Author’s preface: I spent my formative years, after finishing study, mainly in the automotive industry and motor racing, working for amongst others, Ford of Europe in the mid-sixties and eventually, establishing my own automotive business, which was deeply engaged in motor sport, precision engineering and racing. One point of interest, is that I actually worked with one of the personalities at Ford Europe’s European Headquarters, involved later in the Rover debacle, and was therefore able to form my own view of his management ability – or perhaps lack of same, as the case might be. My lips are sealed! As a young man, I inherited my late Father’s passion for cars and speed and was steeped in automotive memory and tradition from an early age. My analysis, therefore, emerges from a backdrop of history and personal knowledge, reaching back, it is hard to admit, even to myself, to the very early 1950s. This analysis, is necessarily truncated: however, much valuable research data resides on the web.
I originally commenced this article on April 8th: due to the research time, events have overtaken me somewhat. The conclusions do not alter, however. MCF
A Circuitous Corporate Roadtrip
At long, long last, Rover-MG Group, the last British volume car manufacturer, has gone into administration, which is a bit like Chapter 11.
To examine this fiasco, one must go back to the turn of the last century and the birth of the motorcar as a method of transport for many, rather than a sort of quaint affectation of the wealthy.
Henry Ford, of course, was the pioneer of automotive mass manufacturing and his approach and systems, particularly the moving production line, was copied by most, particularly the venerable Fiat marque in Italy.
However, there were many unsung British pioneers, too, amongst them such giants as Fred Lanchester, whose advanced and highly innovative design genius created engineering solutions which are still employed today, some 100 years later!
The two British champions of the car as a utility form of transport, were undoubtedly William Morris (later Lord Nuffield) and Herbert Austin, rivals for the mass market.
Other famous early names included Wolseley, Riley, Rover, Daimler, Standard, Triumph, and Leyland, whilst Leyland early on switched to trucks. In the heady pre-First World War days, engineers and entrepreneurs abounded in this area. The war, of course, created a new market for what had been, pejoratively referred to, as The Horseless Carriage. For example, the tank, was arguably a British invention and proved the soundness of the concept of employing the internal combustion engine against horse drawn artillery, much to the chagrin of many cavalry officers.
This war also catapulted aviation forwards at an incredible pace, creating great pressure for engine designers to develop light and powerful units, with excellent reliability.
Since England’s Industrial North and Midlands were already deeply involved in engineering, iron and steel production, foundries and precision tool manufacture, it was a natural progression for the embryo motor industry to find its roots there. The singular exception being William Morris’s business, which, unusually, was centred around Oxford, the old university town, where he owned a bicycle shop and build his first true motor car.
Early on, Morris and Austin became bitter rivals and this rivalry was not ceased, until Morris, by then the largest, bought Austin out in 1952.
By this time, Morris had already absorbed Wolseley, Riley and a number of other manufacturers and thereafter, eventually, Morris became British Motor Corporation (BMC).
Through the 50s and early 60s, BMC were the leading British mass-market automotive manufacturer, beating both Ford, through their British subsidiary and GM, who owned Vauxhall, another leading make, in car and commercial vehicle sales. BMC were pre-eminent in various branches of motor sport, winning the Monte Carlo Rally, twice – with the amazing and revolutionary Mini-Cooper s – and numerous other rounds and championships of the World Rally Championship, with the venerable Austin Healey 3000, as well as dominating the early phases of the Formula III single seater race car engine arena. BMC’s competition successes are far too numerous to tabulate here.
However, as Lord Nuffield gradually had relinquished control and direction, leadership was sintered and the once great manufacturer lost its direction.
By the early 1960s, BMC had indeed lost its way. Ford, amongst others, was making huge inroads into the bottom-end mass market.
Enter one Donald (later Lord) Stokes. Stokes had started with Leyland, the leading UK manufacturer of trucks, coaches and buses and on the back of this success, perceived an opportunity in the car market. He managed to merge Leyland with Standard Triumph and Rover Cars and by 1967, his company, controlled 16% of the UK car market.
BMC, suddenly awake to Stokes’s threat, bought Jaguar Daimler in 1966, to form what was called British Motor Holdings (BMH).
Stokes was backed by the then Labour government to initiate merger talks with his opposite number, George Harriman of BMH.
Stokes's oft repeated mantra was "Big is beautiful": and his favoured strategic utterance, "Economies of Scale!"
Unfortunately, with the exception of probably one senior manager, John Barber, who was a ten year man with Ford, not one of the top echelon had the developed skill-set to run a business with the capacity to produce one million cars annually and enjoying staffing levels of 190,000.
At this time in Britain’s history, manufacturing industry had taken a deep breath, after a sort of renaissance caused by World War II and the immediate post-war shortages of everything. There were deeply ingrained problems, however. Workers had become increasingly dispirited, by years of amateur upper class managers, many occupying their board seats through the benefit of old school ties and social connections, rather than skills. Understandably, Trades Unions were perceived as the worker’s answer. Probably, one of the major problems facing the country was created by a new breed of working man: he had often travelled abroad, in the armed services and experienced a different life-set. The old tired clichés trotted out by government and the ruling classes in the 20s and 30s were seen for what they were: a final attempt by the ruling elite to separate out and maintain the social differences and income differentials, which had persisted from mid-Victorian Britain onwards.
Additionally, post-war reconstruction and a credit boom, fostered by Harold McMillan’s Conservative government, had made consumer durables available to the many. They were determined to retain their grip on increasing equality.
Trade Unions caused the decline?
Populist economic and social theory, considers that Trades Unions were the root cause of British industrial decline. Now on this point, your writer takes issue.
Both industrial and political relations ought to have been a major executive skill area: they were both conspicuous by their absence. It has been an easy option, in later analysis, for commentators to label unions as the scapegoat, whereas in reality, British management through the 50s, 60s and 70s, failed dismally to appreciate the finer points of their task. Forward strategic product planning was forgotten: pip squeezing existing model ranges, with cosmetic update, periodically, was imagined to be enough. Spending significant sums on Research and Development was considered profligate!
Stokes surrounded himself with his old Leyland sycophants, even taking onto the board Lewis Whyte, whose business expertise was in insurance!
People like Sir Alec Issigonis, the genius who designed cars such as the Mini, were sidelined. Most of those with industry skills left or were marginalized, as Stokes’s arrogant ego caused strategic myopia.
The monster he had created was a sprawling mass of manufacturing plant, not updated since the early 1950s and spread through endless unconnected plants, some of them geographically miles apart. Worst of all, the model ranges and designs were hugely outdated: and there was no capital for innovative and ground-up redesign and manufacturing plant renewal.
Once the realities started to sink in, Stokes approached the Labour government’s Industrial Reorganisation Committee (IRC) for a £25 million loan for modernising factories and restructuring the company.
Eventually, in 1969, the IRC called a meeting with Leyland bosses. Its then Chairman, Tony Benn who was also Minister of State for Technology wrote:
"Had lunch with Donald Stokes and the Leyland board. The number of strikes now in the motor industry does indicate a complete breakdown of communication. When we began talking about this, they said that Barbara Castle’s speech last year - in which she had said that power was passing to the shop floor - had done more damage than anything else. I said that it seemed incredible that if this was true - and none of them denied it - there should be any difficulty about it being openly declared. But they took a very conservative view, and although they were conscious of their own managerial defects, they were still a long way from realising that relations with the work force required a great deal more time and effort, thought and participation than they were giving."
In 1970, Pat Lowry was appointed as a director, in charge of Industrial Relations: sadly, it was too little, too late. To put matters into perspective, by 1969 the business was losing 5 million man hours per annum to strikes: by 1970 this had reached 10 million!
Meanwhile, Japanese auto manufacturers were making significant inroads into the UK market, particularly Datsun as Nissan were then branded. Continental manufacturers such as VW, Mercedes and BMW, as well as Fiat and Renault were taking their own share of the middle and top-end markets away from such as Austin, Morris Jaguar and Rover.
Leyland’s attempts to change workers from piece work to day-rate ended in disaster.
However, Stokes’s ego allowed him, at this time, to build a typical flag waving head office called Leyland House, at Marylebone in London: not an inexpensive project!
When home demand for cars was booming, Leyland were failing, dismally.
After the fiasco of the Tory Duopoly of Heath/Barber (Prime Minister and Chancellor of the Exchequer) inspired economic Boom and Bust, the three-day working week - owing to a coal miners strike and lack of electricity generating capacity - plus finally, the Three Day War in 1973 and the subsequent effective rationing of petrol, plus the OPEC attack on Western oil exploiters, it was all but over.
In 1975, British Leyland could no longer stave off its creditors and the British Government became the proud owners of what was effectively the British Motor Industry. BL were effectively nationalised.
The Most Destructive Phase
And so, we enter the next and probably, most destructive phase.
Once under government control, with its name changed to BL Ltd, in 1977, the then Labour government appointed Sir Michael Edwardes chairman, with the role of turning round the business. Edwardes, a man with a somewhat chequered past, set about asset stripping in a big way: since lack of capital had been one of the major stumbling blocks to developing new market-leading models, a collaboration with the Japanese Honda company meant that IPR flowed in both directions. Most critically, new Rover models were to use Honda power-train components: since no capital existed for organic development. It was a cheap and dangerous option.
Mainly, Edwardes closed plants, on a wholesale basis, including Speke, Abingdon and Canley:Solihull, with the Alvis brand (formally a luxury sports car which had become a major supplier to the UK military of scout cars and light armoured vehicles) being sold to United Scientific Holdings. The divestment had begun!
After little of real value had been achieved, Edwardes stepped down in 1982. Thereafter, he went on to sell off another once great British company, Dunlop, to the Japanese: for two weeks work, he received some £250,000. Not bad for a fire sale trader! Bad, however for UK manufacturing and appalling in terms of the loss of IPR and design skills and a knowledge base that went back to the late 1890s and included nearly all World Speed Record cars in the 30s and 40s.
In 1984, under the new Tory government of Thatcher, Jaguar was sold off to investors and after much early PR hype, as exchange rates rose against the pound, fell into loss – again! The CEO, Sir John Egan blamed the global currency markets, neatly ignoring the appalling quality of the cars, poor service record, stale designs and lack of vision and expertise of Jaguar’s management team.
At this point it is worth recalling that the founder and energy behind the original Jaguar company, Sir Bill Lyons, had assembled a team of first class engineers by 1936 and post WW II, launched the range of "Jags" which took the USA by storm! And this was despite the strictures of the post-Bretton Woods fixed US dollar-sterling exchange rate, lack of materials, post-war, and inferior manufacturing technologies.
Lyons’s competition cars, won time after time at the prestigious Le Mans 24 hour race in the mid 50s. They offered Ferrari performance at affordable prices.
So, yet another part of Lord Nuffield’s once dominant empire had fallen to amateur management. One of Thatcher’s chosen, Egan then went on to head-up BAA, the company enjoying an effective monopoly on airport operation. A nice reward for failing, which seems a dominant theme throughout this sorry tale.
Eventually, Jaguar was bought by Ford in 1989: it still struggles today, mainly since Ford have little concept of what the Jaguar marque was all about.
In 1986, Leyland trucks and vans were sold to DAF. Leyland Bus was sold to Volvo. Unipart, the very successful (and profit making) parts business was spun-out in a Management Buyout in 1987. The buyers made a huge capital profit after a few years. Pity they couldn’t have performed as well whilst working for BL!
Seeds of Final Decay
A seminal event and the beginning of the seeds of final decay took place in 1988, when the Rover Group, as it had been re-named – once again! – was "Privatised" by Thatcher’s government. In this case as in so many "privatisations", it simply meant selling off a state owned asset at a knock-down price to your chums. The chums being British Aero Space or BaE, headed up by another Thatcher favourite, Prof. Sir Roland Smith. Now Smith, previously a sheer theorist from Manchester Business School, had sort of shot to fame in this Thatcher era, when as Chairman of House of Frazer, (an old established ailing business, where the founder’s son, was a dissolute gambler and drunkard, doing his best to waste the canny work of many decades), he resisted the entreaties of one Tiny Rowland – who wanted the jewel in the crown – Harrods – and instead, allowed himself to be wooed by a an Egyptian carpetbagger, Mohamed Fayad.
Rover was eventually sold to BaE for £150 million pounds only! Smith promised to infuse Rover with large amounts of capital, new technology, management the whole bag. In fact, BaE set out on yet another glorious asset stripping exercise.
In 1990, the EU Competition Commission complained that the sale price was far too low and set-up an investigation. What emerged, was the BaE had not only bought Rover for a knock down price (other estimates valued the business at anywhere from £800 million to £1 billion), but the friendly Thatcher government, in the guise of another of her sycophants, Lord George Young, a failed property developer, "forgave" £2.6 billion in debt and provided £800 million of fresh working capital!
Worse still, in 1989, the National Audit Office (NAO - the government financial public purse auditor) calculated that in total, during the nationalised period, BL/Rover had cost the British Taxpayer some £ 3,457 Million! Additionally, the Rover business, at the time of sale to BaE, had some £250 million of surplus assets, such as unsold cars.
Undeterred, BaE set about recouping even more! When the DAF truck business was floated BaE’s inherited stake was worth £87 million, having sold 40% of the DAF business previously for £50 million. Rover’s IT company realised some £39 million.
Selling two thirds of the Cowley factory to land developers, plus Canley, raised even more cash.
Despite these various bonanzas and an almost strangle hold on certain aerospace technologies, the old Smith magic didn’t fail! In 1991, one of Britain’s largest industrial companies, BaE shares fell and the company was on the edge of bankruptcy. Only a new chairman, Richard Evans and an urgent special Rights Issue saved the business. Interestingly, BaE itself, had been a nationalised company, formed in 1977, to try and preserve aircraft manufacture in the UK. It was again, "Privatised" in 1981 – by the Thatcher government - which sold its remaining shares in 1985. Another success for privatisation policy!
One further interesting fact about Smith, which perhaps explains much about British management, is that he was, in the mid-seventies, the non-Executive Chairman of an insurance company, Equitable Life, which has lost most of its policyholders' funds, created havoc amongst unfortunate people who bought retirement pensions, (some are receiving perhaps 30%, only!) and is presently suing its auditers, Ernst & Young and former directors for £4 billion!
Eventually, in 1994, BaE sold Rover Group to BMW, who saw this as a route to the mass market. Wrongly, as matters transpired. BaE received some £800 million, from BMW. Not a bad return, considering the assets and value already extracted.
From BMW’s salutary lesson in endeavouring to attack the mass market, flowed a number of lessons: perhaps the most significant, was the problems in attempting to integrate the corporate mindset involved in operating one of the World’s leading top-end brands, with a failed agglomeration of has been hybrids, manufactured mainly, as a joint-venture between disparate manufacturers: in this case Honda and Rover.
On May 9th 2000, after various internecine squabbles between the Alchemy Group (Venture Capitalists with an eye to the main chance) and the British government, BMW sold Rover Group to the Phoenix Consortium for just £10, plus, of course, a £500 million "Sweetener" intended to pay redundancies of unwanted workers.
The company was saved and Rover would remain. Theoretically. As part of the deal, BMW retained rights and premises for the Mini and the Land Rover name and operation was sold to Ford. The asset stripping persisted.
Perhaps now, under Phoenix, there was little left to strip! How wrong could people be.
The history of the Phoenix Group makes interesting reading
The four directors, John Towers, Peter Beale, Nick Stephenson and John Edwards have managed to squirrel £16.5 million into their pension fund: at the same time, despite being paid £500 million by BMW, to absolve their responsibility for redundancies, there is reputed to be a Black Hole in the Rover Group workers’ fund to the tune of up to £400 million.
Since the purchase, these four have paid themselves some £11 million in wages. An interesting quote came from Tower’s wife: she said to the press, recently, "Her husband worked hard for a salary that is not unusual in the private sector." With huge success, I’m sure that we’d all agree.
As before, successful bits of the whole have been asset stripped, the most significant being £60 million from the sale of 60 acres of the Longbridge site for development. The car parts division was sold to Caterpillar Logistics Services (UK) for £100 million. Studley Castle an hotel and conference centre, which made a $3.3 million profit in 2003, is now a separate company and out of bounds for the bankruptcy.
Not a bad investment return, since all the gang of four originally invested, was £66,000 each, of their own cash!
This whole scene is eerily reminiscent of the De Lorean affair, some 25 years ago.
John De Lorean the born-again cocaine dealer, managed to part the British government from £80 million, in the cause of establishing his factory in Northern Ireland, an area of huge unemployment. At the end, he spirited £8.5 million of this into a Swiss bank.
The "Unemployment" scam has played well on many occasions: then Secretary of State for Trade, Norman Tebbit, now of course, Lord Tebbit, despite the huge problems with Rover, not only welcomed the Japanese wolf into the hall, but gave them a nice comfy seat beside the fire, using over £100 million of taxpayer’s money to help establish a manufacturing facility in Sunderland, opened in 1984. The justification was as before, high levels of unemployment. Tebbit’s business acumen was developed during his earlier career as a BA pilot. Some apprenticeship. The resulting Nissan plant, of course, was really a thinly disguised screwdriver assembly facility, for pre-manufactured Japanese parts and allowed Nissan to export, tariff free, into EU states, as well as neatly sabotaging much of Rover’s chance at success.
Another fascinating thread which seems to run through many of these events, is that one firm, Anderson, of Enron fame, seems to crawl through much of these affairs. The present Trade Secretary, Patricia Hewitt worked for Anderson, before she joined new Labour: Andersons were De Lorean’s auditors. They seemed ubiquitous in the earlier Labour government: one of the only good things Thatcher did, was to ban Andersons from any future government work.
Conclusion: In conclusion, could anyone really expect Shanghai Automotive (who had already purchased much of Rover’s Intellectual Property Rights and the right to use the Rover name in China - although this is still owned by BMW! - for another £67 million odd!) to pony up large sums of money for a totally failed and discredited business? What one can forecast, is that the canny Chinese, will wait until the inevitable liquidation and then buy what remains of the desirable assets, those not already sold of by Tower and his gang, that is and pay fire-sale prices besides.
Sadly, this then, once more, leaves the British taxpayer to fund, firstly statutory redundancy for all the discharged workers and then pick up the tab for their pensions, since early in April, the new Pension Protection Fund, came into force.
In theory, the fund will secure its capital base from levies culled from all company schemes. Problem is, that with the Rover fiasco, it is almost broke before it has started! So guess who will now pick up the tab?
Probably, the greatest object lesson herein, is that when government intervenes in industry, with ministers who have little or no developed business and management skills and when government are basically unaccountable for our money, it is inevitably bound to end in tears. Our tears.
© Copyright 2005 by AxisofLogic.com
Author’s Note: In my copious research for this article, I am indebted to Keith Adams and his site http://www.austin-rover.co.uk , amongst many others. Mr Adams’s work, in assembling such a powerful historical timeline is invaluable to business, economics and automotive history students and researchers. MCF)
Michael C Feltham FCEA, ACPA, FSPA
Michael C Feltham is a columnist for Axis of Logic. See his bio and additional insights, analyses and forecasts at Feltham on the Economy. By professional discipline, an accountant, who specialised in international finance and economic analysis in the 1970s. Until December 2001, he was an External Examiner and Moderator to Ashcroft International Business School at their Cambridge and Chelmsford faculties at MBA level. He writes widely on technical finance and economic matters. Michael is Founder and CEO of a software company and CFO of a New Media company. You can reach Mr. Feltham at: Michaeleff@onetel.com.