MG & Rover - XPower Forums banner
1 - 9 of 9 Posts

Discussion Starter · #1 ·
Automotive News Europe

Copyright 2002 Crain Communications Inc.
Automotive News Europe

March 11, 2002, Monday


LENGTH: 3351 words

HEADLINE: Little MG Rover tries hard, but surviving won't be easy

BYLINE: Mark Rechtin, Automotive News Europe


MG Rover is the last independent British automaker trying to compete in the mass market. But it could be dead within three years.

Or it could be part of a daring, highly unconventional British-Chinese-Indian automotive alliance challenging the world's big players.

Those are two possibilities suggested by industry experts when presented with MG Rover's curious business case.

This week is the second anniversary of the former Rover group's separation from ***. Since the split, the reconstituted MG Rover brands have lost more than E1.1 billion. The company has also drawn down E325 million of the E800 million interest-free dowry that *** gave it as part of its divorce. Meanwhile, sales have dropped while MG Rover relies heavily on a domestic UK market that is less supportive of home-built products.

MG Rover's image-building X80 supercar has been delayed by one year. So has talk of entering the US market. The company's work force is in a state of unrest. And its cost structure is based on the strong British pound, making products more expensive in export markets.

The heart of MG Rover's economic model is the proposition of selling in mass-market segments as a niche-volume manufacturer. With low volume, MG Rover cannot match the purchasing power of major manufacturers. Yet MG Rover is selling its vehicles for the same - and in some cases lower - prices as its competitors. The numbers do not add up, financial analysts say.

In 1999, its last year under *** ownership, MG Rover lost E1.5 billion in continuing operations. In 2000, MG Rover slashed the loss in half. In 2001, the loss was reduced to an estimated E325 million. Even a small loss for 2002 would show continued improvement.

But MG Rover has accomplished this without facing many of the harsh realities of the marketplace.

At the time of the divorce, *** took responsibility for all debts; donated 50,000 units of inventory; gave MG Rover the Longbridge plant in the English midlands worth an estimated E570 million; and made its dowry interest-free for 50 years.

Even some MG Rover execs admit the infusion has kept alive the "English Patient" - as *** executives refer to the former subsidiary.

To its credit, MG Rover has surprised onlookers by cheaply creating an MG lineup by changing the sheet metal and improving the engines of its existing Rover lineup.

Its marketing budget is slender. It has cut payroll on the assembly line and slashed expenses. But with the easy cost-cutting done, MG Rover must face a brutal reality in its mid-term future.

The British midlands automaker's biggest challenge will come in the next three years, when it develops a new medium-size car to replace the 45, due in early 2004. Within 18 months of that launch, the next-generation small car - replacing the 25 - is scheduled for market. The aging K-Series four-cylinder engine must be re-engineered to meet European CO2 standards in 2005. In addition to development costs on these two cars, MG Rover is expected to begin repaying ***'s dowry in 2004, though it has until 2049 before the note comes due.

Analysts doubt that MG Rover will be able to successfully finance and develop competitive next-generation products in its current state - or even in cooperation with any potential partners.

"They've surprised the hell out of all of us by their resilience so far," said John Lawson, financial analyst with Schroeder Salomon Smith Barney in London.

"They have reached a fragile stability that was not widely predicted. But clearly they are very dependent on the dowry from ***. MG Rover doesn't look like any proposition that fits the normal economics of the current car industry," Lawson said.

Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff Business School, believes MG Rover's break-even projection for 2002 is optimistic.

"It's supposed to be break-even (in 2002), and it won't be," Rhys said. "But the next year should be break-even if sales and expenditures go as planned, with 2004 showing a modest profit, and 2005 showing a 4 percent return on sales. But that is all very iffy, as it depends on the health and responsiveness of the British market."

MG Rover's future appears to depend on negotiations with two automakers in the developing world, Brilliance China Automotive and India's Tata.

With Tata, MG Rover may just rebadge the Indica mini for the European market. But the Brilliance deal may involve long-ranging connections in engineering, development and manufacturing.

Technical help needed

Analysts don't regard either deal as being much help to MG Rover (see story, below).

"The economics are not very favorable because MG Rover is at the point where new engineering is required," Lawson said. "Finding a technical and engineering partner is what both these automakers are looking for. Both (MG Rover and Brilliance) would rather have off-the-shelf components than be contributing it themselves."

MG Rover declined to make CEO Kevin Howe available for interview on strategic matters. Despite repeated requests over a six-week period from Automotive News Europe, Howe was unavailable. The company said Howe did not want to talk while negotiations with Brilliance were in progress. But the company granted access to other MG Rover executives.

"People will judge the cars by their merits," said John Parkinson, MG Rover director of sales and marketing. "If the car is right, we can sell it, whether it's with a Chinese partner or a German partner."

Perhaps the most generous outside opinion comes from Eberhard von Kuenheim, former chairman of ***'s supervisory board, who was a major force in ***'s decision to buy Rover Group a decade ago.

"If they are successful, you have to congratulate them because the circumstances are not so easy for them," von Kuenheim said.

"Economic models are only one aspect. There is the spirit of the company, the quality and dedication of the people, the financial resources available and the sales organization," he added.

MG Rover sales have fallen off sharply since *** stopped paying attention to them. Through the mid-1990s, sales of MG and Rover products were steady at about 350,000 units annually, but have plunged since. Last year, MG Rover sold 171,000 cars worldwide - 159,778 in Europe and nearly half those in the UK.

MG Rover has said that the sales decline has been deliberate, since it was impossible for the MG and Rover brands to be sustainable at the 350,000-unit level without deep discounting and unprofitable fleet sales.

"We'd rather put cash back into new products than into the big fleet users' pockets," Parkinson said. He added that the company expects to average 200,000 sales a year between 2001 and 2005.

But volume itself is not the concern. It's the price of the vehicles sold at that volume. As one analyst notes, "Porsche does quite well at 50,000 vehicles."

The real problem is that MG Rover is not selling low volumes of Porsche-priced vehicles. It's selling low volumes of VW-priced vehicles.

Is there any possibility that smaller could be better? No, say analysts.

The era is over when a 150,000-unit car company could have any type of a long-term independent future, Rhys said.

The only way to survive long-term is for MG Rover to find an equity or development partner, he said. But the company has done that twice before before, once with *** and before that with technology partner Honda.

To many in the industry, the MG Rover name does not hold much esteem.

"Most of the rest of Europe's volume car industry has perhaps concluded they don't need to have (MG Rover as a subsidiary), and the economics of being a technology donor to the company have not looked particularly appealing," Lawson said.

As a result, MG Rover has had to publicize discussions with the likes of small players such as Indonesia's Proton, Tata and Brilliance.

"We don't need a savior," countered MG Rover spokesman Stewart McKee. "We have a strong business plan. We're a million miles from where the business was. The idea of a partnership is the additional benefits it provides. We don't need the money, and neither does Brilliance."

McKee instead points to the possibility of capitalizing on the great potential of the Chinese market, as well as using a Chinese supplier base to lower its reliance on costly British suppliers who want to be paid in pounds.

But analyst Lawson sees a tie-up with Brilliance as a marriage of partners who each bring little to the wedding. The same applies if MG Rover were to sell Indian-built Tata vehicles under the MG Rover name.

"It's hard to see what Brilliance brings in terms of production, development, engineering or expertise," Lawson said. "A car that's part-Chinese and part-British doesn't sound like it would secure their future."

China's own government ministries have little faith in its local automakers. A recent report by China's State Economic and Trade Commission described the domestic Chinese auto sector as highly uncompetitive, plagued by high costs, low productivity, poor product-development capability and "backward" technology that lags far behind international counterparts.

Automakers sold 2.4 million vehicles in China in 2001, said Auto Resources Asia. But the vast majority of sales are in the bus, limousine and minicar segments, where MG Rover does not compete. Passenger vehicles accounted for only about 740,000 units, ARA reported.

But the potential in small- and mid-size car segments is appealing. Chinese per capita income in 2001 rose as high as E5,000 in some large cities, although many rural residents only earn about E500 a year. But for city residents, the possibility of owning a car is now more than a dream. Reaching this market with local connections could give MG Rover substantial additional volume, increasing its purchasing clout with suppliers.

Return of the Metro?

MG Rover is also talking to Indian automaker Tata about importing the Indica minicar with a Rover badge to replace the Rover Metro. In India, Tata is a force in the commercial vehicle sectors but has a market share of less than 10 percent in cars.

"The Rover brand could do more for the Indica in Europe than Tata ever could. Plus we could import Rovers with a Tata badge in India," said Ratan Tata, chairman of the Tata group of companies. He said the Indica could sell for about E7,000 in Europe.

An executive involved in the ***-Rover deal said a tie-up with Brilliance and Tata would not help MG Rover.

"What's needed is somebody serious like Honda was. Such a partner would make more sense than someone from China who is not on the leading edge of technology. They need somebody who is state of the art," said the executive, who spoke on condition that he would not be named. "The MG name is still very good, and there is a huge customer base in the UK, so they could attract someone looking for market share."

Volume talks

Simply put, when calling a supplier with an order, volume talks.

MG Rover has to pay more for its parts - not only because of its reduced purchasing power - but also because one-time engineering costs must be amortized over a smaller order, said the chief executive of a major European supplier who declined to be named.

"You can imagine the relationship with Ford or Volkswagen is slightly different than that with somebody who doesn't have the volume," the executive said. "We have to react independently of who calls. You have to solve their problem as quickly as possible. And those one-time costs count more heavily."

Added Stephan Kraus, spokesman for Bosch in Germany: "For an electronic stability program system, you have a high amount of application and software work, so a smaller volume order is a higher price per piece. Every producer of smaller cars has to make them more interesting than mass producers, so they can compete despite the negative price aspects of their small volumes."

But that strategy runs into economic and marketing problems.

A product that can compete will cost more to build, because of using superior parts amortized over a shorter production run. And, analysts say, MG Rover does not have the brand strength to market itself as a premium player in niche segments. The next Rover 45 will struggle to match the brand power of a VW Golf or Ford Focus. Both cars will be redesigned in the same time frame.

That's MG Rover's dilemma: It can use less intricate engineering, or use cheaper materials to match component prices with the bigger players. But the desirability of its products would decrease as word gets around that its car is not as advanced as the competition - exactly the opposite of what a niche manufacturer needs.

Suppliers can't count on MG Rover having sufficient product development capital.

"Coming up with a new model in its current (cost) structure will be very hard," the executive said. "They don't have the customer base and they don't have the volume to compete head-on against those competitive cars. They have to come up with a product that can compete, or position themselves in a niche."

Tony Shine, MG Rover supply chain director, said the automaker has been able to cut costs by using suppliers' existing products, but engineering slight modifications to make the car feel like an MG Rover. The automaker also has intensely installed a variation of the Japanese "kaizen" theme of continuous self-improvement.

"We have gone to recognized suppliers, and they find us attractive because we are not too prescriptive. The suppliers have come up with innovative ideas in commodity-parts areas," Shine said.

What's more, nearly all the suppliers on the 25 and 45 are British - and therefore expensive. The cost structure is slightly less for the 75, which has one-third German suppliers.

While Shine doesn't want to alarm his long-standing British supplier base, he said, "We have to look for the best deal for MG Rover. We can help midlands suppliers be competitive, but ultimately we have to be competitive."

Product development

One of MG Rover's best weapons is an agile engineering team that has squeezed substantial improvement from a tight budget.

For E160 million, engineers reskinned and boosted performance of Rover models to turn them into MGs. The effort increased the company's market coverage, credibility and cash flow.

For E50 million, they also gave the MGF roadster an ambitious redesign that included a different rear suspension package, restyled sheet metal, and more powerful engines.

Perhaps more importantly, MG Rover has the critically acclaimed 75 platform, which has been developed into both front- and rear-drive variants, as well as a wagon and a long-wheelbase edition. Von Kuenheim said the 75 platform may be MG Rover's best asset.

MG Rover won't confirm that the next 45 medium car will come from the 75 platform. But with the launch only two years away, a pairing with Brilliance doesn't seem to affect the plan much.

Rhys notes that the 75 sedan's long overhangs disguise the platform's relatively short wheelbase.

Shrinking the 75 slightly puts the platform in the same class as a Ford Focus. The development budget is about E600 million, McKee said.

Said Rhys: "The platform is 40 percent of body-tooling costs, and the rest can come from cash flow and the dowry. In using the 75 platform, they can save 25 to 30 percent of total investment costs, including research and development."

However, the 75 is a luxurious structure that relies on expensive components. Those components could be too expensive to be used in the 45, even with the increased order bank that the 45 would bring. But by using a common platform and saving on research and development costs, the more expensive parts could still fall within budget, Rhys said.

MG Rover can likely survive until the 45 arrives, many agree. But a bigger question is how MG Rover can replace the Rover 25 small car. It is too small for MG Rover to shrink the 75 platform further.

MG Rover's options: Redesign a decade-old platform and risk being uncompetitive. Or partner with Brilliance's unproven development team to create something new.

MG Rover says building all cars at the single Longbridge plant is a strength. But it also is a vulnerability - if the work force strikes, the whole company shuts down. And that is a possibility in the next two weeks.

Labor strife

Workers at MG Rover's plant feel they have made sacrifices to keep the assembly line moving for the past two years. They want better wages, which the workers' union sees as a sign of respect from management.

MG Rover is offering line workers a 2.5 percent pay increase. But what annoys the work force is a flexible working-hours plan. The plan would allow MG Rover to not pay workers immediately for up to 150 hours of overtime per year. Instead of earning higher wages when worked, the overtime could be "banked" by the company. During slow times it would repay the workers by giving them an equal number of hours as time off paid at normal hourly rates.

Line workers voted six-to-one against the most recent proposition. Last week, the union mailed ballots on authorizing industrial action.

The situation makes both company executives and workers unhappy.

Even as MG Rover executives are telling the media the company is fiscally sound, managers have told workers that a strike of moderate length would kill the automaker.

Tony Woodley, national secretary of the Transport and General Workers Union, said he was disappointed that MG Rover was "practicing brinkmanship" with workers.

"Two years ago, it was a matter of reaching a deal for survival, but now in its greed the company is asking for more," Woodley said. "The last thing we need is a dispute. But it's their ****** company, and they don't recognize the issues of working people."

McKee counters that MG Rover must "build cars when people want to buy them" to be competitive. He said management has proposed eliminating additional night-shift hours, restructuring the flex-hours schedule and paying part of the banked overtime hours up front.

"Two years ago, these people were marching in the streets to save the company. The business is in a turnaround. They need to come to terms with economic reality," McKee said.

Rhys said a strike could be the worst message MG Rover could send to its customers.

"It's a legacy of British Leyland," Rhys said. "The thought is if you have shoddy industrial relations, you have shoddy products. That message is even more of a danger than the financial impact."

The Seat example

Despite its circumstances, MG Rover is far from doomed. Other troubled brands have made recent comebacks by attracting a larger automaker as a sponsor, including Alfa Romeo and Jaguar. But perhaps the closest comparison is Seat.

Fiat walked away from a struggling joint venture with Seat in 1980. With the threat of substantial unemployment if Seat failed, the Spanish government poured money into product development.

Seat kept its existing Fiat small-car platform, hired Italdesign-Giugiaro to create new sheet metal outside and a new interior, and convinced Porsche Engineering to improve the engine and put its name on the head cover.

The Seat Ibiza was a big hit, and the subsequent Malaga redesign was successful as well.

After six years of struggle as an independent, Seat attracted the attention of Volkswagen, which was expanding into markets with potential under then-Chairman Carl Hahn. VW replaced Seat's Fiat platforms with its own. Now, after considerable investment, Seat is a successful low-price performance arm of VW group.

But while Seat paired up with Italdesign and Porsche, MG Rover seems ready to team up with Brilliance China and Tata.

Said Rhys: "This is not the usual suspects. Brilliance could develop considerably because China is all potential. But if you are looking for security, you look at existing players, and none express interest at the moment ... It would be (like) the disappearance of the Incas if MG Rover went away."

GRAPHIC: MG Rover TCV at Geneva show * The TCV concept, seen at the Geneva auto show, gives a glimpse of MG Rover's new styling direction. * Tata's Indica could come to Europe with MG Rover badging and powertrains. * Howe: CEO declined to comment

Discussion Starter · #3 ·
Re-hash of old news.

The journalist has forgotten several key business areas, the first one that is a big winner for MGR is Powertrain which makes a tidy profit from selling engines.

The K-series has a worldwide reputation for being one of the finest 4 and 6 cylinder suite of engines in the mass market. All manufacturer will have to reconfigure it's engines for the EU. Ford is going to have the biggest headaches as it's engines are truly ancient, especially the engine plants that power Galaxy which have the worst emission of all petrol engines. MGR's exposure maybe to remap the K-series ECU and cam changes.

This is interesting that he quoted Garel Rhys, I have the Hansard minutes of his meeting with HM Government during the *** debacle a couple of years ago.

This is what he said of the Powertrain works.

"That foundry is state of the art, it is remarkable. It uses zircon sand from Australia. They cracked what had only been a formula 1 type engine which was programmed for mass production, it shows how clever Rover was. It means you cast the block much nearer its final form so you need fewer machine tools and that allows the K series project to stand out. It actually saves machining by what that is. It is absolutely brilliant. They earn a lot of money around the world having licensed it. They said "We have got to license it because people will break the patent otherwise, so we will license it". That is an intriguing little side line to the whole thing."

That journo's article really only scratches the surface of a complex issue. I recommend you read the full Hansard article because not only does it explain the entire story really well but offers an accurate insight into the MGR company and the total and utter incompetence of *** in managing the company.

It can be found at

I'm back
544 Posts
I just stumbled across this old post. Looking at the date, they weren't far wrong with their estimate :(

I'm back
544 Posts
Parsec said:
This journalist thinks there are sheet metal differences between MG and Rover variants! Hmmmm...
I don't think there were back when it was written.
The only one I can think of now is the different front wings on the Rover 45 and MG ZS.

I'm back
544 Posts
Mat C said:
Why ? What's the difference between the 45 and ZS front wings ? :confused:
ZS ones have got big holes in them where the SV style air vents are.
I thought the vents were only in the plastic arch extension moulding, but a recent factory visit to Longbridge showed the panels are different too.
1 - 9 of 9 Posts
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.