Europe and the Big Three

What then do General Motors, Ford and Chrysler have in common with those European countries? More than you might think. In the 1970s, the “Big Three” U.S. auto companies faced an onslaught of foreign car companies. Nimbler competitors from abroad, such as Toyota, Nissan and Volkswagen were quickly expanding their market share and eating into the profits of the established U.S. carmakers.

Up until then, the U.S. market was split between three large companies, each of which was comfortable with its own financial results and market share. With lots of profits, the U.S. companies could agree to give workers a share of the goodies to insure labor peace. If one company had to raise prices because of higher labor costs, the others would soon follow suit. This lack of real cost competition made management complacent — and shareholder interests often took the back seat.

Into this cozy situation burst the competitors from Japan and Europe in the 1970s — a harbinger of the globalization avalanche that was soon to grip economies around the world. Toyota, Nissan and Volkswagen were all able to establish themselves in the U.S. market without too much difficulty.

With their affordable, efficient and high-quality vehicles they were quickly able to win over the hearts — and wallets — of U.S. consumers, thus appropriating a large chunk of the profits previously divided among the “Big Three.” While the U.S. car industry initially tended to dismiss the new kids on the block, it eventually became clear that the industry had to undergo wide-ranging reforms to stay in business.

If this sounds familiar, it is because it describes quite well the situation in which most European countries found themselves in the 1980s and, especially, the early 1990s. Europe’s spectacular postwar boom, which lasted well into the 1960s, had led policymakers in Germany, France and Britain to believe that they could do no wrong. They all developed inflexible government intervention into the economy, coupled with high levels of wages and benefits.

Workers came to expect ever higher levels of benefits even as it became clear that increased competition (for example from Asia) took away the ability of their employers to pay those benefits. In short, global competition came as a rude surprise to the Europeans — exactly what had happened in the U.S. auto industry.

The United Kingdom — smaller and always less competitive — saw the handwriting on the wall long before anybody else in Europe. It responded with the Thatcher Revolution. While many on the continent still have unfavorable memories of “Iron Lady” Margaret Thatcher, they view the results of her work with some envy.

The United Kingdom was the first country in Europe to move away from the postwar consensus, and to set in motion the revolution that got management under control, focused on services rather than manufacturing, and forced labor to accept realistic compensation and benefits. Britain’s path was difficult and risky — and many on the continent wish that they could follow it.

The way the United Kingdom dealt with the challenge at hand is remarkably similar to Chrysler’s situation in the 1970s and 1980s. It was the smallest of the U.S. car companies, and the most vulnerable. For a while, it even flirted with bankruptcy.

Under the gun, the company reinvented itself and revamped its product line in following years. It decided to bet the entire company on a new concept — the minivan. The bet was tremendously successful, and by the 1990s, Chrysler’s profits were the envy not only of the auto industry, but other sectors as well.

Just as Chrysler’s story is similar to that of Britain, Ford’s experience resembles that of France. By the late 1980s, Ford had finally achieved a turn-around by reducing costs, renegotiating labor contracts and producing cars that were more in line with customers’ wishes. France similarly took a while to realize what had to change and may still have an image of inefficiency.

In spite of this image, however, on the whole France has accepted the challenges of globalization. The most recent example is Vivendi’s takeover of Seagram. And a closer look reveals that the stock market capitalization of corporate France is considerably greater, on a GDP-adjusted basis, than that of corporate Germany. In spite of protestations to the contrary, it seems that France has fewer problems with its transformation than Germany.

That leaves General Motors and Germany as the last pair in the car-country parallel. Both — justifiably — have long been regarded the laggards when it comes to restructuring.

Fromer chancellor Helmut Kohl as well as GM’s 1980s CEO, Roger Smith, in the past were convinced that nothing could stop the economic success of their country or company.

Chancellor Kohl, of course, had the added responsibility of overseeing German reunification. But that doesn’t change the fact that at a critical period, when competitors were being forced to turn around, Germany and GM both wasted valuable time by trying to “sit out” the problem.

The good news is that in recent months General Motors has shown the best performance among the Big Three. It seems that far-reaching reforms are finally paying off. And just like General Motors, Germany today has been making up lost time. There are some successes here, even though much remains to be done.

Overall, however, we can draw a cautiously positive conclusion: Both Germany and GM now have fresh “CEO’s” — new leaders at the top that will invigorate their teams and clean up old mistakes. Without question, the speed of reform has picked up in Germany. This is fortunate for Europe, for Germany’s wake-up is critical to the continent’s future.