BSTR/166 IBS Center for Management Research

The Fall of MG Rover
This case was written by K. Yamini Aparna, under the direction of Vivek Gupta, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

2005, IBS Center for Management Research. All rights reserved. To order copies, call +91-8417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: info@icmrindia.org

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BSTR/166

The Fall of MG Rover
“Rover’s demise must give us all pause for thought about how we have failed to protect our once magnificent manufacturing industry and why…”1 - Editorial, Daily Express, April 16, 2005. “The death of a factory and the end of a great tradition… the suspects...British Aerospace, BMW, the Government, Phoenix Four…”2 - Sean O'Grady, The Independent, April 26, 2005.

MG ROVER SEEKS BANKRUPTCY
In its lifespan of over a century, MG Rover Group Limited (MG Rover), one of the oldest and largest automobile manufacturers in the UK, went through countless mergers, takeovers and partnerships. The last merger negotiations the company went through before it folded up, took place in June 2004. This time MG Rover was negotiating with China‟s Shanghai Automotive Industrial Corporation (SAIC)3 to sell 70 per cent of its equity stake to SAIC. These negotiations were critical for MG Rover‟s survival, given the fact that it had been a chronic loss maker since the mid-1970s. If the deal materialized, MG Rover was to develop a new car model in collaboration with SAIC in an effort to pull up its falling sales. However, SAIC required MG Rover to be solvent at the time of signing the deal and for two years thereafter. On an examination of MG Rover‟s books, SAIC realized that the UK-based company was not capable of meeting these solvency requirements. Consequently, SAIC called off the negotiations. On April 08, 2005, after the negotiations with SAIC collapsed, MG Rover succumbed to huge debts and sought bankruptcy (Refer Exhibit I for a summary on bankruptcy laws in the UK). Phoenix Venture Holdings (Phoenix)4, the owner of MG Rover, issued a statement that the directors had taken necessary steps to appoint administrators from PriceWaterhouseCoopers5 (PwC) for managing MG Rover and its subsidiary Powertrain after the bankruptcy (Refer Exhibit II for the press release regarding the appointment of administrators). With this development, Britain lost its last major domestic automobile manufacturer. Commenting on the collapse of MG Rover, Tony Murphy, national officer for the automotive industry at Amicus 6 said, “Yet again I‟m having to write an obituary for another stalwart of the British engineering and manufacturing industry. The loss of MG Rover is devastating news for the UK car industry…”7

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“People Want Answers,” www.guardian.co.uk, April 16, 2005. Sean O‟ Grady, “So Who Killed MG Rover?” www.motoring.indenpendent.co.uk, April 26, 2005. SAIC, a government-owned company is one of China‟s largest automotive companies with about 50 plants in the Shanghai area. It manufactures passenger cars, tractors, motorcycles, trucks, buses and automotive parts. The company‟s other operations include car leasing, auto parts wholesale and retail and financing. For the year ending December 31, 2003, the company posted total revenues of $11,743.30 mn. Phoenix Venture Holdings Group includes MG Rover, Powertrain, XPart, MG Sport and Racing and MG Rover Property. PwC, one of the largest accounting firms in the world, was formed when Price Waterhouse merged with Coopers & Lybrand in 1998. It has offices across the world, providing clients with services in three lines of business: assurance (including financial and regulatory reporting), tax and advisory. On October 02, 2002, PwC sold PwC Consulting, its global management consulting and technology services unit, to IBM. Amicus is the largest manufacturing union in the UK with over one million members in the public and private sectors, covering every industrial, occupational and professional sector of the economy. “MG Rover Admits Group‟s Collapse,” www.edition.cnn.com, April 08, 2005. 1

The Fall of MG Rover

BACKGROUND NOTE
Headquartered at Longbridge in Birmingham, UK, MG Rover specialized in the production of cars under the brand names of Rover and MG. The MG Rover Group was formed through grouping, regrouping, mergers and takeovers of many famous companies in the British automobile industry. The Rover Company was founded in 1877 when John Starley and William Sutton formed a partnership to manufacture penny farthing cycles8 and tricycles. The name „Rover‟ was first used for one of their tricycles produced in 1884. After introducing several motorcycles, the first car was launched in 1904. In 1906, the partnership was transformed into Rover Company Limited. Production of cycles, motorcycles and cars continued up to World War I when Rover produced military vehicles, mortars and gas shells under government contracts. During World War II, the company employed more than 21,000 people who produced aero engines, tank engines and aircraft wings. In 1967, the Rover Company merged with the Leyland Motor Corporation (LMC), headed by Donald Stokes (Stokes). During the period when the first Rover car was launched, Herbert Austin founded the Austin Motor Company at Longbridge in 1905 for manufacturing Austin cars. William Richard Morris (later known as Lord Nuffield) founded Morris Motors Company and produced his Morris Oxford car in 1913. In 1924, Cecil Kimber, General Manager of Morris Garages (MG), who had great interest in body styling and coach building in addition to being an enthusiastic sports car driver, tried fitting the Morris chassis9 with special bodywork of a more sporting nature. The first MG car – a four-door saloon10 body on a Morris Oxford chassis - was born. The period between 1930 and 1935 was the classic MG period in which a large variety of models, mostly sports cars were introduced. The name MG became synonymous with sports cars. During 1934-35, Lord Nuffield consolidated Morris Motors Company, Wolseley Motors Limited and all his other automobile companies and named it Nuffield Organization. In 1952, Austin Motors Company and the Nuffield Organization were amalgamated to form the British Motor Corporation (BMC). The formation of BMC was described as the first step towards re-shaping the British motor car industry. In 1966, BMC bought Jaguar Daimler 11 to form British Motor Holdings (BMH).

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The penny-farthing was an early model of bicycle, produced in England in 1870. The two wheels were of disproportionate size: the front much larger than the rear. It was this feature that gave rise to the name: the English penny coin of the late 19th century was very large compared to the small farthing. The official name of the penny-farthing is the ordinary bicycle but unofficial names include high-wheel and boneshaker. A general term that refers to all the mechanical parts of a car attached to a structural frame. In cars with unitized construction, the chassis comprises everything but the body of the car. A saloon is a closed car for four or more passengers, with either two or four doors. The name Daimler originated from Gottlieb Daimler, a German engineer, who patented an engine design in the late 1800s and built the first 4-wheeled car in 1886. This was the origin of Daimler Motor Company which built cars and also sold licenses of its designs and patents to other automobile manufacturers. In 1924, „Daimler Motor Company‟ merged with Benz to form the Daimler-Benz car company which built Mercedes-Benz cars and trucks. The UK patent rights to the Gottlieb Daimler‟s engine were purchased in 1893 by Frederick Simms, who formed a new English company. This took the name of the „Daimler Motor Syndicate‟ and later, „Daimler Motor Company.‟ From 1910, it was controlled by the Birmingham BSA company. Daimler produced a variety of cars, before becoming an upmarket (badge-engineered) version of the Jaguar. In 1960, the Daimler name was sold to Jaguar. In a classic case of badge engineering, the name was subsequently used for more luxurious Jaguar models. In 1968, Jaguar became part of British Leyland taking Daimler with it. This lasted until 1982. In 1989/90, the Ford Motor Company acquired Jaguar and with it the right to use the Daimler name on a car. Despite the potential confusion with DaimlerChrysler, the name was still in use by Jaguar in the early twenty-first century. 2

The Fall of MG Rover

Stokes believed in the idea „big is beautiful.‟ The then Labour government also wanted a national champion in the automobile industry. This was possible only by merging the big players. Stokes was encouraged by the Labour government to initiate merger talks with BMH. In 1968, the LMC and BMH merged to form one large car and commercial vehicle organization, namely, the British Leyland Motor Corporation (BLMC). In 1975, BLMC experienced financial difficulties and industrial relations crises, leading to the nationalization of the company, when it was renamed British Leyland (BL). The British Government injected multi-billion-pounds to revive the company. From 1982 onwards, BL began to be called the Austin Rover Group. Sir Graham Day, who became the Chairman in 1986, named the company the Rover Group. He started pushing the company and its products up-market by moving away from mass-produced cars. He started a privatization program by selling off many of BL‟s subsidiaries. In 1988, the Rover Group was sold to British Aerospace (BAe)12 and the Group once again came under private management. In 1994, the Rover Group was taken over by the German auto maker, BMW13. In 2000, BMW announced a fundamental reorganization plan which split the Rover Group apart, resulting in the sale of the key constituents of the Group. Phoenix purchased the Group and the new independent company MG Rover Group Limited was born (Refer Exhibit III for the origins of the MG Rover Group). In the early 2000s, apart from producing cars, the Group also dealt in car parts, accessories and vehicle financing. It had a wholly owned subsidiary – Powertrain, which manufactured engines and transmissions. Major models of the Group were the 25, 45, 75, 75 Touring, City Rover and Streetwise under the Rover badge; and ZR, ZS, ZT, ZT-T Sportswagon and MGF Roadster under the MG badge. With a dealer network in over 50 countries, the Group had operations in the UK, Asia Pacific, Europe and both the Americas. For the fiscal ended 2003, the Group declared pre-tax losses of £77 mn.

THREE DECADES OF TROUBLE
MG Rover had been facing problems since the 1970s and, according to industry analysts, the company‟s collapse was inevitable. The non-materialization of the deal with SAIC struck the final blow to the already troubled automaker. In the 1970s, the BLMC had been caught in a financial mess and faced severe labour problems. The British Government had to step in and rescue it. In 1994, BMW played the savior by taking over Rover as it posted heavy losses under the British Aerospace management. Soon, BMW realized that Rover was a liability and became desperate to get rid of the company. Things went from bad to worse after Phoenix took over MG Rover in 2000. All efforts by Phoenix to inject funds through collaborations failed, resulting in the company‟s bankruptcy.

THE 1970s – NATIONALIZATION
Both LMC and BMH had flourished separately till the mid-1960s. During that period, these car manufacturers together employed 250,000 workers and Longbridge was one of the biggest car factories in the world. With highly successful automobile brands like Triumph, Austin, Land Rover and Morris, the duo produced nearly 40 per cent of the cars sold in the UK.

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British Aerospace itself was nationalized in 1977 to preserve aircraft manufacture in the UK. It was later privatized in1981. Germany-based Bayerische Motoren Werke (better known as BMW) is one of Europe‟s top automobile manufacturers. Apart from manufacturing cars, BMW‟s operations include motorcycles, the MINI automotive brand, Rolls-Royce motor cars and software (Softlab GmbH). BMW‟s motorcycle division also offers a line of motorcycling apparel such as leather suits, gloves, and boots. For the fiscal ending December 31, 2004, the company posted sales of $60,472.9 mn and net income of $3,030.8 mn. 3

The Fall of MG Rover

However, problems began to surface after the merger of LMC and BMH into BLMC in 1968. BLMC began to face problems due to competition among its own models. This resulted in a product range that was full of duplication. Moreover, outdated production processes and inefficient management practices resulted in declining sales. MG Rover‟s plants had not been modernized since the early 1950s, and the car designs were outdated. Criticizing the UK government‟s idea of forming national champions, Nick Matthews of Warwick University observed, “Companies were pushed together whether they wanted it or not as part of a drive for national champions; bigger was better. It did not work. The management did not have the technical and managerial capacity to administer these sprawling companies.”14 In late 1973, Britain faced its worst economic crisis since World War II. The country‟s balance of payments15 deficit increased significantly and high inflation coupled with huge lay-offs led to widespread labour unrest. When the Labour party came to power in the elections of 1974, the workers across the country became more active in their protests against their managements. BLMC workers, too, began to agitate and the management‟s relations with the socialist trade union deteriorated. Production was hampered due to frequent labour strikes. BLMC‟s financial position had weakened significantly but still the labour unions demanded a raise in wages. The management refused the labor union‟s demand. The workers were infuriated by the management‟s refusal and said they would not pay the price for the incompetence of management. 16 They put forward three demands – a minimum increase of £15 a week, opening BLMC‟s books for trade union inspection and nationalization of BLMC under the workers‟ control. When the tussle between the management and the trade union worsened, BLMC turned to the Labour government for financial support. In response, Militant, a Marxist newspaper, published a resolution from the Rover production workers in its Solihull factory, demanding that if BLMC was asking for financial assistance from the government, then, the trade unions would demand that the government must nationalize the company under the workers‟ control with members of the board of management being elected on the following basis – one-third elected by the workers of the company; one-third elected by the trade union and one-third appointed by the government. The proposed resolution underwent minor amendments but the Labour party felt that nationalization of BLMC was the only way left to avoid massive job losses and to placate the trade union leaders. By then, BLMC was financially weakened and unmanageable due to its rebellious workforce. As BLMC was on the verge of bankruptcy, nationalization of the company was inevitable, and this was finally done in 1975.

THE 1980s – PRIVATIZATION
After nationalization, BLMC was known as British Leyland and from 1978 onwards, BL. Though nationalization rescued BL from total collapse, the financial position of the company did not show any major improvement. BL failed to produce new and improved models and the internal competition between its models continued. For instance, „The Mini‟17 sold in millions of units but never made much money for BL because of its high production costs. Similarly, models such as
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Mark Milner and Ian Griffiths, “After 100 years, Rover finally reaches the end of the road,” www.guardian.co.uk, April 08, 2005. An annual statistical summary of the monetary value of all economic transactions between one country and the rest of the world, including goods, services, income on investments, and other financial matters, such as credits or loans. At this time in Britain‟s history, workers had become increasingly dispirited by years of, what they called, amateur upper class managers, many occupying their board seats through the benefit of old school ties and social connections, rather than skills. The Mini was introduced in 1959. It was originally used as a sub-brand on the Morris versions of the car. The Austin version was called Austin Se7en. 4

The Fall of MG Rover

„Triumph‟ and „Rover‟ competed directly with each other. Moreover, consumers‟ preferences were rapidly changing as they bought new foreign cars produced by manufacturers in France, Germany, Japan and South Korea. Domestic sales were fast declining and BL could not sell its models abroad either. The company continued to rely heavily on the government for financial support; between 1975 and 1984, a total of £3.5 billion was injected into the company to keep it afloat. The workers were unhappy under the Government‟s management and BL often faced industrial disputes. Due to industrial action, which severely hampered business in 1977, the company manufactured 250,000 cars less than its full production capacity. In 1979, the Conservative party came to power under Margaret Thatcher (Thatcher) and decided not to provide government financial support to inefficient companies. BL topped the list of such companies. Sir Michael Edwardes (Edwardes) was appointed the Chairman of BL. He soon reduced the financial aid to BL and sold its unproductive and unprofitable factories. The factories which could not be sold were closed, Solihull being one of them. BL‟s production capacity was halved, and the cars were manufactured mainly from the Longbridge and Cowley factories. Many of the company‟s famous models were discontinued. Edwardes promised to turn BL around by 1982, but was unable to do so. Exports never took off due to the company‟s weak distribution network in Europe. As sales continued to fall, more and more workers were laid off. Edwardes felt that since there was no capital for research and development, the only way to make BL competitive was through technical collaboration18. In 1979, he began negotiations with Honda19 to co-develop new models and share manufacturing facilities. The first product of this partnership was the „Triumph Acclaim,‟20 launched in 1981. The model was a reasonable success and, though it had only a three-year production run (1981-1984), it led to a long succession of Honda-influenced Rover models. Throughout the 1980s and till the early 1990s, the partnership resulted in Honda branded cars being built and marketed in England by Rover and Rover branded cars being built and marketed in Japan by Honda. After getting rid of numerous unprofitable and duplicated models, Edwardes introduced a twobrand strategy and, accordingly, the name of the company was changed to Austin-Rover Group in 1982. Sir Graham Day, who was appointed the Group‟s Chairman in 1986, renamed the company the Rover Group. He tried to upgrade existing cars to target the up-market consumer segment. In 1984, the Rover range was extended to include a highly specialized range of smaller cars – the Rover 200 series. In 1986, the Rover 800 series was introduced. It was a luxurious range of executive cars with advanced styling and technology. These models were highly successful in spite of increasing competition from the foreign models. However, the success of new models did not improve Rover‟s financial position. Many auto industry experts believed that bureaucracy under the government‟s management was the main reason for such lackluster financial performance. The press named the company a „black hole‟ since several billion dollars of public money had been lost.

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BL short listed Alfa-Romeo, AMC, BMW, Chrysler (US), Chrysler (UK), Fiat, Ford, GM, Honda, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Peugeot-Citroen, Renault, Saab, Subaru, Toyota, Volkswagen and Volvo. Chrysler was the first choice for a partner and Honda was the second because they were approximately the same size as BL. But the deal with Chrysler fell through when the US parent company pulled out of the UK. Finally, Honda was chosen as it was regarded as a highly innovative company and having significant presence in Europe among all Japanese car companies. Japan-based Honda Motor Company manufactures a variety of motor products, ranging from small general-purpose engines to specialty sports cars. Honda produces a wide range of motorcycles, ranging between 50-cc and 1,800-cc. For the fiscal ending March 31, 2004, the company posted total revenues of $75,912,180 and net income of $4,318, 343. The Triumph Acclaim was a compact model based on the Honda Ballade and used a Honda-designed engine, but met UK content requirements. It was succeeded by the first Rover 200-series, based on the Honda Civic. 5

The Fall of MG Rover

Thatcher decided to ease the government‟s financial burden by privatizing the company, but there were no buyers. In 1986, the government tried to sell the company to Ford 21 but the deal failed since Ford wanted to buy only successful models. But the government continued its efforts, which eventually bore fruit in 1988 when BAe came forward to buy the Rover Group for £150 mn. The manufacturing agreement with Honda continued. Honda and the Rover Group bought a 20 per cent stake in each other. BAe initially promised to strengthen the Rover Group by investing a large amount of capital and by bringing in new technology and aggressive management. However, the company later sold the Rover Group assets for financial gain. BAe sold all productive and profitable assets of Rover, further draining the finances of the Group. In the process, Ford acquired the Rover Group‟s Jaguar brand for $2.5 bn in 1989. In 1990, the EU Competition Commission22 complained that BAe was selling the Rover Group‟s assets at very low prices and conducted an investigation into the matter. The investigation revealed that not only had BAe bought Rover Group at a very low price but £2.6 bn of Rover‟s debts were also written off as part of the deal. According to the Commission‟s estimates, the Rover Group‟s business assets were worth between £800 mn to £1 bn. The Commission also accused the UK government of indulging in unfair competitive practice in the deal with BAe. Press reports stated that BAe was given preferential treatment because its head, Roland Smith, was close to the Thatcher government. These developments costed the Rover Group dearly and its financials worsened further.

THE 1990s – TAKEOVER BY BMW
In 1990, BAe faced major problems with its regional jets business. By 1991, the company was on the verge of bankruptcy. It could no longer afford to retain the loss-making Rover Group, which did not fit in well with its core business interests of aerospace and defense. Eventually, in early 1994, BAe sold the Rover Group to BMW for £800 mn. After the sale to BMW, the Rover-Honda collaboration was severed, as Honda did not want to retain equity stake in a company owned by a competitor. Both partners mutually withdrew the 20 per cent equity stake held in the other company. BMW acquired Rover as its products were good in terms of quality and the models did not overlap with those of BMW. Despite the problems faced by the company, Rover never lost some of its staunch patrons. BMW made only one saloon model but in three different sizes. The company wanted to expand its market and product base but at the same time, did not want to lose its image of being a niche manufacturer. Developing a cheaper car to compete with Volkswagen, Ford, Fiat and other mass market players would devalue the BMW brand. Therefore, buying an existing classy brand with good mass appeal was considered a better option. The BMW-Rover combination appeared to be a winning one. Rover could benefit from BMW‟s technical, managerial and financial assistance and BMW could secure a strong footing in the mass market through the Rover range. However, things went wrong from the very beginning owing to certain actions, which some auto industry experts called „errors of judgment‟ on BMW‟s part, while others thought they were shrewd, calculated and self-serving decisions by BMW.
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Ford Motor Company (Ford) is a global company operating in two major businesses – automobile and financial services sector. The automotive sector sells cars and trucks through out the world. For the fiscal ending December 31, 2004, the company generated total revenues of $170,839 mn and net income of $3,487mn. The Competition Commission is one of a number of UK regulatory bodies, set up by legislation, to protect the interests of consumers and industry. 6

The Fall of MG Rover

In a move that surprised everybody, BMW retained John Towers (Towers), the outgoing CEO of Rover, instead of appointing its own candidate. Rover‟s workers felt discouraged with this decision. Auto experts wondered why BMW did not use its own technical expertise and administrative efficiency for managing Rover. By the time BMW realized its mistake and appointed its own candidate, the damage was already done. The workers were de-motivated and internal work environment at the Rover Group continued to deteriorate. BMW was very conservative in making new investments in Rover‟s products. Rover‟s dealership was drastically reduced and there was a dearth of new models. Between 1994 and 2000, BMW launched two cars designed in collaboration with Rover – the Rover 75 and the Land Rover Freelander. BMW did not bother to upgrade the aging 25 and 45 models. As a result, sales of the old models declined since the consumers opted for newer models from other manufacturers. Even a new product like Rover 75 was developed in such a way that though it had the same sophisticated diesel engine as the BMW‟s 3 and 5 models, it was of lower quality in all other aspects. This way, BMW took care that Rover 75 did not dent the sales of BMW‟s exclusive models. The retro-styled 75 had a classy and clubby look and was voted „Car of the year‟ in 1999 by „What Car?‟ magazine. But the model could not achieve high sales because BMW‟s 3 and 5 models offered better features. Industry analysts wondered whether BMW‟s management deliberately induced the sales decline in Rover brands. BMW wanted to launch a 4x423 transmission system to compete with MercedesBenz. It developed and launched the X5 model with Land Rover technology. However, analysts wondered why BMW required X5 when its portfolio already had the successful Land Rover. Land Rover loyalists said that BMW had never wanted to retain the model but only wanted to find out the technical details relating to it. The sales of the Rover Group‟s brands continued to fall and, in February 1999, BMW‟s board ousted the Chairman, Bernd Pischetsrieder, who was responsible for the Rover Group takeover, and appointed Joachim Milberg (Milberg). The new Chairman was given a two-year deadline to turn around the Rover Group, but this was not accomplished. In fiscal 2000, Rover lost over £600 mn. The German press called Rover a perpetual loss maker and gave it the nickname, “The English Patient.” Milberg finally decided to sell the Rover Group. BMW announced a reorganization plan for Rover Group by splitting it into key saleable constituents. In March 2000, BMW sold Land Rover along with its dealer network and designing facilities at Gaydon to Ford, while the rest of the Rover Group went to Alchemy Venture Capital (Alchemy)24 of the UK. The deal with Ford materialized for £1.8 bn. However, the deal with Alchemy faced problems as the company wanted to get rid of all the Rover brands and concentrate on keeping and improving just the MG sports car. The Alchemy deal was initially supported by the UK Department of Trade and Industry secretary Stephen Byers (Byers) because he wanted the Rover issue to be settled before the general elections. However, the Alchemy deal met with strong opposition from the British unions. On April 01, 2000, nearly 8,000 people staged a march in Birmingham protesting against Alchemy‟s plan to get rid of all the Rover brands which would result in massive job losses. Byers could not afford to go against popular opinion before the general elections and withdrew his support to Alchemy. The talks between BMW and Alchemy were stalled and eventually on April 28, 2000, the deal collapsed. BMW warned Byers that it would close Rover‟s plant resulting in loss of thousands of jobs, unless a sale was secured within a month. Towers, the ex-CEO of Rover Group, who was now the head of Phoenix, came forward to purchase Rover and announced that it would retail all Rover‟s models.
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A vehicle transmission system in which engine power is applied to all four wheels. Specializing in buy-outs, buy-ins and venture capital, Alchemy is a private equity advisory business based in London. Apart from the UK and Ireland, Alchemy‟s operations are in Germany, Switzerland and Austria. 7

The Fall of MG Rover

Byers had to support this deal as it meant saving the jobs of thousands of workers. Workers and local pressure groups, too, backed Phoenix. In May 2000, Phoenix bought the Rover Group for a nominal £10. An interest free loan of £550 mn repayable in 2049 was also extended to Phoenix by BMW. The Rover group was renamed MG Rover. Outwardly, it appeared that BMW decided to get rid of the Rover Group as the company had turned out to be the proverbial white elephant eating up billions of pounds. BMW claimed that it had made losses of £6 bn in the six years it owned Rover, but the true extent of Rover‟s losses was never known because its books were not open to the public. Therefore, according to analysts, there was every possibility that BMW had inflated the losses in order to get rid of Rover after it had served BMW‟s purpose. They made an analysis of the investments made by BMW and the consideration it obtained through the sale of Rover Group and came to the conclusion that BMW made handsome profits while Rover lost heavily (Refer Exhibit IV for an analysis of the BMWRover Group deal). Industry experts were divided in their opinion about BMW‟s treatment of Rover. Some analysts believed that BMW did its best to save Rover but had to let it go when the losses became unbearable. However, another group of analysts believed that BMW purposely ruined Rover. During the 1980s, due to the successful partnership of Honda and Rover, the Honda-backed Rover model was described as having the potential to become Britain‟s BMW in the future. Therefore, some industry experts felt that BMW took over the Rover Group to prevent it from becoming a threat to it in the future. Moreover, Honda had always been a strong BMW competitor. By taking over the Rover Group, it severed the Honda-Rover partnership and successfully thwarted Honda‟s European plans.

BANKRUPTCY UNDER PHOENIX
From May 2000, MG Rover became an independent company under the management of Phoenix, a Midlands firm, headed by John Towers, Nick Stephenson, Peter Beale and John Edwards, known as the Phoenix Four25. The short-term risk associated with the acquisition of Rover for Phoenix was minimal considering the generous terms offered by BMW. For its investment of £10, Phoenix got £909 mn in cash, net assets and loans. The assets included the stock of 65,000 cars worth £350 mn and an interest-free loan of £550 mn. Industry experts felt that this money would sustain MG Rover, at its current rate of losses, for four to five years provided no investment was made in new models, research & development and new equipment. At the time of takeover, Towers said, “It was a racing certainty that we will succeed; we will be back in modest profit, probably with collaboration, in a couple of years‟ time.”26 Towers‟ statement was an indication that MG Rover could not survive on its own. Phoenix also wanted to rejuvenate the sales of MG Rover by launching a new model, which was not possible without a partner. Therefore, Phoenix started hunting for a foreign investment partner immediately after the acquisition. The first candidate for collaboration was Proton, the Malaysian car manufacturer. However, the discussions did not materialize as the Malaysian company was not convinced by Towers‟ predictions of MG Rover‟s profitability in the near future. The Malaysian company considered the profitability estimates overly optimistic. Brilliance China Automotive Holdings Limited27 was the next candidate, but this deal, too, failed to materialize.
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Edwards was a Rover dealer in Stratford and Beale was his accountant. Stephenson was an engineer with 25 years of service at Rover. Towers had left Rover as its CEO and joined Concentric, a Birmingham vehicle components manufacturer, as chief executive a few months later. Chris Brady, “English Patient Unsuitable Case For Treatment,” The Observer, April 10, 2005. Brilliance China is one of the leading automotive manufacturers in China. It primarily manufactures minibuses, automotive components and sedans. The Group is also engaged in the manufacture of gasoline engines for use in minibuses, sedans, SUV, light trucks and automotive components. For the fiscal ending December 31, 2003, it posted total sales of RMB 10,109.557 mn and net profit of RMB 936.447 mn. 8

The Fall of MG Rover

Meanwhile, MG Rover‟s sales kept declining. The company needed to sell at least 180,000 cars a year to break even, but the sales fell to 145,000 in 2002, 116,000 in 2003 and 110,000 cars in 2004 (Refer Exhibit V for the financial highlights of MG Rover for the fiscal 2001 and 2002). From 13.4 per cent in 1990, the market share of MG Rover in the UK shrunk to less than three per cent by 2004 (Refer Exhibit VI for the declining market share of MG Rover). Industry experts felt that this was because MG Rover kept producing old models. Without the help of a partner, it could not produce a new model. In June 2004, Towers entered into a strategic alliance with SAIC. The British government offered MG Rover a bridge loan of £100 mn for the SAIC deal. The deal was expected to enable MG Rover to launch a series of new models in Europe as well as expand its network of dealerships. In return, the Chinese company could gain a foothold in the European car market, access to research and development expertise of MG Rover and use its Rover and MG brand names. After prolonged negotiations, SAIC got access to Phoenix‟s books at the beginning of March 2005. Ernst & Young‟s28 appraisal of MG Rover revealed that the company was on the verge of financial bankruptcy. SAIC promptly called off the deal. The news of SAIC pulling out of the deal was made public on April 07, 2005. A government loan was no longer possible without the deal and MG Rover filed for bankruptcy on April 08, 2005.

THE AFTERMATH
The collapse of the SAIC deal opened a can of worms. There were reports that while MG Rover was going through a cash crunch, the Phoenix Four were selling the assets of the company for their own selfish interests. Towers refuted such allegations, terming them „character assassination.‟ But the British press dug in deeper to reveal the truth that from an initial contribution of £66,000 by each of the four members to form Phoenix, the Phoenix Four had become millionaires by the time MG Rover went bankrupt. The Phoenix Four paid themselves very generous salaries and established their own £13.5 mn pension fund, which together made each one of them richer by £40 mn. As a multiple of the average employees‟ package, the average package of the Phoenix four almost doubled from 25 times in 2000 to 49 times in 2003. They paid themselves salary and benefits amounting to £815,000 in 2003, which was slightly higher than the average figure of £790,000 for directors of similar sized companies in the UK. Together with pension funds, their average annual package was £1.5 mn in 2003. In 2002, their compensation package was over £3 mn, more that that earned by BMW‟s directors. Phoenix had split MG Rover into 28 different companies. It transferred Rover‟s profitable assets including the engine and car leasing business in Techtronic, a company under the control of the Phoenix four, and sold them at significant profit. Phoenix sold MG Rover‟s Studley Castle, a 28bedroom mansion spread over 30 acres of land, to one of its group companies. The Phoenix directors made a profit of $3.3 mn out of this deal. This flourishing business was hived off as a separate company from MG Rover, and hence was not a part of the bankruptcy proceedings. The 403-acre site of the Longbridge plant was sold for a bargain price of £57 mn. The Studley Castle and the Longbridge plant site deal together fetched Phoenix £75 mn. The car parts business was sold to Caterpillar Logistics for £100 mn. This callous stripping of assets prompted even BMW to call the actions of the Phoenix four “the unacceptable face of capitalism.” The British press called it “capitalism at its ugliest.”
28

Ernst & Young is one of the world‟s largest accounting firms, offering auditing and accounting services. The firm also provides legal services and services relating to emerging growth companies, human resource issues and corporate transactions (mergers and acquisitions, IPOs, and the like). It has one of the world‟s largest tax practices, serving multinational clients that have to comply with multiple local tax laws. 9

The Fall of MG Rover

All these transactions left MG Rover without any profitable assets and owing huge debts. Many of these debts were owed to other companies owned by Phoenix, thereby, effectively making those companies the principal creditors, in some cases the sole creditors of MG Rover. This meant that when MG Rover went into liquidation, the companies owned by Phoenix would be the first to get the liquidation proceeds. The collapse of MG Rover had serious ramifications for the British automobile industry and its workforce. According to the estimates of PwC, MG Rover was losing £20 mn to £25 mn a month, had liabilities of around £800mn and virtually no assets at the time of bankruptcy. All this meant that while the Phoenix four paid themselves millions and established outrageous pension-funds, the pension prospects for the 6,100 existing workers of MG Rover were very bleak. Calculations showed that if Alchemy had taken over MG Rover, it would have saved 2,000 of the plant‟s 6,000 plus jobs and offered a severance package of over £50,000 for each Rover worker who had been laid off. Now after the bankruptcy, only 1000 workers would be retained temporarily and over 5000 jobs would be lost with each employee getting only £3000. MG Rover‟s workforce was not the only casualty. The collapse meant additional loss of over 18,000 jobs of people at MG Rover‟s suppliers, dealers and thousands of others in related industries. Commenting on the job losses, Nick Matthews, an expert in the manufacturing sector, said, “It‟s like a plane crash. It‟s all the people in the same place at the same time. That plant has been there since the 1890s.”29 The British government, too, had to shoulder the financial burden of the collapse because as per the rules of the new Pension Protection Fund, the government had a statutory responsibility towards all the discharged workers. British Prime Minister Tony Blair announced a £150 mn package for MG Rover‟s workers and suppliers. It meant that once again several million pounds of taxpayers‟ money would be used for MG Rover (Refer Exhibit VII for a brief note on the aftermath of the collapse). The true extent of manipulations by Phoenix directors would be revealed only through detailed analysis of the accounts of MG Rover and Phoenix. However, it was believed that it might not give the clear picture since MG Rover‟s accounts of the fiscal 2004 had not yet been made public. The government ordered a full-fledged investigation. Bryan Nicholson, London‟s leading accounting regulator, was appointed to set up and manage the inquiry. The report was expected to be out after the new government took charge30. Till then, MG Rover would be run by the administrators.

29 30

Mark Rice-Oxley, “MG Rover's Collapse Jolts British Election,” www.csmonitor.com, April 15, 2005. England‟s general elections were held on May 05, 2005. The ruling Labour party under Tony Blair won the elections for the historic third term. 10

The Fall of MG Rover

Exhibit I

Bankruptcy Laws in the UK
Bankruptcy in UK is governed by the Companies Act, 1989 and the Enterprises Act, 2002, which replaced the Insolvency Act, 1986. A court makes a bankruptcy order only after a bankruptcy petition has been presented. It is usually presented either: by the company (debtor‟s petition); or by one or more creditors who are owed at least £750 by the company and that amount is unsecured (creditor‟s petition). A bankruptcy order can still be made even if the company refuses to acknowledge the proceedings or refuses to agree to them. Bankruptcy petitions are usually presented at the High Court in London or at a county court near the registered office of the company. Once the bankruptcy order has been made, it is advertised in "The London Gazette" (an official publication which contains legal notices) and in a local or national newspaper or both. In addition the Official Receiver (OR) will give written notice of the order to local authorities, utility suppliers, courts, sheriffs, bailiffs, National Savings and Investments (premium bonds), the Land Registry and any relevant professional bodies. Enquiries will also be made of banks, building societies, mortgage, pension and insurance companies, solicitors, landlords and any other persons or organizations who may be able to provide details of any assets or liabilities that the company has, or has had, an interest in (either on its own or jointly with others). The OR is also responsible for looking into the company‟s financial affairs for the period before and during its bankruptcy. The OR may report to the court and has to report to the company‟s creditors. The OR must also report any matters which indicate that the directors‟ may have committed criminal offences in connection with bankruptcy or that the directors‟ behavior has been dishonest or the directors have been in some way to blame for the company‟s bankruptcy. An insolvency practitioner, who must be authorized by either the Department of Trade and Industry or the appropriate professional body, can be appointed trustee instead of the OR. Insolvency practitioners are individuals who specialize in insolvency work. He or she is then responsible for disposing of the bankrupt‟s assets and making payments to its creditors. The OR will tell company‟s creditors that the company is bankrupt. He or she may either act as the trustee or may arrange a meeting of creditors for them to choose an insolvency practitioner to be the trustee. This happens if the company has significant assets. The directors of the company have to attend this (or any other) meeting of creditors. When the trustee makes a payment to creditors, he may place an advertisement about company‟s bankruptcy in a newspaper asking creditors to submit their claims. Depending on how long it takes the trustee to deal with its assets, this advertisement may appear several years after the bankruptcy order. The trustee will tell the creditors how much money will be shared out in the bankruptcy. Creditors then have to make their formal claims. The costs of the bankruptcy proceedings are paid first from the money that is available. The costs include fees that the OR or the insolvency practitioner charges for administering the company. At least part of the claims from company‟s employees may be preferential and are paid next, along with any other preferential debts. Finally, other creditors are paid, together with interest on all debts, as far as there are funds available from the sale of assets. If there is a surplus, it will be returned to the company to be distributed among the members. Source: www.insolvency.gov.uk.

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The Fall of MG Rover

Exhibit II

Press Release from PWC about Appointment of Administrators
MG Rover Group Limited and Powertrain Limited (the companies) - in administration 08/04/2005 14:28 Ian Powell, Tony Lomas and Rob Hunt, partners in PricewaterhouseCoopers, have been appointed joint administrators of MG Rover Group Limited. Additionally, Tony Lomas, Steven Pearson and Rob Hunt have been appointed joint administrators of Powertrain Limited. The appointment follows a request by the Board of MG Rover on the evening of 7 April 2005 for PricewaterhouseCoopers to advise the Board on the companies‟ position. Partners from PricewaterhouseCoopers met board representatives at the companies‟ Longbridge headquarters this morning (8 April). Ian Powell, joint administrator said, “Following constructive meetings with management and employee representatives, we will now work to understand and evaluate the financial position of the companies more fully. The business will continue over the weekend. We have asked employees to return to work next week. We will be working closely with management, staff, unions, key suppliers, creditors and the Government as the situation develops.”
Source: www.ukmediacentre.pwc.com.

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The Fall of MG Rover

Exhibit III

Origins of The MG Rover Group

Source: www.mg-rover.com.

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The Fall of MG Rover

Exhibit IV

Analysis of BMW-Rover Deal
BMW made some investments in Rover during its ownership. A major portion of that investment was made in those areas which were either sold away or kept under its own control after reconstituting the group as the MG Rover Group. This gave the impression that BMW had purposely invested only in those areas which it wanted to keep and which it could later sell. The result was that the reconstituted MG Rover Group did not have many profitable businesses when it was sold to Phoenix.

Investment made by BMW:
It purchased the entire Rover Group for £800 mn and sold the Land Rover marque alone to Ford for £1800 mn. Just this single sale amounted to a £1bn profit. Of all the plants, BMW made major investments in the Cowley plant. BMW retained this plant after selling the MG Rover Group to Phoenix. BMW invested in a new engine facility (Hamms Hall) and retained this too. It invested in developing the Land Rover Freelander but sold it to Ford after launching its own X5 model based on Land Rover.

Assets Retained:
BMW retained the Longbridge Engine & Transmission facility, thereby, forcing MG Rover to rely solely on BMW to buy components for making cars. This was the case with the Swindon panel pressing plant too. This way, BMW made money though MG Rover was incurring losses. Later, both facilities were sold to Phoenix. This consideration was separate and was not included in the £10 paid by Phoenix for the purchase of MG Rover. BMW retained the rights to develop Rover‟s Classic 400/45 and 200/25 models. BMW retained the new Mini, the Triumph, the Riley and the Rover brands (While buying Land Rover, Ford put forward a condition that MG Rover should not produce a 4x4 and brand it as a Rover, so that there would be no confusion in the market with regard to Land Rover).

The Unanswered Questions:
How much was Rover charged for BMW‟s management time? How much was Rover charged for „BMW Training‟ of Rover technicians in Germany, when in reality, Rover employees were put on the production lines to make BMWs. How much work did Rover do on BMW products, like the BMW X5 4x4, which was not cross-charged back to BMW? If all or any of these factors were in BMW's favor, Rover would have been a just a dumping ground for excess costs to inflate the BMW side of the business fortunes. Since Rover‟s books of accounts were not available for public inspection, there was no way of finding answers to these questions. Moreover, not many were aware of these intricate issues until the Rover loyalists came out with this analysis. Many refused to accept that BMW used Rover for its own ends and called the entire analysis absolutely „cynical‟. However, industry experts agreed that when Rover Group was sold it was crippled as a manufacturer with no development facilities or on-going development to use. It was left with a largely outdated product range. Moreover, in the initial days, Rover had to depend on BMW for the purchase of components like engines and panels whereas BMW retained the plants with modern facilities and new products in the pipeline. Thus the BMW-Rover deal created quite a controversy in industry circles though the public was not aware of it.
Source: www.austin-rover.co.uk. 14

The Fall of MG Rover

Exhibit V

MG Rover – Financial Highlights (2001-02)
(In £ mn)

Particulars Turnover Loss before goodwill, tax and income from group undertaking Net cash
Source: www.mg-sportscars.co.uk.

December 31, 2002 1741 (95) 315

December 31, 2001 1697 (187) 301

Exhibit VI

Sales of Rover in The UK

Source: www.bbc.co.uk.

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The Fall of MG Rover

Exhibit VII

Aftermath of the Collapse
ROVER WORKERS: MG Rover employed about 6,000 workers at the time of its collapse, but an additional 15,000-20,000 jobs in the Birmingham area were also supported by business from the firm. When the firm filed for bankruptcy, the Department of Trade and Industry (DTI) said that government would announce a package of support measures. A "rapid response unit" staffed by a team of Job Centre specialists could be set up at Longbridge to help MG Rover workers, a spokeswoman for the DTI said. (The government announced a £150mn package for workers and suppliers). They would be on hand to advise on retraining and to help with queries about other jobs in the area. Track Company Network Rail said it wanted to retrain 192 workers to fill vacancies in the Birmingham area. It said that the electrical and engineering skills of Longbridge car workers would transfer well to the railways. ROVER CUSTOMERS: Though MG Rover‟s share of the UK car market had been shrinking, the car still had many loyal customers. After the company filed for bankruptcy, all of them were in a fix about the status of warranty facility provided with new car purchases. As per the usual Rover practice, dealers who carried out repairs on cars under warranty obtained parts and fees for labour from the manufacturer. Historically, MG Rover had reimbursed the dealers for the cost of any repairs carried out for a period of anything up to three years after a new car was sold. After the collapse, the administrators have written to MG Rover dealers to tell them that they would no longer be able to meet the cost of repairs. So customers had no idea whether the warranty would be honored by the dealers. If the dealers refused to honor the warranty claims, in total, an estimated 150,000 MG Rover owners would lose their car warranty cover. ROVER DEALERS: MG Rover was estimated to owe dealers and suppliers about £200mn at the time of its collapse. Dealers were now doubtful as to whether the liquidation proceedings would cover this amount. Apart form that, many showrooms which specialized in MG Rover might make significant six-figure losses. On the collapse of the company, many customers began to cancel their orders. So hundreds of cars were lying with the dealers. The dealers would still be invoiced under previous arrangements for unsold Rover cars which remained to be delivered. SPARE PARTS: Cat Logistics, which supplied MG Rover parts, said that the supply of spare parts was safe. It added that it had £40mn worth of MG Rover spare parts in stock in April 2005. There were approximately two million MG Rover cars on Britain's roads and there would be an ongoing market to supply spare parts for these vehicles. In the long term, some of these cars would come to the end of their natural life and would be broken up for scrap, giving rise to a steady stream of second hand parts in the market. SECOND-HAND SALES: Customer confidence was obviously shaken in the company and so in the short-term, getting a good price for an MG Rover would be difficult. Car dealers said that MG Rovers were fetching far less money at car auctions than they were before the firm went into administration. But it was expected that once buyers were reassured that the supply of spare parts was secure, prices of second-hand MG Rovers would recover.
Source: www.bbc.co.uk.

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The Fall of MG Rover

Additional Readings and References
1. “What Will Rover Collapse Mean?,” www.bbc.co.uk, 08 April, 2005. 2. “MG Rover Admits To Group’s Collapse,” www.edition.cnn.com, 08 April, 2005 3. Milner, Mark and Griffiths, Ian, “After 100 Years, Rover Finally Reaches the End of the Road,” www.guardian.co.uk, 08 April, 2005. 4. “Potted History Of MG Rover,” www.utv.com, 08 April, 2005. 5. “How It All Went Wrong At Rover,” www.manchesteronline.co.uk, 08 April, 2005. 6. “End Of The Road For MG Rover,” www.manchesteronline.co.uk, 08 April, 2005 7. Wardell, Jane, “MG Rover Seeks Bankruptcy,” www.freep.com, 09 April, 2005. 8. Brady, Chris, “English Patient Unsuitable Case For Treatment,” The Observer, 10 April, 2005. 9. Scott-Joynt, Jeremy, “Phoenix Four’s Image Could Be Revived,” www.bbc.co.uk, 12 April, 2005. 10. Downes, Steven, “MG Rover: 30 Years of Hurt,” www.driving.timesonline.co.uk, 15 April, 2005. 11. “Deal for MG Rover Falls Through,” www.msnbc.msn.com, 15 April, 2005. 12. Rice-Oxley, Mark, “MG Rover's Collapse Jolts British Election,” www.csmonitor.com, 15 April, 2005. 13. Fletcher, Matthew, “MG Rover to Fire 5,000 Workers as Talks Collapse,” www.bloomberg.com, 15 April, 2005. 14. “People Want Answers,” www.guardian.co.uk, 16 April, 2005. 15. “Enquiry Launched into MG Rover Collapse,” www.abc.net.au, 17 April, 2005. 16. Jones, Alan, “MG Rover Crisis Begins To Bite With Suppliers,” 19 April, 2005. 17. Griffiths, Ian, “Bounty For Underpaid Men at The Longbridge Wheel Will Rise to £50m,” www.guardian.co.uk, 19 April, 2005. 18. Feltham, C Michael, “The Rover Cars Fiasco: An Object Lesson in Government Incompetence, Mismanagement and Perfidy,” www.axisoftlogic.com, 19 April, 2005. 19. Chapman, Giles, “MG Rover: It’s Over. What Went Wrong?,” www.independent.co.uk, 19 April, 2005. 20. Fidler, Stephen and Denning, Liam, “Final Gamble That Failed To Pay Off,” www.ft.com, 21 April, 2005. 21. Barney Jopson and James Mackintosh, “Findings On Rover’s Finances Expected After Election,” www.ft.com, 21 April, 2005. 22. Jackson, Roland, “Auto History Repeats Itself With Car Maker MG Rover,” www.etaiwannews.com, 25 April, 2005. 23. O‟ Grady, Sean, “So Who Killed MG Rover?,” www.motoring.indenpendent.co.uk, 26 April, 2005. 24. “MG Rover and the Need for an International Perspective,” www.wsws.org, 27 April, 2005. 25. www.mg-rover.com. 26. www.mg-sportscars.co.uk.
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27. www.austin-rover.co.uk. 28. www.insolvency.gov.uk. 29. www.en.wikipedia.org. 30. www.search.epnet.com. 31. www.ukmediacentre.pwc.com. 32. www.biz.yahoo.com.

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