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. Last Updated: 07/27/2016

BMW Strong After Rover Fiasco

LONDON -- German luxury carmaker BMW has seen its carefully constructed long-term strategy crash in flames, it has stumbled into a public relations disaster in its biggest export market in Europe, and investors are beside themselves with admiration.

BMW has quickly shaken off huge negatives and transformed its outlook after breaking with Rover.

Not only have huge losses been stanched by amputating its British arm, but a flawed plan which promised ownership of a mass car producer with a weak brand has been ended at a stroke.

Instead of a large section of BMW output carrying the profit-margin threatening Rover badge, investors can now see all of BMW's model range commanding traditional big mark-ups.

BMW's share price was on the slide in late February as news about losses at its Rover Car subsidiary ate away at investor confidence.

In early March, BMW shares dipped to around 25 euros ($23.85). Then BMW announced an agreement to transfer Rover to the British venture capital group Alchemy Partners, after putting nearly $4.5 billion into it over the last six years. BMW then sold the subsidiary Land Rover to Ford for $3 billion.

BMW was caught in a storm of bad publicity. Thousands of Rover workers and their supporters in the English Midlands protested their treatment. Some politicians and union leaders called for a boycott of BMW products.

Despite the debacle, BMW shares shot up to about 35 euros, before falling slightly in early April. Over the past month, BMW shares have outperformed the European Auto stocks index by 22 percent. Analysts have a medium term target share price of 36 euros.

BMW, which bought Rover in 1994, had a strategy calling for Rover to produce a Volkswagen Golf-sized front wheel drive car codenamed R30.

BMW has said it plans to build a car smaller than its best selling 3 series, but has declined to provide any details.

Some experts wonder whether the front wheel drive R30, thought to have died with the BMW pullout, might be resuscitated as the BMW 2 series.

Peter Schmidt, auto analyst at Automotive Industry Data, reckons the new small BMW is likely to be able to claim bigger margins than the Rover project.

BMW has said it will expand its four wheel drive range, which now comprises the made in America X-5. Schmidt sees an upmarket Range Rover equivalent, and a smaller sport utility vehicle based on BMW's biggest seller, the 3 series.

"The smaller BMW (car) could do at least as well as (DaimlerChrysler's) Mercedes' little A class at 200,000 a year, and at premium prices this could be exceedingly profitable for BMW," Schmidt said.

Greg Melich, auto analyst at Morgan Stanley Dean Witter, said it was risky for premium car makers like Mercedes and BMW to seek bigger volumes by going down market.

"You risk diluting your brand if you go into smaller segments, but we would argue that the BMW brand is performance oriented and will have an easier time going into smaller cars than Mercedes," Melich said.

Melich expected BMW to raise output significantly from about 750,000 last year to close to 800,000 this year, even if it doesn't build the "2" series. With increasing sales of the X-5, the new Mini set for launch in summer 2001, and a four wheel drive 3 series, production could hit 1 million in three or four years.

IMI's Blumel said BMW's big mistake in its Rover strategy was an inexplicable decision to give the British company too much independence.

"Letting one of the worst managements in the industry get on with it, that was the key mistake," Blumel said.

But rather than a company shattered by a disastrous investment, BMW's future looks bright, AID's Schmidt said.

"BMW will emerge as a stronger company without Rover. All their products will be badged BMW, designed by BMW with no poor build quality. It will command significantly higher prices because of the badge, and that all means significantly higher profitability," Schmidt said.