Driven into the ground

The Phoenix Four were the local heroes who saved Rover. They've since made millions - but the company is in crisis and China is set to take over. What went wrong at Longbridge?

The Longbridge car plant, home of MG Rover, lies eight miles south of Birmingham city centre. It is hemmed in on one side by the A38 and on the other by row upon row of neat semis and social housing. A community and, at its heart, the company that has pumped the lifeblood around this part of the West Midlands for a century.

The Longbridge car plant, home of MG Rover, lies eight miles south of Birmingham city centre. It is hemmed in on one side by the A38 and on the other by row upon row of neat semis and social housing. A community and, at its heart, the company that has pumped the lifeblood around this part of the West Midlands for a century.

On the morning of Tuesday 9 May 2000, John Towers rode along these streets in his Rover 75 to the kind of rapturous welcome reserved for returning war heroes. His Phoenix consortium, put together with the help of three other local businessmen, had bought MG Rover from BMW for a symbolic £10, rescuing Longbridge from closure. At the plant, Towers was greeted by a supporter dressed in Union flag garb, who thrust a glass of champagne into his hands before he could even get out of the car. For the saviour of Longbridge, it was a doubly sweet moment, given that he had previously been fired as chief executive of Rover after the Germans took control.

Four years on, and control of Rover, the last remaining British-owned volume car-maker, is about to change hands again. This time the saviour comes from the East, in the shape of China's Shanghai Automotive Industry Corporation (SAIC).

Not a moment too soon. Since the "rescue" of Rover that sunny May morning, car production at Longbridge has fallen by a half, losses are mounting again and the company has succeeded in a court action to end the "jobs for life" guarantee it gave its 6,000-strong workforce. Perhaps most damaging to the morale of employees, dealers and supporters, Towers and his fellow directors - now known as the Phoenix Four - have been deluged by a tsunami of hostile press coverage over their alleged boardroom greed and the millions of pounds they have taken from the company as MG Rover has lost its way.

The deal was a steal in anyone's books. The company was debt-free and came with a £550m dowry from BMW - a £427m interest-free loan not repayable until 2049, and a stock of cars worth millions more. And yet there wasn't a queue of buyers lining up. But self-interest meant that Towers and the other Phoenix directors - Peter Beale, John Edwards and Nick Stephenson - were keen to acquire a business that was an albatross round the neck of previous owners.

For Towers and Stephenson (another former Rover director who fell foul of BMW), it was a chance to show that they could succeed where the Germans had failed. For Edwards and Beale, owner and finance director respectively of one of the biggest Rover dealerships in the Midlands, it was a way to keep their supplier in business. The four each put in £60,000. Estimates of how much they have made or stand to make range as high as £100m. Phoenix hotly disputes such figures, but it acknowledges that the furore over "boardroom greed" has not helped MG Rover's cause. "It would be foolhardy for us to deny that this constant and negative press focus has been quite damaging for us," Towers says. "But it entirely baffles me."

So the news that MG Rover might have a future after all - albeit one that depends on the largesse of the Chinese - has come as a rare fillip. Towers says he is confident of signing a joint-venture agreement early next year with state-owned SAIC, which will inject £1.5bn into the car-maker for the development of new models, enabling it to double production back to about 200,000 cars a year. In return, control of the company will pass to SAIC, which will have a 70 per cent stake in the new venture.

But this is not yet a done deal; several hurdles remain. One is approval from the Chinese government, notoriously twitchy about agreements being trumpeted in advance, as if its only role were to rubber-stamp what businessmen have agreed. Another is approval from BMW, which still owns the rights to the MG and Rover brands, so its blessing must be obtained for any deal which in effect hands control to the Chinese. Third, there is the question of how much the Phoenix directors will make out of the deal, and how long they will stick around afterwards. If the idea gains hold that this is just a get-rich-quick manoeuvre to line the pockets of the Phoenix Four, it could yet be a deal-breaker.

To assess whether MG Rover has a future, we must understand its past. The latest chapter of its crisis-strewn history began that day four years ago when Towers drove into Longbridge. MG Rover, under its fourth set of owners in 12 years, deserved a break, but the honeymoon ended before the year was out. Its decision not to attend the Birmingham Motor Show that autumn was widely seen as a snub to the alliance of community leaders, union chiefs and local press who had campaigned so hard to help save Longbridge.

At about the same time, the negative publicity began: that the company's board was split; that it was failing to pay suppliers on time; that it had been forced to scale back its ambitious production targets. Over the following three years, the drip, drip of bad headlines has become a flood, seriously weakening confidence in the brand and inducing a bunker mentality at the Longbridge operation. The criticism reached a peak earlier this month when BMW's most senior UK executive accused the Phoenix Four of being the "unacceptable face of capitalism" and questioned whether they had been the right people to bequeath the business to.

The next six months will probably decide whether MG Rover expires and Longbridge passes into history, along with Dagenham, Luton and Jaguar's Browns Lane plant in Coventry as places where cars were once built. On that, at least, everyone is agreed - including the men who run MG Rover and the accountants who audit its books. As Towers candidly observes: "The future of the company rests on the Shanghai deal. It is absolutely critical. We are confident we are going to bring it to the table. We are older and wise."

How did MG Rover come to be in such a precarious position so quickly, relying for its survival on a company few in the West, and certainly no one in Longbridge, had heard of six months ago? The question has been posed not just by its previous owners and journalists, but by academic car-industry experts and MPs on the Commons Trade and Industry Select Committee.

In truth, keeping MG Rover on the road was always an uphill task. It had neither scale - producing fewer cars in a year than General Motors makes in one week - nor prestige appeal. The Mini, the one part of the Rover empire BMW hung on to, now outsells MG two to one.

Peter Beale has insisted that the four directors would have faced "personal devastation" had the rescue failed. That may or may not be so. But what is certain is that their initial risk capital has been repaid handsomely. PVH (Phoenix Venture Holdings) has transferred £16m into a trust fund set up for the benefit of the Phoenix Four and a fifth PVH director - the chief executive of MG Rover, Kevin Howe. In addition, the four original directors will soon share in an estimated £2.6m jackpot when MGR Capital, a business set up jointly with the high-street bank HBOS to look after MG Rover's car leasing business, is wound up. On top of this come their salaries; last year, the directors of Phoenix netted £16m, including a £10m windfall thanks to a loan note the four founding directors awarded themselves for free shortly after taking control of MG Rover. That is more than twice what BMW paid its board last year - hence the recent outburst from the managing director of the German car-maker's UK arm, Jim O'Donnell.

The directors of Phoenix have courted still more controversy over what, to outside observers, appear to be complex accounting techniques to separate ownership of MG Rover's loss-making car division from its profitable engines, property and parts operations, and transfer tens of millions of pounds between PVH and its ultimate holding company, Techtronic, in the form of dividends and interest payments. The £427m loan BMW gave MG Rover was interest-free. But the money now sits in the books of Techtronic, which loans it back to PVH at a commercial rate of interest. Last year, it earned £14m in this way.

Likewise, while the company's workforce and dealers may own half of the car-making division MG Rover, this lost £89m last year. The profitable bits of the group are largely owned by the Phoenix Four, who also control 100 per cent of the voting rights.

Little surprise, then, that Martin O'Neill, the Labour chairman of the Commons Trade and Industry Select Committee, was scathing in his criticism when Towers and Beale appeared before it in March this year, accusing them of using "financial sleight of hand" to line their own pockets.

One of the members of that committee is Richard Burden, the Labour MP for the Longbridge area. Does he believe the directors of MG Rover still enjoy the trust of the community? "I think the company does," he replies. "Capitalist businessmen will behave like capitalist businessmen, but to somehow suggest that this reflects a lack of seriousness in the long-term future of the company - I just don't believe that. If they were just out to make a quick buck, there are a lot easier ways to go about it. Do I approve of the payments? No. Did they contribute to the bad publicity? Yes. But has it been the root cause of the company's problems? No."

Towers says he is "baffled" by the unremitting attacks on MG Rover and "puzzled and disappointed" by the outburst from his counterpart at BMW. Otherwise, he is unrepentant. The only thing he regrets, he says, is that Phoenix did not start the pension trust-fund for its directors earlier so the amounts going in did not look so big.

"The Tuesday morning that we signed the deal, the BMW liquidators were arriving at Birmingham airport as we drove into Longbridge. This place was going to close, and those jobs were going to go. There was no other game in town. We either did the deal or the place closed. That was the deadline. We didn't have banks, or the Government, or financial institutions, or shareholders behind us. Just four people who put themselves at risk to do that deal. Somebody had to step up to the line, get out their wallets and get on with it. The question I ask people is, 'Would you have preferred us not to have bothered?'"

It might have been different had the rewards reaped by MG Rover's owners been matched by sales success. But this eluded the company. In 1999, the last full year under BMW's ownership, a total of 211,500 Rovers and MGs were sold worldwide. This year, the figure will struggle to reach 110,000.

On the financial front, the picture is less disastrous, but it is hardly one of unalloyed success. The Phoenix Four's original business plan assumed that MG Rover would turn a profit in 2002. The target now is to break even in 2006. Although MG Rover has cut its losses hugely - from the £770m deficit recorded in 1999 to £77m last year - red ink is seeping back in; this year, losses are likely to exceed £100m.

MG Rover's financial cushion, courtesy of its dowry from BMW, is also disappearing. Last year, the net cash in the business fell from £315m to £213m. A further substantial chunk will almost certainly have been eaten away this year, despite a series of transactions designed to shore up the balance sheet. These include the £100m sale of the parts business to Caterpillar and a sale-and-leaseback deal with the property developer St Modwen, which covered half the 475-acre Longbridge site and raised a further £42.5m.

Where has all the money gone? MG Rover says it has invested £500m in model development. But it doesn't have a single genuinely new model to show for this. In an attempt to fill the gap left in the small-car sector of the market by the demise of the Rover 100, PVH struck a licensing deal with the Indian car-maker Tata to import its Indycar and re-badge it as the CityRover. Shipments began last November, but in the most cut-throat sector of the market, the car proved to be overpriced and under-equipped. Sales have reached only 6,000 this year; the initial target was 30,000.

Professor Garel Rhys, the director Cardiff University's Centre for Automotive Research, says the furore over boardroom pay, albeit distracting, is a "sideshow" compared to the need for MG Rover to come up with a new, credible car for the mid-market. "Everything is in a holding pattern until then," he says. "What really matters is how well the new car performs. If it doesn't, then the company will subside and probably subside quite quickly. The car has to succeed if MG Rover is to rebuild its profitability and restore its image."

That is where the SAIC venture comes in. If it goes ahead, it will mean £1.5bn for product development (mostly from China); production of up to one million cars a year; and a secure future for Longbridge. The UK plant will still only make a maximum of 200,000 cars, but it will benefit from enormous economies of scale.

"It's a terrific deal," Towers says. "It's also sufficiently unique that we should be congratulated for doing it this way, but of course we won't be. We could have moved the entire business to China; we could have done a Dyson ages ago. But we wanted to take advantage of the opportunities of the Chinese market and not migrate all the jobs and all the business to Shanghai."

Brave words - and, if MG Rover does indeed pull it off, a great many of its critics will be forced to eat theirs.