Quotes of the Day
It seemed like anywhere you looked last week, there was a major car company in crisis. Britain's MG Rover was the worst off. On Friday, with its already-meager sales sliding, its cash depleted and its last hope for an 11th-hour rescue by a Chinese buyer seemingly dashed, the four Birmingham businessmen who owned the outfit handed it over to administrators from accounting firm PriceWaterhouseCoopers. Some 6,000 workers at Rover's Longbridge factory in Birmingham fear for their jobs, despite British Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown racing to the plant, promising a massive aid package to mitigate the damage.
Just two days before, DaimlerChrysler chief executive Jürgen Schrempp faced a Berlin conference hall teeming with disgruntled shareholders. They attacked him for the company's biggest ever recall, announced on March 31, which will pull 1.3 million Mercedes-Benz cars worldwide back into the garage because of problems with voltage regulators, faulty software and defective braking systems in some models. They attacked him because Daimler announced it would take a €1.2 billion charge in 2005 to restructure its struggling Smart mini-car unit, which hasn't made a profit since its 1998 launch. And they attacked him for what Thomas Maier, fund manager at Union Investment — Germany's third largest investment fund, which holds some 500 million euros' worth of Daimler shares — called "serious management mistakes."
In the U.S., Moody's cut its rating of General Motors' debt to just one notch above "junk" status — a once unthinkable position for a company that for years was synonymous with American manufacturing muscle. Chief executive Rick Wagoner announced he would personally lead the firm's efforts to turn around its struggling North American operations. Collectively, Rover, Daimler and GM have sold hundreds of millions of cars over the years. Their current difficulties have very different origins, and will likely have very different resolutions, but they are signs of the challenges facing the industry as a whole. At a time when competition is fierce, margins are tight and customers are increasingly discerning, carmakers must control costs and innovate even more aggressively if they're to thrive.
The demise of Rover, the last British-owned mass car manufacturer, is perhaps inevitable. Bailed out repeatedly by successive British governments, the firm long failed to control its labor relations or its costs, and the quality of its cars was so uneven that they became the butt of national jokes. There was a glimmer of hope in the 1990s, when the firm was acquired and run by BMW. The German luxury automaker invested in a new premium model, the 75, but it didn't sell well. Jay Nagley, managing director of British consultants Spyder Automotive, says it was beautifully engineered, "but too Old World. It was a German engineer's idea of Britishness."
In 1999, its last year under BMW's ownership, Rover manufactured 225,000 cars. In 2000, BMW sold it for the equivalent of $15 to four Birmingham businessmen whose firm was optimistically called Phoenix Venture Holdings. Their idea of a great car: the MG SV, introduced in 2002 with a starting price of $120,000. Only about 50 have been sold. Garel Rhys, an automotive expert at Cardiff University Business School, quips: "It's the yeti car. Everyone's heard of it, but no one has seen one." Last year, overall MG Rover sales were down to just over 100,000, less than half what the firm needed to break even.
BMW invested more than $4 billion in Rover, but even the firm's smartest and most successful engineers and marketers failed to turn the company around. That, argues Peter Schmidt of Britain-based consultants Automotive Industry Data, is at least in part a sign of the innate fragility of auto brands. "Image is very, very significant in this business," Schmidt says. "Once your image is badly damaged, you can come up with the most wonderful car and people still won't buy it."
The Daimler people are hoping that won't happen to them. The troubles at Daimler follow years of restructuring after the 1998 merger of Daimler and Chrysler, and persistent quality problems at the Japanese commercial-vehicle subsidiary, Mitsubishi Fuso Truck & Bus Corp. But quality is what the Mercedes brand is especially known for, and that's the area where the firm is hurting itself most. Customer complaints prompted the record recall, and even German taxi drivers are switching allegiance. Since 2001, Mercedes' share of new taxi registrations in Germany has fallen to around 50% from 70% as rivals like Volkswagen, Nissan and Renault have gained ground. Union Investment's Maier said to loud applause in Berlin's convention hall: "If you want to produce premium products at a premium price, you have to pay attention to quality."
Schrempp knew he had to take his lumps. "Quality is one of the strengths that made Mercedes-Benz big. We are aware that in the recent past we have had problems," he acknowledged. But he said that over the past three years Mercedes has actually improved quality, and he's
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Some Daimler divisions have proven it's possible to turn the corner, as have other carmakers. Overall, conditions are tough, though. The industry is plagued by overcapacity and price wars. PriceWaterhouse- Coopers estimates that, despite growing demand from emerging markets such as China, manufacturers have the capacity to build about 20 million more cars annually than they currently produce. But Mercedes' German rivals in the luxury class, BMW and Audi, are thriving, as are several mass-volume Japanese manufacturers, including Nissan. And Renault, for one, is a prime example of an automaker that's reinvented itself. It took years for the formerly state- owned French company to shake off a reputation for shoddy quality it acquired in the 1980s. But thanks to a series of attractively designed cars, and aggressive cost cutting to ensure they could be sold at both profitable and reasonable prices, the firm has rebounded. Renault earlier this year reported record profits, boosted in part by the runaway success of its Megane car. Last year, it introduced a new low-cost auto, the €5,000 Logan, that is aimed at a completely new audience: middle-class consumers in places like Eastern Europe and Latin America. "Renault still sometimes produces dogs that don't sell, but it's innovative, and people want to buy its cars," says consultant Schmidt. It may be too late for Rover, but finding the right mix of quality, design and marketing is critical to keeping the industry's biggest brands on the road.
- PETER GUMBEL
- What Europe's carmakers need to do to get out of trouble — fast