Car makers run out of road

More investment in Rover will just increase the motor industry's disastrous overcapacity, writes David Brierley

The cries of outrage could be heard far outside Birmingham. On the Today programme, local MPs queued up to express shock and horror. They condemned the Government for failing thus far to meet BMW's demands for a pounds 200m subsidy to rescue the Rover plant at Longbridge.

"I was absolutely stunned when I heard that BMW had been given [just] pounds 118m for Longbridge. It seemed astonishingly cavalier; it seems as if they are playing poker with 50,000 jobs. There is only pounds 50m which is coming from the British government," said Julie Kirkbride, the Conservative MP for Bromsgrove.

She insisted on a tradition of Conservative largesse: "There is an honourable precedent which helped the Ford plant and the Vauxhall plant, in which we were well prepared to give selective assistance."

The plea for more government support could hardly have been louder. It was underlined on Thursday when BMW released figures for 1998 that revealed a Rover loss of pounds 650m.

A senior figure at BMW said: "We have lost our chairman and two other board members over Rover. There are a lot of people in Germany who do not think BMW should be investing pounds 1.7bn in Longbridge. The British government does not seem to understand."

Longbridge does need strong political backing, for there is genuine opposition to a hefty payment to BMW within Europe. Porsche's chairman, Wendelin Wiedeking, intends to lodge a formal complaint in Brussels. He regards government subsidies for car production as anti-competitive and wasteful of taxpayers' money.

"If Opel gets DM87m (pounds 30m) for its Kaiserslautern plant, if DaimlerChrysler gets DM218m for its Ludwigsfelde plant and BMW receives DM500m for Longbridge, I ask myself where this is all leading."

It leads to overcapacity. According to management consultants at Pricewaterhouse- Coopers, there is already excess capacity of some 7 million vehicles in a European market producing 18 million vans and cars.

"Overcapacity is a nightmare. Prices and profits fall, and eventually losses appear. Even strong companies such as Mercedes and Volkswagen suffer in the long run because they cannot sustain premium prices," said Professor Garrel Rhys of Cardiff Business School.

BMW's plans for Longbridge will certainly increase the pressure on car manufacturers across Europe. The pounds 1.7bn investment in the 400-acre Longbridge site will create a new flagship for the British car industry. The scale of BMW's ambitions for Rover is impressive. The new Longbridge will produce the new Mini, the replacement for the 200 and 400 cars, along with a range of other vehicles. The investment - which could easily reach pounds 2bn - will double current production levels at Longbridge to 600,000 annually, at least.

If it is a success, Rover will be reborn as a medium-sized car maker, producing 1 million cars annually. Last year, it made half that figure. A revived Longbridge would transform the fortunes of south Birmingham, while taking sales from other plants in Britain and Europe, hitting an industry already weakened by excess supply. After two years' good growth, the European car market looks set to decline this year.

PricewaterhouseCoopers estimates that there is 45 per cent overcapacity within the industry, equivalent to the production of 20 million vehicles. Some believe that the excess is even greater. James Donaldson, president of Ford of Europe, said: "Conventional wisdom has it that Europe has 25 per cent to 30 per cent overcapacity. My view is it is nearer 50 per cent."

Running Europe's car plants on an economic basis would create a political nightmare. For example, production of the Fiesta at Ford's Dagenham plant could easily be switched to Cologne in Germany by adding an extra shift. The Dagenham plant could then be closed and its massive site on the river could be exploited. Such a scenario would be logical for Ford, which struggles to make money in Europe even when the car market is healthy. Like Longbridge, Dagenham has announ-ced production cuts because of slack demand.

Nevertheless, the closure of Dagenham would be unacceptable to the British government. So Ford, one of the richest companies in the world, would have little difficulty in obtaining a subsidy to keep the plant open. This pattern repeats itself across Europe. The car industry is so politically sensitive that it is virtually impossible to shut down production.

Professor Rhys said: "The erosion of profits has seen firms seeking state aid to repair their balance sheets. This maintains the excess capacity. Such policies cannot be sustained. Governments are increasingly reluctant to bail out firms and anti-monopoly agencies are increasing their vigilance."

Renault encountered vast and vociferous opposition when it closed the Vilvoorde plant in Belgium in 1997. Together with the closure of its Portuguese plant, it eliminated 300,000 units of potential production, then introduced three shifts at its remaining factories, slashing its unit costs. At the same time a series of striking new models such as the Espace and the Megane Scenic were created. Because of the higher productivity, these could be offered at attractive prices. This raised Renault's market share and lifted utilisation rates, giving a strong boost to profits. From being a perennial basket-case, Renault has been turned round and now feels able to take a 40 per cent stake in Nissan, potentially creating the world's fourth- largest car company.

Mergers and acquisitions have been the industry's main response to excess capacity. Daimler has merged with Chrysler, Ford has bought Volvo and Fiat is linking with Mitsubishi. Ford's chairman, Jacques Nasser, has predicted that there will be six global players within the next decade - two in the US, two in Europe and two in Japan.

However, the creation of DaimlerChrysler involved no reduction in capacity. Meanwhile capacity, notably in South-east Asia and Europe, continues to grow. Joe Morrison of AT Kearney, the management consultants, said: "Consolidation is going to have an impact but not overnight. What we see at the moment is the development of complementary brands using the same platform."

Volkswagen is basing all of its main brands - including Skoda, Audi and Seat - on just four chassis. And the logic of the Renault deal with Nissan is surely the same - that Renault uses Nissan's efficient factories to produce complementary brands. That would ultimately involve plant closures.

Mr Morrison said: "Even in France, there is greater acceptance of the needs of the company. European governments will start to ask themselves if it makes sense to invest precious capital in under-utilised plants."

Meanwhile, in Britain, nobody feels the need to make a national sacrifice on economic grounds. Friday's uproar showed Longbridge will have to be saved. It is too big and too important. Yet it will have to make attractive cars at a price consumers will pay. Otherwise it could be like Nissan - a modern, efficient manufacturer with too few customers. This is Longbridge's last chance.