BMW to unravel Rover-Honda tie-up

THE INDEPENDENT
JOHN EISENHAMMER and DAVID BOWEN
Sunday, 6 February 1994

BMW plans to move quickly to reduce Rover's dependence on parts it buys from Honda, a move that threatens not only Rover's 15-year relationship with the Japanese car maker but also the future of Honda's engine factory at Swindon. Representatives of BMW, in looking over Rover's books in the run-up to its takeover bid, concluded it had been overpaying for parts. 'We are quite angry about this,' a senior BMW executive said. 'There is a lot of dependence that we want to change. We know we can supply many things a lot cheaper than Honda.'

Sources close to Rover confirmed that it had decided a year ago that it wanted to reduce its dependence on Honda engines. Last year, Rover bought 70,000 Honda engines, worth about pounds 50m. Most came from the Swindon factory, which in turn depends heavily on Rover as a customer.

However, Honda executives believe they would have the upper hand if BMW attempts to unwind the tight licensing arrangements between Honda and Rover. Rover is developing versions of its own K-Series engine, which could replace the bought-in Honda 1600 units used in the Rover 216 and 416.

The Swindon factory made 77,000 engines last year, and Honda says it will make 200,000 in 1995, but the maximum capacity of its adjoining car assembly plant is 100,000 units. The senior BMW executive said the Rover-Honda ties 'need to be changed'.

How Honda let Rover go to strangers: Belief in its partner's independence was only one reason that the Japanese giant failed to acquire it. BMW also had the cash

DAVID BOWEN in London, TERRY MCCARTHY in Tokyo and JOHN EISENHAMMER in Frankfurt
Sunday, 6 February 1994

ON 29 JANUARY, 1994, the last British motor company of any size passed into foreign ownership. BMW bought 80 per cent of Rover Group for pounds 800m, cash; the remaining 20 per cent stayed with Honda. The last time anyone had tried to sell the company abroad, in 1986, there had been a political uproar. The Government, then owner of the group, had had to back down, and two years later sold Rover to British Aerospace.

Last week, the political fireworks were muted. Few people were happy, but most were resigned: in the post-recessionary hangover, an attack of realism had set in. It is possible - easy even - to be optimistic about the future of Rover under BMW. Had the British group been bought by another volume car- maker, there would have been rationalisation: new Rovers would at best have been rebadged Fords or VWs. As it is, Rover will probably continue as a distinct marque - a designer and producer of small cars that BMW will sell in places that have not seen the badge for 30 years.

But the future is the product of the past. In 1952, when the British Motor Corporation (Rover's forerunner) was formed, it was the biggest car company in the world outside America. BMW had moved on from making pots and pans in bombed-out factories to producing motorbikes, and was wondering how to get back into car production. Honda, the third company in the story, was only four years old, a tiny producer of motorcycles south of Tokyo.

But this is not only a story of British industrial decline. BMW was badly managed in the 1950s. Its good fortune was that its crisis came 20 years before that of the British group, and that it started doing things right two decades earlier. Timing, not nationality, was the key. BMW, founded as an aero-engine maker in 1917, made its name in the 1930s: its motorbikes and cars took the race-tracks of the world by storm.

Its involvement in making aero-engines during the war using slave labour nearly led to its destruction in 1945. For the next 15 years,it stumbled along making unsuccessful cars at both ends of the spectrum - including a bubble-car under licence. In 1959, it was rescued at the last minute from being reduced to being a component supplier for Mercedes-Benz through an improbable alliance between the workers' council and a near-blind battery manufacturer, Herbert Quandt, whose family still owns 60 per cent of BMW.

With considerable foresight, Mr Quandt chose a marketing man, Paul Hahnemann, to run the near-bankrupt firm. Mr Hahnemann decided that BMW needed a 'niche', and found one in Britain, where Rover and Triumph were about to launch their compact but up-market 2000 models, so inventing the executive car segment. BMW engineers already had a sporty saloon, the 1500, on the drawing board, and Mr Hahnemann thought he could trade on the pre-war reputation to sell it to young people who did not want a stodgy Mercedes.

It worked, and ever since BMW has kept to its niche. The BMWs of today are recognisably descended from the 1500 and have the same qualities - good technology, elegance, a certain raffishness. The continuity has also been managerial: there have been only three chairmen since Mr Quandt took over.

As BMW started to motor, the lumbering British Motor Corporation was spluttering. The 1952 merger between Austin and the Nuffield organisation had left the factories unrationalised and uncontrolled. The Mini, launched in 1959, was a runaway success, but the company did not know - until Ford told it - that it was making the car at a loss.

The company suffered for its success. 'Whenever the government was short of a few bob, it slapped taxes on cars,' says Keith Hopkins of KBH Communications, who was a senior manager in both Leyland and British Leyland. 'The motor industry was treated as a milch cow.'

Leyland was much smaller than BMC and was doing much better. Although primarily a truck-maker, it bought Triumph and Rover in the Sixties. Harold Wilson, increasingly concerned about the loss-making BMC, pressed Sir Donald Stokes, Leyland's boss, to take it over. He reluctantly agreed and on 17 January, 1968, the birth of the British Leyland Motor Corporation - still the fith largest car company in the world - was announced.

Sir Donald knew it was a mistake from the beginning. 'I wasn't trained to run a company of 190,000 people,' he said. It was painfully clear that British Leyland was overmanned by about 30,000, but Sir Donald found it impossible to cut numbers. 'If you fired a single person you risked having the whole damned lot walk out,' Mr Hopkins says. 'And the government wouldn't take any legislative action to make sure the unions behaved responsibly.'

The company also seemed to have lost its touch in the design studio. The most recent winner was the now ageing 1100 series: the new offerings, such as the 1800 and the Maxi, were uninspired - though there was worse to come.

The oil crisis pushed the rickety vehicle further off the road, and in 1975 BLMC was, in effect, nationalised. The next two years were extraordinary. Sir Don Ryder produced a ludicrously optimistic report recommending the group be expanded. By 1977, the workforce had risen by 4,000, and not one factory had been shut: it still had 55 plants and lost more days through strikes than ever before. In November that year, the South African Michael Edwardes, later Sir Michael, was brought in to sort out the chaos. He went through the entire top management, and moved or sacked hundreds of people; he told the workforce 12,000 jobs would have to go; and he shut the Speke factory at Liverpool - the first large car factory closure in Britain since 1948.

This brought him into direct conflict with the unions, and from then on his main goal was to beat the militants. In this, his main ally was the 1980 recession, which whipped the bottom out of the car market and gave him the ultimate stick: the threat of complete closure. It was not an idle threat either. The anti-interventionist Thatcher government came within a whisker of allowing British Leyland to close.

Meanwhile Sir Michael looked around to bolster the increasingly desperate range. He needed a replacement for the Allegro but was told there was none. He sought a partner to fill the gap and talked to a number of companies, including BMW, before settling on Honda. It had one important advantage: being about the same size as BL, it would, it was hoped, offer an equal partnership.

Soichira Honda had founded his motorcycle company in 1948. It produced its first car 14 years later and soon gained a reputation for engineering excellence. It was never a giant like Nissan or Toyota but it did establish itself, like BMW, as a niche producer of distinctively styled vehicles.

In 1979, Sir Michael signed the deal. Honda would supply Ballade cars in kit form, which would be assembled at the Cowley plant in Oxford and rebadged as the Triumph Acclaim. The relationship was much less equal than either side had supposed. From the beginning, BL was learning while Honda was teaching: Cowley workers were amazed to discover that the Ballade kits always contained every part and fitted together easily. It was their first exposure to Japanese quality.

The recession almost destroyed British Leyland, but also allowed Sir Michael to hack the company roughly into shape. By the time he left in 1982, he had cut 82,000 jobs and closed five huge car plants. BL was no longer in the same league as its European rivals. They produced 2 million cars each a year; BL made fewer than 400,000.

BL now needed a commercial link-up to survive among the big boys, and was happy to throw itself into a more ambitious collaboration with Honda. The result, the Legend/800 was not a great success; it also threw an embarrassing spotlight on differences in quality. BL's managers had started halfheartedly to introduce Japanese-style manufacturing systems. As part of the Legend/800 agreement, BL would build Legends in Cowley for the British market. Few of them got through Honda's quality control, and many ended up being used as in-plant transport at Cowley. Rover's quality improved, but it was only when George Simpson took over from Graham Day in 1991 that 'lean production' techniques were adopted with enthusiasm.

It was Mr Day, later Sir Graham, who created the Rover of today when he took charge in 1986. Like Mr Hahnemann 26 years before, he decided British Leyland needed a niche. He also looked to the past and came up with a solid, unbesmirched name - Rover. He changed the name of the whole group, and invented 'roverisation'. Henceforth, he decreed, all Rovers would have to feel robust and a touch luxurious: he would be selling British tradition and would charge a little more for it. The aim was to set Rover apart from mass-market Fords and Vauxhalls.

The car that proved the concept worked - and that the British had learned the quality lessons - was the Rover 200/400, launched in 1990 and also sold as the Honda Concerto. It was at base a Honda, but was so successfully 'roverised' that the Rover version was acclaimed as the more distinguished car and sold much better. The partnership was starting to come back into balance.

Meanwhile, the government had rid itself of British Leyland. In 1986, it had tried to sell Austin Rover to Ford, and Land-Rover to General Motors, but the political upheaval forced it to back down. Two years later, it found a British buyer: British Aerospace. It was a good buy for BAe - so good that it led to the 'sweeteners' scandal - but the management never made much attempt to integrate Rover with its other operations. It left it alone, fed it with investment cash, and waited until it could, under the terms of the purchase agreement, sell. That meant any time after August 1993.

By the end of the 1980s, both BMW and Honda could see their great runs of success were in danger of ending. Eberhard von Kuenheim, BMW's chairman, realised the company was being threatened by increasing production costs in Germany and by tougher competition, notably from the Japanese. He started cutting costs and decided to build a factory in South Carolina.

BMW also looked at ways of broadening the appeal of the range. There were two main areas in which it had no presence - offroaders and small cars - and in 1991 it started to focus on Rover as an obvious source of these products. BMW had been supplying diesel engines for Land-Rover.

Honda had a similar problem. It was the first Japanese company to set up a factory in the US and was phenomenally successful there. By 1990, it employed 10,000 people in the States and had almost 10 per cent of the market, thanks to its best- selling Accord. But all these American eggs made the basket vulnerable. In Europe, its market share was only 1.2 per cent.

As BMW announced an American factory, so Honda announced a European one. In 1989, it announced it was investing pounds 300m in a plant at Swindon. At the same time it would take a 20 per cent shareholding in Rover, while Rover would take 20 per cent in Honda's UK Manufacturing business.

It was not long before Honda's fears were realised. America went into recession, and the revived American carmakers started to nudge the Japanese vehicles aside. As the market leader, the Accord suffered particularly badly. and in 1992 the parent's pre-tax profits fell by 32 per cent - the first drop for 25 years. In contrast, its pupil, Rover, was performing startlingly well. Its 'roverised' version of the Honda Accord, the 600, was outselling its cousin - now made in Swindon - and last year Rover was the only car company to increase sales in the bombed-out continental market. For the first time, it looked as though Honda needed Rover as much as Rover needed Honda: the Japanese started to negotiate to increase their 20 per cent stake.

Meanwhile, BMW had decided it was time to move. In October last year, it approached both BAe and Honda. The reply from Honda was so dusty that it temporarily retreated. But over the Christmas period, it prepared a full offer.

By now it was a straight negotiating race, though the Japanese handicapped themselves by refusing to take a majority stake in Rover: BAe needed cash, as much as possible.

On Wednesday 19 January, BMW held a meeting of its supervisory board at which the outline of the Rover bid was presented. It was approved. Two days later, Honda told BAe it would pay pounds 165m to increase its share to 47.5 per cent; that valued the whole company at pounds 600m.

The following Wednesday, 26 January, BMW presented its bid - it would pay pounds 800m for BAe's 80 per cent stake in Rover. That valued the group at pounds 1bn. The BAe board decided the next day that unless Honda could top the offer, it would accept the BMW bid. Mr Simpson flew immediately to Tokyo and was told there might be more money, but Honda said it definitely did not want a majority stake. On Saturday, the BAe board told BMW it accepted the offer and Bernd Pischetsrieder, BMW's new chairman, flew to London to sign the deal.

Honda's reaction was hostile. 'We were surprised and diappointed by the deal,' said a company spokesman. This meant Honda was outraged. 'What is the point of cultivating the kind of close intercorporate ties across national boundaries if, in the end, such effort counts for so little, and receives such shabby treatment?' the Japan Times asked on Thursday.

The Japanese are portraying the deal as yet another example of Western companies' propensity for cynical short-termism and lack of respect for business relationships based on trust and familiarity. But there is a certain amount of posturing here. Honda would prefer to be seen as having been betrayed rather than admit that it was outmanoeuvred.

There are three possible explanations for Honda's failure to bid: the truth is probably a blend of all three. First, Nobuhiko Kawamoto, Honda's chairman, criticised the BMW deal as 'completely negating the long efforts between Honda and Rover . . . to make Rover a British company with its own brand identity.'

Second was politics. 'I think they did not want to be seen taking over the last British car-maker,' says Andrew Blair-Smith, an analyst with Barclays de Zoete Wedd in Tokyo. For the Japanese car industry has become sensitive to foreign fears that it is dominating the rest of the world.

Finally, there was cash. BMW offered so much because it could afford to. According to the most recent annual reports, Honda had dollars 1.3bn (pounds 870m) in ready cash. Buying Rover, even for pounds 600m, would have made a hefty dent in that. BMW, on the other hand, had DM5.3bn (pounds 2bn)in liquid money. 'That was enough to buy the whole of British Aerospace,' says Rory Knight, a fellow of Templeton College, Oxford.

By the end of last week, Honda's wrath seemed to be dying. 'It would be very complicated to cut our links with Rover right away,' the spokesman said. Honda makes engines for Rover and Rover supplies its Swindon plant with panels. The replacement for the new generation 200/400, due to go on sale in Britain in 1995, is also a joint venture. Most analysts expect Honda to continue its relationship for the time being, gradually disentangling as joint projects run their course.

'Once the lives of existing models run out, they will probably end co-operation,' Mr Blair-Smith said. 'Honda won't be interested in putting its technology into an operation run by BMW.'

The German company's relationship with Honda is the big question mark. Honda is linked to BMW by its cross-shareholding - and has made plain it is not happy about it. It has reasons to be cross but also worried. For the first time in its history, it is under severe pressure and cannot afford to see its European plans skid.

Both Rover and BMW have been through their crises. The Japanese car companies have, so far, seemed crisis-proof. Maybe their turn has come.