LONDON - BMW's decision to invest more in its troubled Rover subsidiary's United Kingdom base will require nerves of steel and bags of cash.
Rover is losing ground in the brutally competitive UK market and its owner has grown frustrated and impatient. Rover Chairman Walter Hasselkus resigned last week, taking the responsibility for heavy losses. The subsidiary, acquired nearly five years ago, is dragging down BMW at a time when BMW's sales are better than ever.
Hasselkus, a lifelong BMW executive, will take an early retirement. His replacement is Werner Saemann, 56, head of BMW's engine and suspension division. Saemann is described by colleagues as a no-nonsense engineer with a talent for production management (see story on Page 23).
Saemann's arrival means BMW will take closer control of Rover, say industry analysts.
BMW executives and labor leaders last week signed what they called a groundbreaking agreement that will save £150 million ($249 million) starting in 2000. If approved by workers this week, the pact will probably save Rover's largest plant, Longbridge, UK, and ensure production of several future Rover models. Those include the new Mini and the R30 medium-size car that will replace the 200 and 400 series, both to be built at Longbridge. A Range Rover replacement will be built at Solihull.
But BMW still faces a daunting task at Rover. That job is made more difficult by the continuing strength of the British pound, downward pressure on prices in Rover's home UK market, and an aging product lineup.
Rover's problems have eclipsed record sales and profits of BMW brand products and helped drag BMW's share price down more than 40 percent since June.
'Too much time is being devoted to this rather than insuring that BMW is going to be around in ten years time,' said Garel Rhys, director of the Centre for Automotive Industry Research and head of economics at Cardiff Business School.
Said John Lawson, analyst for Salomon Smith Barney in London: 'They're generating huge amounts of cash, but even that can sometimes be stretched.'
BMW has elected to 'invest its way out' of the Rover problem, said Lawson. This decision will require much courage on the part of Chairman Bernd Pischetsreider and his fellow managers in Munich.
Since buying Rover in 1994, BMW has spent between $825 million and $990 million annually on its subsidiary. New products, including the successful Land Rover Freelander sport-utility, have paid dividends. BMW hopes the Discovery Series II, introduced in September, and the all-important Rover 75 sedan, which is due in dealerships next spring, will also be successful.
In spite of its investment in plants and products, Rover faces a future of continued losses while it waits for new volume products. A Merrill Lynch report predicts Rover will suffer a $296 million pre-tax loss this year - nearly double the previous estimate.
'The strength of the British currency creates a double strait-jacket for Rover. It constricts its competitiveness and margins in overseas markets, while hitting volumes in the UK. Its European rivals such as Renault and Peugeot are able to significantly undercut it and still make windfall profits,' said a recent Merrill Lynch research report on BMW.
BMW has partially offset this loss on the strength of sales of its own cars in the UK, the report added.
In his resignation speech on 2 December, Hasselkus accepted blame for underestimating the 'fierceness of competition in the British market.
'We simply got it wrong,' he said.
This was the second press conference in two months where bad news at Rover overshadowed BMW's announcements. At the Birmingham motor show in October, Rover introduced its 75 sedan to the world. The 75 is the first car that is a full product of BMW-Rover collaboration and not a Honda derivative. But at a press conference later that same day, Pischetsreider announced BMW might be forced to close the Longbridge plant if it failed to get concessions from the British government.
The government concessions BMW is seeking - thought to be about £200 million - have not been forthcoming yet. Pischetsreider last week fell short of committing the company to further investments if that windfall does not arrive.
Tony Woodley, national secretary of vehicle building and automotive for the Transport and General Workers Union, predicted Britain's Labor Government would deliver. BMW officials said privately they would not have announced the agreement with unions if they were not committed to building other cars at Longbridge in addition to the low-volume Mini.
The deal Rover negotiated with its unions last week calls for a 35-hour work week and flexible working arrangements similar to those BMW employs in its German plants.
BMW has decided it will manufacture the new Mini at Longbridge, a commitment that insures manufacturing will continue at the huge plant. Beyond the Mini, Longbridge's future is less certain.
'The real future of Longbridge will only be secured,' Lawson said, 'when a subsequent investment is signed off for the R30 medium-size car.'