on to ency. CASE STUDY en to The Rationale behind Attempts id not of MG Rover to Forge Alliances alled This essay explores the rationale behind tion, MG Rover's attempt to forge alliances. It begins with a brief history of the brand ation because in order to understand the rationale aged for alliances, you must understand where the ment company found itself at the start of the new and millennium. spec- The Rover brand emerged over a century other ago and provided high-quality care to the Hively middle classes. Rover was then assimilated that into the nationalized British Leyland in the top mid-1960s. However this was, in hindsight, nation seen as a failure as it starved the brand of that a and investment and seriously harmed its reputa- tion for quality. In 1982, the group was spun range n and off and a recent strategic alliance with Honda active was giving them access to Honda's engineer- ing expertise and produced some excellent results. However the group was then sold to tural British Aerospace in 1988 which in turn sold gani- . it to BMW in 1994. This ended the alliance s and with Honda. is are units Within a year, Rover was within BMW more circles called "the English patient" as they uld believed they had bought a chronically sick car company. The production and labor porate facilities were seen as antiquated and the iniza- model range was in urgent need of updat- tional ing. BMW persevered and invested billions y bon- of pounds in revamping the whole operation ad the to try to modernize it. They finally gave up coal in in 2000 when the drain on BMW's resources team- was threatening their own strong balance ample sheet. The company was sold to a group of dual's private investors, the Phoenix Consortium, tional for a nominal sum. This newly formed entity iented was named the MG Rover group. This group had, however, lost two key niche brands price along the way - the Mini and the Land Rover. it only MG Rover had, in effect, been picked clean of its but key satellite brands and what was left was108 Introductory Micronconomics a company with essentially three models: the growing segments in the market were the the Rover 25, 45, and 75. The very problems super mini, the Sport Utility Vehicle, and the it faced at this juncture were the reasons it MPV. MG Rover had little or nothing in these attempted to forge alliances over the next five segments. Ironically, MG Rover had, under years with other firms including Proton, Tata, China Brilliance, and SCIA. These reasons BMW, drastically improved its quality of the Included: range it had. However, the result of this model gap, was that it was hemorrhaging market Lack of Production Volume share in its only real market: the UK. In 1990, it had 13.62% of market share in the UK, by MG Rover lacked any serious production 2004, it was down to 2.99%. MG Rover simply capacity. The top five car producers all did not have the full range of models to kerp manufactured over three million units a year attracting younger customers. An alliance each in 2003. In comparison, MG Rover's was needed to flesh out their model range, In production of 107,000 units in 2003 was hindsight, now it can be seen that the strate- almost derisory. The key to success in the gic alliance with Honda was probably Rover's automobile industry is either volume or a best chance of success. It allowed Honda easy successful niche product. With volume, you access to the UK market and Rover would get economies of scale which can carry the have gotten access to their RAD and a wider high costs of developing a new model. MG product range. They had jointly developed five Rover's 107,000 cars alone could not justify models before the break-up of their alliance. carrying all the overhead necessary to justify It is clear that Rover was probably seeking new models. Without new models, sales fell. what it already had with Honda. The attempt to forge an alliance was an Lack of International Markets aftempt to escape from this vicious circle. The attempted collaboration with Chinese MG Rover was essentially an English firms was an attempt to rapidly scale up company. The only internationally recog production in a single market with huge ningble brands. it possessed were Mini and potential. Equally, the Chinese were eager to Land Rover. When these torre gone, it was tied to the vagaries of the UK economy and acquire a "Western" brand and technology. could never achieve the global economies of Lack of R&D Capacity scale that, for example, Toyota or VW had. This weakness repeatedly hindered Rover When BMW sold the Land Rover brand to "over its history. Because when it did have Ford, the Research and Development (R&D) good models like the Montego, Maestro, and facility at Gaydon also went with it. This' Metro, it simply did not have the distribu- deprived Rover of most of its RAD capability " tion network to sell them internationally to which is vital in today's car market where gain volume and higher marginal profits. constant innovation is the key to success. The alliance with BMW gave it a redewed Combined with its lack of production volume, potential for accessing the European market MG Rover lacked any ability to perform and beyond but when BMW was gone, Rover serious innovative research itself. The joint " was back to square one. It needed alliances to ventures with Honda and BMW had shown rectify this and help it to expand geographi- what MG Rover was capable of but without cally. However, established world markets deep pockets, if was stuck in a time warp. were oversupplied and the only real place it could turn to was developing markets. Rover Poor Model Range still had the technological experience which "was marketable in these regions- this is why This is obviously linked to the lack of RAD but exposes even deeper strategic China drew their interest. China had the problems within MG Rover. Even when BMW mass market that would allow it to scale up owned Rover, the only new model it launched "production in a low labor cost economy - it was the Rover 75 - an executive saloon. Yet seemed an ideal solution to Rover's problems.Theory of Predation 109 Negative Publicity In the final analysis, when MG Rover It is worth noting that the weaker MO split with BMW, it was too big to be a niche Rover became, the lower its sales went. The market player and too small to be the global public did not want to buy a brand that might player it wanted to be. It needed to forge alliances to rectify theme problems. If needed not exist next year. A successful alliance technology, a new model range, and a brand- may well have stemmed this effect and cura boosting connection with another firm. But turned it. MG Rover needed the imprimatur of most of all, it needed cash. another successful company. The only period "when their image was really improving was Source: Hayat Akbar, May 9, 2010, when BMW owned it and its prestige and under the Creative Commons technology rubbed off - but even this was not Attribution-ShareAlike License enough to support sales. Questions Lack of Cash 1. What are the reasons for MG Rover's This real issue at the core of MG Rover's diseconomies of scale? problems from the moment if broke from 2. Explain how innovation and a good BMW was cash. Without a rich parent pump research and development capacity could ing money into the company, it was consum- have saved MG Rover. ing its own capital to cover the day-to day losses it was making. By 2003, if had corn SUMMARY sold its main production plant, Longbridge, Two Concepts In Theory of Production for 45 million pounds and was leasing if back. In 2001, it had sought investment 1. Law of Diminishing Returns staten the from China Brilliance in order to fund new use of variable resources against the models but this deal eventually fell through. limits of fixed resources or describes the Again in 2004, Rover and the Shanghai Au- tendency at some point for each succeed tomotion Industry Corporation (SAIC) were ing addition to output to become smaller courting but the consummation never look as the firma add succession units of var- place. SAIC was just not willing to pour in lable input to some fixed imputs. the cash necessary. Their logic was incred- Two Lessons: ibly sound: If BMW cash and technology n., Size of a resouren, given the rest could not turn Rover around, could anyone an fixed, should not go beyond its do it! The Chinese also realized that they product-maximizing point. knew more about their own markets than b. Rover did and all they were really after were Plant capacity can only increase with Rover's models and technology; not a poten- more resources combined unless tial money pit. In the end, all that was bought technology changes. by the Nanjing Group was the rights to the 2. Returns to scale measure how output MG Rover's models and technology for 67 changes relative to resource inputs in million pounds. Later, the Longbridge plant the long run and indicate how overall * was physically stripped of the machinery and resource efficiency changes with plant this was shipped to China. It must be asked if the real rational for Economies of scale cost advantages that a search for alliances may really have been a business can use by expanding their a quest for someone to finally buy any value scale of production. that was left within MG Rover. The men be- Diseconomies of scale occur when busi- hind the Phoenix Trust were not new to the ness grows so large that costs of unit go industry; they must have known the situation up and are characterized by the decreas MG Rover was in. ing efficiency or even inefficiency of size