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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