Pre-election jitters could produce the Rover fudge

THE GUARDIAN
Andrew Cornelius examines the factors behind the government's imminent decision on funding

Ministers are on the verge of deciding the future strategy for the survival of Rover, the former BL vehicles business. Decisions on the future of the group are always political dynamite as the government learned to its cost when it was forced to drop proposals to sell part of BL to American multi-nationals Ford and General Motors.

This time round the stakes are even higher for Midlands Tory MPs, fearful of job cuts at Rover in an election year, and the Opposition industry team, which is going into the election with the regeneration of British industry as the plank of its strategy. The dilemma for the government is to balance its obsession with getting Rover off the taxpayer's back with pre-election sensitivities. The answer will almost certainly be a fudge.

This will take Rover a few steps closer to the ultimate goal of privatisation, it will involve the minimum injection of public funds into a business which has swallowed £1 billion of taxpayers money since the last turnround by Sir Michael Edwardes, and it will leave any brutal decision-making until after the election. Graham Day, the smooth talking Canadian appointed chairman of Rover after his drastic rationalisation of the state British Shipbuilders business, gave his recommendations to the government late last year. He has since kept the public relations initiative with a series of announcements intended to put paid to some of the speculation which has been raging about the future.

During his whirlwind six months in control at Rover, Day has announced a shakeout of top Rover management, the £50 million sale of the Unipart spare parts business, and the £4 million employee buyout of the Leyland bus subsidiary. An announcement is imminent on the sale of Leyland Trucks and Freight Rover, the Sherpa van business, to Dutch truck company, DAF, or American truckmaker, Paccar. Debate on the future of Land Rover has gone remarkably quiet, with the last rumoured interest coming from Jaguar. Rover's new chairman has also given the go-ahead for the joint venture development of the new AR8 midrange car with its Japanese partner Honda for production in 1989/1990.

However, it is not yet clear how the work will be split between Rover's two volume car plants at Cowley, near Oxford, or Longbridge, in Birmingham. The future relationship with Honda is at the heart of the discussions over the corporate plan. Both companies have so far been delighted with the joint venture project-by-project approach which saw the successful launch of the Rover 200 and Rover 800 models. The AR8 is meant to be a repeat of this arrangement which has seen Rover boost throughput at Cowley by producing the Honda Legend version of the joint venture Rover 800 on a sub-contract basis.

Much speculation has centred on Honda taking an equity stake in Rover. But, although it is common practice in Japan to take minority equity stakes in supplier companies, Honda's board is reluctant to become involved in a politically sensitive privatisation move, and would much prefer to continue to work with Rover on the present basis. The ultimate goal for Honda is still to build a new engine plant on the 350-acre site it owns at Swindon and either to build an assembly plant there, or take control of the South assembly works at Cowley, where the Maestro and Montego are assembled, to help ease Rover's huge overcapacity there.

The other key production decision which has to be made is whether to go ahead with a replacement of the Mini Metro. A Metro replacement, codenamed AR6, is currently on the stocks. However, the government seems certain to approve a plan to modify, rather than rebuild, the existing Metro, to save public funds. This could mean a government contribution of as little as £100 million, coupled with some balance sheet juggling to wipe off debts. The decision to go ahead with the AR8, coupled with modifying the Metro, and some help from Honda, either by taking a modest equity stake, or taking over the Cowley South Works could provide the ultimate compromise in election year. This would not really provide the ultimate solution to the problem of privatising Rover or improve its UK market share which slumped to a miserly 15.8 per cent last year, against projections of 19 per cent plus.

The long term survival of the company depends on what Day learns from his extensive market research to discover what the market wants from Rover. The first key finding from this research was that the public's perception of Rover cars was way behind reality. Manufacturing executives and dealers in the Austin Rover volume car division are adamant that all the groups models, including the much-maligned Montego and Maestro cars, score at the top end of world quality standards.

The market research has also prompted Day to speed long-held plans to drop the Austin name from the company's products, because of its tarnished image, in favour of the high quality Rover name, which is highly rated by customers. Ultimately Day would like to see Rover competing at the top end of three segments of the UK car market, with the intention of stealing a march on rivals like Volkswagen and BMW whose products have been chased by highly-paid yuppie customers prepared to pay for quality, performance and image. One encouraging pointer for Rover has been the keen interest in the new upmarket Rover 800 in the North American market where it is sold as the Rover Sterling.

Day and his top executives are desperate to top up the UK production lines with these export sales, but they have got a long way to go. The Austin Rover volume cars division has capacity to build 750,000 cars a year, but is selling only 450,000. Whatever the ultimate outcome of the discussions on the latest survival plan, Rover is unlikely ever to rank alongside the giants of the world motor industry like Ford and General Motors, who switch production from country to country to take advantage of changes in exchange and tax rates. At present production levels Rover produces fewer models each year than specialist upmarket manufacturers like BMW and Mercedes and has no chance of competing with the giants. Maybe Day will achieve the impossible and get Rover back into profit by taking the group upmarket.

But the Day plan to take British Shipuilders into specific market niches before he joined Rover has yet to be proved. He left the state owned BS business slimmer but it, too, is still hanging on a knife-edge as it desperately fights on an order-by-order basis to survive. More likely is that Day will continue to slim the Rover business by cutting jobs and capacity wherever he can, to avoid a pre-election time bomb. This would leave the way clear for the real decisions to be made this time next year when the debate over the Rover plan will no doubt resume.