The sorry story of Rover's road to ruin

The positive message of Rover is that, if you go for market niches, you can make money building cars in the UK

The Rover car company faces closure. Patricia Hewitt, the Trade and Industry Secretary is under pressure to make a £100m emergency loan to keep it going while negotiations with a potential purchaser continues. The government is desperate to keep the company solvent in the short term as thousands of people may lose their jobs if it doesn't.

The Rover car company faces closure. Patricia Hewitt, the Trade and Industry Secretary is under pressure to make a £100m emergency loan to keep it going while negotiations with a potential purchaser continues. The government is desperate to keep the company solvent in the short term as thousands of people may lose their jobs if it doesn't.

The picture now? Well, yes of course. But it is also the story of exactly five years ago, when the then owners, BMW, threatened to close the company. The minister was Stephen Byers, not Hewitt, and the negotiations were not with Chinese buyers but with two British firms. One was Alchemy Partners, which proposed slimming down the business and focusing on sports cars under the MG brand; the other, the Phoenix consortium, promised fewer job losses. In the end, in May 2000, Phoenix, backed by the Government and the unions, won.

The deal was greeted with jubilation. John Towers, leader of Phoenix, pledged to create a "world-class" car-maker that would return to profit in two years. He got a hero's welcome at the Longbridge plant.

Tony Blair was cheerful too. The deal was "a real start to the process of giving Longbridge a good future". Stephen Byers, who had pushed for Phoenix rather than Alchemy to take control, greeted it warmly, saying that Mr Towers's "hard-headed" approach gave Rover a chance of success. But the strongest support for the Phoenix plan came from the unions. John Edmonds, general secretary of the GMB, had branded Alchemy as "industrial locusts" and said that the Phoenix deal "the best we could have hoped for".

Five years on, what have we learnt? The negative lessons first. For a start, it is pretty clear the Phoenix rescue was the wrong deal for the medium-term. In the short-run it appeared to preserve more jobs but, as most industry experts observed, it would be impossible for a stand-alone British mass-producer of cars to survive. You cannot rerun history, but the company would surely have had more chance of survival - and would ultimately have preserved more jobs - had it been slimmed down to a niche producer. The government and the unions got it wrong.

I don't blame them too much. Even if they were wiser, the time-scale in which they have to work is too short. They are forced to think in terms of headlines, not the five-to-seven year horizon on which businesses have to plan.

The second negative lesson follows: there is very little room in the middle of the market in most forms of manufacturing - but particularly in the motor trade. If you are huge, you can spread development and marketing costs across volume. True, several giants are under pressure: General Motors, Ford and Daimler-Chrysler all have problems. But their survival is not in question.

At the other end of the scale, there seems to be room for niche manufacturers such as TVR, though it has recently been sold to the Russians. But at the sort of volumes that Rover might sustain, fewer than 150,000 cars a year, you cannot generate the profits to promote and develop an existing range, let alone design a new one.

Some people might add a third lesson: that we in Britain (or indeed more generally in the developed world) can no longer be competitive in mass manufacturing. The great motor companies will be hollowed out. Cars, it is argued, will be made in China and India, retaining only design, finance and marketing in the developed world.

That is surely too gloomy. It may in 30 years come to that but meanwhile the evidence is surely that Britain is not a bad place to make cars. In 2000, the year of the previous Rover crisis, 1,641,452 cars were made in the UK. Last year it was 1,646,773. So it is not a wild growth industry, but equally not one in obvious terminal decline. With the principal exception of Rover, those cars were made by companies owned abroad. There are nine volume producers here, giving Britain a broader base than any other European country.

Even parts of the rump of the old Rover business have prospered. The Cowley plant, which builds the new Mini and was retained by BMW, runs round the clock, thumping out nearly 200,000 Minis a year. And while Ford, which bought Land Rover from BMW at the time of the previous collapse, has struggled to make the group profitable, that is largely because of the rise of the pound against the dollar.

The main positive lesson from the Rover debacle is that if you go for niches in the market, like the Mini or the Range Rover, you can make money building cars in the UK.

Indeed there is even a case for a mass manufacturer having some UK capacity. They don't come here and stay here because of the weather. Interestingly there is none of the talk now that there was five years ago about manufacturers pulling out because of sterling's exclusion from the eurozone. The pound has turned out to be more stable than either the euro or the dollar and, in any case, the size of the UK car market - the fourth largest in the world - means that it makes sense to have some production located here. You want to produce, insofar as is practicable, in the same currency zone as you sell.

There is a further positive lesson: the value of British brands. Years of dreadful management and dreadful unions managed to destroy the value of such former household names as Morris and Austin. But MG (which stands for Morris Garages) is still a valued name and Rover, perhaps surprisingly, still has enough of a ring about it for the Chinese to be interested in acquiring it.

And, of course, Volkswagen, the current owners of Bentley, have been wonderfully successful with the new Continental, delight of football stars throughout Europe.

All this bodes well in the medium term. We will have to wait and see what happens to Rover in the short term, though. If the Chinese do pull out, it will be a sad and savage blow to the West Midlands. Everyone should hope the deal is eventually done, for it is probably the least bad option given the hole that Rover has dug itself into over the past five years.

But we should not be too sanguine about the group's future under its new owners. They have a far lower cost-base in China and, if they are wise, want the brand names and access to the large UK car market, rather than the much more antiquated factory and the much more expensive workforce than they have available back home.

A final thought as we head into the turmoil of a general election. Those politicians and union leaders who supported the deal five years ago should take a little time out to re-read what they said at the time. They should contemplate just how stupid it sounds and they should ponder a little before they opine on industrial policy in the future.

Having said that, I though I had better check on what I wrote at the time. I acknowledged that the Alchemy vision was a fragile one, particularly in the face of a hostile government and a hostile workforce. But as for the Phoenix plan: "There is no successful mass-producer of the size implicit in the Phoenix proposal anywhere in the world. Everyone would wish it, or any other proposal that might save Longbridge, a fair wind. But the window of opportunity is a narrow one, if it exists at all."

If a journalist could see that, why on earth couldn't the Government?