Type: Process Essays
Sample donated: Simon Mckinney
Last updated: April 15, 2019
The challenge facing Kevin Howe is to turn MG Rover from a far-flung and £2m-a-day loss-making outpost of BMW into a profitable and independent carmaker. Can he pull off a strategic success that eluded the great BMW?Howe is Chief Executive of MG Rover Holdings, the private company that makes cars at the 100-year old Longbridge plant in Birmingham. How did he and the company get there?The Historical BackgroundIn the “old Labour” government of the 1970’s, Britain’s major motor manufacturers were nationalised, apart from the plants owned by foreign companies – Ford, General Motors and Chrysler. British Leyland consisted of Leyland Truck and Bus, the Austin-Morris mass-produced cars division and Land-Rover with Jaguar-Rover-Triumph, the specialist cars division. A number of brands – Wolseley, Riley, MG – were retained to “badge-up” some of the Austin-Morris products.The subsequent Conservative government did not want to run a car and truck company, so the process of privatisation began.
Leyland Truck and Bus was sold on – buses went to Volvo, while Leyland joined with Daf to make both trucks and vans.The cars business was bought by British Aerospace at a knock-down price. A close co-operation agreement with Honda resulted in the joint development of a number of models. Abruptly however, British Aerospace decided to sell the car companies – to BMW. Honda, not surprisingly, were incensed by the deal and withdrew all co-operation.BMW wanted to focus on the British heritage of the cars, to raise quality and improve the cost-effectiveness of production.
£3bn was invested over six years in the Longbridge and Cowley plants, new models were developed – but the performance of “the English patient” failed to improve.BMW decided to sell and cut their losses – running at £840m a year. BMW wanted out – and quickly.The best offer came from Alchemy, a venture-capital company that announced that it wanted to slim down the company, sell off some brands, focus on sports saloons at 100,000 per year and sell off sites.
At this prospect, consternation spread among the workforce – and among managers and dealers.John Towers, who was Chief Executive under BMW’s ownership but who left after disagreements over strategy, announced a rival bid. His Phoenix Partnership, supported by other managers and Rover dealers, offered to take over the company. Much against the odds, Phoenix won and in May 2000 paid BMW £10 – yes, £10 – for Rover, with a £500m interest-free 50 year loan from BMW.The rest of the company was disposed of:Jaguar was bought by FordLand-Rover was also bought by FordThe Cowley plant was retained by BMW to build the new Mini.Clearly, operational and financial issues have dominated MG Rover’s concerns, to make the current business profitable.But what of strategy? Amid huge multi-nationals struggling to make cars at consistent profit, MG Rover, a tiny company with no support, has to create a strategy for survival and prosperity – in particular, how to refresh the product range before current models come to the end of their life-cycle?Major Strategic MovesIn May 2000, Rover had – essentially for free – a reasonable factory making a portfolio of newish cars.
But models have to be replaced and the cost of a new medium car platform (the chassis and engine compartment) to replace the 25 and 45 models comes in at around £800m. MG Rover claims to be trading profitably – but not at a rate that would generate such a level of investment funds.The main strategic moves made by management can be grouped into three areas:1. New product launches.MG Rover has been active in trying to wring the most out of its current model line-up.
New products, based around the models it already has, have been developed. It has:- launched an estate version of the Rover 75.- launched MG variants of its Rover 25 (MG ZR), 45 (MG ZS) and 75 (MG ZT).- re-modelled the MGF as the TF with a wider range of engines and specifications.- bought Midland Power Train from BMW.
This company produces engines and gearboxes: 80% for MG Rover, 20% for Land-Rover under an agreement with Ford. Ownership of MPT gives MG Rover control over engine development.- launched vans. The Rover 25/MG ZR are offered as commercial vehicles by having the rear seats removed and the rear side windows replaced by opaque panels.
They are branded the Rover CDV (car-derived van) and the MG Express. The serious point is that as a business vehicle, VAT can be reclaimed and the driver pays no more than £200 in company car tax. (Sunday Times, 23.2.03).
– launched the Streetwise, a derivative of the Rover 25 aimed at “fashion-conscious 30-somethings with an active outdoor lifestyle”. With bulky body mouldings and raised suspension, it is offered as an “urban on-roader” sports activity vehicle.In a financial move, the company has negotiated a joint venture with Halifax Bank of Scotland to give the company ownership of 58,000 cars held on lease. Depreciation on these cars can be minimised by controlled sale through dealers.
2. Strategic partnerships.MG Rover clearly needs partners to share the costs of new model development.
The initiatives taken so far are:China:In March 2002, an agreement was signed with Brilliance China Automotive, China’s largest maker of mini-vans with ambitions to develop into cars. The 50-50 venture would result in MG Rover and its Chinese partners sharing car and power train development and production, component sourcing and sales revenue from all markets in which they operate. China Brilliance would invest in the replacement for Rover’s mid-size models – an all-new small car to replace the 25 in 2005 was proposed.However, the plan fell apart when in June 2002, Yang Rong was ousted as Chairman and CEO of Brilliance China Automotive following allegations of economic crimes brought by the Liaoning provincial government, which also seized BCA. This followed the intention of BCA to expand its production not in Liaoning but in Ningbo, a rival city south of Shanghai. The Liaoning government effectively stopped the deal with MG Rover.This first unsuccessful attempt to create a joint venture with a Chinese partner has not deterred Howe.
MG Rover has continued to cast around for an alternative partner, in the belief that -* China is an unmissable opportunity as a potentially huge car market and a low-cost manufacturing base, and* Better R&D contacts will allow a more soundly-based partnership to be developed. (FT, 22.7.03).Poland.Howe has had talks about buying a Polish plant controlled by Daewoo, the collapsed Korean carmaker. (FT, 23.10.
02). The intention is to ship old tooling and machinery from Longbridge to Poland to make models regarded as too old for the West European market for former Soviet bloc customers. (FT 3.2.
03)India.Rover has signed a deal with Tata, the Indian conglomerate, to market the Indica in the UK. The Indica, India’s only indigenously produced car, has sales running at 7,000 per month, catching the sales of the market leader, Maruti-Suzuki. Rover will exclusively distribute Indica in the UK under the Rover badge, with changes to suspension and trim, and will also sell Tata utility vehicles.
Rover will sell Indica on a non-exclusive basis elsewhere in Europe. (FT, 13.12.02).The new small car will be branded as the Rover 15, with launch planned for November 2003.
(FT, 3.2.03). It will be priced at around £6000.
170K units are to be provided by Tata over the next 5 years.Tata see themselves as the replacement for BCA as MG Rover’s principal strategic partner. Ratan Tata, Tata Chairman, seeks a “much deeper” relationship with MG Rover through which the two companies would develop new models jointly, with a replacement for the Rover 25/MG ZR the first target.3. Brand positioningWhile product development – within the existing range and for the future with new models – is critical, MG Rover also faces strategic issues around customer perceptions of the Rover and MG brands, and their competitive positioning.A Marketing magazine review in December 2002 and an article in April 2003 report:Without the resources of larger rivals, MG Rover has to be agile, feisty and fast-moving, and smart and selective about the niches it occupies and the new products it develops. Within this, there may be grounds for optimism:* The MG brand is actively being developed.
The current MG saloons, based on Rover models, have done well. At the Autumn 2002 Motor Show, the MG Xpower SV was shown. Capable of 200mph and priced at £65,000, it will not be a big seller, but will reinforce brand values of youthful credibility and sportiness, and may be developed as an important sub-brand with clothing, energy drinks and food products proposed.* The Rover brand, however, still sits as the “pipe and slippers” choice, locked into middle England of the 50’s and 60’s and resistant to making itself relevant to the modern world. Campaigns like “Relax, it’s a Rover” leave the brand feeling so blandly comfortable that it verges on sleepy. John Sanders, Sales and Marketing Director, sees the brand developing as a luxury marque – “In a class of its own”, the current strapline, is an expression of this aspiration.* The dichotomy of the MG and Rover brands have led many to suggest that the Rover brand be dropped.
The launch of Streetwise as a Rover-branded product suggests the company sees thing differently – but does it match the “luxury” positioning?Performance.For the 2001 financial year, turnover rose from £1.23bn to £1.32bn. Operating losses were £230m, an improvement on the previous year’s operating loss of £605m.
(profit of £543m in 2001 was boosted by exceptional gains from disposals during the handover period from BMW). Howe claimed that for the 2002 financial year, losses would be in tens, rather than hundreds, of millions. (D.Tel. 19.11.02).
In negotiations with unions, MG Rover confirmed that it is only 3 years into a 5-year revival programme, and that the prospect of profitability has receded to around mid-2004. (FT 6.2.03)MG Rover’s market share is down to 4% in the UK – around the same as Nissan and Toyota – a far cry from the 15-20% it held at its peak as a volume manufacturer which went head-to-head with Ford and Vauxhall. Sales in 2001 were 170,000, against a target of 180,000. Sales in 2002 are expected to be 150,000, marginally below break-even.