Why did BMW sell Land Rover?
In this, the latest in an occasional series of articles on the BMW-Rover affair, I address the matter of BMW's sale of Land Rover to Ford.
You will recall that I have claimed that the main reason for the BMW purchase of Rover was to gain control over the Land Rover operation. Why then did BMW sell Land Rover to Ford?
Of course, at the time that they announced the sale, BMW said that Land Rover was making a loss. Now that all depends on what you define as a loss. If you want to make cars, you must be prepared to spend vast amounts on development and also on building the tooling and other facilities required to make the cars. A car manufacturer is able to use this expenditure to manage its profitability to a much larger extent than many industries.
By writing off the value of tooling and developments at an accelerated pace, a company can cause part of its business to make a loss for a certain period even though it may be consistently profitable.
BMW also said that it felt that the Land Rover range would clash with its own new range of all wheel drive vehicles.
Personally, I find it hard to see how a BMW could ever go head to head with a Defender. Now it is easier to see how a Range Rover could go up against a BMW in somebody's purchasing decision. One interesting thing that comes from published market research is that people who purchase a Range Rover very often include the BMW 7 series or the Mercedes S-Class in their list of possible alternatives.
Well, if BMW would buy Land Rover despite the clash between the top models of both ranges, why would it then shy away from owning the company just because the Discovery might be seen as an alternative to a BMW based on the 5 series?
Even if there was a clash between the badges, it cannot be denied that Land Rover is one of the most prominent brands in the off road market. It regularly benefits from the sort of product placing and attendent free publicity of which most companies can but dream.
When the car buying public sees the news from Kosovo or Sierra Leone, they do not see the Royal Marines trundling around bandit country in a BMW. Not only is this particular product placment highly effective, it is also profitable as the product user actually pays for the product! Of course, the margins on military sales are not as attractive as those on retail sales but it you look at the British registered cars around any of the British military bases in Germany, you will quickly realise that there is a good supply of retail sales to military personnel for private use.
Finally, note that Ford have just paid several billion Pounds to buy Land Rover from BMW. Ford have no need of a loss making brand and also, they already produce an extensive range of AWD models around the world so it would appear that they do not share the opinions that BMW aired in public.
Well, how can I be right despite the fact that BMW have just sold Land Rover? Surely, only if there was a massively compelling reason for them to do so.
The reason is both simple and compelling. BMW have now lost so much money on the Rover cars operation that, unless they sold Land Rover, they would not have the cash to pay for future model developments!
As we all know, Rover cars was a real money pit, sucking up almost one billion Pounds each year and likely to continue to do so. That sum of money is about equal to BMW's new model development budget and clearly the point had reached where BMW's funds could no longer keep Rover going and pay for development of the core BMW models. Something had to go and that was why Rover cars was sold.
But, why sell Land Rover? Surely, BMW and Land Rover are both world class premium products and it should have been possible to raise finance from the banks or from a bond or even an equity issue?
The only reason for BMW to have turned away from that course is that they fear the loss of independence that would result. Clearly, selling shares would lead to a dilution of core shareholdings but at the other end of the funding spectrum, a syndicated bank load would still make BMW vulnerable to take over. Banks could always call the load in if they felt that circumstances merited it. For example, suppose that the banks felt that there was no prospect of BMW paying off the loans. They could threaten to foreclose unless BMW raised money through an equity issue that would allow the loans to be paid down.
Either way, raising new funds would put the current ownership structure in doubt over the long term. By selling, BMW put themselves back in a position where they can fund the developments needed to maintain themselves as a premium price brand.
It is interesting to note that, by their commitment to the losses at Rover over the last few years, BMW drove themselves to the brink of losing their independence. Only a real retrenchment back to their Bavarian fastness would do and so they have to sell the jewel in the Rover crown as well as the discredited car operation.
In the next article in this series I will examine the future for BMW.
Will they remain independent and, if so, what sort of a company will they be in the future?