One automaker prides itself on engineering excellence. Another prides itself on its command of cost and process. When BMW AG merged with Rover Group six years ago, managers believed those strengths would complement each other and make for a strong marriage. But as BMW product development chief Wolfgang Ziebart explains, one united company must have one united culture. It was a difficult realization, says Ziebart, whose criticism of the Rover 75 sedan project helped trigger a management shake-up at BMW last year. Ziebart, who serves as general chairman of the SAE 2000 World Congress in Detroit, spoke candidly about the BMW-Rover merger at the 2000 Automotive News World Congress in Detroit on Jan. 18. Edited excerpts follow:
Being at the leading edge of management trends flatters those involved.
It usually creates excitement for the media. And the more expensive the trends are, the more valuable they are considered to be.
But after a few years, people begin to ask themselves what it was they used to think was so great.
Remember the diversified conglomerates in the '70s? Or the integrated technology corporations of the '80s? If they have not long since been taken apart by resourceful corporate raiders, they have at least undergone reorganization, which is usually a painful process.
If we are to believe the scenarios presented by investment bank analysts and some members of the business press, the latest thing in management is the need for growth through mergers and acquisitions.
A major business paper declared the year 2000 to be the Year of Mergers.
This is supposed to be particularly true in the automotive industry. If it is, only a handful of groups have any chance of existing on their own in this competitive field.
When KPMG analyzed major international mergers between 1996 and 1998, the results were sobering: 83 percent of the mergers did not produce any increase in shareholder value. And in 53 percent of the cases, the value actually fell.
Although some company managers have unwittingly become caught up in this merger mania, I think it is worth taking a closer look.
In my opinion, we at BMW definitely have something to say on this point.
By taking over Rover six years ago, we have gathered experience that many others still have coming to them. I would like to share with you some of this experience. I want to deliberately give you a view that deviates from the modern gospel.
I will then talk about what else a car manufacturer should do to prosper in the future.
As you all know, six years ago, the takeover of Rover by BMW was considered a stroke of genius.
Indeed, the acquisition of Rover was a perfect match with BMW. Rover covered the lower end of the market. Land Rover is the strongest 4x4 brand. BMW was not present in those segments at that time.
Unlike Rover, BMW has a strong international sales organization. This seemed to open up a big potential for Rover in the United States and Asia within a short period.
On the other hand, Rover's sales organization in the United Kingdom, Italy, Spain and France was an interesting basis for excursion in the lower market segments. Rover knew the rules of the mass market while BMW had experience only in the premium segment.
The acquisition of Rover served to realize our multibrand strategy as a means of gaining access to new market segments, which the BMW brand purposely did not cover. The BMW brand and its clear, sharply defined image would have suffered from overextension.
With the Rover Group we acquired authentic brands rich in tradition - Land Rover, Mini, MG and Rover.
With this brand portfolio, supplemented by Rolls-Royce from 2003 on, the BMW Group has good opportunities of operating in nearly every market segment with perfectly suited brands and products.
Taken all these factors together, BMW and the Rover Group had a perfect fit on the macro level. And this was the reason why the takeover seemed so convincing.
Reality sets in
With the day-to-day work, however, friction in the organization appeared. We went into intense discussion about structures and procedures. Everybody was convinced that his way of doing business was superior.
We made the first important discovery: This kind of fit on the macro level is not enough.
What we neglected: Before a merger or an acquisition takes place, it must be absolutely clear what the combined enterprise will look like. Where and what are the synergies and why does the combined enterprise add more value to the market than the single ones?
Initially, we had kept both organizations separate in order to secure the brand identities and prevent only BMW-style vehicles coming from the new company.
Decisions took much longer than before, although clear formal structures and responsibilities had been established.
This was our second experience: We overestimated synergies to be achieved and by far underestimated the increase in complexity of the combined new business.
When we break the problem down, we find that it had several dimensions.
Take the often-quoted synergies in purchasing.
We began with two companies that each had independent product ranges. With the exception of a few standardized screws, clips and small parts, there are hardly any shared parts that would lead to purchasing advantages. A complete renewal of the model range is necessary to exploit these opportunities, which takes seven to eight years.
The short-term effect was only an increased purchasing power when dealing with mega suppliers.
Nor can mergers be expected to bring quick savings in the sales area. Sales networks are tailored to specific turnover volumes and specific target groups.
Neither of the two networks is rendered superfluous by a merger or acquisition.
Despite the fact that the rapid consolidation of wholesale functions is announced with every merger (we did it, too), ultimately, efficiency increased only slightly.
This should not come as a surprise.
In today's world, every stage in the logistical process, from the supply of parts to the delivery of the vehicle, is controlled by information processing systems that can't be replaced overnight.
Germans and Brits
The increase in complexity, however, resulted in paralysis and delays in decision-making, confusion in joint coordination processes, and a lack of understanding for the partner's targets and methods.
We blamed 'cultural differences' between Germans and British for this. We went in for cross-cultural training programs to learn about the differences in British and German management styles.
So this is our third experience: The key problem is not cultural differences. It is differences in the main driving force in the organization.
In any organization, there is one main driving force that determines everybody's thinking and actions. BMW is a very strong product- and technology-oriented company. The Rover Group was more process- and cost-oriented.
When preparing a merger you have to make a fundamental decision: If you want to continue with two different corporate cultures, there is little room for synergies. If you want to fully exploit the potential synergies, one of the cultures has to vanish.
You all know what followed.
After a renewal in the board of management, we had to recognize that the former principle - Rover leads Rover and BMW leads BMW - did not work. Rover was not strong enough to weather the storm.
Therefore, we decided to merge the BMW and Rover organizations completely.
Most of the functions in BMW now are in charge of the Rover business.
Degrees of success
The BMW organization, dealing with this challenge, has become much stronger than before.
When an organization is successful for a long period of time, like BMW was, it grows fat. During the past 12 months, we considerably improved efficiency in BMW also.
In the turnaround program at Rover itself, we achieved quite a lot. We outperformed nearly every benchmark we had. Within 12 months, we cut Rover's labor force by more than 20 percent, from nearly 40,000 people to less than 30,000. Within 12 months, except for the Mini, we replaced the whole product line of Rover cars with new models. We launched the new Rover 75 at BMW-quality level, and had the highest rate of climb in any launch in the company so far.
With this experience behind us, I think it is necessary to take a wider view on the subject of mergers in the automotive field.
We should answer the question: What are the conditions that an automobile manufacturer must satisfy today in order to be able to compete successfully in the future?
Much more important than the number of cars is market share in the specific segment. Economies of scale don't usually depend on absolute production figures, but on relative size within a given market segment. The segment defines the technological standards that more or less have to be met by each competitor.
Second, it's important to be a global player. This makes it easier to deal with regional fluctuations in demand and to avoid being dependent on individual markets. That means more than just selling cars in all the world's important markets. For BMW, it means having our own subsidiaries in 27 countries, having a development network that stretches beyond Germany and Great Britain to include bases in the United States and in Japan. It means buying production materials in more than 40 countries. We operate production and assembly plants for vehicles and engines, parts and components in 19 countries.
Finally, the fleet fuel consumption regulations in Europe will force us to enter the market for subcompact and micro cars. For manufacturers that have no experience in this market segment, taking over a competitor with a better average fleet fuel consumption might represent a feasible alternative.
When you consider these success factors, you can see the strategic foundation for our acquisition of the Rover Group in 1994.
The BMW brand alone fulfilled all the requirements in its segments on its own. But with the Rover Group and Rolls Royce brands, we gained even more opportunities to play the game of brands and segments.
Regarding the merger of two companies, we have learned our lessons over the past six years.