Rover tries the patience of its German master

BMW is finding it harder to revive the marque than it first thought. Harriot Lane Fox reports

Polishing up the unglamorous Rover into a prestige motoring brand is becoming the car industry's equivalent of finding the holy grail.

Graham Day (later Sir Graham) gave British Leyland a plusher name in 1986, and Rover has been attempting to push its image upmarket ever since. First the state, then British Aerospace, and now BMW - have all tried to pull Rover out of the Vauxhall/Ford rat race.

BMW should know what to do: it performed the same trick on its own image in the 1960s. But the cross-border barracking that erupted last week in Munich and the Midlands bodes ill for the transformation. While management at both companies issued hasty denials, disharmony fuelled by an article in September's Car Magazine and a highly critical report by broker Salomon Brothers persists.

The industry is rife with talk of tension between parent and subsidiary two years after acquisition, disgruntled British workers failing to deliver on time or to the exacting standards of their new masters, and growing impatience on BMW's part with a financial and managerial burden that they underestimated from the start.

"There's been an awful lot of gossip about the cultures of the companies," said a Rover spokes-man. "But the truth is we've been getting on very well. Everyone goes on as though BMW had to tell us what to do. The truth is we know very well what to do. We just can't get hold of the money fast enough."

The new Mini - cited amid pink-haloed nostalgia at the time of the acquisition as one of Rover's main attractions - is nevertheless a clear source of discontent. It will now be engin- eered in Britain, but the launch has been put back from 1998 until the millennium. It is likely to become a marque in its own right covering a family of small cars.

Rover may have shrugged off the British Leyland name in 1986, but years of state ownership and under-investment by BAe have proved a much more intractable legacy.

The company made its first profit for a decade in the first half of 1988, after soaking up pounds 3.5bn of government funding just to stay afloat. Another pounds 547m in aid went into the pockets of BAe, which negotiated a rock-bottom price of pounds 150m for the last survivor of Britain's car industry. At the time, Rover had sales in the region of pounds 7bn. By 1994, it was down to pounds 5bn with peak annual borrowings of almost half that figure.

Hardly an attractive prospect, but what BMW planned to get out of the pounds 800m deal appeared to make it worth while. Rover would allow the company to operate in an economy free from the ravages of an over-powerful deutschmark. The extra capacity would fuel growth, and its British counterpart's portfolio of brands would allow BMW to expand into non-traditional market segments without damaging its own core brand.

What BMW seems to have misread is the necessary level of investment. It increased its annual spending by 30 per cent to pounds 500m in 1995 and says it will spend that every year until the millennium. Around pounds 12m has already gone on the new Gaydon design and research centre, which was in the pipeline pre-BMW and is half the size of its German equivalent. There are three new paint shops at various stages of construction. And Rover has also extended capacity at the Land Rover plant in Solihull to accommodate a new small off-road vehicle. The first joint project with BMW, this will be launched next year and soak up many of the 4,000 extra staff taken on in 1994. At the time, the off-road market was growing fast. But it has since slowed worldwide, and BMW is concerned that Solihull now employs too many people.

The extra investment hit Rover's 1995 figures hard. Under newly applied German accounting conventions the com- pany recorded a pounds 150m loss, although it claims this does little justice to profits that rose by nearly 10 per cent to pounds 91m under the old rules.

Last year, BMW increased its sales by 3 per cent. Rover, in contrast, managed 2 per cent growth largely due to a strong worldwide performance from its long-term crutch, Land Rover. This will hardly satisfy its parent's stringent requirement for 6 to 7 per cent returns to support the investment.

And the growth gap has been widening for some years. In 1993, BMW sold 532,960 cars compared with 430,211 built by Rover. In the 1995 calendar year, BMW sales rose to 574,000 while Rover's fell to 358,000.

Many of the current grumbles focus on the influx of BMW personnel into its supposedly discrete subsidiary. But the figures would seem to justify this. Even in the medium term, Rover cannot go on selling fewer, less profitable cars than BMW.

Dr Wolfgang Reitzle, BMW's research chief and number two to chairman Bernd Pischets-rieder, took over as Rover chairman in September - a move said to have sparked the resignation seven months later of former chief executive John Tower.

It was then that Dr Reitzle, who was influential in the creation of the Gaydon design and research centre, scrapped the five-year-old operating structure by splitting engineering from manufacturing.

Rover-ites have maintained a presence at top level with Nick Stephenson, the design and engineering director, who has been charged with reducing the number of suppliers as part of the cost-cutting move towards common design under the skin.

Nevertheless, there is now a marked BMW bias. Mr Tower's replacement, Walter Hasselkus, former head of the motorcycle division, takes over officially on 1 September.

Tom Purves, former managing director of BMW (UK), is managing director for sales and marketing, aided and abetted from the beginning of this month by Martin Runnacles, the marketing director who was also brought over from the parent's UK arm.

"Anyone who believed that Rover would operate separately wanted a brain scan," commented Tony Woodley, national secretary for the trade union automotive group. "It's not unreasonable to expect commitments to be met, but you have to understand BMW did not save Rover. In the end it could save BMW."

Marketing prowess sits alongside technological expertise as the top priority for BMW to infuse into Rover. Mr Purves and Mr Runnacles are widely credited with getting BMW to a UK market share of nearly 3.5 per cent, double that of Mercedes, by sustaining the prestige image while achieving relatively high sales volumes.

There are ambitious plans to build the Rover brand overseas in up to 30 new or neglected markets, primarily in South America, South-east Asia and Eastern Europe. But greater integration of the two brands has been ruled out, except in markets where both have a very low presence.

At the outset, Mr Pischets-rieder said he expected no return from Rover until 2000. Industry watchers say it could be much longer. The doubts hit BMW's share price this week, begging the question of how long initially favourable German investors will be prepared to wait?