Firms gear up to get ahead of the game

Why fortunes of BMW and a small London company are linked
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It may be a long way from Walthamstow to the Bavarian capital of Munich and yet a common theme links a small engineering company in east london and one of Europe's most prestigious carmakers. Both are investing in Britain and both are investing for the future.

Last week, BMW of Germany announced that it will spend pounds 3bn on its British subsidiary Rover by the end of the decade in order to increase production by a half to 750,000 cars a year.

Spring Steel Productions of Fulbourne Road, London E17, has embarked on a rather more modest expansion. It is investing pounds 4m in new premises and equipment so that it can raise its output of springs and precision castings that go into, among other things, Rover cars.

One investment programme may dwarf the other but they are equally important to the two companies.

BMW's ambitious but risky strategy is to turn Rovers into niche, up-market cars and yet produce them in greater volumes. Spring Steel Productions wants to position itself to take maximum advantage of the new trend in manufacturing for large car and electrical goods makers and the like to do business with a handful of preferred suppliers.

If BMW's strategy does not work there will be a high price to pay not just in Longbridge and Cowley but also in Munich. "If Rover fails then it will not only be a problem for Rover, it will be a big problem for BMW," says Walter Hasselkus, who took over as chief executive of Rover six weeks ago.

If Spring Steel Productions has misread its markets and its customers, who include the likes of Electrolux, AC Delco and Psion, then the consequences will be equally dire.

Con Goss, the company's chairman, says this is its biggest investment since he founded the business with his father, Tom, 42 years ago. The amount being invested is the equivalent of nearly half the firm's total turnover. When the expansion is complete it will create at least 50 jobs - swelling the wages bill by a fifth.

A lot has been said and written about how industry has been deterred from investing by City short-termism and the level of returns demanded by the providers of capital.

But neither company has been daunted by high hurdle rates. Mr Hasselkus says: "Rover will not start to make a profit until the next century but BMW is taking a long-term view and investing for the future. If we were interested only in short-term results we could make a profit from Rover in two years but that would mean not investing in things like paint shops which last for 20 years."

Mr Goss says: "People are falling over themselves to lend money but we have a healthy balance sheet and are funding this from profits as well as loans. We are also borrowing from the directors' pension funds and directors' loans."

A lot of companies have also held back from investing heavily by the memory of two deep and severe recessions and a fear that, though the economy is growing strongly again, the next one might be waiting around the corner.

This is not the case for BMW or Spring Steel Productions. Such is the long-term nature of the investment at Rover that it will straddle at least two full cycles of the economy, perhaps more.

Back at Walthamstow, the only thing that stopped Mr Goss embarking on the investment earlier was lack of a site. "We badly needed room for expansion and were thinking of moving out of London. Then the factory next door came on the market. "This solved the problem for us without the upheaval of a move for the firm and its employees."