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BMW, U.K. invest in Rover
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June 23, 1999: 8:36 a.m. ET
British unit seen breaking even by 2002; package to protect 50,000 jobs
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LONDON (CNNfn) - The chief of German carmaker BMW predicted Wednesday that the company's money-losing Rover subsidiary will break even by 2002 thanks to a landmark investment deal involving 152 million pounds ($242 million) in British state aid to the ailing U.K. company.
BMW Chairman Joachim Milberg offered his upbeat remarks during a news conference in London at which the Munich-based carmaker confirmed plans to invest 30 billion marks ($15.9 billion) in products, production facilities and distribution over the next five years. The deal is expected to safeguard up to 50,000 jobs in England that are indirectly reliant on the company's Longbridge plant.
One-third of the investment -- or roughly 600 million pounds -- has been earmarked for the United Kingdom. BMW intends to use the investment agreement as the basis for rolling out a new medium-sized car model to succeed its Rover 200 and 400 series.
BMW Chairman Joachim Milberg in London
The deal is subject to approval by the European Commission.
BMW operates several facilities in Britain, including the troubled Rover plant at Longbridge in central England, which is BMW's largest U.K. operation. Longbridge -- dubbed "The English Patient" by German media -- posted a 1.871 billion mark loss in 1998 that was blamed for a 28 percent plunge in parent company profit last year, to 903 million marks.
Milberg acceded to his post following the ouster in February of two top BMW executives, former chairman Bernd Pischetsrieder, and his heir apparent, Wolfgang Reitzle.
Though BMW dismissed suggestions the shakeup had anything to do with Rover, Pischetsrieder was seen as opposed to job cuts at Longbridge. His departure, analysts said, signaled BMW's intention to tackle the Rover issue once and for all five years after BMW acquired the group from British Aerospace.
BMW's new commitment to salvaging Rover came only after the British government agreed to a 152 million pound ($241.3 million) package in state aid.
The package includes direct government aid of 129 million pounds ($205 million), to be disbursed in six installments through April 2004. Additionally, several regional councils and agencies have pledged 23 million pounds ($36.55 million) in aid, bringing the total to 152 million pounds.
Stephen Byers, British Secretary of Trade and Industry, said Wednesday, the government aid will safeguard about 50,000 jobs in the West Midland region, including 9,000 at Longbridge.
BMW promises a new Rover mid-size model
Byers sought to project the deal as a radical departure from the type of government handouts to flagging industry that are common practice across Europe.
"I was not prepared to deal with this in the traditional way by simply making a substantial payment to BMW," Byers said.
"Instead, I wanted the Longbridge agreement to be one which heralded a new approach to government assistance to industry -- a new approach which reflects a long term commitment and not a quick fix," he said. "That is why I sought guarantees on productivity targets, raising skills, and substantial investment from the company itself."
Byers added that the carmaker will be required to reimburse the state if it fails to meet the targets set under the aid agreement. He denied that the British government had been cowed into a bad deal by the threat of BMW abandoning Rover production in Britain.
"This wasn't a question of having my arm shoved up behind my back," he said.
Milberg, for his part, said the prospects for Rover's speedy recovery will hinge on the strength of the British pound, the success of BMW's productivity enhancement measures, and market factors.
He added that talks between BMW and Rover union workers are continuing on a range of issues including sourcing strategy, shift patterns and productivity. The unions agreed in December to accept 2,500 job cuts at the Rover subsidiary; they also consented to more-flexible work rules.
"We call upon the workers to continue to meet their contribution to this effort," Milberg said.
Praise for BMW
Tony Woodley, the national secretary for the trade group representing Rover's union, the Transport and General Workers Union, praised BMW's willingness to take a risk in committing billions of marks to such a troublesome subsidiary.
The newly introduced Rover 75
"I do not know another multi-national car company that would suffer the losses BMW has and at the same time" place so much more investment in it, Woodley said.
Woodley acknowledged, however, that BMW faced a formidable challenge in reviving Rover, not least of which is getting buyers back.
"We've got to restore customer confidence," Woodley said. "Let's not underestimate the marketplace out there."
Milberg, for his part, insisted Wednesday he has no plans for further layoffs at Rover, suggesting that the cuts made in December will suffice.
The break-even goal of 2002, announced Wednesday, is two years later than the date BMW originally targeted for a Rover recovery.
Milberg said BMW's success in reaching the new goal was based on an assumption that the British pound sterling will stay within a range of 2.80 to 3 marks. When BMW set its initial target of 2000, the pound stood at 2.6 marks.
"If the pound is as high as it is right now, it will have a significant negative impact on the whole of British export industry," Milberg warned. 
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