Rover survival dogged by fresh controversy

Row over Phoenix directors, model delays and continued losses leave Longbridge car maker facing uphill struggle

More than 800 car manufacturers, importers and dealers will descend on the Hilton hotel on London's Park Lane tonight for the British motor industry's annual knees-up. To mark its 87th annual dinner, the Society of Motor Manufacturers and Traders is publishing a special report posing a stark question: Does the UK car industry have a future or is it destined to close down?

Today that question resonates loudest of all at the Longbridge car plant in Birmingham, home of MG Rover, the last remaining British-owned volume car maker.

Three and a half years after it was saved from closure by a group of West Midlands businessmen known as the Phoenix consortium, the company is back in the spotlight for all the wrong reasons. John Towers, the former Rover chief executive who led the rescue in May 2000 and was fêted as a returning hero as he drove back through the gates of Longbridge, is now cast as the villain of the piece.

Mr Towers and his four co-directors at Phoenix stand accused of enriching themselves with multi-million pound loan notes and trust funds at the same time as MG Rover is still losing more than £100m a year and the pension fund for its 6,500 workers is £73m in deficit.

The Phoenix directors have also aroused suspicion by separating the loss-making manufacturing operations from the lucrative financing arm, which is now privately owned by them in conjunction with the high street bank HBOS.

The whiff of scandal could not have come at a worse time. Although MG Rover's losses have fallen dramatically since it was bought from BMW for a symbolic £10, so have its sales. In 1999, the last full year under BMW's ownership, MG Rover sold 240,000 cars. This year it is expected to sell 140,000 at best. Longbridge is operating at only two-thirds of its capacity and, indeed, for the next five days the plant will stand completely idle while production stops in order to bring stocks of cars back into line with demand.

The adverse publicity about Phoenix has depleted the fund of goodwill among the MG Rover workforce and the wider West Midlands community. It would be premature to suggest that it has also hit sales. But observers are in no doubt that unless MG Rover can put a stop to the negative headlines, customer confidence will begin to erode just as it did in the 1970s when the company's forerunner, British Leyland, became a byword for union militancy.

The company blames the strength of the euro for its falling sales. But that is not its only problem. In the past year, its much-vaunted alliance with China Brilliance has collapsed while TWR, the main engineering contractor on its new medium-sized model, has gone into administration. These two events have pushed back the launch of the make-or-break car and MG Rover's return to profitability to 2005.

As Professor Garel Rhys, director of the centre for automotive research at Cardiff University Business School, says: "The row over the directors' trust fund is a sideshow by comparison with the real issue, which is whether MG Rover is going to survive. The next 18 months are going to be a very difficult period. "It was always going to be a holding operation until the new car comes on stream and that will not now happen until a year later than planned. The test of whether the company has a viable future will depend on the new model and customer reaction to it because it is the devil's own job to restore credibility if you get a model launch wrong."

Despite the plummeting sales, it is not all doom and gloom at Longbridge. Next month will see the UK launch of the new CityRover, which is being built by Tata of India and will spearhead MG Rover's return to the small car market in competition with the likes of the Peugeot 106, Ford Ka and Fiat Seicento. MG Rover hopes to import about 30,000 CityRovers a year and stands to make £1,000-£1,500 profit on each car.

The money will be an important addition to the group's cash flow, which has held up well since 2000 with the aid of the £500m dowry provided by BMW. MG Rover still had £300m of net cash in its balance sheet at the end of last year but its cash position will almost certainly have deteriorated this year, now that the final instalment of money from BMW has been paid.

The cash will also support the development of the new car - a replacement for the Rover45 and MG ZS models. Because the car will be based on the same platform as the Rover75, MG Rover will be able to keep development costs down to between £250m and £300m and provide all the funds from its own resources.

But the company will also need to replace the Rover25 if it is to maintain a presence in the "supermini" segment of the market, which now accounts for one-third of all UK sales, and in order to do this it will almost certainly need a partner.

MG Rover says it is exploring other potential alliances in China. It is also looking at Poland, where it is attempting to strike a deal to take over a former Daewoo plant. Initially, the plant would make the old Rover45 under licence with the hope that this could lead on to bigger and better things.

Hope is the operative word when it comes to MG Rover, a company which, in its various incarnations, has lost heroic sums of money for its various owners over the past three decades. As Professor Rhys says: "You can never use the word optimistic about MG Rover. But I am hopeful and the longer it survives the more reason there is for hope."