Europe must not create national champions

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To support the creation of national champions hampers competitiveness. In a letter to Günter Verheugen, European commissioner for enterprise and industry, John hints at lessons from business history.

To: Günter Verheugen, Berlaymont, Brussels

Dear Mr Verheugen,

I hope you are enjoying your new job as European commissioner for enterprise and industry. You achieved much with the enlargement portfolio. But your reputation as one of the ablest politicians in Brussels is now staked on the Lisbon Agenda, that rather embarrassing document that our leaders signed at the peak of the new economy hysteria. At the confirmation hearing, you were suitably modest and realistic, downplaying the role of the Commission and emphasising the role of the governments of member states and, above all, business itself.

But it is hard for anyone in your position to resist the temptation to announce policy initiatives. You suggested last week that the Commission might take a more relaxed view of mergers, allowing the creation of more European champions. I had hoped that your advisers would have told you that no industrial policy has been more comprehensively discredited than the notion that the best way to achieve competitiveness abroad is to suppress it at home.

The edition of the FT that reported your comments also contained the headline ‘How AT&T stumbled towards insignificance’, recounting the failure of America’s national telecommunications champion. The article told a story of infighting between corporate baronies, more concerned to thwart their rivals than to advance a common interest.

You will recognise the problem. Government agencies fight each other because the competition they perceive is with each other. Dominant companies come to resemble government agencies, which is why these agencies are so comfortable dealing with them. As industry commissioner, you would like a single number to ring if you want to talk about telecommunications, or automobiles. You will be more effective as enterprise commissioner if there is no one to take your call.

As the US economy became integrated a century ago, there were many advocates of national champions. When antitrust law was used to break up Standard Oil and American Tobacco, the US turned its back on that idea. AT&T was an exception. There was another, US Steel, which at the outbreak of the first world war had the largest market capitalisation in the world. But far from spearheading American competitiveness, the company steadily declined until it is not even an important steel producer.

The creation of European champions has one success story, in Airbus. It is a special case. Aircraft manufacture is the only industry in which scale economies are so large that Europe really can support only a single producer. The champions strategy has failed everywhere else. You are said to be particularly concerned about the automobile industry. You can learn a lesson here from Britain. We promoted the consolidation of our indigenous motor companies under the leadership of Leyland. The result was not the revival of the industry but the destruction of Leyland. The merger of companies struggling to compete rarely adds up to more than the sum of the parts, and often to less. Today, Britain has a lively automobile sector that is fragmented, and mostly Japanese-run. The Japanese understood that domestic rivalry was the basis of global competitiveness. In the industries where they gained a large share of the world market, several companies have shared in that success.

We all regret European weakness in information technology and wish the continent had its International Business Machines, its Microsoft. But the size and market dominance these businesses achieved was the result of the quality of their products, not government sponsorship or exemption from antitrust laws. Europe’s attempts to rival IBM with national champions Bull in France, Siemens-Nixdorf in Germany, and ICL in Britain all failed. But these companies did not fail because they were too small: they were too small because they failed.

Please do not forget that the industry part of your portfolio will succeed only if the enterprise part does: and that it is competition, not size, that promotes enterprise.

Best wishes,

John Kay

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