Under the watershed agreement, BMW will supply Rolls with its V-8 and V-12 engines for Rolls and Bentley models slated to go into production around the turn of the century.
BMW will permit the engines to be further engineered to meet Rolls' unique needs, such as a for a turbocharged V-8.
The British maker's current 6.75-liter, Buick-derived engine family needed to be replaced by the end of the century to meet more stringent environmental regulations.
Rolls said it also is considering choosing BMW to supply other components, such as transmissions now supplied by General Motors. BMW already supplies body stampings to Rolls through Rover Cars, the British carmaker it acquired earlier this year for about $1.1 billion.
The Rolls-BMW deal came after a year of negotiation in which Rolls-Royce also flirted with Mercedes-Benz AG. The pact relieves Rolls of the burden of trying to raise the hundreds of millions of dollars required to develop a new family of engines.
That money can now be used for the critical task of developing the successors to its aging lineup.
The company will shut its engine plant at Crewe in northwest England, but Rolls said the 400 workers there will be retrained to work in other areas.
The first generation of BMW-engined, four-door Rolls-Royce models is not likely to be ready for another six years. But a BMW-engined Bentley Java, the concept coupe that stole the Geneva show last March, could appear before then.
Rolls-Royce parent Vickers PLC, a diversified heavy engineering concern and military contractor, has considered selling the carmaker in the past.
But Vickers chief executive Sir Colin Chandler made clear last week that Rolls-Royce is not now for sale and that no equity stake will be offered in it 'for the foreseeable future.'
The engine deal with BMW is 'extremely significant' in planning a long-term strategy for Rolls-Royce, he said.
Rolls expects to sell 1,400 cars worldwide this year, essentially even with 1993, and down from a peak 3,330 in 1990.
But after posting an aggregate loss of some $150 million in 1991 and 1992 and only a small profit last year, the company is expected to earn $18*million to $20*million this year.