IMI Magazine

IMI Magazine

Trouble at the top

Trouble at the top

The cars are magnificent. More than enough rich people around the world can afford them. So why aren't Bentley, Maybach and Rolls-Royce selling more? Report by Richard Feast.

The limousine car business was turned upside-down at the end of the last century. When the Vickers engineering group finally realised that the modern car business is a cruel combination of enormous investment and unpredictable demand, Volkswagen bought its Bentley brand and BMW acquired Rolls-Royce. Almost simultaneously, Mercedes-Benz embarked on a project to resurrect the pre-war Maybach name.

The results of those machinations are now on sale for those fortunate enough to have the money. The Bentley Continental GT at £110,000 will be followed by a four-door version early next year and, eventually, a replacement for the even more expensive Arnage. Not sufficiently exclusive? For £250,000, the choice is a Rolls-Royce Phantom or a Maybach. The previous hegemony by Vickers - and Britain - on the limo market is now a genuine three-way competition with a centre of gravity in Germany.

However, there is a major drawback to this vision to provide greater choice for the world's wealthiest buyers: they appear not to have noticed. The trio has so far managed to prise open considerably fewer buyer chequebooks than their makers said they would. And that raises serious questions about the commercial logic underpinning the ventures. It was never very convincing in the first place.

What we do know is that there are plenty of well-heeled customers able to afford these cars - if they want to. The annual wealth study by Merrill Lynch, the bankers, and consultants Cap Gemini Ernst & Young identifies more than 7m people world-wide with investable assets (not including property) of more than $1m (£550,000). There are nearly 60,000 with investable assets of at least $30m (£16.5m). It requires only a small proportion of these people to support the ambitions of Bentley, Maybach and Rolls-Royce each year. They have so far elected not to.

When Mercedes revealed the Maybach concept at the 1997 Tokyo motor show, group boss Juergen Shrempp talked of the potential of 1,500 sales a year. That was down to 1,000 cars by the time the car went into production, but the actual total this year will be closer to 800. Rolls-Royce is expected to deliver a similar number of Phantoms this year. After 300 customer deliveries last year, the first year of availability, Phantom will have to accelerate hard to reach the stated average of 1,000 sales a year over its product life cycle.

Ferdinand Piech, then the Volkswagen chairman, talked grandly of selling 10,000 Bentleys a year - and investments of £1.5 billion in new models and the Crewe factory - in order to secure ownership during the 1998 bidding war with BMW. That was seriously ambitious, because it would have represented a three-fold increase over anything Crewe had managed during the best of times. The figure was later trimmed to 9,000, but, even with the Continental GT finally in full production, Bentley sales this year will be barely half that.

Middle East conflicts, 9/11 and economic uncertainties have taken their toll. The early optimism for the limousine business is now tempered by caution. None of the firms involved will be specific about sales expectations these days. Wilfried Steffan, president of DaimlerChrysler UK, simply acknowledges that "All those early sales forecasts were done in a different era, when economies around the world were strong and stock markets were buoyant. The business environment is different today”.

Long term, that may change for the better. If it does, it would be against the historical trend, because the limousine market has been in decline for several years.

In the decade up to the 1998 separation, the average annual sales of Rolls-Royce and Bentley combined was in the region of 1,600. However, the annual average over the decade prior to that was closer to 2,500. Despite this very significant shift, BMW, Mercedes and Volkswagen then expected their fancy new models to propel world-wide demand to more than 10,000 cars a year. It was an impossible dream. Today, those companies are more realistic about their prospects for Rolls-Royce, Maybach and Bentley.

This drop in demand for top-drawer limos had its origins in two separate developments. Sales steadily increased for versions of the Audi A8, BMW 7-series and Mercedes-Benz S-class with all the trimmings. They may not have the ultimate prestige of a Flying Lady mascot, but each is an exceptionally well-engineered and much-admired prestige car at half the price.

At the same time, sales of Ferraris and Porsches have never been higher. Ambitious expansions were laid down for Aston Martin, Lamborghini and Maserati. The Ferrari Enzo, Porsche Carrera GT and Mercedes-Benz SLR are every bit as expensive as a Phantom or Maybach. The Bugatti - if it is ever introduced - promises to be even more expensive and a great deal faster still.

Over the past decade and more, then, there were fundamental buying shifts away from stately limos to highly respectable cut-price copies or to more visceral high performance cars. As magnificent as the cars are, Bentley, Maybach and Rolls-Royce may be answers to questions that were not asked.

Perhaps we should not be too sniffy. The trio are akin to frivolous deeds in a dull and sober automotive world. Still, rival car makers struggle to understand the business cases behind the creation of the cars, especially now that their sales revenues are so much lower than originally forecast. How on earth can the cars repay the tremendous amounts of money that went into them? What about all the executive time and expenses, and the cost of the fat consultancy fees for bankers, lawyers and brand gurus who helped to complete the deals?

No one outside the companies involved knows how much was really involved, though Volkswagen is more transparent than its rivals. It acknowledges that buying Bentley, launching the new range and rebuilding Crewe have cost it £970m. More will be needed for the Arnage replacement. The cost of capital on nearly £1 billion - whether borrowed or forfeited if made from VW reserves - has to be greater than any profit Bentley will be able to generate on sales of (say) 5,000 a year over a (say) eight-year product cycle.

When Bernd Pischetsrieder, the current VW chairman, predicts Bentley will break even this year, it can only be at an operating level; the purchase price and investments will already have been written off.

The same principles apply at Maybach and Rolls-Royce, where higher price tags are accompanied by lower volumes. Unfortunately, we will never know for sure. The only investments that BMW acknowledges in connection with Rolls-Royce are the purchase of the name (£40 million) and construction of the Goodwood assembly facility (£ 60 million). The world beyond Mercedes knows nothing of what went into Maybach. Even at their exalted prices, though, a thousand sales a year of each can barely generate enough profit to pay the wages bill each month.

For the rest of the car industry, the revivals of these great marques were driven more by egos than economics. Or, as one executive from a rival car group blithely dismissed them: "They make no financial sense. They're just macho demonstrations of corporate willy-waving."