IMI Magazine

IMI Magazine

News Analysis

Now, the main sympathy must be reserved for the workforce who stood to receive bigger severance packages five years ago when the operation was divested from BMW than the pittance they can expect now. Compounding the injury, as vehicle manufacturing continues to leach from the West Midlands, there is scant prospect of experienced shopfloor workers in their forties and fifties ever using their particular skills again. And of course, they are not the only losers as the domino effect spreads to supplier groups and dealerships. With closure of Longbridge following the cessation of car assembly operations at Ford’s Dagenham and GM’s Luton plants, it appears that only the Japanese and Germans are capable of piecing together a  UK-based business which fits into a global manufacturing and distribution network. The UK now joins Canada as the only member of the G7 industrial powers without a ‘major’ domestically-owned vehicle manufacturing operation.

From SAIC’s standpoint, the decision to abandon talks was undoubtedly the right one. MG Rover’s failure to conclude any kind of agreement with potential partners since being cut loose by BMW only served to underscore its inherent weaknesses. Scepticism that this was more about a short-term rescue than a joint venture with real long-term promise was heightened by the increasing intervention of government ministers in the run up to a general election.As majority stakeholder, the Chinese company would have been sucked into a range of liabilities including unpaid suppliers’ bills, dealer warranties and pension fund deficits.

Nor should SAIC be criticised if, as seems probable, Rover 25s and 75s start to be assembled in China. MG Rover sold the intellectual property rights of these vehicles (and their engines) to SAIC last year for £67m and it is natural that the Chinese company will want to see some return. SAIC is likely to be the sole interested purchaser from the administrators of the two models’ tooling, and at least this might provide some work for UK suppliers.

With the dust still to settle over MG Rover, there must now be a growing questionmark over Peugeot’s Ryton plant, which has already scaled back. If PSA decided to focus assembly in continental Europe, it is difficult to see how the British government could make a convincing case for persuading otherwise, given the ease with which MG Rover was allowed to vaporise.

With the dismal record of state funding of car manufacturing in the UK, it’s no surprise that the New Labour administration stopped well short of a bail-out. But for it to argue that it couldn’t have done so anyway because it was hostage to EU rules is not convincing. As both France and Germany have demonstrated with regard to the euro’s stability pact, EU rules are there to be chosen at random and broken when the national interest demands. Can anyone seriously believe that France would contemplate the demise of PSA or Renault, or that Germany and Italy would allow any of their industrial icons to disappear simply in order to comply with EU rules?

GM’s mounting crisisRecent changes to GM’s top manage-ment team – and, in particular, chairman Rick Wagoner’s decision to take personal command of North American operations – is indicative of the mounting crisis facing the world’s largest vehicle manufacturer. Results for the first quarter show a loss of $1.1bn, the worst quarterly loss for 13 years, and all bets appear to be off concerning the out-turn for the remainder of the year.

Performance in Europe, where restructuring costs and the Fiat episode have taken their toll, has not assisted the corporation’s cause, but GM’s prime concern is its domestic heartland where market share continues to erode and is now hovering around the 25% level. The strategy of offering substantial incentives is no longer effective, while latest models which, by now, should be benefiting from the ‘Lutz effect’ are failing to strike a chord among North American consumers.

All of this, though, pales into insignificance compared with the healthcare timebomb which, unless addressed quickly and with union cooperation, has the potential to rock GM’s financial stability to its foundations. GM reports that healthcare costs for hourly and salaried employees totalled $5.2bn last year alone, while Wagoner claims that the corporation is confronted with a potential $75bn healthcare liability. Under these circumstances it is hardly surprising that the corporation’s bonds are close to junk status and that its shares are languishing.

Meanwhile, Ford has caused concern among investors with the announcement that it will fail to achieve its 2005 profit target. First quarter profits amounted to $1.2bn, a decline of 40% compared with the same period of 2004. North American performance was weak and Ford too faces huge healthcare liabilities.

BMW faces plateau on profitsThe battle between BMW and Mercedes-Benz for supremacy in the world’s premium car market is shifting decisively in favour of the former. While Mercedes-Benz focuses on the twin task of restoring financial equilibrium in its car operations and winning back its fabled reputation for quality and engineering integrity – neither of which will be helped by the recall of 1.3m vehicles worldwide to check braking and electrical equipment – BMW continues to stretch the advantage over its German competitor.

A review of performance during the past year highlights the strength of BMW’s achievements, with records set for both sales and profits. Moreover, the introduction of the 1 Series has provided the marque with entry into a new market segment, while the release of a revised and much acclaimed 3 Series should ensure further production advances during the current year. Other BMW models are selling well, while Mini goes from strength to strength. How management must be applauding the decision to pull out of Rover and concentrate on its own brand.

Even so, BMW will confront far tougher business conditions over the medium term as it grapples with rising raw material costs, slumbering markets and continuing adverse currency effects. In particular, profitability in the US will be compromised by the continued weakness of the dollar and less favourable hedging rates.

As a consequence, BMW’s management has provided heavy hints that current year profits may disappoint by remaining on a plateau. It is a message that Ford, GM, DaimlerChrysler and others would love to be able to give their shareholders.