Back to Basics for BMW

Wanna buy BMW?

That's a question WAW asked a year ago (see WAW - April '99, p.28), and the answers came back loud and clear. A resounding "Yes" from nearly every carmaker in the world with the means, an even more emphatic "We're not for sale" from BMW AG executives and controlling shareholders, the Quandts (48%).

Officially, those positions haven't changed. But with last month's sale of Rover to turnaround specialists Alchemy Partners and the shuffling of Land Rover operations into Ford Motor Co. hands, rumors are rife of a closer tie between BMW and Ford in the offing. And now, 12 battered-and-blue months later, it is a little easier to believe the Quandts' resolve to keep BMW independent may be breaking down.

The decision to sell Rover puts BMW nearly back to square one in its 21st century survival strategy. The Bavarian automaker now will attempt to go it alone in the below 3-series market segment, resurrecting plans to develop its own 2-series car for 2004. That game plan was considered too risky - introducing cheaper, mass-appeal BMWs has potential to tarnish the brand - when it was dumped in favor of employing the Rover brand to mine the mid-priced market.

BMW also will retain custody of the new Mini, one of the stepchildren of its unhappy union with Rover. That car, and the Oxford, U.K., plant that will build it (and will make the Rover 75 for Alchemy), isn't part of the sale to Alchemy, which gets the rest of Rover's car operations, including the beleaguered Longbridge, U.K., plant. BMW, which paid $1.2 billion for Rover and sunk into it another $3 billion since then, is said to be gift-wrapping the operations for Alchemy, possibly forking over another $1 billion in net assets and cash to eliminate any debt at the British carmaker. In all, BMW estimates it will cost it $3.06 billion to rid itself of Rover.

Where did BMW go wrong? The missteps were numerous, from its initial hands-off management style that allowed Rover to continue running up losses to what many view as a key decision not to immediately scrap development of the Rover 75, an executive car that competes head-on with BMW's own 5-series. From the get-go it had little chance of broadening BMW's market reach.

Alchemy, which will rename the operations the MG Car Co., plans massive job cuts and a two-thirds slash in production to 100,000 cars (R25, R45, MGF sports car, and current Mini) per year. That stance has sparked opposition from trade union officials and caught the ire of no less than U.K. Prime Minister Tony Blair, who reportedly told BMW Chief Executive Joachim Milberg he was "angry and disappointed" with the way the deal went down. Trade unions are calling for a boycott of BMW products over the sale, which still needs approval from the British and European Union governments.

In making the controversial decision to jettison Rover, Mr. Milberg brooms out a trio of key executives - likely dissenters to the sale - including Henrich Heit-mann, BMW's sales and marketing head; Wolfgang Ziebart, development director; and Carl-Peter Forster, head of production and engineering. Mr. Milberg's own job is said to be in jeopardy, as well.

The real winner may be Ford, which picks up Land Rover, largely considered the sole jewel in the Rover Group crown, for $3 billion, plus gets its foot in BMW's long-barricaded front door. Ford will take control of the Land Rover assembly plant in Solihull, U.K., engineering operations, a test track and other facilities. It also gets Land Rover's U.S. headquarters in Maryland.

In the long run, Ford is expected to work closely with BMW on future Land Rover products. For example, Ford will use a Rover V-6 for U.S.-market Freelanders and a BMW V-8 in 2001's next-generation Range Rover - which BMW will continue to engineer.

And it isn't hard to envision that arrangement, if all goes well, leading to additional cooperation, possibly even some type of equity relationship a la General Motors Corp.-Fiat Auto SpA.

The Quandt family continues to deny interest in selling, but some analysts say it will be a challenge for the automaker to remain independent. For interested carmakers, there's still the hurdle of BMW's estimated price - $30 billion - and the Quandts' still apparent, if not waning, resolve.

"BMW has taken some very tough actions recently with Rover (car operations) and the sale of Land Rover, difficult decisions," Ford Chief Executive Jac Nasser says. "You really have to compliment them for making those decisions. I think it just reinforces their focus and their desire to be independent. We respect that. We like BMW as a company, everybody does. We love what they do, but they want to continue to do it alone."

Still, look for Ford, foot planted firmly in BMW's doorway, to keep the lines of communication open.