Substantial job losses predicted as BMW sells Rover and Land Rover
In March 2000, German motor manufacturing company BMW announced the break-up and sale of its loss-making UK subsidiary, formerly the Rover Group. Heavy job losses are expected among Rover employees and the wider supply base within the West Midlands region of the country. This feature reviews the background to BMW's decision, and the reaction of the UK government and trade unions.
On 16 March 2000, BMW Group AG made the surprise announcement that it was to sell the Longbridge car plant and that it had signed a memorandum of understanding with the UK-based venture capitalists Alchemy Partners over the sale. The following day BMW confirmed that it had also signed a memorandum of understanding with the Ford Motor Company over the sale of Land Rover. Heavy job losses are predicted at both Longbridge and within the West Midlands supply base as a consequence of the sale of Rover and further engineering job losses may occur due to the sale of Land Rover.
In summary, BMW's UK operations are to be broken up as follows:
- The Longbridge plant, which employs over 9,000, will pass into the ownership of Alchemy Partners who will operate the business as the MG Car Company. Alchemy will pay BMW a maximum of GBP 50 million for the MG sport car brand and the licence to manufacture and operate the Rover brand for at least seven years.
- Land Rover Vehicles, whose Solihull plant employs 9,500 and the research and development facilities, based at Gaydon in Warwickshire, are to be sold to the Ford Motor Company for GBP 1.85 billion.
- Rover Body and Pressings in Swindon, employing a further 2,500, is also likely to be sold.
- BMW will retain ownership of the Cowley production facilities, which employs 3,500. Production of the Rover 75 will continue at Cowley under licence for Alchemy. The new Mini will be transferred from Longbridge and manufactured at Cowley. BMW retains ownership of the new Hams Hall engine factory in the Midlands which has yet to be formally opened.
Background to the announcement
Speculation over Rover's future has been mounting in recent months. BMW chairman Joachim Milberg, in the shareholders' letter issued in January 2000, concluded that "the Rover restructuring programme will continue to be vigorously pursued" thereby reaffirming BMW's commitment to its subsidiary. But by mid March the supervisory board of BMW AG reversed their position and decided that they could no longer sustain the heavy losses incurred by Rover. BMW's accounts, published on 28 March, confirmed that Rover's losses had increased to GBP 750 million in 1999 in comparison to GBP 642 million in 1998 despite significant re-structuring within Rover which saw employment fall 19% in 1999 to 29,884 employees. Whilst Rover's total vehicle sales fell by 25% to 227,700 vehicles in 1999, UK sales in the last quarter of 1999 were up by 11% in comparison to the previous year and first quarter sales of 2000 were maintaining this recovery. Land Rover recorded record sales levels in 1999, increasing by 16% to 178,000 vehicles.
BMW squarely lay the blame for their decision to sell upon the strength of sterling against the euro and the continuing weakness of Rover sales. In defence of BMW's decision Professor Milberg stressed the company had warned the UK government over the strength of the pound: "We pointed out that due to currency developments alone the BMW Group was losing more than GBP 1 million with Rover every day, a loss clearly not acceptable and economically viable any more".
The sale of Land Rover Vehicles was completely unexpected, and BMW attributed their decision to sell to the successful launch of their own 4x4 model - the X5.
Reaction in the UK
Government ministers reacted strongly to BMW's claims that they had been warned of the seriousness of Rover's situation. The trade and industry secretary Stephen Byers openly criticised BMW and, in a reference to the deal struck with BMW in April 1999 (Government aid package secures future of Rover plant - UK9904100N), said that "there was a clear understanding between the government, the workforce at Rover and BMW that the business strategy which was entered into accepted that break-even would not occur before 2002".
The unproven track record of Alchemy within automotive manufacture and significant job losses at Longbridge and within the West Midlands supply base is of major concern to the trade unions. "Any owner of Rover must demonstrate financial strength, a clear understanding of the car industry and a demonstrable track record in good employee relations" said Bill Morris, general secretary of the Transport and General Workers' Union. However, union concerns were not allayed by the announcement by John Moulton of Alchemy that significant job losses at Longbridge were inevitable as the company in future would not compete in the mass market but would focus instead upon becoming a mid volume producer of niche market sport saloons. It is feared that as many as two-thirds of the workforce at Longbridge could be lost.
Trade union representatives and the government have tried to persuade BMW to reconsider its deal with Alchemy and to look for alternative offers. However, it appears unlikely that such offers will be forthcoming from established automotive manufactures. Werner Sämann, the Rover chairman, told the House of Commons trade and industry committee that talks had been held with General Motors and Ford but that they were "not interested" in buying Rover. Furthermore, with the reduction in production of Rover models at Longbridge and Cowley initiated only days after BMW's decision, as well as the relocation future Mini production, suppliers have already begun to reduce staffing levels and have withdrawn inward investment from the West Midlands. It is estimated that as many as 50,000 component jobs are reliant upon Longbridge and on top of this a further 20,000 jobs within the motor retail sector are dependent upon Rover's 320 dealerships in the UK. The government has set up a task force to respond to the jobs crisis threatening the West Midlands and the GBP 129 million of government grants originally intended to secure the future of the R30 model at Longbridge (Details of Rover financial aid package announced - UK9906112N) will now be made available to assist economic regeneration within the region.
The reaction to the sale, and integration, of Land Rover into the Ford Premier Automotive Group has been received more positively. Bill Morris welcomed the "bold decision by the Ford Motor Company to buy the Land Rover operation". Whilst no announcements over potential job losses at Solihull have been made, far greater uncertainty exists over how many of the 2,500 engineering staff based at Gaydon in Warwickshire will eventually transfer to Ford. There are fears that the Gaydon site might be rationalised to minimise duplication with Ford's existing engineering centre in Essex. "If the engineering centre at Gaydon is broken up, the high tech skills of the workforce will be lost to the West Midlands forever", warned MSF general secretary Roger Lyons. No firm announcements on job losses are likely to be made before the deals with Alchemy and Ford are concluded sometime in May.
Consolidation and restructuring within the European automotive continues to be a politically sensitive issue for national governments and the European Commission. Over-capacity within Europe is currently estimated to be in the region of 6.7 million units which represents 20% of production. Furthermore, as a consequence of over- production, it was estimated that the value of unsold finished vehicle stocks stood in the region of GBP 18 billion in 1998. As merger and acquisition activity within the industry intensifies and as governments try to protect their national interests, the Commission is increasingly likely to take a hard-line approach towards competition policy within the industry.
Prior to BMW's decision to sell Rover, the Commission had announced that it was to investigate the conditions under which the UK government was offering GBP 129 million of Regional Selective Assistance to secure the future of the Longbridge plant and production of the R30 model. The Commission's attention was drawn to the fact that Tatabanya in Hungary was not identified as an alternative site until 13 April 1999, whilst the final grant offer issued to BMW was made by the government on 26 April 1999. For this reason, the Commission questioned whether production of the R30 in Hungary was a serious alternative to investing in Longbridge. The mobility of the project was further brought into doubt due to BMW's stated policy to producing models in the main market for which they are intended. The Commission concluded that the R30 was essentially a vehicle drawing upon its "Britishness" and that with 35% of potential sales occurring in the UK, this was its main market.
The situation at Rover has brought to a head increasing concerns over the competitiveness of UK-based automotive manufacturing. Continued uncertainty exists over the future of Ford's Dagenham plant, which employs over 4,000 on production of the Fiesta and Courier van, as Ford conducts an extensive review of their European operations. In 1999 Ford had a manufacturing capacity of 2 million vehicles in Europe but sold only 1.65 million. One option for Ford is to switch production of the new Fiesta, due in 2001, to their plant in Cologne. Coming less than a week after announcing 1000 new jobs at its Swindon plant, Honda announced that it is cutting vehicle production in the UK this year by more than 50%. Although Honda confirmed than none of its 3,100 work force would be laid off, Honda blamed slowing demand in Europe for UK-built models, the strength of sterling and weak sales in the UK due to uncertainty over new car prices.
As at the end of March, the final shape of the Rover divestment package remained to be settled but the West Midlands economy is braced for substantial job losses. It remains to be seen whether the Rover crisis is only part of a much wider retrenchment of automotive manufacturing within the UK. (Joy Batchelor, Operations Management Group, Warwick Business School)