LONDON - BMW AG will stay the course for its troubled Rover subsidiary, with a new boss and a landmark labor agreement to save money.
Rover Chairman Walter Hasselkus resigned last week, confessing he had underestimated the 'fierceness of competition in the British market.' He will be replaced by BMW's Werner Saemann, an engineer by training.
BMW executives and labor leaders last week signed what they called a groundbreaking agreement that will save £150 million, or nearly $250 million, starting in 2000.
The pact, if approved by workers this week, will probably save Rover's largest plant, in Longbridge, England, and ensure production of several future Rover models. Those include the Mini; an unnamed medium-sized car that will replace the Honda-based 200/400 series; and a Range Rover sport-utility replacement.
BMW still faces a daunting task with Rover. That job is clouded by the continuing strength of the British pound, rising pressure to keep prices down in Rover's home market, and an aging product lineup.
Rover's problems have eclipsed record sales and profits of BMW brand products and helped drag BMW's share price down more than 40 percent since June.
'They're generating huge amounts of cash, but even that can sometimes be stretched,' said John Lawson, analyst for SalomonSmithBarney in London. 'They're trying to build this new company amidst fears pricing is really cracking in the U.K. market.'
BMW has chosen to invest its way out of the Rover problem, said Lawson. That decision will require much courage on the part of Chairman Bernd Pischetsrieder and his fellow managers in Munich.
Since buying Rover in 1994, BMW has spent between $825 million and $990 million annually on its subsidiary. New products, including the successful Land Rover Freelander sport-utility, have paid off. BMW hopes the new Discovery and the important Rover 75 sedan, which is due in dealerships next spring, also will be successful.
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Despite its investments, Rover faces a future of continued losses while it waits for new volume products to come on line. A Merrill Lynch report predicts Rover will sustain a $296 million pretax loss this year, nearly double the previous estimate. BMW has blamed the problem on the strong pound, and analysts concur.
'The strength of the British currency creates a double straitjacket for Rover, constricting its competitiveness and margins in overseas markets while hitting volumes in the U.K. as its European rivals such as Renault and Peugeot are able to significantly undercut it and still make windfall profits,' said a recent Merrill Lynch research report on BMW.
BMW has partially offset this loss through strong BMW brand sales in the United Kingdom, the report continued.
The deal Rover negotiated with its unions calls for a 35-hour workweek and flexible working arrangements similar to those BMW employees have in its German plants.
BMW previously asked for concessions from the British government - thought to be worth about $330 million. Last week Pischetsrieder stopped short of committing the company to further investments if that windfall does not come through.