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BMW defends its heritage
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February 15, 1999: 9:29 a.m. ET
Dismissing reports, German carmaker denies plans for merger, smaller model
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LONDON (CNNfn) - As luxury German carmaker BMW grapples with the problem of how to resurrect its money-losing U.K. Rover subsidiary, a more fundamental question the company faces is how to preserve an illustrious heritage without inviting charges of heresy.
With consolidation in the auto industry accelerating in the wake of last year's tie-up between Daimler-Benz and Chrysler and last month's agreement by Volvo to sell its car unit to Ford Motor Co., BMW now is rumored to be a hot prospect for the next mega-marriage.
BMW, for its part, has dampened the merger talk by insisting that it is committed to its independence.
Shares of the company (FBMW) were up nearly 1.6 percent Monday in Frankfurt, at 735.5 euros, however, as investors ignored the company's denials.
Joachim Milberg, who succeeded BMW's ousted chief executive Bernd Pischetsrieder last week, dismissed German press reports that BMW is considering a takeover bid from General Motors Corp.
BMW is nearly half-owned by a reclusive German family, the Quandts, who are seen as staunchly opposed to a tie-up that could dilute the company's brand image.
In recent weeks, the travails at the ailing Rover plant at Longbridge have added to the perception of BMW's vulnerability. At the same time, analysts say, political pressure from U.K. officials has been building on BMW not to abandon Rover in its time of need.
BMW vowed last week to commit itself to turning Rover around in the year 2000. The pledge allayed growing fears in the U.K. about the imminent shutdown of the facility, with the potential loss of 14,000 jobs.
BMW 3 Series Compact
An upshot of the Rover saga has been a German press report -- picked up by other European newspapers, including London's Financial Times -- that BMW plans to build a new small car to prop up production at the Rover plant and help make it viable again.
The plans reportedly entail a downmarket move by BMW to develop a 2 Series front-wheel drive vehicle that would be priced below its current bottom-line model, the 3 Series.
Industry observers say the success of other high-end European carmakers -- notably Volkswagen's Audi and Mercedes-Benz -- in rolling out lower-priced models may heighten the appeal of such a move for BMW.
"Probably the success of Audi and Mercedes with small offerings has given them pause for thought," said Stephen Reitman, an auto analyst with Merrill Lynch Global Securities in London.
Basis for a shared platform?
BMW officials couldn't immediately be reached for comment Monday. But a company spokesman told the Wall Street Journal that the carmaker has no plans to develop a smaller model that could form the foundation of a shared production platform at the Rover plant.
Moreover, analysts note that building a front wheel vehicle would mark a radical departure for BMW, which has prided itself on its quality line of rear-wheel drives. For BMW, the 3 Series has been a sort of demarcation line between quality and kitsch.
Critics say that by moving into lower-priced models, BMW would gravely tarnish the brand image it has cultivated so painstakingly over more than eight decades.
But Reitman suggests the market potential of a front-wheel drive may be too alluring to ignore at a time when BMW is facing an outsized challenge from the newly created auto colossus, DaimlerChrysler.
But other industry experts contend the speculation about a smaller model merely obscures a more fundamental reality: that Rover, maker of niche cars under the Rover, Mini, MG and Land Rover brands, is simply no longer viable as a manufacturing plant.
"You're basically trying to keep an inefficient plant alive for political reasons," said a London-based industry analyst who wished to remain unidentified. "They're trying to come up with a solution that says, if the U.K. comes up with a couple of million pounds[in subsidies], what could we conceivably do?"
Describing the entire small-model scenario as one of "damage limitation", the analyst added: "A few months ago, to say BMW would build a luxury front-wheel drive, it would have been heresy."
When BMW acquired Rover in 1994, observers say, the unit was seen as a vehicle for expansion. Instead, Rover began to bleed the company's balance sheet, creating the internal divisions that led to the recent upheaval at the top ranks.
When German rival Daimler-Benz merged with number-three U.S. automaker Chrysler in 1998, BMW suddenly found itself dwarfed by the combined company. 
-- by staff writer Douglas Herbert
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