Too Big and Failing: The Missed Chance to Break Up GM

As General Motors works its way through the early stages of its bankruptcy and forced restructuring, it is worth remembering that government antitrust enforcers once had an opportunity to break up GM. They chose not to pursue it, which missed a chance to create a stronger competitor. That decision holds valuable lessons for antitrust policy going forward.

A little more than 40 years ago, The Wall Street Journal reported that antitrust lawyers in the U.S. Justice Dept. had been engaged in a long-running investigation of General Motors. The investigation, begun in the Eisenhower Administration, continued into the Kennedy Administration, when the head of the antitrust division set up a "General Motors Task Force." By 1964 serious thought was being given to a suit that would break up GM. The fruits of this investigation eventually led to a 104-page draft complaint—"neatly typed," the Journal noted—charging GM with violating U.S. antitrust laws.

The draft complaint traced the history of the automobile industry, showing how GM grew by acquiring numerous competitors and suppliers, how it engaged in costly annual redesigns of its automobiles, thereby further deterring new entrants and making it difficult for small firms to compete, and how it excluded entry or expansion by potential rivals by forbidding its dealers from selling cars for any competing manufacturer. (Indeed, the other two major manufacturers—Ford (F) and Chrysler—had also used this tactic, which the industry abandoned under pressure from the antitrust enforcers in the late 1950s. This change eventually allowed efficient car dealers to serve foreign producers while continuing to sell major American brands.) The result of all these practices, according to the draft complaint, was that GM grew from 13% of the market in 1920 to more than 50% in 1965, while the industry shrank from more than 1,500 auto manufacturers in the early part of the 20th century to only four in the 1960s.

Chevrolet Spin-Off and Other Plans

The document was not specific in terms of what relief the government would seek, stating simply that GM should be required to "reconstitute itself into a sufficiently large number of companies" so as to restore "competitive conditions." What the government lawyers had in mind by this, according to the Journal article, was to spin off the Chevrolet division (which accounted for 40% of GM's production), plus one or two additional auto assembly divisions, and enough parts manufacturing and other facilities to make the spun-off companies into effective competitors. The ability of dealers to represent multiple manufacturers that began in the late 1950s would have made it possible for these new American carmakers to have access to the high-quality dealers essential to effective competition.

The draft complaint was finalized sometime in 1966 and leaked to the Journal in 1967, toward the end of the Johnson Administration. We know that it was never filed; we don't know why.

What we got instead was an auto industry with the political clout to avoid competition, for example, by convincing Reagan Administration antitrust enforcers to allow the industry to cooperate on research and by convincing U.S. trade negotiators to restrain competing imports from Japan, restraints that lasted for nearly 15 years and cost U.S. consumers dearly.

Of course, we don't know whether the Justice Dept. would have won its case. Nor do we know whether the rosy picture of divestiture would have come true. Still, the failure to pursue antitrust action against GM at a time when it could have spun off healthy assets, not failing ones, is a cautionary tale for antitrust enforcers. Failing to take antitrust action often looks like the more "prudent" policy, but the GM story shows just how costly this prudence can be.

Lessons of History

Today's government-guided reorganization of the automobile industry is not coming from antitrust enforcement, but through Chapter 11 bankruptcy or some other less formal process. The end result, though, will be a small and weakened U.S. automobile industry. Had GM been reorganized when it was still a powerful and efficient competitor, the result might have been a stronger, larger, and more domestic automobile industry, where firms would have been under continuing competitive pressure to reduce prices and to innovate, whether by producing smaller cars, more efficient cars, or safer cars.

There are three specific points for current antitrust enforcement policy that we take from this history:

Lax merger policy is terrible policy. We should not allow firms to buy market dominance.

Reinvigorated antitrust enforcement in the Obama Administration can be the friend of a downsized GM. Antitrust enforcement can help check the potential for exclusionary practices by other, stronger automakers during the period of readjustment.

Although market-dominating firms may eventually run down, we don't have to wait until it's too late. Instead, it is time to return to basic antitrust policy—more rivalry is better.

We learned this last lesson in telecommunications, with the breakup of AT&T (T). We disregarded this lesson with Microsoft (MSFT), to ill effect. Monopoly firms need to be broken up. Regulatory solutions, or government efforts to control dominant firm behavior, inevitably are poor substitutes.

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