Strategy

Return of the Phantom

Now under German ownership, iconic British car maker Rolls-Royce hopes to return to its former glory.
Jason KaraianMarch 5, 2007

Given its long and illustrious history, you would expect visiting the headquarters of Rolls-Royce Motor Cars in the English countryside to be like stepping into a museum. But there’s only one classic model on display at the building, a 1928 Phantom I Sedanca de Ville, originally supplied to the Duchess of Westminster. And when Hanno Kirner, the car maker’s finance chief, wants to make a point about the firm’s tradition of craftsmanship, he casually unhooks the velvet rope encircling the car, opens up the bonnet and tweaks the rods inside.

Kirner isn’t the only German rolling up his sleeves at the legendary car maker these days. In a complex deal in 1998, German car giants BMW and Volkswagen split the crown jewels of the British industry, with Volkswagen taking over Bentley and BMW winning Rolls-Royce. The two marques were separated for the first time since 1931, when Henry Royce acquired the assets of rival WO Bentley.

For BMW, the purchase included little more than the right, from 2003, to produce cars under the Rolls-Royce brand, with the iconic “Spirit of Ecstasy” figurine — more commonly known as “The Flying Lady” — on the bonnet. Volkswagen acquired the workforce and factory in Crewe, in the British Midlands, where Bentleys and Rolls had been built since 1946. “When BMW acquired the brand, there was nothing,” says Kirner. “No product, no employees, no factory, no marketing.”

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

Download our 2022 survey report for a high-level view of finance team projections and strategies, directly from our CFO.com executive readers.

Today’s Rolls-Royce Motor Cars is essentially a start-up company that happens to own one of the world’s best-known brands. While respecting more than 100 years of tradition, the marque’s German owner has thoroughly re-engineered the cars that carry the renowned double-R logo. Though the brand retains an unrivalled reputation for luxury and superiority, the commercial reality of the company was grim, particularly in the years leading up to the BMW takeover, when it was propped up by two car-mad princes in Brunei who spent £150m (€228m) a year on custom-built models. The Bavarian car maker hopes to return the brand to its former glory, benefiting from its status as the car of choice for the ultra-rich.

From a gleaming new £65m purpose-built plant at Goodwood, near the south coast of England, the first BMW-produced Rolls-Royce that rolled off the assembly line in 2003 shared a name with one of the company’s earliest models: the Phantom. That’s about all the two cars have in common. The new Phantom, nearly six metres long, two metres wide and weighing two-and-a-half tonnes, boasts a 6.7-litre V12 engine with 453 horsepower. It costs a whopping €328,000 before tax.

Last year, 805 Phantoms were sold worldwide, the third consecutive rise in sales since BMW took over Roll-Royce and a 16-year high for the marque (though well down from the 1970s, when it sold more than 3,000 a year). Most buyers pay much more than the sticker price, given the taxes, duties and the extensive range of customised features available. In December, the firm sold its most expensive car ever, a heavily-customised Phantom that went to a Beijing property developer for $2m (€1.5m).

Last month, Rolls-Royce unveiled a new model, the Drophead Coupé, a two-door convertible based on the Phantom that costs €370,000. It is also planning to launch a smaller, sportier model in the next three or four years, the first Rolls that BMW will sell for less than €300,000.

The Perfect Fit

Helping steer the company through this new phase of development is Kirner, a Berliner who joined Rolls-Royce in the summer of 2005. Before moving to Goodwood, Kirner, a former consultant, worked for BMW in Munich, reporting to CFO Stefan Krause. During that time, he set up a restructuring project involving a 220-person team charged with redefining, standardising and centralising all of the processes, metrics and systems across the company’s finance function.

When he was offered the CFO position at Rolls-Royce, “it was a rare coincidence of my favourite pastime and job being matched,” Kirner says. A genuine car enthusiast, especially when it comes to British ones, he took a road trip as a teenager across the UK, visiting all of the country’s major car factories, the highlight being Rolls-Royce’s base in Crewe. To spice up the daily commute he sometimes drives his 50-year-old MG to the office.

The shop floor is a one-minute walk from Kirner’s office, and the easy familiarity with which he passes through the plant suggests that he’s not a director who’s far removed from the rank and file. He revels in the attention to detail that goes into each Phantom, even as he admits that almost every aspect of the car’s assembly is “a finance director’s nightmare.” It takes the in-house leather and wood shop a month to craft all of the leather and wood elements for a single car; each Phantom takes several times more paint than a typical BMW; and the front grille must be manufactured within one millimetre of specification or it is sent back to the supplier.

Of course, it is this extravagance that allows Rolls-Royce to charge more than €300,000 a vehicle. The brand’s ethos also extends to finance, Kirner says, in that “even reports and presentations should look great.” More fundamentally, though, the CFO runs a lean, modern finance organisation. It can take the plant’s leather workers up to 20 of the finest bull hides to make a single set of seats, but Rolls-Royce’s finance team isn’t above using Microsoft Excel if it’s up to the task. In fact, when compared to BMW, Rolls-Royce’s IT costs relative to revenue and per employee are more than 10% lower. “We want to be lean so that we can spend the money on cars,” Kirner says.

The Flying Lady’s Makeover

When he joined Rolls-Royce, the CFO says that it took some time to “recalibrate his benchmarks.” After all, BMW sells more cars in a day than Rolls-Royce does in a year. Still, “the logic and structure of the auto industry is the same the world over,” Kirner says, so he applied what he learned at the BMW headquarters to standardise processes, review policies, tighten internal controls and “iron out all of the issues you always find at a young company.”

His experience from BMW’s metrics revamp also came in handy. Kirner describes a “weekly panic” striking the finance team every Monday, “with blood, sweat and tears late into the night,” as staffers struggled to produce reports for the management board meetings held each Tuesday. The reports ran to 60 or 70 pages, many of which Kirner found lacking relevance. So the CFO decided to give his team Monday nights off and suspended publication of the report. None of Kirner’s fellow board members noticed.

“I said [to the board members] that it can’t be that valuable if you don’t realise that it’s not there,” he recalls. “They said that I might have a point.” Most of the data that gave finance sleepless nights are now reported only once a year. Today, directors are provided with a slimmed-down set of the most useful KPIs — in: the cost of IT per employee; out: the accident severity rate. These are available online within four days of month’s end, extracted from a centralised SAP system that went live in March 2006.

Kirner’s overhaul was useful in its own right, but also necessary to meet a demand from headquarters in Munich: a 20% cut in fixed costs in his first full year on the job. BMW officials announced a long-term annual sales target of 1,000 Phantoms at the launch, a total Rolls-Royce has yet to achieve. “Did we deviate from the initial business plan? Yes,” says Kirner. “Why did we target a 20% fixed-cost cut? Obviously, to make the numbers work.” Though Rolls-Royce does not report its financials separately, the CFO claims that annual revenue is growing by 30% and that “we deliver a positive contribution to BMW’s bottom line,” conceding that there are many ways to define “contribution.”

There is consolation in the fact that Rolls-Royce isn’t alone. Sales of DaimlerChrysler’s Maybach unit also failed to meet expectations, while Volkswagen’s Bentley is gaining volume only at the market’s low end. “Everyone overestimated the potential of this segment.” says Michael Raab, an analyst at Sal Oppenheim in Frankfurt.

As the Germans gain experience in the ultra-luxury car industry, they are each refining their strategies for a market in which the traditional rules of supply and demand don’t apply.

Aim High

Rolls-Royce is the current leader in the market for saloons priced above €300,000, where its main competitor is Maybach. This is the preserve of ultra-high net worth individuals, defined in a report by Capgemini and Merrill Lynch as people with more than $30m in financial assets. There are around 85,000 ultra-high net worth individuals around the world, and Rolls-Royce’s research indicates that, on average, they own seven cars, three houses and often a jet or a yacht.

Leading up to the launch of its new convertible last month, Kirner was asked whether it would hurt Phantom sales. “As money isn’t usually a limiting factor,” Kirner says, “our customers don’t think in terms of either/or; they buy both.” Phantom owners also often have equally expensive Ferraris or Porsches in their garages, but as they drive these finely tuned sports cars less often than their Rolls, Kirner doesn’t consider them competitors.

Development is now under way on the next generation Rolls-Royce, with plans to hire 200 more workers at the Goodwood plant. The new model — known as RR4 — will be smaller than the Phantom and its variants, and pitched more downmarket, with a price of between €200,000 and €300,000. That should suit potential customers with merely $5m in financial assets, a club of a few million worldwide. It will also bring Rolls-Royce into closer competition with its old stablemate, Bentley.

Bentley sells its Arnage saloons for between €220,000 and €270,000. Similar in concept to the Phantom, the Arnage was launched in 1998 and its sales are diminishing. Bentley has devoted the bulk of its attention to its Continental GT and Flying Spur models, sporty coupés that sell for €147,600.

Launched in 2003, the Continental GT, described by Bentley as the “fastest four-seat coupé in the world,” has been popular with the nouveau riche — movie stars, footballers and the like — who see Rolls-Royces as too staid. The Continental GT and Flying Spur, a four-door variant introduced in 2005, accounted for the bulk of Bentley’s 9,200 unit sales last year, an unprecedented amount for cars in its price range. But this success may, paradoxically, harm Bentley. In the ultra-luxury market, price is a sign of status. “For the people who buy these cars, it’s not a question of affordability,” says Christoph Stürmer, a Frankfurt-based car analyst at consultancy Global Insight. “The problem is whether it’s good enough to mention at the club, whether the price is justified in terms of hierarchy and exclusivity.”

“We will never make a ‘cheap’ Rolls-Royce for the sake of volume,” says Kirner. To operate in the ultra-luxury segment, “you need an anchor at the very top of the market to remain credible,” he adds. “I think that Bentley needs to do something about their anchor because they’re running the risk of losing credibility.”

Market Intelligence

Meanwhile, Maybach has an image problem, market watchers say. The pre-second-world-war German luxury brand was revived by DaimlerChrysler in 2002, with new models launched at the same time, and with similar prices, as the Phantom. Like BMW, DaimlerChrysler also predicted annual sales of 1,000 for the Maybach, though last year only “around 400” were sold, the company says with suspicious imprecision.

Laden with electronic gadgets, the Maybach is “as close as you can get to a business jet on wheels,” says Global Insight’s Stürmer. But buyers of cars at such stratospheric prices are usually not globe-trotting, always-on executives (if they are, they prefer to kit out their cars with humidors instead of high-tech gizmos). This, coupled with the obscurity of the marque outside of Germany, means that Maybach has failed to take off. “With these cars, it’s all about marketing, and that’s Maybach’s problem,” Stürmer says.

Though Maybach also doesn’t report separate financials, there’s little doubt among analysts that the unit is loss-making. The jury is out about the current financial state of Rolls-Royce and Bentley. Both claim operating profits, but it will probably take some time to recoup their parents’ initial investments.

So, what’s the point? Why are some of the world’s biggest car makers pouring money into the ultra-luxury market, known for thin sales and irregular profits? Even if Rolls-Royce were to double its sales this year, “it would add some upside to the estimates, but I don’t think it would chase people into BMW’s shares,” says Raab of Sal Oppenheim.

In the end, for giants such as BMW and Volkswagen, the decision to buy companies like Rolls-Royce and Bentley is similar to the decision that someone makes when they buy a car for hundreds of thousands of euros, writes Richard Feast in Kidnap of the Flying Lady: How Germany Captured both Rolls-Royce and Bentley (Motorbooks, 2003):

For the German firms, the value of Rolls-Royce and Bentley was not their asset worth or technological leadership, but their rarity, their polish and their historic breeding … what Rolls-Royce and Bentley had was something the big groups never acquired, for all their achievements: class. It gave them a value far above their intrinsic worth.

This was anticipated by Henry Royce, who, despite his reputation as a headstrong engineer with little business sense — that was Charles Rolls’s strength — showed an occasional flair for marketing. He coined the phrase still used as a slogan at the company’s headquarters today: “The quality remains long after the price is forgotten.”

Dividing the Riches

“Don’t you think you’ve made a fool of yourself?” That was the insolent question lobbed at Ferdinand Piëch, the CEO of Volkswagen, at a London press conference in 1998. Journalists were digesting the implications of a complex, four-way deal that saw one of the world’s best-known companies, Rolls-Royce Motors, acquired by a German car company.

Volkswagen outbid rival BMW, run by Bernd Pischetsrieder, for the British carmaker, paying £430m (€653m) to industrial conglomerate Vickers, which had acquired Rolls-Royce in 1980. But at the same time, the right to make cars bearing the Rolls-Royce name went to BMW for only £40m. Branding rights were licensed to Vickers by Rolls-Royce plc, the aero-engine company that split from its eponymous car division in 1971. Pischetsrieder had persuaded Sir Ralph Robins, Rolls-Royce plc’s boss, to sell him the brand in the event that Vickers put the car division up for sale. Thus, Volkswagen’s purchase covered only an ageing factory in the British Midlands and rights to the lesser-known Bentley brand, while BMW secured the rights to one of the world’s most famous automotive brands for less than a tenth of the price, prompting the journalist’s particular line of questioning.

Piëch didn’t come away looking good that day, but the reality of the deal was more complicated than headlines suggested. Piëch and Pischetsrieder held weekly meetings for more than a month before the deal was announced, so the Volkswagen chief was aware of BMW’s side deal with Rolls-Royce plc. He also had some leverage on Pischetsrieder, in that some hallmarks of the Rolls-Royce brand — the “Spirit of Ecstasy” radiator statue and the marque’s model names (Phantom, Silver Ghost, Silver Shadow and the like) — belonged to Vickers and would pass to Volkswagen. Eventually, it was agreed that Volkswagen would sell both Bentleys and Rolls-Royces from 1998 to 2002, after which the rights to Rolls-Royce would pass to BMW. Following the deal’s announcement, Piëch often said that he was only interested in Bentley anyway, though a last-ditch offer to Pischetsrieder to swap Bugatti for Rolls-Royce suggested otherwise.

Improbably, Piëch hired Pischetsrieder at Volkswagen in 1999 after the BMW chief was sacked due to heavy losses at its Rover subsidiary. Pischetsrieder then replaced Piëch as CEO in 2002, with the latter moving to chairman of the supervisory board. In November 2006, Pischetsrieder resigned, only six months after signing a contract extension with Volkswagen. Piëch reportedly led the ouster, extracting some revenge for the day back in 1998 that he was made to look a fool.

4 Powerful Communication Strategies for Your Next Board Meeting