dolution

Set out the main stakeholders in the MG Rover business at the time of its collapse. How would you determine the relative importance of their stake?

Please read the case study below carefully and write a 1000 word essay discussing an issue in-depth in your own words.

Case Study: The ‘English Patient’ and the Chinese takeaway: Examining social responsibilities in the MG Rover collapse

This case discusses the collapse of Britain’s last remaining major car manufacturer MG Rover in 2005, and the subsequent loss of 6,500 jobs in the former industrial heartland of the West Midlands. The case traces the role played by the firm’s directors as well as overseas car companies in the Rover collapse, and provides the opportunity to examine the nature of social responsibility, and the relative responsibilities of governments and corporations for safeguarding employment.

The name Longbridge stands for nearly a hundred years of British car manufacturing. The huge site near Birmingham in the West Midlands area has been the stage for many of the peaks and troughs of automotive history in the UK. Once the birthplace of the sporty, Austin Healey, the legendary Mini, and the practical Metro, the site has also been associated in the 1970s with industrial unrest and union militancy. More recently, the plant had started to become a virtual synonym for industrial downturn and decay, and the reversal in fortunes of the British car industry.

It was a history with ups and downs, but the plant seemed to be in for a bright future when in 1994 BMW took Longbridge over from the British car manufacturer Rover. Despite suffering from under-investment, BMW saw the Rover takeover as a suitable means of expanding its range of models beyond the luxury segment that it had become famous for, into more medium-sized, family saloons that appealed to the mass market. However, during the first five years of its involvement in Britain, BMW invested more than £2.5bn (a3.8bn) in Rover, but productivity in the ageing facilities at Longbridge never reached competitive levels. Despite massive job cuts, and the introduction of more flexible work patterns, reports suggested that by 2000 BMW was running up annual losses of £880m (a13.2m) on the Rover investment, more than £2 million a day! Such losses had major impacts on BMW. As one of the smaller players in the international automotive industry, and under constant threat of hostile takeover bids itself, the company’s management got clear signals from its shareholders and from the financial industry that it had to either cure ‘the English patient’ (as Rover was now known back at head office in Munich), or get rid of it.

By March 2000, BMW signalled that it was about to act. Amid uproar from unions, local communities, and the press, the UK secretary of state for trade and industry engaged in frantic shuttle diplomacy between London, Longbridge, and Munich to try and stave off BMW’s imminent withdrawal. However, despite offers of £150m (a230m) in government subsidies, BMW eventually announced it was going to pull the plug on Rover, to the despair of workers and the embarrassment of the powerless government.

Whilst finding a buyer for the ailing car plant was never going to be easy, the Rover business was eventually sold in May 2000 to the ‘Phoenix Four’ consortium headed by former Rover CEO John Towers. To sweeten the deal and hasten their own exit, BMW agreed to sell Longbridge to the Phoenix group for a nominal ten pounds (a15), and even provided the group with a massive ‘dowry’ in the form of cash, assets, debt relief, and loans, said to amount to some £1bn. Towers and his colleagues were hailed as heroes for averting catastrophic job losses and for keeping Britain in the motor industry. They even resurrected the classic MG brand in the retitled MG Rover business. Things were finally looking up at Longbridge.

However, the optimism was not to last long. MG Rover continued to lose money and productivity failed to improve – but at least the spiralling losses of previous years appeared to be getting under control. By 2003, full year losses were £77m compared with nearly £800m in 1999. Nonetheless, with profitability still a distant dream, MG Rover agreed to sell off the Longbridge site for a much needed influx of cash and rented back the land from the new owners. Finally in April 2005, with sales plunging and a much touted rescue deal worth £1bn with the Chinese state-owned Shanghai Automotive Industrial Corporation (SAIC) seemingly floundering, MG Rover hit crisis point again.

As the extent of the beleaguered firm’s troubles became more evident, and with a UK national election due in a matter of days, senior government officials once again stepped in to try and save the company and prevent the loss of thousands of jobs. A government loan of £6.5m to pay the wages for a week did little to plug the holes in Rover’s finances and a frantic trip to China to try to persuade SAIC to complete a buy-out deal failed, despite the offer of a further £100m bridging loan. SAIC simply bought the intellectual property rights for the two main Rover models giving it the opportunity to market the cars in China. With little other choice than to admit defeat, the MG Rover boss, John Towers finally halted production, and called in the administrators in April 2005.

The fall-out from the collapse looks set to be painful, messy, and drawn out. The British government once again faced criticism for not acting earlier to save jobs, and a subsequent enquiry criticized the government for making a loan that would probably never be recovered when the chances of securing a last-minute deal with SAIC had been ‘remote’ – a finding that the opposition party seized on to denounce the government’s ‘election bribe’. The Longbridge site itself was eventually bought from the administrators by another Chinese company, Nanjing Automotive for £50m after a hard won bidding war against SAIC and a British investor. Nanjing renewed the lease on Longbridge and pledged to retain a limited amount of vehicle production at the site despite its ‘Chinese takeaway’ strategy of shipping out much of the Longbridge machinery to lower cost production facilities in China.

Meanwhile, the UK’s accounting watchdog announced plans to investigate Deloitte over its role as MG Rover’s accountant and auditor, whilst Towers and his fellow directors faced a barrage of criticism for taking £40m in pay and benefits out of the failing business and squandering the £1bn dowry from BMW. In its leader page on the day the administrators took over the company, the Financial Times said the Phoenix directors had ‘betrayed the trust placed in them by their workers, the government and the public by burning through someone else’s money’ – a criticism at least partly ameliorated by a subsequent commitment by the directors to plough £49m worth of assets back into the company to slow the company’s demise.

It is estimated that something like around 9–12,000 employees were made redundant in the West Midlands as a result of the collapse – 6,000 at Longbridge and many more besides in the supply chain. Despite the massive blow this has dealt to the area, close to a half of these have now found new employment as the region moves to more highly skilled manufacturing and service industries. Of course, the question of where the responsibility lies for the collapse remains. But it is perhaps ironic that the only hope for UK’s last remaining major car producer lay with a state-owned company from the Far East, while the British government’s incapacity to safeguard employment was confirmed once again after the earlier failure to prevent the BMW withdrawal.