Jeremy Warner's Outlook: A shabby epitaph to a once proud industry

BP/oil super spike; European growth
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The Independent Online

After a wasting illness of more than 30 years duration, Rover, the last remnant of indigenously owned mass market car production left in Britain, seems to be in its final death throes. This has been said many times before, yet somehow or other, the beast has always managed to stagger back off its sick bed. Can it hope to do so again?

Shanghai Automotive Industry Corporation (SAIC) provides the latest possibility for a fresh infusion of revitalising red corpuscles. Yet even if by some miracle John Towers and the rest of the Phoenix Four win another stay of execution, it's hard to see what long-term future there can be for Rover. Having now had the opportunity to take a good look at the books, the Chinese are fast getting cold feet. As long as they keep talking, there is still hope.

But the Government will need to dig deep to make it happen and it is not clear that even if it were minded to do so, European rules on state aid would allow it. The £500m dowry bequeathed by BMW when it sold the unwanted rump of Rover to the Phoenix Four five years ago has gone, as has the £67m so far paid by SAIC towards the project of jointly producing a new mid-range car. The pension fund is also in serious deficit - a bitter irony given the £15m John Towers, the chairman, and his three cohorts have extracted from the company towards their own personal pensions. On top of everything else, there's the little matter of who pays for the 2,000 redundancies that form a part of the rescue.

Even with the £100m bridging loan offered by the Government, persisting with the bail-out looks too much of a gamble for the Chinese to want to take. Rover may already be technically insolvent. Confusion continues to surround precisely what it is that SAIC is asking for. According to one version, the Chinese are demanding that the loan be made interest free and of several years' duration, which would make it more of a gift than a debt. That's not something the Government should, and arguably could, agree to, even with an election looming and 25,000 direct and indirect jobs in marginal constituencies resting on the outcome.

SAIC presents a less alarming version of events, which is simply that it wants satisfaction that the holding company, Phoenix Venture Holdings, won't become insolvent for the next two years, at the end of which the joint venture is expected to be generating sufficient cash to fund an ongoing operation. So little, and yet so much, for no commercial bank would underwrite such an undertaking, and the Government couldn't legally do it either. Yet it is easy to see why the Chinese are insisting. Insolvency would make SAIC responsible for all kinds of Phoenix liabilities, including BMW's £500m dowry, which is in the form of an interest free loan repayable by the middle of this century. In the event of insolvency, BMW would have an immediate claim on the Chinese.

It's possible that SAIC is engaging in brinkmanship, so as to extract the best possible deal from Patricia Hewitt, the Secretary of State for Trade and Industry, and that eventually it will do the deal anyway. There is SAIC's £67m to salvage, after all, and the timing of its demands with the election just weeks away, looks suspiciously like strong arm tactics.

Yet the sad reality is that there appears nothing in Rover left to buy other than liabilities, even with the help of a Government loan. The teams of engineers the Chinese have sent to watch the production lines at Longbridge may already have extracted all the intellectual property and know-how they need to replicate integrated car manufacturing back home. Why they would want to help keep the English patient alive in Britain too has always been a mystery. No one has ever made money out of Rover and it very nearly bankrupted BMW. The idea that SAIC might succeed where one of the best car manufacturers in Europe failed is just fanciful.

No one will take any pleasure in the final demise of Rover, which is a tragedy for all involved, including the Shameless Four. The creditors will surely go after them. More radical action at an earlier stage might have salvaged something from the wreckage, yet the market has never been allowed to take its course. Governments have repeatedly intervened, and in the process only made a bad situation worse. The irony is that today Britain makes more cars than ever. It's just that they are largely made by foreign concerns. Britons lost the plot in mass market car making long ago. The Phoenix Four provide a pretty shabby epitaph.

BP/oil super spike

Another day, another record for the soaraway oil price. It's beginning to look as if Goldman Sachs may be right about a "super spike" in the price, which the investment bank last week predicted might reach $105 a barrel. In real terms, this is almost as high as it went during the two great oil shocks of the 1970s that triggereda deep global recession and a consequent collapse in demand for oil at a time when high prices had led to an explosion of supply. The upshot was a decades-long period of low prices from which we are only just emerging.

In Goldman Sachs' view, history is repeating itself, at least in part. As things stand, there appears to be no let up in demand, with the fast growing economies of China and India lapping up the stuff like there's no tomorrow. The sustained nature of the present cycle has caught almost everyone by surprise, for up until quite recently, few believed China could maintain its break neck pace of growth. Now the conventional wisdom is that it will.

Already there are signs that the oil industry is preparing to abandon the self restraint of recent years, when investment in new development has been well below historic norms. Saudi Arabia has announced proposals for very sizeable investment in new production. Yet it is unlikely that increase in supply alone will bring prices to heel, and in any event, most of the oil majors remain as cautious as ever on new investment. They have been burnt too badly before.

Much more likely is that price stability will be restored via a collapse in demand. This needn't necessarily happen through the usual mechanism of a prolonged global recession. Indeed, high oil prices are much less likely to trigger recession than in the past. Developed economies are less dependent on oil for growth than they used to be, while the Chinese development story looks quite unstoppable. Yet one way or another, the world will find ways of using less oil.

A high oil price is the greatest possible incentive for energy efficiency there can be - witness the $5.5bn of losses predicted yesterday by the Air Transport Association for airlines this year. The airline industry for one cannot afford to keep burning cash and oil at the present rate. So assuming Goldman Sachs is right in pouring scorn on those who argue the oil is about to run out, demand will eventually be brought back into balance with supply. The necessary correction can either occur brutally, through a recession, or it can be done eloquently through energy conservation. In this context, the steady as she goes trading statement from BP yesterday, indicating no great rush to increase production beyond that already achieved, seems a picture of calm amid the storm. There may be a super spike coming, but Lord Browne of Madingley, the chief executive, is wise enough to know it won't last.

European growth

The European Commission cites the high oil price as one reason for cutting its growth forecast for the eurozone this year from 2 per cent to 1.6 per cent. A "super spike" would presumably require some further trimming. Yet, as ever, these external influences are not the root cause of sluggish eurozone growth. Rather, it is an absence of domestic demand, and in particular subdued consumption. As long as unemployment remains high in the core economies of France and Germany, this will continue to be the case. Last month's risible summit to review progress on the Lisbon agenda gave little reason to hope that there might be any quickening in the present glacial pace of structural reform in the labour market. By attempting to protect the jobs of those in employment, the eurozone only increases the misery of those out of it. Yet Europe seems to lack the political leadership necessary to break out of this vicious cycle of relative decline.

jeremy.warner@independent.co.uk

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