Ronald Reagan said, “The most terrifying words in the English language are: I’m from the government and I’m here to help.” General Motors is learning that lesson the hard way. Now that GM is a ward of the state after being bailed out by Uncle Sam, it has to drive forward with all kinds of bad business schemes pushed by Washington bureaucrats, such as the expensive, electric Chevy Volt consumers don’t want. The latest wrong turn is GM’s move to buy a large stake in troubled French automaker Peugeot. The taxpayers who bailed out GM just got sold a lemon.
This is a bad deal on its face. Government Motors is paying $420 million to get 7 percent of Peugeot, which, like GM, has been struggling to make financial ends meet for years. Peugeot lost $578 million and sales were down 8.8 percent in 2011. There’s no mystery why. Anyone who spends any time across the Atlantic knows these French rides are marred by mediocre performance, iffy quality and uninspired styling.
On top of that, Europe’s economy is teetering on the brink of collapse, which has resulted in a 15 percent to 20 percent decline in car sales over the past five years. European auto sales dropped nearly 10 percent last year alone. Onerous labor laws mean carmakers can’t lay off workers and it’s difficult to close factories so supply can’t be rationed to match demand. This dynamic leads to costly excess capacity that BusinessWeek pegs at 20 percent.
With its Opel and Vauxhall brands, GM has lost over $14 billion in Europe since 1999, according to the Wall Street Journal, and $747 million last year alone. It makes no sense to double down on a losing market and expose the company and U.S. taxpayers to even more European problems.
GM’s spin is the deal will allow the two companies to increase efficiencies and save money by sharing car platforms and research-and-development costs. We’ve heard this story before. Seven years ago, GM had to pay Italy’s Fiat (which now controls Chrysler Corp.) $2 billion to annul a relationship that sounded an awful lot like the one it’s now entering into with Peugeot. The deja vu scenario is reminiscent of expansion problems that plagued GM in the past. For decades, the world’s largest automaker suffered from having too many divisions with overlapping product lines and not much to distinguish them from one another. Instead of cutting back, GM grew even more and continually added new brands, creating Saturn and Geo in the 1980s while purchasing Saab and Hummer and wasting resources on myriad joint ventures that didn’t last or make a profit.
GM wasn’t alone. Merger mania infected the corporate world in the 1990s, and most executives bought into the trendy idea that industries needed to consolidate and companies had to merge with competitors to survive. Lots of those marriages failed. Ford Motor Co. has stepped back the most, unloading prestigious luxury brands Jaguar, Land Rover, Volvo and Aston Martin to focus on rebuilding its main blue-oval brand. Unfortunately, GM hasn’t learned the same lessons from past mistakes and is expanding again. It’s hardly surprising smart business decisions aren’t being made with government bureaucrats and union bosses calling the shots at GM. Now even more profits will be surrendered because of a counterproductive alliance with the French.
Brett M. Decker is editorial page editor of The Washington Times. He is coauthor of the new book “Bowing to Beijing” (Regnery, 2011).