BMW is finally bringing Rover to heel

BUSINESS WEEK
BMW IS FINALLY BRINGING ROVER TO HEEL
It's cutting costs and eliminating models to halt losses

When veteran BMW executive Walter Hasselkus took the wheel at Rover Group Holdings PLC last July, he faced a dicey situation. The British carmaker, which BMW bought for $1.2 billion in 1994, was bleeding red ink--and its British chief executive had quit just months before. While BMW had pledged to find another Briton to lead the once proud company, it could not find a suitable candidate. So Hasselkus arrived from his previous post as head of BMW's motorcycle business with a mandate to streamline Rover and steer BMW's makeover of its ancient products.

Now, Hasselkus is shifting into high gear. He's positioning Rover as an upscale, pricier alternative to mass-market sellers such as Ford and General Motors' Vauxhall Motors. In a bid to slash costs, he is merging key operations with BMW in Munich. And using BMW's distribution connections, Hasselkus is pushing Rover into 22 new markets. "Things are under control," says the laconic, 55-year-old German. Adds Tony Woodley, chief auto negotiator for Britain's Transport & General Workers' Union: "The honeymoon is over. Rover is now very much under the control of BMW."

Remaking Rover poses big risks for the German company. BMW has launched a nine-year, $6.4 billion investment program at Rover. While sales of its Land Rover sport utility vehicles are strong, its car sales have lagged expectations. Rover's car factories are running at an average 62% of capacity. Last year, Rover lost $253 million on $9 billion in sales. Says Salomon Brothers International Ltd. analyst John Lawson: "I'm skeptical they will earn enough return to justify the whole exercise" of buying Rover.

Hasselkus is betting that fewer and newer offerings will help. Two top-end models, the 600 priced at $24,000 and the 800 that goes for $27,500, will be supplanted this fall with a single new version developed with BMW. The Rover Mini, nearly 40 years old, is expected to be redesigned in 1999. The $17,500 Rover 200 and the 400 at $20,500 will be replaced by a single model after 2000. Those subcompacts were designed using technology from Honda Motor Corp., which owned a stake in Rover until 1994, when it sold out to BMW. Classics such as the MG convertible, revived in 1995, will stay to give the lineup pizzazz. But Hasselkus is axing the low-end Rover 100.

The company is moving to defend its only bright spot, the Land Rover. To counter complaints about such things as rattles on some models, BMW is stamping out defects. Later this year, Land Rover will launch a new model, starting at less than $23,500, vs. $76,400 for its top-end version. It will compete with less expensive four-wheel drives such as Toyota Motor Corp.'s RAV4.

A key part of Hasslekus' game plan is cutting costs across the board. His first line of attack is procurement. Company officials say BMW will announce within four months that all parts purchasing for Rover will be handled from Munich headquarters. The change is already taking place de facto, says Daniel T. Jones, head of Lean Enterprise Research Center at Cardiff University. By buying parts together in bigger volume, BMW and Rover can cut the cost of some parts by 10% or more, analysts say.

JOBS FOR LIFE. New Rover models will also share components with BMW. A new factory near Birmingham will build four-cylinder engines for Rover and BMW models starting in 2000, BMW officials say. And BMW is pushing for higher productivity from Rover's 30,000 manufacturing workers in four plants. On Mar. 11, talks aimed at changing work rules kicked off with the Transport & General Workers' Union. Workers currently are guaranteed jobs for life in exchange for flexibility. Union leader Woodley says he's willing to discuss changes. But the union is "not going to keel over and have our bellies tickled," he adds.

Meanwhile, Hasslekus has his eyes on an international expansion. With an assist from BMW's distributors, the company sold 274,000 vehicles outside Britain last year, the first time exports exceeded sales inside the country. Rover's small cars are big in France and Spain, while Land Rovers are popular in North America. Rover and BMW are also assembling cars from kits in South Africa, and plan a similar operation in India.

Given BMW's huge investments, most experts think Rover will eventually revive. But how long will it take? BMW CEO Bernd Pieschetsrieder says Rover will return to the black by 2000--several years later than BMW initially thought. Hasselkus will have to drive carefully to ensure that Rover turns around without further delay.

By David Woodruff in Bonn, with Julia Flynn in London