With Rover, BMW Got More and Less Than It Asked For

NEW YORK TIMES
By RICHARD FEAST

BMW of Germany is one of the world's great automotive icons. Its cars ooze class, sophistication and engineering excellence. Land Rover, the British sport utility vehicles made by the BMW-owned Rover Group, enjoys a similar profile in another part of the motoring firmament.

The appeal of these two big names is evident in showrooms around the world. Both are heading for global sales records once more this year. In the United States, for example, in the first eight months of 1999, BMW sales were up 19 percent, and Land Rover's soared by 35 percent.

From an outside point of view, then, the union of BMW and Rover probably looks like the perfect marriage. But appearances can be deceptive. While BMW and Land Rover have never been in better shape, the Rover brand of passenger cars (which are not sold in the United States) has been a continuous drain on the overall health of BMW A.G. In Germany these days, Rover is known as ''The English Patient.''

In early 1994, BMW paid the equivalent of $1.35 billion for the Rover Group, and it has nearly doubled that figure in subsequent investment. For what? For BMW, Rover's poor productivity, so-so quality and rapidly declining sales were like handicapping an Olympic sprinter with winter boots.

So what looked like a bargain -- Ford paid $2.4 billion for the much smaller Jaguar company -- was actually a liability. For the first time in nearly four decades, BMW looked vulnerable, and it was all because of the Rover purchase. BMW's main shareholders, the Quandt family (which owns 46 percent of the stock), began to question the wisdom of the deal.

The situation resulted in a sudden reverse in strategy last fall, when Rover lost all its operating autonomy. That led to the departure of Walter Hasselkus, the BMW-appointed chairman of Rover. A few months later, in February, Bernd Pischetsrieder, the chairman of BMW A.G., and his heir apparent, Wolfgang Reitzle, BMW's engineering director, left abruptly.

What made it worse was that Mr. Reitzle, the man responsible for the design and development of so many cars used as benchmarks by other auto makers, quickly landed the key job in charge of Ford's newly created Premier Automotive Group, made up of Aston Martin, Jaguar, Lincoln and Volvo.

It all began with BMW's recognition that, like its rival, Mercedes-Benz, it needed to find greater economies of scale. As Mercedes expanded organically with additional models -- the merger with the Chrysler Corporation came later -- BMW decided on growth by acquisition. In 1994, it bought Rover from British Aerospace and the Honda Motor Company.

The purchase was seen at the time as a dazzling move by a company that could do no wrong. The German auto maker had chalked up three decades of increasing sales, profits and dividends, transforming itself from a maker of micro cars into a worthy competitor for Mercedes-Benz. In the process, it made the already wealthy Quandt family, which gambled on the near-bankrupt BMW in 1959, even richer.

BMW was not prepared for Rover, however. It failed to study the postwar history of Britain's automotive industry, which had been in terminal decline. In 1952, Rover was the fourth-largest auto maker in the world (after Detroit's Big Three); four decades later it had dropped to 20th.

Over the years Rover had demonstrated an alarming appetite to consume cash. Taxpayers in Britain knew only too well about its performance, because it was under state ownership until Prime Minister Margaret Thatcher sold the majority shares -- for a pittance -- to British Aerospace in 1988. Rover, known variously over the years as BMC (British Motor Corporation), British Leyland or BL, was a byword for unreliable products, late deliveries and inefficiency. Its anarchic labor relations were largely responsible for what became known in the rest of the world as ''the British disease.''

By the time BMW took over, Rover was a smaller, better-focused group following various company selloffs, factory closings and terminations. And in spite of this, labor relations were good. Technology transfer agreements with Honda had helped Rover improve its products and manufacturing, though investments were paltry by international standards when the state and British Aerospace were in control.

BMW decided that, given proper financing and supervision, Rover knew how to get the job done. It doubled investment in Rover, established broad strategy and left its British subsidiary to get on with its own models, engineering, purchasing, production, sales and distribution.

BMW and Rover were separate companies under the ownership of one of them. That turned out to be a mistake.

The reluctance to take a heavy hand was understandable given the histories of Britain and Germany during this century. Rover was all that remained of the once-extensive British auto industry. Having it run by an ''enemy'' it had helped to defeat in two terrible world wars would require careful public relations in Britain.

In the mid-1980's, Mrs. Thatcher was desperate to give up state ownership of BL. She encouraged Ford to take over the passenger-car group (then called Austin-Morris) and General Motors to buy the Land Rover and Leyland truck businesses. The deals were almost done when the Prime Minister uncharacteristically reversed position in response to anti-American protest from her own supporters and from the opposition.

Ford and G.M. were squeezed out. Mrs. Thatcher then found a safe national savior in British Aerospace. It was clearly a political solution rather than an industrial one. Yet, six years later, there was curiously little opposition when Rover was sold to a German company. What had happened before, though, made BMW sensitive to the nationality issue. It kept Rover at arm's length.

At his first press conference last March, Joachim Milberg, who took over as BMW chairman in February, said: ''The multibrand strategy which was pursued was right in principle. The type of group leadership, however, proved to be wrong.'' It was an oblique reference to the dissenting Mr. Reitzle, who wanted to abandon the ailing Rover car brand.

During the press conference, Mr. Milberg also said, ''Our strategy is the strategy of the entire BMW board of management. And since this is demonstrated by all of us, you will not see any of us developing and announcing his own strategies.''

That grand plan amounts to a more sophisticated, high-end version of the seminal one defined in the 1920's by Alfred P. Sloan Jr. for General Motors: a car for every purse and purpose. In BMW's case, its portfolio of brands would occupy the upper niche (translation: fat profits) of each market segment while collectively providing a full range of products.

The company has its successes, of course. BMW and Land Rover are flourishing. The MG name was successfully revived with the introduction of a midengine roadster (not sold in the United States).

This summer the flagship 75, a luxury Rover sedan, was introduced in Europe to favorable notices, and executives of both companies have pointed to the car as a sign of things to come. ''Anybody who has driven the 75 will know that Rover is capable, with BMW's help, of designing and engineering some of the best cars in the world,'' Bernard Carey, a Rover spokesman, said earlier this year.

Helmut Panke, BMW's chief financial officer, said he expects the 75 to provide a boost to Rover's worldwide sales, which were down 33 percent in the first half of this year. In the meantime, however, new versions of the aging 200 and 400 midlevel models will not be ready until 2002 at the earliest. Given the quality of the competition, many auto analysts believe, that's a long time to wait.

The combination of the sales slide and the $2.8 billion investment that BMW has committed to developing new models and rebuilding the main factory in Birmingham means that Rover will be a continuing financial burden on the company for a long time. It's a good thing those BMW's and Land Rovers are so popular.