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NATIONAL NEWS: Defiant carmaker foresees a positive route to the future: John Griffiths examines MG Rover's recent record, including its pivotal collaboration deal with China Brilliance
Financial Times; Apr 27, 2002

Were it to come from a public company, it would be a profits warning to set analysts' alarm bells ringing.

In the case of MG Rover - owned by directors, dealers and workers - a dismissive acknowledgement by Kevin Howe, chief executive, that break-even targets will be missed will serve only to heighten uncertainty over the future of a car company that employs more than 6,000 in the West Midlands.

Only with a shareholders' statement in June is it likely to become clearer whether MG Rover, bought by a group of Midlands businessmen from *** for a token Pounds 10 two years ago, is defiantly waving - or drowning.

To listen to Mr Howe, MG Rover is racing towards a secure future after being jettisoned two years ago with a Pounds 520m cash legacy from *** of Germany.

But some industry observers remain sceptical. Sterling's strength and MG Rover's heavy reliance on a UK components base, its lack of purchasing muscle and other resources will eventually prove a lethal cocktail, say critics.

If Mr Howe has qualms, he hides them well. Speaking at the modernised Longbridge site within which all MG Rover's activities have been grouped, he insists that reports of MG Rover's likely death have been greatly exaggerated.

Nor does he appear to attach much importance to the shareholder statement's expected disclosure of a Pounds 170m loss for last year. That is a huge improvement on the Pounds 500m of the final year under *** but still well short of the Pounds 100m originally hoped, thanks to sterling proving stronger than expected, says Mr Howe.

Hopes of breaking even for this year as a whole have been dashed. Mr Howe says he now expects the group to start breaking even towards the year-end.

According to last year's shareholders' statement, MG Rover began its first full year of independence in 2001 with net cash of Pounds 329m, including Pounds 200m drawn down on ***'s legacy.

Mr Howe insists that over the past year net cash has increased further without using more *** funds, despite Pounds 130m-plus spending on new models.

He also dismisses speculation that MG Rover is struggling to maintain sales. This is despite the company's large cars line working at 70 per cent of single shift capacity and total annual sales of about 170,000 units a year, falling short of an intended 200,000.

"Some of us have been offered big job lots of cars at discounts of up to 30 per cent," according to one franchised dealer group speaking on conditions of anonymity. Mr Howe denied the assertion.

He lists a string of company positives:

* Last month MG Rover signed a far-reaching collaboration deal with China Brilliance, the Chinese automotive group which, says Mr Howe, will lead to jointly developed new models and economies of scale sufficient to ensure a secure niche for both in the global market.

* It has launched swiftly a family of MG models drawing in younger buyers, with more due in the next year, including a "super car" likely to spearhead MG Rover's return to North America.

* It has bought from *** the nearby Powertrain engine manufacturing operations, securing its own engine supplies and, as a potential profit centre, supplying engines to its joint venture partner, China Brilliance.

* It has given credibility to its MG brand with giant-killing performance in touring car racing and Le Mans sports car racing.

But the Chinese deal is pivotal.

Critics say China Brilliance may be biting off more than it can chew in terms of resources; that there may be conflicts of interest with other projects such as one to assemble ***s under licence; and that there may be difficulties acquiring Chinese government production approvals.

Mr Howe retorts that MG Rover's deal is a strategic partnership covering every aspect of the automotive business and to which China Brilliance will give absolute priority.

MG Rover's new medium-sized car, due in 2004, is likely to be made by both companies and the 2005 replacement for the Rover 25 small car will be of joint development and manufacture. Both parties have already put funding into the venture, which may also see a China Brilliance-based "people carrier" added to MG Rover's own range, and cars produced for China Brilliance at Longbridge.

Will it all work?

Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff University, is increasingly positive that it will and that by 2006 production could be well above 300,000.

"It is likely that MG Rover will see a loss of Pounds 30m, not break even, this year. But Pounds 30m is not going to undermine their prospects."

Mr Rhys adds: "Assuming that the new medium car is a success . . . then a Pounds 110m profit is not unreasonable for 2004 and 2005 could be even better.

"Overall, I can't see anything happening to stop them surviving through to 2007. After that - who knows?"
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