of Rover to the press – and immediately began to make overtures that Rover were safe in BMW’s hands – and that much inward investment would be heading towards Longbridge, Cowley and the rest of the company. Indeed Pischetsrieder had already made it quite clear to the Department of Trade and Industry that there would be no closures – even though BMW’s previous management had favoured a closure of Longbridge. As far as BMW were concerned, this decision made by Pischetsrieder himself, would come back to haunt them.

BMW Takes The Helm

If management at Rover had expected rapid and swift changes within the company after BMW took control, they were in for what was seemingly a pleasant surprise. From the beginning, Bernd Pischetsrieder made it quite clear that his would be a ‘hands off’ regime, and this was soon backed up by BMW’s attitude to the new model programme. Pischetsrieder described this process in a letter to the then Trade and Industry secretary, Michael Heseltine shortly after the takeover: ‘We want to protect (the distinctiveness of products and brands) and therefore intend to maintain BMW and Rover as separate enterprises each with their own manufacturing plants and their own design and development capabilities.’

This policy was described as ‘Rover leads Rover. BMW leads BMW.’

The day after the purchase had been formalized, both Wolfgang Reitzle and Bernd Pischetsrieder visited the Gaydon facility to see what products Rover were working on. The Portfolio range (Rover 200, 400 and MGF) was well advanced, just about ready for production, and there was little that the Germans could do to influence these products. However, both men were reported to be very pleased with what they saw and gave the three cars their blessing for production.

Other projects in the pipeline, however, were closely evaluated, and Pischetsrieder ensured that the replacement Mini project was given priority, with a view to production as soon as possible. For him, this was the most important of all the products that Rover had in the pipeline, and he understood fully just how important the Mini brand was to the company.

Not only was the MINI brand important for the company, but also it would ultimately ensure continued volume production at Longbridge. The Rover Metro/100 was beginning to fade in sales terms, and although there was to be a lightly face-lifted version, planned for launch in January 1995, it could be nothing more than a stopgap until the Mini’s replacement came on stream. Rover had been working on this car before the BMW takeover, but following Pischetsrieder’s ringing endorsement of the project – and the promise of much extra finance in order to get the car into production, it was pretty clear that the future of Longbridge would be safe at the hands of the new company.

So, the Mini replacement project received an all-important shot in the arm. Next on the agenda was the less straightforward matter of replacing the 600 and 800 – and whether, indeed, it was actually prudent to do so, given the fact that they occupied the same market sector as the BMW 3- and 5-Series, respectively. Rover had also been working on this matter as well – and after some interesting concepts had been vetoed on cost grounds by BAe, they had settled on a proposal called, ‘Isis’, which would eventually metamorphose into the Rover 75.

The BMW board also liked what Rover at Gaydon had achieved in their early work on the new executive car, so much so they gave ‘Isis’ the go ahead without the need for any change – and they even briefly revived one of the car’s sister proposals, until it became clear that building it (on a shared BMW platform) would cost the company time and money – and potentially delay the launch of the vitally important 600/800 replacement.

On the Land Rover front, the CB40 project – what would become the Freelander – was also agreed, but with changes to the production arrangement that Rover were putting into place for it. Rather like the company’s agreement with Mayflower to produce MGF bodies, Rover had arranged a collaborative deal with the Finnish company, Valmet, in order to share the production costs of the new small Land Rover. This might have meant an agreeable cost saving for BAe, when the deal was conceived, but it was also at the cost of profit – and once BMW were on the scene, there was no real need for such budgetary measures.

So far from being the harbingers of a new Germanic way, BMW seemed to offer Rover everything they needed in order to return to their glory days: freedom in management, and a very healthy development budget with which to produce their next generation of cars. Change, it seems, was the last thing on Pischetsrieder’s mind – and he went as far as making some very unsubtle hints that he would like to resurrect some of the company’s long lost marques – most notably, that of Riley and perhaps, Austin-Healey.

Certainly, the atmosphere at Rover was upbeat, given BMW’s laissez-faire attitude to the company, and within months, some of Rover’s long-standing (and Honda influenced) practices started to disappear: management were soon to be found back in suits, instead of the same corporate overalls that the rest of the workforce wore, in an attempt to break down the generational divide between management and employees.

A confidence started to return to the company’s employees – not least assisted by the fact the Group Managing Director, John Towers, was not replaced by a BMW appointed executive, but was in fact, promoted to the company’s Chief Executive. Towers himself was more than a little surprised by this, and has been quoted as saying that had he been in Pischetsrieder’s shoes then, perhaps, he would have appointed someone straight away to replace the incumbent.

Be that, as it may, Pischetsrieder actively wanted a British CEO to run Rover – and given Towers’ excellent record, he seemed the most suitable candidate for the job. Pischetsrieder was also feeling generous when it came to Towers’ pay – not only was the man surprised by his new post, but the fact that his wages almost doubled overnight, and that certainly must have made him feel wanted. Having Towers in charge during the transition period was certainly a popular decision with the company’s workforce – the continuity made them feel good, even if ultimately, John Towers would not last the distance, as he was always and very publicly a proponent of the company remaining in partnership with Honda.

So, by the time the last of the Portfolio models had been launched at the start of 1996, Rover was still pretty much the same company that it had been when BMW took over some two years previously. Pischetsrieder had been wise enough to realise that any radical changes made to the working practices and management structure of the company would be met with resistance, and so, his thoughts were to leave Rover well alone.

This was an admirable stance to take, but given the fact that Rover were still in a position to offer only Honda based products in the volume sector (which were still in their infancy, and years away from being replaced), it was also a risky one. Many of BMW’s senior executives began to question why Rover was consuming so much of the company’s resources, with what appeared to be little return. By 1996, the R40 (Rover 75) and R50 (MINI) projects were still in their infancy, and yet, the need to get them into production as quickly as possible was not met by what BMW saw as any sense real of urgency at Gaydon.

The honeymoon is over as 1996 draws to a close

In retrospect, the period between BMW’s takeover in 1994 and the early months of 1996 were the honeymoon period in the relationship; Rover certainly felt the benefit of the extra cash coming in, and BMW were still on course to develop their multi-brand strategy. However, piece-by-piece, this honeymoon slowly melted away, and the first real sign of this was when the company had its first high-profile resignation.

It was John Towers, that decided to leave the company for pastures new – being seen as a ‘transition man’, it seemed fitting, almost, that he would leave in April 1996, shortly after the launch of the last Honda-based Rover. A BBC documentary crew, who were working on their, ‘When Rover met BMW‘ programme – caught his resignation on camera and it was memorable for that, at the very least. Towers’ departure was no doubt eased by his £500,000 pay-off, but it did now clearly mark a turning point in the BMW/Rover relationship. The new era had now been well and truly ushered in, and the matter of replacing Towers was an issue that Pischetsrieder could no longer avoid. The problem was that suitable British executives were hard to find, and it took BMW quite a long time before they could fill Towers’ shoes.

That vacuum was filled, initially by Wolfgang Reitzle, a curious choice for the new chairman given the fact that his ideas for Rover’s future were at a variance to those of Bernd Pischetsrieder. But Reitzle’s appointment was temporary, as Pischetsrieder still wanted Rover to be controlled by a British CEO. Finding someone prepared to take the job, and who was also suitable to do it would take longer than imagined! In the end, the man chosen for the job was Walter Hasselkus, a BMW manager with a proven track record within the company. Although German, he was a renowned Anglophile – and was judged to be the ideal man to close the cultural divide between BMW and Rover, at a time when necessity drew the companies closer together.

It was during this time that the marketing strategists began to formulate their plan on how to treat the Rover brand. Pischetsrieder was also well known for being an Anglophile – and he wanted Rovers to be uniquely ‘British’, in their execution. BMW’s market research had shown clearly that although they were very successful in their own market sectors, they offered such a focused package, that they had little opportunity for poaching sales from rivals such as Jaguar and Mercedes-Benz. Rover would perhaps be able to offer a package to do just this, but at the same time – it was evident that Rover’s brand values were not really strong enough to do this, being lodged as they were in the volume sector. Despite the moderate success of the good-looking Rover 600, there was also a (misguided) customer perception that Rover’s products were little more than re-badged Hondas – and although that added value and reliability, it did not add class.

The Rover R8 had slowly begun to change people’s ideas about Rover, but thanks to Honda’s insistence on its replacement being tightly based on their own Domani-based Civic five-door, Rover’s impetus in the middle-sector had been somewhat forestalled. There was also a level of customer misunderstanding over which Rover model occupied what market slot: and why they generally offered (technically superior, but) smaller engines and packages to their rivals such as Ford and Vauxhall.

Against this background, the company’s most expensive and therefore prestigious car, the 800, was ageing at an alarming rate – so the conclusion to be drawn from all of this was the BMW would need to rebuild the entire range before they could even think about seriously marketing Rover in an upmarket way. So, the strongest cars in the range were most obviously Honda based, and they were in the volume sector; hardly a good starting point to build the company into one that were going to produce (in Pischetsrieder’s words) ‘Cheap Jaguars’.

Rover marketing wobbles

The marketing strategy chosen by BMW was one that emphasized this ‘Britishness’, whilst distancing Rover from BMW. How was this achieved? By trying to emphasize just how relaxing and cosseting Rover’s cars were… Whereas in 1989, the then new Rover 200 was sold around an aspirational marketing campaign, the direction was swiftly changed to reflect the new way of thinking. ‘Relax it’s a Rover’, became the much maligned new hook line, and the idea that Rovers were designed for young and ambitious people was swept quickly under the carpet.

Whether this ideology was the right way to go is questionable, but it certainly succeeded in distancing the two companies. However, it also seemed to have a discernable effect on the company’s sales, and although this is hard to quantify because of the fact that the Rover 800 and 100 were losing appeal quickly in the face of new rivals, whilst the 200/400 were both appreciably different to their predecessor. However, the more youthful Rover 600, which perhaps appealed to the younger end of the spectrum, did suffer because of what appeared to be the decision to pull all advertising of the car.

The other problem, of course, was that BMW bought Rover for their volume potential, and the ability to produce and sell a smaller car without the risk of diluting their own brand. BMW wanted a ‘2-Series’ car in order to increase production volumes, and Rover would allow them to do so. So, the grand plan was taking shape: Mini at the bottom, Rover in the volume sector, BMW in the executive class – and at the very top: Rolls Royce. Where there seemed to be a serious overlap was in the upper-medium class, where the Rover 600 and 800 competed against the BMW 3- and 5-Series

By 1996, the matter of replacing the 200/400 models was addressed by a new project, codenamed the R30. It was around this car that the entire future of Rover would hinge, because this was to be pitched at the very heart of the market, and whereas the 200/400 were both selling unspectacularly, the R30 was conceived to increase volume and, therefore, alongside the Mini, establish Rover as a premier player in the small/medium class. It was also the car that would guarantee the survival of Longbridge, because at an anticipated production rate of 250,000 cars per annum, it would begin to use up some of the spare capacity at the huge factory.

The R30 itself soon took shape as a contemporary, yet retro, five-door hatchback. The design process was project managed by Richard Woolley, and like the R40 project, the intention was to produce a very ‘British’ car that offered an alternative within the sector. The car that was formulated at Gaydon was beginning to take shape as a highly interesting and technically interesting package, and because the designers were unconstrained, as they had been in the past, they were really able to exercise creative freedom. At the same time as this, the R40 and R50 nearing completion in design terms, but in both cases, because of the fact that BMW felt that progress was not quick enough, the German company began to involve itself increasingly in the day to day running of Gaydon.

Certainly, it was into 1997 that tensions between the two companies really began to mount, and the wisdom of Pischetsrieder’s ‘hands off’ approach was questioned increasingly within Munich. Pischetsrieder’s number two and BMW’s Director of Engineering, Wolfgang Reitzle was against this approach, and he was quite vocal in this opposition.

His own feelings were that Rover was already irreparably damaged – and had been for some time, not helped by British Aerospace’s under-investment – and that the only course of action should involve closing one of the two UK factories (most likely Longbridge) and concentrate on building a business plan based around the MINI and a BMW ‘2-Series’ (possibly based on the R30) at Cowley (now known as Rover Oxford). This idea did have many proponents within Munich, but whilst Pischetsrieder was in charge of BMW, neither Longbridge nor Cowley would close. He had every intention of standing by the promise that he had made to the UK government back in 1994.

Reitzle’s advocates would need only point to the continuing outward cash flow towards the UK in order to bolster their arguments. Rover continued to post losses year-on-year, and although this picture was rendered less than straightforward, given the fact that much of this expenditure amounted to investment in new models and facilities, it still did not make good reading on the balance sheet.

Sales in UK also looked bad for Rover – and in 1996, the company posted a total market share figure of a disappointing 10.94 per cent – this may have been offset to a degree by increased exports to Europe, thanks to improved client confidence in the brand, it did not amount to a significant upward turn in the total amount of vehicles sold. Lifting the export numbers did improve the company’s standing in Europe, but eventually, this would have lasting implications for the company.

So Pischetsrieder was under pressure from elements with his own company, who were criticising his multi-brand strategy – and Rover’s less than sparkling performance was giving them the stick to beat him with. His growing impatience with Rover began to show, and he increasingly sent BMW executives from Germany to serve time on secondment in Gaydon. This increasing influx of BMW men meant that by 1997, Rover had lost its own independence within the company, ceasing to be an autonomous subsidiary, but effectively becoming a division of the parent company. It also meant that the prevailing feeling of confidence within the company had been replaced by something approaching nervousness.

To counteract the huge amount of money that Rover was by now swallowing, the company needed to contain costs – and a programme of cost saving was rapidly introduced across the company. Whether this would impact upon the £800million per year that BMW was ploughing into the company by this time was debatable, but it certainly made a stark contrast to the attitude at Rover, a mere two years previously! This comprised of such things as reducing non-essential travel, and even ensuring that all office lights were extinguished when the last person left! It also heralded the beginning of re-negotiating the employment conditions of all the company’s workers, as the deals put in place during the early 1990s were not in line with the rest of BMW’s factories.

The cost of Rover begins to mount up

But why did BMW need to plough so much money into Rover? British Aerospace under-invested in Rover, and although, it made a nice headline figure back in 1988, £1bn investment, spread over five years did not actually go very far. This lack of funding explained to an extent, the fact that the ’95 Rover 200 had been designed on a shoestring, and why the 400 was almost pure Honda (Rover were in no position by this time to go it alone), and the 800 received a facelift instead of being replaced by an all-new model in 1991.

It also meant that Longbridge and Cowley had both been under-developed, despite the fact that two thirds of the Oxford plant had been razed by BAe and sold to land developers. BAe sold at a shrewd time (for them); Rover were still seen as an effective force on the market place, their models were still respected, and the ravages of BAe under-investment had yet to manifest itself too badly. The trouble was, that BMW were the ones who were paying the price, and although its cash flow was healthy, it did not possess a bottomless corporate pocket.

Outwardly, the BMW Board still backed Pischetsrieder’s plan for Rover, but the vultures led by Wolfgang Reitzle were beginning to circle.

Although 1997 had seen Rover’s production top 500,000, it still proved to be a traumatic time for its German parents. The combined costs of developing the R30, Rover 75, MINI, Freelander and new Range Rover, the creation of the new engine factory at Hamms Hall, as well as the refurbishment of Gaydon, Longbridge and Rover Oxford were really beginning to put a strain on BMW. Pischetsrieder, no doubt looking over his shoulder at Wolfgang Reitzle, soon began to realize that in order to complete his revitalization plans for Rover, there might be the need for an outside partner. Certainly, the likelihood of Rover turning over an operating profit did not look good until 2000 at the very earliest, and even then, that forecast relied on the Rover 75 and MINI being successes when they were launched, and there being no outside factors, such as an economic downturn.

To ease the burden of Rover, thoughts turned to collaboration with Chrysler in the USA – and, certainly, the announcement in 1997 of a joint engine plant to be built in Brazil indicated that both companies felt the same way. Wolfgang Reitzle and Chrysler’s second in command, Bob Lutz, forged the joint BMW/Chrysler deal, which amounted to 500,000 1.4 and 1.6-litre engines for use in the MINI and Neon cars respectively.

There was a feeling at Gaydon that the K-Series engine was going to be overlooked for the MINI, but it still came as a disappointment when the announcement was made – especially given the rather uninspiring technical specification the Chrysler/BMW engine possessed. Of course, the bigger picture was that the new engine was the entrée: both companies shared a mutual desire to join up and work on further projects… ultimately, the Longbridge plant would make an ideal European assembly operation for Chrysler, who, at the time, were eyeing up expanding their market share of the European market.

If BMW and Chrysler had ultimately joined forces, then it would have placed the Hamms Hall operation in deep jeopardy. With Brazil being extended to produce the 1.8 and 2-litre ‘NG’ (for ‘New Generation’) engines, alongside the 1.4 and 1.6-litre MINI/Neon engines, there would be little call for the new plant in Birmingham.

BMW certainly wished for it to happen – the opportunity to platform share with Chrysler was open to them, as was UK production of the Neon. In simplistic terms, sharing the Rover ‘burden’ with the US Company would have given BMW much in the way of breathing space until the expected 2000-2002 financial breakeven point for Rover.

However, it was not to be for BMW and Chrysler: close links were severed when in May 1998, Mercedes-Benz swooped in to buy Chrysler from underneath its rival’s nose. Mercedes-Benz became very worried by the concept of a BMW-Chrysler partnership, fearing that they would become the German Minnow – and so, went on the offensive, to form the giant $55billion DaimlerChrysler combine.

The net result of all this was that, there were no alternatives left for BMW: Rover needed to become profitable, and BMW was on its own.

BMW begins its exit strategy

As it was, the corporate plan that revolved around the MINI, R30 and Rover 75 still looked fundamentally sound – BMW management had a great deal of confidence in the ability for these products to perform well once they made it on to the marketplace. What BMW needed, therefore, were an easy couple of years, without mishap… It was not to get them, however.

Unfortunately, the MINI was delayed in the wake of the project being passed from pillar to post – and the 1999 release date was moved back to 2000 at first, before dropping back further, to 2001. This could not have come at a worse time for the company, as the Rover 100 had all-but died on the market in the wake of its disastrous showing in the EuroNCAP crash test. The intention was for this car to hang on until the MINI was released, but once it became clear the MINI would not be appearing in time for the fortieth anniversary of the birth of the original, Rover pulled the plug on the 100. At a stroke, the output of Longbridge was cut, and even though there was a downward adjustment of Rover 200 pricing, the entry level Rover was never effectively replaced.

Rover’s plight was becoming more uncomfortable, and because BMW’s shareholders, led most vocally by the Quandt family, wanted results that just did not seem to be coming, Pischetsrieder, was becoming increasingly defensive about his multi-brand strategy. Certainly, it is fair to say that at this point, BMW was now operating Rover without any form of safety net. In reality, it would take only one more upset for the company, and its position would cease being uncomfortable – it would become untenable.

As 1997 drew to a close, that upset occurred – and it came not from within, but from that most unpredictable of mistresses, the European currency market.

The darkest hour

Ever since the UK dropped out of the exchange rate mechanism in 1992, Sterling had lacked stability compared to the Deutschmark – and although it had been steadily declining, there was no need to panic. However, as in all things that depend on the vagaries of the financial market, there was no guarantee that this relative calm would remain so.

In 1995, however, the tide would turn and the gentle decline would turn into a rapid rise – and as a result, all of BMW’s financial calculations were thrown into disarray. In 1996, The Pound equalled DM2.35, by the summer of 1997 that had risen sharply to DM3. BMW Management could see the impending crisis coming their way, but could do nothing to stop it – their idea of a worse case scenario had been for The Pound to equal around DM2.6, so when this figure had been smashed, their profits would suffer terribly.

In case the reader is in any doubt of the significance of all this, what it basically meant was that imports could be sold in the UK at a very advantageous price, as the currency exchange benefited them (a strong Pound meant that their cars could either be sold for less, but profits back in the homeland would remain the same, or prices could remain static, but profits increased). It also had implications on Rover’s exports to Europe – because their cars would need to sell at higher prices in the export market in order to maintain margins (which were already slim). If there was but a single silver lining to this unremitting cloud for BMW-Rover, it was that BMW increased their market share in the UK, and because the brand was still perceived as being strong, they could maintain their (high) prices, and therefore increase their profits, accordingly.

In fact, it was worse that that – In order to maintain sales of any sort in Europe, Rover were forced to discount and up-spec their cars, which meant that they were being sold at a loss. The effect in the UK was horrific: in the summer of 1998, sales ‘fell off a cliff’, as one senior executive described it, whilst the importers had a bonanza. Rover’s 1998 market share in the UK was down to a mere 8.63 per cent of the market, compared with the already low 10.95 per cent of 1996.

Because of the currency fluctuations and the ageing volume models, sales were falling and profits on those sales had vanished – and in tandem with the continuing investment of upgrading of the Rover Oxford factory and, Longbridge, as well as the continuing development programmes of the Rover 75, MINI, R30 and Range Rover, BMW’s continuing investment in the British company was attracting the wrong kind of attention back in Germany.

Fuelled by the German media, Rover became known as, ‘The English Patient’ – and the drain on Rover’s resources was becoming too much to bear for the company’s shareholders. Walter Hasselkus, ever mindful of the continuing strength of the Pound throughout 1998, and pressure from Munich, was left with little choice but to start cutting the staff complement. During July, the announcement was made that some 1,500 jobs would need to be shed, as well as the widespread adoption of the four-day week for many others.

He made no secret of where the blame for this lay: ‘The current value of the Pound means our revenue from vehicles sold is reduced, while cheap imports are sucked into our home market.’ This was a warning shot to the government – and should have been seen as the first sign of BMW’s continuing disillusionment with their situation in the UK. Certainly, the company was one of many large exporters who would have benefited from re-joining the Exchange Rate Mechanism, and the eventual adoption of the Euro.

As it was, the Rover R30 programme also suffered at the hands of the uncertainty over currencies: because of the huge investment needed to bring the remaining portion of Longbridge up to date in order to accommodate the assembly of the R30, BMW needed to re-evaluate their business plans for the car and its factory.

Certainly, new working practices would need to be adopted at Longbridge, at the very least, but beyond that, productivity would need to be improved (from Rover’s already very impressive baseline), and jobs would need to be shed. With these measures, a future for Longbridge could be hoped for, but the company would need to feel much pain in order for the plan to come off. As it was, Bernd Pischetsrieder called to a halt all development of the R30 and MINI, as well as funding for the improvements at Longbridge. However, the government certainly did not appreciate being held accountable for Rover’s woes (even though, quite plainly, they largely were) and rejected the protestations of Hasselkus. This failure to see the seriousness of BMW would cost the government dear in the near future…

It was now a common belief within BMW, as well as the German media, that the Rover 75 was now the final shot in the Pischetsrieder plan for BMW-Rover’s lasting alliance. The general consensus was that the new car would need to deliver on the marketplace if the company was to regain credibility, and therefore survive the long-term. The signs were good – the car was elegantly designed, and Hasselkus himself described it as a ‘beautiful British car’. It also stood more of a chance of delivering a profit for the company, even during times of a strong Pound, thanks to its higher than normal level of imported content. The factory in which it was to be built had been re-developed, and was considered one of the finest in Europe. The signs were indeed, good…

As explained more fully in the Rover 75 development story, BMW needed to show the Rover 75 off to the world at the earliest opportunity – and that would be in the closing months of 1998. Bringing forward the launch was a calculated gamble, given that sales of the Rover 800 and 600 had all-but dried up as production was wound down. The intention was that the boost to the company’s image would be such that many potential customers would choose to wait for the new car, rather than going for a rival’s product. Also, the British Motor Show at Birmingham conveniently fell into this timescale; so the new and vitally important British car would have its unveiling in its homeland.

Of course, the almost desperate situation that BMW felt they were falling into played as a constant tune in the backs of senior company executives’ minds. Although the Rover 75 was indeed a promising package, there was a now almost undisguised feeling of despair at the continuing currency imbalance amongst the Germans. Bernd Pischetsrieder’s position within BMW as the company’s CEO rested on the new model, now dubbed, ‘The Last Chance Saloon’, in the German press – and if it failed, it was likely that the pro-Wolfgang Reitzle faction in BMW’s boardroom, would call for his resignation. Without Pischetsrieder, Longbridge would undoubtedly close, and the R30, which was still on hiatus, would not go ahead – certainly not in the UK, anyway.

Pischetsrieder torpedoes the Rover 75’s launch

So it seems all the more incredulous that Pischetsrieder torpedoed the Rover 75 at its launch in front of the world’s media. But that he did. He used the occasion to criticise the government’s anti-Euro policy, but much more significantly, he questioned whether Longbridge had a future at all. His shock speech cast long shadows over the entire West Midlands – and if it had meant to put the fear of god into Rover’s workforce, it had the desired effect.

However, as a PR exercise, it was an absolute disaster because his unplanned outburst also undoubtedly harmed the entire company’s image, not to mention that of its newest product. In fact because of the speech, seeds of doubt were placed in the minds of many commentators at the time, Rover was now as good as dead in the water – what a way to shatter the image of a ‘make or break’ product! It certainly put some of Sir Michael Edwardes’ more unsavoury announcements into perspective.

In fact, the reasoning behind the ill-advised speech was to get the unions and work force to unconditionally accept job losses – and Pischetsrieder still stood by the plan to re-develop Longbridge, and get the R30 into production there. The main casualty at the time was Walter Hasselkus, who resigned as the Chairman and Chief Executive of Rover on the 2nd December 1998. He simply stated that he was going because of Rover’s spiralling losses and, although it looked like he was deserting a sinking ship, he did oversee a BMW/Union agreement, which at the time looked as though it would help save the company.

Pischetsrieder certainly did not give up either – and although Rover was expected to cost BMW some £500 million in 1998, he knew that the freeze on R30 and MINI development needed to be lifted as soon as possible. Convincing the BMW Supervisory board to keep the faith would be difficult without an austerity plan in order to lessen the financial burden on BMW. The first port of call was to push for the savings that could be made by adjusting the company’s complement, as well as changing their terms and conditions.

Thanks to the efforts of the unions, headed by Tony Woodley in the UK and Manfred Schoch in Germany, as well as Walter Hasselkus, Pischetsrieder was able to table a plan to save the company some £450 million over the next three years. Unsurprisingly, the Unions delivered this to BMW but only after a fight that cost Rover a few members of their own management team. The unions were realistic enough to accept losses in order to guarantee the future of Longbridge, and Woodley employed a great deal of ‘finesse’ in order to reach a mutually acceptable deal.

The sum total of the R30 development programme would be £1.7 billion, of which £1.2 billion was to cover the cost of the Longbridge renovation. Pischetsrieder knew that the BMW would be nervous about spending such a vast sum of money, and although the £450 million wage related cuts went some way towards appeasing them, there would need to be further concessions. Pischetsrieder therefore decided to approach the British government for aid – a £200 million state subsidy to ease the burden of the company’s massive investment in the UK. If he could get this aid in place, he believed that the BMW board would be convinced enough to allow the project to continue.

So, with this in mind, Pischetsrieder was alarmed by the response of the then secretary of state for trade and industry, Peter Mandelson. The government response to the request was that BMW were responsible for the funding of Rover, and it was not a government matter. It was a shocking attitude to take, given the possible consequences of BMW not receiving state subsidy, but it a probably consequence of Peter Mandelson underestimating the earnestness of the BMW boss. For BMW, this amounted to an insult, especially given the fact that as a company, they invested huge sums of money into the country’s economy – and receiving the grant would ensure the continuance of that. Because they were so chagrined by Mandelson’s rebuff, BMW went public over the situation, Pischetsrieder stating that, ‘If they didn’t care, then why should we?’

As it was, the matter was not quite so cut and dried – The Prime Minister, Tony Blair, was acutely aware of the political implications of a Longbridge closure, and ensured that the matter was not left at that. Because they were still then quite new to government, they needed to know that BMW were deadly serious in their request, and that it was not simply a ruse to obtain funding from a new administration keen to make an impression. The truth was that BMW were deadly serious; it was a case that if aid was not forthcoming, then the BMW Board would in all likelihood not back the R30/Longbridge plan – leaving closure as the only option.

As it was, Peter Mandelson resigned (over another issue) at the end of 1998, and so BMW found itself dealing with a new trade secretary, Stephen Byers. This could be seen as a second chance, and Rover management wasted no time in inviting Byers up to Longbridge so that he could see for himself the plans that the company had for the Birmingham factory. Impressed by what he saw, Byers made no secret of his support for the factory and the R30 – and the tide had appeared to be turning in Pischetsrieder’s favour. The possibility of the aid was still on…

However, Reitzle’s supporters had all but declared war on the CEO, so much so that the Quandts, and Von Kuenheim viewed the very public affair with complete distaste. They could see that BMW’s much cherished image was being brought down by this management power struggle – as it was, the whole matter eventually came to a head at one of the most extraordinary company board meetings of all time.

The Knives Are Out

(Note: The definitive account of this extraordinary event has yet to surface, but it has been pieced together from articles in Car and Autocar magazines, as well as the book, ‘The End Of The Road‘, by Chris Brady and Andrew Lorenz)

R30 had been on hold since the summer of 1998 because of questions over funding this huge project. The government was approached for a financial contribution towards the new model programme – initially, they were less than forthcoming. In reality, however, R30 died on the 5th February 1999, when Bernd Pischetsrieder resigned as BMW’s CEO (picture supplied by Autocar magazine).

The date of 5 February 1999 will never be forgotten within the corridors of power at BMW’s headquarters in Munich (nicknamed the ‘four cylinder’). It was on this cold Bavarian day that the Supervisory Board (the hands off board with executive power over the main operating board) met to discuss the future of the company, but in more stark terms, the meeting’s chairman, Eberhard von Kuenheim wanted to stop the in-fighting between Pischetsrieder and Reitzle.

In 1993 Von Kuenheim had stood down as BMW’s long serving CEO, choosing Pischetsrieder to replace him. Von Kuenheim had backed Pischetsrieder’s plan to purchase Rover, seeing the potential benefits, but had seen this plan slowly crumble away. This must have been very painful for the ex-main board chairman, as he knew the company inside out, and was largely responsible for building it into the forceful company it by now was, back in the ‘60s.

As he remained very close to the Quandts, the major shareholders in BMW, he needed to address Pischetsrieder directly at the Supervisory Board meeting in order to ascertain the viability of Rover’s future – and the effect it was having on BMW’s finances. He also needed to be very aware of the wishes of the Quandts. Either way, it was going to be a very unpleasant Board meeting.

The meeting commenced at 7.00am, and within five minutes, Pischetsrieder was asked to present his recovery plan for the company. He did just this, detailing the new model plan, which in six years, and at a cost of £1.4b, would deliver two new model platforms: the R30 and its coupé/cabriolet offshoots would sit on the UKL1 platform, whilst the Rover 75 replacement and Riley badged coupé version would be based on the UKL2. Pischetsrieder also tabled the distant replacements for the MINI, Discovery and Freelander as well, which would ensure the growth of the UK operation.

BMW’s Chief shop steward, Manfred Schoch, backed the plan, and as representative of the company’s workforce, it was an acknowledgement within BMW that the plan certainly had legs. However, Von Kuenheim, ever mindful of the Quandts’ unrest, rejected the plan as too costly and too time-consuming. Given the pressure that BMW were under on the financial markets, and the fact that Volkswagen were making no secret of their desire to take-over BMW, time was a luxury that BMW no longer possessed.

Rover’s future as a builder of a range of cars as BMW’s partner was now effectively dead. Pischetsrieder had lost his five-year battle to restore the British company to its former glory, and now that his plan lay in tatters, he had no other choice other than to resign from BMW. He did so, ‘half an hour later’.

With Pischetsrieder now departed, the way was now clear for Wolfgang Reitzle to take over Pischetsrieder’s job, and it was Von Kuenheim that proposed him as the company’s new leader. Many factions within BMW’s management chain had wanted this to happen, and viewed it as an opportunity to rid the company of ‘The English Patient’, whilst retaining the lucrative parts of the British company: Land Rover, MG and MINI.

However, in the ballot to approve Reitzle’s appointment, all six of the workers’ delegates, led by Manfred Schoch, vetoed him as Pischetsrieder’s replacement. The remaining six delegates, who represented the banks and the shareholders voted in favour of Reitzle, so appointment of the new CEO hanged in the balance – a stalemate of six votes to six. Von Kuenheim held the casting vote, and according to one source, he absolutely could not support Reitzle.

With the situation as it was Reitzle stood up to be counted – and resigned. His reasoning was simple – he felt that he was unable to become the leader of the company given the compromise of a 50/50 split of the supervisory board. Also, it cannot be stressed enough that his appointment would have antagonized the workforce and the unions. If Reitzle’s decision to resign had surprised Von Kuenheim, then perhaps it should not have because of all the instability this man’s supporters had caused when disparaging Pischetsrieder’s plans for BMW. Reitzle had rocked the boat for the past four years, it seemed, and now he was paying the price.

Now the situation was bleak: BMW’s two senior executives had resigned and BMW had no one who was suitable or available to take the top post. According to Car magazine, Von Kuenheim asked Pischetsrieder to remain in office for a few months until his replacement could be found, but, ‘smiling wryly, Pischetsrieder shook his head and left the boardroom for good’.

The meeting continued and things became more desperate – allegedly, executives from Porsche and Mercedes-Benz were cold-called, with the offer of becoming the new top man at BMW. Surprisingly, all turned down the job – their unwillingness to move, no doubt, being fuelled by the takeover rumours in the press, and BMW’s falling share value. Between 7 and 8:00PM that evening BMW’s production chief, Joachim Milberg was mentioned as a suitable candidate, and within half an hour of being called with the promise of the biggest promotion of his life, he accepted the offer.

One thing was for sure: by February 1999, Rover’s future looked bleaker than at any time in its long and turbulent history.

BACK: Part seven, life under British Aerospace

NEXT: Part nine, like a Phoenix from the flames

Keith Adams

1 Comment

  1. ” Rover’s 1998 market share in the UK was down to a mere 8.63 per cent of the market, compared with the already low 10.95 per cent of 1996. ”
    A market share of 10.95% in 1996, the biggest player in the UK is Ford, their market share is 10% and they are in the process of closing 50% of their Ford dealership outlest.
    Just seven brands account for 50% of the Uk new car market, Ford number 1. Brands 2 to 7 account for the next 40% and include VW, Mercedes, many former major headline names such as Renault and Fiat are relegated to being simply minnows

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