Battle for Rolls-Royce moves into higher gear

The battle between German car manufacturers BMW and Volkswagen to take over Rolls-Royce Motor Cars has held the German media and industry analysts transfixed, not least because of the uncharacteristic passion shown by the two protagonists. Nobody disputes the prestige of the British brand but most observers have been surprised by the single-minded determination of the two German giants to gain control over a company that produces fewer than 2,000 cars each year.

When BMW head, Bernd Pischetsrieder, met VW chairman, Ferdinand Piech, at a Geneva car show last month, the two men agreed that the fight for RollsRoyce should be fair and the loser would congratulate the winner as soon as a deal was done.

But when Vickers, the company that owns Rolls-Royce, announced that it was entering exclusive negotiations with BMW, Pischetsrieder received no congratulations from the VW headquarters in Wolfsburg. Instead, Piech accused his rival of using dirty tricks to persuade Vickers to accept BMW's £340 million bid.

VW was stung by the fact that its own, improved bid of £380 million reached Vickers too late to stop the deal with BMW. But the company also claims that BMW put excessive pressure on Vickers by threatening to halt delivery of eight- and 12-cylinder engines and other parts to RollsRoyce if the company was sold to VW.

In view of the fact that the Bavarians produce 30 per cent of the parts for both the Rolls-Royce Silver Seraph and the new Bentley, this could quickly bring production to a standstill at the luxury car plant in Crewe.

Some German commentators have characterised the battle over Rolls-Royce as a clash of egos between Pischetsrieder and Piech. But the contest is about more than just a coveted status symbol and, on closer examination, makes good business sense.

Competition in the car industry has become more intense in recent years, as smaller firms such as Seat, Saab, Jaguar and Rover have been swallowed by bigger companies. Analysts believe that, to remain competitive, car manufacturers must produce every class of vehicle, from small saloon cars to luxury limousines.

This rationale has led DaimlerBenz to produce smaller, cheaper Mercedes cars while maintaining its share at the upper end of the market. But breaking into the luxury market is more difficult and more expensive. It took more than a decade for VW's subsidiary Audi to make inroads into the dominant position of BMW and Daimler-Benz at the top of the German market.

If VW fails to take over RollsRoyce, it plans to develop a luxury limousine of its own but this will be an expensive and potentially hazardous enterprise.

Gerhard Schroeder, the Social Democratic candidate for chancellor in September's federal election in Germany, is on the board of VW and is understood to have discussed the Rolls-Royce takeover during talks with British prime minister, Tony Blair.

VW believes the British government, which has many defence contracts with Vickers, could put pressure on the company to consider the VW bid. Schroder Investment Management, the biggest shareholders in Vickers, has already signalled that it does not consider the sale of RollsRoyce to BMW to be a done deal.

The odds are still on BMW winning the prize, however, not least because it is already so deeply involved in producing Rolls-Royce cars. Engines, axles, electronics and air-conditioning are all made by BMW. The Bavarian car manufacturer also has links with RollsRoyce Plc, the aircraft engine manufacturer that split from Rolls-Royce Motor Cars in 1971. The aircraft engine company owns the name Rolls-Royce and it has threatened to withdraw the right to use it from the motor car company unless BMW wins the bidding war.

BMW remains confident that Rolls-Royce will soon be part of its empire, even if it means offering more money. But VW's Piech insists that its improved bid could persuade many Vickers shareholders who are more interested in profit than prestige.

"The race is still open. We haven't given up," he said.