Slippery road ahead

Has the ultimate driving machine lost the road map? BMW's chaotic withdrawal from Rover, culminating in its U-turn over the bid from the Phoenix consortium, has gravely undermined the company's reputation for teutonic efficiency. More ominously, it has raised a huge question mark over whether BMW itself has a future as an independent car maker. The knives are reportedly out for its chairman, Professor Joachim Milberg, and if the Quandt family, BMW's controlling shareholder, ditches him, it may just be tempted to dispose of the company at the same time.

BMW remains a powerful brand and, free from its "English Patient", a highly profitable carmaker, notwithstanding the 2.5bn euro (£1.47bn) loss it reported for 1999 after a mammoth Rover-related restructuring charge.

But the predators are circling. Now that BMW has abandoned its quest for scale, how much longer can it resist the quickening pace of global consolidation that has seen virtually all other niche car makers surrender their independence? The nightmare that BMW has lived through for the past six weeks, since the decision to abandon Rover was announced, is the product of a decision taken in Munich six years ago.

On 31 January, 1994, Professor Milberg's predecessor, Bernd Pischetsrieder, stunned the motor industry by announcing that BMW had agreed to buy Rover from British Aerospace for £800m. The takeover was negotiated in the space of just 12 days. Rarely has there been a better example of marrying in haste only to repent at leisure. BMW's ownership of Rover has so far cost the German company DM6bn (£1.81bn). If, as seems likely, the fate of Rover's Longbridge plant is to be outright closure rather than sale, then BMW may need to use every last cent of the additional 3bn euros provision it has made to pay for its exit from the company.

As corporate disasters go, it takes some beating. Despite £2.5bn of investment in new models and production facilities, Rover's UK market share is half what it was when BMW took ove,r and overall BMW group production is lower than it was three years ago. Back in 1994, the future looked rosy, said Mr Pischetsreider. Rover had just reported an operating profit of £56m on the back of a 10 per cent rise in worldwide sales. As he spelt out his vision for the company, Mr Pischetsrieder, a nephew of the great Sir Alex Issigonis, designer of the Mini, promised to recreate the golden age of British motoring.

He brushed aside questions such as how BMW would marry a producer of rear wheel-drive cars with one that made front-wheel drive models and instead evoked the famous marques from Rover's past. The Wolseley, the Riley, even the glorious Austin Healey, might be re-introduced. With BMW's backing, there was no reason why Rover output should not double.

It was a hopelessly rose-tinted vision but it set the tone for BMW's early stewardship of Rover. Instead of integrating its British subsidiary within the group, BMW gave Rover its head. Rover, it was deemed, would remain a separate and distinct business with its own management and budgets. It was two and a half years before Munich grasped the nettle and put one of its own men in charge at Rover - Walter Hasselkus, an urbane member of the BMW board with a penchant for motorcyling.

But more serious strategic errors were made. If the Rover deal was to succeed in transforming BMW into a world player with global scale and production of, say, two million units a year, what it needed was a credible presence in the medium car sector alongside the likes of the Golf and Escort.

Instead, BMW chose to put its money into a new executive car, the 75, which bore the styling and hallmarks of the great Rover saloons of the Fifties and Sixties, and a new Mini. By contrast, Rover's two key models, the 200 and 400, were merely given facelifts. By the time BMW finally decided to replace the 200 and 400 with the R30 - the car that was to have regenerated Longbridge - Rover's losses were so great BMW could not justify the £1.7bn investment required. Instead of achieving greater and greater scale, BMW has actually begun to shrunk. In 1997, it produced 1.2m units, including 523,000 Rover cars. Last year it made a total of 1.15m cars, including 392,000 Rovers.

Garel Rhys, professor of motor industry economics at Cardiff University Business School, says: "Certainly BMW's handling of Rover was flawed. They misused the brand and weakened it. They wanted a company that would give them scale and help them expand into the 80 per cent of the market BMW is excluded from. But they underestimated the degree of competition."

The failure of the strategy led to the removal from the BMW board 15 months ago of Mr Pischetsrieder and his deadliest rival for the chairman's job, Wolfgang Rietzle. The decision to sell Rover has led to more boardroom upheaval with the removal of a further three board members, Henrich Heitmann, the director for sales, Wolfgang Siebert, research and development director and Carl Peter Forster, who was in charge of manufacturing. Mr Siebert is said to have resigned as a matter of honour, having reassured Rover directors that the company was safe only a fortnight before the bombshell from Munich. Mr Forster, the heir-apparent to Professor Milberg, appears to have paid the price for his outspoken views on Rover and his believe that total closure was a better option than a sale which could still leave BMW with residual liabilities.

What future, then, for a BMW shorn of both the Rover car business and Land-Rover, which is being sold separately to Ford for £1.8bn?

Professor Rhys says: "Taking over Rover was BMW's survival strategy come the evil day when they could no longer charge a premium price for their own products - in other words an insurance policy against being taken over by a larger company. Now the barbarians are at the gate."

The barbarians are Ford and Volkswagen, respectively the world's second and fourth largest carmakers, joined perhaps by the biggest carmaker, General Motors. Professor Milberg offered to sell Rover to all three companies but none was prepared to take on the risk unless they were also allowed to acquire a stake in BMW itself. The BMW management board and the Quandt family refused. But some observers believe it is only a matter of time before BMW bows to the inevitable and becomes part of a larger automotive group.

Ford has already Hoovered up Jaguar, Aston Martin and Volvo to create its Premier Automotive Group, a division now run, incidentally, by the ex-BMW man Wolfgang Rietzle. VW owns Audi, Seat, Rolls-Royce, and Skoda (a shining example of how to rebuild a brand). It has also recruited Mr Pischetsrieder, who joins the VW board in July as managing director of Seat.

GM's only presence in the niche sector of the car market is Saab. But if there was an auction for BMW it would be hard to see the world's number one carmaker standing on the sidelines.

Whether there will be an auction depends crucially, of course, on the Quandt family's attitude towards its 46 per cent shareholding, held through the Herbert-Quandt-Stiftung foundation.

The trigger could be changes next year to Germany's tax laws which would allow the Quandts to escape paying capital gains tax on the sale of their shareholding. The family is renowned as a value investor and in the last two years, the value of its investment in BMW has fallen by some 30 per cent. On the other hand, the family has given not even the slightest hint in public that it might sell any part of the stake.

But the Quandts, like BMW, are fast running out of road. When the Pischetsrieder strategy failed, they simply sacked the management and brought in fresh blood. The next time things might be different.

John Lawson, motor industry analyst at Salomon Smith Barney, says: "If I was the main shareholder in BMW I might feel my options were narrowing. Where they changed management before, it is now a choice between sticking with Milberg and his team or exiting."

Mr Lawson says there is no evidence of the Quandts heading for the exit, though there is now a higher speculative element to the BMW share price as the market senses that a takeover may at last be on the cards.

BMW's problem is that it takes time to build defences. The messy nature of its withdrawal from Rover will make the process more expensive and is likely to leave BMW nursing heavier Rover-related losses this year than analysts forecast.

Last year Rover lost nearly 1bn euros. Mr Lawson had predicted this would be 400m euros this year. He now believes this will be more than 500m euros. And profit margins in the core BMW car business are under pressure. They fell last year from 9 to 8 per cent although analysts expect them to recover in a year.

But this is an awkward moment for BMW should a predator start aggressive overtures towards the Quandts. Although the recent upgrade of the 3-series has helped maintain an image of a youthful model line-up, the new 7 and 5 series are still two and three years away respectively, and the new small BMW, inevitably dubbed the 2-series, will not appear until 2004.

Production of the X5 - BMW's entry into the 4x4 market - is beginning to rise and should hit 45,000 this year. The X5 could also spawn an X3 and an X7.

Then there are BMW's remaining British interests which in future will span the two extremes of the car market. On the one hand it intends building a £200m plant in the UK to manufacture Rolls-Royce models when control of the marque passes from VW to BMW in 2002. On the other, it is going ahead with plans to build a new Mini, relocating the production line from Longbridge to Cowley. Output is scheduled to reach around 120,000.

Helmut Panke, BMW's finance director, promises that the new Mini hits the roads late next year it will revive our fascination with the "go-kart like" driving associated with the original Mini. BMW also believes it will make money since 60 per cent of the components, including the engine, will come from abroad, making cost of production lower.

The question is whether BMW survives long enough as a stand-alone carmaker to see the dawn of the new era.

It would be the ultimate irony if the ultimate driving machine becomes a casualty of The English Patient.