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

CITY JOURNAL
AUTUMN, 2009

After the Second World War, the United Kingdom’s newly elected Labour government resolved to build of Britain a New Jerusalem. It nationalized the commanding heights of the economy and inaugurated the cradle-to-grave welfare state. By the 1970s, the UK faced an economic crisis unrivaled since the Great Depression. Shabby and hopeless, Britain had become, in Henry Kissinger’s words, a “tragedy” of a nation, reduced to “begging, borrowing, stealing.”

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.

If this story sounds troublingly familiar to you, you appear to be nearly alone. 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.

In 1950, Britain manufactured 52 percent 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 workforce widely known to be strike-prone, careless, and lazy. The 1959 movie I’m All Right Jack succeeded precisely because Peter Sellers’s portrayal of work-shy trade-union shop steward Fred Kite was so familiar. 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. 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 percent of the UK car market and within five years lost nearly a quarter of it.

Why? The early seventies 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 squarish 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. (The bailout prompted other carmakers to follow suit, notably Chrysler UK, which the government later lent 162.5 million pounds.) By 1975, however, it was clear that the Leyland loan would not be enough to save the company.

Sir Don Ryder, head of the newly created National Enterprise Board (NEB)—the very names of these government bodies are harbingers of economic doom—undertook an analysis of British Leyland. His 1975 report contained the excuses for failure that such reports generally offer, among them “a sharp rise in the price of oil relative to other goods,” a “cutback in economic growth and consumer demand in the main industrial countries,” and “long-term anxieties about the environment and congestion.” The words notably absent were “crummy, overpriced cars that people don’t want to drive”—and unfortunately, this was the key problem.

Unwilling to affirm the obvious, the report demanded the inevitable: urgent government action. “Very large sums would be needed from external sources to finance the action required to make BL a viable business,” the Ryder report said. These “very large sums” amounted to 1.2 percent of GDP, and the “external sources,” the report made clear, were the taxpayers: “In our view, a very large part of the funds can only be provided by the Government.” Naturally: no private investor would be so stupid as to sink his money into a failing company. Why, then, sink anyone’s money into British Leyland? Because of its “importance to the national economy.”

The government, Ryder cautioned, shouldn’t simply hand Leyland the cash and bow out; it should ensure that the funds were spent wisely by, for example, choosing the company’s new managers and setting its productivity benchmarks. Note the suppressed premises behind these recommendations: that government ministers are better at selecting an industry’s managers than industrialists are, and that government ministers are able to define and measure productivity through various benchmarks. The former is doubtful and the latter false. The only truly relevant measure of productivity is consumer choice: if people don’t want to buy a company’s products at the company’s price, it may have been busy, but it has not been productive. This point escaped all concerned.

Not yet in power but already in control of the Conservative Party, Margaret Thatcher declared her hostility to the Ryder report. She acknowledged the significance of Leyland to the British economy as an employer but warned that no amount of taxpayer money could solve the fundamental problem. “Unless we can ensure a flourishing and competitive industry capable of producing a product at a price people will pay,” she said, “it is not only the future of the British Leyland that is at stake, but the very standards and standing of the British nation itself. . . . Our solution is not to go on putting massive subsidies into failure.”

Ryder’s proposals for “vast and unprecedented financial support,” Thatcher continued, deserved “particularly critical scrutiny . . . at a time of general economic crisis.” The crisis had been invoked as the justification for the bailout, but Thatcher failed to see the logic. If the economy was in crisis, she held, the government should waste less of the taxpayers’ money, not more.

Harold Wilson, the Labour prime minister, argued that the problem—not only with Leyland but with the entire British economy—was an insufficiency of government spending: “a total inadequacy of industrial investment, both to create capacity and, above all, to advance modernization.” Not so, said Thatcher. The “sheer size” of the National Enterprise Board, she warned, would “surely defeat any attempt at really effective management or adequate Parliamentary accountability. British Leyland—or should we call it British Wasteland—employing 170,000 men, will be just one of the NEB’s chicks. . . . Anyone with less talent than a reincarnated consortium of Henry Ford, Attila the Hun, and Immanuel Kant will fall down on the job.”

History proved Thatcher right.

Ignoring Thatcher’s objections, the NEB took control of British Leyland in 1975. In fact, it went beyond Ryder’s recommendations—pumping 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 percent of the UK market—already down, you will recall, from 40 percent at the 1967 merger—sank to 18.2 percent by 1980.

The nationalization had been justified on the grounds of preserving employment, so Leyland’s managers could not readily make decisions, such as concentrating production in fewer factories with a smaller workforce, that might have increased economies of scale. In theory, the NEB was supposed to monitor the company’s progress, but in practice, there was no clear command structure, and it was unclear who was in charge. For a time, Ryder himself was making the key day-to-day business decisions. The managers of the merged companies, suspicious of each other, refused to share vehicle platforms.

Industrial relations went from bad to worse. In 1978, Red Robbo called 523 walkouts—yes, really—at the company’s Longbridge plant. The following year, Leyland’s workers struck for weeks after losing a pay raise for not meeting productivity targets. No one had ever told them what the targets were in the first place.

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.” There is a world of tragedy in that joke. It would have made no sense a century earlier, when Britain was inarguably the world’s leading industrialist.

Keith Joseph, Thatcher’s intellectual mentor, had laid out the case against intervention in British Leyland in 1976. The maximization of employment was an entirely legitimate government objective, he acknowledged. But if money was taken from taxpayers to finance failed firms, those taxpayers could not invest it in businesses and industries likelier to create wealth and jobs. “By subsidizing the least efficient and most capital-intensive firms . . . at the expense of industry as a whole, the Government could not help decreasing employment many times over in the more efficient and basically healthy small and medium private firms, which provide far more employment per unit of capital,” Joseph wrote. “For every job preserved in British Leyland, Chrysler and other foci of highly paid outdoor relief, several jobs are destroyed up and down the country.”

Thatcher agreed. Today, her name is synonymous with privatization and free markets. So it’s all the more surprising that after coming to power in 1979, she plowed more money into Leyland. That year, the company produced yet another plan for corporate restructuring and asked for yet another handout. Defying all her own wise arguments, Thatcher caved, handing over nearly a billion pounds, and continued to hand over money, year after year. In the Commons, she justified the rescue schemes just as her predecessor had. “At a time of world recession, which has hit Britain very severely, we have higher unemployment than we’ve had in the postwar period,” she said. “I could simply not have let [Leyland] go out of being. . . . The total effect of the collapse would have been colossal.”

Why was Leyland the exception to Thatcher’s otherwise clearly principled policies? It’s simple: she needed the votes. Leyland posed a particularly vexing electoral problem for the Tory Party, according to a 1976 memo between two men who would later become significant figures in Thatcher’s government, Sir Geoffrey Howe and Michael Heseltine. “A very large number of seats, in the West Midlands area, must depend on the votes of British Leyland workers,” wrote Howe. Those votes were in crucial swing constituencies. In the end, recalls Thatcher in her memoirs, “the political realities had to be faced.”

Leyland stayed on the government books until 1988, nearly the close of Thatcher’s time in power, inhaling taxpayer money and exhaling cars that no one wanted. Perhaps the only positive thing that one can say about Thatcher’s policy is that by the time the company shut its doors for good, the economy was stronger and could provide more jobs for those who were unemployed. Still, much the same effect could have been obtained by allowing the company and its component industries to go under while paying their workers to bang rocks together for a decade. Such a policy would at least have been honest.

Ultimately, Thatcher shoved the Leyland albatross into private hands. MG was sold to a Chinese group. Ford bought Jaguar and Land Rover in the 1990s, failed to make a profit from them, and foisted them on India’s Tata Motors. What was left of British Leyland became MG Rover; it passed from buyer to buyer and was sold to BMW, which handed it off to Phoenix Venture Holdings for ten pounds. It went bankrupt in 2005, an outcome that billions and billions had been spent trying to prevent.

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 the 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 just like Wilson’s: 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 percent 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. “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.

And why is the Obama administration pursuing these ruinous policies? Presumably because the United Auto Workers are the Democratic Party’s electoral base. They spent millions electing Obama. Car manufacturers are located in crucial swing states. The political realities have to be faced.

Defenders of the American bailout familiar with the story of Leyland—and this is a very small set—argue that the analogy is flawed. The UAW, they note, isn’t run by Communists; it has made large concessions, agreeing to give up cost-of-living raises, performance bonuses, and one paid holiday. It has also agreed to suspend tuition and dental assistance and to reduce prescription-drug coverage. But Leyland’s unions ultimately made concessions, too, and you don’t have to call 523 strikes in a year to drive up the cost of labor so sharply that your product becomes more expensive than your competitors’. That, unfortunately, is all you need to do to fail.

Even after their compromises, UAW members and retirees still earn a good deal more than the average private-sector worker, and they still have better health coverage, better retirement plans, and more paid vacation. Above all, they still cost more to employ and to retire than the employees of rival carmakers, domestically and abroad. The cuts that the UAW has agreed to will be put into place gradually as workers retire. It is very unlikely that costs will fall fast enough to restore these companies to solvency.

Labor costs are only one point of analogy, and not even the most important. Like Leyland, GM owns too many poorly coordinated factories, operates brands that compete against one another, sells nearly identical cars under different names, seems unable to plan for or adapt to fluctuations in the price of oil, and is managed by people who suspect, deep down, that they will not be allowed to fail.

British Leyland, to judge from the news, has disappeared down the world’s memory hole. 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.