W ho Killed M G Rover? A Special Report from the Cambridge-MIT Institute’s Centre for Competitiveness and Innovation (CCI), University of Cambridge ____________________________________ Matthias Holweg and Nick Oliver Centre for Competitiveness and Innovation Judge Institute of M anagement University of Cambridge Trumpington Street, Cambridge CB2 1AG, UK Tel: +44 (0) 1223 339 700 Email: innovation@ jims.cam.ac.uk www-innovation.jims.cam.ac.uk 25 April 2005 Contacts: Matthias Holweg, 01223 760583, m.holweg@ jims.cam.ac.uk Nick Oliver, 01223 338179, n.oliver@ jims.cam.ac.uk Judy Swan, CCI Manager 01223 339603, j.swan@ jims.cam.ac.uk Alex Balkwill, CCI Administrator 01223 760582, a.balkwill@ jims.cam.ac.uk W ho Killed M G Rover? Summary This paper investigates the final collapse of MG Rover in April 2005, and addresses two main questions. First, what were the reasons for the final collapse, and was this avoidable? Second, who or what was responsible for the circumstances that put MG Rover in such a precarious position, and what critical choices sealed the fate of Rover? W e assess whether the end of Rover was inevitable and identify the critical junctures at which the tide could have taken a different course. W e conclude that by the time the Phoenix consortium took over, the fate of Rover was largely sealed. The company’s collapse was a culmination of a process that started more than five decades ago that included: a failure to consolidate previously independent companies quickly enough; a persistent inability to develop products that hit the right markets at the right prices; the unfortunate severance with Honda; and BMW ’s inability to address Rover’s underlying weaknesses. W hen Phoenix took over, the ship was sinking; the only question was how long it would continue to remain afloat. In the end, Rover was forced to consume its own capital in order to stem its operating losses. Despite MG Rover’s collapse, it should be remembered that parts of the former Rover Group such as Land Rover, Jaguar and Mini do live on – though no longer under the mantle of British ownership. M atthias Holweg, M.Sc. Ph.D., is a Lecturer in Operations Management at the Judge Institute of Management, University of Cambridge, and a principal investigator of MIT’s International Motor Vehicle Program (IMVP). His research focuses on supply chain management strategies in the automotive industry, in particular focussing on order fulfilment strategies and responsive manufacturing systems. Nick Oliver, M.A. Ph.D., is a Professor at the Judge Institute of Management, University of Cambridge, and co-director of the Cambridge-MIT Institute’s Centre for Competitiveness and Innovation. His research interests are high performance manufacturing and the new product development process, with a particular reference to the motor industry. 1 Introduction MG Rover, the last UK-owned volume car manufacturer, passed into administration on 8 April 2005. W ithin days, 5,100 of the 6,000 workers at Longbridge, the company’s last remaining assembly plant, were issued with redundancy notices. Rover collapsed after a possible £1.2 billion deal with the Shanghai Automotive Industry Corporation (SAIC) fell through. Almost immediately there were allegations of mismanagement and dubious financial deals by Phoenix Holdings, MG Rover’s owners since 2000. In this report, we seek to address two main questions: W hat are the reasons for the collapse of MG Rover, and who (or what) was responsible for Rover’s terminal decline? To answer these questions we examine four interpretations of Rover’s collapse. These are: ° Rover’s lack of economies of scale, which made the company too small to compete globally in an industry where economies of scale are crucial. ° Rover’s inability to develop models that were able to be sold at sufficient levels of price and volume, aggravated by lack of consistency of brand and purpose. Even if Rover had had better models, would it have been able to command the levels of price and sales that they deserved? ° Inadequate manufacturing capability, so that even if Rover’s models had been competitive it lacked the ability to make them to an adequate standard. ° Rover was a viable business that failed due to incompetence or malpractice. W e first provide a brief history of Rover, and then move on to look at the reasons behind the company’s demise. W hat is clear from this analysis is that the seeds of destruction were sown decades ago, although there were key junctures where a very different outcome may have resulted had different choices been made. 2 A Brief History of Rover Rover’s history has three main phases. These phases follow the classic product or technology life cycle identified by authors such as Utterback (1994). The first phase was roughly 1900-1950. During this period, what is now MG Rover was actually a multitude of independent companies – Alvis, Austin, Morris, Rover, Riley, Triumph, W olseley and others. 3 Like most sectors, the auto industry followed the classic technology life cycle exhibiting many new entrants, and competition between different designs and technologies, in the early years of its life, namely the late 1800s and early 1900s. Following the invention of a new product or technology, new entrants proliferate as companies are formed, or existing ones bid to enter the new area, all eager to get a foothold in the developing market. This is sometimes known as the ‘era of ferment’. Often these hopefuls compete on different base designs or technologies, but over time a dominant design usually emerges (four wheels, front engine, monocoque steel body in the case of cars). There then follows a period of consolidation as firms who backed the wrong designs or technologies go to the wall or withdraw from the market. Issues of production efficiency, product quality, and the ability to bring appropriate new and updated products to market in a systematic way then typically become critical success factors. Depending on issues such as the scale, variety and complexity of markets and/or technology, only a fraction of those who initially enter a market will remain there. This is graphically illustrated in the auto industry, where in early part of the 20th century there were hundreds of producers (W omack, Jones and Roos 1990), but by the end of the century there were less than 20 players with a significant global presence, several of these trading under multiple brands. This consolidation was well advanced by the Second W orld W ar, but continued throughout the century. In the US, for example, the number of independent firms declined from 10 in 1950 (with 86% of production going to the ‘Big Three’: GM, Ford and Chrysler) to five in 1960 (91% of production to the Big Three); four in 1970 (97% to the Three), until by 1990 only the Big Three remained. MG Rover’s history reflects this pattern. From 1950 to 1970 there were successive mergers and attempts at consolidation as efforts were made to build a British automotive company capable of holding its own in the world in the image of the lines of US multinationals, with Ford in particular serving as a model. In Rover’s case, this took the form of a cycle of integration into a large entity comprising of the majority of British car manufacturers under a single umbrella, first called the British Motor Corporation (BMC) and then the British Leyland Motor Corporation (BLMC). This consolidation occurred over a period of nearly 20 years and was complete by the early 1970s. However, it endured for scarcely a decade, after which there was a gradual disintegration, in which key brands were split off, privatised or sold to other car companies. Appendix A presents a detailed chart of Rover’s ‘family tree’ showing this process. 4 Thus, the Rover car company has not one, but many different starting points. Rover itself was established in 1877/8, in parallel to other makers such as Triumph, Austin and Morris, all of which were established between 1885 and 1915. The first ‘Rover’ was a tricycle manufactured by Starley & Sutton Co. of Coventry, England in 1883. In the late 1890s the company was renamed the Rover Cycle Company Ltd., and three years after Starley's death in 1901, the Rover company began producing automobiles with the two-seater ‘Rover Eight’. Bicycle and motorcycle production continued until the Great Depression forced the cessation of production in 1925. Automobile production resumed in 1947, following the Second W orld W ar, and the company began producing the Land Rover in 1948. The Longbridge plant did not originally belong to Rover, but to Austin. In 1905, the Austin Motor Company was formed by Herbert Austin at Longbridge, a former print works in Birmingham. In 1922, the hugely successful Austin Seven was launched, and by 1946, over a million Sevens had been produced. In 1952, Austin and Morris joined forces, and formed the British Motor Corporation (BMC), the idea being to create a British car manufacturer to rival Ford. The merger was largely forced upon the two companies by the British Government, amidst considerable dissent and animosity between Austin at Cowley and Morris at Longbridge. This rivalry impeded efforts to build a single company to match Ford, and as we shall see, lingered on for many years. However, BMC pioneered a number of enormously influential innovations, such as, in 1959, the Mini. This was launched by Austin and designed by Alec Issigonis, who had also designed the Morris Minor. The Mini was the first car to combine front-wheel drive and a transversely mounted engine using continuous velocity joints in the drivetrain.