The Rover DilemmaTo bail or not to bail?

Gut it out or cut your losses and run? That's the fundamental question BMW AG executives were mulling last month following the company's shakeup at the top.

Up for debate was whether the German automaker should follow the Renault model - when the going got tough, it bailed on the U.S. market and sold its American Motors Corp. subsidiary to Chrysler Corp. (which subsequently rode Jeep all the way to the bank) - or roll the dice on its own recovery plan for Rover, estimated to have cost BMW $600 million to $1 billion in profits last year.

The similarities between the mid-1980s AMC and Rover of today are striking: namely weak car operations with a strong, sport/utility brand known the world over. Rover's struggling, inefficient Longbridge, U.K., car plant, badly in need of investment, looks an awful lot like AMC's dated Kenosha, WI, operations, closed less than two years after the Chrysler acquisition.

Longbridge sprawls over 430 acres (174 ha) and is one of three Rover assembly operations. It's at the crux of the problems plaguing the carmaker. It produced its first carin 1906, and is one of Britain's oldest and Europe's least productive factories. It ranked 25th in a recent productivity survey of European plants, its 10,000 workers producing just 330,000 cars in 1997. And its products, the Honda Civic-based 200/400 sedans and hatchbacks, which have some tough competition in the Opel Astra, Renault Megane and VW Golf, suffer from a strong U.K. pound and too-little freshening since their introduction in 1995.

BMW has applied for $320 million in U.K. government aid to refurbish and retool the plant, but management reportedly also is threatening to move production out of the facility to lower-cost Hungary if the bid for financial backing is rejected.

And even if it pursues new models for Longbridge (see main story), there's no guarantee BMW won't ultimately look to jettison the carmaker.

"One way (for BMW) to remain independent indefinitely is to sell Rover," says Karl Ludvigsen, who operates a U.K.-based publishing and consulting company. He says BMW is now trying to reduce the cash drain from Rover, possibly to pave the way for a sale. "I don't think BMW management is confident the company can remain independent unless they unload Rover," he says.

If it hangs onto Rover it will have to weather the financial storm until replacements for the 200/400 can be developed.

"That would be costly," says Philippe Houchois, senior analyst for Standard & Poor's DRI in London, "but BMW could do it. It would mean they would have to have faith that their core business remains profitable." However, a downturn in the European and/or North American markets would be devastating, he says, if too much of BMW's resources were tied up in Rover.

Mr. Houchois says the biggest mistake may have been to develop the new Rover 75 sedan, a low-volume front-drive model that competes more with BMW's own 3 and 5 series cars, rather than higher-volume 200/400.

The question now is where to get a small, front-drive platform for Rover? BMW denies that it will develop a new 2-series line that will be shared with Rover for the 200/400.

And although Rover may have the wherewithal to develop the cars itself, says Mr. Houchois, "it probably wouldn't be state-of-the-art, the highest quality. The (real) issue is whether BMW would want to operate Longbridge at half capacity for so long."

Volkswagen AG Chief Executive Ferdinand Piech graciously has offered to supply the Golf platform to Rover, but industry watchers view this as another Piech power play aimed at getting control of Rover and possibly BMW, itself. For whatever reasons, Mr. Piech has admitted to floating rumors in the German press about BMW's interest in the Golf. BMW insiders say it was all part of an effort to create the dissension on the BMW board that eventually led to the ouster of Bernd Pischetsrieder and resignation of Wolfgang Reitzle (see story, p.29). The bad press and resulting lower stock price, the theory goes, would force BMW to sell Rover to VW at rock-bottom prices.

But BMW publicly has said it won't sell its British subsidiary. And a spokesman for the Quandt family, controlling shareholders in BMW, says rumors of any strategic tie-up with VW are "nonsense."

"Piech has won the first battle (with the resignations of Messrs. Pischetsrieder and Reitzle)," says one BMW source. "He won't win the war, I promise you."

A renewed partnership with Honda Motor Co. Ltd. is an attractive, but unlikely, alternative. Honda, which once owned 20% of Rover, never got over the way majority stakeholder British Aerospace sold out to BMW.

"It's hard to imagine (Honda coming back into the picture)," says Mr. Ludvigsen. "They'd have to find a way to save face."

And if BMW were to decide to sell Rover, would there be any takers? "Who in their right minds would want to take over Rover?" asks Mr. Houchois. "VW and Ford have the resources, but why would they acquire a brand that would compete with their own?"

Others say there are plenty of candidates. Land Rover, alone, still strong in Europe and mounting a comeback in the U.S., may be worth the price of admission.

Candidates include Peugeot SA, which could use a sport/utility arm and some presence in the U.S., and Fiat SpA, still looking to broaden sales outside Italy, analysts say.

"Fiat would be great, because it could simply move Lancia (not sold in Britain) into the Rover plants," says Mr. Ludvigsen.

But for now, BMW vows to stick with Rover. On the eve of the opening of the Geneva auto show last month, new Chairman Joachim Milberg says moves already are under way to better integrate Rover with BMW and raise its efficiency and productivity. More than $4 billion already has been invested in improving Rover's sales and distribution structures, plants and vehicles, he says.

Adds Henrich Heitmann, member of the board of management in charge of worldwide sales: "Give us a couple more weeks, and we will have a clear idea of where we are going with Rover." - With Peter Robinson and Andrea Wielgat.