The 'gang of four' who run MG Rover cast themselves last week as saviours of the last British mass producer of cars. John Towers, chairman of Rover's parent Phoenix Venture Holdings (PVH), dismissed MPs' accusations that the quartet were guilty of financial sleight of hand by turning themselves into millionaires through methods such as a special £12.9 million directors' trust fund.
Towers said the four - himself, his deputy Peter Beale, Nick Stephenson and John Edwards - had saved 6,500 jobs at the firm's plant at Longbridge in Birmingham in 2000 by putting their hands in their pockets.
But if Towers is right and the company is not a self-enrichment scheme, what is it for?
The view outside the company is confused. Martin O'Neill, the Labour chairman of the House of Commons Trade and Industry Select Committee, which grilled Towers and Beale last week, says: 'Once you strip away the accusations that have focused on their making money, you have to say that there are some very serious and basic questions to be raised.'
Towers himself said: 'Every single process we are engaged in should be to the benefit of Longbridge, not to the detriment of Longbridge.'
Longbridge is certainly central, and not simply as the firm's only manufacturing plant and centre of employment. It defines its ownership, since the employees who work there are also shareholders in the car making business.
And it has important emotional significance. The threat of massive redundancies galvanised support among unions and MPs for Towers and led the previous owner, BMW, to sell to him.
Last week Beale dismissed accusa tions that valuable businesses had been separated from the lossmaking Longbridge car making operation to enrich PVH and to protect them should it hit the rocks. Ninety per cent of the cash generated by these companies, said Beale, was transferred to MG Rover at the end of each year. At the end of 2002 PVH had £315 net cash, largely the result of a £427m BMW 'dowry' and the stockpile of 40,000 cars it inherited. He added that since 2000, £460m had been invested in engineering work at the plant.
Professor Garel Rhys of Cardiff University Business School says proof will come with future sales. 'You cannot compare them with multinationals, so if they are able to bring a new car to the market place successfully then it [investment] has been [adequate]. If not, it hasn't.' As for defining 'benefit of Longbridge' as 'benefit to the workforce', directors argue that they still have jobs. It is four years since the takeover and the workforce has declined, rather than increased, to 6,250 direct employees. Longbridge workers got pay deals of 2.5 per cent, 2.2 per cent and 2.7 per cent in the past three years.
These workers are shareholders, but not in the same way as Towers and his co-directors, who have shares in all PVH companies, which, for example, make engines, and own deal erships - plus the separate MGR capital, which owns the company's loan book. The workers' shares are in the car, parts, property and racing businesses. But they carry no voting rights, are not tradable and have no market value. No dividend has been paid to employees. In the words of O'Neill they are 'meaningless'.
Looking ahead, Towers said the aim was to develop a series of joint ventures to produce existing and new models in such countries as Poland, China and Malaysia, where labour is cheaper and car sales are growing fast. It is involved in talks in all three countries.
MPs and the unions have deep suspicions about whether an international strategy stretching from Eastern Europe to the Pacific is feasible, or is intended to benefit the plant and livelihoods of 6,250 West Midlands car workers. Suspicion is focused on Rover plans to build its flagship 75 model in Poland if negotiations to take over a Daewoo plant in Warsaw are successful.
Towers said costs in Poland would be about 30 per cent of those in the UK, and he argued that getting close to growth markets is vital. 'It is virtually impossible to do business and sell cars in these areas unless you are involved in the manufacture of them,' he said.
Towers added that the benefit would not depend on, or be augmented by, displacement of Longbridge jobs, and that he would not import Polish-made 75s to Britain. 'It would be cheaper, but I am not sure it would be a good business decision.'
The unions are suspicious. Germany, as Towers said last week, has 'patriotic' consumers - but that has not stopped them buying BMWs made in South Africa. Moreover, fear the unions, the more dispersed MG Rover becomes in low-cost regions close to high-growth markets such as Poland and China, the weaker will be the logic for continuing to invest in low-growth, high-cost places like the UK. Ford stopped making cars at Dagenham, and General Motors did the same at Luton because they had more efficient plants elsewhere.
Duncan Simpson, of the union Amicus, says: 'We want to know what their intentions are as a matter of urgency. I can't see what the advantage is of taking production out of Longbridge and putting it in Warsaw. Are these cars really additional? They have a 4 per cent market over here. What kind of market are they looking for over there?'
However, Cardiff University's Rhys says there is logic to expanding abroad. By taking over Daewoo's Warsaw plant, which will put together 75s from semi-assembled kits and engines made at Longbridge, MG Rover would add production capacity near a new market without the expense of building its own plant from scratch on a greenfield site.'It would add scale without incurring major [cost], and it is intended to strengthen the main economics of Longbridge.'
The same imperative for minimal investment and maximum return also applies to longer term investment. Towers explained that, despite receiving the Longbridge assets and the BMW dowry, MG Rover alone couldn't produce new models, which can cost up to £1bn.
Yet developing them is crucial. MG Rover would break even by selling 180,000 vehicles a year, but the total now is only around 145,000. Meanwhile, the car maker acts as a significant drag on the rest of PVH. Its losses have fallen dramatically, but they still total more than £500m since 2000.
The immediate outlook is not good. MG Rover will not reach 180,000 sales this year. The dowry is being whittled away on operating expenses and developing a new model. Cash from a successful new launch is essential next year. Some £100m has been spent on upgrading the 75 platform for a new medium car, the Rover 60. If all goes to plan, it will sell 120,000, pushing total sales to more than 250,000.
Even a successful 60 does not solve things, however. Volume producers constantly churn out new models, each one lasting four or five years. Rover needs partners to develop these, preferably including a micro-mini with potential spins-offs such as a mini people carrier, says Rhys. Its first joint venture is to import 10,000 Indian Tata minis a year and rebadge them as City Rovers. But this is a stop-gap. Rover is now negotiating in China and Malaysia. Towers says the Chinese talks are the most important - massive growth could soon make it the world's second-biggest car market. But last year, negotiations with China Brilliance, which would have led to the joint research, development and production of vehicles, fell apart. The current talks are with other firms, thought to include the Geely group, which has 3.4 per cent of its home market.
Likewise, MG Rover's chief executive, Kevin Howe, was in Malaysia last week, talking to Proton following a letter of intent to collaborate on two new models.
Rhys says joint developments could benefit Longbridge. 'The plan with Brilliance was to share the development costs as they went along [it is unclear how this could work] and to have production in China and at Longbridge.'
But O'Neill is sceptical. 'They have reduced output, despite having variations on different models. Some deals look like ways of producing more existing cars, and they have something a stage beyond that, but it is only a concept. There is no sign of a partnership to develop new ones, or a partnership to increase sales.' Proton, he says, refused to meet his committee on a recent trip to Malaysia. Not a good omen, he says.
Financial form of Phoenix still unclear
So why does the suspicion over Phoenix's finances persist? First there is the cash. According to Phoenix Venture Holding's 2002 accounts, a £12.95 million trust fund was set up last year for the directors - chairman John Towers, deputy Peter Beale, and co-founders Nick Sephenson and John Edwards.
On top of their annual remuneration of £3.7m, this took their 2002 earnings to £15.1m. In addition, they benefited from shares in a £10m loan note, which generated payments of £2.5m to each of the original four. The total they received in the first two years and eight months of running the company was £21m. In that period, MG Rover lost £370m in 2000, £187m the following year and £95m in 2002.
Beale concedes that the trust arrangements and loan notes make him and his co-directors very well paid. But he argues that far from paying a mere £10, the directors put in £60,000 each at the outset and later invested £500,000 each in MGR Capital, the owner of the MG Rover loan book which they now co-own with HBOS.
Beale argued that the investments represented significant personal risk and would have led to 'personal devastation' if things had gone wrong. The second reason for lingering suspicion is that the structure of the company has changed dramatically, with critics alleging that valuable parts of the business once linked directly to MG Rover now benefit PVH (controlled by the four) and not the car maker.
Examples include the Xpart components company; the Powertrain engine business, bought separately from BMW; property interests; the Studley Castle conference Centre; and MGR Capital. All have performed rather better than the car business.
Meanwhile, MG Rover is charged interest on working capital provided from PVH. Conversely, if MG Rover is forced into closure, the PVH assets will be protected. Beale, however, argues that cash generated by these businesses is channelled back into the MG Rover car operation.
The third question mark is over the share structure. Longbridge employees were given shares in the company at the outset. These relate only to the car, parts, property and racing businesses, and carry no voting rights. These stakes in the business were described by Trade and Industry Select Committee chairman Martin O'Neill as 'meaningless share certificates', held by people who were now excluded.
Their fate, should MG Rover not succeed, is less certain than that of its directors.
