[OUTLOOK]MG Rover’s fatal mistakes seen hereAround the mid-19th century, China became half colonized, torn in tatters by Western powers. Shanghai was occupied by many countries, first by Britain in 1846, and then the United States, France and Japan. Shanghai was called “leased territory” in name but it was officially extraterrestrial land, and it was not an overstatement to call it a colony, because Chinese people were banned from entering parks and social clubs.
So it’s ironic that Shanghai has now driven the last nail into the casket of the British automobile industry. After its joint venture with China’s state-run carmaker failed, MG Rover, Britain’s last national automaker, has gone into receivership, a form of bankruptcy protection under which a court-appointed third party takes control of the business.
The British car industry has had problems from the beginning. Although it gained international recognition for its small-scale, artisanal production of top-quality cars like Rolls-Royce, Aston Martin and Jaguar, the British car industry always fell behind in mass production.
As the stock market developed early in Britain, the logic of shareholder capitalism was strong, and accordingly the country’s dividend rate was higher than any other advanced country and the emphasis on short-term performance was strong.
Under these conditions, the biggest cause of the British car industry’s stagnation was the difficulty it had in long-term investment in technology. Another big problem was the low level of engineering and the negligence in training engineers because of the social climate at the time, which dismissed the importance of science and engineering fields.
After having undergone a series of mergers in the 1960s, British Leyland Motor Company emerged. But it could not overcome its management difficulties because of its lack of technological capability. At last, in 1975, the government had to take it over.
In 1986, the auto company changed its name to MG Rover, and in 1988, it underwent privatization. In 1994, it was taken over by BMW of Germany.
But BMW, which had taken the company over with enthusiasm, gave up managing MG Rover in 2000 and decided to dispose of the company except for the production facilities for the four-wheel-drive Land Rover and its legendary sports car, the Mini Cooper.
In 2000, a company called Phoenix Venture Holdings took over the remnants of the Rover Group from BMW at a mere 10 pounds (19,000 won or $19). Phoenix was at first praised as a “white knight” who rescued the British car company, but now it is criticized as having driven the Rover to the brink with its mismanagement.
Phoenix Venture Holdings had paid 28 million pounds to four chief executive officers over four years even though the company continued to post deficits, albeit declining ones. The company also continued to pay high dividends, so the company’s demise was inevitable.
The collapse of the Rover Group teaches us that although producing high profits in the short term, through strategic acquisitions and mergers and reductions in investment, appears to be good management of a business, a company cannot succeed in the long term without investing in technology and training technical experts.
A good example is the United States’ General Motors. This company became the world’s largest carmaker through its successful acquisitions and mergers, but because of its lack of technological capability, its share in the U.S. market has now dropped to below 25 percent, from near 50 percent in the 1980s. A while ago, GM’s top management openly admitted that the company would give up its No. 1 position in the world market to Toyota soon.
As the capital market has been liberated and the logic of shareholder capitalism has dominated in our country since the foreign exchange crisis of 1997, our businesses have become reluctant to invest in technology or facilities on a long-term basis because they want to secure short-term profits and offer high dividends.
As businesses posted high profits and distributed large dividends, their management seemed to improve, but now effects of having neglected investment are appearing. A good example is KT Corp., a provider of telecommunications services in South Korea. The company has neglected investment and distributed high dividends to please shareholders but now is finally facing interruption of telephone services due to the lack of facilities.
Before it’s too late, the government should create an environment where businesses can invest in advanced facilities and technological development for the long term. It will need to improve regulations on banks so they will be able to increase business loans, strengthen regulations on hostile acquisitions and mergers, and expand mutually friendly equity among businesses. The National Pension Fund should also play the role of a stable shareholder.
Otherwise, Samsung Electronics or Hyundai Motor may meet with MG Rover’s fate in the near future.
* The writer is a professor of economics at the University of Cambridge in the U.K. Translation by the JoongAng Daily staff.
by Chang Ha-joon