The car industry: can 'locusts' drive Chelsea tractors?

Ford, which last week hoisted the "for sale" sign over Jaguar and Land Rover, is infamous for "its clipboard accountants". Engineers select the chassis, brakes and components to be used on a new model and then "the accountants turn up at the factory", says one industry executive. "They go through the list saying, 'you can't have this, that's too expensive'."

But Ford has never been in more need of some good housekeeping: last year, the group lost a staggering $12.7bn (£6.4bn). It is a damning indictment of the crisis faced by America's once-mighty car industry - dominated by Ford and General Motors - that the pair's combined stock market value is less than that of Italian rival Fiat, which two years ago looked on the point of collapse.

Last week, on the back of media speculation, the Michigan-based Ford admitted it had hired two banks to consider the "strategic options" for its two British brands, Jaguar and Land Rover. Bought by the American giant in 1989 and 2000 respectively, the two marques are now housed in one company, Jaguar Land Rover, which employs around 19,000 workers and makes sports and 4x4 cars in three factories: Halewood on Merseyside, and Castle Bromwich and Solihull in the West Midlands.

The company itself is part of Ford's European arm, Premier Automotive Group, which lost £160m last year Following the sale of sports car maker Aston Martin in March, the only other company parked within PAG now is Volvo.

Ford does not provide separate figures for its subsidiaries, but according to the last set of accounts for Jaguar, which exclude non-UK sales, it made a pre-tax loss of £534m in 2005. Land Rover is widely thought to be profit-making but no one knows by how much. Merrill Lynch analysts value Jaguar Land Rover at $1bn to $1.5bn.

Ford insists a sale is not a foregone conclusion but has declined to go into further detail. Analysts say the management, led by chief executive Alan Mulally, who was appointed in September, see Jaguar Land Rover as a drain on resources and a distraction to management's overriding focus: saving the rump of the group.

A sale of Jaguar Land Rover was first rumoured last year when Mr Mulally announced a strategic review of the whole business. But in the end only Aston Martin was sold, and as recently as January, when pressed about Jaguar Land Rover, Mr Mulally said a sale was not on the cards. Unions speculate that Ford has been hawking Jaguar Land Rover around for months with little success, which the car company denies. But in the group's current predicament, it is unlikely that any good offer for a non-core subsidiary such as Jaguar Land Rover would have been turned down. Given that the appointment of Goldman Sachs and Morgan Stanley to review the subsidiary appears to have been a recent one, Ford looks to be intent on getting shot of it once and for all.

Paul Newton, an analyst at Global Insight, says: "Everything has been on the table for some time. Mulally hasn't pressed the issue [the sale of Jaguar Land Rover], but it has been under consideration since he arrived. They appear to have decided to kickstart the process by involving the banks."

If it happens, a sale could take up to six months. The consensus view is that some sort of private equity-backed management team, rather than another car company, will buy Jaguar Land Rover.

The recent history of car mergers does not inspire confidence. It is littered with examples of conflicting management cultures and botched integrations that often end in disaster. Many mergers are unravelling, most recently when the Chrysler in DaimlerChrysler was sold last month to private equity company Cerberus for $7.4bn. Howard Wheeldon, senior strategist at consultants BCG Partners, says: "I can't think of a car maker that would dare attempt to buy Jaguar Land Rover."

But a sale of such a high-profile business to private equity - and the possible threat to 19,000 workers - could not come at a more sensitive time. The private equity industry is under intense scrutiny by MPs, and PM-elect Gordon Brown is reviewing the tax breaks it enjoys.

Unions and their members are already deeply scarred by the broken promises of the owners of what's left of Britain's car industry. Take Peugeot's decision last year to close its Ryton plant in Coventry, despite having repeatedly assured workers it would remain open.

So the idea of private equity, demonised as asset-stripping "locusts" (occasionally with good reason), buying Jaguar Land Rover has not gone down well. Roger Madison, national car officer for the Unite union, says: "Private equity is not an option. They do not invest the money that car companies need. What would private equity add? They have no experience in running car companies."

Unions are seeking talks with the Government. But the track record of state intervention in the car industry is little better than that of car mergers. Rover is the classic example. BMW originally planned to sell it in 2000 to Alchemy, Jon Moulton's private equity outfit. Following an outcry from unions, it was sold instead to a consortium of local businessmen known as the Phoenix Four -who are now the subject of a two-year, and counting, investigation by the Department of Trade and Industry. MG Rover, and its workforce, would certainly have been better off under Alchemy.

The Government's subsequent attempts to smooth a sale of MG Rover to Chinese firm Shanghai Automotive Industry Corporation in 2004 fared little better. As Mr Newton says: "Ministers should stay out of it."

Jaguar Land Rover could become - if handled properly - a model for unions and private equity working together. The most likely alternative to a sale of the subsidiary is a cut in production and closure of one of the three sites, which would result in job losses and only prolong the uncertainty over its future. A sale is the preferable option for unions, even if private equity would be the likely buyer.

The car industry has traditionally been heavily unionised. But unions, particularly in Germany, are starting to realise that it is in their interests to work with management. There are too many car companies in the world and those with poor industrial relations are most likely to fail.

Private equity is also aware of this. The last thing a bidder for Jaguar Land Rover wants is a fight. Nicky Samengo-Turner, chief executive of consultants Magma Executive Strategy, suggests that a new owner of the business should form a European-style works council, with seats on the board for union representatives to maintain good industrial relations.

In the Second World War, near the Castle Bromwich site owned by Jaguar Land Rover, stood a factory that churned out hundreds of Spitfires and Lancaster bombers. Sixty years on, unions, workers and any new owners need to show the spirit of Blitz if they are to pull through together.

How a motor giant can be turned round

Though Ford has clearly lost patience, Jaguar Land Rover is no basket case. Despite criticism from environmentalists, 4x4s remain popular, while Jaguar is still a strong brand. Under the right management, the company could be turned round.

Nicky Samengo-Turner, chief executive of consultancy Magma Executive Strategy (part of a group set up by former Ford Europe boss Martin Leech), suggests the subsidiary needs to improve its customer service - an area neglected to their detriment by many car firms.

It could take a lead from Paul Willis, head of VW Group UK, who has taken to following up customer complaints personally and setting new standards that dealers and distributors have to adhere to.

Another area Jaguar needs to remedy is the speed with which its cars depreciate once bought, says Mr Samengo-Turner. Jaguar has among the lowest "residual value" rates in the industry, which not only damages the brand but makes leaseback deals more expensive for consumers.

Are we there yet? Brands on a long journey

Jaguar was founded as SS Cars in 1922, changing its name at the end of the Second World War. In 1968 it became part of British Leyland, which went into state ownership in 1975.

In 1984 Jaguar was floated as one of the privatisations under Margaret Thatcher. Ford bought it in 1989 for £1.6bn.

Last year, the company sold a total of just over 75,000 cars, with around 20,000 sales each in the US, UK and continental Europe).

The first Land Rover was designed in 1947 - supposedly inspired by the US army jeep used in the War. It became part of British Leyland in the 1960s, and then Rover, which was sold to BMW in 1994. Land Rover was sold to Ford for £1.7bn in 2000.

Since the 1970s, rivals from Japan such as Toyota (maker of the Land Cruiser) and Mitsubishi (the Shogun) have eaten into Land Rover's market share. But it has managed to penetrate the executive saloon market that had been dominated by Mercedes, Audi and BMW.

Last year, Land Rover sold 192,500 vehicles, split evenly between the US, UK and the Continent.

Further browsing: You can find the Jaguar enthusiasts' website at www.jec.org.uk

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