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Corporate recovery: Rover and out

The date of the announcement may have come as a surprise, but many in the UK
automotive sector had suspected that Rover’s collapse was going to come sooner
rather than later. On 8 April their worst fears were confirmed when MG Rover
called in the administrators. The company was no longer doing business, or
paying bills.

Within a week of going into administration, leading suppliers announced grim
news. Parts and panel maker Stadco cut 280 jobs at its plants in Coventry and
Shrewsbury as “a direct consequence of the probable demise of MG Rover”.
Wales-based suppliers Thyssen Krupp Camford Pressings, Calsonic Kansei, and CU
Tech also announced 120 job cuts between them.

Since April, Triplex, which supplied Rover with gears, brake discs and wheel
hubs, has closed its Peterborough plant, and more than 100 staff were cut from
Wagon, which supplied small assembly parts and steel stampings to Longbridge.

Many in the industry hope that the sale of Rover’s remaining assets to
China’s Nanjing Automotive on 23 July will restore confidence in the sector. The
West Midlands is the UK components industry. About 40% of ‘tierone’ units –
those directly supplied to car manufacturers – are produced in the region, and
the figure rises to more than 50% at tiers two and three.

So far, the government, regional development agencies and industry bodies
believe that the knock-on effect of Rover’s collapse has not been as bad as
feared. Keith Lewis of industry body the Society of Motor Manufacturers and
Traders (SMMT) says: “Although there were still some companies with large
exposure to Rover, most had spent the past four years or so spreading their
risks and diversifying.”

According to Accelerate – a programme run by the Birmingham Chamber of
Commerce to support the regional automotive industry, and partly funded by
Advantage West Midlands, a regional development agency – 80% to 90% of
locally-based suppliers were dependent on Rover contracts in 2001. However, now
that figure is around 20%. In 2000, when BMW sold Rover, suppliers had around
20% to 30% of their turnover coming from Rover-related work. In March, that was
down to 15%. Suppliers were becoming more risk averse.

But these figures are academic to those companies which have seen their
contracts, as well as their invoices demanding payment, torn to shreds. Jim
Hall, managing director at Astra Engineering Products in Aston, says that
Rover’s collapse resulted in serious cashflow problems for his firm. “We didn’t
have enough money coming through the door to pay our suppliers and employees.
Luckily, some of our other customers began paying very quickly to help us pull
through,” he says.

Hall says that Astra had become a tier-one supplier to Rover just a few
months before it went into administration. The contract was to be worth around
£1.5m a year. “We now need to find that level of custom elsewhere,” says Hall.

“We had only been working on the Rover contract since July last year and we
didn’t start sending them the parts until December because we had had to change
our processes and get the operational aspects of the production sorted out,”
says Hall. “We had encountered and come through all the problem costs and had
established all the necessary production programmes and built all the parts, but
had not supplied that many. Three months later we learned that it had been a
waste of time,” he adds.

Astra, which had a turnover last year of £4.5m and which expects its turnover
for this financial year to be around £6m, supplies parts that are used in car
side panels and is now a tier-two supplier to Honda. Hall says that the company
has recently won a new contract due to begin in November or December with
Unipress in Scotland to supply parts to Nissan in Sunderland. Hall adds that 95%
of Astra’s work is for the automotive industry, and 99% of its customer base is
in the UK. However, the company is looking to diversify and has recently started
exporting components to Mexico.

“While we welcome the new work, it will have been nine months after Rover
went into administration that we actually start making any of the money back. We
have had a difficult six months since its collapse,” says Hall.

Hall says that there were no real definite indications that Rover’s collapse
was imminent, but Astra had already taken the decision to tighten up its credit
terms with the company just weeks before production halted.

Despite this, Hall believes that the company has lost around £300,000 as well
as some staff. “We have had to lose a couple of people who were on short-term
contracts and we have been on a one-shift pattern since April, which means that
production is about half of what we were hoping it would be. We are not likely
to get back onto a two-shift pattern until the end of the year,” he says.

“We are not hopeful of getting any of our money back from Rover,” Hall adds.
“The latest I heard is that the administrators were talking of returning 5p in
the pound, hence a 95% write-off. Also, Rover had included in its contract that
any materials supplied to the company for distribution, but not paid for, would
not be returned to the manufacturer, so we cannot get our supplies back.” Colin
Sarson, managing director at WH Smith & Sons (Tools) based in Sutton
Coalfield, says that nearly 12% of the company’s turnover came from Rover, with
direct and indirect sales to the company amounting to £2m per year. Sarson adds
that the company had been supplying Rover with pre-mouldings such as gear knobs
for around 30 years.

“We knew that Rover was going through a rough time due to industry whispers
and from what we read in the newspapers,” says Sarson. “From January we were
trying to exit our business from Rover, but it enforced its contractual terms on
us. However, we managed to bring down our payment terms.”

Sarson says that Rover’s collapse produced a £250,000 loss, which the company
has already written off in the latest set of accounts. Like most other
suppliers, he is not hopeful of getting any of this money back. “Rover even kept
the stuff that we supplied to the production line, but was not used. Rover has a
clause in its terms and conditions of sale, which meant that the company would
keep goods that had been delivered to its distribution centre even if it had not
paid for them. We believe that we lost £20,000 because of that,” he says.

Fortunately, WH Smith & Sons did not have to make any redundancies.
Sarson says that credit payments from Accelerate were “a lifeline”. “Accelerate
did a fantastic job of getting money out to people within days of Rover’s
collapse. We received our first payment within two to three weeks. As a result,
we were not forced to lay off any people and we have been lucky.” Sarson says
that the company is already revising its credit terms to limit its potential
exposure to payment default in the future.

“As a result of being burnt by Rover’s collapse, we are making similar
alterations to our terms and conditions so that we don’t get caught out again,”
says Sarson. “We want to make it clear in any contract we sign that we want to
be able to reclaim our products in the event of any payment failure. We are also
looking at taking out credit insurance as a form of protection.” Paul Green,
director at Macworth Tools in Smethwick in the West Midlands, a tier-two
supplier of guide rails for Rover car seats, lost £78,000 when the company it
supplied parts to, RDS Automotive, went into administration at the beginning of
May – just four weeks after Rover announced that it was in the hands of
administrators. “Given that our annual turnover is £1.5m, this is not an
insignificant loss that we can absorb,” he says.

Green says that the loss was particularly disappointing because Macworth had
carried out a credit check on Rover not long before the collapse. “The informat
ion we got back was that Rover still had a good credit rating and was paying its
bills. What are you supposed to do? There has been talk about the financial
stability of Rover since the 1970s,” says Green.

Prior to Rover going into administration, Green says that the company started
using invoice finance to guarantee cashflow. “We have now also changed our
credit terms and payment conditions and we are asking all our customers to carry
out staged payments whenever they sign an order with us. This means that they
pay a certain amount of the likely total bill in advance, on delivery, and the
remainder to be settled within 30 or 40 days,” he says.

According to Green, once official news broke of the company’s collapse, “the
banks tightened their credit limits and overdraft facilities – not just for us,
but for just about anyone who had any exposure to Rover.” Green says that “the
only financial assistance we have had is from the Inland Revenue, which allowed
us to defer ‘pay as you earn’ (PAYE) payments for three months rather than pay
every month.” He adds: “There isn’t that much we can do to stop something like
this happening again in the future. To diversify means that you need new markets
and new customers to sell new products to and that takes time.

Furthermore, we have always worked in the automotive industry and we are
comfortable with that.” Green says that the company has considered buying credit
insurance in the past, but adds that it was ruled out as an option. “The
coverage is just too limited and too expensive because most insurers perceive
the automotive and engineering industries too high risk,” he says. “We looked at
various policies from different providers and found that none of them would have
provided enough cover to make it worthwhile.” Birmingham-based APS Metal
Pressings, a tier-one supplier of high-tech pressings to Rover Powertrain, and a
significant tiertwo supplier to MG Rover, believes that it lost between £75,000
to £80,000 in products it supplied, but was not paid for. However, in terms of
lost sales, the company says the figure is around £500,000.

According to its managing director Tony Parr, “around 3% to 4% of our direct
sales were going to Powertrain, but indirectly Rover accounted for around 14% of
the company’s total sales. Our turnover for the last set of accounts was around
£6.5m, so it’s a big loss to write off.” Parr says: “We knew that Rover was in
trouble. We had expected something like this to happen for a few years, but the
speed of its collapse was shocking. Furthermore, right up until the collapse,
Rover was paying us on time – within 45 days – and we have heard that other
suppliers were also being paid on time, so the company is likely to have had a
reasonable credit rating right up until the end. There would have been little
real warning for anyone just about to start working with the company.” Like many
other suppliers, Parr says that “credit insurance was not an option. You
couldn’t get any reasonable insurance cover on a Rover deal because the company
has had too many high profile mishaps and bail-outs for years. On a broader
scale, most car manufacturers in the UK are not making any money, so insurance
premiums are sky high because the risk of payment default or collapse is big.

“Rover’s collapse has refocused our minds on our business, how we operate and
what kinds of technology we should be using to go forward,” says Parr. He says
that the company is trying to diversify its customer base – it has now started
supplying parts for the Ford Mondeo – and it is also looking at diversifying
away from the automotive sector, such as supplying other manufacturing tools to
other companies and working in other areas of the pressings industry.

According to David Malpass, senior operations manager at Accelerate, the
opening up of the supply chain to smaller companies when larger companies bailed
out of the market has inadvertently led to more companies taking a hit.

“Some large tier-one suppliers started distancing themselves from Rover from
2003,” says Malpass. He points out that Lear had a plant in Tipton, which
supplied Rover with parts for interior systems, but the company did not think it
was profitable and sold it off to RDS Automotive under a management buy-out. In
October 2004, BMW decided to close its car parts plant in Swindon which was also
a supplier to Rover. Both these closures meant that Rover had to source from
other companies.

“Ironically, this contributed to more small and local firms getting their
fingers burnt because they took on the Rover work. He says: “Many of these
companies took increased loans and credit facilities to adapt their systems to
cope with demand from Rover, and therefore took a real hit when the company was
forced to halt production.”

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