Is Rover roaring to a sale?

BUSINESS WEEK

Joseph Rodriguez used to be slow to admit he worked for Rover Group Ltd. After all, he had spent years under car hoods as a mechanic before joining Britain's largest auto maker as a salesman. So he knew intimately the poor quality that had dogged the company for years. "Rovers used to be laughing stocks," Rodriguez explains.

Rover is a different animal today. Thanks to an alliance with Japan's Honda Motor Co., the Birmingham-based carmaker is rebuilding a reputation for quality in Britain. Rover was the only major auto maker in Europe to increase vehicle sales in the first half of 1993, with a 13% jump. And following $152 million in operating losses since 1991, the company should post profits this year (chart). Observes Nicholas Cunningham, an analyst with Soci t G n rale Strauss Turnbull: "Rover is quite capable of making $150 million or more by 1995."

WAITING GAME? That's modest, considering Rover's expected sales of $6.8 billion in 1995. But the prospect of a recovery may be enough to make its parent, British Aerospace PLC, rekindle plans to sell Rover. As part of a 1988 deal to buy the troubled company from the government, BAe agreed not to sell for five years. Come Aug. 13, though, it will be free to sell. The aerospace giant denies any such plans, but analysts believe BAe is just waiting for a strong profit run before selling.

Making a sale could be tricky. Honda already owns a 20% stake in Rover, while Rover holds a 20% stake in Honda's British unit. Rover has soaked up Honda's knowhow in passenger-car development and manufacturing processes. And Honda has tapped into Rover's supplier network and handed off jobs such as parts stamping to the company, cutting its need for investment in British plants dramatically. While Honda executives deny any plans to buy more (or all) of Rover, they confirm that the auto maker is key to Honda's strategy in Europe.

The two companies' fortunes are linked. With limited funds for new-product research, Rover is rebundling Honda-designed cars for the European market. The Rover 600 series of four-door sedans, launched in April, is little more than a dressed-up Accord. And the company's 200 and 400 models, representing a third of sales, are based on the Honda Concerto subcompact. "Without Honda, Rover is more or less finished," says Professor Krish Bhaskar of Britain's Motor Industry Research Unit.

Rover isn't the only one rebundling. In September, Honda plans to repackage Rover's four-wheel-drive Discovery for Japan as a Honda Crossroad. "It's the first time Honda has put its badge on a non-Japanese vehicle," says Mitsuru Sato, general manager of Honda's imports division.

CRUCIAL ROLE. So far, Rover's sales in Japan are minuscule--only 6,200 vehicles in the first six months of 1993. That's a clear sign that Rover relies far more on its Japanese partner than the other way around. Yet the move also signals Honda's confidence in Rover quality--a far cry from the days when its Allegro model earned the nickname "all-aggra," shorthand for all aggravation.

Rover may have more difficulty convincing the rest of the world that it has changed.
"Memories of quality problems from those days still linger on," says John Towers, the company's managing director. Perceptions are changing at home, but competing with European carmakers on their home turf won't be easy. "It will be a huge task explaining to a German businessman why he should buy a Rover instead of a BMW," says Karl E. Ludvigsen, an auto industry consultant.

That's because Rover's future still rides on its Honda-derived passenger cars. Honda's crucial role in Rover's recovery could deter any other auto maker from making a bid, while Honda itself, with its overall business under pressure, would probably not want to spend big to buy its British partner outright for now. Then again, maybe a 20% stake is all Honda needs to control Rover, leaving BAe with the sole option of selling its stake to the public in a stock offering. Rover's recovery is clearly in sight; its ultimate fate clearly isn't.

Julia Flynn in London, with Karen Lowry Miller in Tokyo