International -- European Business: Germany
Overhaul at BMW (int'l edition)
BMW's new CEO must revamp Rover and avoid takeover, too
Billionaire Johanna Quandt, 72, abhors publicity. The matriarch of the German family that owns 46% of luxury auto maker BMW rarely ventures from her fortified villa near Frankfurt and socializes only in exclusive circles. Her two children, Susanne, 36, and Stefan, 32, are equally keen to stay out of the public eye. Fear of kidnapping and blackmail is a key reason.
But the Quandts are finding it hard to avoid the limelight these days. The younger generation, both with business-school degrees, replaced their mother on BMW's supervisory board in May, 1997. They kept a low profile at first. On Feb. 5, they held a special board meeting to discuss why British carmaker Rover Group Ltd., which BMW bought in 1994, is still hemorrhaging money. Eight hours later, Chief Executive Officer Bernd Pischetsrieder had resigned, and so had his heir apparent, Wolfgang Reitzle. A virtual unknown, Joachim Milberg, was unexpectedly named CEO.
The Quandts' loss of patience after pouring capital into Rover for five years puts BMW on notice. Milberg has just a few weeks to come up with a strategy for stemming losses at the beleaguered British company, which is estimated to have lost at least $1 billion last year. By the time BMW reports its results on Mar. 30, Milberg and his team must decide what to do about Rover's aging midsize passenger-car models, which are still based on technology from former owner Honda Motor Co. The choices: Ditch the line, design a replacement, or cut costs by sharing Rover's platform technology with a partner.
That decision will be critical to BMW's future. Although the carmaker saw estimated profits of $668 million in 1998 on sales of $36.5 billion, Rover has been a drag on earnings from the beginning. And the younger Quandts may be less tolerant than their mother. If Milberg can't succeed where Pischetsrieder failed, they could even put BMW on the block. They have already received offers, including one for a stake of 25% from Volkswagen last year, which they declined via a terse media statement.TOUGH JOB. The Quandts still insist they want to keep BMW independent. "BMW is not for sale," declares family spokesman Thomas Gauly. Yet the ouster of Pischetsrieder signals that the young Quandts are closely scrutinizing the return on their investment. Stephen Reitman, auto analyst with Merrill Lynch & Co. in London, calculates that BMW could fetch at least $28 billion. The No. 13 carmaker worldwide in terms of unit production, BMW has sales in 130 countries and would be a jewel in any rival's portfolio. And BMW's stock has surged since the boardroom upheaval, as if investors believed the company were in play.
Saving BMW from a buyout would be a daunting task for any new CEO. Many wonder whether Milberg has a deadline for turning Rover around. And company policy dictates he will have to retire in four years, at age 60. Yet investors and insiders have given their vote of confidence. An unassuming former academic who has been with BMW only since 1993, Milberg was on the management board in charge of production, like Pischetsrieder before him. Under his watch, productivity has risen 60%, and last year, BMW's three German plants were ranked as Europe's top three for quality.
If nothing else, Milberg's appointment puts an end to a long spate of bickering over Rover strategy. Pischetsrieder favored an arm's-length approach, while his No. 2, Reitzle, argued that BMW should take tighter control, concentrate on Rover's profitable lines, such as the Land Rover and Mini, and ditch the midsize Rover in favor of putting the BMW brand name on smaller, less luxurious cars. The management board backed the CEO, but many welcome the clean slate at the top. "Now that they have removed the personality warfare, they will be able to take rational decisions," says Kumar Bhattacharyya, professor of manufacturing at the University of Warwick.
None of Milberg's options is risk-free. One would be to shut the decrepit 93-year-old Longbridge plant near Birmingham, England, and discontinue the Rover 200 and Rover 400 midsize cars made there. John K. Lawson, analyst with Salomon Smith Barney in London, says such a move could add 15% to BMW group profits. But with 14,000 employees on the plant's payroll and 50,000 additional jobs depending on it, this would create a political uproar in Britain. BMW is said to be asking for $330 million to $500 million in aid from the British government to keep Longbridge open.
An alternative would be replacing the 400 with a new Rover. The trouble is, Rover's design capabilities were weakened during the four years Honda was in charge. But auto analyst Peter Schmidt, editor of Automotive Industry Data newsletter, thinks Rover could take greater advantage of BMW's development experience and find synergies with the BMW brand in replacing the 400.ANGRY HONDA. Or, BMW could find a partner and share the Rover platform in exchange for licensing fees and production capacity. "There is a long list of people who could help with Rover," says a London-based investment banker who represents an interested carmaker. Honda makes sense, but it is still too angry at BMW for buying from British Aerospace the 80% of Rover that Honda didn't own. Volkswagen could license its Golf platform, perhaps in exchange for the rights to the Rolls Royce name that BMW owns and that VW Chief Executive Officer Ferdinand Piech so desperately wants.
A U.S. partner could step up, too. Ford Motor Co., for one, has ample auto-making capacity in Europe, and CEO Jacques Nasser is willing to make it available for platform-sharing with BMW. "We like partnerships on components and systems," he says. "So we would not be averse to that."
The Quandts, Gauly says, are leaving that decision to management. Although they hold large stakes in a food and drug maker, an auto-parts company, and a battery maker, their attention to BMW suggests the carmaker is closest to their hearts. After supplying engines to the Luftwaffe, BMW tried to regain its prewar pizzazz as a sporty carmaker but nearly went bankrupt in 1959. To avert a bid from Daimler, which wanted to turn it into a truckmaker, the Quandts boosted their small stake to 26%, gained control, and backed the BMW 1500, which debuted in 1961 and pointed the company in the luxury-car direction.
Yet if the Quandts ever do put BMW in play, there are plenty of eager suitors. Besides Volkswagen, Ford is interested, and it still has a $17.4 billion cash hoard after beating Fiat to acquire Volvo's car business. Says Ford CEO Nasser: "We never say never. But when a company the stature of BMW says it wants to be independent, you have to respect that."
The upheaval has certainly put two of Europe's best auto executives on the market. "If you don't win the whole company, go buy Pischetsrieder," advises Maryann N. Keller, analyst with ING Baring Furman Selz. But the world auto industry is deep in the grip of merger mania. The spotlight that turned on Milberg during the boardroom marathon and the takeover buzz from industry watchers won't fade unless he delivers.By Karen Lowry Miller in Frankfurt, with Keith Naughton in Detroit and Heidi Dawley in LondonReturn to top