Can Wagon be Kept Rolling?

That was despite the fact that Wagon's car making clients had offered to put up 30 million euro (£26m) and Wagon's owner Wilbur Ross (a US billionaire) was apparently prepared to contribute 10 million euro (£8.7m) by buying a Wagon subsidiary. A rescue deal apparently fell though when the banks, which had agreed loans of 155 million euro (£134.2m) back in the summer, decided against further funding.

Not surprisingly, this raises a number of issues.

Firstly, the severity of the decline of the UK auto industry is again highlighted in the starkest terms. With sales down 37% in the year to November, and UK car output down by 25% in the year to date, it was only a matter of time before the impact was felt by suppliers and dealers. Sales have not fallen so quickly since 1980. Job losses amongst the auto assemblers have run into the thousands since the summer, with Aston Martin in effect culling a third of its staff recently. It sold just 39 cars in the UK in November.

Secondly, there is a question mark around the role of RBS. Given that it has had £20 billion of taxpayers' money to stop it going bust, many will be wondering whether it has done enough to keep Wagon afloat. This is one case that the Treasury Lending Panel should look at in detail later this week.

Thirdly, it needs to be stressed that the underlying position of the UK auto industry is fundamentally good, unlike the situation facing the Big 3 in the US. The industry is lean, efficient, and produces world class cars that customers usually want to buy. But it is also all foreign owned, so is vulnerable to the big auto firms closing down plants in the UK (which is often cheaper than closing them down elsewhere).

The current huge downturn in sales and output is the result of extreme circumstances - the double whammy of recession and credit crunch. Even those (too few) people wanting to buy a car (usually) have to find the credit to do so, and that is increasingly hard to find. The car industry is the latest collateral damage resulting from the financial crash that is increasingly engulfing the real-world economy.

And we are rapidly approaching the point where if the government wants to maintain a substantial auto industry in the UK it will have to step in to keep it going. Of course, some free-marketeers talk about letting the "recession take its course" but applying this mantra here ignores the 850,000 jobs dependent on the industry in the UK, plus its major R&D spend and its contribution to the exports.

Leaving aside the specifics of the Wagon case, at least three forms of government assistance are now required to support the auto industry in the UK:

1. Action to make credit available to potential buyers (here the government could effectively underwrite car loans);

2. Financial help for assemblers, suppliers and dealers to keep them afloat - if need be direct from the state if the (rather ungrateful) banks aren't willing to help;

3. Further support to enable the development of new technologies that the industry urgently needs to reduce carbon emissions. On the latter the UK industry is well placed to develop the technologies needed but help is needed to speed things up.

No doubt the free-market brigade will go on about the state not being able to 'pick winners'. Actually it's not about 'picking winners', but rather 'backing winners'. The free market doctrine got us into this mess. A new industrial policy can help us get out of it in better shape than would be the case otherwise.

Over to you, Lord Mandelson.

David Bailey is Director of the Birmingham Business School