Uncertainty Continues Following Sale of MG Rover to Nanjing Automobile Corporation

Uncertainty continues following sale of MG Rover to Nanjing Automobile Corporation

Three months after the surprise sale of MG Rover’s assets to the Nanjing Automobile Corporation in July 2005, uncertainty remains over the future of the Longbridge plant in the UK as the relocation of the engine plant to China takes place. This article outlines the events surrounding the sale of MG Rover and the consequences for the local economy.

On 22 July 2005, PricewaterhouseCoopers (PwC) announced the sale of the assets of both the MG Rover Group and its engine producer, Powertrain, to the Nanjing Automobile Corporation (NAC) for the sum of GBP 53 million. The sale by the administrators concluded a three-month process following the collapse of MG Rover in early April (UK0505103F). The choice of Nanjing as the successful bidder came, however, as a surprise, not least to the unions that had backed the rival bid of the Shanghai Automotive Industry Corporation (SAIC). Tony Woodley, general secretary of the Transport and General Workers’ Union (TGWU) told the Daily Telegraph: 'Having viewed both the Nanjing and SAIC bids, there is no doubt in our mind that on first viewing the SAIC proposals appeared to suggest more jobs for Britain. It’s disappointing therefore that the administrators have not seen fit to allow SAIC to complete its bidding process.' SAIC had initially offered to acquire only the assets of Powertrain. By the time that an offer for the whole business was made, the level and conditionality placed upon the bid by SAIC was seen by the administrators to be prohibitive, thereby leaving Nanjing’s bid as the preferred way forward.

According to a statement issued by the administrators: 'Nanjing will now begin to take control of the assets and develop its plans for the future. It has indicated its intention to relocate the engine plant and some of the car production plant to China, to retain some car production plant in the UK and to develop an R&D and technical facility here in pursuit of the same global expansion ambition that it had when it joined with SAIC as the intended joint venture partners to Phoenix Venture Holdings before the collapse of MG Rover.' The statement went on to say that for a transitional period that a residual workforce would continue to be employed by MG Rover and Powertrain to assist the administrators.

The total value of assets raised, including the sale of MG Rover, totals around GBP 100 million. However, the creditors of MG Rover and its Powertrain engine subsidiary, who are owed a total of GBP 1.4 billion, may not see any proceeds until the winter of 2007. Rob Hunt of PwC said that because of the complexity of the business, the standard 12-month period of administration might have to be extended by another six months. It has been estimated that creditors of MG Rover should expect no more than a negligible payout, of around GBP 0.05 per GBP owed, whilst Powertrain creditors could receive GBP 0.13 per GBP owed.

The future of Longbridge

Despite the sale, many question marks remain over future of Longbridge and the scale of any reinstated production. Rob Hunt from PwC has questioned whether large-scale car manufacturing can return to the Longbridge site. 'A good result might be a sports car', Mr. Hunt said. 'As a realist, I question whether anything else can be done. I am not convinced large-scale manufacturing can be done there.' Nanjing has said that it is considering building up to four or five new models at the site, but uncertainty remains over Nanjing’s ability to finance its ambitious plans.

In August, Nanjing confirmed that it had reached agreement with a consortium of managers from MG Rover’s Powertrain subsidiary to collaborate on restarting car production at Longbridge and developing new MG models. The consortium, which is led by Fraser Welford-Winton, Powertrain’s former managing director, has formed GB Sports Car Co to pursue the collaboration. Nanjing will have no equity stake in GB Sports Car Co. The collaboration will include two companies that have been advising Nanjing - Arup, the UK engineering consultancy and China Ventures, which provides commercial and technical consultancy services. The partners 'will work on the development of a range of MG automobiles to be designed and developed for manufacture at Longbridge', a company statement said. GB Sports Car Co is also to oversee the consolidation of the Longbridge site, to give it the capacity to build the 80,000 cars annually. Nanjing has claimed that up to 1,200 jobs could be created.

In September, Nanjing executives met with the unions to reassure them that production would restart at Longbridge following reports of the removal of engine production equipment from Powertrain. Wang Qiu Jing, vice-president of Nanjing, said in a statement that Nanjing would leave two production lines, used to make the MG TF sports car and ZT saloon, and the paint shop as its investment in the new production. It would also provide its share of joint development costs for new vehicles, worth 'many hundreds of millions of pounds over coming years'. Nanjing’s reassurances drew a cautious response from Tony Woodley of the TGWU: 'I met Nanjing last week and I am convinced they are genuine about their plans. However, they still don’t have sufficient finance, including from government, and we will work with them to help them get that finance.' Nanjing’s best hopes of achieving its ambition of becoming a global player in the car industry would be to find a partner, he added.

Finance is only one of the issues to be overcome before production, however limited, can begin. The issue of the intellectual property rights surrounding MG Rover’s models and K series engine is a complex one. The deal with Nanjing does not cover the continued production of the Rover 45/MG ZS, as this model was produced by MG Rover under license from Honda. SAIC had previously paid GBP 67 million to MG Rover, when it was still trading, for rights to the Rover 75, Rover 25 and the K Series engine. SAIC has alleged that Nanjing cannot produce any cars without its permission, because all its plans are based on the use of one or other of those designs. Nanjing does not believe problems arise from the rights SAIC owns, saying they are not exclusive where Rover’s production assets are also used to produce MG cars. Alan Belfield, the industrial consulting director at Arup, the UK engineering group which advised Nanjing on the bid, said that using MG variants of the old Rover cars would avoid infringing SAIC’s intellectual property. In reality, it is highly unlikely that a resumption of production would occur before 2007 at the earliest.

Redundancy rulings

In July, the first in a series of compensation claims for former MG Rover employees was upheld at an employment tribunal in Birmingham. The claim for protective awards, was lodged by the TGWU, Amicus and the GMB union to cover all of the employees made redundant in April by MG Rover and Powertrain. The decision saw almost 4,500 workers receive an extra GBP 2,200 in addition to the maximum GBP 3,400 they received when they were made redundant in April. The administrators did not oppose the unions’ application. As MG Rover is administration the money will be provided by the government through the redundancy payments office at the Department of Trade and Industry (DTI).

Michael Stokes, a partner at law firm Rowley Ashworth who acted for the workers, said: 'We have won 90-day protective awards for the vast majority of employees who were dismissed from the various companies at Longbridge in April this year'. The payments, amounting to eight weeks’ pay at a maximum of GBP 280 a week, are in addition to redundancy payments that have already been awarded. He went on to explain that: 'The claim arose because employers are obliged to consult about redundancies where they propose to dismiss 20 or more employees, and this is a requirement even when a company is insolvent.' Tony Woodley welcomed the ruling, whilst union official Adrian Ross commented: 'This proves that workers must become priority creditors, and administrators should consult with unions before laying anyone off.'

At the beginning of October, a second award was made and this applied to a further 1,000 staff that had been made redundant since April. At this time Michael Stokes confirmed that around 200 people remained employed at Longbridge. He confirmed that further claims would be lodged if additional redundancies were to occur.

Pensions

During September, it was confirmed that the remaining MG Rover pension schemes have entered the formal assessment period to decide whether their 6,000 plus members qualify for help from the government's Pension Protection Fund. The group pension scheme, the largest with 6,004 deferred pensioners and 232 pensioners in payment, and the group senior pension scheme with 100 deferred and current pensioners, formally entered the assessment period when the Fund will examine whether they can be rescued, or provide benefits equivalent to the cut-down protection that the Fund offers.

The assessment is likely to take a minimum of a year. Independent Trustee Services, which acts as the trustee for the schemes, said they had a combined debt of GBP 496 million. It anticipated that for the majority of members 'the Pension Protection Fund will provide benefits at a significantly higher level than the schemes could afford based on their funding positions'.

Ongoing inquiries into collapse of MG Rover

A number of inquires have been triggered as a consequence of the collapse of MG Rover. In addition to the announcement that the Financial Reporting Council would lead an investigation into accounting standards on behalf of the DTI, the National Audit Office (NAO) has said it is investigating the GBP 6.5 million government payment that temporarily kept MG Rover from collapsing in May this year. The NAO has also confirmed that it will examine the part played by the DTI and other public bodies in setting up a GBP 150 million support package for MG Rover employees and suppliers.

MG Rover’s accountants are also being investigated by industry regulators following the collapse of the car maker. The Accountancy Investigation and Discipline Board (AIDB) said that it had decided to investigate the conduct of Deloitte. The firm, which has an office in Birmingham, is one of the world’s four biggest accountancy firms. In 2002, MG Rover paid Deloitte GBP 3.5 million in fees on top of a GBP 500,000 audit fee. The investigation will focus initially on the audits of the 2003 accounts of MG Rover Group Ltd and its ultimate parent company, Phoenix Venture Holdings Ltd, as well as certain non-audit services provided by Deloitte to the group, the AIDB said.

Commentary

The West Midlands economy is unlikely to suffer as much as was first feared from the collapse of MG Rover although the impact is still significant, according to a report published in early July by Regeneris Consulting for Advantage West Midlands (AWM). Of those made redundant at MG Rover, 1,832 former workers were reported to be back in work and a further 1,600 had started training courses with 1,300 more due to start courses. The high levels of those undertaking training is likely to be related to the demography of the workforce with 27% of those made redundant being over 50 years of age and only 5% aged under 30.

Whilst MG Rover’s production volumes had been steadily reducing, the company still accounted for an annual spend of around GBP 835 million in the UK supply chain of which around GBP 410 million was spent in the West Midlands. The degree of reliance of the supply base on MG Rover had fallen from 161 suppliers in 2000 for whom MG Rover accounted for 20% or more of their business to 74 in 2005 (57 based in the West Midlands). In addition to the direct job losses at MG Rover, around 600 job losses have been reported in suppliers with a further 2,400 jobs reported as being at risk in the West Midlands region (3,900 overall in the UK). AWM’s wage replacement scheme for suppliers was reported to be supporting around 3,000 workers in the short term. However, at this stage it is still too early to assess how successful the restructuring efforts within the supply base will be and the extent to which former MG Rover employees will be able to match their previous wage levels. (Joy Batchelor, International Automotive Research Centre, University of Warwick)