It's a new day for the American automobile industry. In order to obtain loans from the federal government that were needed for immediate survival, the new Chrysler Corporation is now partially owned by Fiat SpA as part of an arrangement worked out in federal bankruptcy court. In similar court actions, New General Motors is now partly (temporarily) owned by the federal government. The United Auto Workers union is now part owner of both companies, and a few top officers of both companies were hand-picked by the White House.
This is not the first time government and labor unions have had at least some control over a major auto manufacturer. Let's take a look at how things worked out in the past.
The story of British Leyland has recently been retold as a warning about what happens when government takes an active role in managing the auto industry. In the early 1960s, the British automotive industry nearly collapsed because its products were noncompetitive against imports and they had excess production capacity. Management clearly was at fault, so the government intervened by fostering a monopoly with the size and power needed to succeed against foreign competitors.
The result was the British Leyland Motor Corporation (BLMC), which included most of Britain's automotive and commercial vehicle manufacturers. Formed in 1968, the company's new, government-approved management team made significant improvements, but inefficiencies and flawed marketing strategies persisted. Increasing oil prices, an ailing national economy and poor relations with labor unions forced BLMC into bankruptcy by 1975, at which point the government had little choice but to take over.
By 1986, successful brands like Jaguar, Daimler and Land Rover had been spun off as independent companies. The rest were either sold to foreign competitors, absorbed by other non-automotive companies or simply closed. By the late 1990s, making a profit in the British automotive industry became so difficult that even Rolls Royce sold its car division to Volkswagen.
A different tale: In the 1930s, the Japanese army had no domestic source of vehicles, so the government provided direct support to the Toyoda Automatic Loom Works to develop its automotive division. That support included tariff protection against foreign competitors, but after World War II, that protection was no longer possible.
In 1949, only two years after post-war production began, the nation's economy still was severely depressed, and the market for new cars was practically non-existent. Like Detroit's situation today, production capacity exceeded the market, and credit was not available to keep the company going. When layoffs were announced, the strong labor union went on strike, but soon even it recognized that Toyota would either have to reduce the workforce or declare bankruptcy and close.
In the face of these realities, the union agreed to a 25 percent reduction in work force, but only through voluntary resignations. The president and founder of the company, Kiichiro Toyoda himself, was the first to resign. Over the next three years, the new managers modernized the factory, introduced new products and instituted production control techniques they learned from studying American industry.
With the luxury of hindsight, the lesson seems clear. One ailing industry was taken over by the government in an effort to fix something that was broken, and the other had no choice but to work out its own problems. What's happening here is different; the government has invested taxpayer money and assumed partial control, but with a clear definition of the end-game. The union also has a more direct influence over the final outcome. It's too early to predict success or failure, but history shows us that both are possible.
