BMW has warned that the UK's automotive supplier base faces disaster unless immediate action is taken to cut costs and reduce the strength of the pound.
Wilhelm Becker, senior vice president for purchasing at BMW Group, said: 'We are looking for alternatives. If there is no change in the situation over the next couple of months, I see a big risk for the British supply industry as business goes outside the UK - not only with BMW, but with a lot of other buyers.'
He described the recent deutschmark/pound exchange rate of 3.10 as 'unbelievable. The strength of the pound is more of a political issue than an industry issue - but the UK government has to understand that it can be critical for regions like Birmingham (where Rover is based),' said Becker.
'Eventually, only final assembly work will be done in the UK, with a lot of production work shifting to low-cost countries such as Hungary or Poland.'
Many suppliers to Rover are already under pressure after the recent collapse of Birmingham-based engineering company TransTec. TransTec is thought to owe Tier 2 automotive suppliers around 30 million (euro 47.5 million).
The threat comes as BMW implements a new plan to try and cut costs at its Rover subsidiary. The new initiative - described as the 'second step' by BMW's Chief Financial Officer Helmut Panke - will focus on productivity increases, further Rover work force cuts, outsourcing of key operations, increased pressure on distribution to improve sales, and 'intensified talks with suppliers.'
BMW also wants to see evidence of more pro-European thinking in the UK. 'We have been asking UK suppliers to calculate in euros since last autumn,' said Panke.
'The euro region is where their main competitors are, and they have to realize they do not live on an island. There is European and global competition.
'At Rover we source between 80 and 90 percent of parts from British suppliers, and it is only fair to expect world market competitive prices.'
Re-sourcing decisions will be triggered if the quality level falls below BMW requirements, or if the supplier is unable to achieve the kind of cost level that BMW needs, said Becker.
'We have a very, very significant problem at the moment. Productivity and the strength of sterling are both extremely significant issues,' he said.
Becker said that with some suppliers, such as GKN and TRW, solutions had been found to the cost problems and he was optimistic that BMW would achieve its targets of a 10 percent average cost reduction on purchased parts at Rover this year.
BMW has been working with suppliers to eliminate waste across the board, looking at logistics, packaging, design features, production processes, stock levels, and warranty and scrap levels, said Becker.
The BMW Group is offering all suppliers help to achieve new efficiency targets to remain competitive, said Panke.
Despite the crisis, BMW is still aiming to build a successor to the Rover 25 and 45 models in the UK at the Longbridge plant in Birmingham.
BMW's application for financial assistance from the UK government for the redevelopment of Longbridge is still under scrutiny from European authorities.
Critics of the application say BMW broke the rules by not researching alternative sites for the plant.
However, Panke said: 'We are convinced the funding is compliant with European law.'
Despite the troubles at Rover, BMW claims it remains committed to the brand.
'Whenever we discussed the strategy in board meetings, we always came to the conclusion that the current plan is the right way to go,' said Panke.
'There will be enormous growth in the small car segment and the BMW Group wants to participate in this growth with the Mini and Rover brands. This will allow us to keep the BMW and Land Rover brands as focused and as profitable as they are now.'