MG Rover: What Went Wrong?

On Thursday April 7th, suppliers pulled the plug on Britain’s last remaining car company – they just stopped delivering. They had heard that the joint venture with Shanghai Automative Industry Corporation was not going ahead. On Friday April 15th SAIC confirmed the deal was off.

This is not just bad news for the 6,000 workers directly employed at Longbridge. 18,000 jobs in component supply are threatened. Nobody knows how wide the ripples from the disaster may spread. 8,000 jobs in Rover dealerships are also in the frame.

For the past four years MG Rover has been owned by the Phoenix consortium, who bought the group for a nominal ten pounds. The Rover crash may be a disaster for the workers, and for British manufacturing industry, but the Phoenix four have emerged unscathed from the wreckage. They have sucked at least £40 million out of the firm in the past four years in pay and perks. Workers’ pensions may be in peril but their inflated pay-offs are quite safe. Though the car company has been making a loss for the past four years, the profitable bits – property and MGR Capital, a joint venture car finance business with HBOS, have been hived off to separate companies that won’t go down with the rest of the business. And these separate firms are in the grubby hands of John Towers and his three mates. The Phoenix four have gone very quiet since the collapse. We wonder why?

There’s a terrible smell coming out of the Rover accounts department. They seem to have mislaid £200 million. Or is it £554million as the papers are now suggesting?

Let’s take the lower figure. BMW left the firm with £1.2 billion four years ago. Since then Rover has made operating losses of £800 million. And Phoenix has spent £200 million on acquiring various assets. What happened to the other £200 million?

The government is holding an enquiry to find out where it all went. Isn’t that a bit late? New Labour, in particular Byers at the Department of Trade and Industry, were the ones pushing the deal four years ago. In 2000 MG Rover was finally abandoned by BMW, who bought it in 1994. The firm was faced with two offers: Alchemy, who wanted to run it as a specialist sports car company. This would inevitably have shed most of the jobs. And Phoenix, who undertook to maintain volume car production. As it happens, the MG sports car division is probably still profitable on its own, and may be snapped up by another buyer.

The problem is it would cost about £1 billion to develop a new Rover model. That money would presumably come from sales and profits. But sales are down year on year – 116,000 in 2003 as against 145,000 in 2002. Break even point is 180,000 cars. Rover has been working at little more than half its capacity – 56%. As the accompanying article explains, because of the huge cost of fixed capital in a modern mass production car plant, you have to run at 70% of capacity to break even. After that it’s profit all the way. Because of this effect, Rover has been leaking losses since 2000, and indeed long before.

Phoenix and China

That is why Phoenix was in negotiation with SAIC. They have been talking the deal up for months to keep Rover afloat. But what on earth did they think the Chinese wanted with Rover? Why should a company with a potential home market of 1.3 billion people be interested in producing in the UK? At present Chinese car production mainly consists of assembling kits from more advanced motor producing nations. SAIC is a state owned company. What they wanted all along was the technology. Phoenix has already sold it to them in a separate bundle. That is why they didn’t want the rest of the package. That is why the deal is off.

Tony Woodley, of the Transport and General Workers’ Union, has consistently failed to raise the persistent rumours of malpractice about Phoenix. In effect he has disarmed his members and left them in the lurch. He still blames BMW for the state Rover is now in.

At its peak, the companies that came together to form the present MG Rover employed 170,000 workers. Now just 6,000 are collecting their cards at Longbridge. The story of Rover’s downfall is the story of the decline of the UK car industry and of swathes of other manufacturing industry in this country.

The company was privatised in 1988 into the tender mercies of British Aerospace. What did BAe know about the car industry? Rover was passed from hand to hand, undergoing the indignity of continual name changes. At one time management were looking to a joint venture with Honda. At least Rover would have had a new range of models, even if they looked suspiciously like Hondas. But Rover management rejected the Honda link in favour of takeover by BMW in 1994. BMW appeared to have no plan as to what to do with their new acquisition. The new range failed to materialise. In the end, in 2000, BMW walked away from what they called the ‘English patient’.

BMW threw money at Rover. They gave an interest free loan of £427 million, repayable by 2049. They left them with £385 million of unsold cars and a cash dowry of £112 million. That is what made Phoenix eyes light up. That is the inheritance they have squandered. Managerial neglect is a longstanding feature of the decline of the UK auto industry. Morris (later Lord Nuffield) spent more time on his philanthropic work than running ‘his’ car company. But for the Phoenix four, charity begins at home!

The government has responded to the disaster with a £150 million package. This is mainly redundancy pay and retraining measures. They are paying skilled workers £150 million to stay at home! Four years ago they could have nationalised the firm. They could even have paid full compensation. Labour still could and should take over what’s left of Rover and save whatever still can be saved, in conjunction with the workers. But the last four years has been a wasted opportunity.

New Labour will lecture workers about ‘realism’ and the fact that governments can’t run an active industrial policy because that means them picking winners. That argument would be more effective if the present government didn’t have an unerring ability in picking crooks and losers every time they have the opportunity to select managers.

Socialist Planning

New Labour’s policy towards manufacturing has been one of malign neglect. One million jobs have gone in industry since 1997. Yet it remains the case that 60% of our exports are from the manufacturing sector. How are we supposed to make our living in the world if this goes on? In February this country ran a £3 billion deficit – for one month. We are running a trade deficit of 5% of national income. That means foreigners are giving us £1 of every £20 we spend. Why on earth should they keep doing this? They won’t. We can’t all make a living with financial spivvery in the City or by ringing people up from call centres and irritating the hell out of them. We have to make use of the manufacturing skills that exist. Capitalism has run our manufacturing system into the ground. Only socialist planning can rebuild it.

A very short history of the UK car industry

For the last hundred years British car-making capitalists have shown two distinguishing features – greed and stupidity. The motor industry, together with passenger air transport and the computer, is probably the defining technology of the twentieth century. A hundred years ago the engineering capitalists who had the technological know-how to move into this vast potential new market were not that bothered. They were doing very nicely out of arms contracts with the government. Then as now imperialism and militarism crowds out innovation.

In any case they lacked the vision of the likes of Henry Ford (a thoroughly nasty piece of work) who foresaw homes with a car on every drive, and laid plans for mass production accordingly. As early as 1913 his US plant was churning out 200,000 cars a year while the biggest UK producer, Wolseley, was only making 3,000. British motor manufacturers saw themselves as producing a plaything for the rich while Ford wanted to sell the Model T to every well-paid worker and small farmer in the USA.

Ford realised that, to make his cars affordable, he had to produce them on a mass scale. He introduced techniques of mass production (now known as ‘Fordism’) and made sure his car plants were planned to the last detail. Everything possible was done in-house: he didn’t want any nasty surprises. The trouble, for his imitators in Britain, was that this would involve a lot of costly investment. They preferred to rely on outside suppliers for components. Morris, which emerged as the biggest domestic producer, was family owned and did not even raise finance by launching its shares on the Stock Exchange till the mid-1930s. The families that owned these car firms saw them as tickets to buy town and country homes and places in London ‘society’ – rather than factories to be invested in for the future. Their preference for dividends over investment promoted a short term outlook within the firm. Morris did not appoint an experimental engineer till 1949, and spent just 1% of turnover on research.

Mass Production

For all that, Britain emerged from the Second World War as the second biggest car producer and the biggest exporter in the world. Let’s see how management squandered that position.

What were the scale economies embraced by the US mass producers and balked at by the smaller UK companies? By the 1970s it is reckoned that engine blocks could be produced efficiently only at levels of a million a year. The pressing out of body panels required huge capital investment and two million a year needed to be made to be producing at least cost. By 1970 the minimum efficient size of a car plant was reckoned to be two million vehicles. The combined UK producers, by now called British Leyland, were producing 200,000 – 250,000 cars a year.

The economics of mass production meant that producing below capacity produced massive cost penalties in terms of expensive plant lying around unused.

By 1969 Ford had invested three times as much fixed capital behind the elbow of each of their car workers as British Leyland. Not surprisingly productivity in Ford was three times the BL level.

It wasn’t just the Americans. In 1965 the ‘average’ German car worker made 6.4 cars a year compared with 5.8 in Britain. In 1970 he made 7.5 and in 1976 he made 7.9. British car-making productivity actually fell over that period.

Sup-optimal levels of production increased costs – which hurt sales – which produced below capacity output in the factory – which hurt sales some more. And all the while the boss class made merry. British Leyland (now MG Rover) made £75 million between 1968 and 1975. £70 million was syphoned straight out by the shareholders. The bosses’ hands in the till is as British as roast beef and Yorkshire pudding

The decline of UK car manufacturing became evident after 1960. Critics blame the panic amalgamations in the 1960s for the decline. Actually they were a response to a rot that had already set in. Austin, Morris and all the UK producers collapsed together into a heap called, for a time, the British Motor Corporation. The 1964-70 Labour government encouraged amalgamation to produce a ‘national champion’ big enough to take on the global competition. It was already too late.

The 1968 merger left 48 factories scattered over the country. No real move to mass production was initiated. Rationalisation only reduced the number of engines from nine to three. Even marketing remained divided with separate ‘Austin’ and ‘Morris’ dealers selling an identical Mini, apart from the badge.

In 1975 British Leyland collapsed and was promptly bailed out by the Labour government. So what’s Blair’s problem?

Leyland was privatised by Thatcher in 1988. They managed to get rid of it to British Aerospace by writing off £150 million. In the 1980s BL, now called MG Rover, began to build links with Honda. It is a measure of decline that the British motor industry was now dependent for new models and cutting edge technology on Japanese industry, which had been a smoking ruin in 1945.

In the 1960s Lord Stokes of British Leyland, stated, ‘We don’t make motor cars, we make money.’ The firm he headed now makes neither.

What’s the problem? It’s not Britain. It’s not British workers. Britain is still a country of mass car production. We even export lots of cars. But none of them is British owned. Our problem is the British capitalist class.