BMW looks for Rover return

New launch needs to make a start on repaying a pounds 2bn investment. David Brierley reports

Tomorrow, the Land Rover Freelander goes on sale in Britain. The fourth new model in the 50-year history of the marque, it could signal a crucial turning-point in the troubled history of Rover Group.

"The reaction in the press and from the dealers has been extremely positive," says Walter Hasselkus, Rover chairman.

Good news cannot come a moment too soon for Rover. Since it was acquired by BMW for pounds 800m in 1994, Rover has received pounds 2bn in new investment, accumulated losses of pounds 300m and received a hefty dose of truly awful publicity.

Despite this, BMW remains resolutely committed to the formerly state- owned car-maker. By 2000, BMW will have invested over pounds 4bn in Rover, without seeing one pfennig of profit in return. By any standards, this is truly a heroic effort.

"This was clear from the outset for BMW. We took Rover on with a long- term strategy of developing its own products, not BMW-based cars," said Mr Hasselkus.

While the rewards of the massive investment programme have yet to be seen, Rover's existing models have become fair game to the media. This year, BBC's Top Gear programme deemed that the Rover 100 - the former Mini Metro - and the Honda-based Rover 800 were the worst cars in their respective categories. The former was "old and sad in every way", while the latter was "cramped, dated, ugly, with poor handling". By contrast, the BMW 5 series was "virtually beyond constructive criticism".

To judge by car sales, this is unfair. Although sales of the Rover 400 have been disappointing, those of the Rover 200 have nearly doubled to over 120,000 cars. In Italy, it is the second-best selling car in its category.

Although Rover remains committed to developing a niche as an upmarket manufacturer, it has made 500,000 of the 1.6 million cars built in Britain this year. Over half were exported.

Small wonder that, for BMW chairman Bernd Pischetsrieder, the strength of sterling is the main concern. He set Rover the target of moving into the black by 2000. "If the pound remains strong, it will be difficult to return to profits," Mr Pischetsrieder said. Rover cannot change its overseas selling prices, so the overvalued pound will impact directly on operating profits once its currency hedging ends next year.

Despite this uncertainty and the considerable risks, BMW continues to invest heavily in Rover. Thus far, it has invested pounds 450m in the new Freelander, pounds 400m in the new Mini, pounds 400m in the new engine plant at Hams Hall in Birmingham,

pounds 220m in new paint shops in Cowley and Solihull, and pounds 30m in a new design and engineering centre at Gaydon in Warwickshire - one of the most comprehensive research and development facilities in Europe. Some pounds 40m has been invested in staff training.

Last month, Mr Hasselkus announced a further pounds 450m investment in Cowley to produce a new executive car, the R40, which will replace the Rover 600 and 800 in 1999.

A factory within a factory is being built alongside the new paint shop. Production is expected to exceed 150,000 cars a year, far more than the models that the R40 will replace. Again, much of the production will be sold overseas.

"The R40 will be a truly wonderful car," Mr Hasselkus said. It will revive the Britishness of the Rover marque in line with BMW's belief that Rover has to thrive as a British company.

BMW is backing the British in every sense. Rover's annual investment would continue at pounds 600m for the foreseeable future. This reflects the woeful lack of investment in the past but is also in line with BMW's investment policy. Mr Hasselkus said: "The pounds 2bn invested to date equates to the funding provided to Rover by the Government over the 13-year period of state ownership."

While much of the investment is funded from Rover's own cash flow, it is still a massive risk - which has depressed BMW's shares. How might BMW have fared if it had invested its money in BMW-badged projects? Last week, nobody at BMW's Munich headquarters was willing to answer that question.

By comparison, Volkswagen's investments in Seat, the Spanish car maker, and Skoda, the Czech manufacturer, seem dramatic successes. Volkswagen built on greenfield sites, created new cars and integrated them fully into its model ranges, reducing its manufacturing costs and revitalising the Skoda and Seat brands. This year, Skoda and Seat have enjoyed double- digit growth, selling over 400,000 cars.

The strategy of retaining Rover's independence has yet to pay off. Rover's sales have grown by 4 per cent, matching the market average. At a time when BMW's own European sales are flat, that hurts.

It is vital to the health of the Rover-BMW partnership that the Freelander succeeds. No effort has been spared to make that happen. The Freelander is assembled in a purpose-built factory in Swindon on a line that has been running for a year to ensure Rover standards match BMW's own.

The first signs are encouraging. Launched at the Frankfurt Motor Show, the off-road "fun" vehicle has attracted 10,000 inquiries.