When Joachim Milberg, chairman of Bayerische Motern Werke, appeared at the International Motor Show in Geneva two weeks ago, he gave no sign that his company's disastrous five year relationship with Rover Cars was about to end. Instead, he insisted that Rover was at last recovering. Behind the scenes, the mood was different. BMW's management board was coming to terms with the idea that it either had to ditch Rover, or risk being taken over itself.
Mr Milberg knew not only that losses at Rover had deepened to more than $970 million (€1 billion) last year, but that they were expected to stay at the same level this year. The likely decision today to put Rover in the hands of Alchemy, the UK venture capital firm, marks BMW's admission of defeat. The question is whether BMW has shed Rover in time to keep its own independence.
Most analysts believe it is only a matter of time before BMW and the Quandt family, its controlling shareholder, succumb to the consolidation of the motor industry.
This week's announcement by General Motors of a strategic alliance with Fiat of Italy has underlined the need for scale among European manufacturers faced with over-capacity and a price squeeze. Fiat is a far larger producer than BMW, which faces even greater pressures.
BMW executives hope to salvage something from the 1994 acquisition of Rover Group from British Aerospace by retaining the most valuable parts of the group - the Land Rover and Mini brands. Land Rover is the only profitable part of Rover and enjoyed a 16 per cent sales increase last year. A new Mini small car is being launched following a $632 million investment in Rover's assembly line at Longbridge in England.
But there are now considerable doubts whether BMW in its slimmed-down form can continue to withstand competition from bigger rivals. These would like to acquire the core BMW brand and Land Rover and are likely to maintain their interest despite the expected statement of backing for independence from BMW. That will be little solace to the 9,000 or so workers employed at Longbridge, the largest car plant in Britain. Their future is uncertain, as is the outlook for the 40,000 jobs among West Midlands suppliers that rely on Rover.
The transfer to Longbridge of the Rover 75, a car judged a success in terms of quality, but a sales disappointment will not guarantee job security for ever. It is a sad end to a saga that began when BMW acquired the company in 1994. Rover was then on a slow but steady recovery track. The reconstruction undertaken with the help of Honda, BAe's equity partners in the company, was beginning to pay off.
But Rover Cars was soon heading back into trouble. This was not entirely BMW's fault. It had to invest heavily in a completely new model programme at a time when sterling was moving against it. Plans were drawn up on the basis of a sterling exchange rate of DM2.40, but sterling has steadily risen against the euro and the exchange rate is now about DM3.15.
BMW's senior management contributed to its misfortunes. Underperforming Rover managers were given too much power and too little direction from Munich. By the time BMW installed its own executives, Rover had lost its way in Britain, the most important market for future sales growth. Last year, sales of Rover Cars fell 24.9 per cent to 250,000 units.
Rover's difficulties were not eased by the change of management. Losses are thought to have increased to between €1.1 billion and €1.3 billion last year from €957 million in 1998. BMW's full-year results, which will be published later this month, are expected to be worsened by provisions for the disposal of Rover. Analysts predict one-off charges of up to €3 billion for debts, asset write-downs and restructuring.
The scale of the likely losses at Rover dubbed "the English patient" by the German media became clear a few months ago at BMW.
Analysts have questioned whether the decision to sell Rover came from the Quandt family. But although the family's members have been in close contact, supervisory board members insist it was a management decision.
However it was made, the decision has been welcomed by analysts following BMW. Yesterday, they were able to start recalculating forecasts for what will be a smaller but more profitable company.
Today's move is expected to signal a new direction at BMW away from volume car production, concentrating on upmarket cars with a German heritage and the best-selling elements of its Rover inheritance. But most analysts say that can only be an interim solution. The credibility of the company's senior managers has been weakened, and they believe the Quandt family will eventually reassess.
The immediate priority at BMW now will be to refocus its efforts on its entry model the 3 series. One of the problems of its involvement with Rover is that it has focused management and financial resources on its British brand. Any failure to develop a successor to its German bestseller could have serious consequences.
