So how does Towers put his firm on the road to profit when each export model is sold at a loss?

The Deal
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The Independent Online

The taxi driver at Birmingham's New Street station barely contained his jubilation. "It's brilliant, it's fantastic news, just what everyone wanted. This region has a future again."

Across the West Midlands yesterday there was the same air of euphoria as the Phoenix consortium rose from the ashes of Rover's Longbridge plant.

But as the rejoicing dies down and the new management moves in at Rover - its fourth set of owners in 12 years - nobody should be under an illusion about the scale of the challenge that lies ahead.

John Towers and his consortium may have only paid a symbolic £10 for Rover. But they have inherited a business which is losing £2m to £3m a day and faces a mountainous task to rebuild its reputation and market share.

As if that were not enough, Rover has to contend with wider problems in its export and home markets - a pound now so strong that no British-based motor manufacturer is making a profit, and relentless consumer pressure for lower car prices in this country.

All that without the support of a large parent company such as Ford or General Motors, with the deep pockets to support volume car production.

Had BMW retained ownership of Rover, then it planned to cut a further 4,000 jobs this year and raise productivity by 20 to 30 per cent. Even then, it believed it would still have made a £700m loss, to add to the £2.5bn that BMW's six-year ownership of Rover has cost the German car maker.

Phoenix is not lacking in ambition. It intends to continue production of the Rover 25 and 45, MGF sports car and Mini at Longbridge and shift production of the Rover 75 from Cowley in Oxford to the Birmingham plant, introducing an estate version of the car in the near future. In all, this should guarantee production of 200,000 cars a year and safeguard the jobs of all but 1,000 workers.

But the plans are matched by equally big liabilities. In addition to the running costs of Longbridge, there is the expense of providing finance for the Rover dealer network and guaranteeing the buy-back values of Rover cars sold on lease finance deals. Together, these costs could reach £1bn.

The biggest headaches facing Phoenix is how to stem the losses and how to rebuild confidence in the brand, after BMW's mismanagement of the Rover marque over the past six years. "We have a huge amount of work to do to put this business back in balance," Mr Towers conceded yesterday. However, Phoenix disputes the losses quoted by BMW, arguing that much of the £760m deficit last year is explained by German accounting rules and heavy write-offs of investment. Mr Towers said: "Not many years ago Rover was making money because of the people and the management and the culture of the company." He believes that it will be cash positive again in 14 months and profitable inside two years.

Phoenix freely admits those are hugely demanding targets. More than half of Rover's output is sold overseas, where the brand, particularly the 75 model, has a better reputation. But at current exchange rates, every export sale loses money. Even super-efficient car plants such as the Nissan factory in Washington, the most productive in Europe, cannot make money at the moment.

BMW planned to shift component work abroad so that of the £4bn of supplies that Rover consumes, only 40 to 50 per cent came from the UK compared with more than 85 per cent at present. Phoenix would find it more difficult to do the same thing, being toasted as it is today as the local saviour.

At home the outlook is scarcely brighter for Rover. In the past five years, its market share has fallen by half to about 6 per cent. Last month's doubling in sales, giving Rover its best market share figures for a decade, was achieved only at the expense of vast discounting.

If Phoenix continues to buy market share in this way, then the losses will only become more ruinous. Nick Stephenson, a member of the consortium and Rover's former director of engineering and design, said: "Rover's brand has suffered immense damage over the last few years. We can't change that but we can lift the brand. We are going to make it more exciting, more sporty, which means making more use of the MG heritage and appealing to a younger audience."

The one thing that counts in Longbridge's favour is the huge strides it has made to raise efficiency and productivity in the past two years. Garel Rhys, professor of motor industry economics at Cardiff University Business School, said: "The workforce at Longbridge is fantastic but the reality is that the pound is not going to go south for a long, long time."

Phoenix has not disclosed the financial terms of the deal, or what its funding is, other than to say that Rover was bought "debt-free and cash-free". However, BMW has put up £500m of working capital and £200m of funding is known to have come from Burdale, the UK arm of the First Union Bank of North Carolina. That finance will not come cheap, as interest rates will be punitive because of the high risk.

Beyond safeguarding the immediate future of Longbridge, the big test for Mr Towers and his team will be to launch a new model. Despite a recent facelift, the 25 and 45 series are getting old, and the Mini and MGF only sell in modest numbers. Phoenix has no plans to build the R30 - the medium-sized car that BMW intended to develop at Longbridge at a cost of £1.7bn.

But to develop a new model, as Rover must, it will have to forge a relationship with one of the world's big car makers - Honda, which was Rover's partner until BMW took over in 1994, or Volkswagen, perhaps.

Nick Stephenson, a member of the Phoenix consortium, said: "Collaboration is going to be a very, very important aspect of our long-term future. Honda is certainly an obvious option for us. But there are a long list of possible partners. I am sure they will be banging on our door in the very near future."

But the world car industry is awash with excess manufacturing plants. For every three cars sold there is the capacity to build five. The Longbridge workforce might be jubilant that Alchemy, the rival consortium, has been seen off and with it the threat of thousands of redundancies. But Phoenix remains a risky proposition. Compared with the large redundancy payments that are on offer now to those who choose to go, Rover's workers will be lucky to get more than the statutory minimum should Phoenix collapse.

BMW must have beensufficiently impressed with Phoenix's business plan to be satisfied that it will survive at least two years. Anything less than that and the liquidators of Longbridge would be able to seize back Cowley from BMW and Land Rover from Ford to pay back creditors.

Today, that is the last thing on the minds of the car workers of the West Midlands. But as history has often proved, when it comes to Rover and what is left of the British motor industry, hope has a habit of triumphing over experience.

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