FT941-12127 _AN-EBADGADSFT 940201 FT 01 FEB 94 / A sudden burst of acceleration: BMW's acquisition of Rover Group will realign the world auto industry and has benefits for both By KEVIN DONE BMW's takeover of Rover Group has stunned its competitors and sent shockwaves through the world auto industry. The German carmaker, traditionally a byword for fierce independence, has until now remained aloof from the waves of restructuring that have swept over global manufacturers. Now, at a stroke, the Munich-based producer has outflanked Mercedes-Benz and devised an expansion strategy that is indelibly different to the one chosen by its arch domestic rival in Stuttgart. It has stolen Rover from under the nose of Honda, the Japanese carmaker and Rover's alliance partner for more than a decade, leaving an air of betrayal in Tokyo. Overnight it has become one of the world's leading players in four-wheel-drive vehicles, through Land Rover, and it has pulled out of the hat a strategy for moving into small cars without the danger of diluting its highly prized brand image. The opportunities for such significant takeovers in the world auto industry are dwindling. Most of the smaller players have been swallowed up, and BMW has had to move fast to ensure that it was not left on the starting grid. With the marketplace fragmenting, BMW has accepted that it must move into new segments to add to its niche of high-performance executive and luxury cars. It could have continued to go it alone and develop the necessary products itself, but that would have taken time and would have been expensive. Instead, it has chosen the riskier fast track of acquisition. Even before the dust has settled over the wreckage of the attempted Renault/Volvo merger, which collapsed in December, BMW has stepped forward with its Pounds 800m purchase of British Aerospace's 80 per cent stake in Rover and Land Rover, the last UK-owned, medium-sized vehicle maker. Honda could hardly have been reassured by the mollifying words yesterday of Mr Bernd Pischetsrieder, BMW management board chairman, who said that he wanted the Honda/Rover relationship to continue. In the short term that must be so: the links between Rover and Honda are too close to be unpicked overnight, but in the longer term there is a new master in the Rover house, and Honda is left with its European strategy in tatters. For BMW the immediate attractions of the takeover are clear. They mark out a different expansion strategy to that of Mercedes-Benz. BMW now gains: Control of Europe's only credible manufacturer of four-wheel-drive sports/utility vehicles in the shape of Land Rover. Long the jewel in the Rover crown, Land Rover operates in one of the fastest-growing segments of the world market. A viable way of entering the small car market without diluting its own precious brand image. Access to a low-cost European production base and control of the European carmaker that has probably learned most in recent years about Japanese production and engineering methods. A novel way of developing a presence in some of the fastest-growing auto markets in the Far East and in Latin America, where BMW's traditional products largely price it out of the markets. BMW has been studying whether it should make an independent entry into the four-wheel-drive sports/utility market, currently dominated by makers such as Chrysler of the US, with its Jeep Grand Cherokee, and Ford, with the Explorer, or Japanese competitors such as Mitsubishi, Toyota and Isuzu. It is a critical market. One of the fastest-growing sectors, with consumers increasingly switching over from traditional passenger cars, it already accounts for sales of more than 1m vehicles in the US alone. Mr Wolfgang Reitzle, BMW research and development director, said yesterday that BMW had developed a vehicle concept for a sport/utility that it could have brought to market in about three years, but the takeover of Land Rover placed it immediately in the forefront of the sector. Land Rover's fortunes have been blossoming in recent years and it is undoubtedly the main centre of excellence in Europe for sport/utilities with an unrivalled brand image. With the Range Rover it has developed alone the luxury end of the market, and the launch of the higher-volume Discovery at the end of the 1980s has provided it with a mainstream world competitor. Land Rover is poised to launch the Discovery shortly in the US, where it is expected to quadruple overall Land Rover sales volumes there. Access to the much stronger BMW dealer network, where it will not compete with any existing BMW products, will allow it to expand its presence in North America much more rapidly. BMW's competitors have been forced to take less attractive routes to enter this market. Mercedes-Benz, which long has struggled with its antiquated small-volume G-Wagen, has decided to develop its own mainstream sport/utility, which will be made at a new plant in Alabama in the US. The vehicle will not be ready for launch before 1997, however, and Mercedes-Benz must shoulder the development costs alone. For all the vaunted prestige of the Mercedes-Benz name, it has no pedigree in all-terrain four-wheel-drive vehicles, where Land Rover is a world leader. Land Rover has long been coveted by rival carmakers, but they have been unable to unlock the key, because British Leyland and, more recently, British Aerospace have been unwilling to separate it from the previously chronically loss-making Rover car operations. This is where the BMW deal breaks new ground. It is willing to take on the car operations as well. BMW has studied intensively in recent years how it should take account of the increasing trend towards the use of smaller cars, especially in densely populated and congested urban areas. Almost in step with Mercedes-Benz, it has presented concept studies for a future small car at the world's leading motor shows in the past two years. The design exercises were to assess whether the two luxury/executive carmakers could risk going downmarket into small cars. The answers are now clear: for Mercedes-Benz, yes, but for BMW, a resounding no, at least under its own name. Mercedes-Benz has decided recently to build its own small car for sale under the Mercedes star. The car will be built at a volume of at least 200,000 a year - at least that is Mercedes-Benz's aspiration - at a plant in Germany. The size of the concept car was smaller than a Ford Fiesta, but in the marketplace the small cars will carry the Mercedes name and compete at Volkswagen Golf prices. As of yesterday it became official that BMW will not build a small car for sale under the BMW badge. Rover in the UK and and the Rover brand will become its centre for small car development. This would ensure BMW a presence in this marketplace but would not put at risk the BMW brandname, said Mr Pischetsrieder, BMW management board chairman yesterday. 'There will be no smaller BMW car than the 3-Series,' he said. 'You must not over-stretch the core brand values of BMW. A small BMW would not comply with the hard core BMW image, that we have worked for 20 years to achieve.' Mr Pischetsrieder declared that he had told Mr Helmut Werner, chief executive of Mercedes-Benz, that the Stuttgart group was misguided with its small car strategy. 'I told Werner he was wrong. Clearly he does not think so.' Instead BMW is now intent on developing Rover as its maker of small and medium-sized front-wheel-drive cars. All BMW's existing executive and luxury cars are rear-wheel-drive cars. With the takeover of Rover it buys in front-wheel-drive technology and, crucially, it also buys in one of the most competitive small engines in Europe in the shape of Rover's K-Series engine. Mr Pischetsrieder was at pains to insist that under BMW rule Rover will continue its present car lines but with increased resources and with the potential for creating new car ranges. These include a replacement for the 30-year-old Mini, which has never featured in Rover's own more financially stretched product plans. Rover already has under way a development programme for a replacement for the Metro small car due in 1995-96. This will remain in place, but the development phase will now benefit from the much greater engineering resources of BMW, which will be put at Rover's disposal. The Metro replacement was being developed alone by Rover without the involvement of Honda. Moving up through the Rover model range, BMW will meet its most immediately sensitive challenge with Honda over the replacement car for the Rover 200/400 and its sister car, the Honda Concerto. These existing cars were jointly developed. In Europe both Honda and Rover versions are produced at Rover's Longbridge plant in Birmingham. Under a current agreement, the new generation cars - codenamed Theta - will appear in 1995. The Rover versions will still be produced at Longbridge, but the the Honda version is due to be produced at its new plant at Swindon. Mr Pischetsrieder made clear that BMW expects Honda to remain in this crucial joint development programme, as the Japanese carmaker would lose financially by pulling out. Rover and Honda have a joint purchasing base, many of the sheet metal panels are provided from Rover's main stamping plant at Swindon, and the joint development programme allows Honda to spread its risk over a bigger production volume with Rover involvement. Whatever the ultimate impact of the BMW takeover, this programme appears to ensure that Honda and Rover will continue to work closely together on a project basis at least to the end of the decade. The same can be said for the Rover 600 and the sister car the Honda Accord. These were only launched last year with production of the Accord at Honda's Swindon plant and the 600 at Rover's Cowley plant in Oxford. Beyond these product generations it may suit Honda and Rover/BMW to go their separate ways, but economies of scale may still dictate further co-operation into the next decade. At the top of the Rover range, the 800 is a different story. The present ageing Rover product was derived from a Honda - the old Legend executive car -but there is no joint replacement programme. Mr Pischetsrieder said yesterday that work would start immediately on a replacement. It would be likely, he said, that it would be based on the new 5-Series BMW platform and would share several important components with the new generation BMW executive car. It would also become rear-wheel-drive. BMW wanted, too, to promote the revival of some of the Rover Group's old British makes that had fallen on hard times, said Mr Pischetsrieder. Top of the list is the plan for the reintroduction of the MG sports car marque. Rover has a small affordable MG roadster under development for launch in 1995-96, but under BMW management this programme is expected to be given extra momentum. Even before the Rover takeover BMW had earmarked sports cars as a niche for accelerated development. Yesterday, top BMW executives confirmed industry speculation that the 'secret' car it planned to build in the US at its new plant in South Carolina would also be a small roadster. Mr Pischetsrieder said that for future products there would clearly be potential for the sharing of components between their planned sports cars. He promised that no Rover cars would be built in Germany and that no BMWs would be built in the UK. While dealer networks would not be merged, the distribution systems would eventually be merged, said Mr Pischetsrieder, with common logistics and parts supply. Single dealers may sell both marques but from separate showrooms. Certainly, for Rover, access to the BMW dealer network in Germany will give its fortunes a massive boost in a tough market. The big success of Rover management in the past seven years has been to rescue the old British Leyland car operations from the threat of extinction and create a viable business based on the relationship with Honda. Under BAe its long-term ownership was always uncertain, however. Honda provided the crutch during the long recovery from intensive care, but BMW can provide the long-term home it has long needed in the hostile environment of the world auto industry. Companies:- Rover Group. Bayerische Motoren Werke. Countries:- GBZ United Kingdom, EC. DEZ Germany, EC. Industries:- P3711 Motor Vehicles and Car Bodies. Types:- COMP Mergers & acquisitions. CMMT Comment & Analysis. MKTS Production. The Financial Times London Page 19