Does Our GM (Government Motors) Await Same Sorry Fate As Britain's?

America should learn from Britain’s disastrous takeover of its biggest auto company.

Few of the policymakers currently nationalizing the American auto industry seem to remember the British experience, and fewer still seem to have learned anything from it.

British Leyland, Britain’s largest automaker, faced bankruptcy in 1975. Fearing that its collapse would leave a million workers unemployed, the Labour government nationalized it. The company remained a ward of the state for 13 years.

During that time, the British taxpayers invested 11 billion pounds — the inflation-adjusted equivalent of $22 billion today — in a company whose only sign of life was a willingness to spend that money. Though the British economy recovered, British Leyland did not.

In 1950, Britain manufactured 52% of the world’s exported vehicles. But that was chiefly because Americans wanted more cars than their own factories could yet produce, and the French and German industrial sectors had been destroyed.

Britain’s car plants, anachronistic before the war, remained anachronistic after it. Only the luxury brands, such as Rolls-Royce and Jaguar, were well designed, and even the men who designed them could not sense the industry’s future: attractive, affordable, mass-market vehicles.

The success of the British labor movement had, moreover, yielded a work force widely known to be strike-prone, careless and lazy. By the late 1960s, France, Germany and America had displaced British exports from the world market.

If the facts were clear enough, so was the Labour government’s eagerness to ignore them. In 1967, the devout socialist Tony Benn, chairman of the government’s Industrial Reorganisation Committee, determined to improve the automobile industry by asking Britain’s two biggest carmakers, Leyland Motors and British Motor Holdings, to merge.

Leyland Motors owned Triumph and Rover; British Motor Holdings owned Austin, Morris, MG and Jaguar. Britain’s foreign competitors had large car companies, Benn reasoned, so Britain, too, should have a large car company. Size, he believed, would suffice in the absence of skill, a delusion common to lovers and labor leaders alike.

Homely Cars

Benn further imagined that British Leyland, still relatively successful, could use its capital and expertise to revive the severely anemic British Motor Holdings.

The companies agreed, and British Leyland was born. It held 40% of the U.K. car market and within five years lost nearly a quarter of it.

Why? The early ’70s saw ever more intense competition from continental auto manufacturers, as well as the rise of the Asian car tigers. Leyland’s management was inflexible and slow to adapt. The group had too many companies under its control, and they made similar, competing, outdated cars.

The oil-price shock didn’t help. Neither did Leyland’s militant union. Led by Derek Robinson, an unapologetic Communist known as “Red Robbo,” the union embarked on a series of ruinous disputes with management, regularly bringing production to a standstill.

Leyland’s factories were overmanned, its equipment old, its cars ugly. Antique collectors with a keen sense of irony now cherish the dumpy Austin Allegro, known at the time as the Flying Pig. Available in beige, brown, and wilted-lettuce green, it leaked, and its rear windows spontaneously popped out.

Its proudest design innovation was its square steering wheel. While Leyland was busy inventing the world’s first square wheel, the Germans were building the Volkswagen Golf, a stylish, family-friendly, fuel-efficient hatchback that quickly became one of the best-selling cars in history.

By 1974, the global market share of Britain’s auto exporters had dropped to sixth place. Leyland began begging for a loan, and the Labour government forked over 50 million pounds. By 1975, however, it was clear that the Leyland loan would not be enough to save the company.

Looking For Handouts

Britain’s newly created National Enterprise Board (NEB) took control of British Leyland in 1975. It pumped money into the company year after year, busily deciding where new plants would be built, and taking a hand in how cars would be designed.

The cars produced under the NEB’s supervision were among the worst ever made. Leyland’s 30.8% of the U.K. market — already down, you will recall, from 40% at the 1967 merger — sank to 18.2% by 1980.

Leyland’s cars remained outdated, unreliable and ugly. Its larger models couldn’t compete with those made by Nissan and Toyota; the smaller ones couldn’t compete with those made by Honda. “Only the British,” it was said, “could call that car a Triumph.”

In autumn 2008, with the U.S. economy facing a crisis commonly viewed as the most severe since the Great Depression, the chief executives of General Motors, Ford and Chrysler — all hard-hit by rising oil prices and aggressive competition from overseas carmakers — begged Washington for help.

The Bush administration offered them $17.4 billion in emergency loans. Congress balked, so President Bush tapped the $700 billion Troubled Assets Relief Program for the funds, though that was never what the money was intended for.

Earlier this year, President Obama expanded TARP to guarantee warranties issued by Chrysler and GM. Ford, Volkswagen, Nissan, Honda and Mitsubishi have their palms out, too.

Meanwhile, the Department of Energy is lending automakers another $25 billion to speed the transition to more fuel-efficient vehicles. The Obama administration’s justification for these loans sounds familiar: they will create capacity and advance modernization.

(Notice the assumption that governments are in a better position than individual citizens not only to decide what “modernization” is but to advance it.)

The Treasury has also coughed up $5 billion to keep companies that supply auto parts out of bankruptcy; the suppliers have asked for $8 billion more. Cash for Clunkers — there goes another $3 billion. The total costs of the auto bailout are nearing $110 billion, most of it in loans that nobody expects ever to be repaid.

The government has assured us that it has no intention of going into the car business. It has, of course, gone into the car business.

After GM burned through $10 billion in taxpayer cash in the first three months of this year and then went bankrupt, Obama promptly offered it another $30 billion loan. The government now owns GM — or 60% of it, anyway.

“We are acting as reluctant shareholders because that is the only way to help GM succeed,” the president explained. The implication is drearily familiar: Only the government can do it because no private investor would be so stupid as to sink his money into a company that just declared bankruptcy.

In March, Obama rejected the reorganization plans of GM and Chrysler. He forced out GM’s chairman and told Chrysler to join forces with Fiat. He pressured GM to keep its headquarters in Detroit. The federal government is negotiating with GM and with officials in Michigan, Tennessee and Wisconsin to determine where a new small-car plant should be located.

Will Fail Again

“We cannot, and must not, and we will not let our auto industry simply vanish,” Obama declared. “This industry is like no other — it’s an emblem of the American spirit, a once and future symbol of America’s success.”

That’s exactly what British politicians said about Leyland.

We’re nonetheless repeating an experiment that has been conducted already, and its results are known to anyone who cares to consult them. The experiment was a failure — and there is no good reason to think that it will succeed the second time around.

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily