Saturday, April 02, 2005

Government loan to help Rover?

Once in a while, you see how old "New Labour" really is. The Government is looking at providing a bridging loan of £100m to help MG Rover secure a deal with its Chinese partner, Shanghai Automotive Industrial Corporation (SAIC) and safeguard 6,000 jobs in the West Midlands (excluding suppliers). Why aren't banks prepared to provide this bridging loan? Do they consider the chances of getting their money back too remote? If they do, why should the taxpayer lose out instead? Fear not, the DTI have our best interests at heart and have asked the directors of the company who, since buying the company for £10 and having made £40m, to contribute a couple of million pounds in order to share the risk with the taxpayer. Why don't they risk the £40m? I'm sure they would be delighted to!! Naturally, the BBC doesn't even report this risk to the taxpayers' £100m.

Can we look forward to a renationalistion of MG Rover in the future and look forward to more consumer focused cars like the Allegro, Metro and Maxi? The fact that sales have plummeted in the last eighteen months should show even a Minister what's really wrong at MG Rover. They just can't help interfering in a business producing rubbish cars.

Frankly, SAIC are playing their cards really well, playing hardball in their negotiations as a general election is on the way and Labour cannot afford to lose seats in the West Midlands.


ian said...

This loan, would help safeguard tens of thousands of jobs in the UK.

The loss of MG Rover and its economic activity would cost the country billions over the next few years in lost tax receipts and increased benefits directly and indirectly in its knock-on effects in the wider economy.

That 40m figure is a bit contentious, too. Dreamed up by one of the papers.

SAIC is a nationalised company. It is inevitable that the Chinese Government would want something from the UK Government.

As for 'rubbish cars', have you driven any of the current range? They may be many things, but 'rubbish' isn't one of them.

check the facts for yourself, and don't let other people make up your mind for you.

Thank you!

Snafu said...

Ian. Thanks for your comments. However, I disagree with most of your observations. The loan should not be made if a bank, who has shareholders to prevent money being wasted, is not prepared to lend the money as the chances of repayment are too low. I do not believe it is the Government's role to safeguard jobs if the economic activity they are engaged in is not valued by the market in which they operate. Eighteen months of declining sales suggests that customers are voting with their feet and buying their cars from other companies who provide their customers with a better overall package, whatever that is. I'm afraid that it is better to let MG Rover go bust and re-employ those workers in other more productive industries.

I disagree with your statement that the loss of MG Rover would cost the country billions. As far as I can tell, 6,000 jobs are at risk. Assuming they all earn the average wage of £24k. then I calculate their total wage bill is £144m. Excluding company taxes, and estimating that they pay 40% of their pay in taxes, the annual tax receipt is £57.6m. As MG Rover is struggling financially, I assume it's not profitable and therefore pays no Corporation Tax. If MG Rover goes bust, Gordon will lose this revenue and could start paying out for unemployment benefit and training. The net effect is then starting to edge towards the £100m loan as you point out. However, in a market economy, with success comes failure. A company introduces DVD players, VHS manufactures have to change their product mix or go out of business. Car manufacturers should be no different. All you can do is try to make the skill set of the workforce as flexible as possible, reward and encourage enterprise, but also allow failure. There is a role for Government helping in this transition, but not supporting a failing business model. Otherwise you could find companies producing products that no one needs or wants to pay for..

The £40m figure may be contentious, if you have a more reliable source, then please advise me and I will correct the mistake. As for rubbish cars, yes, that may have been a bit strong as I drove Rovers for eight years, however, in the 2004 JD Power survey, they are rated below the industry average for manufacturers, better than Citroen and Daewoo but worse than Seat and Renault.

I am always happy to stand corrected if any of my facts are incorrect. Ian, I don't let other people make my mind up for me!!

Anonymous said...

Hello Snafu,
Just to let you know that while 6,500 people work directly at Longbridge the suppy chain to Rover accounts for about an additional 15,000. These suppliers also provide components fo other automobile companies in the midlands which will cause problems if these small suppliers go under. Then there are local shops and services that will be affected..The number of peop;e who would be affected by Rovers demise is unknowable but is certainly far more than your suggested 6000..Get your numbers sorted if you want to be taken seriously.
Best wishes,
Bert Brummie

Snafu said...

Bert Brummie

Thanks for the comment. Yes, you are right, potentially more than 6,500 workers would be affected by the closure of Longbridge, it could be double or more depending on the definition used. However, without trying to be too cold as I recognise it does significantly impact the workers involved, you simply cannot keep a factory open producing goods that customers are increasingly not prepared to purchase. We all make consumer choices every day based on varying factors, price, quality, design, service etc. Unless you are altruistic, you will typically seek to purchase those goods and services that maximise whatever factors are important to you. By so doing, you are unfortunately voting with your feet and penalising workers somewhere in the world whose products or services don't meet your exacting requirements. Should we support these workers with Government subsidies because they have families to shelter, food to provide or do we let the "invisible hand" of the free market work it's magic and employ them more gainfully producing some goods or services that you are prepared to pay for? It means that companies overall are constantly having to innovate, try to keep ahead of the competition and provide something that consumers want or need.

I do not believe it is the role of Government to support failing companies. Companies are in business to make profits, not provide people with work five days a week.

PS I note that Tata Automotive also produce MG Rover cars and export them to the UK. I have to assume that prior to the MG Rover negotiations with SAIC, Tata must have looked over the books and decided that it was not interested.

Blithering Bunny said...

>This loan, would help safeguard tens of thousands of jobs in the UK.

There are few misconceptions in the response from Ian and Bert Brummie. One is that people who lose their jobs never get other jobs. But history has shown us that this is not true. In a competitive economy where the government does not try to prop up failing industries, new jobs are being created all the time. The vast majority of the workers in this case will find news jobs soon enough (in fact, many will probably continue to work for MG Rover when it is eventually bought after it collapses - the collapse will not cause the brand name, which is worth money, to disappear).

It may be that some will find it difficult to get other jobs, but this doesn't justify spending 100 million of other people's money for the sake of what is at most going to be a handful of people who might not get other jobs. This is how an economy ends up broke, with everyone worse off in the long run.

The lost tax receipts issue is not as straightforward as you think it is. Given that most workers will find other jobs (or remain working for a restructured MG Rover), their tax receipts will come in anyway. Spending 100 million in order to get the same tax receipts as before is pointless.

Besides, most of those people will be more productive in other jobs (or in a restructured MG Rover) than in a failing company which struggles to sell cars, and will most likely pay more in tax receipts than before.

The same applies to people who make their living downstream from MG Rover. Some of them might find it difficult for a while if it collapses, but in the long run they and everyone else will be better off economically if they deal in the future with a better company which produces more cars that people want to buy.

If the logic being applied here was any good, then it would make sense to bail out every failing company, such as Alders which is in the process of collapsing. But in fact this is a recipe for disaster, as we have to keep pumping money in to companies which are unable to support themselves. (As Snafu says, if it were true that Rover just needed a loan and all will be right, then the banks would be falling over themselves to provide this. But they're not).

Steve said...

I agree with Ian - many of my best friends work in Longbridge, and the Rover plant is vital. You'd feel differently if your livelihood depended upon Rover's survival.

Steve said...

The other thing I would say is Mr Campbell clearly doesn't know Longbridge very well. There are, in fact, extremely few jobs already in Longbridge, and in neighbouring Northfield. The only other places of work in Longbridge, other than Rover, are the sort of shops you see on every High Street - fine, but they're not recuiting large numbers of people, and are more likely to take on students from the University down the road, who often have retail experience, than people with experience of manual labour. The situation with Rover is not the same as the situation with most other large companies - in this case, the local economy totally depends upon them.

Anonymous said...

But if you can't make a vehicle that people want to buy at a price that makes a profit (or at least covers the costs), then why should other people be forced to pay for you to do so ?

This line of arguement must face up to the fact that an economy is dynamic, and changes all the time. There is no particular reason why vehicles can't be made efficiently in the UK, but it seems that few people have the knack.

It always seems monstrously unfair to those involved in such situastions, but large and small, it is happening all the time, and it is the way the economy progresses. The only sensible answer in the end is to let Rover stand or fall on its own. Any other solution is ultimately simply wasting everyone's money.

Anonymous said...

>You'd feel differently if your livelihood depended upon Rover's survival.

Maybe I would, but that's irrelevant. You're proposing the government spend £100 million when all the evidence tells us that MG Rover is failing. It can't sell enough cars to cover its costs, let alone make a profit. We can't pour money into financial black holes, otherwise you end up with Germany where there is officially 12% unemployment (and actually much more hidden unemployment).

That is, trying to save jobs in this way just produces more unemployment, (and a much lower living standard) in the end.

If Rover is to continue it needs to be wound down, bought by a new company, and restructured so that it can make cars that sell enough to cover costs, and some profit as well. Or else completely dissolved.

Of course this is tough on those older manual workers who won't be re-employed by the company, and who find getting new work difficult, and who haven't saved for a rainy day because they've been told (falsely) that the state would always provide for their every need. But it would make much more sense to pay those people who can't get new work to help them get a new job or move to a new area where there is work, rather than spend £100 million just for the sake of a few people (and in doing so propping up a company which is doing us harm rather than good).

(And there are plenty of jobs in Britain, that's why we keep having to import foregn workers, it's just that these are often jobs which British people would prefer not to do, preferring the disability pension instead).

>The situation with Rover is not the same as the situation with most other large companies - in this case, the local economy totally depends upon them.

I know this is going to sound harsh, but you if you can't get a job in the area, you need to move to where there are jobs. Actually, I'm not that sympathetic, as I've uprooted various times myself for work purposes. Other people aren't required to subsidize your preference to stay where you want, in the house you want. The local economy will adapt (or move), as it always does.

I know Gordon Brown makes it difficult to move because he screws us every time we move house with stamp duty. (He certainly makes it easier on the middle-class unemployed because he constantly hires middle-class people for non-jobs in the civil service, but does nothing similar for unemployed manual labourers).

But spending 100 million in such unproductive and harmful ways for the sake of the small percentage of MG Rover workers who can't get a new job will itself cause -- indirectly -- *more* unemployment elsewhere in the country. So in effect you're asking that a bigger number of people have their jobs sacrificed for the sake of a much smaller number in the MG Rover case.

Snafu said...

I totally agree with Scott Campbell of Blithering Bunny and the last two anonymous posts.

Albion Blogger said...

What do we want: an economy that provides real, lasting jobs and which, when the going gets tough, is able to turn itself away from loss-making and towards more profitable ventures?

Or one where a company can start to fail and, finding itself with problems raising finance from commercial banks, gets a loan from the ever-abused taxpayer?

The correct solution to many (not all, but many) of our industrial woes is to create a business environment that contains: a well educated (literate, numerate, able to think) workforce, labour flexibility, very low regulation, low taxes - both company and personal, easy access to markets and the recognition that, if you don't succeed then you fail. There's no bail out.

Then, although one's current employment may not be 100% safe, employment generally will be safer and high unemployment can be a thing of the past. Government, at best, will fine-tune here and there.