ANALYSIS-Past auto bailouts have critical lessons for US now

By Nick Carey

DETROIT, Nov 23 (Reuters) - As they ponder a $25 billion aid package for America's beleaguered automakers, U.S. lawmakers could do well to study two past auto bailouts : one a failure, the other a success.

The failure is strike-prone British Leyland's nationalization in the 1970s. The success, at least until the events of the past two years, was Chrysler's turnaround in the 1980s.

There are some parallels in both cases to the troubles faced today by the Big Three -- General Motors Corp , Ford Motor Co and Chrysler, owned by private equity firm Cerberus Capital Management LP [CBS.UL].

The main lessons seem to be that the U.S. automakers must produce a viable turnaround plan and the government must set clear benchmarks to measure progress or providing aid may be futile.

Congress has demanded the former, it can set the latter.

"You can throw all the money in the world at a problem, but if your production strategy is wrong it won't help," said Timothy Whisler, a Saint Francis University professor and author of "The British Motor Industry 1945-1994: A Case Study in Industrial Decline."

'INEXORABLE DECLINE'

Automotive history is ripe with examples of government support. Firms such as France's Renault -- now allied with Nissan Motor Co Ltd <7201.T> -- and Germany's Volkswagen AG have benefited from government "equity injections and soft loans", said Garel Rhys of the Centre for Automotive Industry Research at Cardiff Business School in Wales.

"British Leyland was different because it was a rescue," he said. "But as it took the company's market share from 35 percent to oblivion by 2005, it didn't work out well."

Formed by a series of mergers starting in the late 1960s, at its peak British Leyland controlled about 40 percent of the British car market. It became the world's fifth largest automaker, but had far too many models.

"Despite the mergers, the company never rationalized production and didn't really discontinue any models," Professor Whisler said. "When the first oil shock hit in the 1970s they ran out of cash and they ran out of credit."

In 1975, rather than let a company that employed 185,000 people and produced 1 million vehicles a year go under the British Labor government nationalized British Leyland. From then until 1988, it pumped 3.6 billion pounds -- or 11 billion pounds ($16.5 billion at today's exchange rates) adjusted for inflation -- into the company.

But market share continued to deteriorate.

"Like GM, who's market share was also once around 40 percent, British Leyland presided over an inexorable long-term decline in market share," Rhys said.

The company was eventually broken up, with the parts going to BMW -- which retained the Mini brand -- China's Nanjing Automobile Group, now merged with SAIC Motor Corp<600104.SS>, and Ford, which sold the upscale Jaguar and Land-Rover brands to India's Tata Motors earlier this year to raise cash.

Whisler said a key problem was the British government "did little to change British Leyland's strategy" after nationalization and just threw cash at it.

Rhys said the government also failed to measure success at the automaker. For instance, 25 percent of profit growth was meant to come from improvements in relations with British Leyland's strike-prone workers.

"But there were no mechanisms to put that into place," he said. "So instead of boosting profits, labor added to losses."

If Congress bails out the U.S. automakers it must not repeat that mistake, he added.

"It should not be a blank check," Rhys said. "There should be benchmarks and hurdles in place, and Congress should only release money when it is satisfied they are being met."

NO COUNTRY FOR OLD MEN

Chrysler's turnaround was engineered by legendary former chairman Lee Iacocca, with the help of $1.5 billion in U.S. government loan guarantees approved in 1979.

The Detroit Three today face similar problems to Chrysler's then: they have cars consumers don't want, and have suffered an oil shock in a slowing U.S. economy. But there are differences.

"Lee Iacocca showed leadership and he knew what he was doing," said Carl Goodwin, who worked at ad agency Kenyon & Eckhardt, which handled Chrysler's advertising at the time. "And Congress didn't ask him for a plan, he already had one."

"And by the time Iacocca went to Congress all of the old managers who had taken the company in the wrong direction had been removed," Goodwin added. "They were long gone."

Ford and GM today seem to have an idea that changes are needed, Whisler said "but I'm not sure they understand what they need to do to get there."

Rhys said to obtain a bailout and survive, the U.S. automakers must acknowledge some hard truths and level with Congress on the cost of survival.

"The trucks and SUVs that kept them going in the 1990s were a false dawn," he said. "They are going to have to truly realize that the level of demand they saw in recent years is gone forever."

"And then they are going to have to admit that they will have to cut production in every way," Rhys added. "Their product lineup, plants, dealers, workers - everything." (Editing by Bernard Orr)