Government-backed companies once brought blackouts to Eastern Europe and produced Russia's Lada car. But last year, such firms launched the world's largest jumbo jet, ranked among the wealthiest of investment firms and laid claim -- in China -- to being the biggest cellphone operator on Earth.
With the U.S. government taking a controlling stake in General Motors, the titan of American private enterprise is, at least temporarily, joining the ranks of semi-nationalized companies. Economic evidence suggests that state involvement in industry rarely works best. But a number of high-flying ventures have defied those odds, offering a glimpse at the costs and benefits of bringing government into the boardroom.
Take, for instance, Airbus Industrie, whose parent company is a public-private venture owned in part by France and Spain and which receives low-interest loans from a host of other European governments. The company's state benefactors dotingly gazed on as Airbus burned though $15 billion over the past decade to develop the risky A380 super liner. The megaplane, which can seat 853, is still weighed down by production delays, but Singapore Airlines debuted the A380 commercially in Europe early this month, and Airbus last month appeared to surpass Chicago-based Boeing as the world's biggest aeronautics manufacturer as measured by sales.
In the same way that government money insulated Airbus from market forces during hard times and allowed it to forge ahead with innovation, GM's new patrons in Washington might help the automaker jump-start its deficient research and development operation and trim underperforming brands. Though the administration has vowed to keep its distance from management and sell off its projected 60 percent stake in GM as quickly as it can, history shows that governments often prove more patient than Wall Street. Some observers are predicting even more taxpayer money coming to GM's rescue as it struggles to emerge from bankruptcy to become a globally competitive concern.
"Government is truly a double-edged sword in business, with one side sharper than the other," said Fariborz Ghadar, professor of finance at Penn State and senior adviser at the Center for Strategic and International Studies. "Yes, you can get lots of money for research and development upfront from a willing investor. But it can come with a high price."
Outsized influence of politicians
That price, for better or worse, may be a social contract with America similar to the one Airbus and its parent, European Aeronautic Defence and Space, has with Europe. European governments have also promised a hands-off approach, and in fact own only about 20 percent of Airbus's parent company stock. Yet critics say they have occasionally exerted outsize influence on major decisions, as the Obama administration is even better positioned to do as majority stakeholder in GM. In the fall of 2006, French executive Christian Streiff, for instance, was forced out after only three months at the helm of Airbus for proposing a radical restructuring that would have cost thousands of jobs across Europe. If GM moves to shift jobs overseas or build factories in the lower-cost countries of Asia or Latin America, the temptation by politicians to influence business decisions will be enormous.
It may already be happening. Analysts point to GM's recent decision to build a new line of small cars -- a class of vehicle widely seen as more cost-effective to produce overseas -- in the United States as underscoring the new pull of politics on GM's business model. GM's restructuring overall, the company said, will see the percentage of domestically built GM cars sold in the United States jump to more than 70 percent from 66 percent.
The administration has also closed off the U.S. market to Opel -- the European arm of GM recently sold to a Canadian company -- as part of the American automaker's restructuring. On Friday, Rep. Barney Frank (D-Mass.) said GM management had agreed to postpone a planned shutdown of a parts distribution center in Norton, Mass., after a meeting he had with its chief executive, Fritz Henderson.
Lack of agility, smart marketing
Yet while government backing became a boon for Airbus, aiding its research and development, GM may find it less beneficial. It takes three to four years to get a new car to market, as opposed to eight to 10 years for an airplane, putting a premium on corporate agility and smart marketing -- two attributes that have never been the hallmark of state-controlled firms.
"The benefits of the state are clearly less obvious for a car company," said Wolfgang Demisch, an aeronautics industry expert. "You have many more models, and research and development is substantially less both in cost and importance. Europe didn't do a great job with their government-owned car makers either, and they sold them off. The question in this country now is whether government money is going to hold back or help GM in making hot cars."
The U.S. government will have a say over the selection of most of GM's new board members, but the administration has promised to largely keep out of the company's affairs. That, analysts say, has proven key to the success of entities like Temasek Holdings, the investment arm of Singapore's government.
Though it suffered staggering losses from the global financial crisis last year along with most investment firms, Temasek, with only 350 employees, earned $15 billion in 2008 after starting with state seed money of $100 million in 1974. The company's business decisions have remained largely independent from the semi-autocratic Singaporean government, and its management has embraced overseas investment more vigorously than most private firms. Even its incoming chief executive -- Charles Goodyear, the American great-great-grandson of the famous rubber baron -- is a foreigner.
Developing nations embrace free market
The United States, accompanied by other free-market leaders like Britain, has moved to take government stakes in desperate firms by arguing that allowing giants of industry and finance to collapse would be devastating to the domestic economy even in the best of times. It happens as developing nations have been embracing the free market, moving away from state-dominated systems that produced inefficient factories, personal piggy banks for politicians, and, in the case of Russia's Lada, products that were just plain bad.
A host of India's cash-gobbling state steel plants have been reconstituted into more competitive, privately owned firms. And China, where private enterprise is thriving, has begun moving to introduce competition against state-controlled firms like China Mobile, with a captive base of more than 415 million customers.
"If the government is going to get involved at all, it must be with the right governance structure," said Michael Porter, economics professor at Harvard University. "Most of the successful companies with some public ownership have the same qualities -- a purely private-sector governance, a largely independent board and transparent reporting standards. But it's best when government isn't there at all."
Staff writer Peter Whoriskey contributed to this report.
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