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Running out of road just as elections loom

7 February 2004

The Guardian

Sales are falling but politicians are unlikely to let the car maker fail now

Rover, the troubled British car company that has plagued politicians, industrialists and financiers for 35 years, could be heading for the rocks in the run-up to a general election next year, senior industry insiders warned yesterday.

"I'm sure the government's worst nightmare must be that Rover collapses just six weeks before the election and, certainly, the company has been bleeding very fast over recent months," one said.

In 2003, a new record year for car sales in Britain, Rover sold just under 96,000 and, in the last two months, sales slumped by about 30% despite generous discounts.

In Europe as a whole, Rover sales fell 2.2% to 127,348, compared with global sales of 240,000 in 1999, the last full year under BMW ownership, 170,000 in 2001 and 148,500 in 2002. Rover's market share in Britain is less than 4%, the level seen as ensuring viability, and sliding - though last month they went up by 800 on the previous January to just under 6,000, giving it a 3% market share. Kevin Howe, chief executive, has now put off the target date for break-even yet again to next year.

Delay, too, has hit the launch of the new medium car, the vehicle that either spells profitable success for Rover, a takeover at a knock-down price or bank ruptcy and closure, with the loss of 6,500 jobs. In his latest comments Mr Howe says the new model, replacing the 45 series, will come "at the back end" of next year.

The company has just launched the CityRover, the mini built by India's Tata. Plans to break into the east European market by buying a disused Daewoo plant in Poland have stalled. Several industry figures believe that, given the overcapacity in Europe, Rover (and even Fiat) should be allowed to go to the wall.

Professor Garel Rhys, director of the centre for automotive research at Cardiff University's business school, believes that last year's losses will show little improvement on the £95m lost in 2002 but that the balance sheet can sustain them - and the possible £400m cost of developing the new model designed to take on the Ford Focus and Golf VW.

"In 2004 the losses have really got to be less, moving towards break-even, and 2005 is the key year; if it's not profitable, end of story; if the new model makes money they have the chance to rebuild the Rover and MG brands. They've got just 18 months," he says.

After the collapse of its planned joint venture with China Brilliance to build the new car and, then the insolvency of TWR, its design partner, Rover is supposedly funding the 45 series replacement out of its own resources. But a new 25 series would definitely require a partner injecting equity and cash, sources say, and none has been found so far.

"The management thinks it has got a new industrial paradigm with a series of alliances that bring external economies of scale - and, perhaps, medium-term prosperity," Prof Rhys says. But, ultimately, he sees Rover as a subsidiary of, or minority shareholder in, a bigger entity.

One senior industry executive insists that Rover will abandon its hopes of remaining a volume car-maker and settle for being a manufacturer of niche sports cars. Ironically, this was the very vision of Jon Moulton, head of Alchemy, the private equity group that was originally earmarked by Steven Byers, then industry secretary, to take Rover off BMW's hands.

Alchemy balked at potential liabilities of more than £1bn and, carrying no political support, walked away. At the end of last year Helmut Panke, now BMW chief executive, and finance director at the time of the German group's decision to sell the "English patient" that cost it billions, spoke of the political as well as financial price it had paid to save 6,500 west Midlands jobs.

Politically, with a general election looming, it would be impossible to let Rover go to the wall now, observers say, believing that the government would be tempted to stump up millions to keep Rover's Longbridge plant open.

Insiders add that, with the cost of redundancies at about £200m-£250m and pension liabilities of at least £400m, the price of closure would be huge.

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