«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»
An even more complex merger brought virtually all the British-owned car and truck manufacturers into the hands of a single organisation, British Leyland Motor Corporation. Part of the motivation for this deal was to prevent further inroads by American companies into the British market; Ford and General Motors were already well established in the UK, and one of the smaller companies, Rootes, had recently been acquired by Chrysler. The hope was that the new group would match the economies of scale enjoyed by the leading American and European companies.
The need for scale was also the justification used by Labour for the decision to re-nationalise the steel industry in 1967, although in this case politics played as big a part as economics.
Having been nationalised in 1951 and privatised by the Conservatives two years later, steel had become a shuttlecock in the ideological contest between the two main parties. Labour argued that the newly created British Steel Corporation would bring about the structural changes that the private sector had been unwilling to undertake.
As later events were to show, the government vastly underestimated the difficulties of making these large mergers work. More generally, its industrial policies did little to improve the UK’s economic performance. When Labour lost the 1970 election to the Conservatives, the stage seemed set for a shift away from state intervention. One of the first acts of the new government, led by Edward Heath, was to close down the Industrial Reorganisation Corporation. The Ministry of Technology was also disbanded, with most of its functions going to the Department of Trade and Industry. In practice, however, four years of Conservative rule brought little change in the conduct of industrial policy. A series of industrial crises forced the government to retreat from its non-interventionist stance.
The first was the near-collapse of Rolls-Royce. The company had developed an innovative engine, the RB211, and had persuaded Lockheed of the US to install it in a new airliner.
However, development costs proved far greater than had been anticipated, and by 1970, despite launch aid from the government, the company was close to bankruptcy. Because of the importance of the company as defence contractor and exporter the government felt obliged to intervene. As Edward Heath wrote later, “we were conscious that the engine (the RB211) was a potential market leader in just the kind of high-technology field which we were keen to encourage”.28 In 1971, after receivers had been called in, the government took over the aero-engine side of the company; the Rolls-Royce cars business was detached and floated on the stock market.
Problems in shipbuilding and other ailing sectors prompted further assistance from the state, and in 1972 the government passed an Industry Act which “gave more or less carte blanche for crisis-driven intervention, although it lacked much in the way of a strategic orientation”.29 One of the companies that received assistance under the Act was ICL, in the form of launch aid for a new range of computers. Despite their rhetorical belief in market forces, the Conservatives were as anxious as their Labour predecessors to preserve a strong British player in this industry. Some consideration was given to merging ICL with a European or
American company, but the government was insistent that control of ICL should remain in the UK. It was also impressed by the fact that the French and German governments were supporting their computer industries on a more lavish scale than in Britain. 30 When Labour returned to office in 1974, its enthusiasm for industrial policy was undiminished; it sought “a closer, clearer and more positive relationship between government and industry”.31 The promotion of mergers was no longer seen as a high priority, but the successor to the IRC, the National Enterprise Board (NEB), was given wide powers to invest in companies, to provide funds for new product development and to create new ventures in sectors that were thought to be of strategic importance. However, Labour’s hope that the new agency would play a central role in modernising British industry was dashed by the recession which followed the quadrupling of world oil prices at the end of 1973. As the recession deepened, the NEB came to act mainly as a hospital for wounded companies. 32 The biggest of the “lame ducks” was British Leyland, which was badly hit by the fall in car sales and had to turn to the government for financial support. After the government had agreed to stand behind the company’s debts, Lord Ryder, head of the NEB, was asked to work out a plan for restoring British Leyland to health. Ryder’s proposals, which were accepted by the government, called for an injection of over £1bn into the company over an eight-year period, with most of the money coming from the taxpayer.33 The Ryder plan was based on the assumption, unsupported by evidence or analysis, that a revived British Leyland would be able to compete profitably in all segments of the car and truck market.
Several other troubled companies came into the NEB’s fold, including Alfred Herbert, the country’s largest machine tool maker, and Ferranti, a leading electronics firm. The NEB also inherited the government’s shareholding in ICL, which was increased to 25 per cent through the purchase of shares from the two private-sector shareholders, GEC and Plessey. The company performed better during this period, and, although it continued to benefit from preferential procurement and from R & D grants, there seemed a reasonable prospect that it might be able to wean itself off government support. The share price in 1979 rose to its highest level since the company’s creation in 1968.
The NEB took responsibility for the state-owned Rolls-Royce, which had recovered from the Lockheed crisis and, with the help of continuing launch aid from the government, was developing derivatives of the RB-211. Although the technical risks with this engine had been underestimated, the basic design was sound, and Rolls-Royce was beginning to gain ground against its two main US rivals, Pratt & Whitney and General Electric. 34 On the airframe side of the industry, little progress had been made in civil airliners since withdrawal from the Airbus, and the case for further public investment was weakened by the fact that very few of the projects supported by launch aid since the policy had been introduced had earned a commercial return. 35 For reasons that had more to with politics than economics the government nationalised the industry in 1977 – Labour claimed that the manufacturers’ dependence on public funds made private ownership anomalous – but that did nothing to improve its performance or to clarify its strategic direction.
Shortly before the 1979 election the government had to decide whether the newly nationalised British Aerospace should take up an offer from Boeing to share in the development of the new 757 airliner, or rejoin the Airbus. The government initially favoured the Boeing proposal on the grounds that a US link would strengthen British Aerospace and make it less dependent on public funds. Although orders for the first Airbus, the A300, were picking up after a 10 No. 1/2012
ECIPE OCCASIONAL PAPERslow start (it had made a crucial breakthrough in the US in 1978 when it won an order from Eastern Airlines), Ministers were doubtful whether the project would ever show an adequate return. However, they were under pressure from other European governments to show their commitment to European collaboration, and from British Aerospace, which feared that if it accepted the Boeing proposal it would be reduced to the status of a sub-contractor. The government rejoined the Airbus consortium as a full partner, and provided £100m in launch aid for British Aerospace’s contribution to the next member of the Airbus family, the A310.
The UK’s policy towards civil airliners had been erratic, and the same was true of nuclear power. By 1970 it was clear that the decision to go for the British-designed AGR had been a mistake, and the principal operator, the Central Electricity Generating Board, was pressing for a switch to the American light water reactor. This marked the start of a lengthy debate about reactor choice, the outcome of which, in 1978, has been described as “a truly British compromise”. Two more AGRs would be ordered and at the same time the government would examine the option of introducing the light water reactor in the early 1980s.36 The effect of the AGR debacle and the long period of uncertainty was to destroy any hope that nuclear power might be the basis of a successful British export industry.
The threat of US domination was a powerful influence on government policy towards hightechnology industries during this period, but Ministers were wrong to suppose that America’s competitive strength derived mainly from very large companies such as IBM. Much of the dynamism of American industry, especially in high-technology sectors, came from new entrants – entrepreneurial firms that were often better able than old-established companies to understand and exploit new technological opportunities. A classic example was Intel, founded in 1968, which within a decade became the world’s leading producer of semiconductor memories. Another was Genentech, one of the first and most successful biotechnology companies. To its credit, the NEB recognised that, if the UK was to make headway in this type of industry, the initiative would have to come from new entrants.
Two such ventures which at first seemed to have a chance of success were Celltech in biotechnology and Inmos in semiconductors; they were set up as independent companies, largely funded by the NEB but with private sector participation. 37 The reluctance of established British companies to invest in these two industries was seen by the NEB as a market failure which could only be tackled by government intervention. The NEB was willing “to take risks and to back a radically different course from the received wisdom of the industry”. 38 The NEB might have gone further in this direction had it not been for Labour’s defeat in the 1979 election. The new Conservative government, led by Margaret Thatcher, reluctantly agreed that Celltech could go ahead, as long as a majority of the shares were held by private investors. As for Inmos, the NEB was instructed to find a private sector buyer; it was sold first to Thorn-EMI, a British electronics group, and later re-sold to SGS-Thomson, the FrancoItalian semiconductor company. As Mrs Thatcher saw it, the National Enterprise Board was based on the false premise that government officials could identify and nurture promising technologies and companies; she was determined to dismantle it as quickly as possible.
Even allowing for the exceptionally difficult economic situation which prevailed in the second half of the 1970s, Labour’s industrial policy had done little to strengthen British industry. It had created national champions on the basis of unrealistic assumptions of what these companies were likely to achieve. It had exaggerated the importance of scale as a source of competitive advantage.39 It had failed to inject new dynamism into technically backward industries. 40 Where whole industries had been taken into public ownership the effect had
been to politicise decision-making and to delay adjustment to market changes.41 Unlimited access to public funds, as in the British Leyland case, had the effect of insulating managers and employees from the realities of the market.
2.2. FRANCE Among European countries France is the one which has most consistently used the power of the state to support selected industries and companies, especially those linked to national defence and infrastructure. This was especially true in the first thirty years after the war.
After the mid-1980s the extent of state intervention was greatly reduced as France adopted more liberal policies. Even today, however, the concept of the state as the protector of the nation’s industrial assets has not gone away.