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MG Rover Runs Out of Gas

April 19, 2005

By Beth Carney MG Rover, the only major carmaker in Britain, had long been seen as the surviving

vestige of a once-thriving national auto industry. But the company that formerly produced famousmodels such as the Mini and Land Rover has now closed its factory. The bankruptcy administrators of

MG Rover announced Apr. 15 that its Birmingham plant would be shutting its gates, after Shanghai

Automotive Industry Corp. said it had no interest in pursuing a joint venture. The carmaker had gone

into bankruptcy a week earlier, but a government grant of $12.3 million kept the workforce paid in

the hopes that PricewaterhouseCoopers, the bankruptcy administrator, would secure a last-minute

deal.

PLEDGE MONEY. MG Rover's closure comes as a blow to the 5,000 workers who have been laid off

and the additional 15,000 or so workers employed by parts suppliers. But the collapse was hardly a

surprise to those who have followed the auto maker's fortunes. The increasingly competitive globalcar industry is leaving little room for underperformers these days. General Motors (GM) reported on

Apr. 19 a $1.1 billion loss, and Ford Motor(F), which releases its results the next day, warned in April

that its earnings would come in about $900 million lower than originally forecast. With the big

producers struggling, the outlook for a small company with an aging lineup is grim. "Carmakers

around the world are in a sick position. There's nowhere now for the inefficient to hide," said Garel

Rhys, director of the Center for Automotive Industry Research at Britain's Cardiff University Business

School. MG Rover's troubles have been known since the 1990s, when its ownership first moved

outside Britain. In 1994, BMW bought it from British Aerospace but in five years failed to turn MG

Rover around. The German carmaker sold the loss-making unit in 2000 for the symbolic sum of ?10 to

Phoenix Venture Holdings, a British investment firm that pledged to maintain jobs in Birmingham. As

part of the deal, BMW gave the new owners an interest-free 50-year loan worth the equivalent of

$813 million to help them keep the business alive, along with $139 million in other payments.

DWINDLING OUTPUT. Since the collapse, the British government has announced that the Financial

Reporting Council, the country's independent regulator for corporate reporting, will review MG

Rover's published results for accounting irregularities. Yet analysts say the disappearance of the cash

pile is no mystery. MG Rover's problems began with the scale of its manufacturing. The economics of

car making today mean an optimal assembly plant will produce 250,000 cars annually, while an

efficient engine factory makes about 800,000 engines, and a press line making body panels can crank

out up to 2 million a year, says Rhys. MG Rover, in 2000, manufactured 205,017 cars -- a number that

dwindled under Phoenix' ownership to just over 115,208 last year. Further, the company's owners

inherited a limited and outdated line of cars, says Paul Newton, associate director of automotive

industry market intelligence for Global Insight, a research and consultancy firm, who also worked at

MG Rover in the 1980s.

SMALL BUT NO NICHE. When BMW sold the business in 2000, the German carmaker kept the Mini

brand, which it re-launched in 2001 with great success. Losing the Mini deprived MG Rover of a

volume-producing business that might have given it a level of sales that would have let it succeed as a

small mass manufacturer, Newton says. In addition, BMW also sold the Land Rover business to Ford.

These moves left Phoenix Holdings with just the MG -- which had a loyal following in Britain but was

always a niche-market car -- and the Rover models, which was considered frumpy and in need of

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updating. Although Phoenix Holdings tried to freshen up its offerings -- for example, by bringing out a

range of MG-branded cars based on Rover models -- the underlying designs were outdated, and

Phoenix lacked the resources to invest in new models. People didn't like the cars: "The basic math is

that people stopped buying [Rovers] because they're extremely out of date," Newton says. Add to

that the high cost of producing cars in Britain and the intense competition from foreign

manufacturers, and the auto maker had little long-term hope. As Donald Sull, professor of strategy

and management at London Business School, explains: "It had a brand that's too small for mass

appeal, but it's not elite. It's in a relatively expensive location, and it's competing against Toyota

(TM)."

NO RESCUE. While Phoenix Holdings never made money on the business, losing $147 million in the

most recent reporting year of 2003, the losses recently became severe, according to

PricewaterhouseCoopers, which estimated them at $38 million to $48 million a month. The shaky

finances quashed a potential lifesaving deal with Shanghai Automotive, China's largest carmaker. In

November, the Shanghai-government owned outfit paid $128 million for the rights to produce the

Rover 25 and 75 and two types of Rover engines. It was also discussing a joint venture that would

have allowed for production in both Britain and China, as well as the development of new models. But

Shanghai Automotive pulled out when it gained access to the British concern's books. "They realized

that MG Rover was on the brink of insolvency," says SAIC spokesman Rupert Pittman of London-based

financial public relations firm The Cardew Group.

BRAND VALUE. Rover's loss hits British suppliers disproportionately hard, says Rhys, as the models had

the most British content of any vehicle made in the country. As much as 75% of the cars came from

British suppliers, compared to 20% of a more typical British-made Peugeot. Prime Minister Tony Blair,

who's in the middle of an election campaign, announced an aid package of about $285 million for the

workers and suppliers. Meanwhile, PricewaterhouseCoopers claims it has about 70 offers for parts of

the group and is still in the process of assessing the bids. Analysts say, however, the business has very

little left of worth. The owners of Phoenix Holdings had sold much of MG Rover, including the land the

factory sits on. One potentially valuable property is the MG brand and its TF series of two-door

convertibles. The sports car has had a loyal British following, and analysts say another company could

buy the brand and produce it as a niche model. "The MG brand is still highly regarded by people who

know about sports cars, and I think there's a huge opportunity," said Tom Blackett, group deputy

chairman of the brand consultancy Interbrand. It's too late, however, to save MG Rover. And while it

had problems unique to a small auto maker, many of its woes serve as a cautionary tale to the

industry's biggest players as they struggle to return to profitability. Carney is a correspondent forBusinesWseek Online in the London bureau.

This article was taken from:http://www.businessweek.com/stories/2005-04-19/mg-rover-runs-out-

of-gas

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