The collapse of MG Rover should teach us some serious economic lessons, says Nick Matthews
In 2000, I appeared on a regional television programme to talk about the prospects for MG Rover under the stewardship and John Towers and his fellow members of the Phoenix consortium. I said that British Aerospace, one of the world’s largest engineering businesses, could not make
MG Rover a success and nor could BMW, one of the world’s best car-makers. So I thought there was little prospect that men from Birmingham with a massive overdraft could make a go of things.
As things turned out, I was both right and wrong. I was certainly right about their chances of building a successful car-making firm. However, I was mistaken about their need for an overdraft. BMW’s largesse meant the “Phoenix Four” made a great deal of money out of the business for themselves, if no one else. According to the recently published report into MG Rover’s failure, the four men took £42 million out of the company without taking any risks whatsoever.
Incredibly, they burned their way through some £2.5 billion. To receive an inheritance from BMW of around £1.2 billion in assets and cash and turn it into a loss of £1.3 billion really takes some doing. As a result, approximately £5 billion has been lost to the regional economy and the Midlands has been left reeling. Add to this the closure of the Peugeot factory near Coventry, the collapse of LDV in Washwood Heath and now the threat to one of Jaguar Land Rover’s plants and it is no wonder that the West Midlands is the biggest national unemployment black spot.
It now seems that, unless there is a dramatic change in Government policy, the West Midlands has little future in automotive manufacturing. This is the result of a series of calamitous decisions. Handing MG Rover to the Phoenix Four on a plate was just one of them.
The death sentence on Longbridge was actually pronounced in 1988 when Margaret Thatcher’s Government sold the Rover Group to British Aerospace. BAe – as it was then – had no real interest in volume car manufacture, but it did have an interest in Land Rover. And at least, given Rover’s engineering weaknesses, BAe had the sense to form a partnership with Honda.
In 1994, the business was sold to BMW for £800 million. Since BAe had bought the company from Her Majesty’s Government for just £150 million, this meant a substantial profit – in theory. However, one suspects that BAe executives were not sorry to be rid for of MG Rover. BMW’s purchase of it was seen as a defensive action. BMW itself was being threatened with takeover and strategic acquisition was necessary to bolster the company.
The rest, as they say, is history. BMW could not make any money from Longbridge. Despite investment in new models, in the form of the Mini at Cowley and the Range Rover at Solihull, the wrong product at the wrong time was given to Longbridge. The Rover 75 came too late to save the plant.
This, too, was partly the fault of Government policy. For many years, cars of this type were bought by firms as a perk for some of their employees. The structure of company car taxation enabled them to do this. Britain’s motorways at the time carried numerous Vauxhall Cavaliers, Ford Cortinas and big Rovers – all looking much the same. When the tax benefits disappeared and people started making their own car choices, the trickle of hatchbacks from mainland Europe became a flood. Dagenham, Luton and Longbridge were left to build cars no one wanted any longer. Unlike Rover, Ford and GM could bring models into Britain from their plants elsewhere in Europe. Their British plants were doomed.
What, then, are the lessons of this sorry tale? First, an active, long-term industrial strategy for any responsible government. Most economies of Britain’s size try to maintain a mixed economy, in terms of services, manufacturing, energy and agriculture. This requires more than supply side initiatives or high spending on science. It necessitates a fiscal policy that favours investment over short-term speculation and ensures access to markets that are big enough to support large-scale enterprises.
It is not just since Gordon Brown gave the Bank of England its independence that the economy has been run in favour of the money lenders. However, the way the Bank of England’s monetary policy committee operates does not help. The members of this committee do not have to take into account the effect of their decisions on investment or the value of the pound.
High interest rates have made it harder for businesses to invest in this country and an uncompetitive exchange rate has made it more difficult for firms to export. The strong pound has a made harder for us to export but easier for those in the eurozone to sell us their products. This is not necessarily an argument for joining the single currency – although doing that would help us. However, if we continue to stay outside, we need – at the very least – a more competitive currency.
Second, ownership is crucially important. The Tory Government should never have handed Rover over to BAe. The laissez-faire approach to the ownership of major businesses in Britain will come back to haunt us. Compare, for example, the French government’s approach to Renault. Here was a company that made a popular small car, the Renault 5. Like Austin Rover it could not make money out of manufacturing an otherwise successful product. When Renault got into financial difficulties in 1984, the French Government stepped and nationalised it. After making a huge investment in Renault and in its suppliers, and completely restructuring the company, the French Government returned it to the private sector in 1996. But – and this is the telling point – the French Government still maintains a 15 per cent stake in Renault.
Further, three members of the main board are elected by Renault employees and another is elected by employee shareholders. Such a board structure means that four directors could never run off with the workers’ redundancy money and pensions.
At the end of 2008 Renault had produced 2,382,230 cars and was employing 129,068 people. Meanwhile, weeds were growing through the rubble of Longbridge.
Third, manufacturing can only survive as part of a more general technological economy. Britain prides itself on its excellence in science. However, science by itself does not necessarily generate wealth. Scientific breakthroughs are easy to copy because they are published. That means even Iran can split an atom or put a satellite into orbit.
Money is made from technology. There is little new science in mobile phones, computers or modern cars. There have been developments in new materials and miniaturisation, but much of the science in modern products is half a century old.
What we need for a vibrant manufacturing economy is a network of small and medium-sized technology businesses. These are the firms that are the first to exploit new materials and new technologies. Governments spend a lot of money on science, but also need to support the development of small technology businesses.
Fourth, we do not need any more engineers or more children doing more engineering or science in school. What we do need is more demand for engineers. A manufacturing economy is driven by investment. New investment drives the development of new products and new product development drives research and development and the acquisition of new skills.
Too many businesses have learned only half the lesson of Japan’s philosophy of “lean manufacturing”. Obviously, if you have a successful product and want to maximise profits, the pressure is to keep costs down. But any long-term, successful business also needs a constant stream of new products. Too many engineering and manufacturing businesses in this country are simply too lean. They have little or no new product development and, as soon as their product base gets stale, they get taken over or close down.
Fifth, there is serious need for changes to company law – particularly with regard to structures. It is a mystery why the trade unions, which made such serious efforts to secure MG Rover for the Phoenix Four, did not demand at least one seat on the board.
There are also major issues concerning the laws on insolvency and pensions. In retrospect, it would have been better if Longbridge had been shut rather than given to Phoenix and BMW’s dowry used to pay off the suppliers and the workforce. It can never be right for directors to be able to walk away with impunity as millionaires and at the expense of their suppliers and workers.
Finally, though, it is never too late. South Korea and the other Asian tiger economies developed as manufacturing nations from next to nothing. Britain can be better at manufacturing and that would do wonders for our trade balance and the economy in general. It would also be good for our society. The collapse of manufacturing has huge social consequences. It makes our country and our society less equal and more divided.
So let us hope this is not just another chapter in the history of the decline of British industry. Manufacturing does matter and an active government can make a genuine difference.
Nick Matthews is a lecturer at Coventry University
