The European Automobile Industry

The European Automobile Industry

The European automobile industry has been transformed in the last thirty years, and illustrates some of the most significant consequences of globalization. The European automobile market is the largest and most lucrative of all the global regions. Yet until the early 1990s, it remained a collection of loosely integrated national markets. Two significant developments changed this. First, the globalization of vehicle production brought American and later Japanese investors into Europe. Second, the political momentum for closer economic union within Europe led to a gradual erosion of national policy paths and a new pan-European framework of regulation and policy. This book presents an analysis of these most important changes and focuses on the response of Europe’s policy-makers. It analyses government-industry relations at both national and transnational levels, demonstrating how national policy instruments have been dismantled by regional political and economic integration. There has been a significant and irreversible shift in the locus of decision-making power from nation states to the regional level in the automobile sector. Andrew McLaughlin is an assistant director at Ernst and Young. William A.Maloney is a senior lecturer in the Department of Politics and International Relations at the University of Aberdeen.

Routledge Research in European Public Policy Edited by Jeremy Richardson Nuffield College, University of Oxford 1 The Politics of Corporate Taxation in the European Union Knowledge and international policy agendas Claudia M.Radaelli 2 The Large Firm as a Political Actor in the EU David Coen 3 Public Policy Disasters in Western Europe Edited by Pat Gray and Paul ‘t Hart 4 The EU Commission and European Governance An institutional analysis Thomas Christiansen 5 Europe’s Digital Revolution Broadcasting regulation, the EU and the nation state David Levy 6 EU Social Policy in the 1990s Towards a corporatist policy community Gerda Falkner 7 The Franco-German Relationship in the EU Edited by Douglas Webber 8 Economic Citizenship in the European Union Employment relations in the new Europe Paul Teague 9 The European Automobile Industry Multi-level governance, policy and politics Andrew M.McLaughlin and William A.Maloney Other titles in the European Public Policy series: European Union Jeremy Richardson; Democratic Spain Richard Gillespie, Ferdinand Rodrigo and Jonathan Story; Regulating Europe Giandomenico Majone; Adjusting to Europe Yves Meny, Pierre Muller and Jean Louis Quermonne; Policymaking in the European Union Laura Cram; Regions in Europe Patrick Le Galès and Christian Lequesne; Green Parties and Politics in the European Union Elizabeth Bomberg; A Common Foreign Policy for Europe? John Peterson and Helene Sjursen; Policy-making, European Integration and the Role of Interest Groups Sonia M azey and Jeremy Richardson

The European Automobile Industry Multi-level governance, policy and politics

Andrew M.McLaughlin and William A.Maloney

London and New York

First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 1999 Andrew M.McLaughlin and William A.Maloney All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data McLaughlin, Andrew M., 1968— The European automobile industry: multi-level governance, policy and politics/Andrew M.McLaughlin and William A.Maloney. p. cm.—(Routledge research in European public policy ; 9) Includes bibliographical references and index. Automobile industry and trade—Europe. 2. Automobile industry and trade—Government policy—Europe. I. Maloney, William A. II. Title III. Series. HD9710.E82M34 1999 338.4′76292′094–dc21 98–31831 CIP ISBN 0-203-98399-8 Master e-book ISBN

ISBN 0-415-11329-6 (Print Edition)

Contents

List of abbreviations

vii

List of figures

x

List of tables

xi

Acknowledgements

xiii

1

Analysing government-industry relations in the automobile sector

2

Heroic strategies and policy failures: the UK 1945–79

17

3

Privatization as industrial policy

43

4

Japanese inward investment in the British automobile industry

65

5

Policy networks in the UK automobile sector

87

6

Policy participation at the European level

105

7

State aids

131

8

Trade policy and the volet externe

155

9

The volet interne for automobiles

179

Governing structures at the European level

197

10

1

Appendices 1

Legislative overview

215

2

Legislation on legal, environmental and consumer protection matters

223

3

Collective organizations

230

4

British Leyland’s organizational structure 1983

232

5

The EC-Japan Car Accord

233

Bibliography

235

Index

245

vi

Abbreviations

ACEA AmCham BAe BEUC BL BLMC BMC BMH BMTA BoT BP BTVMA CBI CCMC CEC CLCA CLEPA CoRePer CPRS CVT DG DoI DTI Dtp EC

Association des Constructeurs Européens d’Automobiles g.i.e. American Chambers of Commerce British Aerospace European Bureau of Consumers Union (Bureau Européen des Unions de Consommateurs) British Leyland British Leyland Motor Corporation British Motor Corporation British Motor Holdings British Motor Trade Association Board of Trade British Petroleum British Transport Vehicle Manufacturers Association Confederation of British Industry Committee of Common Market Automobile Constructors Commission of the European Communities Liaison Committee of the Automobile Industry of the Countries of the European Communities European Motor Components Association Committee of Permanent Representatives Central Policy Review Staff Automobile Network on Continuing Vocational Training Directorate-General Department of Industry Department of Trade and Industry Department of Transport European Community

viii

ECJ EDC EEC EFTA EP ESPIRIT EU EUCAR FDI FIM loans GAO GATT GDP GNP GM HC HCEC HP IRC JAMA JETRO MAA MFA MITI MMC MOT MPV MVEG NACMMI NAO NEB NEDO OICA OJ

European Court of Justice Economic Development Committee European Economic Community European Free Trade Area European Parliament European Strategic Programme for Research and Development in Information Technology European Union European Council for Automotive Research and Development Foreign direct investment French industrial modernization loans General Accounting Office General Agreement on Tariffs and Trade Gross domestic product Gross national product General Motors House of Commons House of Commons Expenditure Committee Hire purchase Industrial Reorganization Corporation Japanese Automobile Manufacturers Association Japanese External Trade Organization Motor Agents Association Motor Factors Association Japanese Ministry of International Trade Monopolies and Mergers Commission Japanese Ministry of Transport Multi-purpose vehicle Motor Vehicle Emissions Group National Advisory Committee of the Motor Manufacturing Industry National Audit Office National Enterprise Board National Economic Development Office Organization of International Automobile Constructors Official Journal

ix

PAC PEP PRO PSA R&D R&TD SEA SEM SMMT SMTA TISC TP UKREP UN-ECE UNICE VAT VER VW WVTA

Public Accounts Committee Political and Economic Planning Public Records Office Peugeot-Citroën Research and development Research and technical development Single European Act Single European Market Society of Motor Manufacturers and Traders Scottish Motor Trade Association Trade and Industry Select Committee Technological Priority United Kingdom’s Permanent Representative to the European Communities United Nations Economic Commission for Europe Union of Industrial and Employers’ Confederations of Europe Value added tax Voluntary Export Restraint Volkswagen Whole Vehicle Type Approval

Figures

2.1 2.2

The impact of non-regulatory measures The concentration of the British automobile industry 1952– 68 3.1 Steering British Leyland 6.1 Working Party 29 of the UN Economic Commission for Europe 6.2 ACEA: internal organization and structure 8.1 EC imports and exports of automobiles Appendix 4 British Leyland’s organizational structure 1983

30 32 47 107 121 170 232

Tables

1.1 Conditioning factors for policy networks 2.1 Regional expansion of the automobile industry, 1960 3.1 British Leyland’s economic contributions 1979–80 5.1 Policy approach, sector type and policy network 7.1 State Assistance to Renault 1980–7 8.1 Import quotas for 1996 compared with predicted imports for 1999

8 27 45 101 138 175

Acknowledgements

It is not protocol to name public officials, but we would like to thank all those in Brussels and Whitehall who were prepared to discuss our work with us, and commented on several chapters in this volume—in particular, Commission officials from DGIII and DGIV, as well as members of the DTI Vehicles Division/Vehicles Task Force who provided detailed insights into the nature of consultation within the sector. Two UK officials were particularly helpful: one who authorized the opening of government files still covered by the thirty-year rule and a second who checked drafts of Chapters 3 and 4 against official DTI records. We owe an even greater debt to those industry figures who willingly and enthusiastically cooperated with our research, in particular Geoffrey Pelling (SMMT), Don Lindley (Rover) and Keith Lockwood (Vauxhall). We are also grateful to a number of individuals who have left the industry, for allowing us to ‘pick their brains’ about past incidents: Mike Carver (former Business Strategy Director with BL), Sam Toy (former Chairman of Ford UK and President of SMMT), Ray Horrocks (formerly Chief Executive of BL Cars) and John Barber (former Finance Director of Ford and Chief Executive of BLMC). On the European side of the research we should like to thank Rudolph Beger (CLCA and ACEA), Dr Hans Glatz (Daimler-Benz), Claude Gerryn (Ford) and James Stuart (General Motors). Most of these interviewees were kind enough to provide further correspondence and comments on draft chapters. We have also benefited from the advice and criticism of fellow academics. We would like to thank David Donald, Wyn Grant, Justin Greenwood, Peter Hennessy, Grant Jordan, Mark McAteer, David Marsh, John Peterson, Jeremy Richardson and Trevor Salmon. We believe our volume has benefited immeasurably from their comments. However, the usual disclaimer applies. None of the above bears any responsibility for the conclusions. We would like to thank Janet Michaelsen for typing successive drafts of this manuscript, and deciphering our handwriting. Ironically, much of the handwriting was done on train journeys between Motherwell and Edinburgh and between Glasgow and Aberdeen.

xiv

Finally, we would like to dedicate this book to our families for their support, patience and love during the writing of this volume. Andrew M.McLaughlin William A.Maloney

For Anna Frances, Marie Frances, Jessica and Hannah Sandra, Caitlin and Patrick

xvi

1 Analysing government-industry relations in the automobile sector

In practice the policy-making process of the car industry is affected by the multi-level structure of the EU decision-making system. Holmes and Smith (1995:125) This book provides an analysis of government-industry relations in the automobile industry at the national and transnational level. It also contemplates the evolution of governing structures at the global level. The automobile industry is one of the best examples of an industrial sector in which national policy instruments have been eroded by regional political and economic integration, and the globalization of production.1 This book examines how policy-makers at each level have managed their relations with the industry and how the industry has organized itself to participate in the policy process. By examining events at the national level using the British case as an example and then at the regional level in Europe, the book identifies the governing structures that have evolved and the relationship between these structures and policy outcomes. This approach reflects our initial suspicions that the steering mechanisms used by policy-makers to govern industrial sectors are shaped in large part by the structure of government-industry relations. There has been a significant and irreversible shift in the locus of decisionmaking power from nation states to the regional level in the automobile sector. The European Union (EU) had achieved the full harmonization of national technical regulations by 1996, implemented a strict sectoral state aids framework and started to dismantle import barriers against Japanese cars. A new policy process has emerged at the regional level which co-exists with previous national arrangements. Accounting for policy outcomes requires an analysis of the relationship between public authorities and the industry at both levels. To this end the recent literature on EU policy-making has focused on developing and refining theoretical tools and models which can cope with the multi-level nature of EU governance. This introductory chapter outlines the sectoral characteristics of the automobile industry, reviews the main conceptual debate in the study of government-industry relations, and examines the utility of the concept of

2 THE EUROPEAN AUTOMOBILE INDUSTRY

policy networks in understanding decision-making at the national and European level. What is being analysed? Sectoral characteristics In global terms and within the European region the automobile industry is an oligopoly. The ten largest automobile companies account for almost 80 per cent of world production. In the major markets of North America, Japan and Europe demand has all but matured and the industry has become a high cost/ low margin business. The sector is suffering from significant over-capacity even though the barriers to market entry in the sector are high. This is due to the international growth strategies of producers from developing regions and the considerable efforts made by producers in established regions (including Europe) to improve their productive efficiency. Thus, somewhat ironically, by embracing Japanese production techniques many European companies have become more productive at a time when demand has levelled out. This environment has led to the development of an extensive array of joint ventures and tie-ups between the leading automobile companies as they seek to balance large-scale production with product diversity. These market conditions have created testing times for many automobile companies in the 1990s and complex problems for policy-makers. The industry may have left behind the rapid growth phase of the 1945–90 period but it remains of fundamental economic importance to national and regional economies. It is a weather vane for the macro economy and the fact that policymakers in all regions have frequently intervened in the sector is a testament to its enduring importance. The symbolic importance of the sector in most nation states partly explains why much-needed mergers and acquisitions have been slow to emerge. The economic significance of the automobile industry rests on the fact that it is such a large and multifarious sector. The following sub-groups can be identified within the automobile sector: full-line vehicle assemblers (some of whom are also large-scale components producers and sub-assemblers); specialist vehicle producers; tier-one component companies (multi-product companies with production facilities in several countries and serving global markets); tier-two component companies (original equipment suppliers to EU assemblers); tier-three component companies (direct suppliers to vehicle companies or more usually to tier-one suppliers); and large suppliers of materials and intermediate items (for example, steel, aluminium, glass, plastics, synthetic rubber, paint, and ball bearings). Our focus is on the major automobile assemblers, but the wider industry is pivotal to the manufacturing base and provides an end market for so many other sectors. The importance of the industry within the European region should not be underestimated. The European automobile market accounts for over a third of both world consumption and production. The industry accounts for 17 per

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 3

cent of total tax revenues in the EU and for 6 per cent of EU manufacturing output. Moreover, it continues to make a positive contribution to the EU’s external trade balance in spite of sluggish demand in Europe and increased competition in export markets. The industry’s products also have a major impact on society. More than 60 per cent of European households own one or more cars, over half of journeys to work are made by car and over 70 per cent of all journeys are by private car. The industry and its products are heavily regulated as a result (see Appendices 1 and 2 for a detailed account of automotive legislation). Thus, the interests of the industry in the policy process extend well beyond manufacturing into areas such as transport infrastructure, transport regulation and environmental policy. The automobile industry has a wide range of policy-relevant interests and is a regular participant in the policy process at the national and transnational level. As a result the range of contacts with national and EU institutions is extensive. Government-industry relations It remains an open but important question whether governmentindustry relationships may vary more significantly or consistently between sectors than between nations. That certain sector-specific characteristics do recur consistently across a range of national settings is clear. Whether such sectoral characteristics are more significant than variations in national characteristics is an empirically unresolved question. (Wilks and Wright, 1987:290) This quotation from Wilks and Wright encapsulates the major research questions facing students of government-industry relations since the 1980s. Until then the literature was dominated by ‘top-down’ macropolitical accounts of policy-making—referred to hereafter as the ‘classic’ approach. This approach relates to studies that rely primarily on systemlevel characterizations of a political economy to inform their position on the nature of governmentindustry relations. The work of Wilks and Wright (1987) represented a major revision of conventional wisdom. They argued that a disaggregated research agenda was likely to reveal a rich diversity of governing structures at the sectoral level, belying the broad characterization of the classic approach. They suggested that a ‘bottomup‘research agenda—termed here the ‘sectoral’ approach—was at least as valid. The two approaches are outlined in turn below. The classic approach The classic approach identifies durable national policy-making traditions and cultural norms amongst political elites which are then reflected in policies

4 THE EUROPEAN AUTOMOBILE INDUSTRY

developed within national political systems. The research agenda is focused on the beliefs, attitudes, political discourse and modus operandi of elite actors. The essence of the classic approach is that ‘politics determines policy’ (Freeman, 1985). Accordingly, macro-political influences are important in shaping specific industry policies and there is an acceptance that certain values and traditions exist autonomously, independent of actual relations between state and societal actors. The state is identified by characteristic features which exhibit themselves across policy sectors and networks. The leading exemplar of this approach in Britain was Shonfield (1965) whose early work presented vividly contrasting images of the British and French political economies. The ‘proactive’ French state was characterized as having a sophisticated planning machinery to implement industrial steering, whereas the ‘reactive’ British state relied on non-regulatory policy instruments and where possible an ‘arm’s length’ relationship with business. The most enduring contribution to the classic approach—the notion of ‘strong states’ and ‘weak states’—has its modern origins in Katzenstein’s edited collection Between Power and Plenty (Katzenstein, 1978). This study explored the historical evolution of domestic political structures (i.e. the degree of centralization in state and society), and assessed their impact on economic and industrial policy. States were then classified according to the findings. Katzenstein (1978) concluded that Britain and America had pursued a laissez-faire strategy which relied on market forces and non-regulatory measures to steer industrial sectors. These were weak states because they were either unwilling or unable to intervene in the economy at the micro level. When weak states did intervene, it was usually reluctantly at times of crises and with disappointing results. Successful interventions appeared to require well-developed governing structures. Thus, the strong states such as Japan and France had adopted a neomercantilist approach involving the use of extensive policy instruments and selective interventions. Katzenstein (1978:299) recognized the dangers of characterizing complex national systems with such broad labels, but he argued that the typol ogy was justified in a comparative context. Thus, while Britain and the USA are different in some respects—the British executive has more power to intervene in society than its American counterpart—in comparison with Japan or France both could be justifiably labelled as weak states. Following Shonfield, Katzenstein suggested that successful intervention in the economy depended in large part on the state’s ability to form productive relations with mobilized societal interests. Another notable contribution to the classic approach is Zysman’s systemlevel analysis (Zysman, 1983). This approach relies almost exclusively on one explanatory variable, the nature of financial systems, to explain differences between nations. He identified three types of financial system, each of which has specific implications for a government’s ability to coordinate industrial adjustment. For example, company-led adjustment strategies tend to dominate

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 5

in capital market-based systems such as that in the USA where finance is raised by companies in financial centres. This contrasts with credit-based systems in Japan and France where the state has greater control in financial markets and can use this position to take a lead role in industrial adjustments. Zysman maintained that his analysis ‘supported the proposition that one can make predictions (about adjustment) based on the nature of the financial system. In Britain the capital market-based financial system which promotes arm’s-length relations between business and government interfered with government efforts to direct the process of industrial change’ (Zysman, 1983:286). Whereas other studies focused on the arm’s length relationship between the state and the manufacturing sector, Zysman suggested partnership between these two may achieve little without the cooperation of the financial sector. Nevertheless, his analysis was very much in the strong state/weak state tradition and reinforced these cornerstones of the classic approach. A final dimension to the classic approach was the transitory attempt to elevate the notion of macro-corporatism as a description of the British and other political systems (Schmitter and Lehmbruch, 1979; Goldthorpe, 1984). In the macro variant of corporatism attention was ultimately focused on the role of peak organizations in the economy. However, this perspective lost ground by the late 1970s as those who examined attempts to develop British corporatism suggested that the more established traditions of the classic approach—weak state and atomistic societal interests—had persisted. Even the most celebrated evidence of British corporatism, the tripartitism of the 1970s, provided inconclusive evidence on closer inspection (see Marsh and Grant, 1977). In summary, the classic approach seeks to understand and explain differences between national political systems when accounting for the development of industrial policies and patterns of governmentindustry relations. The assumption is that industrial governance structures are in large part the product of system-level characteristics. The sectoral approach The sectoral approach consists of a body of sectoral and sub-sectoral policy studies motivated by a healthy scepticism of system level characterizations. Within this approach, labels such as ‘strong’ or ‘weak’ and ‘interventionist’ or ‘non-interventionist’ applied to states are dismissed as ‘positively misleading’ (Wilks and Wright, 1987:284). For example, Cawson et al.’s study of telecommunications and consumer electronics in France found little to support the traditional ‘strong’ state thesis. They concluded that the ‘rhetoric surrounding the role of the state in France, and a good deal of academic commentary, assumes a level of co-ordination and a capacity for concerted action within the French state which our research suggests is the exception rather than the rule’ (Cawson et al., 1987:33). Vogel’s analysis directly

6 THE EUROPEAN AUTOMOBILE INDUSTRY

challenged the laissez-faire images used to describe North American industrial policy. He argued that ‘America does have a highly developed set of industrial policies, which on balance, appear to be no more or less coherent, consistent, or successful than those of its major industrial competitors’ (Vogel, 1987:112).2 Several studies since the mid-1980s have confirmed the suspicion that policymaking patterns are likely to vary between sectors as well as between nations: this includes evidence of corporatist structures in some sectors (see Cawson, 1986). In contrast, Smith (1990) describes a state-led programme of price support policies in British farming which suggests anything but a weak state in agricultural policy-making. In the sectoral approach the idea that ‘politics determines policy’ is rejected in favour of Lowi’s famous argument that ‘policy makes polities’ (Lowi, 1964). This suggests a reorientation in the research goals towards identifying recurring policy problems and challenges faced by policy participants, and examining the structure of ‘sub-governments’, ‘policy networks’ or ‘policy communities’ which cluster around particular policy sectors. Within these arenas state actors and groups form clientelistic relations and attempt to insulate and segment the policy agenda. Thus, the political system is not open to broad characterizations but breaks down into a series of sub-systems in which it may be possible to identify a diversity of policy-making styles and traditions. The sectoral approach also expects that over time each policy sector or industry will evolve a set of governing structures which will mould and shape the politics of the sector (Campbell et al., 1991). Thus, in terms of the wider debate on what shapes industrial policy, the sectoral approach ‘predicts differentiation within individual countries across sectors and con vergence across nations within sectors’ (Freeman, 1985:486). This reorientation in the goals of public policy research (which preceded the specific debates over government-industry relations) has produced a number of neo-pluralist and neo-corporatist ‘meso’ or sectoral-level models of policy-making. Within this, the policy network model has emerged as a dominant paradigm for organizing detailed empirical evidence and exploring the diversity of policy-making patterns within subsystems. For our purposes the policy network approach should be seen as an extension of the sectoral approach to government-industry relations. Policy network analysis The policy network label refers to the clusters of actors forming around specific policy areas and programmes within the political system. If one adopts Freeman’s useful concept of policy sector to indicate a broad and demarcated policy area within advanced societies (Freeman, 1985), then the policy network label can be reserved to describe the various interactions between actors within a policy sector. The policy network terminology is not without its problems because the key concepts have different meanings in different hands. The

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 7

literature is currently divided over the importance or otherwise of interpersonal relationships and whether networks exist at the sectoral or sub-sectoral or even the micro level. These debates are well reported elsewhere.3 Richardson and Jordan (1979), following Heclo and Wildavsky (1974), originally introduced the term ‘policy community’ to convey the image of a sub-government network with a relatively stable membership of actors with broadly shared values on particular policy issues. The actors in the policy community shared various interdependencies and were integrated to the extent that their common ambition was the containment of conflict within network parameters. Thus Jordan contrasts a policy community with an issues network suggesting that a policy community is: a special type of stable network which has advantages in encouraging bargaining in policy resolution. In this language the policy network is a statement of shared interests in a policy problem: a policy community exists where there are effective shared ‘community’ views on the problem. Where there are no such shared attitudes no policy community exists, [original emphasis] (Jordan, 1990:327) Jordan suggests that policy communities develop around specific issues rather than around policy sectors which may be dealing with a number of issues over time. The thrust of his argument is that while conflict exists within policy communities it is constrained by an underlying agreement on the legitimacy of the views of other participants and the need to insulate the policy sector. In contrast, Heclo’s issue network concept (Heclo, 1978) described a much less ordered pattern of actor interaction in the policy process, with no shared ‘community view’ or ‘shared attitudes’ between the participants. Whereas the tendency is towards exclusiveness in policy communities, issue networks are more open and inclusive. Marsh and Rhodes (1992b) tidied up the conceptual map by integrating these two concepts into a policy network continuum. In this approach, a policy community is presented as one extreme of the continuum with the looser issue network at the other (Marsh and Rhodes, 1992b:251). The juxtaposition of the policy community and issue network concepts provides contrasting images of the policy-making process. In fact they seem almost contradictory, but the continuum allows for the undoubted diversity of network structures. Networks can be placed at intermediate points on the continuum depending on empirical findings. Atkinson and Coleman’s (1989) contribution to the network debate deserves a mention in our attempts to explain government-industry relations in the automobile sector. They adapt Katzenstein’s characterization of ‘national policy networks’ within a sectoral analysis, and suggest that the variables help determine a network’s ability to develop effective steering instruments are the degree of state autonomy and the level of mobilization of interests within the

8 THE EUROPEAN AUTOMOBILE INDUSTRY

Table 1.1 Conditioning factors for policy networks

Source: Atkinson and Coleman (1989:54).

sub-system. The mobilization variable refers to the extent to which producer groups in a sector are organized to participate in the policy process. Atkinson and Coleman (1989:53) argue: ‘How business is organized at the sectoral level will help to determine whether and in what way major socio-economic producer groups can make a contribution to policy development and implementation’. In their discussion of state properties, they introduce the term ‘concertation’, i.e. the degree to which decision-making authority is centred in a specific department or division of government. They maintain that this addition to the language is crucial when the focus is on sectoral governance. Using the dimensions of mobilization and state autonomy they develop several ideal type networks (Table 1.1). One of the aims of our study is to assess the utility of the Atkinson and Coleman (1989) model. It is appealing because it is not simply concerned with the identification of particular types of network, but also in relating the specific properties of a network to policy outcomes. They suggest that the structure of policy networks in a policy sector will largely determine the different types of industrial policies that are likely to emerge. This is a direct attempt to explore the connection between government-industry relations and policy instruments, with which this study has considerable sympathy. Moreover, of all the models considered in the sectoral approach, that of Atkinson and Coleman provides most scope for recognizing the variety of policy-making styles which can emerge within policy sectors. It is recognized, for example, that in some networks state actors can develop their own agendas and push through the implementation of policy change in the absence of a ‘partnership’ with industry. The neo-pluralist view of a fragmented state may not therefore hold across all policy sectors. Atkinson and Coleman recognize the possibility that within individual sectors corporatist arrangements can emerge. It will become clear

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 9

later that neocorporatism offers little in an analysis of the automobile industry and that the industry has never demonstrated a capacity or an enthusiasm for such institutionalized political bargaining with the state. However, there seems little merit in developing a model that denies the concepts may be appropriate in other sectors. Like all models developed as ideal types, that of Atkinson and Coleman (1989:54) follows the well-established precedent that the examples are neither ideal nor typical. They recognize that there may be a need for qualification in individual cases. Their work has received very little empirical attention in Europe. We suspect this is largely because of the model’s complexity. It specifies far more variables and ideal types than the more straightforward ‘network continuum’ developed by Marsh and Rhodes (1992b). However, in many respects the two are complementary, as the different types of network identified by Atkinson and Coleman can be seen as an effort to identify network structures along the continuum. It is on this basis that we are utilizing the two models in this book. Our research agenda is grounded within the sectoral approach. The defining feature of this approach is the greater emphasis attached to sectoral level governing structures as opposed to system-level variables. The research objectives of this approach are well described by Wright (1995b:357), who argues that any study of government-industry relations ‘must begin by identifying the actors involved, their needs, and the precise nature of the interdependence. It must also explore the resources of each, the willingness to mobilize those resources, and the constraints which hamper effective mobilization.’ This refocusing of the research agenda is essential in studies of government-industry relations at the European level where networks of actors, governing structures and policy outcomes require detailed analysis. Policy networks at the EU level Several policy studies have identified policy networks at the European level, even if in many cases the nomenclature has not been adopted (see Mazey and Richardson, 1993; Greenwood, 1997). As one leading scholar who has studied European integration within the international relations discipline observed, ‘The common tendency in day-to-day national (and international) policy making for the management of policy to be contained within sectoral policy communities has thus been repeated within the Community framework’ (Wallace, 1996:449). Peterson (1995a) appeals for a much greater level of research and analysis of policy networks at the sectoral level if only to counterbalance the surfeit of macro-political studies of the EU. In many respects, therefore, his concerns echo the debate between the sectoral and classic schools in government-industry relations. Peterson (1995a:80) argues that there is a ‘testable hypothesis that the internal characteristics of policy networks in different sectors are the primary determinant of EU policy outcomes’.

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There are inherent features in the EU polity which encourage policy networks. First, the policy-making structures of the EU were designed to depoliticize issues and break them down into components that could be managed away from the glare of political intervention. Second, the institution responsible for proposing legislation, the European Commission, was designed to manage the integration process through a process of delegation and monitoring. Third, and directly related to this, the Commission lacks the resources and expertise to manage the policy process from the centre. This is particularly the case at the implementation stages of policy-making where it has little choice but to rely on the policy participants attracted or invited to its doors. In many respects what we are describing is the management of interest representation in the policy process. Metcalfe (1992:129) has argued that the EU suffers from a ‘management deficit’. He notes that integration and harmonization ‘places heavy demands on many organisations throughout the member states, at all levels of government and requires more effective coordination among them’. Given that the Commission has neither the political will nor the authority to impose solutions within the complicated European polity, Metcalfe suggests it should act as a ‘network organisation’ prompting the ‘development of organisational capacities and interorganisational coordination that continuing policy innovation requires’ (Metcalfe, 1992:129). We would suggest that policy network structures are developing at the European level if for no other reason than more effective public administration. The Commission itself has conceded as much. In a 1992 document it argued: special interest groups serve as a channel to provide technical expertise to the Commission from a variety of sectors, such as the drafting of technical regulations… There are basically two forms of dialogue between the Commission and special interest groups: through advisory committees and expert groups which assist the Commission in the exercise of its own competence; and through contact with interest groups on an unstructured, ad hoc basis. (SEC 92 2272:6) The precise nature and intensity of these contacts are likely to vary across sectors and issues. For example, the Commission can be more impositional in areas such as state aids policy where it has powerful Treaty rules to support its actions. In general, however, the Commission—and for that matter other EU institutions—have a general preference for working with organized interests within a cultural and constitutional convention that holds that policy-making is more legitimate when affected interests are involved and where possible satisfied. For a policy community to evolve over time it is necessary for the

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 11

policy participants to adopt ‘satisficing’ behaviour as opposed to ‘maximizing’ behaviour. The early work that has been conducted on EU level networks does suggest, however, that students face particular problems in applying the approach. Kassim (1994) argues that because of the diffuse nature of the EU political system it is difficult to identify the boundaries of EU level policy networks. He also suggests that because of institutional complexity EU networks are denied a consistent decision-making locus around which to cluster. This is even a problem within the Commission which, like most bureaucracies, is not a monolith. While the Commission may not be as fragmented as some neo-pluralist accounts suggest, it nevertheless ‘suffers’ from departmentalism and its attendant disputes. Finally, the work of Richardson (1996) and Mazey and Richardson (1993) suggests that the fluidity and openness of the EU system make it difficult, at least in an empirical sense, to identify stable policy areas where networks might operate over time. As Richardson (1996:3–4 points out, ‘the EU, is a complex and unique policymaking system. Its multi-national and neo-federal nature, the extreme openness of decision-making to lobbyists, and the considerable weight of national politico-administrative elites within the process, create an unpredictable and multi-level policymaking environment.’ The images of complexity referred to by these studies connect the ascendant conceptualization of the EU as a system of multi-level governance, ‘within which state and sub-state, public and private, transnational and supranational actors all deal with each other in complex networks of varying horizontal and vertical density’ (Payne, 1997:13). This characterization of the policy process paints a picture of decision-making taking place between different territorial levels within Europe. Marks et al. (1995:4–5) have identified several key features of these new political arrangements. First, decision-making competencies are shared by actors at different levels rather than monopolized by state executives. This situation affords EU officials considerable autonomy and independence in the policy process. Second, collective decision-making among states involves significant loss of control for individual state executives with lowest common denominator outcomes. Third, political arenas are interconnected rather than nested. Policy participants act directly both in national and supranational arenas, creating transnational associations in the process. States do not monopolize links between domestic and European actors, but are among a variety of actors contesting decisions that are made at a variety of levels. Marks concludes, ‘in short, the European Community seems to be part of a new political (dis)order that is multilayered, constitutionally open ended and programmatically diverse’ (quoted by McAteer, 1996:4). We see no conflict of objective or imagery between this view of the EU polity and the need to adopt a policy network approach when analysing EU decision-making. Arguably, if policy networks are to have a use it is in

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explaining how in individual policy sectors, some semblance of order is brought to a seemingly chaotic system of governance. Thus, our starting assumption is that, at the very least, the concept of a policy network has useful descriptive and explanatory values when dealing with the multilevel nature of decision-making in the European automobile sector. We would concede at the outset that the concept could not hope to explain all types of decision-making and processes at the EU level. Peterson (1995a) and Richardson (1996) both wish to see much greater emphasis given to mesolevel analysis, but they are careful to stress that the complexity of the EU policy process is such that no single theory can explain EU decision-making. In Peterson’s approach the network models must be used in conjunction with other models. He gives three reasons for this: First, EU decision-making is governed by different dynamics—or ‘decisive’ variables—at different levels of analysis. Secondly, different theoretical models may offer ‘better’ explanations for decision-making at different levels of analysis. Thirdly, a portfolio of theories is needed to explain decision-making, even if a ‘one-to-one’ fit between theory and level of analysis cannot be guaranteed. (Peterson, 1995:83) Richardson (1996:5) advocates the use of several relatively discrete conceptual tools when studying EU policy-making. Similarly, in his study of state-firm relations at the national and European level, Wright (1995b: 357) concludes that different levels of analysis are required to cope with policy networks which are more complicated, differentiated and fluid than ‘iron triangle’ images of the policy process. The political science choir is singing from the same hymn sheet, at least in terms of a research agenda. Definitions and limitations The policy network approach has been constantly refined since the 1970s. There is a danger that in attempting to offer too precise definitions the flexibility of the concepts is lost and with it much of their appeal. There is great utility in Marsh and Rhodes’ policy network continuum, with policy communities at one pole and issues networks at the other (Marsh and Rhodes, 1992b); however, we would warn against an over-emphasis in either direction. Rigid definitions are an unwelcome development at a time when the policy process has become much more complicated in Europe. This is certainly the case in the automobile sector where the process of assimilating different national and product interests has placed great strain on the policy network at the EU level. The higher propensity for conflict during issue resolution in a multi-level structure need not lead to disintegration, but rather what Marin terms antagonistic cooperation (cited by Marin and Mayntz, 1991:17). He sees this as a

ANALYSING GOVERNMENT—INDUSTRY RELATIONS 13

prevalent if not defining feature of policy networks. Even with highly cohesive networks such as policy communities we might expect vigorous (albeit contained) debate. To those active in these arenas the differences of views are real enough. The important point is that the network provides the institutional mechanism to resolve differences of interests between regular actors. Thus, the consensus apparent to those outside of the network merely indicates that conflict is contained within certain boundaries. By advocating a multi-model perspective to cope with multi-level governance in Europe, authors such as Peterson (1995a), Richardson (1996), and Wright (1995b) are implicitly recognizing the limitations of the policy network approach. This is a necessary qualification at the outset of our study. We recognize that policy networks can and do co-exist (at times unharmoniously) with other sectoral and macro governance structures at the national and transnational level. At times policy outcomes may have as much, if not more, to do with the interaction between networks and other governance structures, as they have with interactions between actors within a network. Policy-making very often cannot be contained in a single community. Ripley and Franklin (1984) note that often when legislation involves sub-systems, approval from the larger political system is needed. This creates competition, conflict and new policy players. In a fragmented and multi-level decision-making system, policy networks may find it difficult to legitimate their own decisions to the extent achieved in national networks. We would like to raise one final note of caution on the utility of policy network models in explaining policy outcomes. They do not, nor were they ever intended to, offer a holistic account of policy-making. Not every issue will be resolved in these arenas even if the milieu of consultation rather than electoral politics is the preferred modus operandi (Jordan and Maloney, 1997). There are alternative types of policy-making models (Jordan and Richardson, 1982; Ripley and Franklin, 1976, 1984). Network structures involving civil servants and ‘their clients’ bargaining over policy details can, at certain times, be undermined by other governance structures: e.g. frequent intervention by elected politicians, and the role of ideology and symbolism in the policy process. There is a fundamental difference between outcomes which emerge from the professional group/bureaucratic interactions, and outcomes where government adopts an impositional policy style, as we shall see in later chapters. Conclusion Given the foregoing discussion it will be no surprise that this book is eclectic in its use of theoretical models. The primary intention is to examine patterns of policy-making at the national and transnational level. A great deal of the analysis that follows can be defined as the ‘nuts and bolts’ of low politics. A considerable amount of policy-making in the automobile sector is highly

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technical, and in many respects mundane, but it is nevertheless crucial to the participants involved. The policy network approach is well equipped to cope with policy-making at this level. It faces far greater challenges when we examine issues of ‘high’ politics such as state aids, import tariffs and privatization. We would argue that policy network analysis must address four other major conceptual issues in accounting for policy-making in a sector such as automobiles. First, the research must analyse the structure of policy net works and explain how actors from different territorial levels come together to resolve issues. Second, the network once identified must be located within the wider political system: this requires an explanation of the linkages between the network and other governing structures and actors. Third, the research must examine how and why networks change: is it the result of changes to governing structures within networks, or because of changes at the macropolitical level? Fourth, we must test the robustness of the network models in the face of a shift in the locus of decision-making power to the transnational and international level. The initial efforts of Peterson (1995a) and Richardson (1996) to sketch a conceptual framework for analysing the EU policy-making process are noteworthy. Peterson argued that his objective: was to develop a framework to guide research which seeks to answer fundamental questions about the nature of the EU as a system of government. We have few definitive answers to the truly important questions at present. Finding them will require hard-headed empirical research, and quite a lot of it. (Peterson, 1995a:89) We hope the following chapters begin to provide the hard-headed empirical investigation he calls for. However, we are mindful of Alfred Marshall’s dictum that facts are silent without theory and to that end we also hope to enlighten the developing conceptual debate. Plan of the book Chapter 1 has outlined the main concepts used throughout the volume. In Chapters 2 to 5 they are applied at the national level in an analysis of the UK automobile industry. Chapter 2 focuses on the British government’s attempts to steer the sector in the 1945–79 period. It argues that the desire for a ‘national champion’ was contradicted by a series of decisions which suggested that policymakers had not developed a coherent policy path for the sector. This is an historical snapshot of the period which provides a backdrop for our more detailed discussion of the major policy

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changes of the 1980s. Some of the issues discussed in Chapter 2 have been covered elsewhere and some readers may wish to move directly to Chapter 3 which provides a detailed examination of the privatization of British Leyland. Chapter 4 analyses the second major policy change in the UK in the 1980s: the Japanization of the UK automobile sector. This policy demonstrated par excellence the neo-liberal approach of the Thatcher government as it embraced international capital and brought highly competitive global firms into a strategically important national sector. The policy also illustrated the UK’s disregard for the problems of excess capacity in the wider European sector, and presented many headaches for policy-makers in other member states and at the EU level. In Chapter 5, we close our national level analysis by identifying the key governing structures in the sector, the nature of policy networks and their impact on policy outcomes. It is at this juncture that we assess the utility of the Atkinson and Coleman model of policy networks. In Chapters 6 to 10 the focus is more firmly transnational. The automobile sector, so long an expression of national economic identity, represents a test case for the European Union’s ambitions as major political actor in the global economy. In Chapter 6 we examine how the sector has responded to the emergence of EU decision-making power, and its efforts to develop effective transnational organizations. Chapter 7 discusses policy frameworks and steering instruments with a detailed analysis of the EU’s long campaign to reduce national subsidies to automobile companies. In Chapter 8 we examine the second pillar of the EU’s policy framework, the reduction and removal of import controls on Japanese cars, the volet externe. Chapter 9 focuses on the EU’s limited efforts to assist the European sector as it comes to terms with global competition, the volet interne. Finally, Chapter 10 concludes the book with an analysis of the development of policy networks at the EU level. It centrally addresses the major conceptual issues outlined in Chapter 1. This chapter deliberately mirrors the conceptual discussion in Chapter 5, but with a specific focus on the transnational level. It concludes by contemplating the prospect of a new tier of governance at the global level. Notes 1 Amoore et al. argue that the ‘dominant conceptualization’ has viewed globalization as ‘seriously undermining the basis of the nation-state as a territorially bounded economic, political and social unit’ (cited in Payne, 1997:3).

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Consequently, state authority has permeated ‘“upwards” to international institutions and transnational corporations, “sideways” to global financial markets and global social movements, and “downwards” to sub-national bodies of all shapes and sizes’ (Payne, 1997:4). 2 The main problem with Vogel’s contribution is that it does not make the distinction between a series of industry policies conceived at the sectoral and subsectoral level, and the development of a national industrial policy within which specific industry policies are coordinated. Arguably it was the lack of such a framework that was identified in the classic approach, and there is little contemporary evidence that this was addressed by American policy-makers in the 1980s (see Grant, 1989b). 3 Wilks and Wright (1987); Jordan (1990); Marsh and Rhodes (1992b); Jordan and Maloney (1997).

2 Heroic strategies and policy failures The UK 1945–79

By the end of the Second World War the British economy was virtually bankrupt. Faced with a legacy of wartime debts and intent on further borrowing to pay for reconstruction and an ambitious social programme, the new Labour government was determined to restore the British trade balance: ‘export or die’ became the maxim. Initially, export policy was concentrated on the main exporters in the inter-war period (e.g. shipbuilding and textiles). However, the government quickly turned its attention to the automobile sector whose export potential was high. The government’s interest in the sector’s export potential also led it to examine related issues such as industrial structure and cost-effectiveness. It soon became clear that the export effort was being hindered by the sector’s industrial structure: there were too many firms producing too many models, preventing necessary standardization of products. It was essential for government to develop effective steering instruments if a sustained vehicle export drive was to be achieved. In the absence of state ownership successful implementation could only be achieved if the policy instruments were acceptable to the companies. This required close cooperation with the sector; however, the government did not have an effective working relationship with the industry’s leaders. The industry was notorious for being dominated by independent-minded autocrats. As one former government official involved with the sector at the time argued, ‘The automobile industry was…a wild horse, every time we got on the saddle it threw us off…when the opportunity arose, we had to use the whip’ (interview, 5 March 1991). At the end of the war ‘sponsorship’ responsibility for iron and steel, nonferrous metals, explosives, engineering and the automobile industry was passed to the Ministry of Supply.1 The Ministry was faced with a diverse range of actors with differing views on the future direction of vehicle production, including: selected leaders of individual companies; the Motor Agents Association (MAA); the British Motor Trade Association (BMTA); the Scottish Motor Trade Association (SMTA); the Institute of the Motor Industry; the British Transport Vehicle Manufacturers Association (BTVMA); the Motor Division of the Institute of Mechanical Engineers; the Motor Factors Association; and most importantly, the Society of Motor Manufacturers and

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Traders (SMMT).2 These organizations were consulted on a regular basis about automobile industry issues and constituted a stable list of policy participants. The role played by each of these actors varied considerably (see Appendix 3 for a brief description of the role these actors played in the policymaking process). However, the key actor was SMMT. The SMMT had 1,500 members who were split into fourteen trade sections representing virtually every aspect of vehicle manufacturing. It was one of the largest sectoral groups in the country and by 1950 had nine permanent departments and eighty full-time staff (PEP, 1950a: 41). The group offered a number of important selective (membership) incentives. It had a parliamentary and legal council which monitored political developments and kept companies in touch with political issues, a public relations advisory panel which published industry statistics and forecasts to assist its members, and acted as an advocate for the industry. The Society also controlled access to all automobile shows, exhibitions and competitions (nonmembers were excluded). These benefits were sufficient to guarantee the group full membership in the sector. The Society was less effective as a collective policy-making body for the industry.3 Government attempts to address problems via sectoral level discussion had little impact on actual decisions. Larger car manufacturing members were rarely prepared to delegate to the group, preferring to supplant group activity with bilateral contacts. The automobile companies often preferred to deal direct with government on issues such as the location of new production facilities, or failure to meet an export target. Companies such as Morris, Standard, Nuffield and Rootes were effectively familyowned businesses headed by independent-minded individuals who were resistant to outside interventions—a factor reflected in SMMT’s arm’slength role on many sectoral issues. These problems of internal cohesion were exacerbated by the group’s policy-making procedures. Any significant decision taken in one of SMMT’s fourteen trade sections was referred to monthly meetings of the SMMT Council for ratification. However, the unanimity requirement in the Council often stifled collective action. Thus it was not unusual to find a proposal blocked because one manufacturer opposed it. As John Barber, former director of both Ford and British Leyland, pointed out: SMMT wasn’t a particularly effective body until the late 1960s…it steered clear of most of the big policy issues and most lobbying was undertaken by the companies on their own behalf… It wasn’t collective at all, the British companies still relied on informal contacts between the Board and the Government. (interview, 5 March 1991) The main problem for government was that these organizations were not predisposed to government overtures, and Whitehall was genuinely unclear about where effective decision-making power rested. A Board of Trade minute

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to Cabinet in 1945 regarding the enforcement of a 50 per cent export quota on the industry stated that ‘discussions should be opened forthwith relating to fundamental problems with exports and costs…but by whom and with whom?’ [emphasis added] (BOT 64 2898). This was a serious issue given the government’s intention to use the automobile industry as part of an export-led revival of the domestic economy. The government did try to provide a formal forum for discussion with the sector through the National Advisory Committee of the Motor Manufacturing Industry (NACMMI). This body was established in the late 1940s to ‘provide a means of regular consultations between the Government and the automobile manufacturers on such matters as location of industry, exports, imports, R&D, etc.’ (PEP, 1950b:46). The NACMMI was a channel of communication and not a policy-forming body. There was no hint of compulsion on the government’s part. Rather, it was hoped the forum could be used to prompt and encourage sector-based action on key issues such as product standardization. Exports and early problem identification The British automobile industry enjoyed several competitive advantages in 1945: its capacity had been boosted by government-financed shadow factories which it inherited after the war; it held a virtual monopoly over sales in the protected home market; European car production facilities had been decimated by the war; and there was an insatiable demand for cars in export markets. Even the expected competition from the USA did not materialize until the early 1950s as American producers concentrated on pent-up demand in the huge domestic market. However, in spite of this extremely favourable operating environment the industry was suffering from a number of serious inefficiencies. These included high costs, lack of rationalization of models and factories, antiquated working practices and under investment (for a fuller discussion see HC, 1975; CPRS, 1975; Lewchuk, 1986). In a reflective report in 1958, the NACMMI was candid about the sector’s dissipating export opportunities: ‘the hard core of the United Kingdom’s car and commercial vehicle export outlets are diminishing at a time when competi tion is on the upgrade and a time when demand in world markets is expanding’. Despite the industry’s deceptive ability to perform well in the favourable market conditions of the post-war period the NACMMI was prophetically pessimistic: ‘Encouraging as these figures appear, the impression of established prosperity becomes more apparent than real when related in proper perspective to the industry’s position vis-à-vis its competitors and discernible trends in world trade’ (NACMMI, 1958:5–6). Discussions through forums such as the NACMMI operated at the sectoral level. However, actual decisions about production and investment were being taken at the level of the firm. Advisory committees were illequipped to influence micro-level decision-making and the relationship was largely

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determined by what was ‘acceptable’ to key firms in the sector, not to government. In addition, there was a cultural reluctance in government to adopt an ‘impositional’ policy style. The export drive In 1938, about 75 per cent of the 440,000 British car exports went to the Imperial Preference Markets of the British Empire. Maxcy and Silberston (1959:111) estimated that some 97 per cent of all the cars produced in Britain in 1938 were sold in protected markets. It was this dependence on protected home and empire markets which the government tried to end after 1945. Two main policy instruments were introduced to achieve this: steel allocations were tied to the level of export production, and demand in the home market was restricted using purchase tax, credit controls and petrol rationing. The first major policy issue to be resolved was the carmakers’ protests that the structure of taxation had inhibited export production. The replacement of the horsepower tax The taxation of a vehicle according to its horsepower had been in operation since 1910. In 1939 the pre-war rate was £1 per horsepower. A typical 8–10 h.p. British automobile would have cost considerably less to tax than a larger 30 h.p. American automobile. Apart from distorting home demand, the tax also encouraged the design of small automobiles which were viewed as a handicap in export markets after 1945. As a Board of Trade minute highlighted, over 50 per cent of UK home market cars were of 10 h.p. or lower: ‘they are too small, cramped, tiring, none too safe and relatively expensive… The basis of taxation encourages the purchase of low horsepower vehicles and therefore handicaps the industry in world markets’ (BoT 96 193 1945). The producers of larger horsepower vehicles and the importers of American automobiles argued that the tax encouraged the production of too many models, increased costs and prevented scale economies being achieved. However, the issue met with indifference from manufacturers of smaller vehicles because the tax offered an indirect protection of the home market: de facto a non-tariff barrier to entry (that was soon to typify most European markets). The SMMT proposed a compromise by switching to a tax based on the cylinder or cubic capacity of an engine staggered by a series of engine classes (probably at 100 c.c. levels). This did not remove the mechanical factor in the taxation formula, but SMMT claimed it would have the desired effect of stimulating export production. This was given lukewarm support by the producers of larger vehicles who argued that they were being penalized. Moreover, the Board of Trade and Ministry of Supply felt that it would continue to discourage the production of the larger engine size cars required for export markets, and would not solve the problem of manufacturers

THE EUROPEAN AUTOMOBILE INDUSTRY 21

producing a multiplicity of models. However, the proposal for a cubic capacity tax was adopted following support from the Treasury. In promoting the cubic capacity option SMMT appealed to the Treasury’s distinctive departmental concerns about macro-economic management. First, they claimed that the switch would involve no loss of revenue to the Treasury, whereas the same level of revenue could not be raised from the flat-rate tax— unless it was prohibitively high. Second, they suggested that a switch to a series of cubic capacity classes would be straightforward to administer. Third, they argued, with some justification, that the delay over a decision on the proposed basis of taxation was generating uncertainty about appropriate vehicle designs. All the other automobile organizations, including dealers, opposed cubic capacity tax but amidst industry divisions, the Treasury’s priorities were a major factor in shaping policy outcomes. The original aim of boosting exports was not best served by this option, because while this tax may have reduced the distortion on engine designs, it still penalized the larger engine. As a result, government consulted the industry about further changes. With several producers originally favouring a flat-rate tax and others beginning to realize the attractions of larger engines in export markets, the industry was able on this occasion to reach a unanimous position within SMMT. In late 1947 it recommended that government introduce a flatrate registration fee of £5 per car. The industry proposals were supported by its sponsoring departments, the Board of Trade.4 The Materials Allocation Scheme British vehicle production was hampered by a number of factors during the 1945–59 period. These included skill shortages, restrictions on capital ex penditure, restrictions on the importation of machine tools and power restrictions. However, by far the greatest problem on the supply side was the shortage of steel. This legacy of war provided the government with its most effective lever over the industry. In October 1945, the Board of Trade Minister Sir Stafford Cripps informally agreed with the car-makers that they should export 30 per cent of total production. The following month at the SMMT’s annual dinner Cripps told the audience that the government now expected a far higher level of export production. Following derisory heckling from his audience Cripps retorted: ‘I have often wondered whether you thought that Great Britain was here to support the automobile industry, or the automobile industry was here to support Great Britain. I gather from your cries you think it is the former’ (Plowden, 1970:312). The government’s patience with the industry was running low. Later that year it announced that the manufacturers’ export target was to be 50 per cent of total car production and 33.3 per cent of their commercial vehicle production. If these export targets were not achieved a company’s supply of steel would be cut back. Showing similar resolve in 1947,

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the government announced that the figures were to be increased to 75 per cent and 50 per cent respectively. The policy led to record export levels between 1946 and 1949, and the new impositional policy style appeared to be working. However, as would become apparent later, most of these exports were still going to Empire markets and not the American and European markets the government wished the industry to penetrate. The industry’s opposition was not simply a case of obstinacy or ‘nonencompassing’ behaviour.5 There were some hard-headed reasons for the car-makers’ opposition to export targets. First, many firms had no real knowledge of the infrastructure conditions in export markets and the vehicles often proved unsuitable and broke down. Second, most of the companies did not have the expertise in their export departments, or the dealership networks in overseas markets to cope with the demands of the policy.6 Third, the problems of acquiring foreign capital made it difficult to invest in overseas dealerships. Fourth, steel shortages meant that many factories were operating 30–40 per cent below full capacity at times. Fifth, Rhys (1972) argued that export policy was further hampered by manufacturers sacrificing quality in the pursuit of breakneck production. In the rush to produce, companies tended to neglect overseas sales and servicing networks and the development of new models. British cars soon gained a poor reputation abroad. The government adopted an impositional policy style because of its frustration with voluntarism. Board of Trade officials accused the industry in 1945 of taking ‘a one-sided view of the relationship between itself and the Government. The immediate problem is the effect that this attitude, which has not so far been resisted, will have upon exports, since the industry can hardly justify its present contribution of only 16 per cent to the export trade’ [emphasis added] (BoT 64 2898). On this issue at least, the prevalent system of consultation and negotiation had apparently broken down. Government clearly formed the opinion that the industry would never have consented to higher levels of export production had it not used steel rationing as a policy instrument. The government also used various credit restrictions to dampen home demand and direct production to export markets. Care must be taken, however, not to overstate the extent to which this policy was designed specifically to facilitate exporting. Treasury policies were devised to restore the trade balance and maintain the value of sterling as a reserve currency and this policy transcended individual sectors. The Treasury view was that a squeeze on home demand would remove much of the manufacturing sector’s discretion in choosing between home and export production. There is little evidence of co-ordination between the Treasury’s macro-economic objectives and the material allocation scheme, although clearly there was a sense of common purpose in government over the need to export. Not surprisingly, car-makers opposed the restrictions on home demand and lobbied government and parliament intensely on the issue.

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At a 1947 NACMMI meeting the manufacturers complained that despite their very considerable contribution to the war effort, or the ‘eight lost years (1938–46)’ as they described it, the sector had not been rewarded with releases to the home market after 1945. They repeatedly argued that an expansion of home demand was necessary to utilize spare capacity, boost production and lower unit costs, and provide a more efficient platform for export markets. It was not difficult for the industry to muster supporting arguments. Waiting list times for cars were then six to nine months, causing much public discontent— individuals could actually be prosecuted for possessing more than one car for private use! The Ministry of Supply endorsed the industry’s argument as the ‘corporate bias’ (Middlemas, 1979) towards industry in general began to manifest itself. The Treasury refused to relax demand restrictions, suspecting the industry had ‘captured’ at least one government department.7 It insisted that a stimulation of home sales would divert attention from export markets and accused the Ministry of Supply of ‘far too much acceptance without argument of the lyrical songs of the automobile industry’s public relations offices’ [emphasis added] (Cabinet EP C51 14). However, the Treasury’s resolve was finally broken in 1951 after the election of the Conservative government, which implemented its pre-election promise to relax fiscal controls on home demand. The Conservative government was still committed to the export drive but the relaxation of austerity policies misjudged the commitment of most of the carmakers to that policy. In 1952, in response to an improvement in steel production, the Supply Minister agreed a new formula with the industry for calculating the ratio of export production to home production. (The government had previously set the export target and announced a fixed figure for new home sales.) Under the new formula the industry’s home quota was calculated as a proportion of total production rather than as a fixed figure. This less formal arrangement, coupled with relaxation of home demand, provided the opportunity for the industry to neglect exports and export production fell dramatically from 66 per cent of total production in 1950 to 38 per cent in 1955 (Maxcy and Silberston, 1959:226). Rhys (1972:380) suggested that successive governments avoided the political costs of implementing export quotas largely because politicians did not wish to be accused of causing unemployment in the industry by reducing steel allocations or being unfair to individual companies. Some firms came close to their quotas, but the aggregate targets for the sector were never reached. While an export target of 75 per cent of production was set in 1949, only 53 per cent of production actually went abroad.8 The industry must take some responsibility for the decline in exports. The main problem was that the traditional reliance on sales in Empire markets was never broken. Even in 1949, when the British industry was the world’s leading exporter, 69 per cent of all cars exported went to the Commonwealth countries with less than 3 per cent being exported to North America (PEP, 1950b:94).

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The failure to take a grip of export markets as competitors struggled in the 1940s and early 1950s was to prove costly. The standardization debate In 1938 the British car industry was producing 138 different models, as many companies aimed to compete in every market niche. This had inevitable consequences for standardization, scale economies and cost efficiency.9 The government believed that important productivity and export targets would only be achieved by a much higher degree of standardization and rationalization.10 Barnett notes that the Civil Service produced several reports between 1943 and 1945 expressing concern about the structure of the industry. One 1945 report observed, ‘export prospects are gravely affected by the division of the industry into too many, often small scale units, each producing too many models'[orginal emphasis] (BoT 64 2898). The report went on to remark upon the car-makers’ apparent indifference to prospects in export markets: ‘they propose to treat the export market as no more than an accessory to their assured home market’ (Barnett, 1986:59). As always, the problem was that government lacked the necessary policy instruments to influence the industry’s decision-makers. The government regularly raised the issue with manufacturers but it relied on their cooperation and was generally reluctant to be more assertive over the issue. The industry’s technical expertise represented a powerful hurdle in the standardization negotiations. To redress the balance, the Ministry of Supply commissioned the Political and Economic Planning Committee (PEP) to examine the industry’s structure and performance. During the preparation of its report, PEP found that the industry was unwilling to release much of the information it required. The draft report concluded that the industry had been ‘sluggish’ over the need for standardization and that its recent (1948) export successes reflected favourable market conditions rather than the underlying strength of its performance. The Society of Motor Manufacturers and Traders labelled the report a ‘dangerous document’ and argued that it had underestimated the effects on vehicle production stemming from steel rationing, shortages of machine tools and the problems of re-equipping after the war. The industry’s influence was such at that time a substantially re-drafted report was eventually published two years later (in 1950). This episode illustrated the maturing of the sponsorship relationship between the Ministry of Supply and the manufacturers. The civil servants appeared increasingly willing to adopt a more conciliatory line with the car-makers, largely because they did not wish to jeopardize the remaining commitment within the industry to export production. The industry made modest progress with standardization, despite these problems, and the number of models in production was brought below sixty by 1950. However, it still lagged behind its competitors, and the government

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believed that it should follow the Ford approach, manufacturing a small model range. In an infamous speech to the 1945 SMMT annual dinner, Sir Stafford Cripps argued: We must provide a cheap, tough, good-looking car of decent size not the sort of car we have hitherto produced for smooth roads and short journeys in this country and we must produce them in sufficient quantities to get the benefits of mass production… We cannot succeed in getting the volume of exports we must have if we disperse our efforts over numerous types and makers. (cited in Plowden, 1970:314) The type of car which Cripps described in his SMMT address was, by that time, actually being built in Germany by Volkswagen. As the 1950s drew to a close, the trading patterns and structure of the automobile industry had changed substantially. However, what had been achieved in terms of standardization and reorientation of export production fell well short of the government’s expectations. There were various rea sons for this, but one of the most notable aspects was the lack of effective policy instruments. The only really effective policy during the period was the Materials Allocation Scheme, and this was made possible by scarcity of steel. The government was unwilling to replicate such an impositional approach in other areas and policy-makers resorted to persuasion via forums such as the NACMMI. Such mechanisms were badly designed inasmuch that they did not target decision-making at the micro level. The advice could be ignored, and very often was. The pattern of ineffectual policy was related in no small part to the governing structures in the sector. If steering goals were to be transformed into outcomes, it required a relationship with the industry which had not been necessary up until then. Car-makers were not well organized for this and were deeply suspicious of the idea of a ‘partnership’ with government. The industry’s leaders were a highly individualistic group of people. If they gave a lukewarm reception to a policy then there was little prospect of effective implementation. Thus, the 1945–59 period was one of frustration. The government had not achieved as much as it intended by way of policy outcomes and was increasingly impatient with its impotence in the sphere of industrial policy. However, things were about to change as British policy-makers began to cast an admiring eye towards the industrial planners of continental Europe. The era of selective intervention: 1960–77 In the 1960s and 1970s a sea change occurred in the attitudes of British policymakers to industrial policy. The Conservative government took on a new role

26 HEROIC STRATEGIES AND POLICY FAILURES

as planner, and began to discard the influence of economic liberalism in favour of corporatist ideas evident in other European states.11 Given its economic importance, the automobile industry was unlikely to escape the new mood in government, and a number of specific policy instruments sprang up from the shift towards planning. The automobile industry’s expansion in the early 1960s became bound up with the regional development policies of the incumbent government (Dunnet, 1980). The industry’s activities also became explicitly linked with the demand management/indicative planning cycle of macro-economic policy (Wilks, 1988). Most significant of all, government encouraged the concentration of British-owned production with the creation of a single volume producer, the British Leyland Motor Corporation (BLMC), in 1968. Regional policy In the early 1960s the automobile industry was induced by the Board of Trade to disperse its production facilities into new locations. In what proved to be one of its most effective steering mechanisms of the post-war period, government was able to influence investment decisions by positively discriminating in favour of designated ‘development areas’ and preventing investment in more prosperous regions. This policy had previously been used in the steel sector with good results. The automobile industry was a major employer which attracted subsidiary investments around its core operations, and was central to the government’s objective of bringing jobs to depressed regions. The specific policy measures introduced to facilitate the dispersion of production included the provision of loans for infrastructure, capital equipment and training, and Industrial Development Certificates. These certificates were crucial because they allowed government to monitor investment plans and divert companies into development areas. Certificates could be easily obtained for ‘development’ areas but not for the traditional automobile manufacturing regions of the West Midlands and the south east of England. For example, Ford was induced to set up a new plant in Liverpool rather than expand its operations near London.12 As Table 2.1 illustrates, in terms of the primary objective of regional dispersal, the policy was remarkably successful. The British were not alone in using regional policy to influence investment in the automobile industry. The French government encouraged Renault to locate new plants in depressed regions, and in Germany Volkswagen were given subsidies to locate in Lower Saxony in the late 1950s.13 While the policy met the short-term goal of job creation, it was implemented without adequate consideration of the long-term implications. Dunnet (1980) argued that the regional expansion created industrial relations problems for the companies concerned. The companies wrongly anticipated that wage costs

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Table 2.1 Regional expansion of the automobile industry, 1960

Source: based on Wilks (1988:77).

in the new locations would be lower than in traditional automobile manufacturing regions which were heavily unionized. Another problem was that decisions about locations were politically expedient: large manufacturing concerns were placed in politically sensitive regions and the fortunes of the plants became inextricably linked with the politics of the regions. Future commercial decisions were heavily influenced by political considerations—a development that only worsened relations between the companies and the government. This was clearly demonstrated in the case of the Rootes (later Chrysler) car plant established at Linwood in Scotland in 1960. The objective was to increase employment in the Renfrewshire region following the decline of the textile industry. The government also saw the Linwood plant as the ideal customer-in-waiting for the steel plant at Ravenscraig, recently established with the use of similar policy instruments. The Linwood plant had excellent transport links and was close to raw material suppliers, but it suffered several significant locational disadvantages, including the fact that the majority of its products were sold in England, increasing its distribution costs; supply lines were stretched, leading to high transportation costs for key components; large stocks of components had to be stored on site in case of any transport problems; and key personnel had to be installed at Linwood, leading to some duplication of staffing with Rootes’s main plant in Coventry (Young and Hood, 1977:241–92). In addition to these problems, the Linwood plant’s main product, the Hillman Imp, was a comparatively poor vehicle which had been expensive to design and arrived late in a highly competitive market. Finally, the multiplier growth philosophy on which the regional policy was premised, i.e. that numerous subsidiary investments would follow, did not materialize and Linwood became the sole focus for the economic fortunes of the region.

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The plant was never profitable, despite receiving start-up subsidies of £9.1 million and Young and Hood (1977) have estimated that the excess of costs over benefits at Linwood between 1963 and 1970 was a remarkable £6.4 million. As the plant continued to struggle, the political implications became clear. A new set of regional interests and pressures had been created around the plant which made it difficult for the company and government to manoeuvre. As we shall see later, when Chrysler threatened to close the plant in 1975 the government decided to rescue the operation with further state aid.14 Demand management policy In its 1975 report the Central Policy Review Staff (CPRS) underlined the need for economic policy to be more sensitive to vehicle production. It argued that of all the European automobile industries, only the Italians had been as badly affected by unstable demand management (CPRS, 1975). 15 This instability had begun in the early 1950s when the Conservative government found it difficult to sustain its manifesto promise, and reintroduced credit controls. In 1955 hire purchase agreements were introduced for the first time to further increase the squeeze on home demand. What then followed was a period of ‘stop-go’ demand management policies oscillating between the priorities of the Treasury and the politics of electoral success. There was little consideration of the impact of unstable demand on industrial production, or any consultation with industrial interests. Frequent changes in credit controls (and therefore demand) disrupted the industry’s capacity utilization, caused substantial redundancies and hindered investment planning. The ‘stop-go’ cycle is a significant benchmark in the industry’s post-war decline (see Rhys, 1972; Baskhar, 1979; Dunnet, 1980; Wilks, 1988). For long periods the automobile industry was targeted with credit control measures as governments sought to expand or depress consumer demand in line with the overall objective of regulating economic activity. The policy instruments that most affected demand in the short run were hire purchase (HP) restrictions and purchase tax (both of which applied to a limited range of industries but were sometimes used selectively on cars), and the car tax.16 As Rhys (1972) has pointed out, the elasticity of demand for car usage is low, while the price elasticity of demand for car ownership is high. Thus, changes in the costs of purchase can have a substantial impact on the level of economic activity, making the industry a useful regulatory instrument for policy-makers. The situation was further aggravated by inconsistent management policies which often restricted demand, and indicative planning issues which encouraged manufacturers to expand production (Wilks, 1988:76–86). The industry complained that it had increased production in line with planning forecasts and then faced problems of excess capacity as demand slumped during intervening deflations of the economy. The CPRS later argued:

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many of the problems of Chrysler and Vauxhall in Britain can be traced to their decision to expand capacity at Linwood and Ellsemere Port in the mid-1960s on the basis of a false expectation that the United Kingdom car market would continue to expand at the then current rates of growth. An excess of plants has effects on the whole industry not just those manufacturers with particularly poor rates of capacity utilisation. (CPRS, 1975:121) The damage of fluctuating controls was fully revealed in 1971 when purchase tax was reduced from 36.7 per cent to 25 per cent and credit restrictions on cars were removed as part of the Conservative government’s Uturn on economic and industrial policy. In 1972 car sales were up over 30 per cent on the previous year’s figures. However, the domestic industry was not in a position to take advantage of this opportunity: it was illprepared for a sales boom after a sustained period of policies designed to dampen demand, and both Chrysler and Ford were affected by industrial disputes.17 Demand was met by imports. Between 1971 and 1973 imports of cars increased from 171, 465 to 436,900. Britain also recorded its first-ever trade deficit in cars in 1973 (Dunnet, 1980:128) and importers such as Renault and Nissan (Datsun) gained their first toehold in the British market at that time. The problem was not so much lack of communication between policymakers and industrialists but, as Wilks (1988) suggests, the departmentalism of the Treasury. The Board of Trade advocated the industry’s case on taxation, arguing that cars were an essential good and should be taxed accordingly (BoT 258 897). The Treasury rejected this view, arguing that ‘no one industry should be allowed to determine the structure of credit policy’ and underlined three advantages to the use of the purchase tax: it was a good fiscal measure for raising revenue; it was easy to administer; and it had gained political acceptability. The Treasury also argued that the car could not possibly be bracketed as an ‘essential need’ good, and was unwilling to tolerate ‘special pleading’ by the car-makers and the Board of Trade. The non-regulatory approach With the era of planning firmly established in the 1960s, policy-makers returned to their long-standing concerns about exports, rationalization and nonprice factors in the British automobile industry. This led to a renewed effort to influence micro-level decision-making with the creation of the National Economic Development Office (NEDO). The NEDO apparatus represented a more sophisticated non-regulatory model. The approach was to use intermediate organizations such as the Automobile Manufacturing Economic Development Committee (EDC) and SMMT to channel government advice or information to the companies on a range of industrial issues. The corporatist philosophy of the policy was a further stimulus for SMMT to improve as a

30 HEROIC STRATEGIES AND POLICY FAILURES

Figure 2.1 The impact of non-regulatory measures (adapted from Young, 1974:33)

collective body, especially since much of the dialogue with government was dominated by the taxation issue. However, it was the EDC which emerged as the main conduit for advice between departments and companies. The EDC had a number of problems as a mechanism of influence. First, the EDC had appeared to lack authority with other government agencies. Wilks (1988:82) argued that while the EDC provided a forum for discussion at a sectoral level, its advice tended to be ignored by government. Second, EDC contact with the industry tended to be through SMMT delegations which gave it a common denominator view and led to a bias towards issues on which the industry had reached a consensus (e.g. taxation policy). Third, the EDC, like the National Advisory Committee of the 1940s and 1950s, operated at a sectoral level and did not have the capacity to consider issues at the level of the firm. It was at this level where decisions affecting rationalization, capital investment, exports and so forth were being made. Fourth, the companies’ anger over demand management policies soured government-industry relations and made it difficult to establish sectoral policy. Fifth, the industry appeared to treat the EDC’s advice with considerable indifference. The EDC effectively became a talking shop having little impact either on tailoring government policies to the needs of the sector, or in influencing corporate decisions in line with the needs of policy-makers. As a result of these factors, a ‘bottleneck’ developed in the system (Figure 2.1). The government had first to clear any problems in negotiations with the intermediate agencies before these organizations filtered advice down to the companies. The initial advice often lost much of its impact as it made its way down to the micro level, and, once there, the companies of ten chose to

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disregard it. The major companies had always been hostile to external advice whether from government or from SMMT, and a policy that relied on intermediate bodies was never likely to succeed. Thus, while the EDC had success in some sectors in partnership with trade associations, the approach did not provide an adequate mechanism for stimulating more effective micro-level governance in the automobile industry. A limited model of intervention: creating a ‘national champion’ The problems being experienced with the EDC approach and the fact that the British Motor Corporation (BMC) was losing market share and profits at an alarming rate, convinced policy-makers to adopt a more discriminating interventionist policy in the late 1960s. During a frenetic period of merger activity in the 1960–6 period the fittest British companies acquired the weakest players (Figure 2.2). While government was not active in these early mergers, it was acquiescent inasmuch that the Monopolies Commission did not investigate any of them. By 1966 there were just three volume producers remaining: Rootes, which would soon fall under Chrysler’s control, BMC (which following a merger with Jaguar in 1968 became British Motor Holdings, BMH) whose profitability was declining, and Leyland, whose export performance in bus and truck markets had been impressive in the 1960s. Leyland’s management had been interested in a merger with BMH for some time.18 However, as one BLMC official recalled, there seemed no real prospect of BMH and Leyland merging without government intervention—‘It wouldn’t have happened if government hadn’t pushed so hard’ (interview, 5 March 1991). In 1966, the government established the Industrial Reorganization Corporation (IRC). The IRC’s remit was to promote or assist with the reorganization and development of the industry, and to encourage a merger between BMH and Leyland: in effect creating a ‘national champion’.19 Several assumptions underpinned the Labour government’s view that a ‘national champion’ should be created in the automobile industry. First, the expansion of the American multinationals heightened fears that the remaining British companies could become targets for take-over. Second, it was believed that the long-standing goals of rationalization and higher export production could be better achieved if policy-makers were dealing with one large British producer and not several competitors. Third, the policy followed an apparently successful European trend. The German Ministry of Finance had encouraged the Volkswagen acquisition of Auto-Union in the late 1960s, and in Italy Fiat acquired Lancia, Ferrari and Autobanchi which were all threatened by foreign take-over. The IRC initiated talks between the two companies in late 1966 at the behest of government minister Tony Benn and the Prime Minister, and was told that the government’s priority was to safeguard BMH. Following its

32 HEROIC STRATEGIES AND POLICY FAILURES

Figure 2.2 The concentration of the British automobile industry 1952–68

initial investigations the IRC concluded that the need to rationalize production facilities was preventing any progress in the company and that BMH was too small to be internationally competitive. The IRC also concluded that any deal with Leyland would have to be sweetened by financial assistance to help with the rationalization of BMH. In contrast, Leyland’s financial position was stable. It returned a profit of £17m in 1965–6 and its managing director Donald Stokes was widely seen as one of the top executives in British industry. The IRC executive believed that scale economies and rationalization could be achieved with Stokes heading a new company. Beyond Stokes, the IRC was deeply concerned about the calibre of the management in the British automobile industry. Despite these reservations, the political will for a new national champion in the automobile industry was overwhelming and there was no power base for pessimism in 1967.20 As a result, the IRC commissioned two sets of merger proposals from merchant banks and proceeded with discussions in the summer of 1967. Both reports concluded that there were tax advantages in the deal being presented as a take-over, but de facto, both BMH and Leyland were to have 50 per cent of the combined equity in the new company. However, BMH resisted these proposals, being apparently unwilling to allow itself to be ‘acquired’ by its smaller competitor. It was yet another example of the fiercely independent attitudes of the British companies which had persisted since the inter-war period. As a result, the IRC’s negotiations broke down in 1967.

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Following the breakdown of talks the Leyland board made a bold move to prepare a hostile take-over bid for BMH in the marketplace. The government had made it clear to Leyland that it would not stand in the way of a take-over, but it was far from happy with the development and the incident strengthened ministerial resolve to find a more amicable solution. It was clear that a deal had to be concluded quickly and a frantic period of ministerial intervention followed to persuade the companies to reopen negotiations. Turner suggests that a crucial turning point came in October 1967 when the heads of both companies were invited to the Prime Minister’s official residence (Chequers): The dinner at Chequers was Harold Wilson’s own idea. He knew the IRC regarded the merger as vitally important and had been struggling to get it under way. An evening at Chequers, it seemed to him, would provide a perfect setting in which to jolly along the two principals and to let Harriman [BMH]…know…a merger was essential but would only come to pass if Stokes was given executive control. (Turner, 1971:120) The government used the meeting to declare its support for the Leyland management (who were persuaded to shelve plans for a hostile take-over) and to cajole BMH to re-enter negotiations. In the restarted talks the IRC was able to resolve the problematic issue of post-merger management structures.21 The ‘national champion’ policy had come to fruition, but only after government, both directly and indirectly through the IRC, had abandoned its traditional reliance on arm’s-length contacts. As an editorial in The Times put it: ‘Never before has a private enterprise merger been conceived with such close contact with government, both officials and Ministers, right up to Mr Wilson himself (The Times, 18 January 1968). Achieving rationalization With the new structure in place hopes were high that the long-awaited rationalization of UK production would now begin. Leyland was inheriting a collection of companies under the BMH umbrella which required rationalization, and the IRC provided BLMC with a £25m loan (almost 20 per cent of its entire budget) at a favourable interest rate to assist restructuring. However, almost immediately it became clear that the IRC was not equipped to influence the implementation of post-merger rationalization policies. Its philosophy was based on supporting the individuals who looked most likely to take the industry forward. The industrialists and bankers on the IRC were ‘steerspersons’ for the economy and it was expected they could identify suitable individuals for the relevant management positions. There was no framework that established accountability or responsibility in the new

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enterprises created. The IRC, in some respects, was simply a governmentsponsored ‘head-hunter’. Rationalization was not tackled in the aftermath of the merger largely because during the negotiations BMH had requested that rationalization of the unwieldy Austin-Morris businesses should ‘proceed at a gentle pace’. In 1970 Stokes told the IRC executive that he did not wish to disturb any plant that was operating properly and would take an incremental approach. Thomas and Donnely (1986:203) have argued that in 1968 BLMC ‘remained a poorly coordinated empire over-burdened by an excessive number of plants, models, workers and dealers. For BLMC to have become truly competitive it would have required an extensive rationalization programme.’ Government, the IRC and Ley land all identified the urgent need for rationalization during the merger negotiations, but the company soon lost its appetite for the difficult decisions involved. A key question was why, after being so instrumental in setting up the company, did the IRC not intervene to ensure rationalization was implemented? Underlying the use of the IRC was an expectation by government that companies would be more responsive to ‘steering’ if it came from ‘prominent industrialists’. However, steering implies stopping short of coercion and this limited the possibilities for action. This was particularly the case with BLMC where the IRC had taken few measures to ensure post-merger influence. For example, it did not seek representation on the board of BLMC as it had done in the case of the Chrysler-Rootes take-over. The IRC did request quarterly meetings with BLMC and a detailed quarterly breakdown of the company’s figures. The BLMC board refused to provide such detail and agreed that only overall sales and profit figures would be made available. In effect, the IRC had surrendered the right to see how the company was progressing in key areas. At the first meeting in November 1969, ‘The (IRC) executive was particularly concerned about British Leyland’s continuing industrial relations problems and about the group’s low productivity compared with its international competitors… Yet no redundancies had been announced. Rootes built car bodies with half the manhours required in British Leyland’ (Hague and Wilkinson 1983:129). In fact, BLMC’s workforce had actually increased by 8, 000 between 1968 and 1970 (The Economist, 14 February 1970). At the time, a Leyland/BMH merger seemed an appropriate solution for government and the companies. Such a solution had been successful in other European countries as they also dealt with the emerging threat of multinational production. It also provided a long-awaited opportunity for government to tackle the rationalization issue. With the benefit of hindsight, part of the problem was that policy-makers were content to allow Stokes a free hand provided the merger with BMH went ahead. The most serious problem, however, was the government’s view that a merger was a panacea for the industry’s ills.

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The earlier experience of the EDC had shown that there was a delicate trade-off between exerting government influence over company behaviour and eroding a company’s commercial interdependence. The creation of BLMC suggested that government had given priority to steering control. However, once the merger was achieved it reverted to a company-led model of adjustment in which ‘firms make basic strategy and production choices without interference’ (Zysman, 1983:310). In this climate, the IRC had neither the instruments nor the political backing to seek further influence over BLMC’s management. As Dunnet suggested: without Government to act as a catalyst, UK automobile firms tended to continue as independents for as long as possible. This acted to the ultimate disadvantage of the firms themselves, the industry and the country. Against this background the intervention of the Government’s IRC was to be welcomed. However, the 1967 Ministry of Technology report identified two problems. First, BMH and Leyland as independents were too small… Secondly, BMH needed reorganisation… [But] the second problem was never solved. Having achieved the merger the government did little to ensure that it worked. Just five years after the merger, BLMC was experiencing serious financial difficulties. (Dunnet, 1980:101) The rescue of BLMC The Department of Trade and Industry (DTI) had been discussing BLMC’s position with the management since 1973. These negotiations were dominated by the management’s requests for state aid under existing government assistance schemes. The Conservative government was besieged by other economic difficulties in the aftermath of the 1973 oil-price shocks and was reluctant to intervene in BLMC’s affairs. In November 1974, the BLMC management approached the new Labour government and requested that it guarantee the company’s loans following a refusal by its bankers to further extend overdraft facilities. The BLMC board told policy-makers that it intended ‘to undertake immediate substantial retrenchment’ (HC Debates, col. 225, 24 March 1975) and sought assistance for its investment programme during this time. The DTI Minister, Tony Benn, agreed to provide BLMC with a short-term working capital loan of £50m. However, as a condition of the loan a five-man team led by the government’s industrial adviser Sir Don Ryder was appointed to ‘conduct, in consultation with the Corporation and the trade unions, an overall assessment of BLMC’s present situation and future prospects’ (HC 342, 1974–5:1). There were significant economic implications stemming from a major retrenchment at BLMC. In 1974 the company employed 170,000 people directly and exported £500m worth of product (HC Debates, col. 1747, 24 March 1975). In his first report to Parliament, Mr Benn

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announced: ‘In response to the company’s request for support for its investment programme, the Government also intend to introduce longer-term arrangements, including a measure of public ownership’ (HC Debates, col. 2115, 6 December 1974). The Ryder recommendations The Ryder report—British Leyland: the Next Decade—recommended that the government nationalize the company and inject £l,400m into its development over the following decade. It suggested that BLMC had a future as a major volume producer of cars, trucks and buses and that its problems in the past were mainly due to a lack of investment in new capital equipment. Senior management were presented as one of the major culprits in the company’s collapse. The report maintained that investment should only go ahead once a new management structure was in place, and that state investments should be linked to improvements in performance, particularly productivity. The government immediately endorsed the findings and placed its new 99.7 per cent share-holding in the stewardship of the latest piece of industrial policy machinery, the National Enterprise Board (NEB). The NEB was set up to monitor the progress of companies in receipt of state assistance, and was something of a hybrid between the Industrial Development Advisory Board established by the previous Conservative government and its predecessor the IRC. Consultation The Ryder team reported to government just four months after being appointed, which suggests that both the consultation process and research were limited. The team appeared to take an early decision not to consult the incumbent board but consulted widely amongst the workforce and middle management (the latter were virtually exonerated of any blame for BLMC’s predicament). This may be explained in part because the team held senior management responsible for the company’s decline and, in particular, the managing director John Barber. He had been an advocate of moving BLMC out of mass production and into lower-volume, up-market vehicles by concentrating on marques such as Jaguar and Rover. Since the Ryder team were determined that BLMC should remain a volume producer, there were inevitably tensions with Barber. The Ryder team’s main point of contact within BLMC was with the finance director who had previously been asked by the BLMC management to prepare an idealistic plan of what the company should do in the future, assuming that it was not constrained by financial or other restrictions. This took the form of a modelling exercise to explore future strategy and was known inside BL as the

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‘concept study’. However, the ‘concept study’ appears to have become the basis for the Ryder report. BL’s managing director recalls how events unfolded: The plan was very back of the envelope but he [Ryder] seized on it and the message went right down the line, obviously the people he spoke to were very optimistic. Large elements of a blueprint became transformed into public policy and BL got vast sums of money to throw at products and factories which frankly not even Ford could have afforded. It was a criminal waste of public money. (interview, 5 March 1991) The concept study was essentially a comprehensive company ‘wish list’. In fact, Pryke (1981) noted that Ryder’s recommendations for the number of models to continue in production and the sales forecasts after 1975 virtually mirrored the BLMC document. In one of its more serious forecasting errors the report made no allowance for increased import penetration in its estimation that BLMC could maintain its domestic market share in future years. The House of Commons Expenditure Committee was equally scathing of the Ryder team when it came to investigate the granting of state aid. A firm’s concept study based on ‘a fairly free availability of cash’ is unlikely to have rigid economy as its central theme, and it is rigid economy and high cost effectiveness which should be two of the criteria for the expenditure of public money, not to mention commercial survival. (HC, 1975:95) The BL chairman Stokes argued that the Ryder team completely ignored the views of senior management about BLMC’s predicament: We were never asked any reasons why anything had been done or what the long term thinking behind it was. If you go round any company and you ask people to tell you what’s wrong, you will get a whole host of stories…without anyone being there who would have told them the answers they were getting were absolute rubbish. [The Ryder team] got a slanted view from the junior management and the shop floor and succeeded in dividing the company. (quoted by Adeney, 1988:280) Stokes complained to Prime Minister Wilson about the lack of consultation and eventually obtained a meeting two months into the investigation. While the Ryder team clearly did not hold the incumbent board in high regard it is surprising that consultation was so perfunctory, given the experience (good or bad) which the senior management possessed. Moreover, the Ryder team had

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only limited first-hand experience of the automobile industry (the only member of the team with industry experience was Sam Gillen, a retired Ford executive, and he did not participate fully in the team’s negotiations and did not endorse the final report). There are a number of reasons why the Ryder team did not consult more fully. First, it may have been inhibited by the poor quality of the information available within the company itself. British Leyland relied on antiquated information systems and there was no central library of information about the various operations. Second, they were asked to investigate at the point of crisis. Any prolonged investigation involving extensive consultation might have undermined confidence in the company, thus jeopardizing the eventual implementation of any recovery plan. Third, consultations were restricted because of ministerial pressure for the ‘national champion’ option. In the first ministerial statement announcing the Ryder investigation, junior minister Michael Meacher told MPs: ‘While I cannot anticipate the solution that will emerge, I can state again the Government’s requirement for a solution that would maintain the company as a major producer, exporter and employer’ (HC Debates, col. 226, 6 December 1974). The options and outcomes The Ryder team considered five central issues in their analysis of BL’s future prospects: 1 Did BL have a future as a vehicle producer? 2 Should it diversify into non-vehicle activities and divest itself of existing peripheral activities? 3 Should BL remain a producer of both cars and commercial vehicles? 4 Should it remain a producer of both volume and specialist cars? 5 In which geographical areas should BL’s marketing effort be concentrated? (HC 342, 1974–5:3)

The second option was rejected because the team believed management effort should be concentrated upon the task of recovery in the core activities of car and commercial vehicles. The fourth option was rejected for no reason other than that there were ‘strong arguments on national economic grounds’ for BLMC continuing with volume production. In terms of marketing, the team recommended BL should seek to increase market share in European and Middle Eastern markets. Options 1 and 3 addressed the question of whether BLMC should remain a multi-product volume producer. The report concluded that BLMC could perform such a role although the main explanation given owed more to the macro needs of the economy than to the viability of BLMC itself.

THE EUROPEAN AUTOMOBILE INDUSTRY 39

The Ryder team were later criticized by the Expenditure Committee for not even considering the alternative option of dismantling the BLMC empire and establishing its operating units as independent producers. The Committee argued, ‘we are concerned that the arguments for and against completely independent truck, bus, quality car and mass produced car companies should not have been made to the House. Indeed, we have no evidence they have been seriously considered at all’ (HC, 1975:107). All these alternatives involved substantial political, social and economic costs, which was a central consideration of the Ryder team. However, just two years after it endorsed the recommendations, the government had lost all confidence in the Ryder report and its heroic strategy for the sector. In 1977, with the company continuing to suffer from serious underperformance, a company-led model of adjustment re-emerged when a new management team were appointed to ‘solve’ the problems which resulted from the implementation of Ryder’s recommendations. Wilks (1988: 103–108) identified four factors leading to the failure of the Ryder plan. First, the DTI became concerned about the progress of plans to build a mew Mini model—a cornerstone of the new investment programme. The low profit margin on such cars raised question marks over the wisdom of large-scale investment. Second, Ryder’s industrial democracy strategy did little to resolve BLMC’s industrial relations problems, and a month-long tool-makers strike in 1977 symbolized the ongoing malaise in labour relations. Third, government concerns were further heightened because Ryder’s forecasts proved alarmingly inaccurate and results fell well short of market share and productivity targets. Fourth, decisionmaking in relation to the Ryder strategy proved unwieldy. However, as Wilks (1988) also points out, the success of the ‘national champion’ option was also dealt a severe blow by the government’s decision to rescue Chrysler UK in 1975. Conclusion: an end to heroic strategies By the late 1970s, the British government had lost all confidence in its ability to ‘steer’ the sector and, frankly, had lost its way. The ‘hands off’ era of the 1940s and 1950s had been frustrating and government entered a ‘hands on‘period in the hope that it could finally address long-standing problems in the sector. The hopes were soon dashed and government interventions came to be seen as part of the problem. If evidence was ever needed that government thinking had become muddled and dictated by short-run political pressures, it was the illfated rescue of Chrysler UK in 1975. This decision made little sense given the government’s prior objective to promote BLMC as a volume producer (the rescue of Chrysler meant more domestic competition for BL and exacerbated the over-capacity problems in the sector). As Wilks (1988:186) noted, ‘it is strange how successfully government managed to treat BL and CUK (Chrysler UK) as unrelated cases. There was no indication that they were

40 HEROIC STRATEGIES AND POLICY FAILURES

assessed together as part of an overall strategy.’ The failure of the Ryder plan brought to an end the era of heroic ‘state-led’ strategies for industrial adjustment. The government was soon in retreat and while state aid would continue for some time yet, the answers to the industry’s problems were once again being defined in terms of micro-level solutions. The government resolved to find a new management team for BLMC and to invest in that team the responsibility for turning the business around. The era of an active industrial policy was drawing to a close. The then industry minister, Eric Varley, summed up the feeling of helplessness: ‘There was only one thing to do which was to get the best management available and back it to the hilt’ (quoted by Adeney, 1988: 291). Notes 1 The division of responsibilities between the Ministry of Supply and the Board of Trade (which had hitherto been the main sponsor of industry) on matters such as exports remained ambiguous and both departments continued to con sult the industry after 1945. 2 These actors were described in Ministry of Supply files as ‘the principal associations concerned with policy’ (M Supp 14 340), and by the Board of Trade as ‘the principal interested bodies’ in the automobile industry (BoT 258 978). 3 With regard to governmental steering the most important sections of the group were the ‘Car Manufacturers and Concessionnaires’ and ‘Commercial Vehicle Manufacturers and Concessionnaires’. 4 In a second change to the legislation later that year the Treasury accepted the burden of the industry’s proposal but took the opportunity to raise further revenue from the sector. It introduced a £10 registration fee effective from 1948 and introduced a purchase tax on larger vehicles for the first time. 5 Mancur Olson (Olson, 1982) distinguishes between encompassing and non encompassing behaviour. Olson introduced the compelling argument that economic growth depended in part on whether a nation’s economic groups were encompassing or non-encompassing. Encompassing organizations, he argued, would pursue goals which coincided with or at least complemented the goals of the wider economy. Non-encompassing organizations, on the other hand, would lobby for sectional interests often in conflict with the wider national interest. 6 As one industry insider told Pagnamenta and Overy (1984:228): ‘We only had, after the War, about three people in our export department (Standard Automobile Company). So there was no way in which we could export 80 per cent, and we appointed dealers without ever having been to the countries.’ 7 The Chancellor argued that ‘releases to the home market because of growing competition abroad, will make the solution of our Balance of Payments quite impossible and I can give no encouragement to the suggestion that the purchase tax be removed’ (Cabinet EP C 51 14). 8 Plowden (1970) argued that the collapse of the material allocations scheme was a ‘political failure’. Neither France or Germany had emerged from the war with as large a debt as Britain yet both devalued several times to assist exports.

THE EUROPEAN AUTOMOBILE INDUSTRY 41

9

10

11

12

13 14

Moreover, both countries resisted the temptation to ease controls on home demand much longer than Britain. Sir Keith Berrill, an economic adviser to the government between 1945 and 1955, suggested that the British resolve in these important areas was influenced by the allied victory in World War II: ‘I think that winning the War was, in a way, a very expensive luxury… we hadn’t that tough approach to post-war problems which I think France, Germany et cetera had. And there wasn’t that willingness to button-to and rebuild and make sacrifices which the defeated nations, I suppose Japan being the outstanding one, realized they had to do’ (Hennessy and Anstey, 1992:21). This problem with the industry’s structure had been recognized at an early stage by policy-makers. At the sixth meeting of the Cabinet’s Post-war Reconstruction Committee in 1945 the Board of Trade argued that: ‘Standardisation might not only decrease the price of the complete car but would also simplify the provision of adequate stocks of spares overseas, a point on which the British Car Industry has been consistently criticized’ (BoT 64 2898). Tomlinson (1989:13) has noted that there was a general government concern about productivity and exports between 1945 and 1951. He argues: ‘concern with productivity did lead to a very substantial discussion, and to a lesser extent policy-making in an attempt to raise industrial productivity’. More recently Grant (1980) identified periods of selective intervention in the 1960s and 1970s, and argued that a socialist approach, involving the extension of public ownership, briefly emerged in 1974–75. Young (1974) illustrated how the government gradually became disillusioned with non-regulatory approaches to influencing business behaviour and responded with a series of micro-level interventions. Not all the companies could be cajoled by the ‘stick and carrot’ approach of the regional policy. Jaguar refused to consider moving when it was not granted a development certificate to expand production in Coventry. In fact, the motivation behind Jaguar’s acquisition of its neighbour Daimler in 1960 was to circumvent the government’s regional policy and gain new capacity locally. However, this was not an option for volume producers planning large-scale investments. For a discussion of the French experience, see ‘It Depends What You Mean By Big’ (The Economist, 31 March 1973) and Sheahan (1960). It is worth noting that one of the most distinctive structural changes in the European automobile industry in the 1960s was the expansion of American inward investment. While this development caused alarm in other European states the British government adopted a more benign view. While Ford UK was, de facto, controlled by its American parent before 1960 it was not until that year that the American company gained full ownership control of its British namesake. The large size of the bid meant that Treasury approval was required. Despite parliamentary protests about the Ford move, lax conditions were attached to the acquisition because of the Treasury’s wish to gain new reserves: there was a gentlemen’s agreement from Ford about the ‘Britishness’ of the Ford UK board, and future investment and exports. While Ford adhered to its assurances initially, they were not mandatory and the UK subsidiary effectively became a ‘bit’ player in the transnational operation (The Economist, 19 November 1960:803–804). In contrast to the British approach the French government tried to prevent

42 HEROIC STRATEGIES AND POLICY FAILURES

15

16

17

18 19 20

21

Chrysler’s attempts to purchase Simca in 1963 and lobbied unsuccessfully within the EEC for the adoption of a common investment policy which restricted such investments. In the absence of such a policy the French action had little effect because the Americans could invest in neighbouring Belgium or Germany and penetrate the French market from there. The CPRS (1975:124) argued, ‘in all the other main car-producing countries, with the exception of Italy, manufacturers have been operating during the last five years (1969–74), at least, in an environment in which fluctuations in demand for cars caused by the business cycle were hardly affected, if at all, by Government policies operating specifically on the automobile industry. In the case of Japan, where the Government did directly influence the demand for cars, the manufacturers were warned in advance. In this country there has of course been no such warning.’ Fluctuations in HP and the purchase tax greatly irritated the industry. In 1960 HP restrictions were introduced which required a 20 per cent deposit on a new car with a maximum 24-month repayment period. By 1969 the deposit required was 40 per cent with the same repayment period. Between 1961 and 1975 there were 11 changes in all to HP regulations (HC, 1975) and the industry was convinced these measures had denied it a platform for steady growth. In 1970 The Economist (1 August 1970) predicted such events: ‘there is no sign that the Heath Government is any more likely than any other Government has been to cease the practice of treating car sales as one of the principal tools for controlling the home economy. To the car-makers the car is livelihood; to the owner a means of transport; but to any British Government is a wondrous mixture of Treasury milch cow and economic tiger.’ Turner (1971:101) traces preliminary merger talks back to 1964. See Hague and Wilkinson (1983) for the full story of the IRC’s role and its interventions in the automobile industry. Leyland appears to have been more than aware of BMH’s difficulties but was prepared to overlook them in its search for increased scale and turnover. An internal Leyland report (August 1967) on BMH noted that ‘its management had shown a “serious lack of foresight, its Board was unimpressive, it carried an enormous staff surplus”, it had not begun graduate recruitment until 1963 and the fall-out rate thereafter had been uncomfortably high, it had no less than seven model ranges not counting sports cars and Jaguar-Daimler (compared with four at Ford), there had been no apparent attempt to concentrate the production of one model in one factory and its truck business was being hammered by Ford and Vauxhall’ (quoted by Turner, 1971:118). It was also agreed that each company would hold 50 per cent of the equity in the new enterprise. However, these terms had to be revised in early 1968 when it became clear that BMH’s financial position was worse than expected. During earlier negotiations the BMH profit projections for 1967–8 were estimated at £12–20m; however, it later became doubtful whether the company would make any profits at all in 1968! This revelation forced further concessions from BMH and it was agreed that Harriman should resign the chairmanship post six months after the merger, leaving Leyland with full management control of BLMC (Turner, 1971).

3 Privatization as industrial policy1

I plead for stability for my company because we cannot withstand indefinitely these altogether too regular crises of confidence that beset us. They have taken on a strong political leavening. They are all issues with which we are familiar like the corporate plan and the privatisation policy. We have to stop this cruel and shameful persecution of the company in the public place… the politics of ownership are actually outweighing the responsibilities of ownership, and that is to the detriment of the business, and to a large part of the UK motor industry. (Ray Horrocks, Group Executive BL Cars, evidence to the Trade and Industry Select Committee, HC 291, 1985–6 par 110:13) Privatization enters the agenda The recession of 1979–81 had a devastating effect on British Leyland’s performance. A high exchange rate policy reduced export sales and the high interest rates depressed the home market. The effect was to leave the company requiring further subsidies from government. In May 1980 the BL board decided to give the Prime Minister and senior government officials forewarning of the need for further aid at a Downing Street dinner. Following this there was significant support within the Conservative party for closing down the company. At this stage there was no real privatization programme; BL had lost £535.5m in 1980 and it was inconceivable that during a worldwide recession another car-maker would have bought large parts of the business. Nevertheless, a policy to declare the company insolvent was gathering pace amongst a substantial number of backbenchers on the Conservative Industry Committee, in spite of BL’s sizeable contribution to the UK economy (Table 3.1). It is a measure of government indecision at the time that BL had to expend considerable energy persuading the Cabinet that this course of action would involve punitive financial costs (Edwardes, 1983:228). In October of 1980 BL submitted its annual corporate plan which requested a further £990m of state investment. However, with the Thatcher government

44 PRIVATIZATION AS INDUSTRIAL POLICY

openly hostile to the concept of state aid and committed to restraining public expenditure, approval of the plan was far from certain.2 Wilks (1988:216–20) has painstakingly reconstructed the final Cabinet discussions of the plan and argued that a collective decision to meet BL’s demands was taken on pragmatic grounds—the financial and political costs of closure proved too great to contemplate. He notes that the policy was opposed by the Department of Trade and Industry (DTI) Minister, Sir Keith Joseph, and the Prime Minister, Margaret Thatcher. Thereafter the Prime Minister’s Office took an intense interest in BL’s performance and policy—immediately demonstrated when it sought changes to the wording of the DTI statement which approved further investment. It insisted that the statement should mention some commitment to privatization. It was clear that following this further massive injection of state aid privatization was the government’s, if not the board’s, priority for BL. Roger Holmes, seconded to BL from the DTI to assist with government relations, suggested that Edwardes’ opposition at this early stage reflected the BL board’s fear that the embryonic collaborations with Honda would be jeopardized by privatization.3 The board saw collaboration as the most viable route to privatization for the whole of BL. At this stage (1981) Honda’s interest remained cautious and the board wanted more time to persuade the Japanese car-maker to think about equity involvement in BL. The origins of a piecemeal privatization In 1980 the board split the BL empire into four distinct operating groups: Automobiles (Austin Rover, Jaguar), Unipart (Components), Leyland (Commercial Vehicles) and Land Rover. Each sub-division had its own chief executive and was supported by a non-executive member of the board. However, in October 1981 in an extension of this decentralizing policy, the BL board proposed to split the business into two free-standing companies: one concentrating on private automobiles and components, the other on commercial vehicles. The reorganization was related to the board’s strategy of returning core businesses to the private sector via collaboration with other companies. It had become clear that the potential collaborative partners for cars and commercial vehicles would be different. Honda had made it clear it was not interested in the commercial vehicle side of BL and the reorganization was viewed as a step towards finding another partner for this area of the business. The danger was that in splitting the company in this way, the board had exposed itself to pressure from the politicians to proceed with piecemeal sales as parts of the company became profitable. This prospect materialized almost immediately. The Department of Industry (DoI) supported the extension of BL’s policy to reorganize the group and the new DoI Minister Patrick Jenkin recommended this to the Cabinet sub-committee on BL in January 1982. His endorsement was rejected and a proposal by the Prime Minister’s Policy Unit that a team of

THE EUROPEAN AUTOMOBILE INDUSTRY 45

Table 3.1 British Leyland’s economic contributions 1979–80

Source: The Economist, 8 November 1980.

consultants should review the proposals and their implications for privatization was adopted (interview information, 21 February 1992). The board was exasperated by this latest intervention, as Edwardes noted: we now had two separate concepts—the Government were heightening the priority they attached to privatisation, which was at odds with the objectives of the BL Board—objectives agreed only ten months earlier with the Chancellor of the Exchequer and Sir Keith Joseph which saw commercial recovery as a prerequisite of privatisation. (Edwardes, 1983:247) The consultants’ report controversially recommended that Land Rover was in a position to be privatized. This angered the board, since the consultants’ remit was originally to comment on the proposals for reorganization. The board was aware that Land Rover was the likeliest candidate for privatization, because it had its own market niche, its own factories, a separate distribution network, and it still had a good order book in 1981. British Leyland reluctantly agreed to conduct an internal feasibility study to ascertain the impact of a sale on the rest of the group. The option to sell was debated throughout the spring of 1982 and Ray Horrocks, the group executive of BL cars, was assigned the task of drawing up a prospectus. However, this task was undermined by the aftereffect of the 1979–80 oil-price shocks which began to affect Land Rover’s export markets in Africa and Asia. Horrocks recalled the problems: ‘If you are going to float a company you have to write a prospectus which talks about future prospects and just at that time they had become pretty downside. The notion that we could sell this to the City was extremely doubtful in the board’s view’ (interview, 23 February 1991). The board was also keen to hold on to Land Rover, believing that the group would be needed to sweeten any deal involving the sale of BL’s truck and van businesses. It also opposed the Land Rover sale on the grounds that it would jeopardize the recovery of the whole group, and with the assistance of two merchant banks was able to convince government of their case in the summer. Horrocks considers this event a crucial turning point in the Prime Minister’s

46 PRIVATIZATION AS INDUSTRIAL POLICY

attitude towards BL: ‘I do think that after Land Rover the Prime Minister never forgave Michael Edwardes and never forgave BL’ (interview, 23 January 1992). The board scaled down its plans to reorganize the group following this incident. The Treasury had been concerned that creating two entirely separate entities would entail substantial financial and legal work and for these reasons disliked the idea. The board, alarmed by the Land Rover issue, now believed that retaining a unified group would help it to ‘concentrate on the fight against premature privatisation’ (Edwardes, 1983:249). At this stage at least, there was a reluctance on the part of the government to adopt a more dirigiste policy style. The changing dynamics of a government-industry relationship Prior to 1979 the Labour government had allowed effective supervisory control of BL to rest with the National Enterprise Board (NEB). The election of the Conservatives, who were hostile to the whole ‘corporatist’ concept of the NEB, signalled a fundamental change in the relationship. The NEB’s role had also been the subject of some debate within BL. Some board members regarded it as an unnecessary bureaucratic buffer between themselves and a more assertive government, but they remained apprehensive about seeking a more direct relationship with Whitehall for two reasons. First, they believed that such a relationship would lead to the politicization of commercial policies. Second, despite their misgivings, the existing relationship was familiar, and in the past the NEB had been a useful ally in discussions with the unions and the Labour government. However, the NEB’s role had been reviewed and reduced by the Conservatives and the organization had suffered a loss of prestige. These deliberations were overtaken by events when the NEB board resigned following a dispute with the government over supervision of Rolls Royce. The new NEB board made it clear it did not wish to supervise BL because of executive intervention and an indifferent management attitude. Announcing the transfer of BL shares from the NEB to the DTI in 1981, junior Industry Minister Norman Tebbit outlined the government’s more interventionist approach: ‘the size of the sums involved in the public funding of BL is such that the government are inevitably closely involved in major decisions about the company, and the proposed transfer recognises this reality’ (HC Debates, 4 February 1981, col. 319). The transfer removed two key actors from the government-industry interface, the NEB and, in view of its tripartite structure, the trade unions. A more direct bilateral relationship was now established between the BL board and the DTI. In fact, the government had three formal relationships with BL. It was the majority shareholder (through the DTI’s 99.7 per cent shareholding in the company) and was therefore responsible for monitoring the performance and

THE EUROPEAN AUTOMOBILE INDUSTRY 47

Figure 3.1 Steering British Leyland

policies of the incumbent board. This monitoring function was conducted via section V2 of the DTI Vehicles Division which was headed by a senior civil servant and five or six other officials ‘actively engaged’ with BL throughout the privatization programme. The lower-grade staff were split between monitoring the separate areas of the business, while senior officials held regular consultations with BL’s business strategy director. In 1980, BL had taken a policy decision that the government interface regarding corporate policy would be managed by its corporate staff who reported to the overall board. The government’s second relationship was through the Treasury’s role as the company’s banker. Proposals with financial implications had to be scrutinized and approved by the Treasury. Under the Varley-Marshall-Joseph assurances the government had underwritten BL’s accumulating debts since 1975. Thus, any decisions about raising finance via asset sales or flotation was of interest to the Treasury. The third interface was with ministerial actors in their role as politicians: BL’s performance was an emotive issue in government and the privatization of the company appears to have assumed symbolic importance. The distinction between these three interfaces is important to an understanding of subsequent events because options were often vetoed for political reasons despite the fact that the board had secured the support of its shareholder and banker on commercial grounds. As Norman Tebbit put it, ‘the business has brought every Minister into conflict with Margaret Thatcher… she hoped that a Minister would find a short cut at little financial expense that would get the Government out of the BL morass’ (Tebbit, 1989:222). The government-BL decision-making structure which existed during the implementation of the privatization programme from 1981 to 1985 is outlined in Figure 3.1. The main chain of decision-making involved the V2 Assistant Secretary reporting to the Under-Secretary who headed the Vehicle Division

48 PRIVATIZATION AS INDUSTRIAL POLICY

and chaired the ‘Official Group on BL’. This interdepartmental committee would typically meet ‘half a dozen times’ in an average cycle to work on issues stemming from BL’s annual corporate plan. Once the major options had been defined they would be discussed at ministerial level and ultimately by the Cabinet’s Economic Committee. After the summer of 1985, however, the interdepartmental committee was not involved in privatization discussions. These were negotiated directly between BLV2 and ministerial level. This process was supplemented, if necessary, by direct consultations between ministers and members of the BL board. Testing the water: the Jaguar flotation and the board’s Uturn Companies should be floated off and owned by real people, not by the state. That is our policy. We shall urge that policy on the successor to Sir Michael Edwardes. Patrick Jenkin, Secretary of State for Industry (HC Debates, 14 June 1982, cols 599–600) In 1983, BL recorded a pre-tax profit of £4m, its first profit since the Conservatives came to power (HC, 1983–4:2). While there was still a net loss of £67m for the year, there were important disparities in the performance of BL’s constituent companies. The automobile side of the business had returned a pre-tax profit of £73m and, most significantly, Jaguar had made profits of £55m. The major losses had come from the decline in the bus and truck markets. Jaguar’s success was almost entirely due to a more competitive exchange rate which saw its US sales increase by 8,000 to 29,000 in 1983. Following this change of fortunes the board submitted its 1984 corporate plan in October 1983 with proposals to sell 75 per cent of Jaguar’s assets through a public flotation.4 Following the board’s opposition to a ‘hive-off policy during the Edwardes era, no-one was more surprised by the 1984 plan than the Trade and Industry Select Committee (TISC) which had scrutinized BL’s corporate policy since the company was rescued in 1975. In its 1983–4 report the Committee observed: We are surprised that, whatsoever the merits of privatisation from Jaguar’s point of view, BL considers selling Jaguar is in the best interests of BL…the amputation of the most healthy part of the company is bound to make it harder for the rest of BL to achieve viability in the next few years. Indeed, such a sale could prove highly detrimental to the possibility of privatising BL in the near future. (HC, 1983–4:V)

THE EUROPEAN AUTOMOBILE INDUSTRY 49

The ‘U-turn’ must be examined in the context of the operating environment which the government had superimposed on the company. The initial decision to sell 75 per cent of Jaguar was certainly a board decision: the government did not suddenly impose the policy. However, the decision was taken to satisfy the wishes of the major shareholder as expressed consistently since the aborted Land Rover sale and because, following financial restrictions placed on the business, selling Jaguar was necessary to raise money for investment in other parts of the group. The Jaguar announcement also saw the emergence of a familiar characteristic of subsequent privatization negotiations: disputes between the overall BL board and the line managements of particular companies over the details of privatization. A legacy of Michael Edwardes’ reorganization of the company was that line managers had considerable operating autonomy over individual companies. This was partly due to the series of mergers which preceded BL’s formation in 1968. Many of the independent companies brought into the group, such as Jaguar, retained their own plant and marques and were passionately independent. This was clear in 1983 when the Jaguar management successfully opposed BL’s discussions with General Motors over Jaguar’s future. What became evident in this and subsequent privatizations was that the line management would take a different negotiating position from the BL board. Thus, once the BL board decided under financial pressure to sell 75 per cent of Jaguar, the subsidiary’s management saw an opportunity to reestablish Jaguar’s independence and began lobbying for the complete sale of the company. Negotiating the details By the summer of 1983 it was clear that Jaguar would be sold the following year (interview, DTI official, 21 February 1992). From then until the submission of the corporate plan later that year the government awaited the board’s proposals. The board proposed a programme, beginning with Jaguar, to divide the group into discrete companies each initially wholly owned by a BL holding company, then selling 75 per cent of each company leaving 25 per cent in the holding company. It was envisaged that only the volume car producer, Austin Rover, would be left in full state control, and that because of the BL group’s minority holdings in the other companies it would retain a market value which would remove the risk of leaving a rump that could not eventually be sold. The board of BL offered six main reasons for advocating this approach to privatization. First, there was concern both in BL and in the DTI that Jaguar should be protected from a take-over by a foreign car-maker. Second, Jaguar was profitable and the BL board felt that it would be a good investment to retain 25 per cent. Third, a number of synergies existed between Jaguar and the rest of the BL car division. For example, BL made all the body pressings

50 PRIVATIZATION AS INDUSTRIAL POLICY

for Jaguars, and the board saw cost advantages for both sides in maintaining a formal relationship. Fourth, the board thought it would be mutually beneficial for Jaguar to continue to use BL’s testing sites and facilities. Fifth, the BL car group wished to maintain its common distribution outlets with Jaguar, particularly in the USA. Sixth, the board saw potential economies of scale in utilizing common plants and sharing new plant investment. By their own admission the BL board recognized that these arguments were unlikely to prevail and made them ‘more in hope than expectation’. Nevertheless, this option was worked throughout the winter of 1983–4 and was vigorously advocated by the incumbent minister Norman Tebbit (Tebbit, 1989:278). In February of 1984 it was referred to the ‘Official Group on BL' for interdepartmental discussion. The Treasury and the Prime Minister’s Policy Unit were both unhappy with the proposals, preferring a complete sell-off, pointing out that this was favoured by the Jaguar management. The merchant bankers advising the Treasury also argued that BL’s desire to retain 25 per cent might affect the success of the flotation. Unhappy with this opposition, the DTI minister Norman Tebbit then took the issue to Cabinet sub-committee level only to be met with similar responses (Tebbit, 1989:278–9). The DTI official who negotiated the original policy with BL recalls the outcome: At some point we were forced by the interdepartmental committee to look at alternative options. John Moore (Treasury) and John Redwood (No. 10 Policy Unit) were present and made it clear that from a share ownership point of view a full flotation was desirable. Therefore we had to look at the golden share options with 3 months to go before a sale was due, the BL board were not happy and not over-helpful with the various technical formalities. (interview, 21 February 1991) Thus, despite spending considerable time and resource at the policy development stage the lead department was unable to deliver the policy to its clients. The prospect of a full flotation held a number of attractions for the government. Other companies had been successfully floated, including British Aerospace (1981), Britoil (1982) and British Petroleum (1983), and the method had allowed the government to perpetuate the ‘share owning democracy’ slogan as well as having electoral advantage. However, there were other cogent reasons for seeking a full flotation. It would provide Jaguar with a realistic market valuation which was of particular concern to the Jaguar management. Furthermore, apart from a trade sale it would provide the best mechanism for raising revenue from the privatization, which would in turn reduce the possibility of direct assistance to the rest of the business. By the late

THE EUROPEAN AUTOMOBILE INDUSTRY 51

spring of 1984 there were two outstanding issues to be resolved, the size of any ‘golden share’ and the price of the shares. Both BL and the DTI were still worried about the need to protect Jaguar from the attentions of the American multinationals and advocated that the government retain a 25 per cent share in the company. Once again this was rejected at interdepartmental level because the Treasury felt that it would inhibit the flotation and because No. 10 was still insistent on a complete break with state ownership (Financial Times, 23 May 1991). In fact, Tebbit had to struggle to gain Cabinet approval for a 15 per cent ‘golden share’ lasting for just six years (Tebbit, 1989:278–9). The BL board were further disappointed when their efforts to secure a share price of 190–200p were rejected by the Treasury, whose financial advisers were anxious not to be left with any unsold stock. When the company was floated in July 1984 the share price was set at 165p and the offer was hugely over-subscribed. British Leyland had raised £297m for reinvestment in the remaining businesses, although the government released itself from a previous obligation to grant £110m in aid, leaving the group with £187m. Privatization hits turbulence In 1984, the DTI initiated discussions between BL, Ford and General Motors (GM) on the problems of over-capacity in the UK commercial vehicle market. During these discussions BL expressed an interest in a rationalization agreement with GM. Ford had already decided that a tie-up of some kind with BL would only worsen the problems it was already experiencing with its own truck business, and decided there was more potential in a deal with Iveco-Fiat. General Motors saw some potential in merging Leyland and Land Rover with its Bedford Truck operations in Luton which were thought too small to be viable in the long term. With its car production based in Germany with Opel, GM intended to create a European commer cial base in the UK and to exploit Land Rover’s marque through a more global dealership network (Financial Times, 22 March 1986). Leyland represented one of the least profitable parts of BL and the group lacked the investment to develop its truck operations. Land Rover was profitable and although the board saw it as a prized asset its inclusion was necessary to sweeten the deal. Discussions between GM and BL continued throughout 1985 and in December advanced to the stage where officials from the DTI Vehicles Division and the Treasury became involved. At this stage there were two main issues to be resolved, the sensitivity of selling Land Rover as part of the deal, and GM’s unusual request to pay for the purchase with bonds and other noncash methods. Both BL and the Treasury wanted a cash payment. As one official put it: ‘GM had come Christmas shopping looking for January sales prices’ (interview, 23 January 1992). The GM deal was placed in jeopardy by two events in early 1986. First, the government was in turmoil after the

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Westland affair which had placed American ownership and investment in strategic sectors under the public microscope. Second, it became clear that Ford had made a controversial move to purchase Austin Rover. The Ford negotiations A casual conversation between Norman Tebbit and senior Ford officials at the annual dinner of the company’s European Advisory Council led to the Ford proposal to buy Austin Rover. Tebbit was now Conservative Party chairman and agreed to mention Ford’s interest to his successor Leon Brittan. At a meeting in October 1985 between Brittan and Ford executives the DTI minister approved the commercial logic of a possible deal but asked for some time to consult senior ministerial colleagues about its political acceptability. In early November, the DTI gave Ford the go-ahead to begin exploratory discussions with BL. Ford’s initial interest stemmed from the possibility of collaborating with BL on a middle-range engine development. By 1985 Rover were committed to buying in large engines from Honda and had developed plans for a small engine range. However, BL did not have plans for a middle range engine and Ford saw the opportunity for sharing development and production costs in this area. The Ford UK chairman at the time recalls: We had already invested a huge expense at Dagenham to provide a double cam engine for the 1990s. The Americans had just approved this and thought it was crazy that BL should go to Japan for engines when we had invested so much. It started with engines and extended from there. The idea was to achieve economies of scale and create one big competitive British manufacturer. (correspondence, 6 January 1993) At the time Rover had over 17 per cent of the UK market and the merger would have given Ford a total market share of 44 per cent. This was a completely different type of policy from the GM deal; it had been formulated at the highest level in government and was subsequently imposed on BL. Inevitably BL was unhappy with the Ford overture and made this known to government from the outset. However, a disagreement about tactics developed between the management of Austin Rover, led by Ray Horrocks, and the rest of the board. Austin Rover were reluctant to negotiate with Ford, while the overall board wanted talks to proceed, believing that this would allow a better appraisal of Ford’s intentions. The BL Board was worried that attempts to obstruct Ford would only irritate the government and wanted to oppose the deal in a less confrontational manner. Again, it was to prove difficult to prevent the management of the company in question from using its discretion in the matter.

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Austin Rover took particular exception to the government’s request in January 1986 that it allow Ford access to its commercial figures. Horrocks was instructed to exchange costings with Ford and recalls: Some of the information they were asking for was commercially sensitive and could be used to the detriment of the business. I was reviewing the information requested and personally fought to withhold some of it. Sometimes I was forced to but at least they didn’t get all they had wanted… These were not merger talks, it was a contested predatory bid. I kept telling the politicians that if I made an aggressive bid in the marketplace I would be asked to put my price on the table, I would not be given the books in advance. (interview, 23 January 1992) Horrocks believed that Ford had overestimated the incrementality that was likely to accrue in terms of extra business from the link-up and that this would ultimately lead to the rationalization of BL. Yet BL’s dislike of the policy made little impact on the government, which insisted the option be explored. There was a further important dimension to the Ford talks. The DTI officials involved were also convinced that the issue had became interwoven with the political career of the incumbent minister, Leon Brittan, during his controversial six-month spell at the DTI. Mr Brittan had been moved to the DTI from the Home Office in the summer of 1985, and one DTI official argued: ‘Leon was very aware of No. 10’s hostility towards BL…he did not want to be accused of spoiling Ford’s move…he seemed very concerned about his political image and felt he could not be seen as being too close to BL‘(interview, 21 February 1992). Thus, BL’s bargaining position was further weakened because the minister was unwilling to support the company’s opposition to the policy. British Leyland’s concerns were also heightened because the negotiations were being steered by Section VI of the DTI Vehicles Division, which was the sponsor of the American multinationals, and not by V2, BL’s sponsor. Parliamentary pressure On Monday 3 February 1986 Labour’s industry spokesman, the late John Smith, asked for a ministerial statement on the future of BL (HC Debates, 3 February 1986, col. 21). Once news of the GM-BL talks leaked, the government was forced to reveal the existence of the Ford negotiations as well. The salience of the issue was further heightened on 5 February when Labour used its own parliamentary time to debate BL’s future. In spite of a defence of the negotiations by the new DTI secretary Paul Channon and the Prime Minister, the issue was now proving divisive within the Conservative Party.

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British Leyland had considerable parliamentary support on the Conservative backbenches. The company’s management regularly briefed MPs on the Conservative Industry Committee and the all-party Motor Industry Group, which contained MPs with constituency and/or personal interests in the sector. Once the Ford talks had leaked and Austin Rover’s (if not BL’s) opposition was made known, the company could reasonably expect some parliamentary support for its position. A backbench campaign against the Ford sale was led by two senior Conservatives, former Prime Minister Edward Heath and Sir Hal Miller, the vice-chairman of the Conservative Party whose Bromsgrove constituency contained the highest concentration of automobile industry jobs in the UK. The Cabinet’s ‘E' sub-committee first considered the issue on 28 January 1986 when the Prime Minister and the Chancellor agreed that the DTI should allow Ford to continue the negotiations. Following the leaks, several Cabinet Ministers vented their anger at not being kept informed about these developments and sought access to Cabinet dossiers. Social Security Minister Norman Fowler was explicit over the source of his opposition to the policy: As far as I was concerned, the publicly revealed position was totally unsatisfactory. I was a Cabinet member from the West Midlands whose constituency included many workers and managers who were employed by Leyland or whose companies relied upon it. However, I had known nothing of this dramatic development of policy. I had not even been consulted. I had not even been advised that such developments were in the offing. Yet it was becoming increasingly clear that the strategy of the sale had been approved by the Cabinet’s economic committee. (Fowler, 1991:236) In the aftermath of the Westland affair, however, Fowler found himself in a strong position and was invited to join the E Committee on BL which was to follow Cabinet on 6 February. He did in fact make his objections known by raising the matter during full Cabinet and his position gathered strength when the influential Norman Tebbit expressed belated concern. At the E Committee meeting it was decided to end the talks, despite the fact that the government had won a House of Commons vote on the issue by 324 votes to 195 the night before. Thus, after imposing the policy on BL in 1985 and encouraging its development, the government was now terminating discussions. Sam Toy of Ford recalls the sudden nature of the decision on 6 February: ‘We called the DTI in the morning and were given permission to proceed with the talks. The same afternoon we got a phone call from the Minister telling us to get out’ (interview, 9 September 1992). While BL was relieved at the outcome, the event demonstrated the potential for a decision to move through a number of policy-making arenas in the space of a few days.

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It is now clear that the DTI’s ministerial team was also divided by the issue. One of its junior members, John Butcher, a West Midlands MP, had been given the automotive industry brief by Leon Brittan. Yet he too was excluded from the privatization negotiations. The government was therefore proceeding with controversial negotiations without a united front on the issue. Clearly the decision to adopt a more dirigiste policy style was not well thought out on this occasion. It was the arbitrary nature of the political costs of such a policy style that had in the past made government reluctant to act assertively. Interlude: the collapse of the GM deal Despite the collapse of the Ford talks, BL was continuing its negotiations with GM. Again, it is important to note that while the automobile and commercial vehicle divisions reported to the same corporate centre, they were managed as separate operating units. In fact, while the balance of opinion on the BL board had been against Ford’s interest, it was firmly in favour of a deal with GM. However, throughout February 1986 the public and parliamentary protests, which had initially centred on Ford, now focused on the GM talks. Land Rover owners and dealers launched an official ‘Keep Land Rover British’ campaign and held a series of public events and meetings on the issue. The Cabinet committee considering the options on Leyland and Land Rover now contained the two West Midlands MPs Norman Fowler and Peter Walker, with the Prime Minister still in the chair. By early March the E Committee had virtually ruled out the competing option of a managementled consortium because it related specifically to Land Rover and offered no solutions for dealing with the truck operations. The GM deal was the only viable option, but the Committee was concerned about GM’s poor track record in commercial vehicles in Britain, and the prospect of Land Rover passing out of British ownership. When the Committee met for the fourth time on 18 March it permitted the DTI and BL to continue negotiations with GM but it had itself reached something of an impasse. It was now proving difficult to reconcile the concerns of Fowler, Walker and Tebbit over the issue of national ownership of Land Rover with GM, and BL’s reluctance to consider anything but a full transfer of assets. In the three days that followed, negotiations between the DTI and the companies took a new turn and collective decision-making on the issue collapsed. During this time the DTI and the two companies discussed options that would reduce anxiety over the Land Rover issue. Two potential solutions arose from these discussions: • General Motors takes 49 per cent of Land Rover leaving 51 per cent with BL —with a later option to take a controlling interest (DTI proposal).

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• General Motors takes 100 per cent of Land Rover but a British supervisory board is also set up to ensure that it respects a number of preagreed conditions (BL proposal). British Leyland executives met the DTI Minister on 18 March to discuss the Land Rover issue. At that meeting they told the DTI team that the first option would not be acceptable to GM. Instead, the BL executives urged the Minister to accept the second option, and this was agreed providing BL could obtain assurances from GM that it would pay cash for the deal and that the supervisory board would guarantee the ‘Britishness’ of Land Rover after any sale. After forty-eight hours of negotiations GM agreed to these conditions and the deal looked set to go ahead. An agreement was undermined, yet again, when confidential details were leaked. This prompted Norman Fowler to reenter the process. Irritated that the Prime Minister’s assurances to keep him informed had not been met, he sent a minute to her office expressing his concern about the proposals and threatening resignation should either of them be implemented. He recalls: ‘On this occasion… industrial, political, and crucial local interests all came together for me…I was in fundamental disagreement and in those circumstances I felt that any self-respecting minister should go’ (Fowler, 1991:243). In one of the most dramatic U-turns of the Thatcher period, on an industrial issue of far greater strategic importance than the Westland affair, the government terminated the discussions with GM. It did so largely because of the prospect of a significant backbench revolt (see below). Unsurprisingly, BL and GM were furious at the outcome after almost two years of negotiations. The BL truck, bus and van businesses showed no sign of recovery without major rationalization and investment which BL simply could not finance. Each of these aborted policies did not exist in a political vacuum but instead added new dimensions to the history of the privatization policy. The proposed Ford deal threatened BL’s relationship with Honda and thereafter Honda’s views would be influential in the search for privatization options. Moreover, while the DTI assured Ford that it would have first option on any future sale of Austin Rover, the show of economic nationalism on the government’s backbenches in 1986 effectively ruled out a trade sale to another ‘foreign’ carmaker for the foreseeable future. Finally, the derailment of both privatizations led to internal changes within BL as the government ‘removed’ key board members. The most significant casualty was Ray Horrocks (the group executive of BL cars) who later told the TISC, ‘Unluckily I organised the resistance to the Ford deal and I have paid the price’ (HC, 1985–6: par. 111, 14).

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The Rover-British Aerospace deal The 1987 Corporate Plan (submitted in late 1986) contained a commitment to continue the recovery of the Austin Rover business, largely at the expense of the other businesses in the group. The plan contained six main points. First, the government should write off the rationalization costs and accumulated debts of the truck and bus companies. This would prepare both for privatization and would also transform the balance sheet of the remaining Rover Group (as the company was now called). In effect it was £750m of state aid (later reduced to £680m by the European Commission). Second, an AngloDutch commercial company (DAF-Leyland) including Leyland Trucks, Freight Rover vans and DAF Trucks should be established. The Dutch company (which was partly state-owned) would control 60 per cent of the shares. Third, Leyland Trucks would be further rationalized with the loss of 2, 600 jobs. Fourth, Unipart, BL’s component business, would be sold to a management consortium (subsequently one of the most successful and least controversial sales from the group). Fifth, government approval was required for a new model range for Rover in collaboration with Honda. Sixth, the government’s approval was required for the development of a new gearbox in collaboration with Honda. The plan was approved by the government in December 1986 despite its wide-ranging nature. The government preferred to maintain a low profile on the issue with 1987 being a possible election year; if anything, the events of 1986 had demonstrated the widespread support for BL in key Midlands constituencies. In 1987 the truck business was sold and there was a management buy-out at Leyland Bus—both BL proposals. Rover’s Australian subsidiary was also sold in 1987 to a management consortium. The search for a formula to privatize the Rover Group was resumed after the 1987 general election, with the appointment of another DTI minister, Lord Young. In his first public pronouncement on BL Lord Young stated that he had asked the board to provide him with ‘detailed privatisation plans which could be implemented within the lifetime of the present parliament’ (Financial Times, 19 September 1987). Privately, he told the Prime Minister that he would privatize the company by Christmas 1988 (interview, 9 June 1990). His first attempt was to offer Land Rover to Jaguar, giving the luxury car-maker an extended ‘golden share’ as an incentive. The Jaguar board rejected the proposal in late September, preferring to concentrate on its core car businesses. In the meantime the Rover Group had been working on an elaborate privatization strategy. This involved three stages: • the disposal of all peripheral businesses; • the diversion of all resources into developing the core Rover and Land Rover businesses;

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• the return of the core businesses to the private sector via a flotation when their balance sheets had been improved. However, the board’s strategy was rejected by Lord Young when it became clear that Rover required £l,200m to fund its five-year plan to 1993—such investment would hinder attempts to improve the company’s balance sheets. By late 1987, the government’s privatization plans for BL had reached an impasse, when, as Lord Young (1990:289) recalls, ‘there was a startling development’. British Aerospace fills the vacuum The government’s eagerness to sell Rover, coupled with a lack of ideas on how to achieve this, did not go unnoticed amongst other British manufacturers. In November 1987 the British Aerospace (BAe) chairman Roland Smith indicated to the Rover board that his company would be interested in purchasing Land Rover. In mid-December BAe approached the DTI Permanent Secretary, Sir Brian Hayes, and suggested they might now be interested in the whole group. It was clear from the outset that both they and the Rover Group realized the attractions of a ‘British solution’ for the government. British Aerospace requested that they be allowed to conduct negotiations with Rover for an exclusive period. The government’s financial advisers, Barings, advised them against this, recommending the option of a limited tender, since Ford, Volkswagen and another British company Melton Medes were all potential bidders. The DTI minister decided against their advice because, in his own words, ‘what we were after was not necessarily the best price but the best solution, and the best interests of both the company and the workforce dictated the exclusivity route’ (Young, 1990:294). This move angered Ford, which had been assured in 1986 that it would have a first option when the Rover Group’s future was being decided. In a stern letter to Lord Young dated 2 March 1988 the chairman of Ford Europe wrote: I have to tell you my surprise and disappointment when I learned through the media of your statement in the House yesterday about the talks between the Rover Group and BAe. We believe we had a clear understanding with your Department that when the Government came to explore different alternatives about the future of Rover we would be involved and able to participate in some way. I do not propose to comment on the merits of the options available to the Government or the contribution that Ford could make. As I understand your statement, the discussions will be confined to BAe and the Rover Group and we have been excluded. I would like you to be in no doubt about our deep di sappointment.

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This is further indication of the government’s influence in the policy process in this instance. Potential buyers such as Ford and GM were dependent on the goodwill of government for access to the relevant policy arena. Again, the government’s influence over policy development stemmed from its ownership control of BL. In 1988 Ford’s interest was seen as politically unacceptable and the company was denied access to BL by the DTI. This unusually high level of government discretion during policy development was an important characteristic of the policy area. The deal with BAe was seen as meeting all the government’s strategic objectives. First, it would ensure that the car-maker remained in British ownership. Second, a sale to BAe with no warranties would release the government from all its financial obligations to the company. Third, a sale to BAe was less likely to jeopardize the Honda collaboration and this was of particular concern to Lord Young. He later argued that: It was made clear to me by the Prime Minister that Rover had no fu ture in public ownership and we agreed to seek an early resolution which BAe offered. But there was in my view an overriding point: Honda was interested in coming into Britain through Rover and I was very anxious to land all three Japanese producers, which I eventually did. Honda told me categorically that they were not interested in coming in through anyone else other than BAe ownership. (interview, 9 June 1990) Thus the ‘British solution’ was now deemed very much to be in the ‘national interest’: a national interest that was shaped by the economic nationalism of the 1986 fiasco, and the government’s commitment to Japanese inward investment. Once the government responded to BAe’s interest, the lack of any competition and the need to avoid damage to Rover’s market position from another failed negotiation, placed BAe in a highly advantageous position. In March the government announced that a deal had been reached with BAe. Since the policy involved further state aid in order to write off Rover’s debts, it would require the approval of the European Commission. The importance of the Commission as an influence on British domestic policy is well known. During Sir Leon Brittan’s tenure at the competition directorate the Commission adopted a tough approach to the implementation of competition laws, especially in relation to state aids to the automobile industry. Between April and July 1988 the Commission demanded sweeping changes to the March deal, which had five main elements: 1 The government would inject £801.1m into Rover Group to eliminate Rover’s indebtedness. 2 British Aerospace would pay £150m for the government’s 99.8 per cent shareholding in Rover.

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3 The Rover Group was not to use more than £500m of its accumulating trading tax losses (£l,600m) against future profits; its other tax reliefs were to be confined to Rover (rather than made available to BAe). 4 The government guarantee of Rover’s obligations, known as the VarleyMarshall-Joseph assurances and mounting would £l,600m, would be eliminated. 5 British Aerospace would not relinquish control over Austin Rover and/or Land Rover for the next five years (or would be liable to incur a financial penalty of up to £650m). The most contentious issue was the proposed £800m cash injection. The government’s defence of this sum had been undermined as Rover’s profitability began to recover unexpectedly in late 1987 and early 1988. The Commission therefore argued that only £443m should be injected (later increased to £469m) and not £800m. This reduction alarmed DTI officials who were convinced that the deal would collapse. Following DTI protests, the Commission allowed the government to offer £78m in regional aid as part of a revised deal. Despite this concession, the DTI were unable to negotiate a deal that was agreeable to both BAe and Rover and to the Commission. Lord Young recalled: ‘The position was becoming desperate. Quite apart from an enormous political row that would have erupted should the Commission prevent the sale going through, we were less than four weeks from 1 August’ (Young, 1990:279–80). August is the peak month for UK car sales and in addition there was less than a month of the 1987–8 Parliamentary session left in which to announce a deal. The £469m the Commission were willing to sanction, plus the regional aid, still left the deal £240m short of the sum originally agreed. On 6 July a DTI team including Lord Young and the head of the Vehicles Division met with Commission officials and secured a further £29m in debt write-off plus the removal of some ring-fencing on Rover’s capital losses. However, BAe were still unhappy with the £240m reduction in the cash injection which the Commission had demanded, and insisted that the gap would have to close to £100m or it would contemplate withdrawing from the deal. In a bid to meet their demands, Lord Young suggested that payment of the purchase price for Rover could be delayed until the following financial year —in effect a tax concession—subject to Commission approval. At the time of the deal, it was reported that BAe’s fears had been placated by this offer and that the deal was still on. Following some last-minute delays, as BAe sought clarification from the Commission on the new terms and its responsibilities in respect of Rover’s corporate plan, the deal below was finally concluded on 14 July 1988. It had four main elements: 1 The sale price would remain £150m but payment to be deferred.

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2 The government capital injection to be reduced to £469m plus £78m regional assistance. 3 Restrictions on BAe using Rover’s capital tax allowances and losses lifted. 4 Further financial aspects of the deal not to be announced. The British company had exploited the fact that the government was determined to sell its assets but had few means of doing so. For example, BAe twice accepted increases in the purchase price demanded by the Commission, and its chairman told the TISC, ‘when the DTI have got some cards in their hand they are pretty aggressive in terms of being able to play those cards. If you have not got any cards in your hand, like selling Rover Group, you have a difficult time’ (HC, 1990–1: par. 49; xvii). The DTI were further encouraged to agree to BAe’s terms by the Rover board which supported the deal. This illustrates one of the clear disadvantages of formulating policy in such an intimate and restricted policy arena. As a later TISC investigation argued, once the government agreed to the BAe-Rover negotiations, it found itself in a very weak bargaining position, ‘With the prospect of the deal failing and the severe consequences that might have for the Rover Group, we conclude that the DTI had little alternative but to agree to the terms demanded by British Aerospace’ (HC, 1990–1: par. 50, xvii). This was clear from the details of the July deal as published. However, sixteen months later it was revealed that the undisclosed conditions of the July 1988 announcement were in fact illegal payments to BAe to guarantee the survival of the deal. Parliamentary scrutiny and EC authority In November 1989 the National Audits Office (NAO) published its report on the financial aspects of the sale. It estimated that Rover was worth £56.5m more than the £150m sale price actually paid, and that the company had not been properly valued prior to the sale. The report also stated that some commercially sensitive details were being submitted separately to the House of Commons Public Accounts Committee in a confidential memorandum (NAO, 1989:1.13). This memorandum was leaked to the press and revealed illegal undisclosed concessions which had been withheld from Parliament and the European Commission. These included: 1 Payment to Rover Group of £1.5m as reimbursement for their costs in the privatization. 2 Payment of £9.5m to BAe to reimburse them for buying out the minority shareholders and for BAe’s acquisition costs. 3 Possible payment of £5m in lieu of BAe’s contribution to the Columbus space programme. 4 The deferment for 19 months of the payment of the £150m purchase price (worth £22m net in interest charges).

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5 Removal of the ring-fences on Rover’s capital losses and allowances, worth £25–33m to BAe. On this occasion, policy-makers were seeking to insulate themselves from the European Commission. The companies and the DTI were aware of the Commission’s authority in this area and that aspects of the deal contravened EC law. In fact, it was because of this added complexity and uncertainty in policy-making that the groups involved did not disclose full details of the deal. Arguably, there were pragmatic reasons for withholding information from Parliament and the EC. Rover’s future would have been jeopardized if the deal had collapsed at such an advanced stage and the actors knew the risks they were taking by concealing the ‘sweeteners’. Thus, despite the detailed parliamentary interest in Rover’s affairs, especially after the collapse of the Ford-GM negotiations in 1986, Parliament was sidelined during policy development in 1988, as BL and the DTI negotiated with BAe. Clearly the actors involved were not oblivious to the parliamentary interest in the issue but the logic of keeping issues off the party political agenda is that uncertainties can be reduced. The relevant groups were able to achieve this degree of sectorization in spite of the wider interest in the policy. Ironically, where the groups involved are agreed on the policy, the knowledge that it is politically sensitive tends to reinforce the need to respect the ‘rules of the game’, mutual trust, secrecy and so forth. Following the uncovering of the ‘sweeteners’, the Commission investigated the issue in 1990. It ruled that with the exception of the £5m aid for the Airbus programme, all the other sweeteners would have to be repaid by British Aerospace. The incident also set a precedent, with the Commission ruling that in future it would not accept exclusivity periods or ‘closed bids’ in negotiations. Its ruling was accepted by the Cabinet the following day. BAe challenged this ruling in the European Court of Justice (ECJ) and won their case against repayment on a legal technicality. However, the Commission did not wish to let this matter rest and in May 1992 pursued a fresh procedure on this matter. The ECJ finally ruled in June 1993 that the ‘sweeteners’ were state aids and were incompatible with the treaty (OJ L 143/.7 15 June 1993:7–16). The British government made no comment, and BAe repaid the money to the government—almost five years after the concessions were granted. (This episode is dealt with in much greater depth in Chapter 7. A rational industrial strategy? The implementation of privatization owed as much to political expediency as industrial or commercial logic. There are several examples of this. The sale of Jaguar appeared premature and there were always question marks over its ability to survive as an independent, low-volume producer. These doubts were

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confirmed when Ford purchased the company in 1989. Similarly, DAF proved to be a weak partner for BL’s commercial vehicles business; arguably GM would have proved to be stronger. The deal with GM was called off because of the political controversy surrounding the sale of Land Rover. The sale to BAe may have solved the political dilemma over the foreign ownership of Land Rover, but BAe was an improbable longterm owner for the Rover Group given the financial investment required to update Rover’s model programme. The strategy of successive BL and Rover management teams was to develop the joint venture with Honda on cars. Honda was encouraged to acquire the Rover Group from BAe in early 1994. An acquisition of this nature had never been part of Honda’s European strategy. In 1993 BMW had opened separate and ultimately successful negotiations with BAe. There is no doubt that the Rover management’s preferred option was a deal with Honda. There is also little doubt that the DTI was unhappy with the sudden sale of the Rover Group to BMW and the treatment of Honda in the affair. The Japanese company began to unravel its links with Rover almost immediately and in so doing disrupted a valued part of the government’s Japanization policy for the sector. The DTI was given no opportunity to mediate in the negotiations and the Minister, Michael Heseltine, was reported to be ‘angered and embarrassed’ by the abrupt nature of the decision (Guardian, 19 March 1994). The government had no effective steering instruments by this stage. It may appear somewhat harsh to criticize the piecemeal privatization with the luxury of hindsight. It is arguable that even if the government had tried to keep the various parts of BL together in the 1980s—the ‘national champion’ option—the group would still have succumbed to the process of rationalization and consolidation in the global automobile industry. The ‘national champion’ option was never properly considered, being unpalatable for ideological reasons and impracticable from a public expenditure perspective. Moreover, the government’s confidence in a piecemeal approach to privatization increased when it became convinced that Japanese investment could be used to compensate for the decline of indigenous production. In the government’s view, BL’s national champion status was irretrievable and the Japanese could perform the role of surrogate national champions. Notes 1 An abridged version of this chapter was published in Public Administration, vol. 74, no. 3 (Autumn, 1996). 2 Michael Edwardes recalls, ‘frankly when I looked at the size of the figures, I was not sanguine about our chances of securing government approval. The sum of £990m over two years (with a requirement of £150m thereafter) looked pretty horrific to me’ (Edwardes, 1983:233). 3 Correspondence, 22 June 1992.

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4 For a detailed analysis of the processing of the corporate plan through the Whitehall machinery see Wilks (1988, Chapter 8).

4 Japanese inward investment in the British automobile industry

Secretary of State, I want to put a point which you might feel is rather cruel, but it is being said. That is, you have no real idea of what kind of British car industry you want or of what should be in that framework of industrial strategy for Britain, that you have acted entirely reactively to each request from British Leyland, and that as you have reacted you have had no clear idea of how it fits into what is happening elsewhere in the British car industry. (Question to the DoI minister, Trade and Industry Select Committee, HC 294, 1980–1, par. 93, 16) Chapter 2 illustrated that British policy towards the motor industry developed haphazardly. At no stage in the post-war period did government develop a clear view of a preferred type of industrial structure or the future development of the sector. From 1945 to the end of the 1970s ‘interventions’ were commonplace and ‘plans’ for various levels of the industry were from time to time advanced as desirable, but these ambitions were never realized in a coherent and sustained policy. There was no development—let alone implementation—of a consistent positive industrial policy for the automotive sector (Wilks, 1988). It seemed unlikely that the incoming Conservative government of 1979 would change the situation. It was determined to avoid the perceived pitfalls of both selective intervention and planning, and strongly advocated a laissez-faire policy for industry as part of the process of ‘rolling back the frontiers of the state’. One of the most distinctive features of ‘Thatcherism’ was a consistent rhetoric that the business of government should not be the government of business. Accordingly, the market was to be the primary determinant of both the success or otherwise of companies and the structure of industrial sectors. This belief was reinforced by the interpretation of the processes and outcomes of the history of industrial policy in Britain and, in particular, the experiences of the 1970–4 Conservative government. How ever, as outlined in Chapter 3, the effects of recession and decline in the 1980s meant that in the short term decisions were made that compromised this ideology. Nevertheless, while the

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Thatcher governments made conspicuous interventions in industrial affairs, these short-term ameliorative policies were to be distinguished from mainstream policies for industry. Muddling through—finding friends The Thatcher government’s view that the state was incapable of developing strategic industrial policy found an echo in part of the academic literature on British industrial policy. Several accounts have argued that British governments have muddled through successive industrial crises without developing any sort of rational strategy. Cable’s retrospective is typical: Britain has never had an industrial policy in the sense of binding sectoral output targets, or even a list of priority industries towards which the government would assist the mobilization of resources. In fact, it can be argued that there has never been a coherent, overall approach to industrial policy, only a series of individual strands, addressing specific issues or problems. (Cable, 1985:1–29) This raises several questions. Is it simply that the British version of industrial policy was flawed in policy planning and badly managed in implementation? Or has the particular history of British political and economic development established traditions, perhaps even a sub-culture which militates against ‘successful’ state-industry interactions (Shonfield, 1965)? And how novel was the 1980s ‘liberal’ or ‘neo-liberal’ outlook of the Thatcherite Conservatives? Does its particularly prominent position in the recent rhetoric of political discourse cloud the fact that it has long been a major influence on policy? Dyson and Wilks believe so, arguing that there is a British tradition of a passive liberal state: In the industrial policy field this [liberal] ideological inclination is translated into an abdication of responsibility. The traditional response of the British Liberal state has been to define industrial problems as, prima facie, the problems of industry, to be resolved by the market and with a presumption against government action…the private-public barrier remains as impermeable as ever, with the issue of industrial success, failure and crisis still located firmly in the private sector. (Dyson and Wilks, 1983:138) What these studies suggest is not so much a failure to develop industrial policies but a failure to establish the sort of symbiotic relationship with industry which Shonfield (1965) admired in France and Japan. In the face of these circumstances the growth of the Japanese-owned and managed motor

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industry in Britain in the 1980s with the support of the British government requires explanation. By 1989 Nissan, Toyota and Honda had all established production facilities in the UK automobile sector. Indeed, the incoming investors stressed the importance of their close relationship with the British government as a major factor in their investment decision. To what extent was this remarkable ‘industry policy’ part of a rational deliberated strategy for industrial recovery by a strengthened state? To what extent does it suggest that strategic interventions can and do shape markets and industrial structure? This chapter examines two central issues of Japanese foreign direct investment (FDI) which have bearing on these questions. First, it explores the extent to which the successful wooing of the Japanese automobile companies was a national (i.e. governmental and ‘strong state’) response to serious weaknesses in an important sector of British manufacturing. Second, it investigates whether the development is better explained in the context of longer-term Japanese direct investment policies in the global economy. The Japanese in Britain [The Japanese] are very welcome here. Britain has made no secret of welcoming inward investment. We view it not as a threat but as an opportunity: both for investors and the UK as host country. (John Major, Anglo-Japanese Journal, 1990,4 (3):10) While there has been a general trend of Japanese FDI in advanced economies in the 1980s, the UK enjoyed the largest share of Japanese investments in the EC (Dickinson, 1992). Initially, the majority of these investments were in nonmanufacturing areas but as the 1980s progressed the Japanese began to make major investments in strategic sectors such as cars and electronics. In both these sectors, Britain has been a major (European) recipient, and in the case of the automobile industry has secured virtually all the major investments. In 1996, three Japanese manufacturers (Honda, Nissan and Toyota) produced just over 450,000 cars in the UK: a figure expected to rise to 750,000 by the year 2000. The first signs of Japanese inward investment in the UK automobile industry came in January 1981 when the government announced that it was in talks with Nissan. Nissan began its production in the UK tentatively, making a £50m investment in assembly facilities. By 1992, it had invested over £600m with a production capacity of 300,000 vehicles per year and in 1997 announced plans to build a third model in the UK. In 1989, Toyota announced that it was investing £840m in UK production facilities. The startup capacity of the Toyota plant was 100,000 in 1993 and this had risen to 120, 000 by 1996. The third direct investment also came in 1989 when Honda announced plans for a £300m assembly plant at Swindon. Honda was the last of the major Japanese producers to establish a European transplant; it had

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nurtured its entrance into the European market for over a decade through a series of joint ventures with the Rover Group. Honda’s start-up production in 1993 was 70,000 vehicles and reached 105,000 by 1996. The view from Britain The attraction of inward investment to the UK economy (and its potential disadvantages) have been discussed at length elsewhere. The basic aim of any multinational is to exploit the inherent economic advantages of global strategies and the scale economies they produce. In addition, there are certain business advantages in multinational production such as minimizing the effect of exchange rate fluctuations, different tax regimes and protectionist measures in specific national markets. In exploring the assumptions that underpinned the British Japanization policy, a number of demand and supply-side factors can be identified. Activity, employment and trade: the decline of the British sector The UK’s motor manufacturing base had been suffering a twofold decline from the mid-1970s onwards. First, BL was undergoing a period of rationalization and was losing market share rapidly. In 1970 its market share was 38.1 per cent, in 1980 it was 18.2 per cent and by 1990 it had dropped to just 14 per cent. The parlous state of BL’s position was illustrated in The Economist (8 November 1980) which contemplated the effect of a BL closure on the UK manufacturing sector. The study discovered that BL placed £460m worth of orders in 1979 with Britain’s ten largest component companies. The article concluded, somewhat prophetically, that if BL did not exist, Britain ‘would have to invent it’. Second, American multinationals in Britain were also causing the government some concern. Following low productivity in their British plants and high exchange rates, Ford and General Motors began importing vehicles and components from their European plants, hence reducing their British content and contribution to the British trade balance. Jones (1985) demonstrated that in 1985 only 22 per cent of GM’s British car sales were of British origin. Thus, the corporate policies of the existing multinationals, and the government’s lack of control over them, spurred on the Japanization policy. Hodges (1974) pointed out that the American multinationals have always exploited the fact that they were mobile within Europe when lobbying the British government. The British government for its part ‘finds itself in the invidious position of competing with other countries for the location of investment by the car-manufacturer, whilst attempting to derive maximum development from such investments and retain control over the country’s economic development’ (Hodges, 1974:183). By the early 1980s, the government had lost patience with the American multinationals over their low

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British content levels, and the lack of policy instruments to deal with this underlined the importance of bringing new investment into the sector. The Japanese policy offered the prospect of change in this troublesome sector. By boosting both car and components production, the government could address the widening trade deficit on motor products which was the largest part of Britain’s balance of payments deficit in the 1980s. Thus, government ministers such as the Department of Trade and Industry minister Leon Brittan swept aside industry criticisms of Japanese investment. The decision by Nissan to go ahead with a major investment, with the help of Government regional aid has, I know, led to rather mixed feelings within the industry… I have no patience with the argument that Japanese car companies coming here represent a kind of Trojan Horse. The same might well have been said about the now established American multinationals and it is a little ironic that they should be amongst those expressing fears. Let there be no doubt: when full production is achieved, the Nissans built here will have a high level of British content. They will be British cars and Nissan will be exporting from Britain. With UK car production at low levels and with imports taking half the UK market, there is plenty of room for Nissan. (Leon Brittan)1 Since the Japanese motor investments in Britain have not yet reached their full potential it would be premature to assess their economic contribution. In the British case, the ‘success’ of inward investment will to a large extent hinge upon the degrees to which the Japanese are sourcing with local companies; direct Japanese imports are substituted by transplant production; and (most importantly) the amount of British production which is exported. It is likely that the Japanese-UK investments will significantly reduce the UK deficit in motor industry products. Automotive exports from the UK have already been given a massive boost from the flow of Japanese cars into European markets. In 1996, the three Japanese producers exported over 300, 000 cars from their UK base, representing some 70 per cent of their total production. However, existing producers have expressed concern that this increased activity will not be transformed into significant employment increases because of the displacement of existing production and employment. Since much of the transplant production in Britain is expected to supplement the existing levels of Japanese-EC penetration rather than supplanting it, this factor cannot be lightly discounted. American research has demonstrated that where the new production is additional to existing supplies the displacement of jobs can be significant (GAO, 1988). Moreover, Japanese car companies in the UK have tended to employ younger workers on the basis of educatability as opposed to those with experience in the automobile industry.

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Another major concern for government in the early 1980s was the effect that declining vehicle production was having on the hitherto successful British motor components industry. In 1982, about 800,000 people were employed in the components industry which was largely dominated by British-owned firms.2 Providing that the government could secure adequate local content agreements from Japanese investors, this would provide much needed new business for the components sector. Lord Young’s memoirs reveal that this concern was uppermost in ministerial minds: ‘If I could persuade not just Nissan but the other companies to come then that alone would revive all our component suppliers’ (Young, 1990:285). Perhaps the biggest advantage of the government’s Japanization policy was that the Japanese would not be exporting from another EU country into Britain. The diffusion effect The possibility that the Japanese investments would encourage the adoption of Japanese work practices throughout the motor industry was seen by government as a major plus factor. It was anticipated that there would be policy transfer between incoming Japanese companies and existing producers. Stopford suggested that ‘the greatest single source of benefit probably stems not from the performance of the Japanese-owned assets themselves, but from the stimulus to improve competitiveness their presence has given to British competitors’ (Stopford, 1989:9). The DTI attached a high priority to this in negotiations with the Japanese. For example, the Nissan chairman, Mr Ishihara, ‘bluntly’ asked the DTI minister, Norman Tebbit, in 1983: ‘you are very eagerly inviting Nissan to Britain. This is very strange to me. What is your reason?’ He answered in the following way: ‘Nissan has acquired very new production technology. Nissan is capable of developing highly innovative models. Nissan has high productivity. It has good labour relations. Everything that is an object of envy to us. We want you to set up your operation in Britain to demonstrate not only to our car-makers but also other industries these aspects of Japanese industrial management’. When I heard this I thought in my mind: ‘Of all things they want us to be a tutor at their home’. (Oriental Economist, January 1984:17) The UK government simply wanted to import successful Japanese production techniques. Japanese success is built on high-quality production with low levels of reworking which reduces costs and improves customer satisfaction. By adopting flexible Japanese production methods more model variations can be offered, allowing Japanese producers competition in a wider range of market niches. This system has helped the Japanese to introduce new models every three to four years compared with an EC average of nine years. As part of this

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process the Japanese have developed a unique relationship with suppliers. Japanese plants are typically much less vertically integrated than their British counterparts and buy in more components. In order to guarantee profit for each party and to reduce problems in production and assembly, suppliers are included in the design process, thus reducing research and development costs and assisting with the development of ‘just-in-time’ techniques.3 The British government hoped that these practices would permeate the sector following the arrival of the Japanese. This process has been described by Ackroyd et al. (1988) as ‘mediated Japanization’, i.e. where domestic companies mimic Japanese practice. Arguably, the Japanization policy was aimed more at the components industry than at direct competitors. The advantages for the components manufacturers are (potentially) much greater than simply increased orders; they include higher volumes; speed of model changes—each model change provides the opportunity for component suppliers to increase their presence on a model; technology of model changes—as new models tend to have increased technology contents, component suppliers have the opportunity to increase the technology and thus value-added of components; supplier partnerships—the Japanese operate a pricing policy whereby the assembler determines the price of a vehicle in consultation with suppliers, working back so that each party achieves a profit; and stability—the Japanese approach provides a far greater degree of stability than has traditionally been enjoyed in supplier relationships with European companies (Barret and Sharp, 1992:12). These benefits may or may not materialize, but the attempt to address such fundamental issues should not be underestimated in the light of the previous failures of British governments. As Chapters 2 and 3 have illustrated, post-war governments have introduced a range of policy instruments and policy machinery to try to improve the competitive performance of the sector. In 1975, the Central Policy Review Staff (1975:119) under lined the need for better workplace organization as a prerequisite for the development of an internationally competitive industry. There is not the slightest prospect of the British car industry becoming viable at any level of production if the present constant interruptions to production, reluctance to accept new methods of working and capital equipment, and readiness to accept sub-standard quality continue. Fundamentally, these problems reflect prevailing attitudes of management and labour towards each other, towards productivity and towards work… unless these attitudes do change, many of the key competitive weaknesses will not be overcome. (CPRS, 1975:119) Adopting Japanese production methods became accepted wisdom in the global automobile industry. Britain, for once, appeared to be ahead of the chasing

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pack. All the European car-makers and their governments faced the need for retrenchment in their domestic sectors in the 1980s. Excess capacity problems and low productivity underlined the need for rationalization and restructuring. Pursuing Japanese investments provided the British government with a policy instrument which did not require large tranches of public money. The Japanese car companies were successful and there was little prospect they would become a burden on national policy-makers in the way that, for example, Chrysler had in the 1970s (Wilks, 1988). Ironically, the policy was well suited to the British policy style because it did not involve ‘intervention’ in the active sense. The distinctive feature of this policy instrument was that it circumvented the need to negotiate policy details and implementation issues with existing producers. The existing producers fight back The response of the existing producers to Japanese inward investment was initially hostile. The timing of the Nissan announcement was unfortunate, coinciding with a general breakdown in relations between the British and Japanese car industries. British Leyland was unhappy with agreements reached between SMMT and the Japanese Automobile Manufacturers Association (JAMA) in 1980 over the level of Japanese imports to the UK, and had campaigned throughout the early part of 1981 for SMMT to adopt a tougher stance (Financial Times, 14 July 1981). British Leyland was also spearheading a Confederation of British Industry (CBI) campaign against Japanese imports in key sectors. The then BL chairman Sir Michael Edwardes argued, “The Japanese need to see the size of the stick before they decide what action they will take’ (Financial Times, 22 May 1981).4 The reaction from other EC carproducing states was similarly hostile. The French industry minister André Giraud accused Britain of ‘a lack of Community solidarity’ over the policy to woo Nissan (Financial Times, 4 February 1981). The design of the policy was such that during its early development ministers were able to outflank existing producer interests. Accordingly, the industry accepted the inevitability of inward investment at an early stage and decided to concentrate their lobbying on a number of implementation issues. The former Ford chairman Sam Toy recalls: We took the view that with the existing problems of excess capacity in the industry having more production would not be healthy. However, recognizing that the Japanese were coming to Europe anyway it was better for Ford UK if they were in Britain and not elsewhere. At least it would give the components industry a chance to get a better share of the business. (interview, 9 September 1992)

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Consultations between the producers and the DTI were dominated by three issues: the local content of Japan-UK products, the cost production advantages that would accrue to Nissan on a green-field site, and the level of exports from the transplants. Local content The issue of British content was vital to the UK components industry, since the average British content of cars sold in the UK had fallen to just 39 per cent by 1979 (HC, 1987:107). An EC/EFTA agreement stated that an 80 per cent local content measured on an ex-works price basis should be the benchmark for free trade within Europe. (An ex-works price value is measured by subtracting the value of the parts originating outside the EC from the price at which the car leaves the factory.) 5 The DTI’s policy was to negotiate a local content with Japanese producers in line with the EC/EFTA agreement allowing the Japanese to build up to the 80 per cent ceiling (interview information). This content level was vehemently opposed by domestic component and assembling producers. They argued that the agreement with EFTA had been designed to provide EC producers with access -o other European markets, and EFTA producers free access to the EC. It was not, they argued, an understanding that extended to Japanese transplant production. The domestic industry wanted a stricter measure of local content to apply to the Japanese producers which excluded non-manufacturing areas. The leading component company, Turner & Newall, outlined the problems with an exworks price definition: It is easily possible, by including administration, marketing, distribution, depreciation, financing charges and gross margin, as well as assembly, to achieve 80 per cent local value content, yet still import the power unit and transmission, or other technically strategic parts, probably at transfer prices. (HC, 1987:198) The British car producers wanted a local content figure measured on an exworks cost basis (in this definition the cost of imported parts is subtracted from the cost of all other local components to reach a percentage value). By specifying an ex-works cost EC content of 80 per cent they believed that the manufacture of constituent parts and various manufacturing processes would overwhelmingly have to take place within the EC. This issue of national content was raised in Parliament in 1984–5 when the Midlands MP Doug Hoyle introduced a Ten Minute Rule Bill (No. 128) proposing that the minimum UK content should be 50 per cent rising to 90 per cent depending on the volume of UK sales. Even as late as 1987 the TISC was recommending that an ex-works cost rather than ex-works price definition be

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used, and that engines for UK assembled cars be produced in the UK (HC, 1987). There was a lengthy debate within SMMT between the component manufacturers and the assemblers on this issue. The component makers wanted a British content figure specified within an overall EC percentage. However, vehicle manufacturers argued that content figures should be measured at EC level, rather than the national. The American multinationals feared that a UK precedent would affect their Europe-wide sourcing policies, and for small companies like Austin Rover, a British content figure could prove ruinous. As an Austin Rover official told the TISC, “The danger of a very restrictive interpretation is that the result can be to freeze the present pattern of international production and trade, and to constrain developments in international technological co-operation, particularly the indigenous national or EEC manufacturer who does not have parents or subsidiaries elsewhere’ (HC, 1987:164). Eventually, it was agreed within SMMT that the domestic sector should push for an ex-works cost definition of content and undertakings about levels of export production from the transplants. The car-makers’ lobbying throughout 1981 appears to have contributed to Nissan’s decision in 1982 to shelve its original investment plans.6 In addition to this, there were several other factors that led Nissan to withdraw from the investment. First, some Nissan board members favoured expanding the company’s Spanish commercial vehicle operations to build cars, in the light of expected Spanish entry into the EC. Second, there was concern about falling demand for Japanese products in the EC markets throughout 1981–2. Moreover, the possibility that UK production would substitute direct imports from Japan caused Nissan problems with the Japanese unions who were worried that overseas investment was undermining domestic production. No-one was more dismayed by the announcement than the Japanese Ministry of International Trade (MITI) which had encouraged the investment as a means of reducing trade friction. A MITI spokesman commented, ‘The senior management of companies realized the need to get more involved in ventures overseas or trade friction would never go away. This was particularly the case in the motor industry where direct imports had gone as far as was “politically feasible” (Financial Times, 15 July 1982). Another major area for debate between SMMT and the British government related to cost-production and the government’s intention to provide Nissan with regional aid. Ford had been a long-term critic of the policy of providing assistance to selected regional areas, partly because its main operation in southeast England did not qualify for assistance. On this occasion Ford felt even more aggrieved because the aid was going to a project on a green-field site with all the additional advantages this gave Nissan. Despite these protestations Nissan received regional aid amounting to 10 per cent of the total costs of stages one and two of its investments and, exceptionally, the company

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was given a 22 per cent regional development grant even though the rate had been cut to 15 per cent following the downgrading of regional policy (Wilks, 1989:186). The issue of exports for the Japanese factories was a final area for debate. Underlying the industry’s pragmatism about the Japanese investments was the assumption that much of what was produced by the Japanese in the UK would be exported. The SMMT lobbied the DTI to specify export targets for Nissan. There were precedents for this type of condition. Ford had given an undertaking about export production to the Spanish government when setting up its production facilities there. The British government resisted this demand. One official recalls: We had some quite heated discussions with SMMT and the assemblers over the export issue…because we did not sign anything does not mean that this concern did not register. The issue of exports formed a major part of the negotiations with the Japanese and tacit understandings were reached on our expectations of each other. (interview, 22 January 1992) The official gave two explanations why no explicit conditions were agreed. First, the DTI minister was concerned that such an arrangement would contravene the Treaty of Rome. Second, while it was widely believed that Britain was the only welcoming host for Nissan, this view was not shared by the DTI. Nissan had in fact held talks with public authorities in West Berlin and Portugal about possible locations there. The official recalls, ‘their signature was by no means certain and it was made plain to us by ministers that we should do nothing that might frighten them off’ (interview, 22 January 1992). Thus, while the government remained unwavering in its commitment to a Japanization policy, uncertainty over aspects of policy detail did allow the domestic industry to bring limited influence to bear on the conditions for direct investment. The DTI did not possess all the detailed technical information about local content formulae to autonomously implement the policy. Neither was it, in the words of one official, ‘willing to be entirely heedless of the views of the domestic sector’ (interview, 14 January 1991). UK automotive investment: the view from Japan Presenting matters from a Japanese perspective provides contrasting images. The explanatory starting point is Japanese national industrial policies and their centrality in international trading relationships. In broad terms the Japanese perspectives on economic objectives have been ‘explicitly dynamic and explicitly developmental’ (Tyson and Zysman, 1989). Relationships between government and firms are long-established and close, and certain national and corporate values and strategies are shared. The broad forms of Japanese

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overseas direct investment have been shaped in the context of these relationships. This is particularly true of attitudes to markets and the manipulation of them by both government and corporations: In the Japanese variant of capitalism, markets are emphasized as a source of growth rather than of short-run efficiency, and a primary role of government is to supply incentives to promote growth through markets… From this perspective the competitive advantage of a nation’s producers in world markets is created by policy rather than given by immutable resource and technological endowments. (Tyson and Zysman, 1989:xvi) There is considerable debate about the efficacy of such a perspective as a guide to policy. The exponents of ‘free markets’ assert that not only is Japanese success explained by forces other than public policy, but that ‘interventions’ have inhibited policy. The concern here is not with allocative effects: the issue is what light would a study of Japanese outward investment policy shed on events relating to the British automobile industry in the 1980s. The evolution of world players The expansion of Japanese car-makers into American and European markets is the most recent stage in a long-term government policy for the development of the domestic sector. This sectoral policy can be placed within the context of the more general strategy of encouraging foreign direct investment. In 1936 a law was passed which restricted established foreign producers in Japan. Two years prior to open hostilities with the USA, GM and Ford—which had produced two-thirds of the vehicles for the Japanese market in the mid-1930s—closed their plants and withdrew from Japan. However, as Ueno’s excellent account reveals, after 1945 the Japanese government faced some hard choices about the development of the economy. The Bank of Japan wanted the government to concentrate its resources on those established sectors with export potential. The MITI, on the other hand, wished to use industrial policy to nurture chemical and machine industries as part of a longer-term strategy. Ueno recalls the debate: MITI believed that developing the automobile industry would benefit the machine tool industry and, through that route, industry in general… MITI hoped that Japan’s automobile industry would concentrate efforts on improving productivity as much as possible in order to contribute to substantial sophistication of the national economy of Japan in alignment with the advanced countries. (Ueno, 1977:190)

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From that point on government policy has been to create a Japanese oligopoly with assured market shares for the main participants. Thus, intermittent cutthroat competition spurred development and product quality, while avoiding what MITI describes as ‘excessive competition’ which might threaten prices and eventually investment. In ‘designated industries’ power players have been established whose significant market share at home enabled them by the 1970s to become serious contenders in international markets. Thus, it was recognized at an early stage that scale economies were needed in an industry which was important in all advanced capitalist economies. The policy of building up ‘national champions’ had mixed results in the automobile industry. In the second half of the 1960s MITI stated its intentions to reorganize the sector into three large groups, each specializing in different types of car. There was little industry enthusiasm for this proposal. Smaller producers such as Mitsubishi and Honda were angered by MITI’s intention to concentrate the domestic sector around the two main producers, Toyota and Nissan. However, the result proved beneficial in that it forced smaller producers to consider growth through exports. In addition to this, with the onset of capital liberalization in the late 1960s these smaller companies were able to resist MITI pressure to merge with Nissan or Toyota by establishing joint collaborations with American producers. It was at this time that collaborations between Mitsubishi-Chrysler, Mazda-Ford and Isuzu-GM were developed. While the policy is often cited as a MITI ‘failure’ (Ozaki, 1984:64), the domestic industry had assumed an oligopolistic market structure by the early 1970s, dominated by Toyota and Nissan. From the national point of view, as represented by the Japanese bureaucracy, domestic economic security required such world players, and the automobile industry had proved in the 1960s that it was capable of the requisite competitive performance. Thus the best defence against the penetration of the Japanese market by foreign producers was the emergence of world-class players from the ranks of domestic corporations.7 Odaka et al. outlined MITI’s strategic aims: [MITI] took up the infant industry argument, maintaining that promotion of the industry would serve as a springboard for industrial development in general. In the end, the automobile was chosen as a strategic target for the government’s industrial policy, together with such industries as synthetic fibres, petrochemicals and electronics. (Odaka et al., 1988:24) The first phase of foreign direct investment policy 1950–72 From the 1950s through the 1960s FDI had no significant part in this Japanese industrial strategy of world market expansion.8 The securing of an international market presence was the initial objective, supported by the

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securing of resource imports to assist the development of the key sectors. The bulk of Japanese FDI in this period was in the developing world and was directed towards investment in the exploitation of raw materials. A number of specific automobile industry policies sprung from this general strategy in the 1950s and 1960s. The MITI protected the sector with a variety of measures to limit demand for non-Japanese vehicles and to assist domestic producers with low-interest loans, depreciation allowances and subsidies for essential machine tool equipment. Perhaps the two most significant measures in the 1950s were financial assistance from the Development Bank of Japan and a MITI-sponsored programme of importing technology from established foreign automobile companies to allow the Japanese to build vehicles under licence in Japan. Various regulations were introduced by MITI on licence importing, patenting and local assembly to assist the process. The most significant technology transfer was that between Nissan and the British Motor Corporation. Once licensed production began the Japanese government gradually implemented tougher local content rules based on a ‘schedule for deletion of foreign parts’ until the cars were wholly Japanese. The government also introduced the ‘Citizen’s Car Project’ which subsidized companies who produced passenger cars which conformed to a number of model specifications, e.g. engine size. Toyota was an exception; it focused its resources on its own product development programme, declining the opportunity to build under licence. As a result of this carefully orchestrated period of development the industry had, by the early 1960s, come through a crucial ‘learning process’. By 1970, when trade liberalization started to open up protected vehicle markets, ‘a mass production system was almost fully in place’ in Japan (Mutoh, 1988:309). The 1960s were dominated by MITI’s attempts to protect the home market to allow domestic production to rise, and to facilitate the development of the components industry. The main aim was to limit domestic demand for imported cars. For most of the 1960s an import duty of 40 per cent operated and foreign currency for the purchase of imported cars was restrained. In perhaps its most (in)famous set of measures the government frustrated importers with obscure technical specifications and importing regulations. The result of these developments was that well into the 1970s import volumes were kept below 25,000 units in the Japanese home market. A further significant development in this period was the improvement in Japanese quality control techniques. Car-makers’ attempts to improve quality control were being hampered by an underdeveloped components industry. In an attempt to remedy this, car-makers began to develop close relationships with component companies. The special relationship which now exists between Japanese carmakers and component suppliers developed at this time. These efforts to achieve manufacturing efficiency and technological credibility were supplemented by a high pricing policy in the domestic market which provided manufacturers with higher margins and increased revenue for

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reinvestment. These policies were central to the ‘big player’ strategy described above. Thus, at a time when pent-up demand was being unleashed in world markets the Japanese strategy was clear: to create a strong home market in which emerging car producers could develop products and production. During the first phase of FDI the objective was to use foreign investments in raw materials to feed pivotal domestic manufacturing sectors. During this period (1955–70) the domestic motor industry made significant progress. In 1955, production of all vehicles was less than 100,000 units compared with a global volume of 13.7 million. By 1970, Japanese production had overtaken that of France and Italy, and was second only to the USA. In 1980 Japan became the largest vehicle-producing nation in the world with a volume of 11 million units—a position it has maintained ever since. FDI strategy after 1972 A second FDI phase (the 1970s through the 1980s) witnessed the Japanese industry beginning to tackle international competition. In the watershed year of 1972 known to the Japanese economic community as ‘the gannen [the very first year] of direct investment’, Japanese foreign ownership topped $2 billion and the share of manufacturing investment began to grow. This second phase of FDI was consistent with traditional trade theory as outlined by Dickinson (1992). A successful economy will produce a trading surplus with its competitors, increasing the value of the nation’s currency and hence the price of exports. However, the success of the national economy can lead to higher production costs, further increasing the price of exports. In such circumstances FDI becomes attractive since exports can be substituted by local production in export markets with the additional effect of reducing trading imbalances between the successful economy and its competitors. These trends continued into the 1980s. As wage rates in the newly emerging economies began to grow and as the presence of Japanese exports in the markets of the USA and Europe also rose, new investment for resource exploitation became less significant than that for manufacturing, property and services. The total outflow increased substantially (particularly in dollar terms) with manufacturing dominating FDI in the late 1970s and early 1980s. In all of this, the Japanese state was less ‘active’. However, the policy momentum was sustained by a mixture of shared values and understandings bolstered by institutional continuity. There is no doubt that MITI’s role in the Japanese automobile industry became less assertive. Nevertheless, this more subtle guiding role should not be lightly discounted. The Japanese government was in full support of the investment decisions that took its automobile industry overseas. The first requirement of establishing a world-wide market share in vehicle products was to follow the market and to establish a presence in the highincome markets that bought motor vehicles—hence the USA and Europe. In what has

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become a classic market strategy, Japanese industrial companies slowly and methodically established a market and distributional presence, and subsequently developed a manufacturing capacity. Investing in the UK The attitude of the British government and access to the EC market were the fundamental reasons for the Japanese decision to locate in Britain—not, as is commonly argued, factors such as the English language, educatability of the workforce, lower labour costs, satisfactory infrastructure, or experience of earlier investors from other sectors (Nissan had a commercial vehicle operation in Spain long before it decided to come to Britain). The Japanese are in Britain first and foremost because it is in the European Union. The Japanese had to penetrate a customs union, well established and sustained by continental European traditions, but which during the period under review was to further integrate into a ‘single market’. The Japanese were concerned that the development of European regulations for the Single European Market (SEM) could lead to various forms of protectionism, supplanting the verbal agreements which JAMA had negotiated with its peers. Anticipation of European integration encouraged the Japanese to consider direct investments as opposed to other options such as export progression policies. The SEM is now the largest world market for automobile products and it is essential for the Japanese that they have production close to this market. Thus, the British transplants were ‘bridgehead investments’ intended to provide a location to expand sales in the wider region. The key advantages of Britain as a location have been outlined by a Toyota official: We chose the UK as our base for several reasons. It has a strong domestic market, partly because of the high number of company cars sold here and there is a long tradition of vehicle manufacture. There is also good access to mainland Europe and a very good attitude from both local and central government. (Investors Chronicle, 17 July 1992) The intention was to increase European market share which had hitherto been suppressed by national export restrictions. In the case of Nissan, its interest in the UK as a location was influenced by its successes in the British market in the 1970s. Nissan-Datsun had acquired a UK market share of 8 per cent (its highest in Europe) and its (then) independent UK distributor apparently convinced Department of Industry officials of the possibility of Nissan locating in Britain (Financial Times, 30 January 1981; Tebbit, 1989:220–1). The UK distributor also lobbied the board of Nissan in Japan, pointing out that: The prospect of Nissan selling any more than 100,000 vehicles a year was bleak. By

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locating here, market share could be increased’ (Financial Times, 31 March 1984). Of all the partners in the EC enterprise the British were best disposed to ‘free markets’ and had found the traditional negotiated trade relationships of the EC hard to fathom and to manipulate. Also, as noted earlier, the domestic automobile industry was in a parlous state. The British government was therefore likely to be receptive, and having accepted Japanese invest ment was likely to defend free distribution of its products throughout the region. In 1991, the Toyota president Shoichiro Toyota emphasized that he expected ‘Whitehall to fight hard’ for Japanese-UK plants in the EC: Mrs Thatcher was most aggressive in inviting us, and we felt confident that we would have the clear and full support of the British government in the future…the UK government can make sure that a British-made car will have free circulation throughout Europe without any political restrictions. (Financial Times, 23 April 1991) The Japanese have become surrogate national champions for the UK government and free EC circulation of transplant goods became a key industrial policy. In this sense at least, British policy-makers have developed a policy for the automobile industry, confounding its critics who bemoaned the lack of such an initiatives in the past (see Wilks, 1990:166–72). The longer-term development of the British policy The British government now has a large vested interest in defending Japanese investments in Europe. The fact that the British Japanization policy was designed to boost UK production of vehicles at a time when other EU states had been preoccupied with the problems of over-capacity in the sector has always remained a source of tension at the intergovernmental level. Britain’s willingness to remain aloof from its EU partners, especially on matters of trade policy, appears to have helped it adopt a more flexible Japanization policy for its automobile industry. Studies by Hellmann (1977) and Robinson (1983) illustrated that Britain traditionally had a promultinational stance within the EU and international organizations more generally. Thus, as other European governments oversaw a period of retrenchment and rationalization in their domestic industries in the 1980s (Jones, 1991), the British government, with its commitment to the free flow of international capital and belief in the efficacy of competitive market pressures, pursued an entirely different strategy. The need for the British government to protect its surrogate national champions within the EU continues. The larger EU car-makers are convinced ‘their governments’ will not oversee their decline at the hands of the Japanese. This issue remains prominent on the European policy agenda. Even companies

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who viewed the Japanese inward investments with equanimity have begun to express fears. The BMW chairman commented in 1992: “Through their aggressive policy of conquering markets, the Japanese have created a scenario of ruinous competition everywhere. The first people to suffer from this cutthroat competition were the US manufacturers. The next will be the Europeans’ (Fortune, 4 May 1992). The same article noted that: many European business leaders…believe the formula for creating strong Euro-companies includes a mixture of centralised industrial policy, improved productivity, and intensified pressure on competitors— especially the Japanese—to hold down exports and open up their markets. (Fortune, 4 May 1992) The British Japanization policy was based on the assumption of continuing trade liberalization in Europe. The growing economic problems of EU member states has led to the emphasis shifting away from free trade towards a more active industrial policy. Thus far, the Commission has resisted these pressures, but the issues are not as clear-cut as they appeared when the neo-liberal paradigm was dominant in the period up to 1992. Given the economic interdependencies which exist in Europe alone, a concern must be whether British policy-makers have the capacity to deliver free access for Japanese transplant goods. In fact, if one takes a global perspective, the British position may well come under increasing pressure from its EU partners. The Japanization policy may have boosted short-term manufacturing prospects and dealt with immediate economic problems. However, in the longer term it may have permanently damaged Europe’s ability as an automobile-producing region to compete with the USA and Japan in the global economy. The Thatcher governments which brought the Japanese into Europe would argue that the proximity of global champions in the European market is the most effective means of raising the competitiveness of the European sector. This may be so, but it remains a high-risk strategy for Europe. A‘significant advantage’ of the British policy is that the Japanese do not have fully integrated European operations and are therefore heavily dependent on their British base. The very nature of Japanese production with its emphasis on efficient production techniques and total quality control suggests there may be significant long-term supply-side benefits from the investments. The competitive advantages that the Japanese firms have exploited in order to ensure successful FDI are different from those held by American multinationals investing in the European automobile industry in the 1960s. The Americans’ strength lay in the possession of innovative production technology, whereas Japanese success depends on the identification and pursuit of a ‘holistic set of goals’ (Dunning, 1986:38). Emphasis is placed on planning and cost control, high human capital

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investment, product differentiation, efficient procurement, quality control and harmonious industrial relations. Thus, the Japanese will have to invest large sums in training British employees in the methods of total quality. As Norman has argued: The view that a multi-stage production process should be treated as an integrated process leads naturally to the realisation that any such process is only as good as its weakest link. A zero-defect philosophy and the view that workers must be encouraged through training and communication to take responsibility for the total activity, disseminated to both suppliers and competitors. (Norman, 1989:9) This suggests that investment must be ongoing, further binding the Japanese car-makers to Britain as their European manufacturing base. Integrated Japanese production facilities are not as mobile as screwdriver assembly operations, and it is the task of British policy-makers to ensure that the unique position of Britain as the EU home of Japanese automotive investment is nurtured. It remains to be seen whether the British government can extend an influence over the decisions of Nissan, Toyota and Honda which it has in the past been unable to exercise over Ford, Vauxhall and Chrysler. Conclusion: the illusion of design? This chapter began by postulating that the Japanization policy could be characterized as a part of a ‘rational deliberated strategy for industrial recovery by a strengthened state’. By considering matters from the perspective of the Japanese investors as well as British policy-makers it is clear that it would be over-deterministic to argue that the DTI or senior government actors had developed and implemented the policy in line with preconceived policy objectives. A combination of factors led to a situation in which this policy became a feasible option. First, the sector had evolved to a stage where the decline of British owned production and damaging multinational policies combined to produce a number of serious economic problems for government. Britain did not have the embedded interest of a strong national industry, like France, Italy and Germany. Consequently, British policy-makers were able to implement the Japanese policy without the constraints of strong opposition from the existing sector. Second, the Japanese needed proximity to EU markets in readiness for a single market in vehicles. The task of British policymakers was to convince the inward investors to establish themselves in the UK. Self-evidently the first factor made this a much easier task. Thirdly, while the policy required an element of sectoral governance it was not entirely at odds with the government’s ideological ambitions in the area of industrial policy. These is no reason to doubt the conviction of Lord Young when he told

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disgruntled European car-makers that he ‘represented the consumers of Britain not the producers of Europe’ (interview, 9 September 1990). The policy was implemented at little financial cost and was also consistent with the government’s belief in the free flow of international investment. In short, while the policy was not the product of remarkable foresight by a ‘strong’ state, neither was it the reactive response of an ‘arm’s-length’ or ‘weak’ state. The policy indicated an ability by policy-makers to take advantage of the circumstances of the 1980s as a basis for new policies. If, as suggested here, the policy demonstrates that British policy-makers are learning to adapt to economic change with rational policies, then it does represent a watershed in British industrial policy. British policy-makers have in the past been criticized for failing to develop policies that allow companies, sectors and the economy to make economic adjustments. The Japanese policy is limited evidence that these criticisms are being met. The nature of this transformation is nicely described by Katzenstein’s tale of the snake, the frog and the owl in his discussion of the ability of small European states to survive in the global economy of economic superpowers and multinationals. Katzenstein’s thesis is that small European states could survive in the global economy by making a virtue of being adaptive to economic change: Fearful of being devoured by the snake, the frog asks the owl how he might survive. The owl’s response is brief and cryptic: learn how to fly. None of the small European states has learned to soar like the eagle. What they have learned to cultivate is an amazing capacity to jump. Although they appear to land on their stomachs, in fact they always land on their feet and retain the ability to jump again and again in different directions, correcting their course as they go along. In a world of great uncertainty and high risk choices, this is an intelligent response. (Katzenstein, 1985:211) British policy-makers were adaptive in finding a solution to the change that occurred in the automobile industry in the late 1970s and the predicament of serious economic decline in the domestic sector. Whether they can develop this policy and adapt to subsequent change remains to be seen. Notes 1 Transcript of speech obtained from SMMT. 2 The government’s concern for the sector was demonstrated in 1985 when it invited the Trade and Industry Select Committee (HC, 1987) to conduct a farranging investigation into the strengths and weaknesses of the sector. 3 For a detailed analysis of the production methods of the Japanese car producers and their competitive advantages see Jones (1991).

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4 For a comprehensive review of the history of the Voluntary Export Restraint (VER) and relations between SMMT and JAMA, see MMC (1992:149–63). 5 An ex-works price value could, for example, include profits, energy, labour costs and marketing expenses. 6 Some members of the government and Conservative backbenchers blamed the problems on DTI officials ‘who had been unduly influenced by heavy lobbying by the UK motor industry for a high local content’ (Financial Times, 5 July 7 For a discussion of the remarkable development of the Japanese motor industry 1982). see Cusumano (1985) and Odaka et al. (1988). 8 This section on direct investment draws on Komiya and Wakasugi (1991).

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5 Policy networks in the UK automobile sector

In the preceding chapters we assessed the post-war development of the UK automobile industry; in this chapter we discuss the evolution of British policy networks during this period. In particular, we test the utility of Atkinson and Coleman’s (1989) model of policy networks. The benefit of our longitudinal study is that policy change can be placed in its proper historical perspective and developments in policy-making structures can be accounted for. This chapter draws the UK section to a close with a discussion of the key governing structures and networks of actors before shifting the discussion to the European level. However, there are important links between the two levels. Independent political activity An interviewee who had spent over twenty years in the Department of Trade and Industry (DTI) in the UK argued that he had never encountered a sector in which individual firms were so well organized for government relations (interview, 21 January 1991). The major manufacturers have cultivated close links with government departments, ministerial actors and regional MPs through ‘in-house’ government relations divisions, hired professional lobbyists and elite contacts at executive level. For example, the origin of Ford’s attempted purchase of Austin Rover in 1986 was the result of Ford executives approaching Norman Tebbit (then Conservative Party chairman) at one of the company’s social functions. He agreed to raise Ford’s interest with the DTI minister. These in-house operations have become much more professional in recent times but such activity has been commonplace for some time. In the 1950s Roggow observed that: ‘While the larger firms also utilized trade associations, they were better equipped to deal directly with controlling agencies, either through their own special Government Relations Offices or, in at least one case, through an entire top-management related, Government Relations Department’ (Roggow, 1955:58–9). Several factors encourage direct contacts between large companies and policy-makers in the political system. First, if the government takes a decision for ideological reasons to downgrade consultations with trade groups, as the Thatcher governments did in the 1980s (Sargent, 1993), companies will

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reinforce their capacity to deal directly with government. Second, cultural norms may be important. Vogel (1978) argues that the liberal ideology of business people makes them suspicious of ‘partnerships’ with the state conducted through organized groups. However, because contact with government is practically unavoidable, the result may be that individual companies interact with government on a direct basis. The automobile industry is a major source of revenue for the Exchequer and is involved in a complex set of tax relationships which demand an individual capacity to interact with government. Some policies are aimed at specific firms—or at least their effects fall disproportionately on large firms—and this encourages independent political activity. Moreover, the large automobile companies are involved in major procurement issues with government, and this sort of issue encourages the creation of sections within companies to handle contact with civil servants and politicians. American multinationals placed great emphasis on government affairs, partly because of a need to gather local political information in all investment locations. However, it is important not to generalize, because even within the sector there will be differences in style and approach. Ford has a very active government relations function, whereas Vauxhall has operated with a relatively small unit and has been unwilling to adopt a strident stance on major issues. For example, in spring 1993 Ford UK circulated to other manufacturers a letter critical of the government’s attitude towards Japanese imports, asking the other companies to sign it. Vauxhall refused. The decisive factor in the development of independent contacts between British Leyland and the government was the consolidation, nationalization and privatization of the company. The fundamental point in all such political activity is captured by Salisbury’s argument that large companies have ‘institutional interests’ which cause them to engage in a range of policy-relevant tasks (Salisbury, 1984). Effective political representation requires that companies develop a number of political tactics or strategies: participation in various business organizations, developing government relations divisions, the use of consultants, and possibly even financial contributions to political parties. This ‘horses for courses’ approach thrives in the absence of a rigid structure of business representation. Sargent has argued that unless ‘a future UK Government refuses to deal directly with individual companies and makes membership of a representative trade body “compulsory” in some way, the growth of alternative forms of dialogue with individual companies will continue and the potential of British trade associations…will be undermined’ (Sargent, 1993:245). Thus, in Britain independent political activity has become a key governing structure used by the companies in their corporate representation strategies and relied upon by policy-makers seeking information about policy formulation and implementation (Campbell et al., 1991). In fact, the government accommodated such activity within the structure of the DTI Vehicles Division

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in the 1980s. The Vehicles Division was established to ‘sponsor’ all aspects of the automotive sector. It had three main divisions, one responsible for dealing with the American multinationals, one dealing solely with British Leyland (although as privatization progressed this was split to deal with Nissan as well), and one dealing with the components sector. At the European level, the Directorate-General III (DGIII) has an equivalent automotive section, as does DGIV to deal with state aids cases, although between them they have barely a quarter of the DTI division’s staff. The limits of collective action Widespread independent political activity in the sector stemmed in part from another national phenomenon: the comparative weakness (in a policy participation sense) of British trade associations. This phenomenon has long since been identified. The growing concern among academics and policymakers in the 1960s was expressed by Nettl (1965:23) who argued that the business community is ‘in a state of remarkable weakness and diffuseness— compared, say, to organized labour or the professions’. Grove (1962:157) had earlier suggested that large companies were members of trade groups largely as a public relations exercise. The progress made by many trade associations (including the Society of Motor Manufacturers and Trader (SMMT) in the last twenty-five years appears to have been limited. In 1993 the President of the Board of Trade, Michael Heseltine, told a CBI audience: It is widely believed that many trade associations simply do not have the resources that they need to be effective because of a fragmentation in coverage, because key companies are not members, or because the industry they serve is not prepared to provide the funds required ... the inherent tragedy of this situation is that many officials of under-resourced associations and even some of their members continue to inhabit a make believe land. They believe they are effective, when it is all too brutally clear that they are not. The major problem facing SMMT is that, as an umbrella organization in a large sector, it suffers from many of the problems associated with peak as sociations. The difficulties it faces in mobilizing its membership can be demonstrated by considering Atkinson and Coleman’s checklist of factors which may be needed if high levels of mobilization are to be achieved: 1 A horizontal division of labour will mark the associational system with separate associations or divisions representing different products, service groups or territories. Such a division of labour implies the absence of overlapping organizations, on the one hand, and of gaps in the

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associational system on the other. There will be no competition for members. 2 One and (normally) only one association will speak for the sector as a whole. Either subsectoral organizations will belong to this sector-wide association (such as the vertical division of labour is sustained), or individual firms will associate directly. 3 Both sectoral and subsectoral associations will have a high density, that is a high proportion of the firms (or of the production) in a given sector will be represented by the association. 4 In oligopolistic sectors where major firms enjoy the option of direct contact with the state, these firms will retain a high profile of activity in the association, thereby employing both direct and indirect means of securing influence. 5 Firms and associations will possess considerable in-house capacity for the generation of information, both technical and political. 6 In a highly mobilized sector, associations will have the capacity to bind member firms to agreements negotiated with the state and to offer assurances of individual firm compliance with policy decisions. (Atkinson and Coleman, 1989:53) In some respects the automobile industry appears well placed to achieve high levels of mobilization. The SMMT has no serious competitor for its manufacturing members and has some powerful selective incentives and negative sanctions to guarantee that membership levels are high. The leading assemblers also maintain a high profile in SMMT and provide the bulk of its subscription income. So it is not the case that SMMT is weakened because of competition for its members or any lack of credibility over its representativeness.1 The difficulties arise when this level of organization and representativeness has to be translated into collective action in the political system. The role of SMMT as the voice of the sector is often compromised because it cannot bind its members to agreements with government. The group may have the loyalty of its leading members on some issues, but they are also willing to exercise exit on others. This has been the major constraint on the development of some form of sectoral corporatism in Britain. The very nature of automobile manufacturing and distribution mean that a large number of specific sub-sectoral interests have developed alongside the core manufacturing activity. There are a number of distinct subsidiary interests which have been accommodated within SMMT’s federal structures rather than in separate organizations. In theory, this provides the major manufacturers with a network of contacts with sub-sectoral interests and a means of regulating the whole sector. In the world of realpolitik these interests have been imperfectly integrated into the group to the extent that their respective interests are not always complementary.

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Arguments between indigenous producers and importers were a frequent source of tension within SMMT. For example, one of SMMT’s major successes as a trade group was to negotiate and maintain a Voluntary Export Restraint (VER) on Japanese imports since 1976. Yet it is now apparent that Nissan UK, the former independent importer of Nissan cars in the UK, had donated some £80,000 to the Conservative Party in the mid1980s for the sole purpose of raising with government its worries that the VER had prevented the growth of Nissan dealerships.2 The importer wanted a relaxation of a policy which BL, among others, regarded as essential to the health of domestic producers. In 1982 BL threatened to leave SMMT because it was unhappy about the status of importers within the group: BL believed that the importer members of SMMT wielded too much influence, often to the detriment of indigenous producers. The issue resurfaced in 1984 when Volvo AB was awarded full manufacturing status within the group on the strength of an assembly operation in Scotland. The Financial Times (23 March 1994) reported, ‘The issue is a deeply political one within SMMT. On the UK side BL in particular has frequently criticized the extent of importers’ influence.’ British Ley land of course had little in common with importers seeking to build market share in the UK market. Another source of conflict was between indigenous producers and multinational interests. For example, Austin Rover launched a campaign in 1985 to change the UK’s system of licence plate prefixes to identify the year a vehicle was registered. The system leads to a seasonal sales boom when the prefix changes in August, which coincides with the main holiday period in the UK industry. The need for breakneck production at this time of year severely disrupted Austin Rover. Moreover, otherwise quiet European factories capitalized on the UK system by switching their production to right-hand drive vehicles for the UK market. The issue was discussed at length within SMMT but no consensus was reached. The American multinationals believed that the advantages to their European operations as a whole from the August sales boom outweighed the disadvantages to their UK factories. The Society of Motor Manufacturers and Traders (SMMT) has never been an exclusively British group and has welcomed membership from any company involved in the automobile trade. The problem for British policymakers is that SMMT can never truly be the voice of the sector on such issues because often no single automotive interest can be delivered in the policy process. Inadequate consultation? Students of government-industry relations would be forgiven for a degree of confusion about the extent to which industry, in whichever shape or form, is consulted by government in policy-making. There is a dissonance between the major theoretical studies on the nature of contacts between government and

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industry. The classic approach perceived government-industry relations as unsatisfactory, arguing that the combination of a consensual policy style and the non-encompassing instincts of industry led to an arm’s-length governmentindustry relationship. Discussing the creation of the National Economic Development Office (NEDO), Shonfield argued that The Government approached the problem in a deliberately disarmed state; this was intended to be a persuasive posture. No one was trying to impose anything on anyone; what was being offered was a forum in which people were invited to do a deal’ (Shonfield, 1965:163). What emerges from such studies is a tale of both repeated attempts and failures by government to foster a closer dialogue with industry. Studies by both Dunnet (1980) and Wilks (1988) suggest this was a problem in the automobile sector. Wilks argued: The striking contrast between Britain and the other countries…lies in the profusion and regularity of contact abroad the intensity of the relationship: and in the absence of regular contact in Britain the sporadic nature of the relationship, [orginal emphasis] (Wilks, 1990b:163) Wilks’ concern is about the alleged lack of routine contacts between carmakers and government, which prevents the development of tacit understandings about policy. However, there is a parallel literature in political science from a public administration and pluralist perspective which projects a different picture of government-industry relations. This literature stresses that producers are advantaged vis-à-vis other interests in the policy process (Grant, 1978; Maloney et al., 1994; May and Nugent, 1982; Richardson and Jordan, 1979). Business groups are portrayed as ‘core insiders’ who enjoy preferential access at the pre-legislative stages of policy development (Maloney et al., 1994). This alternative view is well captured in Grove’s detailed study of government and industry: every economic Department and practically every division and branch of the Department has its retinue of organized interests which accompany it around as the pilot fish swim along with the shark; and it by no means follows, because some fish are smaller and more insignificant than others, that they will pass unnoticed… The practice of consultation has grown less formal with the passage of time, and its scope has been broadened to include a mass of administrative procedure. Formal machinery set up by the statute for consultation about draft regulations has been supplemented, if not supplanted, by informal day-to-day contact between government and industry on all matters of mutual concern. (Grove, 1962:143–4)

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Clearly, much policy was being made in policy networks long before this nomenclature came into common parlance. It would therefore seem misleading and inaccurate to leave the impression that British policy-makers have failed to consult the automobile industry in the way that they consult other sectors. Far from being isolated during policy-making (though this may occur in exceptional cases where government has a clear view on how to achieve its objectives), trade groups and companies are given the opportunity to shape policy: they are not ‘beggars at the gate’. Of course not all issues or problems will approximate to the model of consultation and negotiation—the repertoire of policy-making styles can be diverse. There are instances where an assertive government pushing through a non-negotiable manifesto pledge will not engage in extensive consultation: for example, there was only limited consultation of the existing sector when the government decided to encourage Japanese inward investment in the 1980s. The impression given by the classical studies of political economy is that Whitehall is some kind of citadel withstanding industrial interests, when in fact other accounts stress that industry consultation is widespread. In the automobile industry, apart from the frequent contacts between SMMT, the major companies and the DTI Vehicles Division, there are also statutory quarterly meetings between these actors and the DTI. As the discussion of the British Leyland privatization underlined (see Chapter 3), an individual company can interact with government at all levels on a routine basis. In fact, the Rover Group took a corporate decision to scale down government relations in 1988 because it believed they had become too intense. The dispute about the nature of contacts between government and industry is partially explained by the different levels of analysis employed by the classic and sectoral approaches, and their respective expectations about what constitutes an effective government-industry relationship. The classic approach sees consultation as unsatisfactory because it need not involve any forms of power-sharing between governing institutions and state actors. It is evident that the British industry in one form or another was frequently consulted about policy and involved in various policy communities at the micro level. On the other hand, the industry and the government have not dealt well with the major sectoral or structural issues that have arisen in the post-war period. These contrasting images of government-industry relations can be reconciled in a policy network analysis of the sector. The automobile industry: clientele pluralism and pressure pluralism? The empirical reality of the automobile sector in the UK is that policy communities are most likely to exist at the micro level. Following Atkinson and Coleman (1989), the elaborate system of micro-level policy communities in the automobile industry can be viewed as an example of clientele pluralism (see

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Table 1.1). They suggested that clientele pluralism developed where business groups were well mobilized to deal with state actors. These state actors have decision-making responsibility for specific areas but lack the autonomy to act. The official responsible for policy on a technical issue will be insulated from other officials because of the low (political) visibility of the issue, but will lack the expertise to develop proposals. Such an official is likely to turn to SMMT to co-ordinate a working group to provide that expertise. The SMMT usually has few problems in bringing the various experts from member companies together to produce proposals and will often suggest organizations from whom the government would commission research on the problem. As a result of such activity, regularized, clientelistic relations have evolved between governmental experts and industry experts. Atkinson and Coleman (1989:55) defined clientele pluralism in the following terms: the state actually relinquishes some of its authority to private actors, who, in turn, pursue objectives with which officials are in broad agreement. Ostensibly, it is the details over which these ‘private interest governments’ have control. Situations in which business associations undertake these responsibilities include those in which insufficient resources are available within state agencies, or where there are no objectives the state wish to see achieved, short of the prosperity of the sector itself. (Atkinson and Coleman, 1989:55) While Atkinson and Coleman (1989) wish to label a specific sectoral network with the term, we are adapting it to describe the complex network of communities which exist at the sub-sectoral level in the automobile industry. The system portrayed is one where self-regulation is encouraged, or more typically, where the specific community of industry experts and civil servants are ‘on licence’ from the Department to deal with a specific issue or problem. Occasionally the low-key issues involved will attract wider attention, as was the case with the issue of lead in petrol in the early 1980s (Wilson, 1983). However, such instances are the exception rather than the rule. The vast majority of technical policies affecting the automobile industry never become matters of public debate because, quite frankly, they are of little or no interest to a wider audience. This may become less so if outsider groups can link technical policies to wider issues, but it is doubtful whether they have the resources to do this on a regular basis. One caveat about the clientele pluralism label is that the automobile industry has always complained that decision-making power is not concentrated in one department but is spread throughout government. For example, the SMMT argued:

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What the automobile industry does seek from government first of all is a willingness to consider its interests when formulating policy in relevant areas. These include transport planning for example, road construction and bus deregulation, taxation, employment, technical matters, environmental matters and international trade policy. (SMMT, 1988:3) However, this is more of a problem on sectoral level issues, such as taxation, trade policy and broad environmental factors. Technical issues in the UK are handled by Grade 5 officials in the DTI or Department of Transport (DTp), and they can usually proceed with policy without ministerial interference or clashes with other departments and policy communities. Thus, although it is possible to identify a large number of sub-sectoral policy communities in the automobile industry dealing with everything from axle weights to noise reduction measures, the general pattern of policy-making is well captured by the term ‘clientele pluralism’. This pattern of policy-making has not been reproduced at the sectoral level where the diffuse network resembles what Atkinson and Coleman have described (see Table 1.1). In the pressure pluralist network the mobilization of business interests is low, and while state actors may have the autonomy to take decisions, responsibility for specific programmes is dispersed, requiring coordination and cooperation between state actors. In the pressure pluralist network there is scope for intra-sectoral disputes and intra-governmental disputes as the various interests interact in the policy process. This approximates to the situation in the British automobile industry where because of the disparate nature of the manufacturing in terest and the fragmentation of government, it has been difficult to develop industrial policy instruments. As a result of these governing structures, inertia can beset the network to such an extent that while each side may recognize a problem their capacity to solve it is limited. Atkinson and Coleman describe the pressure pluralist network as one in which the particular circumstances of economic development and the organizational evolution of the bureaucracy in a sector combine to deny the state both autonomy and concentration of decision-making power. Business interests cannot be accommodated to one another, either because organization of business is hopelessly rudimentary, or because there exist diametrically opposed interests in the same sector. As a result, these interests are fragmented with groups operating on their own in narrow, specialized and overlapping domains… Groups are confined to the task of policy advocacy, and no power sharing is countenanced. The objectives of state officials emerge in the process of competition among contending interests. (Atkinson and Coleman, 1989:55)

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The defining characteristic of the pressure pluralist network in the automobile industry in recent years is that the problems stem not from competing groups, but from large companies breaking ranks with the central organization and representing their own institutional interests. In addition, while the Atkinson and Coleman (1989) model suggests that the objectives of state interests emerge during the interactions between interests in the policy process, this has not always been the case in the automobile industry. Often, the response by politicians is to adopt an impositional and interventionist policy style when confronted with the inertia which a pressure pluralist network tends to produce. On some occasions there might be ideological objectives for such action but often objectives are simply born out of frustration. For example, the government only imposed steel quotas on the industry after 1945 because the industry showed no inclination to alter its pre-war trading patterns (see Chapter 2). The inherent governing structures in the sector outlined earlier have helped to sustain a dominant pattern of pressure pluralism. For twenty years after 1945 collective organization was inhibited by the liberal entrepreneurship of the magnates who dominated British vehicle manufacturing. The companies were concerned with domestic competition and aimed to compete in as wide a range of market niches as possible. Standardization and mass production were anathema to them. These entrepreneurs were hostile to external interference in company decisions, whether this came from the SMMT or directly from government. Their suspicions were reinforced by some unfortunate and insensitive policy decisions in the 1950s and 1960s, not least the vagaries of demand management (Adeney, 1988; Wilks, 1988). The problem in terms of government relations was not that cooperation was never feasible, but that it was begrudged and could not be taken for granted on a consistent basis. From the mid-1960s onward, the wave of sectoral-based initiatives spawned by the NEDO, and the rise of American multinationals, helped to erode the influence of this sub-culture. A new crop of professional graduate managers in companies such as Ford and Chrysler began to place government relations on a more systematic footing, realizing that one way to prevent damaging policies was to get both good advance intelligence and an early policy input. This philosophy spread to SMMT, which enjoyed a honeymoon period in the late 1960s as the major companies, encouraged by the Ministry of Technology, worked to improve government relations. However, there was a sting in the tail as far as multinational penetration was concerned. The British operations of Ford, Vauxhall and Chrysler became key components of their parent companies’ integrated European operations. This development had two main consequences. First, within the sector there was the possibility of a mismatch between the interests of the multinational subsidiaries and the British-owned sector. The silence of Ford and GM, and hence SMMT, on the inequities of Spanish trade tariffs on British vehicle imports in the early 1980s was a case in point. The UK trade was clearly

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suffering and the issue angered BL, but collective action was impossible because Ford and GM were among the major importers from Spain. Second, British policy-makers lost much of their ability to influence decisions in the sector because leading companies were now multinational subsidiaries. As Wilks argued, ‘the automobile companies are responding to a logic beyond the comprehension of the British government, as defined by a corporate executive beyond the reach of British officials’ (Wilks, 1990b:175). Factors such as Britain’s departure from the Exchange Rate Mechanism into the uncertain world of floating exchange rates in the 1990s only reinforced the need for transnational production. The organization of government has also been an important factor in the persistence of pressure pluralism. As Chapter 2 illustrated, attempts by lead departments such as the Ministry of Supply, Ministry of Technology and the DTI, and by bodies such as the NEDO, to develop sectoral policies were often undermined by the precedence given to macro-economic and political objectives (see below). Part of the problem is also that British central government is organized along functional lines, and as the automobile industry has evolved, responsibility for regulating it has been dispersed throughout Whitehall. The DTI, DTp, Department of the Environment, Treasury, Home Office and regional Departments have all had their hands on the steering wheel. These factors have sustained pluralist governing structures and limited corporatist tendencies in the sector. Industrial steering and the automobile industry It is conventional wisdom that British policy towards the automobile industry has developed in a haphazard and reactive manner. While at different points in the post-war period various plans were advanced as desirable sectoral developments, they were never realized within the framework of a coherent industrial policy or sectoral policy path. When a member of the Trade and Industry Select Committee put it to the then DTI minister that ‘you have no real idea of what kind of British car industry you want or of what should be in that framework of industrial strategy for Britain’, he was not far from the mark (TISC, HC 294, 1980–1:16, par. 93). Too often the government appeared to be gripped by events rather than in control of them. However, it is important not to make sweeping generalizations: clearly British governments have implemented a whole gambit of industrial policies in the automobile industry with varying degrees of success. Studies that have focused specifically on post-war policy towards the British automobile industry suggest that it has been largely determined by macroeconomic policy objectives and/or ministerial or party political objectives, rather than sectoral priorities (Bhaskar, 1979; Dunnet, 1980; Wilks, 1988). Even the 1975 BL rescue was, by the government’s own admission, prompted by the political view that BL must remain a multiproduct volume producer.

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This was a crisis period for automobile manufacturing in Britain and the issues went beyond the immediate problems of the companies in trouble. There were, however, several serious issues which ought to have been prominent in any major intervention by the state in the sector. Could the British and European markets sustain the existing level of production and number of mass producers in the sector? Was the long-term problem of standardization in the industry hindered by the multi-product option? The list could go on to cover a series of other areas. The ill-fated Chrysler rescue in 1975 was clearly driven by political expediency. Even with the benefit of hindsight it is difficult to comprehend why the Chrysler situation was not properly assessed in the light of the government’s policy to sustain BL as a volume producer. Preserving capacity in the industry only made the job of rescuing BL harder. As Wilks argued, it was ‘strange how successfully government managed to treat the BL and CUK as unrelated cases. There was no indication that they were assessed together as part of an overall strategy…the probable impact of the rescue on the industry as a whole was a peripheral consideration’ (Wilks, 1988:186). When major structural disjunctures occurred government tried to deal with them by developing short-term solutions directly with individual companies. When a major company is in crisis and the government is intent on assisting, the details of policy will be sorted out on a bilateral basis, but there is no necessity for policy to be formulated without reference to developments elsewhere in the sector. More dirigiste attempts to steer the automobile industry have also taken place in the post-war period. This has been described as a ‘state-directed’ industrial policy (Atkinson and Coleman, 1989) or as a ‘state-led’ adjustment strategy (Zysman, 1983). Zysman (1983) envisaged semi-autonomous state actors being able to develop and implement policies despite the influence of groups and companies. This is an option British governments have (reluctantly) used from time to time following the failure of the sector to respond to cooperative ventures, or a fundamental clash of objectives between potential partners. The difficulty with adopting a strident approach to steering is that the government risks alienating the interests it is attempting to influence. As Lundquist (1972) illustrated, the success of steering rests in part on those being steered accepting the legitimacy and rationality of the policy objectives and the means of achieving them. Most government policy used to influence the sector required a minimum degree of cooperation from the companies if they were to produce successful outcomes. As Chapter 2 demonstrated, in cases where the government proceeded with its own objectives without the support of the industry there were major problems with policy design and implementation. The materials allocation scheme ultimately fell apart because car-makers were unwilling or unable to meet export targets, and government had not anticipated the possible consequences of an impositional policy style. It is one thing to impose, it is quite

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another to implement: the former tends to inhibit the latter in the sphere of industrial policy. A further problem with imposition is that it can often be based on the doctrinal views of the government of the day or an incumbent minister. This was certainly a problem in the chequered history of BL between 1968 and 1988. One potential steering model which policy-makers might have contemplated after 1968 was to use BL as a role model in the way that French and Italian planners used Renault and Fiat respectively. Certainly, the UK government placed pressure on BL’s management at several points to take decisions in the interest of British production. There was an unwritten agreement that BL would source a high level of components with other British firms in an effort to support local component production. On several occasions ministers vetoed BL’s plans to purchase more components from overseas. This type of steering could not be widely used in Britain because BL was not the major force in the UK market that Renault and Fiat were in their home markets. The philosophy behind the state’s direction of Renault was that if the policy of the market leader in an oligopolistic sector was placed on an ‘encompassing’ path, then other national producers in the sector would mimic these policies (Sheahan, 1960).3 The French model was by no means perfect. Peugeot and Citroën actually left the national trade association for a period in the 1950s because of Renault’s position on trade policies. Nevertheless, Renault was clearly connected to the nexus of decision-making power. Other French companies could not be certain that if they diverged from Renault on key aspects of their corporate plans, they would not be out of step with French industrial or economic policies. Renault was a ‘pilot’ for the entire automotive sector—BL never reached such dizzy heights. In its various guises BL may well have sold the most vehicles in Britain until the late 1970s, but it was never a market leader in terms of productive efficiency, sourcing or marketing. It was unrealistic to believe that other companies would imitate BL’s policies. The other problem for Britain was that BL’s domestic competitors were the more efficient American subsidiaries such as Ford UK. They were answerable to their parent company and the logic of multinational production. Even in the hypothetical circumstance where Ford UK could have benefited from following BL’s domestic lead, this would not necessarily fit in with Ford’s European or world view. However, policy may not have to rely on a domestic company to play the lead role in this type of industrial steering. A key feature of the government’s ‘Japanization’ policy for the British sector was to use the Japanese companies as a yardstick: other companies can emulate them, or lose market share. This has been possible in the short run because Japanese producers are absolutely dependent on their UK base within the European region. Should they develop the kind of European production network that the American multinationals currently possess, then the British policy would be in jeopardy. In this sense, it

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is imperative that UK governments continue to bind the Japanese to the UK within Europe if the rejuvenation process is to continue. The decision by Toyota to locate a factory in France was an unwelcome development for UK policymakers. Many of the problems the UK automobile industry faced in the post-war period required heroic solutions. However, the relationship between government and industry left much to be desired. Developing a policy to deal with structural issues requires meso-level strategies and governance structures to establish some consensus about the validity of steering goals. It requires the kind of collaborative approach which Streeck (1984) details so well in the efforts by the German government to coordinate a recovery programme at Volkswagen in the mid-1970s. There are three dimensions to this level of collaboration. First, there must be cooperation within the industry concerned; in Britain this usually means through the trade association. Second, there must be coordination within government so that the various departments are aware of the steering goal, and ensure that their policies are at best complementary, or at worst do not inhibit its implementation. Third, when both sides have organized themselves effectively they must pursue the relevant policy issues by means of an exchange-based relationship. Even in the case of self-regulation, such an arrangement is likely only when government is satisfied that the sector is capable of effectively governing its own affairs. Self-regulation does not mean there is no state policy; rather, the state and the industry concerned share certain objectives and agree they are better obtained without government intervention.4 The impact of networks on industrial policies Most advanced industrial nations have been faced with circumstances in their domestic automobile industries that rendered government action unavoidable. They have responded in different ways to these challenges. Even where different nations face similar situations and have the same steering goals, the policy instruments and governing structures they rely on can differ. A key question is whether the British responses discussed above are indicative of national traditions, or a reflection of the type of government-industry relationships that have prevailed in the sector? The history of industrial policy towards the British automobile industry is one of unsuccessful micro-level interventions and painful industrial adjustments. This may be a crude summary, but it is not out of step with the relationship between policy network and policy approach suggested by the Atkinson and Coleman (1989) model. They argue that the key characteristics of the pressure pluralism mean that it does not matter whether the sector in question is expanding, declining or in a stable period: an ‘anticipatory’ or ‘proactive’ policy approach will be inhibited by such a network (Table 5.1).

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Table 5.1 Policy approach, sector type and policy networks

Source: Atkinson and Coleman (1989:63).

Pressure pluralism by its very nature will generate reactive policies and hence unsuccessful industrial adjustments. Atkinson and Coleman (1989: 63) argued: Competition among producer interests and among state agencies is antithetical to planned positive adjustment. Anticipatory policies, by their very nature, require close co-operation between business and the state. Either business must be highly mobilized capable of looking to the longer term and sufficiently strong to keep state intervention under control or the state must be autonomous from business capable of articulating its own vision of the industry’s future, and sufficiently co-ordinate to implement a range of policies. (Atkinson and Coleman, 1989:63) As Table 5.1 illustrates, proactive industrial policies require either a stateled, a company-led or corporatist approach, or some form of high-level concertation between organized interests and the state. The state-led approach may be particularly useful where there is a need for expansion in the sector, an example being the way French planners stimulated the development of the French automobile industry in the 1950s and 1960s. However, Atkinson and Coleman (1989:63) maintain that the concertation network is the most appropriate governing structure to generate anticipatory policies no matter what stage of development a sector is experiencing. Such a network requires interaction between ‘centralized and autonomous state agencies’ and business interests ‘mobilized into hierarchical and inclusive groups’. In the pressure pluralist network where neither the state nor the business interest are in a position to form an effective partnership, or seize the initiative in policymaking, anticipatory policies are conspicuously absent. Industrial policies and interventions are characterized by reactive responses to specific political pressures emanating from the sector. Alternatively, state-led attempts at adjustment become unstuck at the implementation stage because state actors

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lack the authority or capacity to see through such a strategy. For an ideal type model, this provides us with an alarmingly close approximation to events in the UK automobile industry since 1945. For most of the post-war period the state’s ability to intervene at the meso level in this vital area of the economy has been inhibited by the lack of cohesion among the major players. While it is generally assumed that networks, and in particular policy communities, act as major constraints on policy change (Marsh and Rhodes, 1992a), the evidence from this study suggests that the prospects for industrial steering and policy-making can be enhanced if certain types of network, and hence governing structures, are established in a sector. Some networks enhance the prospects for the use of self-regulation and assist in generating proactive policies to deal with industrial problems. These networks have rarely been in evidence in the British automobile industry. The reality is that British governments have been at their most successful at influencing events in the automobile industry, when they have relied upon state-led policies and measures which did not entail any detailed negotiation or collaboration with the industry. It is unrealistic to expect such an approach to be suitable in all circumstances. In fact, these policies often proved damaging to the industry’s (and ultimately the country’s) prosperity. It could be argued that because of the economic importance of the automobile industry, governments had no choice but to intervene. Alternatively, one could maintain that (for the same reason) it was imperative that a longterm view of policy development be agreed with the industry. The Japanization policy pursued in the 1980s presents a clear exception to this general description of pressure pluralism and reactive policy. In this case, the government responded to a need for expansion in the domestic industry and was sufficiently autonomous from producer interests to see the policy through to implementation. It was a rare example of vision on the part of British policy-makers—undoubtedly assisted by the weakness of sectoral interests. The main attraction of Japanization was that it bypassed the need for negotiation with the sector, being ideally suited to a state-directed policy approach. This policy, we would venture, highlights one aspect of pressure pluralism which Atkinson and Coleman (1989) leave unstated. Where a pressure pluralist network is unable to deal with specific sectoral problems, a sufficiently motivated political elite with clear objectives and the political will can make significant interventions. Conclusion The development of policy and policy-making structures in the automobile sector sheds considerable light on the debate between the classic and sectoral approaches to government-industry relations outlined in Chapter 1. First, the automobile industry case suggests that national influences were more

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prominent than sectoral inputs in post-war industrial policy. Sectoral influences were more prominent in other areas, notably technical regulations. Second, the balance of influence in favour of macro-political factors is partly explained by the sectoral properties of the automobile industry. The industry was not well equipped to undertake self-regulation on a consistent basis or to develop policies with government in a corporatist type of partnership. A pivotal economic sector which is not capable of self-regulation and is unable to generate its own solutions, by default passes the initiative to state actors. Thus there seems a rather obvi ous point that has not been sufficiently emphasized so far in British studies: the nature of policy networks in sectors will have a major bearing on the degree to which national influences shape policy. Citing Dell’s famous remark that the state exists so therefore it must intervene, Wilks goes on to conclude: ‘Unfortunately, the state is stubbornly bovine and the china shop of the automobile industry is steadily being smashed’ (Wilkes, 1988:273). National influences and pressures will always exist in the formulation of industrial policies. Grant is right to argue that while ‘the notion of national policy paths is not without its problems, to abandon completely any notion of a national policy approach would be to introduce a greater distortion into the discussion’ (Grant, 1989b:363). When one is characterizing a policy sector and industry policies over time, what matters is the extent to which national influences have shaped policy. The important point is that they can be offset by the nature of the policy networks and governing structures within sectors. The weakness of the sectoral voice in the automobile industry exposed it to more macro-political influence. It is debatable whether the state would have found it necessary to intervene as often as it did if a corporatist or clientele pluralist network had existed. Notes 1 In addition, one of the major strengths of SMMT is its ability to generate and produce detailed statistics and technical data on automobile manufacturing. 2 Transcript of Frost on Sunday television programme (BBC, 27 June 93). 3 It was partly because this model was preferred by the French planners that they resisted American inward investment so intensely. American companies could not be relied upon to respond to this type of indirect steering. 4 SMMT records show clearly that the VER on Japanese imports exists because both government and industry believed it essential to protect domestic production. This was revealed in an MMC (1992:152, par. 9.14–15) report, ‘It appeared, from the minutes of meetings of the Executive Committee, that (in discussion with the Department of Trade) it had adopted the VER policy in 1975 and implemented it thereafter through the discussion with JAMA… minutes of meetings, and copies of letters exchanged, between the SMMT and the Government stated that the VER policy had been conducted by the SMMT with the full support of the Government at all relevant times.’

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6 Policy participation at the European level

There is an expectation in models of European integration and policymaking studies that interest groups will be the main actors in the policy process. As early as 1958 Ernst B.Haas argued that when nation states joined supranational bodies the ‘institutional and political logic of supranationalism’ would ‘lead to the defensive grouping of commercial interests (at a supranational level) fearful of no longer being able to lobby effectively at a national level’ (Haas, 1958:318, 323). However, as Grant et al. (1989) noted, the political science literature has concentrated on collective action by business while neglecting the independent activities of large firms. It is therefore important to examine firms both in the European and national groups they join and as ‘own account’ actors. This observation connects with Salisbury’s (1984) important warning about the lack of conceptual precision in the American literature on interest representation. He argued that a distinction between interest groups, and the interests of institutions (e.g. a corporation) was needed if the complex patterns of interest representation in Washington politics was to be explained. Accordingly, the ‘interest group’ label can be seen as too restrictive. There is an identifiable overlap between what are conventionally perceived as interest groups and what are not. Salisbury (1984) drew our attention to the fact that the pattern of divergent interest representation discovered in policy studies is often not adequately reflected in the use of the ‘interest group’ label. Interest groups often represent corporations who have distinct corporate interests and are policy participants (Jordan et al., 1992) in their own right. Here we are using the generic term ‘policy participant’ to indicate a common feature among organizations attempting to affect policy outcomes. The rest of this chapter is concerned with the development of different forms of participation in the policy process at a European level. The evolution of collective representation in the automobile industry Supranational interest federations or ‘Euro-groups’ were given a starring role in early political science accounts of European integration. Haas made the

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enduring point that European integration should be viewed as a process and not a condition: the role of agency in this process being vital. Informed by a federalist vision of the EC and heavily influenced by American pluralism he attributed to interest groups a catalytic role in the integration process: Political integration is the process whereby political actors in several distinct national settings are persuaded to shift their loyalties, expectations and political activities towards a new centre, whose institutions possess or demand jurisdiction over pre-existing national states. The end result of a process of political integration is a new political community superimposed over the pre-existing ones. (Haas, 1958:16) European federations of national interest groups would be formed and become key agencies in the integration process along with the European Commission, ‘which was believed to be in a unique position to manipulate the facts of domestic pluralism and international interdependence so as to push forward the process of European integration even against the resistance of national governments’ (George, 1991:21). Forces favouring integration in EC institutions would begin performing economic, social and technical functions which would place pressure on nation states to relinquish sovereignty. The automobile sector’s first supranational organization in Europe was the Paris-based Organization of International Automobile Constructors (OICA) which was established in 1955. This organization was formed to lobby the United Nations Economic Commission for Europe (UN-ECE) in Geneva.’ The UN-ECE is an important market of ideas for Commission officials, who have observers at its transport committee Working Party 29 meetings (Figure 6.1). Most of the EU technical directives implemented during the Single European Market (SEM) programme are based on regulations from Geneva. For example, in an internal document dated November 1990, General Motors noted: “The EC has recently prepared a proposal for a directive on child restraints based on the existing UN-ECE regulation 44‘(GM, 1990:29). In fact, UN-ECE discussions are often well advanced of the EC’s agenda. The same document noted that ‘The UN-ECE GRSP, however, is also dealing with this subject and may well reach a final decision ahead of the EC. In this case the EC is expected to follow the UN’ (GM, 1990:29). The important distinction between the two bodies is that the EC has resources to impose regulatory frameworks which its member states generally accept, however reluctantly in some cases. As early models of European integration anticipated, the automobile sector responded to the creation of the then European Community with a new Brussels-based organization. The Liaison Committee of the Automobile Industry of the Countries of the European Communities (CLCA) was established in 1958 as a satellite of OICA with a membership comprising the 7

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Figure 6.1 Working Party 29 of the UN Economic Commission for Europe

member states’ national automobile trade associations. In its statutes it claimed to represent the ‘general, economic, legal, fiscal and technical interests common to all manufacturers’. In 1972 a second automobile Euro-group was formed—The Committee of Common Market Automobile Constructors (CCMC)—and soon became the industry’s most prestigious group. This group was set up for several reasons. First, some manufacturers were dissatisfied with the lack of direct company representation in the CLCA. Moreover, in the early 1970s, the Commission began to draw up plans to regulate a number of technical areas, including engine emissions, and the European companies were worried that Ford Europe and General Motors would lobby for the adoption of US regulations. Both American companies were members of national trade associations and hence had indirect access to CLCA—membership of CCMC was restricted to those firms whose corporate headquarters were located within the European Community. Thus, the main European-owned companies wanted a ‘club’ of producers to push a ‘European’ line. In the period up to the mid-1980s the two groups worked closely to gather to monitor the relevant policy agendas. Cooperation between the two secretariats (they shared the same office floor in Brussels) ensured that each could assume responsibility for representation in their respective areas of strength. Thus, CCMC tended to concentrate on technical issues, while CLCA became the dominant group on legal and fiscal matters.

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Relations become strained The political development of Europe, and the momentum of the SEM programme after 1986, placed the working relationship between the two groups under strain. Both groups’ areas of expertise became blurred as policymaking activity increased. For example, CCMC’s primary function at formation was to respond to an increase in technical regulations; however, by the mid-1980s the group’s Administrative Committee, composed of the government affairs executives of member firms, had assumed a major function within the group. This committee was responsible for the increasingly timeconsuming and burdensome task of ‘advising’ the industry’s presidents on political and economic aspects of policy in order to assist them in their dealings with the Commission. Similarly, CLCA under pressure from its US and Scandinavian members who were excluded from CCMC became more involved in technical issues. At this time the Commission was privately expressing concern about the sector’s inability to act collectively—an issue that eventually came to a head over the subject of Japanese imports in 1990. A member of the CCMC’s Administrative Committee suggested that the group’s internal decision-making structures did not adjust to changing circumstances and the group was illequipped to respond to the Commission’s consultation demands: In the mid-1970s CCMC formed a political wing at the instigation of the Commission. It was not an original function. The Commission was attracted to the group because it represented all the European-owned producers and brought together their respective chairmen. Our original statutes were not designed to create cast-iron policy positions. As the push for harmonization started most technical issues became political and we encountered enormous difficulties trying to achieve a common position within the voting system. (interview, 15 February 1991) In the 1980s the CCMC and CLCA found it increasingly difficult to aggregate the various national interests in their memberships. The CLCA’s trade group membership exhibited quite divergent interests reflecting different national industrial structures. For example, the Society of Motor Manufacturers and Traders (SMMT) represented a small British-owned car industry, subsidiaries of American multinationals and latterly, a Japanese producer. In contrast, the French trade group was dominated by the two French-owned producers Renault and Peugeot, who were highly critical of the British government and SMMT for allowing the Japanese to establish car production inside Europe. Clashes of national economic interests over the issue of Japanese transplants actually led to the bizarre situation where CLCA excluded the issue from its discussions.

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The CCMC suffered from similar problems and was handicapped by its internal voting system. The requirement for unanimity amongst its twelve company members often prevented it from generating common proposals. As one participant put it, ‘It could have been quite an effective body. The difficulty was that the common denominator was dependent upon the unanimity rule. One extreme position tended to bring the system down’ (interview, 8 March 1991). The use of a unanimity procedure was a perfect recipe for group inertia, especially since there was also a degree of mutual mistrust and suspicion amongst the members.2 Thus, in the period up to the late 1980s the major problem with collective action in the sector was the difficulty of distilling various national and company interests into a meaningful collective interest. As the CCMC example shows, even where the neo-functionalist vision is fulfilled and a Euro-group is established, it can be handicapped by simmering national differences. The groups’ full ‘influencing capacity’ was not realized and they became little more than clearing houses which at best supplied the Commission with information on policy design. In this respect, the automobile sector was similar to telecommunications: Although these [Euro] groups grow numerically and participate in an expanding array of EC expert Committees, their functional performance seems to be limited to information provision for the CEC [Commission], that is, to produce a representative picture of the diversity of national and sectoral interests in the European Business community. These associations, however, are not yet able to speak for, and to enter into, binding commitments for their members. The goals of European associations are thus still very modest. (Schneider, 1992:67) By 1989, tension between the CCMC and the CLCA had reached the level where several key companies began to argue for the creation of a single European federation. Challenging the weak group thesis The debate about the effectiveness or otherwise of Euro-groups has been discussed at length by Mazey and Richardson (1993) and Greenwood (1997). Greenwood convincingly argues that the ‘weak Euro group label is an unsustainable and unfounded caricature’ (Greenwood, 1997:79), and that there are a number of important ways in which groups have contributed to the integration process. The point is a valid one in general, but there is little doubt that prior to 1990 the CLCA and CCMC were weak on key issues. This spurred them on to create the sort of effective collective body Greenwood (1997) found in other sectors. For the meantime we consider briefly why the

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automobile companies continued to support Eurogroups in both their weak and strong phases. An authoritative and representative business group can expect to have its voice heard in the Commission. Of the 525 Euro-groups identified by Mazey and Richardson (1993), almost 50 per cent were industrial and commercial employer interests. As the Commission’s political remit has gradually extended, the management of policy has become more complex and administratively burdensome. Increasingly the Commission prefers to break larger issues down into technical matters which can be hammered out in a myriad of ad hoc consultation groups. These committees exhibit policy network structures, are dominated by Euro-groups, and have become a key mechanism for drawing national groups into the EU policymaking process. Commission officials are prepared to offer groups preferential access at the early stages of policy development in return for detailed information they would otherwise struggle to gather. One official neatly characterized this process: the official is a very lonely man [sic] with a blank piece of paper in front of him, wondering what to put on it. Lobbying at this very early stage therefore offers the greatest opportunity to shape thinking. The drafter is usually in need of ideas and information and a lobbyist who is recognised as being trustworthy and a provider of good information can have an important impact at this stage. (Hull, 1991:4) The automobile companies have long been aware of the importance of such relationships. One interviewee commented: The key to successful lobbying is in the writing process. EU drafts are like rolling stones ... The further down the process you go the opportunities to make an input decrease, it is therefore vital to get in early. Early on he is looking for advice and you are in the ideal position to be effective because you can make suggestions and no-one has to lose face. (interview, July 1991) If the Commission is keen to make use of collective bodies via its network of ad hoc committees then companies will be anxious to make sure that the group’s positions have been sensitized to their particulars. Elsewhere we have discussed in detail this defensive element to participation in Eurogroups. Even in the days when such bodies were far from effective, there was a rationale for participation if only to monitor the dialogue between the group and the Commission. In an analysis of the logic of collective action at a European level we argued:

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Participation in the group is one means to participate in the policy network which will attempt to make policy. It is not sensible to free ride because the collective benefits might be unacceptable…participation in the group is quite compatible with participation nationally or on a bilateral basis with the Commission. Each avenue will be utilized: not to do so would be to throw away a potential advantage. (McLaughlin and Jordan, 1993:156) Thus in order to minimize uncertainty in their competitive environment, companies join the Euro-group, however weak or strong. Participation in the group may not always be constructive: companies often seek to prevent the group reaching common positions.3 There are additional practical considerations. MacMillan’s study of more than twenty major companies showed that not all felt they had good access to EU officials, and many conceded that ‘getting time with key officials in Brussels is becoming more difficult as the city attracts more lobbyists’ (Macmillan, 1991:11). Companies appreciate that the already excessive burden on officials encourages them to seek collective solutions. Thus it appears that Euro-groups are more likely to find themselves pushing at an open door in Brussels. There are other benefits to be gained from membership of a Eurogroup. For example, on issues where there may be a competitive advantage at stake, the Commission goes to extraordinary lengths to be seen as ‘evenhanded’ and will only deal with the collective body. On the issue of a sideimpact bar test procedure, one company told us ‘the Commission insists on going via the group even though it has been approached by a manufacturer… they won’t take up some issues unless the Association des Constructeurs Européens d’Automobiles (ACEA) runs with it too’ (interview, 18 March 1992). Moreover, even in the days of paralysis in CCMC there were occasions where the collective route did work effectively. Former British Leyland chief executive Sir Michael Edwardes, president of CCMC in 1980, recalls that the group was at its most effective representing European automobile producers in negotiations with its Japanese counterpart. At the time the Eu ropean producers became increasingly concerned about the import penetration achieved by Japanese producers in the late 1970s. In response to this, the CCMC set up a series of talks with the Japanese Automobile Manufacturers Association (JAMA). The CCMC decided in the first instance to try to obtain a ‘gentlemen’s agreement’ with JAMA over the need for Japanese prudence before taking the matter up with the Commission. The negotiations broke down acrimoniously but Edwardes is in little doubt that CCMC’s actions produced the desired outcome: their export drive gradually eased during 1981.1 suspect that this was influenced by the often sharp exchange with CCMC and by the way in which the disparate personalities of the leaders of the European Industry

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complemented each other, showing a united front and lobbying their national governments. (Edwardes, 1983:273) This was the Euro-group at its most effective—although prior to the arrival of the Japanese automobile producers in the UK in the mid-1980s it was not difficult for the European industry to unite in favour of import tariffs. The group was rather less effective when the issue at hand cut across established national or corporate interests and positions. The group also has an important role to play in areas of self-regulation. Automobile companies believe that the Commission’s lack of technical expertise combined with its inability to police technical implementation properly have increased the appeal of self-regulatory proposals to hardpressed officials. Euro-group undertakings to monitor their members’ compliance and provide regularly updated information are far more credible in the eyes of officials than guarantees from individual companies. It is therefore essential to establish a group which is seen to have the resources and expertise to regulate its members effectively. To this end the automobile companies pushed for selfregulation in areas such as recycling and safety measures. One company official underlined the point: ‘Offering to police ourselves makes their lives easier and our lives easier and is possible if you have a credible central organization. It’s then a matter of whether they [officials] can convince the politicians’ (interview, November 1991). Even in those areas where the Commission is suspicious of the ‘closed shop’ aspects of self-regulation, it has rarely been willing to assume more responsibility for implementation. The corollary of this is that a group that loses its credibility with the Commission and appears to have little authority with its members cannot expect to enjoy such status. In our perspective the Euro-group is on licence from its members to cater for their interests. Pressure groups are essentially vehicles for collective political ambitions. Large companies have direct influence over the organizational agenda. The group’s strength stems from the responsibility invested in it by members and this will remain the case so long as those company members have multiple options open to them in their corporate representation strategies. It is to these other options we now turn. The national route to Brussels Paterson (1991:307) argued that the European chemical industry’s technological achievements, commercial successes and harmonious labour relations insulated it from national government intervention. Its authoritative trade groups have enjoyed a great deal of self-regulation. The contrast with the European automobile sector is spectacular. Up to the late 1980s the industry was regularly beset by financial crises and suffered from poor industrial relations. Accordingly, because automobile production is so important to the

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manufacturing sector, governments felt compelled to intervene. In many respects the European industry remains dominated by ‘national champions’ heavily reliant on domestic sales. It is not surprising therefore that issues such as Japanese imports, technical harmonization and state aid have all become matters of high politics for the national governments concerned. In such circumstances the use of national strategies by companies and groups, i.e. exploiting linkages between national governments and policy development and decision-making at the EU level, is an attractive option. The likelihood that automobile issues will become issues of high politics was illustrated in 1988 when the French government refused to allow UK-built Nissan Bluebird cars entry to the French market. Their objection to the car was based on the argument that it did not have a high enough European content. The Renault chairman argued, ‘Europe must defend itself, but if Europe takes no measures, I want France to stand alone in defending itself…it is not a European car and we think it should not be circulating in Europe under a European label’ (Financial Times, 30 July 1988). Under European law only the last substantial manufacturing operation needed to take place within Europe and on this basis at least the cars were eligible. The issue was of significant importance to the British government which had encouraged Japanese car producers to invest in Britain with the guar-antee of free access to European markets (see Chapter 4). Following a series of complaints by the British government and a threat to take the issue all the way to the European Court, the Commission finally upheld Britain’s protests. The French government accepted the decision in April 1989, but not before the French industry minister had set out French concerns in a letter to the Commission: France cannot afford the risk of large scale lay-offs in one of its key industrial sectors by adopting a lax approach to Japanese imports… the dispute between the French and British Governments reflects the different economic weight of the car industry in France and Britain. Cars are no longer a vital sector in Britain. (Financial Times, 5 October 1988) The national route to Brussels is encouraged by the enduring importance of the Council of Ministers in the decision-making process. Integrationists frown upon the nation-state bargaining character of much of EU policymaking. While the Single European Act (SEA) sought to redress this by limiting the powers of veto in the Council of Ministers, the majority threshold needed for a decision remains high and national channels have figured prominently in the corporate representation strategies of leading automobile groups. For example, in 1992 the Commission proposed stringent standards to reduce vehicle noise levels which would apply to all new models in 1994. In an internal document GM’s Brussels office noted of the proposals, ‘Since it will be up to the Council of Ministers to take the final decision, good opportunities still exist for

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lobbying at national level to go no further than 75 dB [a lesser noise level] because of the considerable technical and financial efforts involved’. Such issues may seem relatively minor, but there are numerous similar directives on the Commission’s agenda which can have significant cost implications for the companies concerned. A similar picture was discovered in a detailed study of the engine emissions debate in the late 1980s. The leading car companies took up different positions depending on their product development strategy and the importance of environmental issues domestically. For example, BMW and Daimler-Benz responded to the salience of green issues in Germany by investing in catalytic technology, while others—notably Fiat, Peugeot and Rover—invested in lean-burn engine technology as a longerterm alternative. The issue was high on the German political agenda following emission-related forest damage but it had little political salience in Italy, France or the UK. The Commission proposed standards that could only be met by fitting catalytic converters, because it believed that lean-burn technology was not sufficiently advanced. This handed a potential competitive advantage to those companies already advanced with catalyst technology, but it also created problems for small-car specialists such as Fiat and Peugeot who could not easily disguise the cost of a catalytic converter in their price margins. These issues were typical of the sort of different corporate interests which paralysed Euro-group discussion. Arp highlights the nation-state bargaining character of the subsequent emissions negotiations: manufacturers were affected in different ways by regulation-induced changes, and their responses to proposed standards varied accordingly. Individual car companies targeted their national governments to ward off damage to their interests, and the governments brought these interests to bear in the EC framework. (Arp, 1991:31) The approach to corporate representation taken by each automobile company will be influenced by the configuration of the national political system, the decision-making environment there and the company’s relationship with national officials. For example, Fiat and Renault enjoy a symbiotic relationship with the Italian and French states. These companies represent vital economic interests and rely heavily on their national contacts to influence EU policy. Paradoxically, one consequence of increased EU legislation has been to reinforce the tendencies towards such relations between national officials and national companies. For example, activity at the EU level has actually increased the degree of contact between Whitehall and national groups in the UK. The national department is also an important ally where the group wishes to lodge a protest with the Commission. In its 1990 Activities Report, the SMMT stated that, ‘As a result of committee lobbying, the DTI will register objections in Brussels about restraint of trade by certain community members

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intent upon imposing more stringent technical requirements locally’ (SMMT, 1990:12) However, while European integration has reinforced national groupstate relationships, the frequency and importance of EU policy-making have also led to tensions at the national level. For example, there was a widespread feeling in the British sector that the UK industry minister had too a wide a portfolio to be able to master any one brief. One SMMT official commented, “The Minister has to carry the whole departmental load in the Council, nothing of importance is delegated…[the] briefs of other national ministers are usually more polished. With the DTI everything has to go through the eye of a needle’ (interview, 17 January 1991). At one stage in the run-up to the completion of the SEM it appeared that the British government was overburdened by the number of drafts coming from the Commission. In one incident, the Department of Transport (DTp) circulated proposals to implement a regulation requiring drivers of vehicles with more than nine seats to be specially qualified. Groups ranging from district councils to the Girl Guides were informed, but the manufacturers knew nothing of the issue. One car-maker commented: ‘Ford’s legislative affairs department heard of the move and told the SMMT. Our view could have gone unheard by default’ (Financial Times, 12 September 1990). Thus, the national route to Brussels is by no means foolproof. Council decisions are reached through a complex process of bargaining and tradeoffs between member states. One study by Turner (1988) discovered that a British minister disappointed national groups when he inadvertently agreed to harmful technical proposals during bargaining over emission standards. Turner argued that: politicians almost certainly had no idea of what effect the agreed standards would have on the environment. The British minister was not at all sure that the compromise norms, if fully implemented, would allow the UK industry to proceed with the development of their lean-burn engines. (Turner, 1988:19) Therefore a key decision can hinge on how well the minister has mastered the national brief. Companies also realize that once a Council meeting begins their position is in the hands of a minister who may have competing priorities. Therefore belligerence in the Council, though an important lobbying option, is not an adequate substitute for influencing the content of a directive during the initial drafting stages in the Commission.

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Independent activity by automobile companies One of the most significant developments in the automobile sector was the opening of seventeeen Brussels offices by major companies aiming to develop personal links to policy development. The Brussels office plays an important role in the representation strategy of the large company. At the launch of their company’s new Brussels office in December 1989 (in the presence of the DGIII Commissioner Martin Bangemann), Daimler-Benz emphasized that they were seeking to create a ‘synergy of know-how’ between the company and Commission officials: Only those who are well informed about the wide variety of initiatives and proposals and who have a thorough understanding of the decisionmaking mechanisms will be able to defend their legitimate interests effectively. (Daimler-Benz, 1989:33) Large firms also hire Brussels-based lawyers to represent company interests or firms of local political consultants. The last course of action is, however, viewed with some scepticism by companies, wary of delegating their interests to independents, and by Commission officials who are keen to avoid speaking to ‘hired hands’. Thus, while there is an expectation by Commission officials that policy will be channelled through Euro-groups, a company rarely relies on the group alone. For example, Daimler-Benz stated that: The Brussels corporate representation is a manifestation of the desire of Daimler-Benz advanced technology conglomerate to use all possible channels to foster the dialogue between the economy and politicians, against the background of growing economic integration and the creation of a single market in Europe. (Daimler-Benz, 1989:33) MacMillan (1991:5) outlined the main functions of the Brussels office as follows: monitoring social and political issues likely to affect the interests of the business; helping represent the company to key audiences or stakeholders; and guiding top managers as necessary in their policy-making. We would add two items to that list: first, the task of coordinating company applications for funds from EU programmes and communicating EU issues throughout the organization. A representative in the BMW office commented, The most important part of the job is making sure that the key individuals in Munich know how EU policy is developing and can assess how it affects the business.’ Second, several officials in company offices pointed out that it was part of their role to monitor the activity of the Euro-group, although not to the extent of

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frequent participation in group committees. That task was largely left to specialists commuting from company headquarters. MacMillan further noted that companies with established Brussels offices felt ‘they had some “inside track” advantage, for example, due to the long-term relationship they have with key individuals or by virtue of leverage due to specific expertise or national importance’ (MacMillan, 1991:11). Good contacts are essential if companies are to acquire advance intelligence of developments affecting their business. Even German companies accustomed to working through authoritative central trade groups at the national level have undertaken independent activity at the European level. Grant et al.’s crossnational study of the chemical industry found that ‘The increasing importance of the European Community as an economic and political arena for the industry has been the principal factor encouraging the German firms to develop independent political capabilities for the first time’ (Grant et al., 1989: 89). The Commission appears to welcome company contacts despite its professed wish to work with Euro-groups. This was demonstrated in 1990 when negotiations between CCMC and the Commission over the issue of Japanese cars in Europe broke down (see Chapter 8). Faced with this problem the Commission then entered into formal bilateral dealings with the four largest European-owned manufacturers-Peugeot-Citroën, Renault, Fiat and Volkswagen-Seat. The intractability of this issue illustrates the ‘policy mess’ which can emerge when the consultation process extends beyond Euro-groups to bilateral contacts. This per haps helps explain the Commission’s general preference to consult through Euro-groups. The failure of CCMC to produce a position led to a consultation cacophony and officials proceeded no further with the issue in 1990. The Commission may have preferred the Euroconsciousness predicted in the neo-functional model leading to the establishment of strong authoritative umbrella groups in Brussels, but on this issue the use of the national strategy and direct contacts was resilient. This example also shows that where the Commission is sceptical of a group view, it will often test that position by seeking the opinions of individual companies. One official emphasized the value of contacts with DaimlerBenz during the engine emissions debate in the 1980s. The official recalled: Daimler were very useful allies because of their concern about the issue domestically, they were advanced with catalyst development…they shared our view that CCMC was being intransigent on the issue. In fact Daimler were already implementing some of the standards in other markets which CCMC told us were not possible. (interview) It is important for companies to try to build up a good reputation within the Commission in this way. As one official argued, 'the most successful [lobbyists] are those who have…already established a track record as a useful source of

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information'. There may be advantages here for large companies with panEuropean operations. These companies will have experience of operating in a number of EC member states and may possess cross-national information which can be utilized by Commission officials. In summary, it is evident that establishing personal links to policy development provides useful discretionary influence. It is an important means of bringing influence to bear in the relevant policy networks at a European level, and no large company is willing to discard such an option. The formation of ACEA The neo-functional expectation of interest aggregation through a European federation of national federations had not fully materialized in the automobile sector because of the breadth of the business (leading to elaborate internal specialization) and the resilience of national interests. In the case of the issue of Japanese automobile imports, the Euro-group was beset with problems and the resultant inertia frustrated the Commission. By the summer of 1990, with a decision due to be reached in less than a year, the Commission began to pressurize the sector to develop a more cohesive collective voice. On 4 September 1990 a meeting was arranged between DGIII Commissioner Martin Bangemann and industry leaders from BMW, Fiat, Volkswagen and Renault to discuss the Commission’s concerns. He stressed that the Commission was determined to replace national import barriers with a European trade policy. This meeting set in train a six-month process which led to the creation of a new collective body in early 1991. In November 1990 eleven of CCMC’s twelve members resigned en bloc from the group and announced they would no longer be supporting CLCA either. Throughout 1990 negotiations took place between CCMC and CLCA over the need to create a single group. These ‘advanced’ discussions were jeopardized at a Paris meeting of CCMC when the Peugeot-Citroën (PSA) president used his veto to prevent the group adopting a system of qualified majority voting (requiring a 75 per cent threshold). The other car-makers had long anticipated the need for a new organization but the Paris incident was the final straw. For group cohesion there has to be a political skill to keep disgruntled members ‘in’ with the promise of long-term benefits to balance temporary disappointments. The repeated use of the veto by PSA precipitated the collapse of CCMC; any group that finds its internal discussions reaching a stage where voting is necessary is clearly in trouble. However, there were other reasons for disbanding CCMC and CLCA. The existence of two lobbying groups was (latterly) viewed as detrimental to the industry’s relations with EU officials. The last executive secretary of the CLCA emphasized this factor in the events of 1990:

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When I arrived at CLCA and reviewed the situation of dual representation I reached the quick conclusion that it had to change. There was a duplication of effort with all its attendant inefficiencies and there was a problem of personal conflicts between the two secretariats… on some issues there was also an unhealthy degree of competition… In fact, in my year at CLCA I spent most of my time trying to kill off the group and form a new organization. (interview, 26 July 1991) The McKinsey management consultancy was hired to look at the situation and propose alternative forms of collective representation. There was also substantial pressure from American and Scandinavian companies for membership of the collective body. The British and German industries advanced several arguments in support of this move. First, the legitimacy of the CCMC was always badly affected by the fact that it did not represent the third and fourth largest car producers in Europe, i.e. Ford Europe and GM Europe. Moreover, Volvo AB was one of the largest truck and bus manufacturers in the region. European Union officials often had to conduct bilateral consultations with these firms on matters of substance. Sec ond, the lobbying resources of both multinationals made them attractive to a reformed Euro-group. General Motors is one of the leading players in the American Chambers of Commerce (AmCham) based in Brussels. In its November 1990 government relations brief, GM’s Brussels office reported that: Heavy lobbying is under way against the proposed mandatory requirement by the employers’ association and AmCham in Brussels. The GM Government Relations Office has drafted an AmCham position paper regarding mandatory worker participation rights in the statute. (GM, 1990:11) Third, the Americans and Scandinavians had managed to negate their exclusion from CCMC to some extent by being very active in CLCA, where they utilized their membership of several national trade groups and by establishing close links with CLCA’s secretariat (interview information, 23 July 1991). Within the industry BMW was given the task of devising a new form of collective organization which would overcome the problems of its predecessors. In February 1991, the industry agreed upon the statutes for a new unified group, the Association des Constructeurs Européens d’Automobiles (ACEA). The new group’s structure differed from its predecessors in two important respects. It extended its membership to include the American and Swedish manufacturers, and adopted a system of majority voting. Moreover, ACEA was given more resources than either of its predecessors with a full-time staff of eighteen. Within the secretariat there are eight departments in the following

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policy areas: Legal and Taxation; Trade Policy and Economics; Transport Policy and Regulation; Communications; Emissions and Fuels; Technical Affairs; Safety; and Administration and Translation. These departments are responsible for responding to EU requests for information. They also prepare position papers and liaise with the various working groups which comprise company representatives involved in specific issues. The group’s structure and policy-making functions are set out in Figure 6.2. A number of companies felt that CCMC’s secretariat was too ‘reactive’, only responding to issues once they became problems. In response to this the new group doubled the staff of its predecessors and increased the number of working groups to cover a wider issue agenda. There are approximately thirty ad hoc groups at any one time, with about twenty technical groups examining issues such as carbon dioxide emissions, Eco-labelling, passive safety and light installation. These committees represent the industry in the Commission’s network of committees. However, it is often the case that. even within the group’s technical committees, agreement cannot be reached and it remains for the board of directors to agree a common position. The ACEA adopted a majority voting mechanism requiring a 75 per cent threshold with decisions reached on a one member, one vote basis. The assumption is that this voting system will be better able to avoid lowest common denominator responses, enabling the group to engage in a higher-level policy-making dialogue with the Commission. However, any group will generally go to extraordinary lengths to avoid having to take a vote at all, and ACEA has yet to use the new majority system. The existence of a majority system is probably enough to prevent any member from stifling discussion of an issue. Within ACEA, voting power resides with the member companies in the board of directors. National trade associations are marginalized within the group structure. These groups are represented by one standing committee; they have no voting power, no representation on the board of directors and can only participate in working groups and strategy groups if invited to do so by the secretariat. The structure signals a shift towards the ‘Euro-club’ of companies which are increasingly being formed by large corporations exasperated by national disputes in peak associations. As George (1991) pointed out in his critique of neo-functionalism, it was precisely this propensity for national interests to hinder supranational association which early integration theorists failed to anticipate. The changes made in 1991 represent an attempt to move away from traditional Euro-group structures. The key manufacturing companies now directly finance the Euro-group’s activities and control its policy-making mechanisms. As with other sectors this change was prompted by active large companies, aiming to form (numerically) small producer-led Eurogroups through which companies could advance their interests (Greenwood, 1997). These smaller ‘Euro-clubs’ are likely to form in oligopolistic sectors and in sub-

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Figure 6.1 ACE A: Internal Organization and Structure

sectors where a specific set of commodity interests are involved. For major industrial sectors such as automobiles there is too much to be lost from not having an effective central body. As Greenwood argues: In establishing transnational networks, the Commission undoubtedly also creates demand structures for integration at the European level, and for the expansion of competencies… It makes crystal clear its preferences for engaging with transnational actors, and provides incentives to these to form and develop, ranging from encouragement and criticism at the

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‘soft end’, to advisory committee places and funding at the hard end of the spectrum. (Greenwood, 1997:262) The Isolation of Peugeot The initial decision by PSA not to join ACEA may appear unwise in the light of the above discussion, but it also illustrated how dispensable the group option can be to a large transnational company. This manufacturer is an important political actor in France and can rely on the use of national channels when lobbying Brussels. It is also clear from interviews that PSA is such an important player in the European automobile sector that its views cannot be ignored by the Commission. For example, the company has its own representation on some Commission advisory groups. Commission officials concede that because of Peugeot’s expertise in the design and development of diesel engines its views simply cannot be overlooked. Indeed the French carmaker’s solo approach appears to have paid some dividend on the Japanese issue, with the French government successfully negotiating agreements with Japanese car-makers independently of the EU-Japan discussions in 1992.4 Earlier it was argued that group membership makes sense not because it helps ensure the adoption of policy by the government, but because it helps shape the policy demands and inform a ‘receptive’ bureaucracy of specific needs. In this context PSA’s self-imposed isolation was as much a hindrance as an advantage. While there are various ways of lobbying EC authorities, there is no adequate substitute for being part of the collective position. Not to participate in the group is to discard a potentially important option and can involve unwelcome risks. Peugeot’s non-participation was largely because of the dogmatic views of its president, Jacques Calvet, who opposed the creation of ACEA, rather than a failure to realize the group’s importance. There is also more practical reason for a large company to belong to the relevant Euro-group. The diversity and volume of interfaces that are likely to develop between a multi-product company and EU institution make group activity a useful way of managing the company’s corporate representation. This point has been made by Salisbury (1984) who notes that it is the complexity of government-industry relations that often leads corporations to represent their interests via groups: the very size and complexity of an institution renders it vulnerable to a much broader array of specific policy impacts, positive and negative, present and prospective… A given corporation is quite likely to find itself in several encounters at once, on different policy issues, being worked on in different institutional settings, and requiring different modes of political action. (Salisbury, 1984:69)

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It was no surprise, therefore, when Peugeot belatedly announced that it was to join ACEA in May 1993. The ACEA/Commission relationship The automobile industry more than most sectors illustrates the shift in decision-making authority from nation state to the transnational level. The Commission’s policy-making remit for the sector falls into four broad areas: 1 The internal market, including all aspects of competition policy relating to state aid and vehicle distribution, the harmonization of vehicle taxes, improvement of vehicle safety, and promotion of environmental standards. 2 European Union policy in the field of structural interventions and human resources, including all EU policy programmes used to facilitate economic adjustments in the sector, such as regional policies and support for training and infrastructure. 3 Research and technological development: all horizontally organized funding programmes incorporated in the EU’s framework programmes. 4 External trade policy, including monitoring the gradual opening of the EU market to Japanese car imports and improving market access to third markets for European automobile companies. (CEC, 1994:4–10) The industry in fact has working relationships with twelve of the DirectoratesGeneral and issues often cut across departmental boundaries. Of course the Commission is itself political and there is evidence of departmentalism. One Commission official commented: There is no general scheme for talking to people representing different interests in the community. As a result, the development of dialogue had been on an ad hoc pragmatic basis and many different patterns of dialogue now exist depending on the people involved both inside and outside the Commission… Forms of informal dialogue exist with the motor, pharmaceutical and food interests. (interview, 24 July 1994) This is a source of great frustration to ACEA which has complained on a number of occasions about the lack of coordination within the Commission on key automobile issues. One industry official spoke of being ‘exasperated by the inefficiency which resulted from the fragmented organization of the Commission. Sometimes it is clear that they have quite different ideas on an issue and are not even talking to each other about it’ (interview, 17 January 1994). For example, while DGIII supported the industry’s case for renewal of the selective franchise car distribution system for a further ten years after 1995,

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DGIV wanted to see wholesale changes to the system. One Commission official responsible for the industry commented: DGIII takes the view that you should not change a stable regulatory framework during a period of restructuring. Irrespective of arguments about the principle of selectivity versus multi-franchising, we believe this point to be paramount. However, the issue has become very emotional in DGIV and they are very resistant to outside arguments. (interview, 20 June 1994) By 1993 ACEA was convinced that the only way to make progress on issues which transcend DGs was to establish ad hoc structures which brought all parts of the Commission and industry together. During discussions with the Commission over proposals to assist the industry with its restructuring efforts in 1992–3, ACEA proposed that ‘inter-service’ working groups be established to overcome the problems of communication and coordination on automobile issues. An ACEA official commented, ‘We can accept the fact that DGs have a different view on some issues. We cannot accept the fact that they won’t sit down and talk about these differences’ (interview, 17 January 1994). In the summer of 1994 two inter-service groups were established to discuss the issues of EU research and development policy, and training policy. The pivotal nature of the sector means that ACEA finds itself a central player in many EU policy networks. Peterson (1995b) described the EU policy process as a ‘hothouse of different types of sectoral policy networks’. He argued that these networks proliferate because the EU lacks the institutions that could facilitate bargaining between interested actors. From ACEA’s standpoint, the essential task of interest representation is to ensure that once sectoral priorities have been defined in working groups, all parties stick to that line in any separate dealings both with the Commission and national governments. The internal decision-making structure of ACEA is designed to reflect the decision-making structures of the EU as a whole. However, ACEA also realizes the importance of nation-state influence on issues such as environmental and safety standards, and effective interest representation crucially involves communicating a strong industry line to the twelve member states. The role of the group in organizing the industry in the policy process can be illustrated by a brief case study. The selective distribution system One of ACEA’s most effective campaigns in the 1990s was over proposed changes to the industry’s selective distribution system. All major automobile companies sell and service their vehicles through a network of authorized car dealers. The system has some fundamental features that breach the competition laws of the EU. Each dealer has a clearly defined territory within

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which the dealer has exclusive rights to sell the manufacturer’s products. In return for exclusivity, the dealer signs a contract with the manufacturer to retail the vehicles and provide all servicing and after-care services. The manufacturer supplies spare parts through this network. The dealer is not allowed to sell other brands without the permission of the manufacturer. Some manufacturers apply the rule strictly, while others will allow other franchises to be added so long as they are on separate premises. The system sits somewhat incongruously with EU competition laws since it denies consumers the chance of comparing a range of brands at any one dealership, and restricts competition in the after-sales market. All new cars come with a warranty that requires the vehicle to be serviced at an authorized dealership. The manufacturers have consistently argued that the system is essential because the complexity of the product requires specialist after-care (in which they have made substantial investments, i.e. the system provides thousands of highly skilled workers throughout Europe), and this is a significant benefit to consumers. Consumers also benefit because the system is geographically comprehensive through a carefully planned network of authorized dealers. The system was reviewed in the early 1980s and the Commission was persuaded by the manufacturers’ arguments that the benefits to consumers more than offset the anti-competitive nature of exclusive distribution. In 1985 the system was given a ten-year exemption from EU competition law. Consumer groups have continually disputed these arguments, maintaining that manufacturers use the system to segment national markets in Europe and to maintain higher prices for cars in high-value markets. These campaigns led to an investigation by the Monopolies and Mergers Commission (MMC) in the UK in 1992 and by the European commission in 1993. The results of these investigations were inconclusive, but they did succeed in keeping the issue on the agenda and added to a growing scepticism in DGIV about the merits of the system. The fluid and relatively open nature of the policy process at the European level helped consumer groups to push an issue on to the policy agenda which had been successfully blocked for many years in several nation states. Thus, when the Commission came to review the renewal of the block exemption in 1995 there was little prospect that the system would survive the process unscathed. Officials in DGIV began to review the conditions for the 1985 block exemption in late 1993. From the outset DGIV and DGIII adopted contrasting positions. The DGIII acknowledged the weaknesses in the system, but strongly argued that it was the wrong time for a fundamental change because the sector was in the process of adjusting to harmonization and increasing penetration by Japanese producers; DGIII was fulfilling its sponsorship role par excellence, but the argument that radical change was a step too soon rather than a step too far was a powerful one. The DGIV had lost faith in the ability of the system to deliver net benefits to European consumers, and throughout the winter of

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1993–4 DGIV officials informed the automobile companies that they were no longer comfortable with the ‘philosophy’ behind the 1985 regulation and would be seeking significant changes. In the early summer of 1995 DGIV’s thinking became clear. In an extraordinary incident, a redraft of the 1985 regulations including substantial changes began circulating in Brussels. The draft was simply a copy of the 1985 regulations with several paragraphs deleted and some additional text in key areas. The leaked document began with an indictment of the existing system: Experience over the past ten years has shown that the present Regulation has significantly contributed neither to the opening of national markets nor to the development of effective, flexible channels for the distribution of vehicles and spare parts. The redraft was designed to open that market to more competition, and to reduce some of the power manufacturers exercised over ‘their’ dealers within the distribution system. The main changes can be summarized as follows: 1 The Commission proposed that in future manufacturers could not prevent their dealers taking on a second franchise and selling other brands.5 2 The Commission proposed to end ‘territorial exclusivity’. Dealers would no longer be granted exclusive rights to a defined territory and could seek customers outside ‘their’ territory. 3 In future all disputes between a dealer and the manufacturer over sales objectives would go to binding arbitration, and would not be settled by the manufacturer. 4 Dealers could only appoint sub-dealers within their territory with the consent of the manufacturer. The 1994 draft proposed that dealers have more freedom in this area and that any disputes go to binding arbitration. 5 Manufacturers were to make technical information more widely available, and not simply supply it to their authorized dealers. Independent dealers and repair shops should be included. 6 Dealers were to be given more freedom to retail replica parts manufactured by independents, and were not to be tied to manufacturers’ parts or manufacturer-approved parts only. Under these revised conditions, DGIV proposed a renewal of the block exemption for a further ten years with a substantial review after five years. The important point for the present purposes is that this document was leaked before formal consultations had taken place between the industry and the Commission. ACEA was taken by surprise, and opinion was divided within the industry over how much importance should be attached to the incident. Several manufacturers believed the draft was a ‘paper hut’ prepared for internal

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consumption in the Commission and did not merit a major offensive by ACEA. However, a majority of manufacturers were sufficiently concerned to push ACEA into a strong rearguard action. With DGIV’s hand apparently declared, it would require a substantial effort in government relations to swing the momentum back in favour of the automobile companies. An ad hoc working group was immediately formed by ACEA, attached to its permanent Legal and Taxation group, with a view to formulating a response. In addition to the permanent secretariat the working group comprised representatives from eleven companies and five national trade associations, and implemented a three-stage strategy. First, a response document was drafted which highlighted ten key areas where the draft proposals would encounter major legal and practical problems at the implementation stage. Second, the group resolved to generate a clear and unanimous collective position on the whole issue by the end of the summer. Third, the sector’s lobbying efforts were stepped up. Individual companies were handed the task of approaching selected individuals in the Commission, the European Parliament and national governments. Their task was to make sure that industry’s position was communicated in a coherent way to key decision-makers at all levels of the EU. The strategy reflected ACEA’s structure. The industry drew expertise from companies and national associations, developed a common position and articulated the same view at both the national and European level. The comprehensive and coordinated approach proved to be successful as DGIV began to shift its position on several proposals throughout the winter of 1995– 6, and eventually agreed to a greatly diluted draft in the summer of 1996. Conclusion ACEA took much of the credit for producing a strong collective position on the issue of Japanese imports in 1991. In reality the group was formed to give voice to a position which had evolved among the disaffected members of CCMC. However, as we have seen with the selective distribution issue, the group has had other notable successes and is a better organized, and—perhaps more importantly—a more respected group than either of its predecessors. Its working group structure and broad membership enable it to cover a wide agenda effectively and authoritatively. In numerous areas of ‘low polities’, notably the morass of details involved in technical harmonization, the group is showing its mettle. With PSA now in full membership it claims to speak for the entire European sector. However, most automobile companies still use multiple voice strategies in Europe. The considerable effort to create and empower ACEA in 1991 was not an effort to create collective voice that would displace other forms of political representation. Rather, it was designed to rectify a glaring weakness in an important area of corporate representation. Strengthening of the Euro-group took place alongside efforts to improve ‘own account’ operations in Brussels.

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If one accepts the need for multiple voice strategies the two efforts can be viewed as mutually reinforcing rather than contradictory. The idea that the interests of companies can be fully represented by a Euro-group which interacts with policy-makers at a European level has never been sustainable. While Greenwood is correct to challenge the ‘weak’ group caricature, he nevertheless concedes that for large firms ‘formal groups provide just one of a range of strategies in meeting their needs at the European level’ (Greenwood: 1997:269). The positions a company might favour are not always areas where there will be a collective interest among the members and thus cannot be advanced via the Euro-group. The group is an important option and one that has been considerably strengthened in the case of the automobile industry. Whether this in itself constitutes claims for a ‘strong’ group revisionism in the face of overwhelming evidence in favour of multiple voice strategies remains an open question. It falls well short of the European ideal promulgated by integrationists and craved for by the Commission. In fact, part of the reason why interest groups have been unable to fulfil early expectations is that the Commission itself seems to encourage lobbying from other quarters. In its 1992 document outlining relations between the EC and special interests the Commission argued that it still favoured the: Preservation of the open relationship between the Commission and special interest group… While the Commission tends to favour European (con)federations over representatives of individual or national organizations, it is nevertheless committed to equal treatment of all special interest groups, to ensure that every interested party, irrespective of size or financial backing, should not be denied the opportunity of being heard by the Commission. (SEC 92 2272:5). In reality the Commission’s preference for the Euro-group approach is an ambition with no guarantee of success, and the Commission will gather—and welcome—good information from whatever source. A Commission official in close and continuous contact with the automobile sector told us, ‘The need for company contacts is greater than ever because on many key issues we are still getting filtered views from ACEA. Like all bureaucracies its secretariat has become a gatekeeper.’ The polarization of the debate over Euro-groups’ evidence in the ‘strong’ and ‘weak’ labels is unfortunate. A great deal of empirical research by political scientists in this area has been seized upon in the wider debate between neofunctional and neo-realist assessments of European integration. More recently, the same has occurred with the emergence of neocorporatist accounts. Greenwood’s broadside on the weak group thesis is thus a vehicle for promoting a meso-corporatist view of the policy process at the transnational level. As we have argued above, the weak group label has been knocked down

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but hardly replaced by a convincing alternative. The debate reveals as much about the mercurial nature of modern corporatist theory as it does about the European policy process. There is, however, a futility about all such debates in the European case. We concur with Cameron’s view that there is a uniqueness and complexity to the whole integration process which is incompatible with the regimentation of the theoretical paradigms: When all other factors are reviewed, neither neofunctionalism nor neorealism seems to fully explain the process by which 1992 came into being. And, taken alone, neither serves as a reliable guide to the Community of the future… both neofunctionalism and neorealism taken together rather than as alternative approaches are useful for, and indeed necessary to, an understanding of the EC initiative. (Cameron, 1992:30) Exactly! Notes 1 The UN-ECE is a ‘club’ of UN member states who make non-binding collective decisions on technical harmonization. It has no power to insist on implementation but the UN-ECE has managed to establish an impressive range of technical regulations for the automotive sector in western Europe. The main purpose of the UN-ECE was to foster cooperation on technical issues between member states and prevent a proliferation of national legislation. National technical regulations were a long-valued policy instrument for protecting the development of national industries. The UN-ECE established a ‘menu’ of regulations in its transport committee, Working Party 29, which had five working groups covering specific areas. The UN-ECE continues to perform this role despite the emergence of the EU as the main regulatory body for the European industry. 2 This was underlined by the procedure for a rotating presidency in CCMC. A president from each national industry would take on the position for a one-year period. Though one-year positions may weaken the incumbent, the companies were simply not prepared to allow an individual a longer-term presidency for fear that they might acquire a disproportionate influence over group policy. Thus, the custom evolved in CCMC of each of the four major EC manufacturing industries—France, Britain, Germany and Italy—taking on the presidency of the group in rotation for a period of two years. For example, the French period would be split by one year for Renault and one year for Peugeot. 3 For example, Peugeot frustrated emissions talks within CCMC because it was well advanced with lean-burn engine development. 4 Nissan and Toyota reached a bilateral deal with the French government to limit the sales of their UK-produced cars in France in return for clearance to establish their own dealerships in the country. Thus the French industry is currently protected by a voluntary export restraint on direct exports, and by this new

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‘gentlemen’s agreement’ over transplant production. In addition the French government also gained undertakings from the Japanese that they will buy more French components for their British plants as part of the arrangement (Daily Telegraph, 24 January 1992). 5 In the UK a number of large distributors emerged in the second half of the 1980s on a multi-franchise basis. However, these were the exception rather than the rule and many smaller dealers were effectively prevented from multifranchising by the manufacturer or at best were told which other brands were acceptable to the manufacturer.

7 State aids

A policy framework for the European automobile sector In 1988, the Commission published a memorandum which set out a policy framework for the sector. It acknowledged that despite the substantial restructuring of ‘national champions’ in the 1980s, the industry still lacked international competitiveness. The Commission decided to intervene more directly to accelerate the restructuring process in the sector. The approaching 1992 single market deadline and the increasing globalization of automotive production provided ideal ‘cover’ for a more assertive approach. The memorandum identified a need for action in four areas: 1 Completion of the internal market in vehicles through the harmonization of technical regulations and taxation while simultaneously preventing any future fragmentation of the market. 2 Strengthening the industry’s research and development programmes. 3 Implementation of a common commercial and trade policy which would remove national restrictions to non-EC imports, stabilize Japanese exports to the EC, and ensure a high content factor in Japanese production within the EC. 4 The design of a coherent style and policy for the sector which would facilitate the restructuring process and ensure greater transparency in the granting of aid.1 The memorandum also called for more effective regulation of aid, and received the support of the Council of Ministers and the European Parliament (EP). The support of the Parliament was gained only after there had been some softening of the report’s tone. For example, the revised report stressed the need to avoid shocks to the market during the restructuring phase and now included the suggestion of a transitional period to facilitate an orderly integration of national trade policies towards vehicle imports.

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The evolution of a state aids policy In their excellent analysis of industrial concentration in Europe, Cox and Watson (1995) describe how national industrial policies in the 1960s and 1970s were predicated on the belief that there was a direct link between size and competitiveness. This was the ‘national champion’ era when Fordist production techniques were ascendant and in the automobile case they were embraced with enthusiasm. Yet by the late 1980s, the notion that scale somehow equated with efficiency and global competitiveness was thoroughly discredited. It was against this background that the Commission began to focus on the European sector. Informed by a neo-liberal perspective, many in the Commission, and DGIV in particular, associated the automobile national champions with much that was wrong with the European economy. National champions were associated with inefficiency, seen as retarding restructuring efforts, and, most seriously of all, had become dependent on subsidies from their national governments. Cox and Watson described the prevailing view well: ‘National super-firms…did not give rise to a new competitive efficiency in Europe but arguably led to the creation of a group of firms with sufficient market power to be substantially insulated from the furies of the market’ (Cox and Watson, 1995:312). The British Ley lands and Fiats of Europe had been protected at home so they might conquer abroad. In reality, they often captured the home market and became complacent about international markets. Not only did their market power afford them protection, it also made their regular demands for state subsidy difficult to refuse. Consequently, state aid came to be associated, not with successful restructuring and modernization, but with the preservation of enfeebled firms and inefficient capacity. Under Articles 92 and 93 of the Treaty of Rome, the Commission, in cooperation with member states, is authorized to monitor state aid. However, it is the DGIV of the Commission that implements regulations prohibiting public assistance from distorting the market.2 In general, Article 92 prohibits ‘any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between member states, be incompatible with the common market’ (quoted by Montagnon, 1990:18).3 In practice, Treaty rules have been implemented in a pragmatic fashion. The granting of aid was a well-established policy instrument in many nation states and the Commission focused its efforts on control rather than eradication in the first instance. A number of limited exemptions to the Treaty were therefore permitted. These exemptions included aid promoting the development of areas suffering from abnormally low standards of living (i.e. selective regional as sistance); aid to promote the realization of an important project of common European interest or to remedy a serious disturbance in the economy of a

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member state; and aid that facilitates economic development and does not conflict with the common European interest. The Commission is guided by two basic principles when dealing with state aid issues. First, the aid must always be ‘in proportion to the purpose it seeks to achieve’. Second, it ‘must always be compatible with the Community sectoral interest’ (COM [96] 166: 9). The Commission has argued that in the case of the automobile sector state aid that takes excess capacity out of the sector, or helps to alleviate regional problems or advance the technological development of the European sector as a whole, can be compatible with the Single European Market (CEC, 1982). Thus, while the Commission may be sceptical of the merits of state aid policies, the Treaty does allow national governments to assist firms in a variety of ways. Prior to the introduction of the 1989 sectoral state aid framework for the automobile sector, the parameters for granting aid were relatively wide. This caused considerable tension between the Commission and member states as the latter responded to each industrial crisis in automobiles with large amounts of subsidy. As two Commission officials closely involved in the process candidly stated: it should not be a total surprise that state aid control and the automobile industry in the EU have had a love/hate relationship over the last fifteen years. A relationship which was perhaps as cyclical as the business cycle which characterizes this industry so much. (Dancet and Rosenstock, 1995) In the remainder of the chapter, we split the discussion of state aids into four areas. First, there is a brief review of the situation between 1980 and 1986 when control rather than prevention was DGIV’s main objective. Second, we review the contentious period between 1986 and 1989 when a new state aid framework was developed for the sector. Third, we examine the 1989–95 era when the new state aid framework was implemented. Finally, we comment on more recent developments. State aid policy 1980–6 The 1980–6 period can be described as one of frustrated impotence for the Commission. As our discussion of British privatization in Chapter 3 illustrated, the recession across Europe in the 1970s led to a further round of state subsidies for automobile companies. For example in the UK, British Leyland— which had been rescued by the state in 1975—was back at the government’s door in 1980, asking for a further £lbn of aid to prevent large-scale closures. In Sweden, Volvo followed a similar route, and in Italy, both Fiat and Alfa Romeo were undergoing major state-funded restructuring programmes. Between 1977 and 1987 member states granted state aid of an estimated amount of ECU 26bn to motor vehicle producers (Dancet and Rosenstock,

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1995).The Commission increased its efforts to monitor such programmes but found the situation almost overwhelming. In a communication to the Council of Ministers in 1979, the Commission set out six criteria to be used when evaluating the compatibility of state aid with the Treaty: 1 It should be justified by the circumstances in the industry concerned. 2 It should promote long-term viability by solving problems, rather than preserving the status quo and putting off inevitable changes. 3 Since adjustment takes time, aid to redress the social and economic costs of change is admissible, subject to strict conditions. 4 Unless granted for short periods, aid should be progressively reduced and clearly linked to the restructuring of the sector involved. 5 The intensity of the aid should be proportionate to the problem involved to minimize the distortion of competition. 6 Problems should not be transferred from one member state to another. In 1980 an exasperated Commission wrote to all member states complaining that many state aids had not been notified, and where they had been, the DGIV monitoring team was given insufficient time to execute its functions. In 1981 the Commission took the first steps towards a more stringent enforcement of Treaty rules and publicly criticized member states for regularly granting state aid with little or no regard for its wider implications in the European automobile sector. The Commission also announced proposals to establish sectoral monitoring machinery. The proposed system would operate on an a posteriori basis, i.e. with member states obliged to inform the Commission after the granting of aid. Cownie describes the logic behind this move: This would supplement the information already available to the Commission by providing a coherent frame of reference, and would facilitate dialogue between member states and the Commission on adjustments in the industry and discipline in the granting of state aids. Potential recipients in this sector will thus have to show that aid could improve competitiveness and that it is not merely a prop to an ailing undertaking. (Cownie, 1986:258) The Commission saw the automobile sector as a special case: an industry much in need of assistance, albeit one which had often received the wrong kind of assistance. The main problem was that aid granted for purposes that appeared to satisfy the exemption criteria was in fact being used for general purposes which the company concerned would have had to finance

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itself anyway. In the neo-liberal paradigm increasingly underpinning DGIV’s approach, such behaviour constituted a distortion of trade. The Commission emphasized its determination to clean up the automobile sector in 1983 when it reminded several member states of their obligation to notify state aids (OJ C318, 1983:3). It also made known its displeasure about the practice of paying illegal aids to companies before the Commission had the opportunity to investigate. Using a precedent from a 1973 Court ruling the Commission underlined its determination to recover such payments.4 The first test case of the new system came in the same year when the Italian government notified the Commission of its plans to award fifteen grants to automotive firms under its Industrial Restructuring and Conversion Act. The Commission decided to scrutinize eleven of these awards to ascertain their compatibility with the common market, and in each case approved the awards only after a reduction in the aid. However, the cost-benefit model used by the DGIV vehicles team to evaluate such cases was only as good as the information fed into it. As we illustrate below, in the major state aid cases of the 1980s, a political game was played throughout the assessment stages as national governments and companies decided how best to respond to each request for information. The system depended in large measure on goodwill and there was scope for abuse. The difficulties with this approach have been well described by the Commission itself: It is essential for the Commission to move towards a priori and away from a posteriori control of aids put forward by individual member states. This would greatly enhance the Commission’s control over state support and would avoid the present situation under which a final decision is often made years after the aid has been granted and the Commission is always faced with a fait accompli. As a result, information has to be collected from the recipient, who may be reluctant to provide it, or it may even have been lost. Besides, it is far more difficult to recover money after it is spent rather than prevent it being spent in the first place. (CEC, 1990:49) The DGIV was well aware of the shortcomings of the a posteriori monitoring system introduced in 1981 and began to press for a system of prior notification by the mid-1980s. Member states were already obliged to provide prior notification of aid given to the sector under horizontal aid schemes such as regional assistance. However, they had become adept at channelling aid to automobile companies on a discriminatory basis through programmes that fell outside the rubric of the horizontal aid rules. The monitoring system now being proposed would involve transparency if nothing else on an ex post facto notification basis.

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The new monitoring system was to apply to all aid granted, and the Commission tried to persuade member states to adopt its new proposals throughout 1982 and 1983. The leading member states, with economies still recovering from the second oil-price shock (including the Thatcher government in the UK), were in no mood to agree to measures restricting the use of coveted national policy instruments. There were objections to the monitoring procedure from all member states and the proposals were soon side-lined by a range of technical factors. The Commission had dropped its plans for greater monitoring by the end of 1983 and continued to rely on general competition policy rules in individual cases. By its own admission, DGIV could do little to properly monitor and assess the true extent of subsidization in the sector. The stark reality was that between 1977 and 1986, the automobile sector received ECU 26bn in state aid, yet no negative decisions were taken by the Commission. This was ‘despite frequent initiation of the action provided by Article 93(2) of the EC Treaty’ (Dancet and Rosenstock, 1995:3). A more active Commission: 1986–9 The Commission emerged from the first period disappointed at the failure to establish sectoral machinery but determined to deal more effectively with the sector. There was no shortage of new cases to examine. In the period 1986–7 alone, it launched investigations into preferential loans granted to Renault and Peugeot by the French government, the German government’s plans to partly fund a new Daimler-Benz factory in BadenWürttemberg, and injections of new capital in Renault, Alfa Romeo and ENASA by the French, Italian and Spanish governments respectively. The Commission also had to deal with the British government’s plans to write off the accumulated debts of the Rover Group’s commercial vehicle operations as a precursor to privatization. These cases raised further concerns about distortion to trade and competitive advantage. The industry itself remained silent as one manufacturer after another received aid. There is, as one British civil servant put it to us, a’dog doesn’t eat dog’ mentality in the sector. Even though many Commission investigations, at that time and subsequently, demonstrated that some aid was illegal and represented a market distortion, it remains the case that no member of the Committee of Common Market Automobile Construc tors (CCMC) or the Association des Constructeurs Européens d’Automobiles g.i.e. (ACEA) has ever objected to aid granted to another member. Only once has DGIV received an objection to aid granted in the automobile sector, and that was when Matra, the French aerospace group, complained that the Portuguese government had given aid to Ford and Volkswagen to develop and build a multipurpose vehicle. In the words of one Commission official, ‘Matra is the exception that proves the rule’. So the Commission began the 1986–9 period facing the same old scene. However, by its end, the Commission had in place a specific sectoral

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framework to monitor aid to the sector. This substantial shift in policy was largely due to the experiences of, and reaction to, three major state aids investigations in this period, involving Renault, Rover Group and Alfa Romeo. The Commission climbed a steep learning curve during this period and used its knowledge to good effect when later designing a sectoral framework. Moreover, the Commission used this period of structural adjustment and change in the sector to persuade a majority of member states that the time had come for a new approach to state aids monitoring. Two of these cases involving Renault and Rover are examined in detail below. The restructuring of Renault In May 1985 the French government informed the Commission that it had provided Peugeot and Renault with two preferential loans under the French industrial modernization (FIM) loans scheme, and that it intended to provide FF 3bn of new equity capital to Renault to assist restructuring.5 In December 1985 and July 1986 the Commission decided to initiate action under Article 93 (2) in respect of both these loans. It decided that the FIM loans were not for truly innovative purposes—the main ground for exemption from Article 92— and that they constituted state aids because they had been granted at preferential interest rates. For example, the FF 750m loan granted to Renault in 1984 was based on a rate of 8.4 per cent, whereas the commercial rate applied by Credit National at the time was 14.75 per cent. The Commission eventually took a negative decision against Renault in respect of all FIM loans, arguing that, ‘neither the priority interests of the French industry—or the modernization of industries as such could be regarded as of sufficient community interest to justify exemption’ 220, 11 August 1988:39). It ordered the aid element of the loans to be repaid along with the accumulated interest. During its investigations into the FIM loans, the Commission was faced with a far more serious state aids case, when the French government indicated that it would make substantial capital injections into Renault in 1986 and 1987 as part of a seven-year restructuring programme leading ultimately to privatization. This required the French government not only to restore the company to financial health but also to change the company structure and legal status so that it was no longer protected from bankruptcy. At the outset, the French government insisted it was acting in accordance with its interest as the major shareholder and was merely informing the Commission of its intentions. It was not providing prior notification to enable the funds to be released. This was a political decision rather than a legal one because equity could not be injected immediately if a notification procedure was being followed. In its 1987 Budget, the government announced that Renault had received a FF 2bn capital injection in 1986 and was likely to receive further assistance in 1987 (Table 7.1). The Commission immediately instituted a procedure against these funds. The French government proceeded

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Table 7.1 State assistance to Renault 1980–7

with its policy and in late 1987 informed DGIV that it would repay Renault’s FF12bn loan outstanding to Credit National. The Commission’s long-standing fear, that the need for modernization in the European sector would lead to an escalating subsidy programme, was now being realized. The French government defended its position with a number of arguments. Most convincingly, it argued that the restructuring aid was integral to its privatization policy. There were also a number of supporting arguments. First, it claimed that Renault never enjoyed preferential status, but had always been obliged to produce profits and secure a return on capital invested. The subsidy package could therefore have been expected to take place at any major French enterprise. Second, Renault suffered from the decline in the French vehicle market between 1982 and 1986 and the state was ‘obliged’ to restore the company s financial position and support its restructuring efforts. In both respects, the government argued, somewhat disingenuously, that its actions were consistent with those of a private investor seeking to safeguard its shareholding. Third, it maintained that a proposed redundancy programme would return the company to profitability by 1988 and lead to much-needed capacity reductions in the European sector. Finally, in respect of the FIM loans, it argued these would lead to technological advances that would benefit the wider European economy (OJ 220,11 August 1988:32–3). The Commission was sceptical of the French government’s argument that it was merely acting as any investor would to protect its investment. It ruled that the FF 12bn loan write-off did not constitute normal market behaviour. Moreover, the Commission doubted whether private investors would have made such large capital injections over such a short period. Nevertheless, it conceded that the plans did meet the criteria of restoring the long-term viability of the company rather than preserving an inefficient operation or distorting trade against the European interest. The Commission also agreed that the 7 years over which restructuring would take place was reasonable given the scale of the problems and the size of the company. At that time Renault comprised 269 entities employing 182,448 people (OJ L220, 11 August 1988). Finally, part of the aid was allowed to cover the social costs of restructuring which would ultimately lead to 38,311 redundancies between 1987 and 1990. The Commission ruled that the restructuring aid, which accounted for 24 per cent of the total restructuring costs, was proportionate to the problem at hand, and because Renault would lose market share during the restructuring, the aid would

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not lead to job losses elsewhere in Europe. The Commission had therefore been persuaded of the case for such large capital injections and debt writeoff. The DGIV monitoring team was broadly sceptical of the aid package for Renault. It felt that the sums involved were too large. However, the restructuring package proposed by the French government was wide-ranging and a pragmatic decision was taken to support these efforts, although the Commission was careful to specify a number of strict implementation conditions as part of its consent. The most important condition was that the FF 12bn debt write-off should not take place until the company’s legal status had been changed. If the change did not occur by 31 December 1988 the write-off should be abandoned. The Commission also specified that any future earnings from the sale of Renault’s American operation should be transferred to the French government. Finally, it was agreed that restricted aid should lead to specific reductions in capacity. Implementation difficulties The French government published a decree on 29 December 1988 which it claimed placed Renault on the same footing as other commercial companies in France. The Commission rejected this, arguing that Renault still enjoyed a preferential relationship with the state, and that the French government had not clearly ruled out the possibility of granting further aid to the company. In fact, the enthusiasm for the privatization of Renault had waned following the election of the new government in France and it was not long before the implementation conditions were breached. Privatization had met with strong resistance from the French trade unions facing the prospect of reductions in capacity in line with those proposed in 1988. A political decision was taken to delay privatization. The Commission also argued that the capacity reductions that had taken place at Renault and which were linked to the restructuring aid, fell short of the targets agreed in 1988. There had not been a 15 per cent reduction in car production capacity between 1986 and 1989 as a result of the proposed closure of three plants in France and one in Spain. By the end of 1989 none of these plants had been closed and there had only been a 4 per cent capacity reduction. The company had received finance to take capacity out of its operations, but having received the finance, still continued to enjoy the benefits of most of that capacity. The European car market experienced boom years in 1988 and 1989 in Europe and Renault had therefore enjoyed an unfair competitive advantage. The French authorities argued that capacity reductions represented only one of the eleven components in the initial restructuring plan. However, its protests fell upon deaf ears as DGIV adjudged that the reductions in capacity envisaged in the original plan were a vital part of the restructuring process at Renault, and in the European automobile sector more generally. A team of consultants hired by the Commission were in little doubt that Renault could not have

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traded without these aids. In a 1990 report, they argued ‘Notwithstanding the French government aid, Renault was technically in a position of bankruptcy by the end of 1985, for its accumulated losses were greater than its shareholders’ equity. It only survived as a result of its special status which prevented it from bankruptcy (quoted in CEC, 1990:17). In the light of these implementation failures the Commission decreed its 1988 decision void and opened a new procedure. In doing so it faced two choices. Either it could seek a reduction in the aid permissible to reflect the fact that all conditions had not been met, or it could completely reassess the situation. The Commission chose the former course of action and began negotiations with French officials over how much aid was to be repaid. The DGIV and the French government failed to reach an agreement on how much capacity reduction had actually taken place and how much aid should be repaid throughout 1989–90. French officials stalled the negotiations for two reasons: first, because some of the capacity reductions were scheduled for 1990, and second, because repayment of the aid before then would disrupt the restructuring plan and might jeopardize the early plans for a cross-shareholding agreement with Volvo AB of Sweden. Following the political decision to shelve privatization in 1988, this emerged as a more palatable option for a partial return of Renault to the private sector. The dispute became ever more heated and prompted the intervention of both Leon Brittan (the DGIV Commissioner) and Jacques Delors, then President of the Commission. The DGIV wanted a reimbursement of FF. 8. 4bn, whereas the French government insisted that the correct figure was FF 4bn, based on progress made during the restructuring plan. Eventually a deal was agreed by telephone at the highest level between the Commission and the French government. The Commission accepted that only half of the capacity reductions originally contemplated would now take place in return for a FF 6bn reimbursement of aid. The Renault case demonstrated the manifest disadvantages of an a posteriori monitoring system and the difficulty in recovering aid retrospectively. The DGIV set out clear competition policy rules throughout the 1980s: notification was required; restructuring aid should be granted within a reasonable time frame; any aid should be commensurate with the problem; and aid should not be used to fund investment that would have taken place anyway. These rules were well known to the French government but Renault was too strategic a component in the French industrial base to be allowed to collapse. It was government policy to maintain Renault as a ‘national champion’ apparently irrespective of the competition policy of the European Community at that time. The French government continued to work throughout 1991–2 on its preferred option of a merger with Volvo, now that the aid issue was resolved. This option collapsed in 1993, when the Swedish group withdrew from the talks. Since then, the French government has proceeded with piecemeal

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privatization, reducing its equity stake in gradual phases. However, by 1997 the government still held 46 per cent of the shares in Renault. The Rover Group privatization 1988 Chapter 3 discussed how the sale of the Rover Group to British Aerospace (BAe) met all of the British government’s political and economic objectives. The deal safeguarded and preserved Rover’s British status and maintained the strong relationship between Rover and Honda. In March 1988 the government announced that the following deal had been agreed in principle with BAe: 1 The government would inject £801.1m capital into Rover to eliminate the company’s indebtedness. 2 British Aerospace would pay £150m for the government’s 99.8 per cent shareholding in Rover. 3 The Rover Group was not to use more than £500m of its accumulating trading tax losses (£1600m) against future profits; its other tax reliefs were to be confined to Rover (rather than made available to BAe). 4 government guarantee of Rover’s obligations, known as the VarleyMarshall-Joseph assurances and amounting to £1600m, were to be eliminated. 5 British Aerosace would not relinquish control over the two core businesses, Austin Rover and Land Rover, within the subsequent five years, subject to a financial penalty of up to £650m. 6 British Aerospace would meet all costs of future restructuring at Rover. 7 The government would not give any of the warranties that might be expected in such a sale. Privatization required Commission approval because it involved further state aid to write off Rover’s accumulated debts. The British government had no option but to seek approval from DGIV before completing the sale, especially given the political furore surrounding Renault. On 29 March DGIV announced its intention to initiate the procedure laid down in Article 93(2) of the Treaty. The Commission decided that the provisional terms of the deal conferred a competitive advantage on Rover vis-à-vis other European carmakers. The Commission was also concerned that the British government had not provided enough detailed information about Rover’s future restructuring efforts—a common complaint in such cases. Between April and July 1988 it demanded significant changes to the original deal between BAe and the British government. Commission officials had climbed a steep learning curve during the Renault episode, and were putting these lessons to good effect. The British government put forward several arguments in support of the aid. First, it was consistent with the Commission’s objective of creating a more

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competitive structure for the European sector. It would facilitate Rover’s strategy to move towards lower volume production, hence removing capacity from the industry. Second, the aid was consistent with the UK privatization programme which subjected former public enterprises to the disciplines of the market. Third, it was suggested that without aid there was no prospect of selling Rover. Fourth, because the buyer was not a competitor, the deal preserved competition between vehicle manufacturers by not reducing their number. (This was a weak argument as it was widely recognized, not least in the Commission’s own competition model, that consolidation between car manufacturers was part of the process of reducing capacity in Europe.) Fifth, the aid would complete the government’s withdrawal from the sector and would eliminate any need for future state aid (with the exception of the proposed £78m aid under the Regional Selective Assistance Scheme). Sixth, the aid package was designed in such a way that if BAe did not respect the terms of the sale it would be liable to pay a penalty of up to £650m (see OJ L25, 28 January 1989:93). In seven written communications with the Commission between 29 April and 12 July 1988 the British government provided detailed information in support of these arguments. The DGIV accepted most aspects of the sale and the supporting arguments on the basis of the information available to it in 1988. The return of Rover to the private sector and the guarantee that no future aid would be forthcoming were consistent with the single market objectives. However, DGIV was unwilling to authorize the proposed £800m debt write-off. The British government had not sought to disguise the fact that this was aid: the debate was over whether the distortion of trade could be justified under Article 92(3). This was a matter for investigation, but before then, the Commission pursued its more immediate suspicion that the British government had over-estimated Rover’s indebtedness. The DGIV already had significant knowledge of Rover as it had monitored aid given to the group since 1981. The company’s consolidated balance sheet for 1987 had shown a net indebtedness of £585.8m, well short of the £800m write-off proposed in the BAe deal. However, the British government argued that the balance sheet neglected four additional factors which should be taken into account: finance for the restructuring of Rover’s commercial vehicle operations, which the company was committed to providing (£155.8m); the costs of a strike at Land Rover in 1987 (£25m); accruals falling due after one year (£25.1m); and increased indebtedness in the early months of 1988 due to interest charges (£26m). The Commission rejected these arguments, maintaining that the money constituted aid for activities the company would have financed in any event and was, therefore, illegal. Thus, before proceeding to consider whether the aid was compatible with Article 92 the Commission had already decided that only £569.2m should be considered in the calculation. The British government sought to justify the aid under Article 92(3) because it facilitated the restructuring of the company in a manner consistent with the

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European interest. For the aid to be granted on these grounds it had to satisfy four additional criteria. First, the aid should be justifiable in sectoral terms and lead to the long-term viability of the company rather than preserving the status quo. The Commission ruled that since there would be a 30 per cent reduction in Rover’s capacity by 1992, the aid would help prevent over-capacity in the future and therefore satisfied the first criterion. Second, the aid should be progressively reduced as restructuring takes place: this condition was being met, as the British government undertook not to provide aid in future. The Commission was also satisfied that a third criterion, that the aid should not transfer industrial problems from one member state to another, would be fulfilled. The fourth criterion states that ‘the intensity of aid should be proportionate to the problem it is designed to resolve so that distortions be kept to a minimum’ (OJ L25, 28 January 1989:98). The Commission calculated that the debt write-off amounted to 36.7 per cent of the total restructuring cost. It argued that this level of aid represented a comparative advantage: other companies in the sector were carrying equivalent levels of debt. The Commission therefore proposed to reduce the aid so that it corresponded to 30 per cent of the total restructuring cost, i.e. £469m: such a reduction of the debt written-off is necessary to ensure that intracommunity trade is not affected in a way contrary to the common interest and that consequently any distortions of intra-Community competition remain limited. The future distortions will also be limited by the fact that Rover Group will try to become a specialist producer and retire gradually from the volume car market. (OJ L25, 28 January 1989:99) In many respects therefore the aid and the manner in which it was defended was very similar to the Renault case: restructuring aid was needed to take the company to a position which was more consistent with the Commission’s longterm objectives for the industry. Analogous with its Renault ruling, the Commission agreed to many elements of the Rover deal, but only after a number of implementation conditions were established. The Commission sanctioned aid on the basis that BAe completed Rover’s existing five-year corporate plan. The British government was further required to supply biannual reports detailing Rover’s performance, especially with regard to capacity reductions and intraCommunity trade. The reduction in aid from £800m to £469m alarmed Department of Trade and Industry (DTI) officials who were convinced that BAe would withdraw from the deal. The Commission permitted the British government to offer £78m in regional aid as part of a revised package, but this did not ease its worries and BAe pushed for further concessions. The government team of DTI and UK Permanent Representative to the European Communities

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(UKREP) officials were unable by the early summer to close the gap between what BAe wanted and DGIV would allow. On July 6 a DTI team, including the Minister, Lord Young, and the head of the DTI Vehicles Division, met with Commission officials and secured a further £29m in debt write-off plus the removal of some ring-fencing on Rover’s capital losses. However, BAe was still unhappy with the £240m reduction in the cash injection and insisted that the gap would have to be closed to £100m or it would contemplate withdrawing from the deal. In a bid to meet their demands, Lord Young suggested that payment of the purchase price for Rover could be delayed until the following financial year—in effect a tax concession—subject to Commission approval. At the time of the deal, it was reported that British Aerospace’s fears had been placated by this offer and that the deal was still on. BAe also sought eleventh-hour clarification from the Commission on its responsibilities to implement Rover’s existing five-year corporate plan. On 14 July 1988 a deal was concluded. As expected, the British side accepted the Commission’s reduced capital injection figure of £469m, plus the £78m regional assistance. It was also announced that certain restrictions on BAe’s use of Rover’s capital tax allowances and losses would be lifted. Moreover, the DTI and DGIV agreed to reduce to £400m the penalty BAe would incur if it sold the core business within five years because the amount of debt write-off had also been reduced. Finally, the DTI announced that other financial aspects of the sale would remain as undisclosed conditions. New disclosures In November 1989 the British National Audit Office (NAO) published a report on the financial aspects of the sale. The report estimated that Rover was worth £56.5m more than the £150m sale price and noted that the government had not undertaken a proper valuation of the company prior to the sale. It also contained the following innocuous paragraph: ‘Some details of the sale are commercially sensitive and are being submitted separately to the public accounts committee in a confidential memorandum’ (NAO, 1989: par. 1.13). This confidential memorandum was subsequently leaked to the Guardian newspaper and revealed that a number of ‘illegal payments’ had been included in the deal. On 11 and 12 December 1989 the Commission received the full details of the NAO investigation plus the sales contract, side letters and other correspondence relating to the sale. It requested written information from the DTI on three further occasions and held several bilateral meetings with UKREP between January and June 1990. It became clear that full disclosure had not taken place in the 1988 discussions with the British government. It emerged that seven additional concessions had been agreed between the DTI and BAe without the Commission’s knowledge:

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1 Payment to Rover Group of £1.5 m as reimbursement for their legal costs during the privatization. 2 Payment of £9.5m towards BAe’s £13.6m acquisition costs in the purchase of Rover’s minority shares.6 3 Possible payment of £5m in lieu of BAe’s contribution to the Columbus space programme. 4 The deferment for nineteen months of the payment of the £150m purchase price, worth a net benefit of £22m according to the NAO. 5 Removal of the ring-fencing on Rover’s capital losses and allowances with an estimated net benefit of £25–33m to BAe. 6 The £400m penalty cost should BAe sell within five years could be waived. 7 The DTI agreed to treat favourably any applications by BAe for financial assistance under approved aid schemes in favour of its non-Rover businesses. The critical period in the negotiations was 6–12 July 1988. In evidence to a parliamentary select committee BAe suggested that the concessions were their proposals which ‘the DTI said they would look at’ (HC, 1991: par. 54, xviii). British Aerospace also confirmed that in June 1988 it had set an internal target of £600–615m for the amount of state aid it should seek to obtain—£55m more than the Commission was prepared to sanction (HC, 1989–90: Qu. 164). The concessions were a means of reducing the gap between the Commission’s figure and BAe’s expectations. In a letter dated 8 July 1988 the BAe chairman wrote to Lord Young expressing: Growing concern regarding a number of issues affecting the relationship between the company and the government both in civil and military fields ... if the Board accepts these revised terms for the Rover acquisition, you should appreciate that it is their sincere hope there will be some demonstrable evidence of the government’s responsiveness to that concern. (Sunday Times, 3 December 1989) The DTI Minister appeared to offer BAe assurances in his reply of 14 July: I wish to make clear that this provision does not in any way constrain British Aerospace in respect to its non-Rover Group businesses from seeking financial assistance from government under approved schemes. I further wish to assure you that any such application would be sympathetically considered against the criteria of the relevant scheme and that, in its evaluations, the government would take fully into account not simply the overall financial position of British Aerospace (where this is

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appropriate) but also the demands placed upon it by the performance and obligations of the Rover businesses. (OJ C21, 29 January 1991:4–5) It is also evident from leaked correspondence that both the government and BAe were aware of EU rules in this area and that the proposed concessions contravened those rules. In fact, it was precisely because they feared DGIV reprisals that there was not full disclosure. A letter sent by the DTI Minister to BAe the day before the deal was signed stated that: On deferment of payment of £150m… I can offer three possibilities in ascending order of risk that the deferment will be picked up by the EC, in which case they might require repayment on the notional interest saved …as you are well aware the Commission have the power to seek repayment… in order to avoid seriously misleading parliament, when we table the revised estimates of the cash injection on the day of the statement, we cannot include the £150m as a receipt due this year. The omission is likely to be spotted by at least some members, [emphasis added] (Sunday Times, 3 December 1989) The Commission ruled negatively on several aspects of the undisclosed deal. It rejected the argument that the £9.5m concession was not an illegal state aid. The Commission thought it ‘inconceivable that under normal market circumstances a majority shareholder who sells his stake in a company would be willing to cover the cost to the purchaser of the subsequent acquisition of the minority shares’ (OJ C21, 29 January 1991:5). It also noted that the DTI had proposed this concession in discussions with DGIV in 1988, at which time it had been ‘firmly rejected’ by Commissioner Sutherland. The Commission decided that the £1.5m concession to cover legal costs was a normal transaction cost and was therefore a state aid, and that the deferment of payment was an artificial advantage and constituted an illegal aid. It argued that, ‘a normal investor would not agree to such a deferment of payment when selling his shareholding in a company’ (OJ C21, 29 January 1991:5). Moreover, the Commission argued that the British government had miscalculated the benefit of the concession to BAe at £22m and ruled instead that £33.4m would have to be repaid. Since the DTI had never actually paid BAe’s £5m contribution to the Columbus project this concession was not deemed relevant. The Commission also ruled that the option to waive the £400m penalty cost be removed since it had a significant bearing on the value of Rover to BAe, The manner in which the British authorities sweetened the deal at the eleventh hour highlights the problems faced by the Commission. Its team was reliant on the goodwill of the British authorities for information about the privatization. Nowhere was this more evident than over the matter of Rover’s

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value. The Commission did not challenge the valuation placed on Rover in 1988, but had the documents which subsequently came to light been made available in 1988 it might well have intervened. These documents included correspondence between the DTI and other interested parties, advice from the government’s financial advisers on the consequences of granting BAe exclusive access, a report by a management consultancy on the use of Rover’s tax losses, Rover’s profit and loss account and balance sheet of 30 June 1988, and precise profit and cash flow forecasts prepared for the company in February and June 1988. All this information was in the possession of the British authorities and was relevant to the Commission’s appraisal procedure, yet it had not been passed to DGIV officials. The Commission gave vent to it feelings in unequivocal terms: ‘the non-provision by your authorities of this detailed information at that time constitutes a failure to cooperate’ (OJ C21, 29 January 1991:7). The incident did, however, set a further precedent in state aid guidelines. The Commission ruled that in future exclusivity periods or ‘closed bids’ in such circumstances would be prohibited. The Commission ruled that £44.4m worth of additional concessions should be repaid by BAe to the British authorities in line with state aid regulations. The British government accepted the new ruling without comment and issued legal proceedings to recover £44.4m from BAe. However, BAe challenged the Commission’s decision and instituted proceedings in the European Court of Justice (ECJ) to have it annulled. Interestingly enough, BAe did not dispute the illegal nature of the aids; rather, it sought an annulment on a legal technicality. It claimed that since the concessions were new aids the Commission should have opened a fresh procedure under Article 93. When the Court considered the case it agreed with the Commission that the concessions constituted illegal state aids, but it upheld BAe’s appeal that DGIV had not followed the proper procedures. The Court ruled that the concessions could only have been declared as incompatible state aids after the procedure provided under Article 93(2) had been followed. As a result the 1990 decision was void and BAe did not have to repay the £44.4m. The Commission was determined not to let the matter rest and in May 1992 —almost four years after the concessions were granted—it decided to pursue the matter through a fresh procedure. Its decision of June 1993 ruled that the £44. 4m worth of additional concessions were state aids incompatible with the treaty (OJ L143/.7 15 June 1993:7–16). The British government made no comment during this procedure; BAe made a series of forlorn observations, and later that year the company relented. The aid was finally repaid five years after it had been granted and just months before Rover was sold to BAe. Learning from the restructuring cases The two major state aid cases highlighted above, along with other restructuring cases at ENASA (Seat) and Alfa Romeo, had many similarities. The companies

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concerned were losing market share, some had negative cash flows, and debt relief was granted by national governments. The member states were learning how to package these subsidies and, in all cases, the aid was designed to prepare the companies for privatization. There was now a clear pattern in the way the Commission dealt with Renault, Rover and ENASA. In each case the only part of the aid that was approved was that linked to specified capacity closures. The companies were trading par tial exit from the market for aid. Perhaps most important of all, the aid was conditional upon fulfilment of a number of implementation conditions. This was a measure of the Commission’s growing authority in the area. During the previous phase of restructuring in the early 1980s, the Commission was only able to monitor the performance of companies in receipt of aid. Now it had put in place structures which allowed aid to be clawed back if necessary.7 Despite this, the Commission settled for repayments which in each case fell short of its initial demands. Some long-standing problems remained. There was a lack of transparency and obfuscation on the part of national governments as they dealt with the small Commission team valiantly struggling to obtain full disclosure. The Commission’s highly technical approach to such cases tended to founder on the rock of national belligerence. When nation states became intransigent, DGIV officials came under intense pressure to reach a compromise settlement. Perhaps the main legacy of the restructuring cases of the 1986–9 period was to bring home to the other member states the Commission’s repeated warnings that such subsidies would ultimately hinder the development of an internationally competitive sector. The 1989 framework and its implementation The Commission completed a draft sectoral framework by the end of 1988 which advocated changes in three main areas. First, it called for greater transparency of state aid programmes. Second, it wanted to strengthen the requirement for prior notification. Third, it advocated clearer guidelines and greater control of restructuring and regional aid. The draft was debated with member states, and although several expressed concern over the scope of the proposals, it was adopted in December 1988 and became operational at the start of 1989. The new framework set out the main criteria for the various forms of aid available to the sector (see OJ C123/1989:3–11). These included: 1 Rescue and restructuring aid would only be approved in exceptional circumstances and where re-establishing the company is in the interest of the whole sector. 2 Regional aid would be approved provided the aid granted was proportionate with the structural handicaps of the region. The interest of

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the region must be balanced against the effect of a subsidized increase in capacity. 3 Modernization should be financed by companies themselves; aid for rationalization must be part of radical restructuring; and aid for innovation must go beyond the company and lead to benefits for the European economy. 4 Research and development aid would only be approved where it concerns pre-competitive research and development. 5 Environmental and energy-saving requirement aid should not be given for environmentally friendly cases which constitute normal business activity. Some environmental measures may attract aid in individual circumstances. 6 Vocational training linked to investments will be viewed positively provided it ‘does not exceed a reasonable intensity’. 7 Operating aid should not be allowed under any circumstances. Under this new comprehensive framework any aid over ECU 17m required notification. Moreover, any aid given to the industry under horizontal schemes, even if these have received general approval from the Commission, would require notification. The new guidelines required member states to provide an annual report containing details of all aid payments to automotive companies. The whole spirit of the new rules was ‘to allow the Commission to verify more directly the compatibility of the aid in this sector with the competition rules of the Treaty’ (OJ C123/1989:3–11). The Commission had now reached the position it had long coveted: policeman of the sector with effective sanctions. Earlier, we noted that attempts to strengthen competition rules in the sector in the early 1980s were thwarted by the opposition of all the leading member states. This opposition had weakened by 1989, not least because substantial amounts of aid had been granted by 1989 and many national champions had been restructured. The first serious test of the new framework came in 1993 when the European economy and the automobile industry showed record losses. The scene was set for another wave of subsidized restructuring. One major case emerged in 1993, when the Anglo-Dutch commercial vehicle group DAF reached the brink of insolvency. The following year there were two further cases in Spain. The Commission investigated the role of public authorities in the take-over of DAF and the creation of its successor DAF trucks. The Commission took a generally positive view of the rescue and restructuring of DAF. The first Spanish case involved Suzuki-Santana which claimed that it could only be rescued by public loans; the latest in a long line of automobile companies to knock on the state’s door. The Commission was faced with a perplexing case because when it initiated proceedings, the case was further complicated by the sale by Suzuki of its majority stake to the regional

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authorities of Andalusia and by regional aid grants to Suzuki’s engine subsidiary on which Santana depended (Dancet and Rosenstock, 1995:12). The second Spanish case involved aid granted to Volkswagen by the Catalan authorities as part of a restructuring package for its subsidiary, Seat. In October 1995, Volkswagen agreed to reduce capacity and Commissioner Van Miert stated that the Commission intended to approve the restructuring aid under strict monitoring conditions. Capacity reductions are always welcomed by the Commission within general aid packages. The transparency of the new system meant that most aids were small and for specific projects. With the exception of DAF, there were no major restructuring packages in the sector, although arguably most states preempted the 1989 framework by granting substantial sums of aid before that date. The fiscal constraints of the Maastricht Treaty have also acted as a cap on state aids in the 1990s. The 1989 framework was not intended to remove aid altogether but to control both its flow and its range of purposes. Between 1989 and July 1996 the Commission considered fifty-seven cases under the new guidelines, only two of which were deemed to be incompatible with the framework. In 75 per cent of the cases the original requests for aid were amended, and the total aid approved was ECU 5.4bn. A measure of the success of the framework is that during the early 1990s, when the European sector experienced its worst-ever recession, the industry collectively received less aid than Renault alone had received in the 1980s. In fact, the amount of aid granted to the sector in the six years after introduction of the framework was equivalent in nominal terms to 25 per cent of that granted in a similar period prior to its introduction. The area where the Commission has shown itself to be most likely to sanction aid is where it is defined as regional.8 This has proved an important area for recipients of state aid in the automobile sector. For example, in December 1996 the Commission approved an investment aid project at the Ford Bridgend plant in South Wales. The aid was granted to facilitate the setting up of a production plant for engines for the new Ford Escort model to be launched in 1999. A total of £338 million was to be given between 1996 and 1998 of which £278.5 million was eligible for regional aid. Approximately 580 jobs would be created and a further 1,227 jobs would be safeguarded: ‘The Commission concluded that the aided project complies with the criteria for regional aid set out in the Community framework for State aid to the motor vehicle industry’ (Competition Policy Newsletter 1996, 2 (3):49–50). The implementation of the sectoral framework was not restricted to the member states of the European Union. The Commission also sought to extend the principle to the European Free Trade Area. Thus, when the Austrian government awarded a 33 per cent subsidy to a joint venture investment involving Chrysler and Steyr-Daimler-Puch, the Commission intervened. A comparable project within the EU would only have attracted 16 per cent state aid. The Council of Ministers threatened to impose import duties on Austria,

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and the Austrian government responded by reducing the aid element to less than 15 per cent. A similar case occurred in 1993, when the Austrian government granted a 15 per cent state aid to GM to expand production at Aspern/Wien. Austria refused to withdraw the aid when the Commission protested, and as a result the Council imposed a 5 per cent import duty on products from the GM plant. State aid policy: some conclusions Since the mid-1980s the Commission has successfully dismantled the practice of member states supporting ‘national champion’ car producers with direct subsidies by inserting itself as filter with considerable powers and political will. What is clear in the 1990s is that the Commission, following some major disputes with member states over companies in the 1980s, is increasingly ‘getting a grip on these extensive aid operations’ (Hancher et al., 1993:121–2).9 In fact, the Commission ordered a comprehensive review of the sectoral (automobile) framework in 1995. At that time DGIV was considering whether the successful elements of the sectoral approach could be incorporated into a horizontal state aids framework which could then be applied to all sectors. The independent consultants hired to examine the effectiveness of the automobile sectoral framework completed their confidential report at the end of 1996. Its conclusions suggest that while the Commission may have been successful in reducing the volume and value of state aid, many long-standing problems remain in dealing with the issue. For example, they noted that resources allocated to the control of state aid in the sector was insufficient given the complex operational issues involved. The current staffing levels within the Commission were inadequate. This problem was particularly acute where past decision monitoring was involved: ‘the decision on whether to monitor the implementation of state aid cases in the automobile sector is made on an ad hoc basis and tends to be restricted to the larger, complex cases. Bearing in mind the different motivation of the aid providers to that of DGIV, we believe there is sufficient scope for ex post erosion of the principles of the decisions’ (EINS Strategy Consultants, quoted by Dancet and Rosenstock, 1995).10 However, as Menon and Hayward argue, in the EU as a whole highprofile cases such as Rover have proved to be the exception rather than the rule. Air France has continued to receive substantial subsidies from the French state; anticompetitive practices continue to dominate aerospace procurement de cisions; the achievement of a free market in energy provision has proved elusive; and the Commission has proved reluctant to use its powers to deal with anti-competitive practices, notably in the case of Eurosport. (Menon and Hay ward, 1995:284)

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Arguably, this is less valid in the automobile sector where the Commission has broken up long-standing institutionalized government-industry relationships which were bolstered by shared attitudes and understandings about the use of such policy instruments. However, it is far from clear what type of relationship or model of policy-making the Commission has put in its place. We can only properly assess whether the state aid policy is part of an enterprise to encourage strategic or open competition by assessing in subsequent chapters the other central elements in EU industrial policy towards the sector. For its part, the industry believes it has been singled out for special attention. In many respects it has been. The Commission had good reason to use the sector as a test case. Automobile companies had been receiving aid on a regular basis and if DGIV could assert its authority in this area it would send a powerful message to member states. Commission officials closely associated with the automobile sector have been candid about the need for a sectoral framework: The functioning of the motor vehicle framework has demonstrated that, in order to avoid distortive industrial policies of member states, it is not sufficient for the Commission to force member states to operate regional and horizontal aid systems in conformity with its guidelines for the different objectives that the EC Treaty considers valuable… member states have learned to use those aid systems in a refined way, so that strategic sectors can benefit more than other sectors from these support mechanisms. (Dancet and Rosenstock, 1995) The highly technocratic approach used by DGIV provides a fairly robust assessment which then forms the basis for bargaining and negotiation. The case studies discussed earlier illustrate that in practice the Commission adopts a pragmatic approach. State aid cases soon break down into a number of manageable facets which can be brokered through a process of bargaining and negotiation as various political pressures come into play. For example, DGIV officials are in no doubt that the replacement of Sir Peter Sutherland by Sir Leon Brittan in 1989 helped BAe and the British government in their rearguard action against the Commission’s 1988 decision. The final deal with Renault over how much aid should be repaid was agreed on the telephone following the intervention of Jacques Delors. Finally, it is important to remember that the Commission is a vested interest. The DGIV, in particular, is pursuing an endgame of a European market where distortions to trade are minimized, if not eliminated.

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Notes 1 The four points essentially break down into three policy areas: state aids (point 4), the volet externe (point 3); and the volet interne (points 1 and 2). We examine each of these policy areas in turn in the next three chapters. 2 Gilchrist and Deacon (1990:33) summarize these as follows. Member states must give prior notification to the Commission of any plan to grant or alter the grant of aid. Only if the Commission approves the notified aid can it be put into operation. The Commission shall, in cooperation with each member state, keep under constant review all existing aid schemes. If warranted by the development needs of the common market, the Commission shall address appropriate measures to the member states concerned; and these two procedures are linked by the so-called ‘examination and contradictory procedure’ which, after due process, allows the Commission, subject to appeal to the European Court of Justice, to modify or suppress a national aid. 3 The Commission’s enthusiasm for controlling state aid is driven by efforts to complete the single market. Wolfgang Mederer (of IV-G-1) points out that the Commission faces challenges in the European Courts from enterprises over state aid decision. In 1996 there were some 80 state aid cases pending court decisions, ‘the majority of them brought to court by competitors’ (Competition Policy Newsletter 1996, 3 (2):13). 4 Case 70172, Commission versus Germany, 1973, ECR 813. 5 FIM loans are ‘a type of low interest and state-guaranteed loans, targeted among others towards the car industry to support modernization’ (Dancet and Rosenstock, 1995). 6 The government contributed £9.5m towards acquisition costs because it was below the £10m threshold for parliamentary approval required by the 1982 Industrial Development Act. 7 The Alfa Romeo case was exceptional inasmuch that the Italian government conceded no reductions in capacity and put forward no restructuring plan for the aid. The Commission, therefore, took a negative effective in respect of all the aid (see OJ 394/1989:9–18). 8 In 1975, the Commission did not oppose the UK government’s £162.5 million ‘in the form of grants, guarantees and a low interest loan’ to the Chrysler automobile company because of the direct employment problems this would have caused in Scotland (see Hancher et al., 1993:117). In the same year the Commission accepted aid to British Leyland which consisted of ‘a guarantee of up to £200 million; participation in an increase of capital of £200 million; and £500 million long-term loans’. These aids were deemed compatible with the Common Market because ‘the rationalization of British Leyland was necessary in view of the essential role which the motor industry plays as an employer in the UK economy and its contribution to the trade balance’ (Hancher et al., 1993:116). 9 It is important to emphasize the Commission’s vetting role. This is quite differ ent from saying that it is trying to eliminate state assistance; on the contrary, the cases discussed clearly illustrate that the industry has received large amounts of assistance for restructuring efforts and specific projects since the mid-1980s.

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10 The consultants also noted that some member states have continued to drag their feet, and advocated the publication of annual state aid reports shaming the culprits. The consultants made a series of recommendations designed to fine-tune the operational aspects of the report and to underline its scope. These were under review at the time of writing in September 1997.

8 Trade policy and the volet externe1

Europe is throwing the dice. It is confronted with a change in the structure of the international economy, with emerging Japanese and dwindling American power and position. It feels the shift in Asian competitive pressure in industry and finance. The problems are no longer those of American production in Europe, but of Japanese imports and production displacing European production. Sandholtz and Zysman (1989:127) In the EU automotive trade policy is dominated by the issue of reciprocal trade with Japan in terms of both trade flows and market access. The elimination of national import restrictions on Japanese cars is one of the most controversial aspects of the completion of a single market in automobiles. In the 1970s and 1980s the use of Voluntary Export Restraints (VERs) and import tariffs to limit the free flow of finished vehicles from Japan was viewed as a ‘legitimate’ policy instrument. The restrictions placed on the French and Italian markets had the effect of limiting Japanese imports to a trickle. Even the UK government, which has been a net gainer of international automotive investment, gave tacit support to a VER agreed between the British national trade association and its Japanese counterpart. Thus in 1988, when the European Commission announced its intention to develop a European automotive trade policy, it started an ambitious and daunting effort to harmonize national trade policies in a highly sensitive area. The requirement that all member states remove restrictions on the movement of goods within the EU after 1992 had the potential to undermine the existing informal agreements aimed at protecting some national markets from Japanese imports. After 1992 Japanese cars could enter the EU via a hitherto unprotected national market and then be redirected to a heavily protected market. The scope for disruption and the possibility of national governments adopting unilateral measures encouraged the Commission to act. In late 1988 the Directorate-General I (DGI) Commissioner Willy de Clercq established a committee to work out an EU policy position. The Commission seized the initiative during de Clercq’s tenure at DGI, questioning the efficacy of national

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policies to restrict Japanese imports. It persuaded member states that the time had come for a European response to Japanese import penetration. There had been little evidence to suggest that protectionism had enabled national industries to acquire the requisite competitiveness to match the Japanese. As one Commission official put it, these policies ‘protected the market for protection’s sake’. The Commission’ s argument was further strengthened by the emerging Japanese production base in the UK which would soon be used to circumvent national import restraints. However, there was an even more ambitious motive behind the decision. The Commission’s desire to fashion a European automotive trade policy was not only an important integrative step towards a single European market in vehicles, but also as a symbolic step in Europe’s development as a regional trading bloc and its evolving political relationship with Japan. Economic and political union in Europe was partly motivated by the rise of Japan as a global economic power. In 1992 the Commission stated unequivocally its view of the global economy: The emergence of Japan over the past two decades as a great economic and financial power is a challenge to the international community… The challenge facing the Community will be to maintain and develop its technical and industrial strength, while participating fully in an open multilateral economic system. (CEC, 1992b:2) The Commission was staking its claim to be the key (and arguably the sole) broker in future trade relations with Japan and other regions. Against this backdrop, the existing bilateral trade agreements between member states and Japan in key markets such as automobiles had to be eliminated. Sandholtz and Zysman have argued that the 1992 project was sustained by a self-interested Commission, brokering elite bargains by adapting to changes in the international environment and exploiting diversity in the domestic political context: 1992 emerged because the institutions of the European communities, especially the Commission, were able to exercise effective policy leadership. International structural shifts and a favourable domestic setting provided a motive and an opportunity for restarting the Communities. The Commission played the role of policy entrepreneur. The renewed drive for market unification can be explained only if theory takes into account the policy leadership of the Commission. (Sandholtz and Zysman, 1989:100) This view is shared by the Commission. In this chapter we consider whether this argument has merit in the automotive case. The requirement to harmonize

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policy towards Japan in this sector had long been recognized; however, it cut across entrenched national interest. Consequently, it would require the dismantling of valued policy instruments at the national level. In the other major account of harmonization in this area, Mason adopted a neo-realist framework which viewed nation states as the key actors in the policy process: Analysis of the negotiation process and outcome suggests that, at least in this key example, individual state interests generally dominated the policy process. Specifically, the timing and substance of decisions rendered by critically affected EC member governments largely dictated the course of the negotiations. (Mason, 1994:450–1) In Mason’s account the Commission is portrayed as a second-division team—an image far removed from that conjured up by Sandholtz and Zysman. In this chapter, we review the arduous negotiations which led to a trade understanding between Europe and Japan in 1991. We argue that Mason’s account underestimates the Commission’s pivotal role in the process. Replacing national arrangements with a regional policy The Single Market cannot function properly if, within it, some member states continue to impose quantitative restrictions. How could it function? How could you prevent imports from countries without quantitative restrictions into countries with quantitative restrictions? There is no practical way of doing it, let alone legal means. (Bangemann, 1989:18) European governments were alarmed by advances in Japanese market share in the 1970s and those with national production bases to protect responded with some form of market closure. The British case illustrates the point. In 1971 Britain imported 12,995 Japanese cars, representing 1 per cent of the total market; by 1975 the figure was 107,934 (or 9 per cent of the market).2 At this juncture, the Society for Motor Manufacturers and Traders (SMMT) failed in its attempts to persuade the UK government to impose anti-dumping duties on the Japanese. The government instead encouraged SMMT to seek a voluntary agreement on moderation with JAMA. However, it did take the intervention of the British government to bring the Japanese side to the negotiating table. During a 1975 trip to Japan the then Industry Minister Peter Shore gained assurances that the situation would be addressed by JAMA. The SMMT minutes show that JAMA agreed to keep UK demand more or less stable through ‘prudent marketing? and timely adjustments in the light of market demand.3 Thereafter a VER was implemented through annual negotiations

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between SMMT and JAMA. The full minutes of these meetings were sent to the British government, which tacitly supported the measures. The effect was to restrict Japanese market share of the UK car market to 11 per cent throughout the 1980s. Arguably, this was a good deal for indigenous producers. For example, Jones (1991) estimated that Japanese market share would quickly have reached 20 per cent in the absence of the VER. Increased Japanese import penetration met with a similar response in other European countries. The French government contemplated imposing a formal quota in 1977 but decided instead that a VER would operate once Japanese companies had achieved a 3 per cent market share. This occurred in 1980 and the 3 per cent ceiling was duly implemented (Ikeda, 1985: 114).4 In Spain, a unilateral quota limited Japanese imports to just 12,000 units. Germany and the Benelux countries, who had hitherto made a virtue of their openness, flirted with informal agreements throughout the 1970s and 1980s. Japanese market share in Germany hovered between 15 per cent and 16 per cent throughout the 1980s. While there was no formal agreement in place, the Japanese side were mindful of the need for restraint. Italy had a bilateral trade agreement with Japan dating back to 1952 limiting the flow of finished products in both directions: Japanese share of the Italian market stayed below 1 per cent throughout the post-war period. Since 1981 the Commission had been monitoring Japanese imports, with member states informing the Commission of the number and value of Japanese automotive imports into their national markets. In spite of this ‘surveillance operation’ no action was ever taken.5 Throughout 1988 and 1989 a team of Commission officials began working on the details of an approach to harmonization. The Commission team was led by DGI (External Relations) whose job was to deal directly with MITI and liaise where appropriate with DGIII (Internal Market and Industry) and DGIV (Competition). As the process developed DGIII became ever more active, especially in direct discussions with the European automobile companies. The Commission team focused on three possibilities in the initial policy options exercise. First was the abolition of existing national restrictions after 1992, leaving a completely open market; this option was never feasible, not even for the more liberal states such as Britain, because of the severe adjustment involved. Second, removing national quotas and replacing them with an EU-wide VER; the Commission gave this serious consideration, but again it was not a realistic proposal for cooperation between the member states. It entailed a significant intraregional transfer from consumers in the six unprotected member state markets to consumers in the six protected markets. Moreover, Gros (1992) has argued that this option would have provided Japanese companies with further opportunities to make excessive profits by filling their quotas with higher-price models.6 Thus, rather than benefiting European consumers the policy would have imposed additional costs, as the Japanese exploited price differentials.

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The third option was to develop a hybrid policy which combined a negotiated EU-wide understanding on moderation along with a transitional period within which protected markets could gradually relax their quotas. This had to be reinforced by an assurance that the member states would open their markets completely after the transition years. From an early stage this was the favoured option. There was a delicate balance to be struck between the longterm goal of a liberalized market and the shortterm interests of national industrial policies. The Commission wanted a leaner and more competitive European sector: it is arguable whether this would be better achieved by gradually exposing the sector to Japanese competition. However, the alternative of a short, sharp shock would have found no support within Europe, and the Commission needed to build constituencies of support for its objectives. Smith and Venables described the dilemma facing Commission policymakers: In the long run, a restrictive policy will draw in more transplants and thus more competition that will drive less efficient European plants out of production. A less restrictive policy will increase competitive pressure in the short run, but could force a speedier and more successful response from the Europeans. (Smith and Venables, 1990:146) In effect the trade policy, like the state aid framework that preceded it, was to be used as a surrogate industrial policy. The third option was favoured from an early stage. The Commission team had to strike a delicate balance between the desire to complete the single market in vehicles and the requirement that the policies adopted ensured that the European industry emerged from the transitional period fit to compete in the global market. The third option was agreed in outline by the end of 1989 and contact was formally opened with the Japanese government. The MITI was sympathetic to a policy which led to the gradual opening of the EU market but were concerned about the policy details. The negotiations were set to take place at intergovernmental level between the Commission and MITI—Japanese automotive companies decided not to participate directly. Their strategy was to agree common positions in JAMA and communicate these to MITI in Tokyo. There were various strains on the Japanese side, both within the industry and between the industry and the Japanese government. However, Japanese divisions remained a largely internal matter and never manifested themselves in any significant way in the policy process. The Japanese side, loosely defined, was solid and focused throughout the process. Japanese companies could also rely on the qualified support of the British government. The major European producers feared that Japanese production in the UK could be used to circumvent agreed import quotas. French and Italian companies, and latterly Volkswagen, expressed the fear that the growth

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of transplant production would have to be central to any EU-Japan agreement. However, Japanese automobile companies simply followed a path trailed by Ford and GM decades earlier. In June 1990 the Commission reached a preliminary understanding with MITI. It recommended that the Japanese should practise self-restraint on exports to the EU. National governments and the Commission would monitor the situation in specific national markets during a five-year transitional period. This would allow for an ‘orderly” growth in Japanese market share, with no targeting of protected markets, and a completely open market by the end of 1997. The Commission signalled that it envisaged the Japanese market share being around 20 per cent by the end of the transitional phase, although the growth target was open for discussion with the member states. The precise status of UK transplant production in the calculation of market share figures remained a contentious issue. Reaction to the 1990 proposals The initial proposals met with widespread opposition from the European industry. The most outspoken critic was the PSA chairman Jacques Calvet. The PSA group had been excluded from the negotiations between the Commission and the car-makers in early 1990, apparently because of the intransigence of Calvet’s position.7 The PSA view throughout the whole process was that the Committee of Common Market Automobile Constructors (CCMC) and later the Association des Constructeurs Européens d’Automobiles g.i.e. (ACEA) should adopt a tougher line with the Commission. The French producer argued that the global Japanese situation had to be taken into consideration in any trade negotiations; it wanted the EU to seek reciprocal undertakings from the Japanese about their national market in exchange for greater access to the EU market and to treat transplant production as part of any quota. It was also claimed by PSA that different sociopolitical conditions in the two regions made it impossible to talk in terms of ‘fair trade’. A PSA official summed up the company’s position: The problem is reciprocity. The EU decided to open the market without negotiating with our trading partners. We cannot see the sense in an arrangement where we are dependent on Japanese goodwill on such a vital issue when they have offered us nothing in return. That is a situation we believe should have been avoided. (interview, 25 November 1993) Japanese import barriers have been substantially reduced in recent years but European firms still face substantial difficulties when investing in Japan. In 1992 a report by the European Business Community (EBC) group in Tokyo commented:8

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Japan remains fundamentally a protectionist society with a very limited propensity to import manufactured goods, reacting positively only under strong external pressure…[the] EU must take a decidedly stronger stance on the automotive import question by adopting, and arguing strongly for, an affirmative action programme. (EBC, 1992:32) Irrespective of the accuracy or otherwise of such views, they were strongly held in important parts of the European automotive sector and remain a source of considerable tension between Europe and Japan. Commissioner Bangemann privately consulted three of the ‘big four’ European companies—VW, Renault and Fiat—over the draft proposals (PSA was excluded). The response was very cool, although they were not prepared to adopt as confrontational a stance as PSA. The other European automotive producers did not dispute the importance of the reciprocity issue or the need for tougher import quotas; rather, the disagreement with PSA was one of strategy. The position of ACEA was that since the European market was due to open anyway in January 1993 it would be pragmatic to cooperate with the Commission in its efforts to negotiate an extended period of protection. Some ACEA members, notably the producers of luxury vehicles who had some success in the Japanese market, took the view that most of the obstacles to investment in Japan were the result of the cartelization of the Japanese economy rather than crude government tariffs. As a Daimler-Benz official observed: ‘It’s a difficult market. But if you accept the philosophy of free competition and the international division of labour then you can’t say we don’t want to sell cars in that market and therefore we don’t want any products from there’ (interview, 25 November 1994). Commission negotiators were privately worried that the PSA stance might influence the French government. This did not materialize because of disagreements between Calvet and Raymond Levy, the chairman of Renault. Renault were intent on taking a conciliatory tone, not least because the company was involved in separate negotiations with the Commission over illegal state aid payments it had received. In this respect Mason (1994) overstates the idea of there being a ‘French view’ on the issue. The volet externe was one aspect of the policy framework being erected by the Commission, and the French government had other battles to fight on state aids and other assistance to the sector. Calvet may have represented an extreme view but he was not alone in believing that the 1990 proposals were flawed. The industry’s leading members also held the view that a five-year transitional period was inadequate and found alarming the prospect of Japanese market share reaching 20 per cent by 1997. These concerns were echoed by the main national governments. Consequently, the June 1990 proposals were discarded as a basis for an understanding with the Japanese government.

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The Commission tries again In September 1990, the Commission renewed consultations with the industry and invited proposals from the four key European-owned manufacturers— PSA, Renault, Fiat and Volkswagen. Calvet maintained his strong line on the issue and PSA decided not to sign its name to the proposals eventually agreed by the other companies. The group known as the ‘European generalists’ submitted a joint paper to the Commission towards the end of 1990. The informal coalition requested guarantees on reciprocal access to Japanese markets and a ten-year transition period before the market was completely liberalized. The Fiat president Umberto Agnelli argued: ‘It is impossible to think of less than ten years as the period we need to acquire technological credibility’ (Financial Times, 3 December 1990). The industry had at least conceded the need for removing national barriers and moving towards a harmonized market, and recognized the inevitability of increasing Japanese market share. As if to complicate matters for the Commission, the United States government appears to have brought some pressure to bear at this juncture. The issue of automotive trade was, and remains, an extremely sensitive issue in the bilateral relationship between the USA and Japan. The Japanese have established a large local production base in North America from where they export to Europe, albeit in very small numbers. The US government wanted assurances that these vehicles would not be included in any EU policy to limit Japanese imports. Once again we see the full complexity of the global economy and its impact on the policy process. If the Commission had been considering the option of including these American produced cars in its calculation of Japanese imports, it quickly dropped the idea. The US government was mindful of its own trade balance in automotive products and this involved (to limited extent) championing the global investment strategies of Japanese automotive companies. The flow of finished Japanese goods from the USA to Europe was negligible and the Commission could readily concede on the matter. However, a principle had been established: if US-produced Japanese vehicles were not part of the quota, then neither were finished goods from Japanese factories in the UK. The private view of the European automotive producers was that Japanese cars produced in Britain and North America were still Japanese. Not surprisingly, the transplant nations took a different view and argued their case strongly with the Commission. The role of the Commission The task facing the Commission was to engineer a consensus on the European side so that it could take a solid negotiating position in talks with MITI. As DGI worked throughout late 1989 and early 1990 it appeared content to give

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CCMC time to organize its members. However, it became clear by early 1990 that CCMC would not prove a reliable discussion partner and the Commission acted decisively following the hostility shown by individual companies to its June 1990 proposals. On 4 September 1990 a crucial meeting was arranged between the DGIII Commissioner Martin Bangemann and industry leaders from BMW, Fiat, Volkswagen and Renault. The German company BMW appears to have been invited at the expense of PSA which was now isolated by its strong rhetoric on Japanese market share. One company official recalls the outcome of the meeting: The Commission was irritated by the practice of individual companies sounding-off about the Japanese issue when no collective position was coming from the sector. Bangeman’s officials believed that CCMC was next to useless. The industry came away with its ears ringing. The message was clear: ‘An understanding would be concluded with Japan in 1991 so get a group together and agree a line if you want to participate’. (interview, 25 March 1992) Mason (1990:440) suggested that the luxury German producers were initially wary of backing the line taken by the volume producers because they had enjoyed some success in the Japanese market and feared retaliation. This was certainly a factor, but BMW and Mercedes had a much greater concern that an overly restrictive quota in Europe would encourage Japanese companies to export their most expensive, high-value and hence higher-margin vehicles to Europe. This would have brought additional competition to niches of the market that the German companies dominated in Europe. The German automobile industry was always uneasy about how to deal with Japanese imports, and the two luxury producers and VW debated the issues long and hard in the national trade association. The disputes were related more to tactics than substance. Thus when the German industry and the German government threw their weight behind the position of the European generalists (and later ACEA), it did not represent such a major or decisive policy shift as Mason (1994:442) suggested. The September meeting was the catalyst for the eventual formation of ACEA and began a period of close dialogue between the industry and the Commission which led to ACEA’s compromise position of March 1991 (see below). The Commission was deeply concerned that disharmony in the automobile trade group would influence and be reflected in the positions of the member states. Past experience had shown that where an industry is agreed on an issue, national governments tend to fall into line. There was little doubt that the French, Italian and German governments were in very close dialogue with their national producers on the issue. Prior to the final negotiations between

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the EU and MITI the French industry minister commented: ‘I hope the Commission will agree on a proposal not much different from what the European car producers have put forward’ (Financial Times, 30 April 1991). ACEA responds By the summer of 1990 there was widespread inertia on this issue in the EU automobile sector. This was partly due to the ineffectiveness of the industry’s collective voice in Brussels. Following pressure from the Commission the European generalists decided that the best course of action was to develop a collective position without PSA through a new Euro-group structure. This would not be a straightforward task, especially on the issue of Japanese imports. The high-volume producers were united in their preference for a strict quota on Japanese imports throughout the 1990s, but low-volume producers such as Daimler-Benz and BMW were more hesitant for the reasons outlined earlier. The key industry negotiations pre-dated the official formation of ACEA in 1991. However, in the months before ACEA’s creation a leadership-elect was in place which coordinated the collective strategy of the producers. The first element of that strategy was to bring the various producer interests together. This included negotiations over specific details such as the length of a transition phase, the increase in Japanese penetration of the EU market, and the treatment of transplant products. The ACEA leadershipelect effectively acted in an intermediary role, maintaining close contact with the Commission, informing it of internal agreements. The final element in ACEA’s strategy was to make sure that its position had the political backing of the national governments of France, Italy, Spain and Germany. The intention was to create a powerful European coalition around a common line; ACEA believed that this would give their position added political clout and place further pressure on the Commission negotiating team to stick closely to the industry’s stance in its negotiations with MITI. As Sandholtz and Zysman (1989) pointed out, the Commission itself is a vested interest in the integration process. Its advocacy of ‘integrative’ steps is central to the ‘policy entrepreneur’ thesis. However, the Commission needs allies to achieve its goals. Its attempts to promote integration have to strike a chord with national and corporate interests if they are to gather momentum. Sandholtz and Zysman (1989) saw the leading European and American multinationals as key interests in this endeavour. Multinationals were increasingly frustrated by different national operating environments, and the efficacy of the SEM project appealed to them. Sandholtz and Zysman argued that: The significance of the role of business, and of its collaboration with the Commission, must not be underestimated. European business and the

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Commission may be said to have together bypassed national governmental processes and shaped an agenda that compelled attention and action. (Sandholtz and Zysman, 1989:116) Decision-making authority in the European policy process is dispersed and this allows organized interests to shift their loyalties back and forth in a way not envisaged by early integration models. Thus, while the established American multinationals in Europe were allies for the Commission in many areas of technical harmonization, both Ford and GM supported continuing protection against Japanese imports in Europe. Both companies have serviced European markets almost exclusively with local production and had tended (until recently) to discourage trade flows of finished cars between Europe and North America. Ford lobbied national governments as hard as any European company on the Japanese issue. Ironically, Commission officials found themselves under pressure from American companies to protect the European market from Japanese cars! A position paper was submitted by ACEA to the Commission on 6 March 1991 which carried the unanimous support of its membership. The ACEA position was more pragmatic than anything the industry had previously submitted, in part reflecting the informal dialogue that had taken place between the group’s secretariat and the Commission. It argued that protection of national markets should remain in place for a seven-year transitional period, requested concessions from the Japanese side on reciprocal access to the Japanese market, and argued that Japanese market share should be adjusted downwards as well as upwards depending on trading conditions in the EU market. This last point was the only substantial addition to the policy. The rest was merely tweaking of the original Commission proposals. Most importantly of all, ACEA accepted that the European car market would be liberalized after 1999, and remained equivocal on the issue of transplants as the industry struggled to agree a compromise. The issue was left vague, with the more protectionist-minded members having the discretion to push through national channels for transplant production to be included in any quota agreement. This was eventually undertaken, albeit with limited success. When MITI and the Commission met to negotiate a final understanding in the spring of 1991 two broad coalitions of interest had emerged, one involving the EU producers and their national governments (with the exception of the British), the other led by the Japanese side with the implicit support of the British and American governments on the transplant issue. There was little evidence of coordination among the second coalition. Rather, the globalization of Japanese automotive production meant the interests of the host government and inward investor were inextricably linked. This created a formidable grouping determined to limit the protection afforded to the European market.

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The 1991 understanding It is important to note that the British and Dutch governments remained uncommitted on the ACEA position and an informal agreement could not be reached in the Council of Ministers to support the European coalition. The Commission had therefore to enter a process of dialogue with MITI without a mandate from the Council of Ministers. If the Japanese side had refused to negotiate then the car market would have been opened on 1 January 1993 in line with the SEM programme (although the Japanese were never likely to adopt such a confrontational posture). The decision to create the SEM before the single market was created in individual sectors inevitably weakened the Commission’s position. There was no need for the Japanese delegation to offer reciprocal undertakings and the Commission GATT EC/JAPAN -TRADE IN MOTOR VEHICLES Joint communication from the European Communities and Japan 16 October 1991 The following joint communication, dated 11 October 1991, has been received from the Permanent Delegation of the Commission of the European Communities and the Permanent Mission of Japan with the request that it be circulated to contracting parties.

1 The EC and Japan wish to inform the CONTRACTING PARTIES to the GATT that, in response to the EC’s request for co-operation to achieve the objectives mentioned in 2 below, a mutually acceptable solution has been found through consultations with regard to trade in motor vehicles for the future. 2 The objectives are to achieve, through co-operation between the two parties, the progressive and full liberalization of the EC import regime on motor vehicles with avoidance of market disruption and, through an appropriate transitional period, to facilitate structural adjustments that may be required of EC manufacturers to achieve adequate levels of international competitiveness. 3 The EC has undertaken to ease the levels of national restrictions of any kind on the importation of motor vehicles from Japan, including those measures that can be authorized under Article 115 of the Rome Treaty from now and to abolish them by 1 January 1993 at the latest. During the transitional period, which will begin in 1993 and will be fully terminated by 31 December 1999, the Japanese authorities will continue, within the measures of cooperation, to monitor total exports from Japan to the EC and, they will also monitor exports to France, Italy, Portugal, Spain and the

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United Kingdom, through twice-yearly bilateral consultations on current export trends and future forecasts for the following year. 4 It is confirmed that inward Japanese investment will continue to be free of restrictions and that the products of such enterprizes will circulate freely within the EC. In addition, measures will be taken by the EC by 1 January 1993 to ensure that type approval can be obtained at the Community level. 5 The exports from Japan in 1999 are forecast at 1.23 million units on the assumption that total demand in the EC would be at 15.1 million vehicles in that year. In the case of the five markets mentioned, the exports from Japan in 1999 are forecast at these levels: France Italy Spain Portugal United Kingdom

150,000 138,000 79,000 23,000 190,000

based on the following assumption of demand in that year: France 2,850,000 Italy 2,600,000 Spain 1,475,000 Portugal 275,000 United Kingdom 2,700,000 6 The coverage of this monitoring is passenger cars, off-road vehicles, light commercial vehicles, light trucks (up to 5 tonnes), and the same vehicles in wholly knocked down form (CKD sets). Source: Holmes and Smith (1995, 144). had effectively to appeal to MITI to agree to a postponement of the original deadline. This was hardly a commanding position from which to start negotiations. In spite of this an understanding was reached between the EU and MITI in July 1991 which approximated closely to the position ACEA adopted in close consultation with the Commission. In the talks with the Japanese government the transitional period was agreed at seven years, within which time the Japanese share of the EU market would be allowed to increase from 12 per cent in 1991 to 16 per cent by 1999. The understanding also allowed the heavily protected EU car markets to gradually expose their domestic industries to increased Japanese competition. Within the agreement (see box) the Commission

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requested cooperation from the Japanese in not concentrating sales in the five protected national markets (France, Italy, Portugal, Spain and the UK). A biannual monitoring process was established whereby the Commission and MITI would meet and reach agreement on ‘six monthly binding quotas’ on Japanese market share in the light of prevailing market conditions (Holmes and Smith, 1995:142). The two sides did not reach a completed agreement on the formula for sharing any growth or decline in the market. An internal Commission declaration stated that EU suppliers should benefit from at least one-third of the growth of the market and that Japanese suppliers should shoulder three-quarters of any shortfall. Neither MITI nor any of the Japanese producers individually or through JAMA has ever acknowledged this formula. The agreement was ‘deliberately vague’ and, as Vigier noted, it was also a ‘“grey area” measure under GATT rules, though notified as a special exemption under the Uruguay Round agreement’ (Vigier, quoted by Holmes and Smith, 1995:142).9 It is worth emphasizing the legal status of the consensus. It is, according to Holmes and Smith, as strange as: the grin on the Cheshire Cat in Alice in Wonderland. A measure has been notified to GATT, but the measure itself does not actually exist. It may well be that a simple administrative act by the Commission executing what is known to be the will of the Council is enough, but if the legal status of the 1991 consensus were cast into doubt under Community law, problems might well arise… In a written response to the Juge Rapportuer’s question, the Commission was emphatic that the 1991 consensus did not constitute an ‘agreement’ with Japan…[Thus] the 1991 consensus has no legal basis at all, and its operation rests solely on the attractiveness to the Japanese of compliance. (Holmes and Smith, 1995:147, 157) The 1991 understanding superseded the existing national VERs and the exemptions from Article 115 of the Treaty of Rome. In practice, however, there was little immediate change. In 1995 Japanese exports equalled 800,000, some 250,000 vehicles below the agreed monitoring level; ‘Weak markets in Europe, the rise of the Yen and the improved competitiveness of European industry collectively explain this situation’ (CEC, 1996a:13). Simultaneously, transplant production is increasing in line with expectations and to a certain extent is replacing Japanese imports. The Commission concluded that, ‘There has been no marked disruption in the European market on account of Japanese sales’ (CEC, 1996a:13). The 1991 agreement allowed for a very gradual increase in Japanese penetration and recognized the continuing need for national markets to open at different paces, depending on their historic position. For this and other reasons the 1991 agreement was aptly named Elements of Consensus.10 This

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breathing space ‘agreement’ was essential given the fact that by 1990 car imports to the EC were greater than exports (see Figure 8.1). The transplant issue The major difference between ACEA’s position and Elements of Consensus was over the treatment of Japanese local production in the EU. The Japanese were prepared to see their market share limited to just 16 per cent up to 1999, but neither they nor the British government believed this should include transplant production. Both insisted that Japanese cars produced in Britain were European. ACEA and other national governments argued that transplants should also be part of the understanding since restrictions on direct imports could be rendered meaningless if Japanese market share was boosted by local production. In 1992 the French Minister for European Affairs, Elizabeth Guigou, argued that: ‘The definition of transplant is clear it is a Japanese car made in Britain’ [emphasis added] (quoted by Masdeu-Arus and Bêche, 1992: 19). The MITI refused to accept any clause that formally included transplant production in the calculation of quotas. The Japanese side were anxious not to set a precedent that could disrupt its ongoing discussions with the USA over automotive trade, within which transplants were an equally contentious subject. In the final agreement the Commission met UK concerns, albeit in a roundabout fashion. The understanding anticipated a growth in EU transplant production from 120,000 vehicles in 1991 to 1,200,000 units by 1999 (there was no mention of the consequences should these figures be exceeded). This magnitude of increase would consume most of the 4 per cent increase in Japanese market share that was envisaged during the transitional period. At the time of the understanding it appeared that the Commission had reduced the increase in direct Japanese imports to a trickle between 1992 and 1999. The Commission was sympathetic to the view that it was better to have higher local Japanese production which provided jobs in Europe than higher imports. This eased the fears of the British government, but it was not acceptable to the Japanese negotiating team. They insisted that the understanding should not mention transplant production in any way. Only three Japanese producers had significant production bases in Europe and if these companies accounted for most of the envisaged market share growth this would leave less than 1 per cent to be divided between the other Japanese companies importing into Europe. The only guarantee the Japanese side would give on transplants was that MITI would ‘advise’ Toyota, Nissan and Honda not to target hitherto protected markets with transplant production. The final agreement stated that local production had free circulation in Europe. An informal agreement was reached that the Japanese would not increase local production to an excessive level. This was sufficient to produce an

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Figure 8.1 EC imports and exports (in thousand units).

understanding, but it was one of several grey areas which led to disputes in future years. ACEA insisted that while transplants did not count in any formal sense, the Commission had assured the Europeans they would be taken into account when measuring the Japanese share of the EU market. The Japanese side disputed this interpretation and were equally adamant that transplants were outside the understanding. The only policy participant not brought into the consensus was PSA (for a full discussion of the debate in France, see Gandillot, 1992). The Commission had virtually ignored the company’s views after 1990. However, the PSA president Jacques Calvet, who had close personal links to Edith Cresson and Elizabeth Guigou, brought some influence to bear. Throughout 1991 the French government continued to raise the issue of British transplants with the Commission. It threatened to hold up the July 1991 Hague declaration on EUJapan relations until the status of automobile transplants was clarified.11 The Commission resisted these demands but the brinkmanship of the French government contributed to the ambiguous position of transplants in the final understanding. All of the European producers were disappointed on the issue of reciprocal trade. The Commission was reluctant to raise the specific issue of automotive investment in Japan because the issue of reciprocity was a central feature of the separate negotiations which led up to the July 1991 declaration on EU-Japan relations. These ran parallel to the automobile talks and concluded with both sides agreeing to pursue ‘equitable access to their respective markets and removing obstacles, whether structural or other, impeding the expansion of trade and investment, on the basis of comparable opportunities’ (Agence Europe, 19 July 1991). The Commission perhaps believed this general statement was

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sufficient in 1991. The automobile talks with MITI were fragile enough without introducing reciprocal trade as a central element. A less charitable interpretation of events is that the Commission’s negotiating position was not strong enough to press MITI on reciprocal automotive trade. One official commented, ‘Europe took a unilateral decision to create a single market from which all suppliers would benefit. We were now asking the Japanese, on bended knee as it were, not to take advantage of the market for another seven years. We were in no position to make demands about the Japanese market’ (interview, 17 January 1994). Such views dismayed the European automotive companies (see the comments by the chair of Ford Europe in the Financial Times, 13 September 1994). Eventually, the Commission adopted a more strident approach in a communication on EUJapan relations in 1992 when, to universal condemnation from the Japanese government and Japanese companies, it argued for the: full integration of Japan into the international system by making it as open to foreign trade and investment as other advanced economies. Greater penetration of the Japanese market is vital, not only for the direct economic benefits, but also to give Community industry the opportunity of competing under equal conditions in the most advanced market in the world’s fastest growing region. (CEC, 1992b:2) Implementation problems All sides involved in the 1991 understanding could agree on one thing: the details of the arrangement were ambiguous. Lipson (1991:518) argued that international organizations often prefer informal agreements of this kind because they can be agreed rapidly, presented in an obscure fashion and be open to reworking at a later date. Informal arrangements ‘are more easily renegotiated and less costly to abandon than treaties. This flexibility is useful if there is considerable uncertainty about the distribution of future benefits under a particular agreement.’ It is in this context that the 1991 EU-Japan car accord should be analysed. As Lipson further argued, such understandings: allow greater attention to detail and more explicit consideration of contingencies that may arise. They permit the parties to set the boundaries of their promises, to control them more precisely, or to create deliberate ambiguity and omissions on controversial matters. (Lipson, 1991:498) Both sides knew it was not possible to reach an unambiguous agreement on issues such as market access and market share over a seven-year period. The Commission and MITI were faced with a number of uncertainties and were

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anxious to establish a flexible framework for negotiations in the short term, bolstered by a solid commitment to market liberalization in the long term. In fact, while ACEA may have been unwilling to give the understanding a ringing endorsement in public, privately they were ‘delighted’ that the agreement was hazy (interview, 25 November 1993). The former Secretary General of ACEA commented: The pact has no legal base; it is not a legal agreement, it is an understanding about the progressive full opening of the biggest automobile market in the world…The fact that is has no legal base is probably the best reason why it will be respected; it is in the interest of both parties to make it work. (quoted by Lepeu, 1992) The downside of such an arrangement is that it leaves open to interpretation fundamental aspects of the understanding. In the case of the 1991 understanding much would depend on how the two sides interpreted issues such as sharing the burden of market decline, agreeing market forecasts and monitoring the growth and location of transplant production. Less than a year after the understanding was reached ACEA communicated its concerns to the Commission: ACEA insists that the EU Commission continue to adhere to the letter and the spirit of the Understanding and to ensure a strict application of its own written interpretation. A vigilant monitoring is of particular importance due to the cyclical market down-trend at the beginning of the transitional period. (ACEA, 1992:27) The severe recession in the EU car market in 1992–3 created a difficult environment for the initial implementation of the understanding. The Commission and MITI held their first biannual meeting in April 1992 when the European side requested an 8 per cent reduction in direct Japanese imports. This was based on their forecast that total market demand would decline by 5 per cent on an annual basis. ACEA requested a 10 per cent cut in Japanese imports because of the poor operating results of the EU industry in 1992 and the Commission’s underestimation of the depth of the recession. MITI disputed the Commission’s forecasts, arguing that it was unreasonable to expect Japanese car-makers to agree a fixed quota in advance of a reliable picture of the market situation. The sides met again three weeks later in Tokyo and agreed a 6 per cent cut in Japanese imports, on the basis that demand fell by 5 per cent in the EU in 1992 (Financial Times, 25 April 1992). The next meeting took place in November 1992. The Commission argued the import quota should be cut further, following a worse than expected

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decline in the EU market. MITI again disputed the EU figures and, after two days, the talks ended inconclusively. The failure to revise the April agreement at this juncture angered the EU industry, and several national governments complained to the Commission about the growth of Japanese production within the EU. The French government threatened to place temporary blocks on any direct Japanese imports until the situation was resolved (Financial Times, 5 January 1993). The Commission and MITI met on two further occasions without reaching agreement. The official leading the Commission’s negotiating team commented: ‘The EU wants Japanese reductions otherwise we would fear that markets would be under strains and sometimes excessive strains’ (Financial Times, 3 March 1993). If the two sides could not agree, he went on, then a ‘political solution’ would be necessary. This was a clear warning that the negotiations would be lifted out of the framework established in the 1991 understanding, which the Japanese side comprehended fully. Thus in April 1993 after three days of talks in Tokyo, MITI agreed to cut Japanese imports by 9.4 per cent (113,000 units). The Commission described the outcome as a ‘defensible result’ (Financial Times, 2 April 1993). However, the EU industry was still unhappy and argued that their own forecasts had consistently shown a more severe decline than those of the Commission. ACEA’s complaints appeared to be justified when, just two months later in July 1993, the Commission requested fur ther talks with MITI to review the market situation. In the first six months of 1993 new car registrations were down 17.8 per cent on 1992 levels: the Commission had clearly underestimated the extent of the decline. On the eve of the June 1993 talks the Commission accepted that ‘it would need an explosion in demand to reach our original forecasts’ (Financial Times, 4 June 1993). In September 1993, after further protracted negotiations, MITI agreed to reduce Japanese car imports by 17.6 per cent. Within the first two years after the 1991 understanding the ‘almost inevitable’ implementation problems had arisen. It soon became clear that the understanding would have to be adjusted and revised in the light of market developments. For example, if the Japanese had agreed to shoulder threequarters of the market downturn in 1993 then there would have been virtually no exports to the European market that year from Japan. In the 1994 negotiations the Commission changed tack and suggested that the original formula could still work provided it was implemented over the entire transition period. So-called ‘overruns’ in Japanese imports in any one year would be recovered by making adjustments in future years. This new arrangement came into effect almost immediately when at the first biannual meeting in 1994, the Japanese side agreed to restrict the rise in exports to the EU to just 0.4 per cent. Theoretically this meant that Japanese market share would fall fractionally. However, as the Financial Times (21 March 1994) pointed out, ‘Japan’s car industry accepted the small increase in exports without complaint, reflecting the fact that their overall EU sales would be little affected

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as a result of the build-up in European-based production’. This was precisely the scenario the European producers had wanted to avoid at the start of the process. ACEA’s comment on the 1994 negotiations conveyed the sense of frustration: The slight increase in direct exports now reflects a spirit of compromise, but it is not likely to lead to fairer sharing of the present burden of severe European market contraction… Therefore, the 1994 EU/ Japan monitoring consultations have again resulted in an unsatisfactory situation that is disappointing for the European Automobile Industry and detrimental to its restructuring process. (European Automakers, no. 12, April 1994:9) In fact, over the course of the 1990s a combination of rising local Japanese production and the high value of the yen combined progressively to reduce car exports from Japan to Europe. Despite this, disputes over the implementation of the 1991 understanding rumbled on. When the Commission and MITI agreed in 1996 to reduce the ceiling on vehicle exports to the EU to 1,066,000 million units, against 1,071,000 in 1995, Jacques Calvet—newly appointed to the chair of ACEA—was highly critical. The complaints were familiar. First, the Commission’s forecasts were flawed. Secondly, that there should be an indefinite extension of the seven-year quota period beyond 1999. Thirdly, the five protected markets were being excessively targeted. It was true that the 1996 agreement involved an annual increase in exports of 19 per cent in Italy, 8 per cent in France and 10 per cent in Spain. However, this merely reflected the fact that exports to these countries were recovering from a very low base after the recession of the early 1990s. Indeed, a breakdown of the actual agreement for 1996 shows that in the case of France, Spain and Italy, Japanese exports were still well short of the level envisaged at the end of the transition period. Only the UK appeared to be on course to meet the original targets (Table 8.1). The implementation process has provided an insight into the ability of the Japanese government to manage trading relationships in the global economy. The 1991 understanding is between the Commission and MITI, not an arrangement between the European and Japanese automotive industries. Despite the apparent reduction in MITI’s ‘guidance’ role in the Japanese automobile sector, it emerged in 1991 as a credible actor managing the internationalization of a linchpin in its economy. Yet the de facto situation was that a compromise had only been reached because difficult issues were postponed until the implementation stage. The understanding rested on the goodwill of the respective industries. However, the difficult market conditions of the 1991–5 period with recessions in the European and Japanese automotive sectors meant that goodwill was short on both sides. One ACEA official accused the Commission of failing to

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Table 8.1 Import quotas for 1996 compared with predicted imports for 1999

Sources: Commission breakdown, and the EC/Japan Joint GATT Communication.

implement the spirit of the understanding, ‘by giving Japan an unacceptable increase in market share at a time when the market is declining and massive work force reductions are taking place’ (European Automakers, no. 12, April 1994: 18–19). The Japanese side has always argued that the assumptions made by the European side about transplant growth, and how a market downturn should be shared, were unilateral. At the time of the agreement the EU Vice President Frans Andriessen gave an oral declaration which suggested that MITI had agreed to restrict transplant production to 1.2 million vehicles by 1999. This figure was included in his assumption that the total Japanese market share would reach 16.1 per cent by 1999. This was never openly challenged by the Japanese government, and ACEA amongst others took this as a signal that an informal arrangement had been agreed. However, MITI disputed this throughout the implementation period. As the debate intensified through the early 1990s the Commission insisted it was relying on the principle of annual negotiations and the willingness of the Japanese side to show self-restraint. There is a long history of Japanese goodwill in this respect and there was little to be gained from antagonizing the Europeans during the transitional phase. Conclusion The European Community—as it then was—took the decision in 1985 to create a single market. It was an opportunity for the Commission to stamp its authority on the region and announce its arrival as an international trading partner. The Commission was determined to press ahead with the SEM programme and to undertake harmonization in the automotive sector as a key integrative step. This was a sector where national policy paths were long established and where protection of the national market through quotas and technical specifications was accepted as a legitimate objective. This chapter has shown that it would be potentially misleading to follow a neo-realist scenario, and to view this as an issue of high politics played out at

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the intergovernmental bargaining table. Ultimately, our analysis questions Mason’s interpretation when he argues: This state-dominated process finds clear reflection in the vague formulations concerning the final accord and related understandings, which contain deliberately vague formulations concerning the transplant issue, together with detailed Community-wide, but also state-specific, regulations relating to imports—regulations which mock the notion of a truly ‘common’ EC external commercial policy. (Mason, 1994:451) This is a harsh judgement which we believe fails to take account of several important factors, including the pragmatism needed to negotiate complex interregional trade understandings, and the complexity of EU policymaking and its multi-level nature, and which does not attach sufficient weight to the unique circumstances of European integration at this time. The notion that in the absence of member state interventions in the debate, the Commission and MITI could have produced an unambiguous agreement is difficult to sustain. As Lipson (1991) has shown, such agreements are normally ambiguous and flexible. Ambiguity is often central to their success. The entire integration process in Europe is an incremental one, not least because the Commission has to build consensus for EU-wide policy, and to reassure those interests wedded to national policy instruments. The 1991 understanding nudged the EU automobile sector closer to the goal of an integrated, liberalized market. This was always the Commission’s intention. It was no surprise then that the Commission continually brokered deals at the national, regional and international level. It had a seat at each negotiating table—something that no other actor in the process possessed. It used its pivotal position to good effect by producing compromises and deals; sometimes through incentives, at other times with veiled threats. It was the Commission and not national governments that sponsored the reorganization of the industry, and through the secretariat-elect of ACEA it was able to persuade the industry to modify its position and unite behind a common line. One Commission official commented, ‘We certainly pressured [the companies] to clean up their act…the Japanese agreement was inevitable and they were either a constructive partner in the process or a bystander’ (interview, 24 July 1991). This supports the neo-functionalist arguments about the importance of transnational interest groupings in the integration process. The key point here is that the formation of ACEA and the momentum it provided at a key stage in the process was a response to the agenda that had been set by the Commission, albeit the Commission was by this stage looking for partners in its efforts to build a robust policy stance. This is not to say that the Commission’s views prevailed in all outcomes. As Gandillot (1992) highlighted, policy towards Japan was achieved as a result of

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European car producers (excluding PSA) reaching a common position through ACEA and negotiating with the Commission (cited by Holmes and Smith, 1995:131). Indeed, interested member states (and many European automobile producers) gained significant concessions in the negotiation process (i.e. there were member state specific and community-wide limits on Japanese automobile imports, subtle limits on Japanese transplant factories and a long transition period). As always the details of policy were hammered out in consultation with the various interests. On many issues the coalition of nation states and powerful automobile companies was a powerful and influential one. In fact, the 1991 understanding can be viewed as yet another raft of protectionist measures for the European automotive sector. In our view this would underestimate the progress that was made in such a sensitive and coveted area. The Commission has gained assurances that the market will be completely open after 1999, that protected markets will gradually open, and that Japanese market share will climb to 16 per cent over seven years. It is doubtful whether this significant integrative step would have been taken in the absence of Commission intervention. Mason (1994) took the view that the Elements of Consensus case demonstrates that member states are the decisive actors in the process. However, we perceive them to be responding to an agenda and timetable set by the Commission in line with the SEM. That the Commission had to extend olive branches to several national governments in order to keep the negotiations with Japan on course is not in doubt. Neither is the fact that it pushed the Commission further away from the policy package it originally wanted. However, the SEM represented a unique integrative step and a mammoth project for the Commission and Europe. It would have been foolhardy and counter-productive not to accommodate the various interests. In what has become a clear trend in single market policies the understanding reflected the Commission’s desire to ensure national cooperation in policy development rather than pursue full integration and the attendant risks of disputes with member states (Kastendiek, 1990). The DGIII Commissioner Martin Bangemann has been candid about the situation: It is not enough merely to encourage free trade, it must also be backed up politically. In this respect, there was hardly a realistic alternative to the method of Japanese self-limitation chosen by the Committee even if this intermediate measure is not entirely satisfactory. I can only agree to this solution because, at the end of the transitional period, the GATT rules will be fully accepted. (Bangemann, 1989:85) Viewed in this light, the Commission can be characterized as a ‘policy entrepreneur’ persuading, cajoling, enticing and bargaining in pursuit of pragmatic and workable policy outcomes.

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Notes 1 The authors would like to thank R.Beger (ACEA), Dr H.Glatz (Daimler-Benz), C.Caporale (PSA) and T.Osawa (Nissan) for their cooperation and comments. 2 Statistics supplied by SMMT. 3 For a further discussion of the VER issue, see MMC (1992:149–62). 4 Ikeda (1985) mischievously described the French 3 per cent quota as an example of ‘unilateral administrative guidance’. 5 EEC Regulation No 535/81, OJEC L54, 28 February 1981. 6 This would be the case if the Japanese companies managed to organize an efficient cartel that was able to achieve the necessary volume restraint. In the case of Britain the companies appear to have done this successfully (see Gros, 1992). 7 In a speech to the Paris motor show the PSA president described Britain as ‘a Japanese aircraft carrier just off the coast of Europe’ and ‘Japan’s fifth island’. He went on to highlight the pressures Japanese successes in the American market had placed on indigenous producers there (Independent, 3 October 1990). 8 The EBC is a committee of European companies with business interests in Japan. It is not unlike the Committee of the American Chamber of Commerce in Brussels. The EBC has an Automotive Committee whose membership overlaps with ACEA and CLEPA. 9 Holmes and Smith concluded that, “The 1991 consensus is said by the Commission to be an informal arrangement. It was not passed as a regulation by the Council of Minister. The notification to GATT does not in any way give any legal force to the “non-agreement”. From a GATT point of view the notification reports what has been done, and simply makes it impossible to challenge under GATT law what has been notified: notification does not create any obligation to implement the agreement.’ 10 Under the GATT Safeguard Agreement signed in 1993 as part of the Uruguay Round the seven-year transition is ultimately restricted and—in principle—cannot extend beyond 1999. The Safeguard Agreement also means that existing Voluntary Export Restraints such as that between the British and Japanese automobile industries have to be abolished within four years. 11 The French government insisted that because of the size of the EU’s trading deficit with Japan and barriers to the Japanese market required in key sectors such as automobiles, the declaration should refer to ‘balanced trade’ rather than ‘equitable access’ as stated in the initial draft (Financial Times, 18 July 1991).

9 The volet interne for automobiles

Anything less than a global approach to industrial policy can generate consequences that may defeat the purposes of the policy… the nature of modern technology often demands networks larger than Europe can provide: a network for the assembly of relevant information on design and production; and a network of market outlets sufficiently large to absorb the development costs of the product. Raymond Vernon, quoted by Hayward (1995a:5–6) During the negotiations over the Elements of Consensus, and subsequent to the understanding, great emphasis was placed on the volet interne that would accompany the volet externe. This chapter analyses the volet interne for automobiles and its implications for the wider debate on industrial policy at the European level. The Commission published an updated action plan for the sector in 1992 following consultation with the Association des Constructeurs Européens d’Automobiles g.i.e. (ACEA), the European Motor Components Association (CLEPA) and the European Parliament (EP). In the plan the Commission committed itself to: 1 The completion of the internal market. 2 The reorientation of Community research and development (R&D) support towards generic technologies. 3 The stimulation of vocational training and reconversion. 4 Obtaining an improved access towards third markets. 5 ‘Responsibilizing’ of the social factors. 6 A consistent competition policy. There would be a programme of support for the automobile sector during the period when national trade policies were lifted to smooth the process of industrial adjustment. A Council resolution on the sector (17 June 1992) stated that measures should be brought forward to facilitate adjustment; ‘such measures should be aimed at the adjustment of the European motor vehicle

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industry and should be taken in good time, so as properly to accompany the gradual opening up of the market’. DGIII insisted that all available instruments would be used to facilitate the restructuring process. This chapter deals with certain aspects of this action plan. It does not discuss issues such as trade policy or state aid which were dealt with in Chapters 7 and 8, although as we discuss later the state aid framework effectively limits the scope for action in the sphere of industrial policy. Neither will it examine the general issues that arise from completing the internal market, such as harmonization of taxation and implementation of the Social Chapter. These are issues of significant importance to the single market in vehicles, but they are matters of ‘high’ politics which are decided at a level well beyond the politics of the automobile sector. The focus here is on those areas where Commission-industry negotiations make a difference, notably technical harmonization, research and development, education and training, and modernization of capacity. Many groups in the European automobile sector had high expectations of the new volet interne. Companies from national systems which had a more active framework of industrial policies took the public and private briefings from DGIII to mean that discriminatory measures would be forthcoming. A smaller band led by the German companies were more sanguine about the prospect of the industry receiving such support. The Commission was in fact careful to state that it would be working within the framework of existing policy instruments rather than bringing new ones forward. Part of the confusion stemmed from the fact that Commission officials in DGIII and DGIV were providing different interpretations of official drafts. Irrespective of the reasons for the misunderstandings that followed, it is fair to say that most in the industry entered 1992 with high hopes that special measures would be considered. Yet just two years later ACEA was complaining that, ‘it seemed increasingly unlikely that Commission measures in this field will ever match the expectations triggered by the “volet interne” promises’. Industrial policy Industrial policy is generally seen as an instrument through which governments underwrite certain industrial enterprises or sectors because they are believed to be of strategic importance to the economy, usually for heroic reasons associated with ‘national champion’ status.1 Clarke defines industrial policy as ‘any policy implemented by government which is directed towards a particular industry with the objective of improving that industry’s comparative advantage’ (quoted by Coates, 1996:22). Industrial pol icy covers a wide range of policies directed at the activities of firms, including state aid, competition policy, R&D and education and training. According to Geroski, it is a ‘label that has come to be used to describe a wide-ranging, ill-assorted collection of micro-based supply side initiatives which are designed to improve market

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performance in a variety of occasionally mutually inconsistent ways’ (Geroski, 1989:21). Hayward sees it ‘as imparting a spurious unity to public action which consists of an impoverished amalgam of ad hoc instruments and inconsistent objectives intended to influence firms to behave in ways that would not have spontaneously occurred in a market context’ (Hayward, 1995:11). A good example of this in the automobile sector is the successful efforts of various states to push new investment into depressed regions (see Chapter 2). In fact, this policy instrument is still encouraged in Europe by dint of its qualified exemption from state aids rules. As Grant (1995b:ix) points out, the basic premise of an industrial policy is politically contentious, with the debate being roughly dichotomized into two main schools of thought. ‘Neo-liberals’ advocate limited government intervention in the market mechanism: effectively providing a level playing field via competition policy, anti-monopoly measures and a regulatory framework which guards against anti-competitive practices. Alternatively, there are those who advocate a more interventionist or ‘active’ industrial policy, based on a government-industry partnership which, it is argued, ‘permits a more effective, long-sighted response to changing economic circumstances and leads to a higher growth trajectory’ (Grant, 1995b:ix). We suspect that this is the sort of relationship some in the automobile industry wanted with the Commission and they became frustrated when it failed to develop in the early 1990s. The different political discourses used to legitimate industrial policy is an important feature of the European economy. Many authors since Shonfield (1965) have shown how states have pursued different policy paths for key industrial sectors. The cross-national differences in discourse, style and instruments have provided a complex heritage for the European Commission as it asserts its authority in the automobile sector. The Commission’s response, at least in terms of policy outcomes, has been confusing, vacillating between the ascendant (1980s) neo-liberal approach, and the traditional social market position of the central European states (see Wright, 1995b). For example, in the 1992 framework document for automobiles the Commission argued its aim was ‘to apply to the motor vehicle industry the concept of industrial policy’. This was seen as important in a sector where a high level of intra-Community car trade required coordination to avoid distorting national policy measures (CEC, 1992a:1). Yet elsewhere the document also defined the Commission’s role as that of umpire, defending the integrity of the European car market (CEC, 1992a:5). Strange argues that: Like most other industrialized countries, the trade policies of Europe are an inconsistent mix of openness and protection. This reflects the conflicting interests of European business, which sometimes wants trade barriers against foreign competition, especially from Asia, but at other

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times is all for a free and open market. Exactly the same is true, despite the Washington rhetoric, of American business and of US trade policy. (Strange, 1998:107) This inconsistency is hardly surprising in view of the rich variety of national policies and styles in the sphere of industrial policy. In addition to this, the potential for conflict between a liberalized market and an active industrial policy is to an extent institutionalized within the Commission as the repeated tensions between DGIII (internal market and industry) and DGIV (competition) illustrate. The EU policy therefore reflects the sum of its parts, and in the sphere of industrial policy this can create inconsistency of both policy purpose and policy instruments. Cox and Watson describe the difficulties: ‘there is a desire to increase the competitive efficiency of EC firms but a confusion over whether this should be achieved by means of an EC-led policy of supporting European champion firms (the French approach) or through the adoption of neo-liberal competition policies favoured by Sir Leon Brittan’ (Cox and Watson, 1995: 330). The composition of the Commission’s ‘leading personnel’ is an important variable in explaining its orientation to competition policy. As Woolcock and Wallace (1995:295) highlight, Commissioners such as Sutherland and Brittan have ‘pursued aggressively competition-based policies’ in the face of opposition from member states, firms, other Commissioners and even Jacques Delors. Karel van Miert has adopted a more flexible and pragmatic approach since his arrival at DGIV. There is a consensus between the Commission and ACEA over the basic principles of EU industrial policy. While conceding that the primary responsibility for industrial restructuring falls on the industry itself, ACEA maintained that EU institutions and EU member states have a responsibility to create an environment that facilitates and encourages the growth of a competitive car industry: If the European automobile industry’s efforts to become more competitive are to be successful, European public authorities must take action: eliminating or reducing the external handicaps of the industry, providing appropriate framework conditions for industrial flexibility and adaptability and using the EC’s full economic and political weight to assure full trade reciprocity and protect the principles of free and fair trade. (ACEA, 1993:1) In practice, as we saw in the discussion of state aid, ACEA’s members have looked for rather more by way of tangible support. In December 1993, ACEA (1993:7–9) provided the Commission with an extensive ‘wish list’ to help the restructuring efforts of the sector. The ACEA document was a predictable

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request for policies that would reduce the cost burden on European manufacturers. The Commission concurred with the sentiment that a structural overhaul in the technical, financial, commercial and social aspect of the European automobile industry was essential. However, it was within the constraints of existing European support programmes that both it and ACEA identified a number of specific areas that needed to be addressed if the European industry was to meet the global challenges. It is to some of these issues that we now turn. Technical harmonization One of the major obstacles to the single market in vehicles was the myriad of technical regulations that existed in national markets. As Pemberton (1991) noted, when those surveyed as part of the Cecchini report (Cecchini, 1988) were asked to rank industrial sectors by incidence of barriers to trade, the automobile sector topped the rankings.2 Different vehicle regulations evolved for national and cultural reasons within each nation state. Some of these were developed for quite innocuous reasons, others were often designed to favour indigenous producers and to frustrate importers. One of the better-known examples of such barriers to trade in the automobile sector was the French regulation that required all cars and commercial vehicles to be fitted with yellow headlights. Egan (1994:11–12) identifies three factors behind the pressure for harmonization. First, the 1984 Union of Industrial and Employers’ Confederations of Europe (UNICE) memorandum—The creation of a genuine internal market as regards standards and technical regulations—which argued that: so long as numerous technical barriers to trade between member states remain, and new ones are created, European industry will not be able to enjoy all the advantages which might be expected from the huge domestic market provided by the Community. This situation prevents Community industry from making full use of large scale production, makes penetration of various markets by enterprises more difficult and costly, and distorts competition. (quoted by Egan, 1994:11) This was a key factor behind the development of an EU Whole Vehicle Type Approval system. The second factor is what Egan refers to as ‘preference convergence’ in economic management. National governments throughout Europe began to follow the UK’s lead by adopting deregulation as a move towards a ‘competition state’ model.3 The third factor she identifies is third country access; this issue was of particular importance to the USA which wanted to ensure that the internal market did not lead to protectionism. To Egan’s list we would add a fourth factor. Emerging global automobile

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companies began lobbying vigorously for regional and later global technical standards. Harmonization at this level is essential if scale economies are to be achieved. Companies such as Ford have implemented a global production strategy and the existing differences in technical standards between regions inhibit such a strategy. The role of the multinational or ‘global’ company in removing state specific technical barriers cannot be understated. Needless to say, technical harmonization is an extremely complicated area of policy dominated by ‘experts’. It is the stuff of policy community politics and it was essentially this type of network structure that evolved to process the issues. The process of harmonization actually began as far back as 1970 when increasing trade flows between European national markets and pressure from multinational producers led the Commission to seek common standards and regulations. It was in response to this that the industry formed the Liaison Committee of the Automobile Industry of the Countries of the European Communities (CLCA) and Committee of Common Market Automobile Constructors (CCMC). Many issues were dealt with in a myriad of technical committees under the umbrella of the Motor Vehicle Working Group (MVWG): a forum of industry experts drawn from relevant European and national trade groups and companies. The Commission worked closely with MVWG which then submitted its proposals to the Committee for Adaption to Technical Progress for Whole Vehicle Type Approval (WVTA) for passenger cars and multipurpose vehicles. There were fifty-four areas of regulations ranging from sensitive issues such as engine emissions to mundane ones such as towing hooks. In addition, these fifty-four regulations were applied to ten classifications of vehicles ranging from passenger cars to trucks. Each of these product groups has moved at its own pace towards harmonization.4 The Commission worked on harmonization throughout the 1970s and 1980s in an effort to achieve full harmonization or WVTA by 1992: i.e. regulations when approved and certificated by one national authority are accepted throughout the EU without further examination and approval. The Commission was able to make substantial progress because of the significant groundwork which had already taken place within UN-ECE Working Party 29.5 Here we see an example of relatively cohesive policy community struc ture operating. However, we must not overstate the degree of consensus within the network. As Richardson (1996) and Peterson (1995a) remind us, cohesion is difficult to achieve in EU-level networks. In our discussion of policy participation we noted how in many of these areas of ‘techno polities’ there were vested national interests and corporate interests at work. Thus, despite the apparently obvious logic of full technical harmonization by the time of the 1992 single market deadline, there were still three outstanding issues blocking WVTA. These concerned weights and dimensions, tyres, and windscreens. Writing at the time, Pemberton noted:

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Paradoxically, there has seemed little pressure from the indigenous European manufacturers to move towards whole vehicle type approval and certification. This is generally ascribed to protectionist strategies… The continuance of type approval has been particularly favoured by those countries which currently have strict quota constraints in place to protect local industry. (Pemberton, 1991:65) This was precisely the reason for the delays and was one of many issues that led to divisions within the European automobile sector. However, with the final agreement on the volet externe achieved in 1991 the effectiveness of national approval as an instrument to frustrate and control Japanese imports was greatly reduced and the Commission pressed ahead with WVTA and worked towards a deadline of 1996 for full harmonization. This was achieved for the two main vehicle groups, cars and multi-purpose vehicles (MPVs). International harmonization? There is now considerable pressure within the industry for global harmonization as the major automobile companies seek a regulatory framework which matches their ambitions for global product strategies. If the process of technical harmonization in Europe is indicative, then creating a truly global WVTA will be a long and arduous process. Even within Europe problems remain. Sweden did not join the EU until 1995, and still had distinctive national standards in several areas. For example, Swedish engine emission legislation required a specific emission certificate which every importer had to obtain, even if it was from another EU state. The Commission, for its part, is also keen to open up foreign markets to European producers, and has negotiated with third countries over the harmonization of technical standards. In 1994 and 1995 it reached an agreement with Korea and Japan respectively on ‘technical standards, certification and testing issues in the field of automobiles’ (Wright, 1995a: 8). For example, in 1994 the Korean government undertook several initiatives to improve market access to non-domestic producers. It reduced the tariff on cars to 8 per cent and the acquisition tax on luxury vehicles to 2 per cent. The Commission also secured ‘a list of 23 exemptions from Korea’s new 38 item safety standards and test procedures, provided EU manufacturers demonstrated compliance with the equivalent UN-ECE Regulation or EU Directive. And that 15 Korean safety tests can be carried out in European manufacturers “Korean Accredited” premises’ (Wright, 1995a:12). There have been several similar bilateral agreements with the Japanese Ministry of Transport (MOT). For example, the MOT has accepted that all testing of vehicles destined for the Japanese market can be carried out in Europe.6

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The Commission is pursuing the harmonization of technical standards between EU and non-EU countries through the 1958 UN-ECE agreement. This agreement was crucial in establishing EU WVTA and the Commission believes it ‘provides a valuable guidepost to international regulatory activity in the automotive area’ (Wright, 1995a:8). Thus far the agreement is almost totally a European one; however, Japan and Turkey have committed themselves to joining it, and Korea and Australia have registered their interest in signing up to it in the future.7 Most significant of all, the EU and the USA have agreed to work towards technical harmonization and this seems likely to be the first major step towards global harmonization. American multinationals are embedded in Europe and there is considerable consensus between the two sides on many technical areas. Thus, we have the prospect of policy networks operating at the global level. This is a subject we return to in the concluding chapter. Research and development Negotiations between the automobile sector and the Commission over research and development (R&D) have been contentious for many years and reached a low point when the Commission rejected the industry’s ‘Environmental Friendly Vehicle Programme’ under the Third Framework Programme. In 1992 the Commission criticized the industry for an inability ‘to translate R&D activities into innovative products and/or processes, and these into shares of the market'(CEC, 1992a:10). Relations with the industry deteriorated even further in the early years of the volet interne with disagreements over the policy instruments used to fund R&D in the automotive sector and the (limited) sums of money available. In its efforts to encourage internationally competitive manufacturers, the Commission identified several R&D and technological priority (TP) projects ‘geared towards developing key technologies and achieving a better return on R&TD (research and technical development) investment in terms of industrial competitiveness’ (CEC, 1992a:11). TP projects are based on increasing precompetitive cooperation between businesses: The Community has an important catalytic role here. Encouragement of this type is perfectly compatible with the competition rules… The importance of increased cooperation to make the motor vehicle industry more competitive is shown by the Japanese experience. A far greater proportion of R&TD activity is carried out jointly by businesses in Japan than in the United States or Europe… In Europe, in a key technologies sector such as electronics for the car industry, there is virtually no cooperation between different companies. In Japan, on the other hand, the big companies take advantage of the complex structures of the industrial system in this area

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to launch R&TD initiatives bringing together the manufacturers and users of integrated circuits, [emphasis added] (CEC, 1992a:11) Inter-firm cooperation at the pre-competitive stage has been very limited in Europe. The Commission encountered difficulty trying to foster initiatives in this area. The main European firms spent the entire post-war era competing against each other. There is also a history of attempted take-over and merger between European companies. In their study of mergers and acquisitions, Cox and Watson (1995) noted that European firms are as likely—if not more likely— to form joint ventures with non-European firms as with other European firms. This trend is clear in the automobile sector, most notably with British Leyland seeking out a partner in Honda rather than pursuing the European options available at the time. The industry does not dissent from the need for more cooperation at the precompetitive stage. However, it disputes the sole focus of funding programmes on pre-competitive R&D as opposed to R&D initiatives closer to the market. The industry led by ACEA spent much of the 1992–4 period in the run-up to the Fourth Framework Programme lobbying hard for changes in the Commission’s approach. The arguments can be summarized as follows. First, the industry argued that the EU approach was out of step with practices in the USA and Japan where there was a much clearer orientation of R&D policy towards technologies which are close to market application. In the period after 1992 this issue became all the more contentious when the new Clinton administration announced a number of high-profile initiatives involving American government agencies such as NASA and the National Science Foundation working with General Motors, Ford and Chrysler in the development of more fuel-efficient vehicles. Irrespective of whether these initiatives amount to meaningful outputs, they had symbolic importance and appeared to reflect badly on the relative lack of activity in Europe. There were plenty of less spectacular examples which ACEA could call upon to illustrate the industry’s concerns. Among the many contentious issues within the Third Framework Programme was the funding of new car battery technology. In the USA the Department of Energy provided over $130m in the early 1990s to the US Advanced Battery Consortium (USBAC). The American automotive sector matched this level of funding for the initiative which focused on traction battery technology. This technology was regarded in the industry as the key to the further development of electric vehicles which were already in prototype stages of development. The need for similar efforts in Europe was recognized within the Third Framework Programme. However, under the subsequent JOULE programme, EU funding focused on longer-term research on the lithiumpolymer system which was at the pre-competitive stage. The importance of Li-polymer technology was not disputed, but this and other

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cases have encouraged a view in the European industry that it is not operating on a level playing field vis-à-vis its major global competitors. Second, the industry complained that insufficient funds had been made available to the sector. Before the Fourth Framework had been finalized ACEA argued that the ECU 700m earmarked for ‘technologies for transport means’, within the ECU 1,800m allocated for industrial technologies, fell well short of the sums needed. However, ACEA’s concerns also appeared to relate to the fact that most of the money was earmarked for nonautomotive projects. The horizontal funding programmes of the EU preclude discrimination at the microlevel. Funds are sought on a competitive basis from a wide and diverse range of industries, and are available through a number of horizontal funds for generic purposes. There is no vertical allocation, and certainly no specific ‘automobile pot’. This is consistent with the Commission’s, neo-liberal approach to industrial policy, but it contrasts sharply with national approaches where industrial policy often involved making allocations on a sectoral basis. In a 1993 communication with the Commission, ACEA argued: Access to generic R&D may be a necessary condition for some industries to exist but it is certainly not sufficient to restore competitiveness, notably not for the European automotive industry, in particular in the short time frame available until the end of transition period in 1999. The automobile industry appears to believe that because it is such a pivotal part of the European manufacturing base, embracing a wide range of technologies and products, it should receive ‘special treatment’. Third, the industry argued that it was unfair to rely on national government initiatives and EUREKA programmes for close to the market R&D. At the Edinburgh summit in 1992 it was agreed that EUREKA would re main the principal source of funds for R&D directed at bringing products onto the market. This approach was opposed by ACEA because of potential distortions of competition between its members. For example, EUREKA funds come predominantly from the national government of each consortium member. However, some member governments attach a low priority to EUREKA projects which are effectively competing with national R&D programmes for funding. In addition, some national governments—notably the UK—have in the past objected to funding such programmes for the same ideological reasons as the Commission. Thus when the Commission proposed that 10 per cent of the BRITE/EURAM budget should be allocated to projects with a EUREKA follow-up, this was opposed by ACEA because it favoured companies from nation states which supported the EUREKA initiative. These disputes within the policy network perhaps give the misleading impression that the industry receives little or no support through EU R&D programmes. In fact, as one would expect in a sector which is so crucial to the manufacturing base of the region, its companies have received funding through

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participation in a range of programmes. These include projects on generic manufacturing issues via BRITE/EURAM, the development of computerassisted design and production processes via ESPIRIT, engine combustion programmes via JOULE, and the development of intelligent road traffic management and road safety programmes via DRIVE. The industry may not have been happy with the EU focus on pre-competitive research and generic technologies but, as Dancet and Rosenstock pointed out, ‘the actions put forward in 1992 (referring to the Volet Interne documents) were revised in a more horizontal than vertical way. It is now up to the industry and the Commission to identify the horizontal policy programmes which may benefit the automobile industry’ (Dancet and Rosenstock, 1995). By the mid-1990s the key players in the network, notably ACEA and officials from the DGIII automobile unit, had put to one side their reservations and began working on projects which might attract funding in the Fourth Framework Programme. There have been several high-profile examples of R&D initiatives emanating from the network in the mid-1990s. For example, the Commission has attempted to focus attention and effort on new product design through its ‘Car of Tomorrow’ Task Force. It has also been encouraging the industry to develop ‘clean, lean-produced, intelligent, quality, value cars’ for the year 2000 and beyond. The ambitious aims of the Task Force are to facilitate more efficient and effective coordination and to focus research into issues such as ‘ultra low and zero emission cars of the future, and associated infrastructure for road telematics, refuelling and recharging’ (CEC, 1996a: 10). The Task Force’s steering groups comprise representatives of the Commission, the automotive industry, the battery industry and the leading automotive research institutes. These groups between them determine the Task Force’s orientation. At the ‘Car of the Future’ Conference in 1995, DGIII Commissioner Bangemann outlined the objectives of the Task Force: 1 To establish an action plan with all interested actors to identify ‘the needs, priorities and actions to be addressed at the European level in respect of R&TD', and market place acceptance of a new breed of ‘competitive, ultra low and/or zero emission vehicles’. 2 The action plan would set out the required steps, ‘time-scale, performance and energy-environment efficiency targets’ for a number of vehicle projects. 3 To ‘focus on all technological bottlenecks which limit the rapid realization of ultra low and/or zero emission vehicles’ (e.g. advanced propulsion technologies and associated critical technologies), ‘and in close cooperation with the automotive industrial sector, their integration into zero emission or hybrid vehicles together with the related infrastructure’. The announcement of the Task Force ‘Car of Tomorrow’ was followed by extensive negotiations between the Commission and EUCAR centred on the

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Action Plan (EUCAR is a project established by manufacturers for joint R&D in areas of common interest). The Task Force also aims to facilitate regulatory stability. The Commission has allocated additional funds to this endeavour. In 1996 the Task Force requested ECU 130m to fund this new research initiative (CEC, 1996a:11). A similarly high-profile initiative in Europe is the Auto-Oil Programme. The programme was established, principally involving ACEA, the European Petroleum Industry Association (EUROPIA) and the relevant units within the Commission, to jointly identify cost-effective legislation to achieve new air quality standards. A final area to note is the Commission’s efforts to assist training and organizational change in the automobile industry. At the start of 1994 the Commission announced that it was establishing a transnational network involving ACEA, CLEPA and the six leading automotive research institutes to ensure that the industry actively participates in the EU’s training programmes. The work of these organizations was guided by a steering group involving ACEA, CLEPA and Commission officials. Throughout 1994 the research institutes conducted a full analysis of eighteen past initiatives in the sector funded through the FORCE programme, and identified, in conjunction with the industry, fifty-three project proposals for funding under the LEONARDO programme. These projects are focused on three main areas: training for new work structures; training for co-makership, i.e. transfer of knowledge between assemblers and suppliers; and ‘learning while working’ projects. The main aim of the transnational network—as with so many of these initiatives—is to ensure that the industry’s applications under the LEONARDO and ADAPT programmes are of sufficient quality to attract support. Thus, the principal response of the Commission to the industry’s criticism of R&D policy has not been to change the approach, but rather to redouble its efforts to encourage the industry to take advantage of the existing instruments. It is clear from the foregoing discussion that while the automobile sector may have been a vociferous critic of the volet interne, it has not stopped ACEA from mobilizing its resources to make coordinated applications for funding from the horizontal aid programmes. Setting to one side the intellectual discussion about what constitutes industrial policy, there are an array of Commission-supported programmes and initiatives aimed at raising the international competitiveness of the automobile (and other) sectors. Such efforts may fall short of what the industry expects, but realistically they represent the limit of the Commission’s abilities, given the constraints of the overall policy framework. As Menon and Hayward observed: ‘Although many firms and some governments increasingly see the need for European-level coordination and co-operation in R&D activities… Community policies are, of necessity, targeted as much with equity of distribution as effectiveness in mind’ (Menon and Hayward, 1995:272).

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Over-capacity The Commission, the automobile industry and national governments are all agreed that over-capacity is the biggest challenge facing the sector. Fiat, Ford, General Motors, PSA, Renault and Volkswagen produce almost 10 million cars per year (78 per cent of West European production). The market share is (almost) evenly distributed between these six manufacturers, ranging from 10.3 per cent to 12.0 per cent, with the exception of Volkswagen who have a ‘clear’ market lead with 16.7 per cent mainly as a result of the purchase of Seat and Skoda. This contrasts with the USA where only three national manufacturers out of the fifteeen that existed in 1945 now operate. Chrysler have a 14.7 per cent market share, Ford have 25.7 per cent and General Motors 32.8 per cent (DGIV, 1997:6). European overcapacity is compounded by two other factors: first, Japanese European transplant production is fast approaching 1 million vehicles in Europe; second, imports from developing regions have been on an upward trend in the 1990s.8 Thus, at a time when the Commission is seeking to reduce capacity in the European sector, the progressive liberalization of the European market is bringing in new capacity. The arrival of new capacity in Europe has led to heated debates between the Commission and ACEA. The existing producers on brown-field sites are at a disadvantage compared with Japanese plants in Europe which are set up on green-field sites, with some measure of public support, and based on leadingedge technology and design. ACEA argues that older factories in Europe need funding to facilitate modernization and enable them to become more internationally competitive. A 1990 report for the Commission by UK-based Motor Industry Research Unit warned that the new Japanese plants: work with the most up-to-date facilities right from the start. As all Japanese transplants are likely to benefit from this, distortion cannot be avoided; the Japanese are being favoured to the disadvantage of established European manufacturers who cannot abandon existing plants in favour of new facilities in a more favourable environment because of the problems associated with the closure of facilities, which have provided employment for many people over many years. (quoted in CEC, 1990:46) This issue was of major concern to ACEA as it pushed DGIII to produce an aid package for restructuring during the 1991 talks with Japan. It sought unsuccessfully to tie the industry’s agreement to a reduction in imports, with additional support for European firms to cope with the challenge from transplants. The following quotation from an ACEA document underlines the depth of feeling:

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The UK’s preoccupation with attracting new transplant investments while ignoring the needs of the well established manufacturers may create new jobs in the short-term but will result in a net loss of jobs over the long-term. Independent automotive consultants and the EC Commission have calculated that in fact one new job created by a transplant operation in Europe destroys two existing European jobs. (ACEA, 1993:27) The British government has countered that the proximity of Japanese competition has encouraged other producers in Britain to raise their competitiveness. The British government has also emphasized the benefits in terms of rising quality which the Japanese factories bring to the automotive components sector in Europe. Both these arguments have found favour with many in the Commission. The French government’s successful efforts to have Toyota’s second European factory located in northern France suggests it too now recognizes the competitive dividend to be gained from Japanese inward investment. The difficulties of the UK automobile sector in the 1950s and 1960s (see Chapter 2)—too many producers, with too many factories, producing too many cars—now haunt the sector at a European level. George Simpson, former Chairman of Rover and Lucas, estimates global over-capacity to be as high as a third of output, and sees major restructuring and mergers as the only likely outcome if supply and demand are to be balanced. The mergers thus far have done little to tackle the problem of over-capacity. Finding a solution to this problem has proved as difficult for the Commission as it did in the 1950s and 1960s for UK policy-makers. One way of alleviating the problem is to generate higher demand for vehicles. An obvious option here is a permanent cut in car prices. Consumer groups have campaigned vigorously for car price reductions and several industry executives have acknowledged that this may be part of the answer. However, higher demand for car ownership would bring the car into conflict with other parts of society. The major task is to remove some of the capacity from the European automobile sector by removing the weaker, less efficient producers from the market. The traditional approach to over-capacity has been for national governments to intervene and try to broker a deal between the leading companies. At one level, this may involve encouraging firms to enter into a dialogue, while at another it may be a consolidated policy package (e.g. injecting state funding, assisting with acquisition and reorganization and signalling that competition policy would not be an obstacle). The latter approach has been pursued at various times in all the main European nation states. However, as we saw in the British case, such an approach is fraught with difficulties, especially in a sector where multinational competitors are present. A whole maelstrom of defensive political interests and pressures emerges around car factories and companies, making the task of removing

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capacity a highly sensitive one. Wilks (1988) describes how British industrial policy plumbed to new depths of inconsistency and confusion in the 1975–6 period when the government rescued British Leyland and Chrysler UK in spite of the fact that government advisers warned of the need to reduce capacity. Faced with similar problems at a European level, the Commission has neither the political authority nor the political will to adopt such an interventionist approach. The future of many European economies remains bound up with the performance of their automotive sectors and this alone is a major disincentive to any direct intervention. Throughout the 1980s, the Commission was content to allow national governments to oversee restructuring programmes. The difficulty with this approach, as we saw in the Renault and Alfa Romeo examples, is that member states often failed to implement the reductions in capacity required. The Commission’s preferred option has been to create a policy framework which allows market forces to determine which companies survive. However, it has only been able to assert this objective since the introduction of the sectoral state aids framework in 1989. The crusade mounted by DGIV against state aids in the automobile sector was motivated by the fact that most of these subsidies had preserved the weak—and in some cases, the insolvent—to the detriment of the long-term health and international competitiveness of the European economy. Similarly, part of the motivation for removing import tariffs on Japanese goods is to expose European producers to international competition and hasten adjustment and rationalization. It is difficult to dispute the wisdom of the Commission’s approach. The more interventionist options have a chequered history amongst member states, and the Commission lacks the authority or the policy instruments to emulate such an approach. EU institutions have shorn national governments of many of the instruments of selective intervention and replaced them with a strictly noninterventionist approach. The Commission’s problem is that its stance may be too slow to produce the desired outcomes. Closing down automobile firms involves massive job losses, often in regions that can ill afford them. Moreover, achieving capacity reductions through mergers and acquisitions is equally difficult. The track record of competition, joint venture and amalgamation between European companies is not good. The mergers that have taken place have generally represented instances where there is a natural fit between the companies. For example, Ford’s acquisition of Jaguar and Fiat’s of Alfa Romeo were cases of a volume producer acquiring a luxury brand. The take-over of Rover by BMW was motivated by its need to access the ‘4x4’ market of Land Rover and to acquire small-car technology. In most instances, these alliances have actually increased capacity rather than reduced it. In a mature market such as the automobile sector these alliances are to be expected. Finding complementary parties is preferable to take-overs: it is more difficult to integrate a direct competitor into an existing organization. To

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further complicate matters, most European producers are in better shape now than they were in the mid-1980s. This is partly because several national governments allocated massive state aid to the sector as a preemptive strike against the new restrictions about to be implemented by the Commission. Somewhat counter-intuitively, the European sector can be accurately described as in a semi-permanent state of transition. A rigid policy framework is in place founded on the efficacy of market forces and the belief that these are the best discipline for automobile companies. Yet the policy goal of a leaner, more efficient sector, able to take its place in the global industry, is still some way off. The Commission has no choice but to be pa tient, having turned away from a more interventionist approach. Achieving international competitiveness is not a positive-sum game. The fact there will be losers helps explain why the pace of change is slower than the Commission might wish. Conclusion The review of the volet interne has thrown up a number of important themes whose resonance permeates the whole issue of industrial policy and government-industry relations at the European level. It is clear that divisions between the member states over what should constitute an industrial policy has militated against a more ‘activist’ approach. Several national governments have pushed the Commission to develop such policy instruments over the last thirty years without success. In the crucial period in the second half of the 1980s when so much of the groundwork was being laid for the single market programme, the neo-liberal paradigm was dominant. We have seen this come through powerfully in the automobile case where EU has focused on reducing subsidies and exposing the sector to greater competition. The key volet interne documents of 1989 and 1992 emphasized a horizontal approach to industrial support rather than a sectoral one. It is no accident that the Commission first established a sectoral state aids framework, then a sectoral framework on import tariffs, before finally drafting an action plan on industrial support that contained no sector specific measures. The message from this process is clear: general support was available to all industrial enterprises, the automobile sector would have to win its share on merit. The special treatment— so long a feature at the national level—was not on offer. The Commission’s approach to industrial policy, or more accurately industrial adjustment, has led to tensions with both leading manufacturers, and member states. These have been more noticeable with companies such as PSA, Renault and Fiat who were used to a symbiotic relationship with government agencies. In the face of the move towards increasing liberalisation, national policy preferences were affected by EC action to different degrees, because the prevailing industrial policy mix varied greatly between countries. States

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in favour of a more dirigiste approach to industrial affairs, such as France and Italy, have increasingly found their ambitions to foster the growth of either national or European ‘champions’ frustrated by the emphasis on a competition adopted by Community institutions. (Menon and Hayward, 1995:275) We must be careful not to perpetuate the image of a rampant neo-liberal EU riding roughshod over national approaches. As the gradual privatization of Renault illustrated, the French state was beginning to lose its appetite for selective intervention and especially the subsidies that went with it. There was already a process of convergence in policy preferences (Wright, 1995b). Equally, we should not view the Commission as a monolith in the field of industrial policy. Many of the contentious issues discussed in this volume are the subject of great debate within the Commission itself. There are certainly officials within DGIII who would like to see a more active management of industrial adjustment in the automobile sector. ACEA has, on several occasions, urged the Commission to pursue a ‘managed trade’ strategy and to learn the lessons of the Japanese Ministry of International Trade’s success with industrial policy initiatives. Those academic commentators who are highly critical of the Commission’s laissez-faire approach to industrial policy have been equally scathing. Williams et al. (1994:184) argue that the volet interne for automobiles amounts to little more than ‘a few high-tech projects and some noises about training’. This is not far from the reality of the situation. There is, of course, a difference between a strategy that is deliberately minimalist and not having a strategy at all. In addition to this, one must not forget that the member states have not given the Commission a licence to pursue a more interventionist approach. In the light of the first two points, the only surprise is that there should be consternation from some quarters (notably the industry) that an activist sectoral policy has not materialized. The Commission responded to the industry’s criticism by encouraging applications from automobile companies under the Fourth Framework Programme (1994–8). Apart from this, the message has been clear: public authorities can only create a supportive business environment based on open and competitive markets. The primary responsibility to bring about the changes necessary to improve its competitiveness stays with the European automobile industry (Dancet and Rosenstock, 1995). We would argue strongly that the EU does have an industrial policy for automobiles. Its central pillars are the state aids framework, technical harmonization and the removal of tariff barriers to the EU market. These priorities may not be shared by all sides, but they have been clearly articulated by the Commission in the last decade. We concur with Tsoukalis (1997:92) when he argues that EU policies have promoted internationalization rather than Europeanization. The Commission has attempted to expose European national champions to greater global competition.

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Notes 1 Mc Arthur and Scott in 1969 were the first to speak of national champions when they made reference to ‘the creation of a French “champion” in each industry… Such a champion would represent the national in international competition, and would probably assume the aura of a public servant, a company operating in the interest of the national as well as the owners and managers’ (quoted by Hayward, 1995a:4). 2 Egan (1994:40) points out that, ‘Complaints about technical barriers account for 50 percent of all complaints lodged relating to the breach of Article 30, prohibition of measures have “equivalent effect to quantitative restrictions”. 3 It is also worth noting that as a result of privatization and liberalization in Europe, the EU itself has been drawn deeper into the regulatory process as a corollary. In many instances, monopolies remained intact after privatization, largely as a result of the maxim (most strongly practised in the UK) that private regulated monopoly is superior to public monopoly. Consequently, the EU has become embroiled as a major actor in the process of re-regulation. 4 For a full list of these technical areas, see Appendix 1. 5 The UN-ECE agreement is based on the principle of mutual recognition by signatory countries of approvals given to harmonized regulations adopted by Working Party 29 of the UN-ECE. 6 Japanese automobile inspectors must visit European car plants within forty days of being requested to do so, to observe the tests that require Japanese officials to be present. 7 In 1995 the Japanese Ministry of Transport (MOT) stated that it ‘will adhere to the UN-ECE 1958 Agreement on the mutual recognition of approvals in the field of motor vehicle equipment and parts as soon as possible and that it will apply a substantial number of regulations. This is this first time that a nonEuropean country has announced it is signing up to this agreement’ (Wright, 1995a:11). 8 ACEA (1993:20) estimated Japanese transplant output would reach 1.4 million units by the year 2000.

10 Governing structures at the European level

This book has explored the governance of the automobile sector at both the national and the transnational level, analysing the distinctive characteristics of the relationship between the industry and public authorities. This concluding chapter explores more fully the development of policy networks and governing structures at the European level. These issues go to the heart of the debate between the classic and sectoral approaches of government-industry relations outlined in Chapter 1. The impact of Europe on domestic networks In the past, the government-industry relations debate has been dominated by efforts to identify cross-national and cross-sectoral patterns of interactions and governing structures. This research agenda has been superseded to a large extent by the process of European integration which has provided the context for the convergence of national policies into European Union (EU) policies. The discussion of the EU-Japan car accord in Chapter 8 showed how previously incompatible and distinctive national policies are now being tied up in a common framework. Long-standing national policy networks have found themselves gradually shorn of policy instruments. Often the process is softened by implementation clauses, derogation and so forth, but the trend towards transnational policy is unmistakable and irreversible in an industry in the throes of globalizing its production. The development of European industrial policies and the shift of decisionmaking authority from nation states to Brussels has been evident in the automobile industry for some time and raises the spectre of new networks of actors and governing structures at the transnational level. Within such networks we find actors from the national and regional level involved in a process of issue resolution. Thus in the case of the French government’s efforts to restructure Renault we saw how a well-established national network was challenged by EU institutions. The interactions between national actors and transnational actors were as important to policy outcomes as the interactions that took place within the national network. Thus, to understand policy change

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one has to analyse the structure and dynamics of both national and transnational policy networks. At one level, the need for a national response to EU draft directives has had the effect of reinforcing relationships between domestic groups and national officials. Our study of the UK suggests there are several reasons for this. First, there is a degree of national solidarity between civil servants and industrialists in response to the ‘outside’ interventions of EU policymakers—although this is likely to vary between member states. Second, because national governments are responsible for assessing the impact of EU directives at an early stage, i.e. ensuring they are sensitive to national circumstances; national officials are keen to avoid ‘agreements’ which could disadvantage ‘their clients’. In the British case, this has sometimes amounted to the Department of Trade and Industry (DTI) or the Department of Transport (DTp) allowing the Society of Motor Manufacturers and Traders (SMMT) to redraft an EU directive as the government’s position (interview information). Third, domestic groups and companies realize that through the Committee of Permanent Representatives and the Council of Ministers national governments are still powerful in the decision-making process. On some issues the Council can have a decisive influence at an advanced stage in policy development. However, this is a reactive approach and often signifies a failure to exert influence at earlier stages in policy development. Therefore we have something of a paradox: the ability of domestic networks to manage their policy agenda has been circumscribed by the shifting of decision-making power to the European level, yet this very process has reinforced relationships within domestic networks because of the amount of policy scrutiny required. However, there is little doubt that in many policy areas there are significant limitations on domestic actors’ room for manoeuvre. National networks can sensitize EU policy to local conditions—something that is positively encouraged by Commission officials—but their ability to develop policy in the automobile industry at the national level is increasingly circumscribed. In the automobile industry, national networks are brought into policy development at the European level by the Commission or Association des Constructeurs Européens d’Automobiles g.i.e. (ACEA) where they have a recognized technical expertise to contribute. For the most part the role of the national policy network is increasingly one of scrutinizing EU directives. We recognized that such conclusions may not be ‘generalizable’. The national network in the UK is dominated on the industry side by multinational interests who are committed to harmonization and are active in EU level networks. Consequently, the national network increasingly perpetuates the EU network. In contrast, the French and Italian national level networks are still dominated by indigenous producers and may be far more active in policy development. National governments retain a large number of policy instruments that can shape corporate behaviour. The leading European-owned automobile firms still produce most of their product at home. Thus, national

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policies in areas such as taxation, labour market regulation, competitive R&D programmes, infrastructure, education and training have direct consequences for these companies. Our point is not to deny this but to emphasize that the role of nation states has been greatly circumscribed. Multi-level governance and policy networks This study suggests that the notion of ‘multi-level governance’ (Marks, 1993; Fuchs 1994; Scharpf, 1997) seems to broadly capture the characteristics of policy-making in the automobile sector. In many areas policy is being made between transnational and national levels and in some areas we have seen that there is also interaction between these levels and the international or ‘global’ level. Our account has emphasized the presence and influence of a range of transnational actors who help create fluidity between the different levels and in the process embed supranational governing structures. There are some straightforward functional reasons why multi-level governance should evolve in Europe. The Commission as drafter of EU policy must establish coalitions and structures with societal interests and public authorities across territorial levels if it is to effectively manage the integration process. As Metcalfe notes: [The] Commission alone could not be solely responsible for managing EC policies. In a multilevel and multinational system of government, responsibilities are shared. But institutional differentiation creates problems of coordination and integration. The Commission, as the key supranational agency of public management in the EC, has a unique responsibility for ensuring effective coordination among the other organizations involved. (Metcalfe, 1992:118) We would argue that, at least for sectors where integration and harmonization are firmly on the EU policy agenda, multi-level governance will be an empirical reality. If EU institutions wish to implement a series of positive integrative steps, as they did in the automobile sector, then policy-making is bound to take on a multi-level character. EU institutions have neither the resources nor the expertise to do otherwise. For example, Laffan (1997:423) argues that the Commission is ‘in the market for ideas as it strives for collective solutions at the European level’. The issue is then to explain how the Commission seeks to translate its steering goals into outcomes in a policy sector. It is here we find great utility in policy network analysis. The Commission is ‘resource poor’ but as Peterson (1997:8) argues, it therefore has a very strong incentive to ‘network with EU policy stakeholders’. Accordingly, the Directorates-General are seen as the ‘ring leaders of sectoral policy networks: they depend on other

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actors for resources but still hold the keys to the policy agenda’. This theme is echoed by Cram (1994) who suggests that: Much of the activity of the European Commission might well be interpreted as an attempt to expand gradually the scope of Union competence without alienating national governments or powerful sectoral interests. The Commission, acting as a ‘purposeful opportunist’, has employed a variety of techniques aimed at expanding the scope of the Union’s competence, and the extent of its own scope for action. (Cram, 1994:199) In our account policy network models are entirely compatible with the multilevel governance image of Europe. The network approach facilitates an examination of the linkages between actors from the different levels, how they associate and negotiate, and how they manage policy-making in individual sectors. The approaches that have served us well in studies of national and comparative politics require adaptation and empirical testing in EU policy studies. They may prove to be inappropriate but we can only properly construct new models once we have understood the deficiencies of the existing ones. Atkinson and Coleman (1992) have argued that policy network analysis must cope with three challenges if it is to develop as a model of decisionmaking. First, the connections between networks and broader political institutions must be explored. Second, international levels of decision-making need to be integrated into policy network studies. Third is the need to explain patterns of change in networks. The first point has been discussed in detail in Chapter 5, but the last two points are particularly apposite to our analysis of the politics and policy at the European level. Policy networks in the automobile sector In the period up to the late 1980s a cohesive policy network failed to develop in the automobile sector at a European level. In fact, the policy sector had a range of governing structures which prevented such an arrangement. First, the industry was still dominated by ‘national champions’ who had little or no production outside their home market. Harmonization involved significant risks for these companies as the delays in achieving Whole Vehicle Type Approval illustrated. Second, the industry had a tradition of independent political activity which came to the fore at the regional level, frustrating EU institutions’ efforts to replace national policies with regional policies. Third, European collective organizations were long established in the automobile sector but they were unreliable partners for EU officials as they pursued integrative steps in the 1980s. What existed in the second half of the 1980s was a fairly loose EU policy network which lacked the order of a policy community. National cleavages

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were still strong, there were differing levels of support for harmonization and Europeanization among national policy networks, and the EU institutions had not at that stage wrestled significant decisionmaking power from member states. Many automobile companies were still dependent on state aid and were preoccupied with achieving competitiveness within Europe. The Commission’s priority of global competitiveness was still a distant concern. This rather loose network structure existed at the sectoral level throughout the 1980s. We deliberately hesitate to use the label ‘issue network’ in this instance, because as noted in Chapter 1, issue networks tend to have unstable memberships and are easily penetrated. This was not the case in the automobile sector. There was a definable network based around the Committee of Common Market Automobile Constructors (CCMC), the Liaison Committee of the Automobile Industry of the Countries of the European Communities (CLCA), the Brussels offices of several leading companies and the DGIII automobile unit. This network failed to assert its authority over pre-existing domestic policy networks on many of the key issues. One of the ironies of the situation was that the two American multinationals were the main campaigners for further integration and technical harmonization, rather than the indigenous producers. When a national champion saw a need to react defensively to a proposed directive or regulation it tended to concentrate on building support for its position within the national network, while simultaneously frustrating any progress on the issue in the European network. It was the use of this tactic on several occasions by PSA within CCMC that earned the company the antipathy of many of its peers. Even at this stage the multi-level nature of EU policy-making was evident, although the balance was very much in favour of national interests and national level activity. The Commission seizes the initiative There was a decisive change to these arrangements in the late 1980s as the momentum towards further integration, embodied in the Single European Act (SEA) and Single European Market (SEM), increased dramatically. As Baumgartner and Jones (1993) have illustrated, institutional change in Europe can have a dramatic impact on policy outcomes. As we saw in Chapter 6, the principal governing structures in the sector, namely the limited scope for effective collective action and the persistence of multiple voice strategies, continued throughout this period. Arguably, large parts of the automobile industry failed to grasp the significance of the single market programme in legislative terms, and collectively the sector was left trailing in the wake of draft proposals from a rejuvenated Commission. Companies who anticipated the full implications of changes, such as Daimler-Benz, were exasperated by the responses of many of their peers. During this period something akin to ‘state’ direction developed, although we recognize the difficulties in using the term when discussing the Commission. In

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this type of ‘network’, officials ‘are not in the mood for concertation, and they are by no means neutral with respect to outcomes and instrumentalities. The political-administrative style is one of managerial directive followed by polite briefing’ (Atkinson and Coleman, 1989: 59). As a generalization this is a remarkably good description of events in the automobile sector when the Commission, or more precisely DGIV with the support of a powerful neoliberal advocacy coalition, seized the initiative and set the parameters of policy. The Commission was able to exercise policy leadership at this stage. The weakness of the existing network and divisions within the industry provided the opportunity for a more assertive policy style. The Commission in particular is adept at exploiting this type of situation, even if its preference is to work closely within a more cohesive network in policy development. The openness and complexity of the EU polity has created an environment which the Commission and other EU institutions have, at times, manipulated to their advantage. The Commission exploited the rhetoric and discourse which surrounded the single market programme to widen its remit in the automobile sector. From 1989 onwards the Commission effectively controlled the formulation of policies, the timing of initiatives and the policy instruments that would translate policy into action. In Chapter 8 we outlined how the Commission utilized these powers to good effect as it brokered the Elements of a Consensus understanding. This was just one example of the policy leadership which it demonstrated in its efforts to integrate the automobile sector. The most spectacular example was the introduction of a sectoral state aids framework. Member states rejected DGIV’s requests for a sectoral state aids framework in the early 1980s. However, a series of policy papers, EUfunded consultant reports and Commissioner speeches throughout the mid1980s were used to advocate a European response rather than national responses for the sector. The arguments were couched in terms of Europe’s position in a global sector dominated by American and Japanese producers. EU officials stressed the potential benefits which could be gained from the removal of obstacles to competition in the European economy. This was a dormant period in terms of policy initiatives but it was crucial in laying the foundations for what followed from 1988 onwards. The argument that the traditional national policy instruments used in the sector were unsuitable for the challenges of globalization began to find a more sympathetic audience. Informed by a predominantly neo-liberal stance, the key Commissioners—Brittan at DGIV and Bangemann at DGIII—found friends for their views among some German producers, American multinationals, the secretariat of CLCA, and a small but vocal band of member governments.1 Most of the volume automobile producers led by the major French companies and Fiat fought a rearguard action against this coalition on several key issues. These tensions came to a head spectacularly in the debates over Japanese imports. When collective representation collapsed in the industry in

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1990 it was interesting to note that it was the secretariat of CLCA rather than CCMC which emerged as the driving force behind the new body. Those in favour of a more liberalized market gained the upper hand in the sector just as they had done at the macro-political level in Europe. As we saw in Chapter 6, the ‘advocacy coalition’ (Sabatier, 1988) never quite succeeded in changing the belief system of the entire network. There were still many differences among its members on key issues of industrial and trade policy. Nevertheless, the coalition had done enough to enable the Commission to implement key integrative measures. What occurred in this period was competition between rival advocacy coalitions for influence and control of the policy network. The Commission supported the group that ultimately prevailed. The automobile case during this period demonstrates par excellence the entrepreneurial role of the Commission outlined by Sandholtz and Zysman (1989). The governance of the automobile sector reached a critical juncture in the second half of the 1980s. The industry was accelerating towards a global structure which threatened to leave national strategies and policies trailing in its wake. The Commission seized its opportunity. In a single policy draft in 1989 the Commission dealt a decisive blow to the hitherto common practice of national policy instruments being used to support ‘national champions’. However, as always there were other circumstances which influenced events. Most notably, the European car market was growing rapidly and manufacturers were enjoying record levels of sales and production. There was a ‘feel-good’ factor in the industry and this made life easier for the proponents of major change. This point was brought home in the 1992–5 period when the industry endured its worst-ever recession and began to cast a more critical eye over the Commission’s governance of the sector. At the meso-level where the policy sector was confronted by major issues of industrial policy there was no policy community structure. The industry was fragmented as individual companies repeatedly broke ranks from their peers and engaged in independent political activity. Moreover, it was not just the industry who were split; the responsibility for policy formulation was also undergoing a transition as national states and the Commission sought to clarify the lines of responsibility. In this ‘messy milieu’ it is no surprise that a policy community did not develop. Power and influence were dispersed and this allowed the Commission—or more accurately parts of the Commission—to adopt a more impositional policy style. Throughout this period there were tensions between the civil servants in DGIII and those in DGIV responsible for driving forward competition policy in the sector. Ever mindful of its sponsorship role, the DGIII automobile unit was frequently to be found trying to soften the impact of various measures on the sector; although it would be wrong to suggest that many in DGIII, including Commissioner Bangemann, did not support the broad objective of dismantling national trade barriers and regulations. Similar tensions emerged with other parts of the Commission on

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issues of environmental and consumer policy. In our view there is a strong preference within the Commission for close working relationships with societal interests through policy network structures. Ironically however, it was the weakness of the network in the late 1980s that enabled the Commission to push ahead with its plans for the sector. The policy network in the 1990s The period of state direction and imposition was, as we might expect, a transitory development. In the 1990s there has been increasing evidence of a more cohesive network structure emerging at the meso-level. This process began during negotiations over Elements of Consensus. The Commission, having determined the parameters of policy, then went to extraordinary lengths to negotiate implementation details with the industry. This was more than polite briefing and fence-mending: the Commission was well aware of the industry’s implementation power. The divisions within the industry and between member states helped to create a vacuum which the Commission duly exploited. However, when it came to the ‘nuts and bolts’ of policy detail there was no question but that detailed consultation with the industry would follow. The difficulty with adopting a strident approach to industrial steering is that policy-makers risk alienating the interests they are attempting to influence. This is particularly true of the political system in the EU: policy networks are often associated with policy inertia at the national level, and policy-makers can be captured by organized groups. At the transnational level network development is positively encouraged by EU institutions seeking to translate steering goals into outcomes. Sbragia suggests that policy steering at the EU level is inextricably linked with the development of policy networks: Governance in the (European) Union is clearly understood as ‘steering’ which involves creating new linkages among actors and re-shaping existing linkages. Although the literature on governance seems to imply a dichotomy between traditional notions of steering and the activities of networks defined as public and private actors working in a interdependent fashion, in the Union the two are intimately linked. (Sbragia, 1997:7) Following our discussion in Chapter 5 we expect the structure of policy networks to largely determine the steering instruments adopted by EU institutions within policy sectors. The preference is for negotiated and regularized relationships with resource-rich actors; however, this may not always be possible. The clearest indication of greater cohesion in European-level networks in the automobile sector has come in the area of technical harmonization where we believe policy community structures evolved in the 1990s. When the

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Commission sought to introduce a (gradual) programme of more stringent standards in the 1980s negotiations were paralysed by differing corporate and national interests (see Chapter 6). Such disputes were much less a feature of the network by the mid-1990s: a well-defined policy community has emerged around the key units of the Commission with responsibility for engine emissions. This issue cuts across the remit of six Directorates-General and attracted increased interest from the European Parliament (EP). Yet in true network fashion the issues were unpacked and debated in working committees dominated by experts from ACEA and its counterpart in the oil sector, the European Petroleum Industry Assocation (EUROPIA), and the Motor Vehicle Engine Group comprising experts from the national level. It is fair to say that industry provides the technical foundation for future policy. However, given the linkages between the issues, transport networks and wider environmental concerns, the policy network has been careful to provide regular briefings to MEPs and national governments. In fact, key individuals in the EP have been brought into the network in recent years in recognition of their growing technical sophistication and power in the policy process. This sort of development would be unthinkable in a domestic policy community in the UK where civil servants and organized interests aim to insulate the policy agenda from the wider political system. At the EU level there is a recognition that the network must cope with openness of the political system and the extensive interaction between EU institutions. The emissions example illustrates an important feature of governance in the automobile sector. The sectoral-level network has faced periodic threats to its cohesion but it does seem able to spawn much more cohesive structures to deal with specific (usually technical) issues: what are best described as subsectoral policy communities. The sectoral-level network has found it very difficult to achieve consensus on some issues. In these more discrete arenas ‘ownership’ of the issue will rest in an ACEA working group. This group will be in close contact with the relevant Commission unit (usually no more than two officials) and they pull in expertise from the national level as appropriate. These participants will shape the policy and engage in informal discussions with other parts of the Commission and other EU institutions as and when necessary. This pattern of interaction precedes initial policy drafts and continues throughout the drafting process. These policy community structures have evolved to deal with the technical harmonization required for Whole Vehicle Type Approval. In this area the Commission faced a breathtaking range of issues which had to be formulated and implemented as directives (see Appendix 1). Once the industry accepted that full harmonization had become an unstoppable political objective it knuckled down to policy community politics and differences between the various policy participants were resolved within the network. Technical regulations for cars were fully harmonized by 1996, removing the need for national testing procedures in line with the Commission’s deadline. This was a

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significant achievement for a bureaucracy not involved in service delivery, operating with a very small team of officials and a limited budget. The Commission’s achievements in this area would lead one to characterize the governing process as close to what Stone and colleagues called ‘supranational polities’, i.e., ‘a mode of governance… in which centralized governmental structures (those organizations constituted at the supranational level) possess jurisdiction over specific policy domains within the territory comprised by member states. In exercising that jurisdiction, supranational organizations are capable of constraining the behavior of all actors, including the members states, within those domains’ (Stone et al., 1997:303). The Commission may occasionally be impositional and sometimes manipulative, but it generally accords a high priority to cooperation with societal interests as a means of managing the policy process. The support given to the formation of ACEA throughout 1990 was typical of this approach—in the absence of a cohesive network structure the Commission sought to create one. The emergence of ACEA as a well-resourced interest group has been fundamental to the developing cohesion within the policy network in the 1990s. The group has created a large number of expert committees which are plugged directly into the relevant parts of the Commission and its Task Forces from where many draft regulations and directives emanate. ACEA’s structure ensures links between the European policy network and national networks in an effort to ensure that EU policies are sensitive to national conditions and have broad-based support in the industry. It has formal links with national trade associations and calls on experts from these groups as and when required. These linkages between the European and national level are important as the effective implementation of EU policy requires coordination between the two levels. The approach is deliberately inclusive. We can see therefore that a key governing structure of the pre-1991 period has started to change. More effective collective action is gradually replacing the previous environment where policy participants were content to use multiple voice strategies and transfer their loyalties between national and European level on an issue by issue basis. The changing nature of governing structures in the automobile sector in the 1990s was underlined when the group began pushing the Commission to improve its internal organization. As we saw in Chapter 6 the industry has become increasingly frustrated with the inability of DGIII to speak for the Commission on many issues of industrial policy. DGIII of course often faces as much difficulty negotiating with other Directorates as it does with societal interests. In 1993 ACEA complained to DGIII that: the salient features of European governmental/regulatory practice at present is the adversarial, sometimes even hostile, relationship and the frequently hermetic walls between the production (industry) and regulation (government) functions… In contrast to the consultative

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techniques used elsewhere that result in broad long term ‘visions’, European policies and regulations are hammered out among a wide array of competing, conflicting and often ideological interests, producing a highly adversarial environment for industry-government relationship. (ACEA, 1993, private communication) This is obviously a one-sided view of the relationship and the communication came at a particularly sensitive time when the industry was locked in disputes with the Commission over selective distribution and R&D in the run-up to the Fourth Framework Programme. Nevertheless, it is hardly the stuff of policy community politics. The initiative by ACEA to establish ‘inter-service groups’ which brought officials from different DGs together with ACEA working groups to discuss policy, was a response to this. ACEA’s criticisms of the Commission notwithstanding, we would suggest that greater cohesion has marked the government-industry relationship in the mid-1990s. Policy networks at the EU level have evolved from the looser arrangements of the 1980s and exhibit more routine and regular characteristics. A number of factors explain why the network has changed in this way. The formation of ACEA was a major step towards a more cohesive network. We would argue that a well-organized sectoral organization is a prerequisite for a more cohesive policy network. Such networks have organization, loyalty and order at their core. Second, the major policy initiatives of the late 1980s and early 1990s determined the policy framework for the sector and the detailed implementation phases that flow from this have helped create regularized structures. The clearest example of this is the 1991 Elements of Consensus understanding which set in place a seven-year implementation timetable. Moreover, because many of the contentious issues of industrial and competition policy were settled prior to 1992, the policy network has tended to focus on less politicized issues relating to harmonization and implementation. This is likely to continue as further harmonization takes place. Finally, we would argue that just as European integration initially reinforced relationships between national champions and member states, similarly the threats and opportunities posed by globalization created pressure for closer cooperation between the EU and its automobile producers. Globalization is pushing the industry towards even closer joint venture activity, crossshareholding arrangements and increasing consolidation and rationalization. This is altering the industrial structure of the sector and will in turn change the inherent governing structures of the policy network. For example, Toyota’s decision to locate in France and not Britain in 1997 will further weaken resistance to the Commission’s volet externe policy. Europe already has a multinational automotive sector and the trend is towards further internationalization.

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In Chapter 1 we noted Peterson’s point about the importance of the linkages between sectoral level governing structures and the macro-political level (Peterson, 1995a). We have described how the structure of domestic regulation of the automobile sector has gradually been replaced by European regulation. Our focus has been on the sectoral and micro-level and on the governing structures that have developed as various actors come together in policy networks. In our view such structures are essential for integration. In this respect our account is sympathetic to the theory of European integration proposed by Stone et al. (1997). In an attempt to explain the uneven progress of European integration across policy sectors they suggest that intergovernmentalism and supranationalism are best seen as ideal types at either pole of what might best be called an ‘integration continuum’. Stone et al. (1997) argue that movement along the continuum towards supranational governance will depend to a large extent on the intensity of pressures emanating from transnational society and EC organizations. The greater the autonomy of the latter and the greater the intensity of the former, the more likelihood there is of movement towards supranationalism. Thus they stress the importance of ‘interest groups, business and knowledge-based elites— on policy processes and outcomes’. They conclude, ‘In supranational politics, transnational actors have a choice of fora in which to exert their influence. They may target national government structures… as well as supranational bodies and they may play one level off against the other’ (Stone et al., 1997: 305). The evidence from the automobile sector supports such an account, although like them we also would point to the important role played by civil servants and Commissioners in defining options, setting timetables and doggedly pursuing policy objectives. In the important case of state aids this meant at one level simply asserting and implementing Treaty rules and developing them within a sectoral framework, although arguably the muchmaligned DGIV officials were not without their supporters within the industry who wished to see an end to at least some state aid practices. The role played by EC rules, autonomous bureaucrats and transnational actors will be closely linked as a policy sector moves towards further integration. The strength of policy network analysis is that it provides a tool to analyse such activity. We recognize the danger in assuming that this will hold true in other policy sectors. The automobile industry is an example of a maturing sector that is heavily Europeanized; one where global competitors are firmly established within the European market; where soaring product development costs have led companies into joint ventures with competitors; and where by the early 1990s most national governments had lost their appetite for active support of national champions. The importance of these and other factors will vary between sectors and are bound to have a bearing on the extent of multi-level governance. The same point holds true for the policy network approach. The majority of industrial sectors are subject to varying levels of EU regulation and policy and we would

THE EUROPEAN AUTOMOBILE INDUSTRY 209

expect different types of policy networks to exist in each of these. However, we fully accept the point made by Kassim (1994) that these policy networks may lack cohesion—there are plenty of factors in the multi-level system outlined above that can challenge and weaken networks. In his study of the air transport sector Kassim (1995) demonstrated how national cleavages remain strong. He maintained that the national level was predominant and the Commission has not developed its domain to the extent, say, evident in automobiles. This is a sector where national champions such as British Airways are directly engaged in global competition. We part company with Kassim when he appears to suggest, on the basis of evidence from one sector, that the general utility of network models in EU policy studies is in doubt. Attention would be better directed to ex plaining why networks thrive in some sectors and apparently founder in others. Globalization and policy networks Perhaps the most significant force of change in EU level networks will be the seemingly relentless process of globalization. Globalization can also stimulate movement towards increased supranational governance within Europe… Transnational actors are sometimes the conduit through which globalization stimulates advances in European integration’ (Stone et al., 1997:309). The internationalization of policy sectors which flows from global corporate strategies is the most important and daunting conceptual challenge facing policy network analysis. As we saw in Chapter 1, Peterson (1995a) advocated a synthesis of several theoretical models and traditions in dealing with the issue. We have considerable sympathy with this approach, but believe that part of the research agenda must be to study how existing national and European networks alter their governing structures in response to these macropolitical changes. There is a tendency to be mesmerized by globalization, seeing it as a major new development which cannot be accounted for using the traditional tools of network analysis. There is little justification for such pessimism. Globalization in the form of European integration has been taking place for several decades and is gradually being assimilated into models of public policy-making. When Ford, Chrysler and General Motors dramatically increased their investment in Western Europe in the 1950s and 1960s, the national policy networks which existed in the European sector had to adjust. The American firms pursued multi-domestic strategies that initially treated national markets in Europe quite independently of one another (not least because of the absence of technical harmonization in the region). However, by the 1970s there was increasing integration and coordination within GM Europe and Ford Europe. National networks reacted in different ways to this development. In the UK and West Germany the multinationals soon became integrated into domestic policy networks, and policy-makers focused on raising the competitiveness of

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national producers in co-existence with the multinationals. In France, by contrast, the domestic network retrenched and the traditional policy instruments were used to bolster and protect the national champion. In the 1980s domestic policy networks had to adjust to a further wave of globalization as the various national markets in Western Europe accelerated the harmonization process that had trundled through the 1970s. By this time there was a nascent network structure at the European level. The industry formed collective bodies in response to the early stages of technical harmonization and several companies had opened lobbying offices in Brussels. The ‘Europeanization’ that occurred in the automobile sector in the 1980s and 1990s was both a form of globalization, in the sense that many national policy instruments and systems of regulation were replaced with transnational arrangements, and a response to the wider process of internationalization occurring in the industry. As Payne argued, regionalist projects such as the EU have to be undertaken in the context of an awareness of globalization, and such projects are ‘centrally concerned with the reorganization of the dominant form of state operative in their region’ (Payne, 1997:6). This book has illustrated how the adolescent policy network which existed in the European sector coped with this process of change. The ‘Europeanization’ of the sector created significant turbulence in the network. A process that radically reshapes domestic government-industry relations and changes the rules of the game regarding the development of policy is not the ideal backdrop for cohesion. The Commission, ably supported by key member states, selected tactics and policy frameworks which were deferential to market forces and sceptical of heroic interventions at the micro-level. For companies such as Renault and Fiat this represented a radically different philosophy and ideology. Perhaps the most interesting aspect of this phase of globalization was the manner in which those responsible for formulating policy, the European Commission, responded to the challenge. Campenella (1993) distinguishes between three types of policy response to globalization. First, policymakers may respond by immersing themselves in international affairs and emphasize the international agenda over national agendas. Second, policymakers might emphasize domestic agendas in the face of international turbulence. This tends to occur where policy-makers are constrained by domestic policy communities and react to demand for policy rather than initiating new policies. The third approach is a paternalistic response which sees policy-makers try to manage the economic adjustments deemed necessary in response to globalization. Campenella describes the third response in the following terms: By seeing interdependence and globalization as elements in a dynamic environment which challenges the capabilities of the participating actors and institutions, policy-makers might feel a duty to act as manager-like actors whose aim is to prevent organizational decline and policy inertia.

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This is achieved by resorting to cooperation and coordination, and by activating networking and new institutional settings. (Campenella, 1993:199–200) Campenella’s typology was developed with nation states in mind and we can identify in the second approach the typical national responses to the threat posed by American multinationals in the 1960s. However, the typol ogy has relevance for EU institutions as they strive to manage Europe’s response to further globalization. The third approach accurately describes the Commission’s preferred policy style in the automobile sector. The tensions that emerged in the policy network between the industry and the Commission in the late 1980s arose because elites in DGIII and DGIV eschewed the national champion approach and embarked on a programme of liberalization at what for many in the industry was an uncomfortable pace. The removal of state aids, national vehicle testing and regulations and the elimination of import barriers were akin to a penicillin injection—most players in the industry recognized the long-term benefits but there were few willing volunteers for the treatment. The single market in vehicles can never be fully completed until the ‘big’ issues of monetary union, labour market deregulation and harmonization of indirect taxation have been resolved. However, the majority of the sectorspecific measures required in automobiles are close to completion. With ‘Europeanization’ all but achieved, the automobile sector is now adjusting to the challenges of the next phase of globalization: integration with the other major vehicle-producing regions of North America and South-east Asia. The discussions between the European and American authorities on trans-Atlantic technical harmonization are the ‘green shoots’ of this process, as is the proposed merger between Daimler-Benz and Chrysler. The prerequisites for further globalization—increasing international economic concentration, firms established beyond their own region, and global production strategies—are already evident in the automobile sector. Toyota and Honda already have global products and the American multinationals are hard on their heels. When the Ford chairman Alec Trotman announced his company’s plans for global production and global products in 1994, he argued: ‘Ultimately, there will only be a handful of global players and the rest will either not be there or they will be struggling along’ (Sunday Times, 27 March 1994). Who will govern these supercompanies? What policy instruments can be used to steer corporate behaviour? We have seen in this book the enormous challenges that have confronted well-established policy networks as the need for policy coordination and cooperation between member states became more important than policy-making within member states. The result is a complex, multi-level government-industry relationship. This complexity becomes more bewildering when we contemplate the evolution of governance structures and regulatory frameworks at an international level above regional trading blocs.

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At present this ‘super’ level of governance is underdeveloped in the automobile case. Genuinely international as opposed to regional regimes do not adequately perform this role at present, nor were they designed to do so. Currently global issues tend to be resolved through high-level discussion between the Commission and its counterparts in North America and Japan. These efforts are focused on technical harmonization and, in the Japanese case, issues of reciprocal trade and investment: but this is surely a temporary arrangement. The global strategies of companies such as Ford and Toyota are likely to be hindered if governance regimes remain rooted in regional trading blocs with only rudimentary coordination mechanisms. It seems likely in the automobile case that the industries of Europe, North America and Japan will strive to agree common regulations. Harmonization within Europe suggests that this process requires a regulatory response which recognizes other legitimate interests and objectives in a legal and political framework. Issues such as engine emissions, for example, may be highly technical but they cannot be left to the industry alone. As Grant (1992:1) has observed: ‘International firms create the need for improved international governance, but they do not and cannot provide it’. Thus, the prospect of the stateless firm looms ever larger in the automobile case and will soon pose dilemmas for policy networks in Europe. There are some interesting challenges ahead. As the Japanese companies further develop their manufacturing bases in Europe, will they be offered full membership of ACEA? Can Japanese companies be excluded from the plethora of research programmes and initiatives which the Commission has encouraged in the development of generic technologies? The inclusion of the American multinationals is a precedent, although European firms have been excluded from the US programme USCAR. These issues are bound to arise and will bring into sharp focus the dilemma over whether in a global economy it is possible for individual regions to develop industrial policies for a sector whose global players ‘are no longer the industrial projections of national identity’ (Hayward, 1995a:2). We might expect a policy network to evolve at the global level as the ‘big players’ develop common interests that mark them out from companies who are unable or unwilling to operate in such venues. The global groups are likely to perceive competitive advantages in a global governance regime. The network approach has coped well with the challenges presented to date. The era of the stateless firm and global governance regimes will provide yet another challenge. Whether or not the network approach can respond is as much an empirical as a theoretical question. Notes 1 . A leading official in one European automobile company recalled the mood at the time: ‘We were one of the first of the major companies to endorse the

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Commission’s free market position but we were far from clear in our thinking. Every major study that came out showed Europe falling further behind the Japanese, Britain had now let them into Europe on very favourable terms, and the national governments were becoming less and less comfortable with an active role in the sector. It was a threatening environment and the Commission arguments about the dynamism of a single market were very attractive’ (interview).

214

APPENDIX 1 (Source: ACEA, 1997) Legislative Overview Before any motor vehicle can be sold on the EU market, it must comply with what is known as the Framework Directive for Whole Vehicle Type Approval. This Framework Directive contains procedures and a long list of separate Directives laying down technical requirements for motor vehicles as well as for components and separate technical units from which vehicles are assembled. There are also Directives which establish requirements for the use of motor vehicles, as well as regulations, which apply throughout the European Union on the basis of Community law. Definition of vehicle categories

216 APPENDICES

Framework directive for whole vehicle type approval

APPENDICES 217

218 APPENDICES

Recently adopted legislation

Note COP: conformity of production

Legislation under discussion

APPENDICES 219

220 APPENDICES

Notes CATP: Committee for Adaptation to Technical Progresses; votes on Commission propasals amending existing Directives; ECE: United Nations Economic Commission for Europe; its Working party 29 establishes international technical requirements for motor vehicles; MVWG: Motor Vehicle Working Group, a group of member country experts which examines all technical draft proposals related to motor vehicles; industry and NGOs are admitted as observers and advisers.

APPENDICES 221

Notes EEV: Enhanced Environmental vehicle; MVEG: Motor Vehicle Emissions Group, a group of member country expers, which examines all technical draft proposals related to motor vehicles: industry and NGOs are admitted as observers and advisers.

Emission legislation Under discussion

222 APPENDICES

APPENDIX 2 (Source: ACEA, 1997) Legislation on legal, environmental and consumer protection matters The automobile industry is subject to numerous technical Directives and Regulations, as well as legislation of a more legal nature. The legislation covers areas such as competition law, intellectual property law, consumer protection and taxation, and emissions (air quality and fuels). Listed below is the current ‘state of play’ with regard to these pieces of legislation. Existing legislation applicable to the automobile industry Competition law

224 APPENDICES

Consumer protection

Intellectual property

Other

APPENDICES 225

Taxation

Legislation under discussion

226 APPENDICES

Air quality approved legislation

Air quality proposed legislation

APPENDICES 227

228 APPENDICES

Fuel approved legislation

Fuel proposed legislation

APPENDICES 229

APPENDIX 3

Collective Organizations The Motor Agent’s Association (MAA) was the national employers’ organization for the retail motor trade in Great Britain and Northern Ireland. Rather like the National Farmers Union, the MAA membership was divided into twenty-four regional divisions for administrative purposes. In its early days the MAA was not a competitor of the Society Motor Manufacturers and Traders (SMMT); instead, its activities complemented the manufacturers’ association. The MAA rarely became involved in the type of manufacturing issue under consideration in this chapter. On export policy, for example, its input was restricted to providing information on overseas dealership and marketing conditions. However, as Milburn’s early study reveals, on retail issues it enjoyed good access to policy-makers. The MAA, he observed, maintained contact with ‘those government departments whose activities have a bearing on the retail trade and the Association is frequently consulted by the Government before new regulations are issued or changes made in policy announced’ (Milburn, 1950:323). The Scottish Motor Trade Association (SMTA) represented the Scottish retail sector. Its position in Scotland was strengthened by its close links with SMMT. For example, the SMTA organized the Scottish motor show and other exhibitions and competitions in Scotland on behalf of SMMT. The British Motor Trade Association (BMTA) was the regulator of the motor market. Once the manufacturers had determined retail prices it was the task of BMTA to make sure these were upheld. The group’s main role was to prevent internecine competition amongst dealers, in particular, encroachment into each other’s territory and price cutting or price inflation. The manufacturers determined the rules of distribution for their dealers and BMTA made sure these were implemented. It was not an active policy participant and was rarely consulted by the Government. The British Transport Vehicle Manufacturers Association (BTVMA) was a separate trade association formed by the heavy vehicle manufacturing members of SMMT to represent the specific interests of heavy vehicle production. It remained a satellite of the

231 APPENDICES

SMMT (later rejoining the manufacturers association) which focused on specific subsectoral issues. The Motor Factors Association (MFA) had a monopoly representation over the factors industry. In theory, factors were restricted to conducting wholesale business with commercial customers and the retail trade. In practice, they were often accused by MAA members of supplying vehicles to the public at wholesale prices. The MFA was the antecedent of modern fleet management groups, and like the MAA was only intermittently involved in the policy process on manufacturing issues. The Institute of the Motor Industry was a professional organization with a membership of individuals. Its main functions as set out in its statutes in 1920 were ‘to provide an opportunity for the interchange of opinions on matters of professional interest, and to bring motor traders together socially’ (PEP, 1950b: 45). The Institute was in effect a motor industry ‘think tank’ and its input into the policy process was very much in the category of ‘information for policy design’ (Grant, 1987); for example, it might carry out research into an area of vehicle safety for the Government. It had no formal links with the SMMT or the MAA. A similar role was performed by the Automobile Division of the Institute of Mechanical Engineers which was a society through which automobile engineers discussed engineering issues and published papers. It was an educational rather than a political organization. Where the Government wanted to discuss issues such as R & D, production methods and so forth these groups could make a contribution, but again, on the policy issues of concern here—exports and rationalization—the principal policy actors were SMMT and the individual companies.

APPENDIX 4 British Leyland’s Organizational Stucture 1983

Source: based on Wilks (1988:210).

APPENDIX 5

The EC-JAPAN Car Accord EC undertakings

1 The EC side is committed to take the following measures with respect to the motor vehicle sector when market unification is completed by the end of 1992. With respect to vehicles imported from Japan: a The EC side will cease to authorize recourse to Article 116 of the Treaty of Rome by the end of 1992 at the latest; b France, Italy, Spain and Portugal will ease the levels of quantitative restrictions (including restrictions on registration) imposed upon vehicles imported from Japan from now and totally abolish them by the end of 1992 at the latest; c The EC side will achieve full Community acceptance of type approval for motor vehicles by the end of 1992. 2 In view of the fact that there are concerns on the part of the Community that unexpected circumstances might arise after 1 January 1993, the EC side requests the Japanese side to take cooperative measures with respect to motor vehicles exported from Japan, so as to avoid disruption in the Community market as a whole and in the markets of the following member countries: France, Italy, Spain, Portugal and the United Kingdom. Such measures will be completely terminated at the end of 1999. 3 The EC side will make an appropriate notification to the authorities at the General Agreement on Tariffs and Trade. 4 The EC side declares that the necessary measures will be taken to ensure that the operation of competition law does not constitute an obstacle to the operation of the cooperative measures on the Japanese side. 5 The EC side will not request any cooperative measures on 1 January 2000 or thereafter.

234 APPENDICES

MITI undertakings 1 The Japanese side welcomes the liberalization of motor vehicle imports from Japan in France, Italy, Spain and Portugal through elimination of all existing quantitative restrictions (including restrictions on registration), the decision by the EC side to cease authorization of recourse to Article 115 of the Treaty of Rome for motor vehicles and the full Community acceptance of type approval for motor vehicles. The Japanese side welcomes the EC side’s commitment to impose no restrictions on Japanese investment and on the free circulation of its products in the Community. 2 Upon request from the EC side, the Japanese side will take the following cooperative measures after the measures stated above have been completed: the Japanese side will monitor motor vehicle exports to the market of the Community as a whole and the markets of its specific member countries: i.e. France, Italy, Spain, Portugal and the United Kingdom. Such monitoring will be completely terminated at the end of 1999. 3 The Japanese side will monitor exports from Japan to the EC market as a whole in accordance with forecast level of exports in 1999:1.23 million, based on the assumption of demand in the EC (including the five new Bundesländer) in 1999 of 15.1 million. 4 The Japanese side will monitor exports from Japan to France, Italy, Spain, Portugal and the United Kingdom in accordance with the following: forecast levels of exports in 1999: France 150,000, Italy 138,000, Spain 79, 000, Portugal 23,000, UK 190,000, based on the assumption of demand in 1999: France 2,850,000, Italy 2,600,000, Spain 1,475,000, Portugal 275, 000, UK 2,700,000. 5 The Japanese side is prepared to hold consultations twice a year in order to assess market developments in the Community with respect to motor vehicles as well as trends of motor vehicle exports from Japan to the Community market. 6 The Japanese side will make an appropriate notification to the GATT.

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244

Index

ADAPT programmes 190 Agnelli, Umberto 161 Air France 150 air quality approved legislation 225 Airbus programme 62 Alfa Romeo 147, 192, 193: state aid 133, 135 American Chambers of Commerce (AmCham) 119 Andriessen, Frans 175 antagonistic cooperation 12 Association des Constructeurs Européens d’Automobiles (ACEA) 110, 163, 178, 179; 195, 197: on 1990 proposals 159; on 1991 understanding 171–81; capacity and 191; and Commission relationship 123–31; formation of 117–6, 127; on R&D 186, 187–5, 189, 190; on state aid 136, 182; trade policy and 160, 181–9, 204–14 Austin Rover 49, 141: British local content and 73; DTI on Ford-Austin Rover talks 52, 85; Ford regulations to purchase 51–7; plate prefixes campaign 90 Austin-Morris 33 Autobanchi 30 Automobile Manufacturing Economic Development Committee (EDC) 29, 30, 34 automobile sector sub-groups 1–2 Auto-Oil Programme 189 Auto-Union 30

Bangemann, Martin 115, 117–2, 160, 162, 177, 202, 203 Bank of Japan 76 Barber, John 17, 36 Barings 58 Bedford Truck 50 Benn, Tony 31, 35 BMW 63, 113, 119, 162, 163: takeover by Rover 193 Board of Trade 20, 25–8, 29 BRITE/EURAM budget 188 British Aerospace 50, 62 British Aerospace-Rover deal 56–5, 140– 52 British Airways 208 British corporatism 4 British Leyland (BL) 37, 39, 50, 96: attitude to SMMT 90; changing government-industry relationship 45–48; collaborations with Honda 43; collapse of deal with GM 54–56; concept study 36; DTI on BL-GM talks 54, 55; economic contribution (1979–80) 44; effect of recession (1979–81) 42–7; government-BL decision-making structure 46–1; operating groups 43; organizational structure (1983) 228; privatization 42–9; rationalization agreement of GM with 50–5; response to Japanese investment 71; state aid 132–8; as steering model 98–3; 245

246 INDEX

see also Land Rover; Leyland; Unipart British Leyland Motor Corporation (BLMC) 32–6, 39: creation of 25; government rescue of 34–38, 97, 192; strike (1977) 38, 78; workforce 33 British Motor Corporation (BMC) 30 British Motor Holdings (BMH) 30, 31, 32, 33, 34 British Motor Trade Association (BMTA) 16 British Petroleum 50 British Transport Vehicle Manufacturers Association (BTVMA) 17 Britoil 50 Brittan, Leon 51, 52, 54, 59, 68, 139, 151, 181, 202 Butcher, John 54 Calvet, Jacques 122, 159, 161, 169, 173 ‘Car of the Future’ Conference (1995) 189 ‘Car of Tomorrow’ Task Force 188–6 car production (1955–70) (UK) 78–3 catalytic technology 113 Cecchini report 182 Central Policy Review Staff (CPRS) 27– 28 Channon, Paul 53 Chrysler 28, 29, 30, 71: R&D 186; rescue (1975) 97, 192; Rootes takeover 33; state aid 150 Chrysler UK 39 Citizen’s Car Project 78 classic approach to government-industry relations 2, 3–5, 92–7 CLCA 106–12, 109, 118–3, 183, 200, 202 CLEPA 178, 189 clientele pluralism 93–8 Committee of Common Market Automobile Constructors (CCMC)

106–15, 117, 118–3, 136, 159, 162, 183, 200, 202 competition law 222 Confederation of British Industry (CBI) 71 consumer protection legislation 202 Cresson, Edith 169–6 Cripps, Sir Stafford 21, 24 DAF 62, 149, 150 DAF-Leyland 56 Daimler-Benz 113, 115–20, 117, 163, 201: state aid 135 Datsun 29 de Clercq, Willy 154 Delors, Jacques 139, 151, 181 Department of Trade and Industry (DTI) 34, 75, 197: on BL-GM talks 54, 55; on Ford-Austin Rover talks 52, 85; on Jaguar flotation 49, 50; role in privatization 44, 45–46, 94; on Rover-BAe deal 143–52; Vehicles Division 46, 51, 53, 88, 92 Department of Transport (DTp) 94, 114, 197 Development Bank of Japan 77 DGI 162 DRIVE 188 EC policy framework 130–6 EC-Japan Car Accord (1991) 165–4, 171– 81, 230–8: EC undertakings 230; MITI undertakings 230–8 Edwardes, Sir Michael 43, 44, 45, 48, 48, 71, 110, 111 Elements of Consensus 177, 178, 201, 203, 207 Ellesmere Port 28 emissions regulations 113–18, 117, 215 ENASA 135, 147 Environmental Friendly Vehicle Programme 185 EUCAR 189 EUREKA programmes 187–5 Euro-clubs 120

INDEX 247

Euro-groups 105, 127–3: effectiveness of 108–16; see also under names European Business Community (EBC) 160 European Commission see under EC European Court of Justice (ECJ) 62, 147 European Free Trade Area 150 European generalists 161 European Motor Components Association (CLEPA) 178, 189 European Parliament (EP) 130, 178 European Petroleum Industry Association (EUROPIA) 189, 204 Eurosport 151 Exchange Rate Mechanism 96 exports, UK 18–7: drive 19 replacement of horsepower tax 19–2; resistance to targets 21–5; standardization debate 23–7 Ferrari 30 Fiat 30, 116, 210: state aid 133; as steering model 98–3 FORCE programme 189 Ford 26, 29, 50, 58, 96,210: Bridgend plant 150; DTI on Ford-Austin Rover talks 52, 85; import from European plants 67–2; Portuguese aid 136; R&D 186; regulations to purchase Austin Rover 51–7; on trade policy 164 Ford Europe 119, 209 Ford UK 99: on Japanese imports 87 Fowler, Norman 53–8, 55 French industrial modernization (FIM) loans scheme 136–3 fuel approved legislation 226 GATT 167 General Motors (GM) 48, 96:

collapse of deal with BL 54–56; DTI on BL-GM talks 54, 55; import from European plants 67–2; R&D 186; rationalization agreement with BL 50– 5; state aid 150; on trade policy 164 General Motors Europe 119, 209 Gillen, Sam 37 Giraud, André 72 Guigou, Elizabeth 168, 170 Harriman 32 Hayes, Sir Brian 57 Heath, Edward 53 Heseltine, Michael 63 hire purchase (HP) restrictions 28 Holmes, Roger 43 Honda 43, 51, 76: investment in UK 66, 67; relationship with 56, 63 horizontal aid schemes 135 Horrocks, Ray 42, 44, 45, 52, 56 Hoyle, Doug 73 Industrial Development Advisory Board 35 Industrial Development Certificates 26 industrial policy 179–9, 194 Industrial Reorganization Corporation (IRC) 30–4, 32–6, 35 Industrial Restructuring and Conversion Act 134 industrial steering 97–4 Institute of Mechanical Engineers, Motor Division 17 Institute of the Motor Industry 17 intellectual property legislation 202 interest groups, definition 103: see also Euro-groups Ishihara, Mr 69 Isuzu-GM 77 Iveco-Fiat 50 Jaguar 30, 50, 62: British view of FDI 67–9;

248 INDEX

FDI in UK 66–1; flotation 48–4 Japanese Automobile Manufacturers Association (JAMA) 71, 80, 111, 156–3, 159 Japanese foreign direct investment: after 1972 79; benefits to British Components industry 70; benefits to UK of 69–5; British local content of cars 72–9; decline of British sector 67–3; diffusion effect 69–5; first phase (1950–72) 77–3; import barriers xv, 154–1, 160; Japanese perspective 75–81; longer-term development of British policy 81–7; reaction to 1990 proposals 159–7; reason for investing in UK 79–5; response to 71–6; trade policy 154–5 Japanese Ministry of International Trade (MITI) 74, 76–1 Japanization policy 81–7, 99, 102, 154–5: see also EC-Japan Car Accord Jenkin, Patrick 44, 48 Joseph, Sir Keith 43, 44 JOULE programme 187, 188 just-in-time techniques 70 ‘Keep Land Rover British’ campaign 54 Korea, technical harmonization with 184– 2 Lancia 30 Land Rover 50–5, 141: proposed privatization 44–9; strike (1987) 142 lean-burn technology 113 legislation: emission, under discussion 215; recently adopted 217; under discussion 218–7, 224, 224, 227 Leonardo programme 189, 190 Levy, Raymond 161 Leyland 50, 51:

proposed merger with BMH 30, 31–5, 33–7 Leyland Bus 57 Leyland Trucks 56 Linwood plant (Rootes, later Chrysler) 27, 28 lithium-polymer technology 187 Maastricht Treaty 150 macro-corporatism 4 Materials Allocation Scheme 20–5, 25, 98 Matra 136 Mazda-Ford 77 McKinsey management consultancy 123 Meacher, Michael 37 Melton Medes 58 Mercedes 162 Miller, Sir Hal 53 Ministry of Supply 16, 20, 22, 24 Ministry of Technology 34, 96 MITI 77, 78, 79, 158–5, 162, 163, 195: on 1991 understanding 165–3, 171–81; on transplant issue 168–5, 170 Mitsubishi 76 Mitsubishi-Chrysler 77 Monopolies and Mergers Commission (MMC) 30, 125 Moore, John 49 Morris 17 Motor Agents Association (MAA) 16 motor components industry, British 69 Motor Factors Association 17 Motor Vehicle Engine Group 204 Motor Vehicle Working Group (MVWG) 183 multi-level governance 198–7 NASA 186 National Advisory Committee of the Motor Manufacturing Industry (NACMMI) 18, 19, 22, 25, 30 National Audit Office (NAO) 61, 144 ‘national champion’ option 30–5, 63, 76, 112, 130, 131 National Economic Development Office (NEDO) 29, 91, 96

INDEX 249

National Enterprise Board (NEB) 35, 45– 46 ‘national route’ to Brussels 112–19 National Science Foundation 186 national-group-state relationships 114 networks, impact on industrial policies 100–6 Nissan 29, 66, 68, 69, 76, 78: ‘Bluebird’, French objection to import of 112–17; export targets 74–9; regional aid to 74 Nissan-Datsun 80 Nissan UK 90 noise levels, vehicle 113 Nuffield 17 Opel 50 Organization of International Automobile Constructors (OICA) 105, 106 over-capacity 190–194 policy community 6–7 policy network approach: in the 1990s 203–17; analysis 6–9; in automobile sector 199–8; at EU level 9–12; globalization and 209–20; impact of Europe on local networks 196–6; limitations 12 Political and Economic Planning Committee (PEP) 24 posteriori monitoring system 134 pressure pluralism 94–96, 100, 102 privatization: of British Leyland 42–9; as policy 42–63; of Renault 195; role of DTI in 44, 45–46, 94; of Rover Group (1988) 140–52 PSA (Peugeot-Citroën) 116, 120–6, 159– 6, 162, 176, 200: preferential loans 135 purchase tax 28, 29

Redwood, John 49 Regional Selective Assistance Scheme 141 Renault 29, 116, 192, 210: locations 26; preferential loans 135; privatization 195; state aid 136–5; as steering model 98–3 research and development 185–7 Rolls Royce 45 Rootes 17, 27, 30: takeover by Chrysler 33 Rover Group 92, 135: deal with British Aerospace 56–5, 140– 52; privatization (1988) 140–52; state aid 150; takeover of BMW 193 Ryder, Sir Don 35 Ryder report 35–38, 39 Scottish Motor Trade Association (SMTA) 17 sectoral approach to government-industry relations 3, 5–6, 92–7 sectoral characteristics 1–2 selective distribution system 124–31 Shore, Peter 157 Simpson, George 192 Single European Act (SEA) 113, 200 Single European Market (SEM) 80, 105, 107, 164, 165, 175, 200 Smith, John 53 Smith, Roland 57 Society of Motor Manufacturers and Traders (SMMT) 17, 20, 24, 29, 30, 71, 73, 88–4, 91, 92, 96, 107–12, 156–3, 197: clientele pluralism and 93, 94 Spanish motor industry 73–8: trade tariffs 96 Standard 17 state aid policy 131–7: (1980–6) 132–40; (1986–9) 135–1; 1989 framework 148–6;

250 INDEX

learning from restructuring cases 147– 3; on Renault 136–5; Rover Group privatization 140–52 Steyr-Daimler-Puch 150 Stokes, Donald 31, 32, 33, 34, 36, 37 ‘stop-go’ cycle 28 ‘strong states’, notion of 3, 5 Sutherland, Sir Peter 151, 181 Suzuki-Santana 149 system-level analysis 4 taxation, vehicle 19–2, 28: legislation 224 Tebbit, Norman 45, 46, 49, 50, 51, 54, 69, 85 technical harmonization 182–92 Thatcher, Margaret 43, 46, 81 Thatcher government 43, 82, 135 Toy, Sam 54, 72 Toyota, Shoichiro 81 Toyota 76, 78, 99, 207, 210: investment in UK 66, 67 Trade and Industry Select Committee (TISC) 48, 73, 97 trade policy 154–83: 1991 understanding 165–4; 1991 understanding implementation problems 171–81; reaction to 1990 proposals 159–7; renewed EC consultations 161–8; replacing national with regional policy 156–5; response of ACEA to 1990 proposals 163–71; role of Commission 162; transplant issue 168–6 Treaty of Rome 131–7, 167 tripartitism (1970s) 4 Turner & Newall 72 UK motor industry 16–39: achieving rationalization 32–7; demand management policy 27–29; exports (1945–79) 18–7; imports (1971–3) 29; industrial disputes (1972) 29;

non-regulatory approach 29–5; regional policy 25–9; selective intervention era (1960–77) 25–9; vehicle production (1945–59) 20 UK Permanent Representative to the European Communities (UKREP) 143, 144 Union of Industrial and Employers’ Confederations of Europe (UNICE) 182 Unipart 56 United Nations Economic Commission for Europe (UN-ECE) 105, 183, 185 Uruguay Round 167 US Advanced Battery Consortium (USBAC) 187 USCAR 212 van Miert, Karel 181 Varley, Eric 39 Varley-Marshall-Joseph assurances 46, 59, 140 Vauxhall 28, 87 vehicle categories, definition of 213 Volkswagen 24, 58, 149–5, 159, 163: acquisition of Auto-Union 30; Portuguese aid 136; recovery pro gramme 99; regional locations 26 Volkswagen-Seat 116 Voluntary Export Restraint (VER) 90, 154, 157 Volvo AB 90, 119: state aid 133, 139 Volvo-Renault, proposed merger 140 Walker. Peter 55 ‘weak states’, notion of 3 Westland affair 51, 54, 56 Whole Vehicle Type Approval 183–1 200, 205, 215–3 Wilson, Harold 32, 37 Young, Lord 57, 58, 60, 69, 83, 143, 145