One hundred years of volume car production at the Longbridge plant in Birmingham, UK, came to an end in April 2005, nearly five years after the sale of Rover by BMW. This article outlines the main events surrounding the collapse of MG Rover and the consequences for the local economy.
On 8 April 2005, MG Rover, the UK’s last volume car manufacturer, and Powertrain, the engines business, went into administration following months of speculation over a proposed deal with the Shanghai Automotive Industry Corporation (SAIC) (UK0502104F). PriceWaterhouseCoopers (PcW) was appointed as administrators for both businesses, which employed some 6,100 people between them. An estimated 15,000 further jobs at suppliers are also thought to have depended upon Rover, whilst the dealer network supported a further 8,000 people.
By the end of April, 5,500 job losses at MG Rover and Powertrain were announced following the final withdrawal of SAIC from negotiations. The deadline for potential bidders for all or parts of MG Rover passed on 13 May; however, the chances of reviving volume car production at Longbridge look bleak. The administrators confirmed that seven bids had been received for the MG sports car operation and five other bids for all or part of the business.
Breakdown of deal with SAIC
On 17 March 2005, Department of Trade and Industry (DTI) officials wrote to Rover and SAIC offering a loan and stipulating three conditions - that there was actually a deal, that the loan was repaid and that the directors of of Phoenix Venture Holdings (PVH), MG Rover’s parent company, contributed. They received a reply from SAIC on 19 March stating its four concerns: MG Rover’s solvency, the redundancy and pension costs, and the need for financial facilities. At the end of March, officials from the DTI flew to Shanghai with a pledge of a GBP 100 million bridging loan from the government. However, it emerged that the proposed government loan was allowable under European Commission rules but only if it was repaid in six months; SAIC’s worry over liabilities meant it wanted the loan to be extended for two years - until, it judged, the joint venture would be profitable.
Late on 6 April, SAIC’s adviser, NM Rothschild, contacted the DTI to say that the position had become 'extremely bleak'. The following morning, the BBC reported that Longbridge had suspended production due to a shortage of components after suppliers stopped shipments to the company because of the uncertainty surrounding its future. Later that day, Peter Beale, vice chair of PVH, urged the government to provide the loan immediately whilst the PVH directors offered to provide GBP 10 million of personal money 'to convince the government of our commitment'.
Tony Murphy, national officer for the automotive industry at the Amicus trade union, said: 'Talks are continuing at a very senior level and we are still hopeful that a deal can be struck. The problem is that some in the supply chain are panicking and this is having an effect on the delivery of parts. We would urge MG Rover’s supply companies to hold their nerve.' Later that day the door frames supplier Wagon Automotive issued a statement saying that, 'in view of MG Rover’s current inability to meet its payment obligations, [Wagon Automotive] has decided to suspend supplies to MG Rover with immediate effect'.
Later that evening, a surprise press conference was called at the DTI attended by Patricia Hewitt, the trade and industry secretary, and Tony Woodley, general secretary of the Transport and General Workers’ Union (TGWU) where it was announced that MG Rover had called in the receivers. Initially MG Rover denied that it had gone into administration and said that Ms Hewitt’s statement had been premature, but by Friday lunchtime PriceWaterhouseCoopers were appointed as the administrators. Mr Woodley said: 'My members have had a pretty difficult time over the past five years but we always thought MG Rover would find a partner. Up to three days ago, I still believed that SAIC would be that partner. This is an absolute disaster.' Mr Woodley confirmed that there would be consultation with the unions before any decisions on the future of the workforce were made.
Shop stewards from MG Rover’s Longbridge site met with the Prime Minister, Tony Blair, Chancellor Gordon Brown and Ms Hewitt following the news that MG Rover had gone into administration. They were joined by union representatives from suppliers, local community representatives, national union leaders and MPs from the Birmingham area. The ministers pledged their total support and the Prime Minister revealed that all three had been in contact with their counterparts in China, working hard to reopen negotiations. After talks with unions and the administrators, the government offered a GBP 6.5 million loan to cover overheads and staff wages at MG Rover’s Longbridge plant for a week. During this week the administrators hoped to reopen negotiations with the Chinese.
Mass redundancies announced
On 15 April, Ian Powell, one of the joint administrators, confirmed that they had received a letter from SAIC which communicated to the DTI that SAIC was not willing to acquire either the whole or part of the business on a 'going concern' basis. He went on to say: 'In light of this important development we have concluded that there is no realistic prospect of obtaining sufficient further finance to retain the workforce while the position with other parties is explored. As we indicated earlier in the week significant redundancies will now be effected.' That afternoon, the administrators confirmed 5,000 redundancies. Around 600 workers would be kept on at Longbridge to help finish some 1,000 cars before the factory was mothballed, whilst around 400 workers would be retained at the company’s engine plant.
In the supply base, Amicus said it was aware of at least 1,500 staff at supplier companies who had been notified by employers that they stood to lose their jobs in the likely event that administrators fail to secure a deal. The union said the real number would be much higher because it had little contact with contract staff and non-unionised workforces.
On 19 April, Phoenix Venture Motors (PVM), a chain of car dealerships, became the latest division of MG Rover to fall into administration, resulting in the loss of 86 jobs and putting 472 more at risk. This event coincided with the first meeting of the dealership subgroup of the MG Rover Task Force, chaired by the Confederation of British Industry (CBI) director-general Sir Digby Jones. He said: 'The issue of the dealerships’ future viability is in many ways the most wide-ranging to emerge from the MG Rover collapse. It impacts on the jobs of about 8,000 people around the country, more than were employed at Longbridge itself.' Most of these employees are highly skilled and some 2,000 are trainees, with approximately 500 in apprenticeship schemes.
At the end of April, a further 420 workers at Longbridge lost their jobs, taking the redundancy total to more than 5,500. Only 500 workers were thought to remain at the site after the administrators said 363 jobs were to go at Powertrain and another 58 at MG Rover and MG Rover Sport and Racing. PwC had been negotiating with Powertrain’s suppliers to ensure four more months of production but had to admit 'a small but significant number of suppliers have been unable to agree terms'. The administrators had met with suppliers and outlined a plan which envisaged up to four months’ production but was reliant on the unanimous support of suppliers. Following further discussions with customers, the Society of Motor Manufacturers and Traders, the DTI, the unions and the suppliers, administrators decided it would not be viable for production to restart. Joint administrator Steven Pearson said: 'It is extremely disappointing that, despite everyone’s best efforts, a viable solution for all parties to see production restarted could not be achieved.'
This is a potential blow to Land Rover, whose Freelander model uses the K-series engine. Land Rover had been stockpiling engines in anticipation of problems in supply prior to MG Rover’s collapse. Land Rover said that it had a sufficient supply to see it through until the end of the year. However, there could be a short fall of over 5,000 petrol engines between January and July 2006, prior to the introduction of a new Freelander model. 'We have a long-term problem', admitted a spokesperson.
Government support
The immediate reaction of the government to the collapse of MG Rover was to provide a EUR 40 million support package for suppliers. The MG Rover Task Force, led by the chair of the Advantage West Midlands (AWM) regional development agency, was set up to up to advise on how best to allocate emergency support for MG Rover’s suppliers, as well as for Longbridge workers and the local community. By the end of April, a total support package of GBP 150 million (including the original GBP 40 million) had been allocated by the DTI to cover redundancy payments, retraining and support for suppliers. The support package consists of:
- up to GBP 50 million for training for workers made redundant at MG Rover and suppliers;
- over GBP 40 million to cover redundancy payments and protective awards for Longbridge workers;
- GBP 24 million to establish a loan fund to help otherwise viable businesses affected by MG Rover’s collapse and for other purposes agreed by the MG Rover Task Force; and
- GBP 41.6 million made available for MG Rover suppliers.
Advantage West Midlands reported that since the crisis had begun that around 350 suppliers had contacted the task force. AWM quickly released around GBP 350,000 of aid to support 41 suppliers to provide 'about six weeks’ breathing space' to allow the companies to find alternative work. The aid was thought to be enough to protect about 970 workers in the short term. At the end of April further assistance was offered to 'vulnerable but viable' businesses when the Inland Revenue agreed to defer immediate and current VAT payments on up to GBP 120 million of bad debt owed by MG Rover and Powertrain. A similar deferment has also been offered on the payment of National Insurance contributions. MG Rover’s 264 dealers have been offered a similar package of aid. The fund aimed at providing a lifeline to MG Rover suppliers and dealers became active at the beginning of May. Loans of up to GBP 500,000 will be made available for up to three years to companies that show they have viable recovery plans in place but which do not have the funds to carry them out.
At the beginning of May, 4,000 of the former Longbridge employees received redundancy payments, averaging GBP 5,500 for each employee.
Uncertainty over the MG Rover pension scheme
The collapse of MG Rover is the first big test for the government’s recently introduced Pension Protection Fund (PPF), which came into effect on 6 April 2005. Under the PPF, workers who are still of working age will have 90% of their pension payments protected, capped at EUR 25,000 a year, whilst retired members would get 100%. As the vast majority of the members of MG Rover’s pension scheme are of working age they could lose 10% of their pension, but no more. However, pension trustees have written to 6,500 people warning them that the main MG Rover Group fund and another plan for about 100 senior managers are 'not currently eligible' to be assessed for the PPF.
The pension plans for the workforce and managers have failed to meet the PPF’s criteria for state help because they are multi-employer schemes, which are not entitled to help unless all related companies are in administration. All MG Rover’s main subsidiaries are in administration except PVH. Hetal Kotecha, a director at Independent Trustee Services (ITS), said: 'It remains our objective to get the pensions schemes into the protection fund. Beyond that, we are unable to comment for legal reasons.' It is thought that the ITS is considering legal action to make PVH assume responsibility for the pension schemes, thereby forcing PVH into administration. If this were to happen then a fresh approach could be made to the PPF. The TGWU, which represents MG Rover workers, said that officials are optimistic that a solution would be found: 'The detailed situation is complex, but the TGWU is confident that people will receive their pensions.'
An investigation into MG Rover’s accounts has been ordered by the DTI. Sir Bryan Nicholson, chair of the Financial Reporting Council, has been asked to lead the investigation to ensure that the accounting standards, detailed under the Companies Act, have been complied with. He said that an examination of MG Rover’s pension scheme was to be a part of his investigation of the accounts. Discrepancies in the published accounts would require directors being summoned before the inquiry to explain.
Questions are also being asked over the role of Techtronic 2000, the holding company set up to acquire Rover in 2000. Techtronic, which is not in administration, received the GBP 427 million 'soft' loan paid by BMW and the money was then paid to MG Rover Group, and interest charged. A BMW spokesperson said that questions over whether BMW could demand repayment was a non-issue because it was not made direct to MG Rover. 'The loan is still in place and will not appear in the list of creditors being drawn up by the administrators', she added. Provided Techtronic remains solvent, the loan would not have to be repaid to BMW until 2049. It has also emerged that Techtronic is one of MG Rover’s largest creditors and as a result, a significant proportion of the money recovered from any sale of assets would have to be paid to Techtronic.
The future
Faint hopes that Iranian or Russian carmakers could buy the entire business and revive production at Longbridge had faded by the beginning of May. The sticking point to any rescue deal hinges upon the claim by SAIC that it holds the intellectual property rights to the Rover 25, 75 and two engines. PwC, Rover’s administrators, disputes the validity of the Chinese claim but SAIC, which is understood to be planning to build Rover 75 in China, insists that it now owns the intellectual property.
The collapse of MG Rover has left SAIC without the asset it almost certainly wished to acquire most - the capability to design and develop its own models. However, Ricardo, an automotive engineering consultancy, announced that it had signed a deal with SAIC which would enable it to secure the engineering research and development capability it had been seeking from MG Rover. Ricardo chief executive Rodney Westhead said the deal with SAIC 'will mean recruiting between 50 and 100 people. We will be looking at some former Rover people'.
Bidders interested in the MG sports car operation include Chapman Automotive, an engineering consultancy, and a consortium of former managers of MG Rover’s Powertrain engine operation. Chapman revealed that its bid was supported by 'a consortium of investors including an overseas vehicle manufacturer, a US-based investment fund, and a wealthy entrepreneur'. Their plan is to transfer production of the MG TF from Longbridge to 'another facility in the West Midlands'. The manufacturer of the MG TF’s body panels, Stadco, announced that it is to close its Coventry factory with the loss of 280 jobs. The management consortium want to retain MG TF production in a corner of the Longbridge site and keep control of the modern paint plant facility, with suppliers brought on to the site. About 400 jobs might be saved.
Commentary
The consequences of the closure of Longbridge will be felt throughout the West Midlands for many years to come, whilst the work of the Rover Taskforce has been extended to include the 850 workers at Peugeot in Coventry, following a decision to axe the third shift there (UK0504103N). A report published by The Work Foundation warns that despite the investment committed to support training, it will be hard for the local economy to recover. The local unemployment rate of 4.3% is higher than the national average by just under 2 percentage points, whilst long term unemployment in the Longbridge and Birmingham areas are also above the national average. The report predicts that 'absorption rates into new jobs will be relatively slow', and that where absorption occurs that it will be in relatively low skilled sectors where wages are low in comparison to the wage rates of MG Rover. (Joy Batchelor, International Automotive Research Centre, University of Warwick)