Known throughout the world for quality and style, BMW as a manufacturer of luxury automobiles, motorcycles and engines, has built a strong reputation and brand image. For decades, the BMW trademark has been synonymous with quality German manufacturing and with attention to detail that caters to the refined consumer with a passion for driving.
Currently, the BMW group consists of three brands: BMW, MINI and Rolls-Royce Motorcars. All three brands are associated with quality, luxury and a design focused on the driver’s experience. With 24 manufacturing facilities in 13 countries and operations headquartered out of Munich, Germany, BMW reaches customers in over 150 countries worldwide.[i] The automotive firm has a solid grip on the global premium automotive market, one that it is not willing to relinquish without a fight.
It may therefore be surprising for those familiar with BMW’s quality and luxury status to hear that the firm may have been partially responsible for the demise of UK-based MG Rover in 2005. BMW owned the iconic British automotive group with a noble history including the MG series, the Land Rover and the MINI from 1994 to 2000. BMW’s efforts to integrate the Rover Group in the BMW group were not successful and BMW ultimately decided to sell the underperforming Rover Group in 2000. Only the MINI brand remains with BMW today.[ii]
A brief history of BMW[iii]
BMW’s roots can be traced to aeronautical design and manufacturing. Bayerische Flugzeugwerke (BFW) was founded in 1916, and was combined with the Bayerische Motoren Werke (BMW) GmbH, created in 1917 from the restructuring of the military aircraft engine manufacturer Rapp-Motorenwerke. This combination would eventually become BMW AG, which was established in 1918. BMW AG was created as a stock corporation, and one third of the 12 million Reichsmark share capital was held by Camillo Castiglioni, an Italian-Austrian financier, with the reputation of being the richest person in Central Europe at the time of World War I.
The impact of World War I and World War II
With the end of World War I came a ban on aircraft engine manufacturing; in the 1920s BMW experienced a shift in focus to producing rail vehicle brakes and engines, and in 1922 relocated to the BFW factory in Munich. The 1930s–40s and World War II witnessed a surge in demand for aircraft engines, resulting in a flurry of activities for BMW, the dispersion of the aircraft engine manufacturing and the automotive production to smaller companies, the acquisition of a number of new plants, and the takeover of Brandenburgische Motorenwerke GmbH and its aircraft engine facilities.
Air raids in the 1940s caused damage to BMW’s main Munich plant, and the US government seized control and dismantled most of the company’s assets. In exchange for providing repairs to American military vehicles, BMW was allowed to resume manufacturing of spare parts, equipment, and, most importantly, motorcycles. By 1948, the company was back on its feet and began production of its first post-war motorcycles. By 1950, nearly one fifth of this motorcycle production was being exported outside of Germany.
BMW’s perseverance pays off
BMW’s new foothold in the automotive and motorcycle industries remained tenuous throughout the 1950s, and by the end of the decade Daimler-Benz made an offer to take over the company. This offer was declined largely due to shareholder Herbert Quandt’s faith in the company; he increased his equity holdings in the firm and took control with some governmental financial aid. The Quandt family has retained the controlling majority of the BMW Group.[iv]
During the 1960s, global demand soared for BMW automobiles and motorcycles. In order to relieve some pressure on the firm’s overwhelmed plants, motorcycle production was moved to the old aircraft engine facility in Berlin-Spandau in 1969 and the Munich facility expanded production of automobiles. The 1970s were a period of major change, including the arrival of Chairman Eberhard von Kuenheim, who led the company out of Europe and into global waters. He remained at BMW’s helm until 1993, when he became Chairman of the Supervisory Board. Subsidiary BMW Kredit GmbH was established in 1971 to provide financing for the company and BMW dealers, as well as financing and leasing for customers.
The mid-to-late 1970s marked an important evolution in BMW’s company structure: responsibility for sales was shifted to subsidiaries being established across the world. BMW was making the transition from being a German exporter to developing foreign subsidiaries. The year 1979 was a landmark year for BMW: in a joint venture with Steyr-Daimler-Puch AG, an engine plant was established in Steyr, Upper Austria, where just three years later the first diesel engine was developed. In the 1980s, massive new plants were added to BMW’s production facilities in Germany, and a ‘think tank’ was established for new concept development and design innovation. By that time BMW had earned global recognition for its groundbreaking engine development and quality automobiles; a few concept vehicles had even gone into small-scale production with some success.
Maintaining a foothold in the global marketplace
Building upon its successes of the 1980s, BMW began to make massive strides to establish itself as a dominant player in the global luxury automotive market throughout the 1990s. Innovation and design became key strengths for the company, as illustrated by the establishment of BMW’s Research and Innovation Centre in Munich in 1990. In 1992, BMW launched its US operations with a manufacturing facility in South Carolina; this plant serves as the sole production facility for the Z3 roadster and the X5 SUV.
While BMW was experiencing dramatic success and had developed powerful brand equity, it was still struggling in some markets, particularly in the UK. It was becoming increasingly apparent to then Chairman, Bernd Pischetsrieder, that BMW’s small size and specialized product offering would not be enough to remain a global player in the automobile market which was becoming flooded with mass-produced models of increasing quality and decreasing prices.[v] Pischetsrieder recognized that BMW needed to appeal to new markets, including the UK market. The solution to this problem came in an unusual form: in what was hailed at the time as a brilliant strategic move, BMW purchased an 80 per cent controlling interest in Rover Group from British Aerospace for GBP 800 million, or approximately US $1.2 billion, in 1994.[vi] BMW hoped to gain new strengths in mass production through the purchase of Rover, thereby realizing manufacturing economies of scale, additional branding power coming from the Rover brand name, and design and production capabilities specific to small-sized automobiles produced at a reasonable cost. BMW also stood to gain significant location advantages through the acquisition, primarily those of lower labour and manufacturing costs in the UK as compared to Germany. This acquisition would double BMW’s production scale from 440,000 units to more than 800,000 automobiles per year,[vii] which would represent a major step towards solving BMW’s perceived size problem. According to one observer, this purchase “turned Europe’s Big Six auto makers into the Big Seven and laid to rest the fear previously voiced by company chief Bernd Pischetsrieder that ‘in 10 years’ time, BMW might be too small to compete in the world auto industry.’”[viii]
The Rover Group
The pre-BMW years
The Rover Group was an amalgamation of UK automobile companies with a noble and iconic heritage such as Austin, Rover and Triumph, most of which were founded in the late 1800s and early 1900s. Throughout the 1950s, 60s and 70s, most of the original UK auto manufacturers consolidated into one group, the British Motor Corporation (later the British Leyland Motor Corporation – BLMC), in order to compete with the increasingly dominating American multinational automobile companies such as Ford.[ix]
The integration of these consolidated companies was not successful, and by 1975, the BLMC was nationalized and received GBP 2 billion in government financial aid. Even this large amount of resources was insufficient to rescue the failing company, and in 1979, Honda took a 20 per cent stake in Rover in exchange for the right to produce a Honda model rebranded as the Triumph Acclaim and services for the production of some Honda automobiles at Rover facilities. Throughout the 1980s, British Leyland was renamed as Austin Rover, and a number of auto models were developed in collaboration with Honda.[x] British Aerospace purchased the remaining 80 per cent stake in Austin Rover in 1988, and remained in control until it decided to sell the company in 1994. Rover doggedly attempted to convince Honda to increase its 20 per cent holding and take over the company, but Honda refused and BMW successfully purchased the remaining 80 per cent stake.[xi],[xii]
BMW’s acquisition of Rover
During its years of ownership of Rover, BMW invested heavily in development, hoping to revive flagging sales and capitalize on the Rover brands’ iconic status as well as the firm’s portfolio of small, front-wheel drive cars (an area of the market BMW had not been able to penetrate). The purchase positioned BMW as the world’s largest specialty auto manufacturer and allotted the group previously unattainable economies of scale. Following the acquisition, in May 1994, BMW’s shares rose in value from DM 740 to DM 927, an indication of investors’ early support of the investment decision.[xiii] BMW hoped to drive down its high costs of production by offshoring some of its manufacturing to the newly acquired facilities in the UK.
In the first few years following the acquisition, both Rover and BMW experienced some success. Rover experienced increases in both domestic and export sales in 1996 and 1997, and heavy investments were made in research and development for new product offerings.[xiv],[xv] In 1997 and 1998, BMW’s share price continued to rise dramatically, despite the drain of massive financial investments into Rover’s development[xvi]. Even with increased sales, Rover continued to make financial losses throughout this period.
The end of Rover
In spite of all the ‘positivity’ and efforts to turn around the British manufacturer, the Rover Group continued to lose money, and by 2000, BMW had to rid itself of the lagging company. There is little consensus amongst industry analysts as to what exactly happened.
The beginning of the end
Despite the positive reception by the public of a new model launched under the Rover brand (the ‘75’) in 1998, BMW chief Pischetsrieder publicly indicated frustration with Rover’s continued financial losses and overall sluggish performance.[xvii] This marked the beginning of the end, as this announcement spawned a flurry of media reports that Rover was in trouble. That year, the reason for Rover’s continued decline offered to the public by BMW and Rover spokespeople was the decreasing value of the British pound (i.e., an unfavourable exchange rate). However, this explanation has been explicitly rejected by a number of industry experts, who ranked Rover as the poorest performer in the European automotive industry based on both productivity and quality levels.[xviii],[xix]
The end – BMW’s move to part ways with Rover
By 2000, a deeply embarrassed BMW cut its losses and divvied up and sold the Rover Group, retaining only the MINI brand. Land Rover was separated and sold to Ford for GBP 185 million, while the remaining group was renamed MG Rover and sold to the Phoenix Group for the rather shocking nominal sum of GBP 10.[xx] Despite Phoenix’s promises to turn a profit within two years, MG Rover continued to spiral into debt, haemorrhaging money throughout the next five years. In April 2005, the company was dissolved, leaving thousands of workers jobless.[xxi] This spectacular failure leads to a particular question: did BMW help contribute to Rover’s decline, or did it do all it could to save the ailing company in an effort to diversify the geographic scope of its manufacturing base?
BMW’s participation in Rover’s destruction
BMW’s management suffered from information problems in its decision making prior to the acquisition of Rover. Even BMW management admitted, following the failure of the Rover acquisition, that more information should have been gathered and a closer examination of the actual advantages to be gained should have been undertaken. Had such scrutiny taken place, it is unlikely that BMW would have gone through with the purchase in the first place.[xxii] It appears that the German firm overestimated Rover’s brand equity, its production capabilities and the possibility to gain scale economies and manufacturing synergies with the remainder of the company.
Rover was suffering from productivity and quality issues problems prior to BMW’s takeover in 1994, and it would appear that one major source of the group’s failure to turn things around was BMW’s over-estimation of its own capabilities to revitalize/reengineer Rover, both financially and managerially.[xxiii],[xxiv]
Production decisions
A key factor cited as a potential source of BMW’s problems with Rover, was BMW’s choices in the production sphere during its years of control. While the new model ‘75’ was launched with some degree of success, BMW failed to develop other products to serve the demands of the very market segment it was targeting. In fact, the planned replacement for Rover’s midrange platform was never actually launched, partially due to BMW’s untimely dissolution of the company. By the time BMW sold Rover, it was left with an inadequate product portfolio that failed to meet the demands of growing market segments.[xxv]
Managerial deficiencies
After acquiring Rover, BMW initially gave the incumbent management a great deal of autonomy to continue production operations in the UK in a ‘business as usual’ fashion. BMW’s attempt to avoid ‘stepping on Rover’s toes’ resulted in a disastrous blindness to many of the troubles faced by Rover. For example, it has been heralded as a foolish neglect by BMW not to exploit the US’ frenzied appetite for premium SUVs via the Land Rover brand, and an even greater mistake may have been to let the Land Rover unit go to Ford following the dissolution of the Rover Group; this failure was due in large part to slow strategic issue recognition and slow strategic response on the part of BMW management. By the time, BMW realized the problem and tried to regain control of the Rover operations, it was too late.[xxvi]
From the perspective of Rover management, everything seemed to be going well at first but when BMW suddenly tried to impose its own administrative systems and was sending senior management from Germany to the UK to alter manufacturing operations, tensions began to run high. By 1996, Rover’s CEO Towers had resigned, and BMW appointed a new CEO from the company’s German board.[xxvii] An article criticizing BMW for failing to come to terms with its small size and specialty orientation states:
On a deeper level, a key factor in Rover’s demise was that BMW believed – either through arrogance or naïveté – that it could turn Rover into a British version of itself. What the executives in Munich didn’t realize was that the Rover brand had suffered too m any quality problems over time, and consumers weren’t going to come back – not even for a BMW-vetted product.[xxviii]
It seems that one of BMW’s largest failures during its time with Rover was its inability to achieve successful resource recombination in the host country. BMW’s main problem in this case was not an inability to transfer its existing strengths from Germany to the UK, nor an inability to create knowledge through its newly acquired subsidiary, but rather an inability to integrate Rover-based knowledge with its existing knowledge base. Whether it was because BMW leadership lacked the skills necessary to perform this essential integration or whether it simply did not see the need,
BMW did not recombine its existing strengths with the potential new advantages brought by Rover. It would appear that the entire acquisition process was driven by top line concerns, i.e., the perceived need to increase scale, and by the rather naïve view that adding UK manufacturing plants to the BMW network of factories would somehow make for a more healthy and diversified production base. According to Grogaard, Verbeke and Zargarzadeh, such “lack of creative resource recombination as a precondition for market success reflects the absence of effective entrepreneurial action”.[xxix]
QUESTIONS
- What are some of BMW’s FSAs? Was BMW able to diffuse these FSAs to Rover?
- Did the acquisition of Rover provide substantial location-bound and nonlocation-bound FSAs to the BMW group?
- Using Ferdows’ framework, define the strategic role of the intended versus realized BMW-Rover manufacturing activities in UK.
- Did BMW invest sufficiently in resource recombination after the Rover acquisition?
- Can you provide an update on the strategic role of the various BMW manufacturing plants spread around the world, using materials available on the Web?
Notes
[i] The BMW Group company information 2009.
[ii] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation, Cambridge: University of Cambridge (2005).
[iii] The BMW Group company information, 2005.
[iv] The BMW Group company information, 2008.
[v] B. Gould, ‘The BMW acquisition of Rover’, The Antidote 3 (2) (1998), 37–38.
[vi] P. Bingham, ‘BMW buys Rover’, Motor Trend 46 (5) (1994), 18.
[vii] Ibid.
[viii] Ibid.
[ix] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation, Cambridge: University of Cambridge (2005).
[x] Ibid.
[xi] Ibid.
[xii] P. Bingham, ‘BMW buys Rover’, Motor Trend, 46 (5) (1994), 18.
[xiii] B. Gould, ‘The BMW acquisition of Rover’, The Antidote 3 (2) (1998), 37–8.
[xiv] Ibid.
[xv] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation. Cambridge: University of Cambridge (2005).
[xvi] B. Gould, ‘The BMW acquisition of Rover’, The Antidote 3 (2) (1998), 37–8.
[xvii] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation, Cambridge: University of Cambridge (2005).
[xviii] G. Robinson, ‘The great Rover disaster’, New Statesman (27 March 2000) 13–14.
[xix] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation, Cambridge: University of Cambridge (2005).
[xx] Ibid.
[xxi] Ibid.
[xxii] S. Zesiger, ‘Why is BMW driving itself crazy?’, Fortune Magazine (26 June 2000).
[xxiii] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation. Cambridge: University of Cambridge (2005).
[xxiv] G. Robinson, ‘The great Rover disaster’, New Statesman (27 March 2000), 13–14.
[xxv] M. Holweg and N. Oliver, ‘Who killed MG Rover?’, Centre for Competitiveness and Innovation, Cambridge: University of Cambridge (2005).
[xxvi] S. Zesiger, ‘Why is BMW driving itself crazy?’, Fortune Magazine (26 June 2000).
[xxvii] P. Crush, ‘When HARRY met BMW’, Human Resources (November 2010), 41–2.
[xxviii] S. Zesiger, ‘Why is BMW driving itself crazy?’, Fortune Magazine (26 June 2000).
[xxix] B. Grogaard, A. Verbeke and M. A. Zargarzadeh, ‘Entrepreneurial deficits in the global firm’, in A. Verbeke, A. Tavares-Lehmann and R. Van Tulder (eds.), Entrepreneurship in the Global Firm (Emerald, 2011), 117–37.