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Friday, 4 May, 2001, 18:07 GMT 19:07 UK
MG Rover - One year on

By BBC News Online's Orla Ryan

MG Rover marks its first year as an independent British car maker on 9 May.

Forecasts of disaster and predictions of glory accompanied news that the Phoenix consortium had bought Rover from BMW for 10, after an earlier deal struck with rival Alchemy had fallen through.

UK unions and politicians sighed with relief at the time, but were doubtless outdone on the celebrations front by BMW, glad to be finally shot of the company that the German media called the "English Patient".


The reason they can't find a partner, is in negotiations they haven't much to offer

Graeme Maxton, automotive economist
The English patient is now thought to have cut its losses and be on track to break even next year.

But questions still remain as to whether it can survive as a mid-volume producer without joining forces with a large car maker.

Surprise

Judging whether Rover - now MG Rover following a rebranding last September - has done well is difficult, partly because so many people express surprise that the company has survived at all.

"Some of the critics have been confounded... [Phoenix] have actually managed the situation quite well," David Leggett, managing editor of just-auto.com, the auto industry website, said.

John Towers: thought to have played a difficult hand well
John Towers: thought to have played a difficult hand well
MG Rover has been helped by the generous terms of the BMW sale. The German company lent Phoenix about 500m ($765m) to help cover the cost of redundancies and restructuring.

But independently of this, most observers believe the Towers team have played a difficult hand well.

So far, the car company has met and surpassed its sales forecasts.

The company did top its original prediction of 200,000 car sales last year, selling 205,000 cars, though critics raised concerns it had only been able to do so by twice cutting prices.

But Mr Towers has claimed the company is now making more "quality sales", sales on which the company makes money. In May last year, it was estimated that Rover was losing 1,500 on every car sold.

This year's growth hinges on new models - a new series of MG saloons and an estate version of the Rover 75 saloon - unveiled in January, which will arrive in showrooms later this year.

To partner or not to partner

Crucially, there appears to have been a sea change in Mr Towers' gameplan - and it is this that raises most questions about MG Rover's long-term future.

One year ago, the aim was to turn the company into a suitable purchase for one of the car giants.

Mr Towers' opinion now appears to have changed. "I was of the view when we did the deal that probably the best outcome was a big car company collaboration. I am no longer certain that is right," he said in a recent interview.

However, scepticism remains as to whether MG Rover can go it alone in the long term.

It costs an estimated 1bn to develop a new car. On top of that, MG Rover engines need to be upgraded to meet new European emission standards by 2005. An alliance with a large manufacturer could enable it to update its range and its engines cheaply.

Can MG Rover afford to go it alone?

"They can't stand alone and they do need to find a partner," Graeme Maxton, automotive economist at Autopolis said. "The reason they can't find a partner, is in negotiations they haven't much to offer. A declining share of a market which looks like it is declining in the UK, using yesterday's technology, at a production site which is among the world's poorest."

> A large partner might also cushion the impact of some potential time bombs within MG Rover. According to Mr Maxton, the company might have to pay for an estimated 250,000 pensions on a staff of 5,000 and a possible difficulty in maintaining the long warranties introduced to boost sales.

MG Rover disputes these figures, saying it is not liable for the previous pensions scheme and will offer its current workers to join a new company scheme from next week on.

Stuck in the middle ground

The crux of MG Rover's dilemma is that it is trying to occupy a space in which few car makers have succeeded.

The company is neither in the luxury niche market, such as Porsche, or the mass market, with giants such as Ford and GM.

Longbridge factory
Productivity at Longbridge is much lower than at comparable European plants
There are some successful mid-volume regional car makers - such as Peugeot - but traditionally large volumes or high-end exclusivity are seen as keys to automotive success.

And Peugeot's success can in part be attributed to its high productivity. By contrast, MG Rover's Longbridge site is said to be half as productive as comparable European sites.

Middle-ground success

So, how can MG Rover succeed in this harsh middle ground if it doesn't forge an alliance with a large company?

A radical rethink of their business is called for, says Professor Peter Cook, head of department of the Centre for Automotive Industries Management at Nottingham Business School.

He believes that outsourcing is the way forward, leaving MG Rover in charge of design, branding and distribution - but bash less of the metal that goes into its cars.

He points to recent reports that the company might be in talks to fit Fiat engines to future models, as an indication that the company may adopt this strategy.

Believing in the future

But whatever the future might hold, customers have to believe there is a future of some sort.

Only then will they be persuaded to part with their cash and buy an MG or Rover.

"The risk they face is that people will hesitate to buy Rover because there is some fear that the company may not be around all that long," Karl Ludvigsen, an auto industry consultant, said.

This is just as true for business buyers as for private buyers - which after all only account for 50% of all cars sold.

And belief in the future of a car keeps second-hand car prices high, a factor which influences corporate buying decisions.

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