THE AUTOMOBILE INDUSTRY IN THE UNITED
STATES OF AMERICA - A STUDY OF ITS
GROWTH AND COMPETITIVENESS
A THESIS
SUBMITTED TO THE FACULTY OF ATLANTA UNIVERSITY IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF BUSINESS ADMINISTRATION
BY
CHIH-KANG PENG
SCHOOL OF BUSINESS ADMINISTRATION
ATLANTA, GEORGIA •->-.■ 11 AUGUST, 1967 ^ ^ PREFACE
This thesis was undertaken as a result of my interest in the automobile industry in the United States.
My attention, along with the interest of many others, was attracted by the brief history of the industry, and the dif ficulties of survival of the small firms which form an oli gopolistic model of the industry.
My interest in this thesis was encouraged by Dr. K.
K. Das, Professor of Management and Economics in the School of Business Administration, Atlanta University, who gave me precious guidance and project questions to work. I appre ciate very much Dr. Das' help. I also wish to express my appreciation to Dr. N. F. Davis, Professor of Business at
Atlanta University, who gave me the benefit of his criticism and suggestions. I also appreciate the automobile firms and associations who related automobile industry information and who sent published materials and books for my reference. I made a trip to Detroit, Michigan, an automobile industry city, and got lots of help from the Automobile Division,
Detroit Public Library.
G. K. P.
11 TABLE OF CONTENTS
Page
PREFACE ii
LIST OF TABLES iv
Chapter I. INTRODUCTION 1
The Automobile General Influence Purposes of the Study- Procedure of the Study
II. GROWTH AND DEVELOPMENT OF THE INDUSTRY. ... 15
The Birth of the Automobile The Early Merger: General Motors and United States Motors The War Boom (World War I) Depression Time World War II Post War
III. THE CHARACTERISTICS OF AN OLIGOPOLISTIC BUSINESS OF THE UNITED STATES AUTOMOBILE INDUSTRY ... 54
The Question of Size Marketing Disadvantages
IV. CONCLUSIONS 79
What is the Likely Competitive Trend for the Future?
BIBLIOGRAPHY 86
APPENDIX 89 LIST OF TABLES
Table Page
1-1. Businesses Dependent on Manufacture, Distribution, Servicing and Use of Motor Vehicles ...... 3
1-2. 12,400,000 Employed in Highway Transport Industries-~One of Every Seven Employed in the United States ...... 5
1-3. Automobile Consumption of Materials, 1965 ... 7
1-4. General Figures of the Major Automobile Manufacturers in 1964 9
2-1. Net Income of United States Corporations 1914-1917 ..... 26
2-2. Automobile Production 1914-1916 27
2-3. War Products Produced by Automobile Companies ...... 44
2-4. Automotive Industry Percentage of Total War Output ...... 45
2-5. Historical Motor Vehicle Statistics ...... 50
2-6. U. S. Passenger Car Production by Makes 1960-1964 ..... 52
3-1. Massachusetts Cars of Major Makes 1916 .... 55
3-2. Massachusetts Cars of Minor Makes 1916 .... 56
3-3. The Competitive History of the Automobile Industry 1946-1955 67
iv LIST OF TABLES - Continued
Table Page
3-4. Passenger Gar Advertising Expenditure By Manufacturer and Per Car Registered 1949-1958 . 75
4-1. The Percentage of Motor Vehicle Produc tion By Makes 1960-1965 ..... 84 CHAPTER I
INTRODUCTION
The history of the automobile industry is not a
long one. It was born in the latter part of the nineteenth
century, and has grown with tremendous speed. As it devel
oped, some representative aspects of capitalism can be seen.
It tells a story of booms and depressions, of the rise of
industrial unionism, and of the national effort in two world
wars. It also gives us the foundation of know-how upon
entering the air plane age of World War II, and the present
space age.
The Automobile General Influence
The role of the automobile industry in the United
States has developed as one which can manage or control the
economy of the entire country. The following facts may
give us a clear idea of how the automobile industry has weight in the economy and affects the family and man's life
in this country.
1. One out of every six businesses in the United
States is dependent for its existence upon the
1 2
manufacturer, distribution, and servicing of
automobiles. (See Table 1-1, page 3.)
2. One-seventh of the country's wage earners--almost
12 million people--earn their living from the
automobile. These range from the president of
General Motors, who gets upward of $740,000 each
year for his services; to the ticket seller in a
drive-in movie, who may receive $35 a week.
(See Table 1-2, page 5.)
3. The automobile industry relates to other indus
tries. It uses 22 per cent of America's steel,
57 per cent of its iron, 65 per cent of its na
tural rubber. Forty-four per cent of the nation's
radios are on the road. Two and three-tenths
persons own a car. Fifty-seven per cent of the
3 world's passenger cars are in the United States.
(See Table 1-3, page 7.)
4. The automobile companies are most meaningful in
Automobile Manufacturers Association, Automobile Facts and Figures (Detroit: Automobile Manufacturers Assoc iation, 1965), p. 65.
2 Ibid., p. 66. 3Ibid., p. 14. TABLE 1-1
BUSINESSES DEPENDENT ON MANUFACTURE, DISTRIBUTION, SERVICING AND USE OF MOTOR VEHICLES
Number of Kind of Business Establishments
Retail Stores Automotive Passenger car dealers {franchised)...... 38,646 Passenger car dealers (nonfranchised) .... 25,401 Tire, battery, accessory dealers ...... 20,952 Household trailer dealers ...... 3,076 Automotive dealers, N.E.C...... 659 Gasoline service stations ...... 206,755
Total Retail Automotive ... 295,489
Automobile Repair General repairs ...... •■•>• 70,627 Battery & ignition repair & service ..... 1,902 Glass replacement & repair ...... 1,356 Point shops ...... 3,026 Radiator repairs ...... 3,153 Tire repairs ...... 4,027 Top and body repairs ...... 14,416 Brake repairs ...... 1,082 Wheel, axle, spring repairs ...... 1,244 Other repairs, N.E.C 3,265
Total Automobile Repair . 104,098
Automobile, truck rentals (without drivers) . . 4,751 Automobile services, except repairs ...... 5,926
Total Automobile Services ...... 10,577
Manufacturing Motor vehicles and parts 1,551 Motor truck and bus bodies ...... 562 Motor truck trailers ...... 170 Automobile trailers* 528 Rubber tire and inner tubes ...... 142 Petroleum refining ...... - 631 TABLE 1-1 - Continued
Number of Kind of Business Establishments
Storage batteries ...... 256
Total Manufacturing ...... 3,840
Wholesale Motor vehicle distributors ...... 3,926 Automotive equipment ...... 17,102 Tire-tube wholesalers . 2,107 Gasoline, kerosene, fuel oil wholesalers . . 29,717 Petroleum products distributors, ex cluding bulk stations, terminals ..... 4,734
Total Wholesale 57,586
Automobile Storage, Parking Parking structures, storage garages ..... 1,910 Parking lots ...... 9,106
Total Automobile Storage ...... 11,016
Miscellaneous Auto Enterprises Drive-in theatres ...... » 4,071 Automobile race tracks ..... 578 Motels, tourist courts .. 41,371 Trailer parks ...«...... ••>•• 8,133
Total Miscellaneous 54,153
Total of Above Concerns ...... 536,759
For-Hire Trucking, Motor Bus Operators Taxicab company, auto wreckers* « 250,000 Highway Contractors* ...... 11,300 Total Automotive Business in U.S...... 798,059 Grand Total All Business in U.S 4,635,000 Per Cent Automotive 17.2
* Estimates by AMA; N.E.C. - Not Elsewhere Classified Source: Census of Manufacturers and Business 1958; Copy from Automobile Facts and Figures, Automobile Manufacturers As sociation, 1965, p. 65. 5
TABLE 1-2
12,400,000 EMPLOYEDIN HIGHWAYTRANSPORT INDUSTRIES One of Every Seven Employed in United States
Motor Auto Sales State,Coun- Truck Drivers, Motor Bus, Vehicles, Petroleum and ty and Other Employ- Taxi Em- States Parts Mfrs. Refining Servicing Local Roads ment ployment Total
Alabama 1,939 246 37,864 13,549 159,000 1,769 214,367 Alaska 1,797 1,502 24,000 310 27,609 Arizona 77 22,164 5,197 116,000 722 144,160 Arkansas 389 1,302 24,333 5,889 131,000 750 163,663 California 29,261 16,165 236,468 37,678 968,000 14,280 1,301,852 Colorado 660 675 31,980 5,946 153,000 1,460 193,721 Connecticut 2,338 30,190 7,790 101,000 3,333 144,651 Delaware 6,186 1,649 44,000 496 52,331 Florida 836 103 81,939 15,849 244,000 4,084 346,811 Georgia 9,363 * 53,906 12,370 201,000 1,304 277,943 Hawaii * 6,388 1,834 21,000 448 29,670 Idaho 11,570 3,124 68,000 492 83,186 Illinois 19,966 8,310 119,954 23,784 296,000 26,633 494,547 Indiana 53,533 8,488 64,575 12,189 249,000 3,154 390,939 Iowa 1,489 42,433 9,585 140,000 1,506 195,013 Kansas 4,398 3,500 36,898 10,177 169,000 1,256 225,229 Kentucky 4,146 1,578 34,925 9,924 157,000 2,684 210,257 Louisiana 506 9,780 40,227 12,435 164,000 1,981 228,929 * Maine 14,286 5,141 49,000 697 69,124 Maryland 5,480 * 38,010 7,703 108,000 9,222 168,415 Massachusetts 3,449 316 58,365 16,491 153,000 9,094 240,715 Michigan 262,876 2,016 110,000 17,810 283,000 6,470 682,172 Minnesota 3,300 783 46,746 11,898 158,000 3,964 224,691 Mississippi 668 22,621 9,429 109,000 425 142,143 Missouri 22,748 * 67,665 10,341 228,000 4,631 333,385 Montana 1,019 12,661 3,515 64,000 502 81,697 Nebraska 1,328 23,911 5,334 92,000 850 123,423 Nevada 6,941 1,891 45,000 1,232 55,064 New Hampshire 9,388 3,108 37,000 445 49,941 New Jersey 14,787 6,951 70,020 14,244 218,000 6,451 330,453 New Mexico 148 * 16,728 3,153 82,000 830 102,859 New York 38,464 1,161 164,246 41,723 407,000 30,147 682,741 North Carolina 1,708 60,530 11,970 230,000 2,886 307,094 North Dakota * 9,946 3,284 38,000 346 51,576 6
TABLE 1-2 - ContinuE d
Motor Auto Sales State, Coun- Truck Drivers, Motor Bus, Vehicles, Petroleum and ty and Other Employ- Taxi Em- States Parts Mfrs Refining Servicing Local Roads ment ployment Total
Ohio 92,169 4,310 125,090 24,124 311,000 8,720 565,413 Oklahoma 986 6,562 38,268 8,099 203,000 1,439 258,354 Oregon 1,506 29,855 7,275 110,000 1,278 149,914 Pennsylvania 17,106 11,649 138,415 29,396 406,000 12,228 614,794 Rhode Island 877 * 10,003 2,092 31,000 842 44,814 South Carolina 134 28,748 6,463 102,000 943 138,288 South Dakota 11,290 3,765 46,000 221 91,276 Tennessee 2,286 * 48,454 13,292 147,000 2,572 213,604 Texas 6,662 36,626 160,455 29,664 677,000 6,634 917,041 Utah 232 974 14,229 3,133 67,000 521 86,089 Vermont 6,147 2,380 17,000 360 25,887 Virginia 2,205 313 53,751 14,020 153,000 4,029 227,318 Washington 1,192 1,108 39,924 9,628 185,000 2,052 238,904 West Virginia * * 21,957 7,353 86,000 1,495 116,805 Wisconsin 36,926 203 49,613 12,009 160,000 4,091 262,742 Wjoming * 7,458 1,835 45,000 321 54,614 District of Columbia 11,583 1,407 16,000 922 29,912
Totals 651,019 130,054 2,412,764 533,441 8,467,000 195,242 12,389,520
*State data not ava±lab1e
Source Automobile Facts and Figures, Automobile Manufacturers Association, 1965, p 66 TABLE 1-3
AUTOMOTIVE CONSUMPTION Of MATERIALS, 1963
U. S. Total Automobile Percentage Materials Consumption Consumption Automobile
Steel (tons)
Alloy steel (other thanstainless) 5,386,391 1,826,747 32.1 Stainless steel 659,279 98,258 14.9 Steel including carbon, alloy and stainless: Hot rolled bars 7,568,286 2,321,517 30.7 Cold finished bars 1,319,492 302,013 22.9
Total 8,887,778 2,623,530 29.5
Hot rolled sheet 8,825,660 3,922,946 44.4 Cold rolled sheet 14,509,569 7,020,624 48.4
Total 23, 335,229 10,943,570 469
Hot rolled strip 1,486,308 519,325 34,9 Cold rolled strip 1,371,962 339,375 247
Total 2,858,270 $58,727 30.0
Total All Steel 75,555,142 16,889,048
Aluminum (000 pounds) 6,338,238 $55,000 13.5 Copper (000 pounds) 5,183,000 666,000 12.8 Cotton (500 lb bales) 8,246,100 170,500 2.1 Gray iron (tons) 12,763,757 2,482,295 19.4 Lead (tons) Ma11L1 Irun ttcrc) 932,951 528,378 56.6 Nickel (000 pounds) 248,956 35,000 14.0 Rubber (long tons) Natural 457,228 295,008 64.5 Reclaimed 263,668 155,075 58.8 Synthetic 1 ,306,786 785,701 60.1 Zinc (tons) 1 ,285,113 447,000 35.0
Copied from Automobile Facts and Figures, Automobile Manufacturers Assoc, l965,p.l4.
44 per cent of U. S. produced radios in 1963 were auto sets.
Portable Per Cent Home Sets Battery Sets Auto Sets Total Sets Automotive
2,496,000 4,614,000 7,947,000 18,281,000 43.5
Source: Supra. 8
the automobile industry and in the Free World
economy. General Motors is the world's largest
manufacturing corporation. Ford Motor Company
is the third, followed in the United States by
Standard Oil Company of New Jersey. Chrysler is
rated as seventh. Even "little" American Motors
is in the top ten per cent of the country's 500
leading manufacturing corporations.
In 1964, assets of the manufacturing corporations were as follows: General Motors, $10,292 millions; the Ford
Motor Company, $6,459 millions; and the Chrysler Corpora tion, $2,421 millions. These huge investments give the meaning of bigness. The earnings in 1964 of these manufac turing corporations were: General Motors, $1,735 millions;
the Ford Motor Company, $506 millions; and the Chrysler
Corporation, $214 millions. If we put the earnings of these three big companies together, it would be $2,445 million dollars. This will give more than $12 benefits to each
American person. This amount would be greater than that of
the world's sovereign countries. (See Table 1-4, page 9.)
•fortune, July 15, 1966, p. 232. 2Fortune Dictionary 500, Time, Inc., August, 1966. TABLE 1-4
GENERAL FIGURES OF THE MAJOR AUTOMOBILE MANUFACTURERS IN 1964 (thousands)
Net Invested Company Sales Assets Profit Capital Employees Payroll
General Motors 16,997,045 10,292,829 1,734,782 7,599,015 661,000 4,592,481
Ford 9,670,766 6,459,295 505r642 4,011,022 336,841 2,252,142
Chrysler 4,287,348 2,420,774 213,770 1,122,149 142,410 1,019,192
American 1,163,035 440,938 26,227 278,718 32,016 243,757
Source: Fortune Dictionary 500, Fortune Magazine, August, 1966.
Annual Reports of the automobile companies. 10
5. Besides the manufacture of automobiles, these
corporations manufacture a large share of the
nation^s major household appliances; farm equip
ment, diesel locomotive, marine and aircraft
engines, and industrial, domestic air-condition
ing and heating equipment.
The industry made 7,745,491 passenger cars in the
United States in 1964, and an additional 1,561,952 on-the- road commercial vehicles. Industry also produced a large
share of the nation's major household appliances; Frigidaire
is a part of General Motors, Philco is owned by Ford, and
Kelvinator belongs to American Motors. The industry manu
factures off-the-road earth-moving and farm equipment,
diesel locomotives and marine and aircraft engines, and in
dustrial and domestic air-conditioning and heating equip ment. Among the "oddities'" of its thousands of diversified
products are fabrics and furniture coverings made by Ford
and adhesives made by Chrysler. In addition to American
cars assembled abroad. General Motors makes the Opel in
Germany, the Vauxhall in England, and the Holden in
Australia; Chrysler produces the Simca in France; and Ford
manufactures cars called Anglia, Counsul, Cortina, Zephyr, 11 and Zodian in England and the Tanus in Germany.
Fortune Magazine forecasts an annual market of 9.4 million in new cars by 1980. There are others who whisper of a 10-million-car year by that time, and if all trends of the past few years continue, the possibility is not un likely.2
Purposes of the Study
With significant figures and facts, the automobile industry has grown with tremendous speed within the short period of seventy years. Why, at the beginning, were there so many automobile makers? Why have the smaller firms found it so difficult to continue in the business? What have been the particular advantages and disadvantages of big company operations? What is the likely competitive trend for the future?
In order to answer the above questions, this study is mainly concerned with the "internal" and "external" fac tors affecting the industry. The internal factor has to do with the performance of the company in organizing produc tive facilities, and managing their use. That is, of
2Ibid. 12 acquiring materials and labor, choosing effective techni ques and methods of production, managing finances, and so on. In this connection, attention is given to size and economies of scale.
The external factor may be said to be the market factor. It concerns principles and methods of determining price and output, the policy of product variation, advertis ing and other sales promotion policy, predatory or exclu sionary tactics directed either toward established rivals or potential entrants, and so on.
If economies of scale are great, what is the most ad vantageous size of the firm which can save cost? As a prac tical matter, it is difficult to determine the size of the firm and cost saving advantage. However, in this study a few examples given by different authorities regarding the unit cost may show the advantages of the large firms and show why the small firms have found it difficult to survive.
In many respects, the mergers among the small auto mobile firms has resulted in a high degree of concentration in the industry. This also gives them a competitive strength through the scale of operations of the firms. 13
Procedure of the Study
The growth and development of the automobile indus
try is a discussion of how the industry started, developed
and finally reached the present stage. This discussion is mostly dependent on printed materials and is divided into
six stages in Chapter II. It will give a sketch of the in
dustry's history and induce the question of the firm size
and market condition.
For large scale, the firms have advantages to re
duce their cost of manufacturing, advertising, transporta
tion, purchasing, research, financing, and management ac
tivities. This is the second section of the study as pre
sented in Chapter III, and develops the main point. It
consists of the nature of manufacturing economics of scale.
The approach of "indivisibilities" gives the automobile in
dustry a right size. The theoretic size of producing cars
in a year may be widely spread--180,000 units per year esti mated by Mr. Romney to 300,000 units per year estimated by
Professor Bain. But the unit is not very important as a
problem for the firms. The difficulty of the small firms
in the industry was not lack of manufacturing capacity. It
was the inability to generate sufficient sales to utilize
effectively the capacity which they had available. This 14 produced market disadvantages. These problems are also discussed in Chapter III. Special emphasis will be placed upon pricing and sales promotion.
The comparison between the economic theories and actual figures in the industry gives the clear idea of the automobile industry in our world. It seems to me that the automobile industry represents the greatest features of the modern economy.
In the final chapter, by way of conclusion, there is given competitive trends for the future. The industry has been substantially changed in its structure. At the birth stage, there were hundreds of makers. Now, five auto mobile makers have survived. It seems that the automobile industry goes to the "big three" strong hands. The two
"small" firms--American and Studebaker, seem to be driven out of the industry. This gives a model of an oligopolistic type economy. CHAPTER II
GROWTH AND DEVELOPMENT OF
THE INDUSTRY
For many, the history of the automobile industry in the United States began in 1893 when Mr. Henry Ford built his first car. Although this is not the case, Ford sold his car until 1898 at which time both gasoline and steam cars were produced.
The almost 70-year history of the automobile may be divided into six stages which shows as follows:
1. The birth of the automobile
2. The early merger: General Motors and United States Motors
3. The war boom (World War I)
4. Depression time
5. World War II
6. Post war
The Birth of the Automobile
The automobile is European by birth, American by adoption. The internal-combustion engine, upon which most
15 16 automobile development has been based, is unmistakably of
European origin, and both, the idea and the technique of ap plying it to a highway vehicle were worked out first in
Europe. On the other hand, the transformation of the auto mobile from a luxury for a few to a convenience for many was definitely an American achievement.
The Oldsmobile
The first man to put his money--or a portion of it--
into the automobile business and come out with considerably more than his shirt was S. L. Smith, who had made his
fortune in Michigan lumber and copper, and who in 1899 was
living in retirement in Detroit. Automobile historians do
not say much about Smith, their praises being reserved for
Ranson E. Olds, the man who built the car which Smith fi
nanced. On May 8, 1890, Smith put up $199,600 to finance
the first company that sold automobiles on a quantity basis.
It is this company which may justly be considered the be
ginning of the automobile industry as it exists today. On
Jefferson Avenue East, Olds built Detroit's first automo
bile factory and there began the production of the Oldsmobile
1John B. Raw, The American Automobile (Chicago: The University of Chicago Press, 1965), p. 1. 17
car.1 In 1908, the Oldsmobile Company became a division of
General Motors.
The Cadillac
The Cadillac Motor Company, the successor to the
Detroit Automobile Company, headed by William H. Murphy, had
organized in 1898. Chief engineer and general manager of
the Detroit Automobile Company was Henry Ford. The busi
ness was not successful. After Ford left the Detroit Auto
mobile Company, Henry Leland became a member of the staff.
The company was renamed the Cadillac Automobile Company in
August, 1902. In 1908, the Cadillac, like the Oldsmobile,
became a part of General Motors.
The Buick
The first Buick proprietor was David Dunbar Buick.
Before going into the engine business, Buick had been a suc
cessful bathtub manufacturer. However, Buick had no con
ception of how much money an automobile endeavor could de
vour in its experimental and introductory stages. His
funds soon dwindled and he found it necessary to borrow money
Automobile Manufacturers Association, A Chronicle of the Automobile Industry in America (Detroit: The Automo bile Manufacturers Association, 1952), p. 80. 18 from Benjamin Briscoe. His business failed in Briscoe's hands. Mr. Briscoe transferred his interest in Buick to
James A. "Whiting. Whiting made the usual mistake of under capitalizing the automobile.
William Crapo Durant was a man who made money of
$45,000 from reselling road carts. With this money, he also did well with Buick. Sales volume went up as follows:
2,295 cars in 1906, 3,848 cars in 1907, and 8,487 cars in 1908.-1 The Buick was the largest seller in the automobile field. Durant paid his merchandise debts, collected his stock subscriptions, and promptly began the merger negotia tion to form General Motors.
The Ford Motor Company
The fourth of the major automobile companies to get under way in the Detroit area was the Ford Motor Company, which was organized in June, 1903. The founder of the
Ford Motor Company was Henry Ford who was considered as the greatest man in the automobile world. At first, he worked in the Detroit Automobile Company. Later he formed the
1Taken from The Historical Sales by Automobile Makers, Automobile Statistics (Detroit: Detroit-Chrysler Corp., 1952), p. 53. ^Automobiles of America (Detroit: Wayne State Uni versity Press, 1962), p. 9. 19
Henry Ford Automobile Company which lasted only a few months. He then formed the Ford Motor Company and owned only a 25.5 per cent interest in the company. Two groups of investors held interest in the company. One group was headed by Alexander Malcomson, a Detroit coal dealer, which included John S. Gray, President of the German American
Savings Bank; C. J. Woodhall, Malcomson's bookkeeper; James
Couzens, a car-checker for Malcomson; Horace Rackham and
John Anderson, Malcomson's lawyers. The other group was composed of the Dodge brothers, John Dodge and Horace Dodge.
The former group was especially influential in the company's policy making.
In the Ford Motor Company, Malcomson, himself, had an interest equal to that of Henry Ford, 25.5 per cent of the company's stock. There was conflict between Ford and
Malcomson because Ford favored low-priced model cars, and
Malcomson favored the high-priced models. Late in 1906,
Malcomson sold his interest to Ford. This enabled Ford to gain more than 50 per cent of the Ford Motor Company stock and thus had controlling interest in the company he managed.
Free to determine his own price policy, Ford dropped the high-priced car and produced the low-priced car. The profit went up sharply. Eventually, in 1909 Ford introduced 20
the "Model T" which gave him complete success and left the
rest of the industry far behind.
The Packard Motor Car Company
The Oldsmobile, the Cadillac, the Buick, and the
Ford were typical Michigan automobiles. In the Middle West
there was the Packard Motor Car Company. The company, like the Buick, does not owe its founder much more than its name.
The company was organized in 1901 by James W. Packard, a cable manufacturer of Warren, Ohio. The man who determined the character of the Packard was Henry B. Joy, a wealthy young Detroiter whose father was chief counsel for the
Michigan Central Railroad.
The Packard Formula—sell 1,000 cars and make
$l,000,000--was particularly effective in the years between
1905 and 1910. It was easier to sell expensive cars to rich people than to sell medium-priced cars to middle-class people, and one had to sell only a few cars to have a most satisfactory year. In the early years of the century, there were still such things as millionaires without automobiles, and very few luxury cars were being produced.
The main companies--the Oldsmobile, the Cadillac, the Buick, the Ford, and the Packard--which manufactured cars in the early stage have made tremendous improvements 21
in the speed, the power, and reliability of the gasoline
engine. The endless succession of new speed and endurance
records gave the public a dramatic demonstration of new
standards of performance, and also gave the car business a bright future.
In the early stage, the car business went continually well in engineering and sales volume. Production began with only four cars in 1895 to over 40,000 cars in 1905. A great economic problem loomed for the industry--monopoly and
merger.
The Early Merger: General Motors and United States Motors
The automobile was born competitively, operated com petitively, and a large part of the industry died competi tively. No other industry of comparable importance, and particularly no other industry in which a few large corpora tions have produced the bulk of the output, has remained as individualistic, as independent, as true to the tenets of
Adam Smith's capitalism.
The automobile was in a period of growth and the total output of the industry would constantly increase. No individual automobile company had any assurance of continued prosperity. But if a manufacturer had two automobiles, it 22 was not likely that both would be selling failures in the
same year. The manufacturer with three or more cars might
consider himself well protected from the fluctuations in
the public's taste.
Owing the above reason, most automobile men wanted more than one company and tended to negotiate a merger.
There were two examples of the early merger. One was
William Crapo Durant, and the other was Benjamin Briscoe.
Both tried to stay their positions rather than to become a monopoly in the industry by buying other companies as we mentioned above.
In September, 1908, Durant incorporated the General
Motors Company with capitalization of $12,500,000. General
Motors then issued $1,249,250 of its common stock and
$2,499,500 of its preferred stock in exchange for all the stock in the Buick Company.
Durant went out into the highway and byways and be gan picking up automobile and auto-parts companies in re turn for as little cash as was possible and as much General
Motors stock as seemed desirable. In a little more than a year's time he had acquired eleven automobile companies and
1Alfred P. Sloan, Jr., My Years With General Motors (New York: Doubleday and Company, Inc., 1964), p. 192. 23
six manufacturers of accessories and parts. Most of these properties were of very little value, but most of them were picked up with the expenditure of little, if any, cash.
Durant came out with a wonderful paper organization, but many of his acquisitions were not merely doubtful assets
but actual liabilities, as they constituted a steady drain
upon the resources of the new concern.
Durant was not only putting a great deal of money
into his money-losing companies, but was also expanding the
capacity of his good companies more rapidly than their
sales increases warranted. In 1910, Durant invested about
$8,000,000 in plant expansion. In the same year, the value
of General Motors inventories increased from $8,500,000 to
nearly $40,000,00 0. To finance his expansion Durant went heavily into debt to his suppliers while his automobiles were attempting to make production schedules that were far
in advance of the time.
Durant toured the country in search of money, but no one would lend him a cent. Hence, Durant's first admin
istration at General Motors came to an end. Although he
remained a director and also a very large stockholder,
■'■Automobile Manufacturers Association, A Chronicle of the Automobile Industry in America, op. cit., p. 22. 24
control of General Motors was put into the hands of a board
of five trustees, three of ■whom were representatives of the
bankers. James J. Storrow was the most active of the trus
tees and was, for all practical purposes, Durant's successor,
In September, 1910—at the time, almost to the day, when Durant lost control of General Motors—Briscoe made his
bid for automobile leadership. With the assistance of
Authemy Brady and several other members of the old Electric
Vehicle group, Briscoe organized the United States Motor Corporation, with an authorized capital of $30,000,000-1
Then, following almost exactly in Durant's footsteps, he
collected nine companies making automobiles or automobile
parts and had, on paper, an organization nearly as imposing
as General Motors itself.
But there was no Buick, no Cadillac, and not even
an Oldsmobile in Briscoe's collection. Except for his own
Maxwell, none of his cars had a considerable sales volume
and many of them were heavily in debt. The United States
Motors went into a receivership in 1912. Briscoe was gone;
and so was United States Motors. Since the organization of
United States Motors in 1910, there has never been a 25
comparable consolidation in the motorcar manufacturing
field.
The two merger examples mentioned here, both failed.
United States Motors went into receivership, and everything
was gone. General Motors went into another's hands, and
shares of the total motorcar output dropped from 20 per cent in 1910 to about 10 per cent in 1915.-1
The War Boom (World War I)
The First World War, 1914-1919, changed the American
economy. It made big companies out of little companies and made enormous companies out of big companies. In 1910, the
net income of American corporations was $3,326,000,000. In
1914, it was $3,617,000,000, an increase of only about 9 per
cent in four years. For the next three years, 1914-1917, however, the movement was perpendicularly upward. (See
Table 2-1, page 26.)
The net income of 251 large corporations rose from
$415,000,000 in 1914 to $1,774,000,000 in 1917. The number
of these who were paying income taxes on incomes of more
than $3,000 a year rose from $357,000 in 1917. Even the
Chrysler Corporation, Financial and Statistical Fact Book (Detroit: Chrysler Corporation, 1950), p. 53. 26
1929 net income of all corporations was about $1,500,000,000 less than the 1917 figure.1
TABLE 2-1
NET INCOME OF UNITED STATES COEPORATIONS 1914-1917
1914 ...... $ 3,617,000,000
1915 5,184,000,000
1916 ..... 8,765,000,000
1917 ...... 10,730,000,000
Source: David Friday, Profits, Wages and Prices (New York: Harcourt, Brace and Company, 1921).
In 1916, the American corporations took in about
$350 per capita—that is, each inhabitant of the United
States spent an average of $350 on the goods that corpora tions sold. In 1920, the corporate income was about $1,100 per capita--that is, the "average" person was spending
$1,100 on the things the corporations had for sale. The in come of corporations had more than tripled in five years' time.
The U. S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, 1914- 1917 (Washington, D. C: U. S. Government Printing Of fice), p. 409. 27
As might have been expected, the automobile manu facturer was a major beneficiary of the war boom. It took
the automobile industry from 1900 to 1914 to reach the out put of 500,000 cars a year. In 1915 it barely missed an output of 1,000,000 cars and in 1916 it left the 1,500,000
car mark considerably behind. Thus, nearly thirty years of progress, at the prewar rate, was compressed into two years' time.
The output and wholesale value (that is, the manu facturer's income) of the 1914-1916 automobiles was:
TABLE 2-2
AUTOMOBILE PRODUCTION 1914-1916
Year Cars Wholesale Value
1914 569,000 458,957,000
1915 969,930 701,778,000
1916 1,617,000 1,082,000,000
Source: Historical Motor Vehicle Statistics. Also see Table 2-5.
As cited in the table above, the most significant figure is the $1,082,000,000 wholesale value of 1916.
Measured by its income, the automobile industry had now 28 become a $1,000,000,000-dollar business. But it had not been even a $500/000/000-dollar business in 1914. The re
tail cost of the 1916 automobiles was in the neighborhood of $1,300,000,000. Whatever may have been the ratio be tween higher incomes and higher cost of living, or whatever extent the national standard of living may have increased, it is evident that the people had $1,300,000,000 to spend on automobiles in 1916, and that they had never possessed any such automobile spending money before. Or, to put the same proposition in different terms, the number of people who could afford to buy automobiles in 1916 was about
1,000,000 greater than the number who could afford to buy automobiles in 1914.
Part of the prosperity of the 1914-1916 period re sulted from the fact that automobile prices were going down while popular income was going up. Ford applied his more- volume, less-price formula, with the result that in 1916 he got the Model T down to the remarkably low figure of $360.
(He also made $59,000,000 in 1916 against $30,000,000 in
1914.) But other manufacturers were also cutting their prices, partly because of their increased volume but more
Allan Nevins, Ford, The Times, The Man, The Company (New York: Charles Scribner's Sons, 1954), p. 411. 29 because of increased competition. Willys, who came closest to following Ford's technique of progressive price reduc tions, brought the Willys-Overland from $950 in 1914 to
$750 in 1916. He also sold 140,000 Willys-Overlands in 1916 against 45,000 in 1914.X
The second phase of the war boom covers the period of America's participation in the war. The years 1917 and
1918 were not a good time for the automobile industry. In the first place, the automobile manufacturer did not make money out of the war. In the second place, the scarcity of steel almost compelled the industry to shut down entirely; and, in the third place, the rising price of steel and other raw materials sky rocketed automobile prices to an extremely unhealthy level.
In this period of time, Ford made shells, cuissions, and "Eagle boats" (submarine chasers). Leland resigned from Cadillac and became one of the several manufacturers of Liberty engines. Willys-Overland made trucks and muni tions. Chalares headed a company which made anti-aircraft guns. The Stanly Steamer people sold their plant outright to a munitions maker, but had the bad judgment to buy it
1Ibid., p. 271. 30 back again after the war. The Dodges put up a munitions plant which cost $11,000,000 and employed 8,000 men. But the industry was a little slow in getting into military pro duction, and the war was over before the automobile makers military output had reached a volume large enough to have any influence on the result.
Furthermore, the war-time automobile man considered himself abused by the Government. The country was hardly in the war when Burnard Baruch, head of the War Industries
Board, began to hint that liquidating the automobile busi ness- -at least the passenger car business--would have an ex cellent effect upon the supply of steel for military pur poses. When automobile men pointed out that such a shut down would "put the State of Michigan into bankruptcy,"
Baruch was temporarily silenced. In the spring of 1918, however, with the German army driving toward Paris and the
Channel, Baruch returned to the attack. This time he seemed determined to suspend automobile making no matter what hap pened to the State of Michigan. A compromise was finally reached by which during the second half of the year, automo bile companies were allowed one-half as much steel as they had used in the second half of 1917. But Baruch also said that after December 31, 1918, no more passenger cars could 31
be made. Fortunately, the war ended about six weeks before
this deadline, but the automobile industry had witnessed a
close shave indeed. Throughout the augument with Baruch,
the position of the industry had been that there was suf
ficient steel for both military and civilian purposes and
that clamping down on their automobile making was not neces
sary for winning the war.
The output of motorcars held up well in 1917, but
in 1918 dropped to 1,170,000, a decline of 703,000 from the previous year. It was the first time in the history of the
automobile that the current year had not been an improve ment on the previous year, and the automobile maker was ex
tremely unhappy even though the slump was obviously the re
sult of circumstances entirely beyond his control.
Depression Time
The automobile business, after World War I, up to
1929, the year beginning the world depression in economy, made steady progress. The number of cars produced was
1,933,000 in 1919 and 5,337,000 in 1929. From the year
1930, the year which saw the beginning of the world's biggest
XE. D. Kennedy, The Automobile Industry (New York: Reynal and Hitchcock, 1941), p. 65. 32
depression, the car business got the same fortune as many
other producers. Only 46 car exhibitors were on hand for
the 1930 automobile show, against 53 in 1929 and 87 in 1921.
As the year went on, the signs of depression multi
plied and the echoes of 1929 diminished. The industry pro
duced 421,000 cars in March and 432,000 in May. Only a few
years before, these records would have been considered ex
cellent. But the automobile plants were now geared to vary high volume and the industry had become dependent upon a production of from 500,000 and 600,000 cars a month.
Even the first quarter of 1930 showed that the de pression was getting a running start in the automobile in
dustry. In the first three months of 1930, Hupp made only
$66,000 against $1,500,000 in the first three months of
1929, Chrysler was off to $200,000 against $8,800,000 in the
first 1929 quarter, and Willys lost $136,000 against a 1929 profit of $2,000,000. Ford and General Motors continued to make substantial profits, but the profits of the independent were rapidly vanishing as sales continued to decline.
The second half of 1930 was much worse than the first half. In July, Durant Motors laid off half its workers,
1Ibid., p. 82. 33 both factory and office. In August, Hynes and the former
Dodge executive left Durant.
In September, the Bay City, Michigan, plant of
Murray Body closed down. Ford went on a four-day week, al though he was still making two-fifths of all the cars.
Chrysler cut salaries 10 per cent. General Motors dropped the Marquette, which had come out only the year before as a running mate for the Buick.
Ford had the best year of anyone in the industry, with a world output of about 1,500,000 cars and trucks. He was about 450,000 units under his 1929 production, but he sold nearly 1,100,000 passenger cars in the United States.
The Ford not only left the Chevrolet in the far distance, but its record was 300,000 more cars than the entire General
Motors line. In 1930, Ford's profit also held up remarkably well. He made $41,700,000 which was substantially more than half his 1929 net income.
General Motors had a miserable year from a produc tion standpoint. It made only 1,200,000 cars and trucks, against 1,900,000 the year before. The Chevrolet was off from 1,333,000 to 863,000, and the Pontiac from 190,000 to
40,000. The Buick, in spite of its relatively high price, was much more resistant to the depression, sales being 34 121,000 in 1930, against 167,000 in 1929.1
Yet, 1930 also demonstrated the inherently strong earning power of General Motors. Even with a sales decline of 700,000 cars, the company made $141,616,000 on the year.
Both Ford and General Motors showed that a large decline from the sufficiently large volume need not be disastrous from a profit standpoint. On about 75 per cent of his 1929 volume, Ford made about 53 per cent of his 1929 profit. On about 63 per cent of its 1929 volume, General Motors made about 56 per cent of its 1929 profit. But, both companies
2 started down from a volume of nearly 2,000,000 cars.
Even the largest independent, however, were very much less able to retain profits while losing sales.
Chrysler, for instance, sold 267,000 cars in 1930. This was a very respectable volume; indeed, it was about two- fifths of the entire output of the independents. As
Chrysler had sold 450,000 cars in 1929, he was off about
200,000 cars on the year. Yet, he sold six cars in 1930 for every ten sold in 1929. In 1930, therefore, he had
Annual Reports, General Motors Company, Ford Motor Company, 1930. 2Alfred P. Sloan, Jr., op. cit., p. 225. 35
60 per cent of his 1929 volume.
But after making $21,902,000 in 1929, Chrysler made
only $234,000 in 1930. His 1930 profit was about one per
cent of his 1929 profit; in any large sense, he had no 1930
earnings left at all. He made fewer dollars than he made
automobiles—a net of $234,000 on 267,000 cars came to a
profit of 80 cents per car. To be sure, Chrysler was still
paying about $3,000,000 a year interest on the Dodge bonds
(some of which had been retired) and had larger deprecia
tion items than any other company except General Motors and
Ford. Chrysler's record in 1930 demonstrated the frugality
of automobile profits. For every company there was a cer
tain critical volume below which no earnings could be made.
The great trouble with the automobile industry in
1930 was a lack of customers. Other industries had the
same difficulty, but not usually to the same degree. The
decline in money spent on automobiles in 1930 was very much
greater than the decline in money the public had to spend.
This discrepancy was to be expected, since even the most
confirmed automobile addict had to buy food, shelter, and
^-Walter Percy Chrysler, Chrysler Corporation; the Story of An American Company (Detroit: Chrysler Corporation, 1955), p. 97. 36
some irreducible minimum of clothing before he bought an
automobile. The discrepancy--the difference between the
decline in total purchasing power and the decline in money-
spent on automobiles--was discouragingly large.
In 1930, compared with 1929, the "compensation of
employees"--dropped from about $51,000,000,000 to about
$47,000,000,000. The farmer's cash income fell from about $10,000,000,000 to about $8,500,000,000.1 The reduction in
these two items was very considerable, yet the 1930 total
was about 92 per cent of the 1929 total. That is, the work-
ingman and the farmer had about 92 cents in 1930 income for
every dollar in 1929 income.
In 1931, automobile sales continued to decline
rapidly; most of the manufacturers had large deficits on
the year, there was never any point at which the outlook
could be described as anything but bad.
March 4, 1933, was the turning-point in the depres
sion and therefore in American economic life. Mr. Hoover's
policy of letting the depression run its courses, still had much to recommend from the standpoint of orthodox economics.
■'"U. S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, 1929-1930 (Wash ington, D. C: U. S. Government Printing Office.) 37
Unfortunately, the orthodox economist had not taken into consideration the possibility of a banking collapse. With the arrival of the "bank holiday," the country was con fronted not with a depression but with a panic. And, for a very brief period, the most conservative of industrial and financial circles appealed vigorously while President
Roosevelt laid violent hands on laisse-faire, free enter prise, individualism, and the .American way. As.soon as the immediate crisis was over and the banks were functioning again, the businessman and the banker rapidly reverted to type. For a few months after his inauguration, however,
President Roosevelt had the almost unanimous support of all classes.
In May the industry established an even more en couraging figure. Actual retail sales (not factory output) in the United States were 153,000 cars compared to 132,000 in May, 1932. It was the first time in forty-two months— since October, 1929--that the sales for any month had been higher than the sales for the corresponding month in the previous year. In June, retail sales were 217,000 cars, against 166,000 cars twelve months before, and production for six months of 1933 was 784,000 cars, against 704,000for the same six months the year before. Although a majority 38 of the automobile companies were still far from prosperous,
General Motors had a new income of $48,068,000 for the first half of the year.
The year 1934 was essentially a continuation of the year 1933. Output, sales, and profits continued to go up.
In the meantime the country, as a whole, was continuing to recover from the depths of the depression, and the automo bile industry was recovering very much more rapidly than the country as a whole. Production for the first half of 1934 was 1,802,000 cars against 1,081,000 in the first half of
1933--an increase of almost 90 per cent. And by the first of October the industry had turned out 2,500,000 cars-- which was more cars than had been made in any full year since 1930.
World War II
When the German blitzkrieg in the spring of 1940 brought a belated awareness that the threat of a Nazi con quest of Europe was far greater than people had realized, the United States government began to press more energet ically for military preparations. Except in the matter of
•^Chrysler Corporation, The History of Sales by Auto mobile Makers (Detroit: Chrysler Corporation, 1952.) 39
aircraft production, which will be mentioned later, indus
trial mobilization was still half-hearted.
Not until after the United States itself became
belligerent was there an effective organization to control
production. In the meantime, getting anything at all ac
complished depended entirely on voluntary cooperation on the
part of industry, and fortunately this cooperation was forth
coming. Progress was slow and halting for many months; first
of all, it was necessary to determine what had to be done,
and after that to figure out how to do it. There was also
the fact that except for a few leaders of government and
industry who were aware of the true seriousness of the war
situation, there was no great sense of urgency in the
twilight era before Pearl Harbor.
The manufacture of motor vehicles continued very much on a "business-as-usual" basis through 1940 and 1941,
reading a total of 4,400,000 and 4,800,000 units in each of
these years, respectively. This was done despite growing
shortages of materials. At Knudsen's request, the industry
suspended major model changes so that the resources of the machine tool industry could be devoted to military needs.
^William S. Knudsen, President of General Motors had just been appointed by President Roosevelt as Joint Head of the Office of Production Management for the Government. 40
At the time, or rather on the basis of second-guessing shortly afterward, the automobile manufacturers were criti cized for using as much as they did of materials that were becoming scarce and might otherwise have gone into arma ments. It seems unfair to hold the industry responsible for the government's failure to formulate a clear-cut pro duction policy or to establish and enforce a rigorous sys tem of priorities.
Truck, Jeep, Tank, and Other Military Items
It was, of course, a simple matter to make trucks for military as well as civilian use, and before the end of the war more than two and a half million would be turned out. The manufacture of trucks was less glamorous than some of the other war activities engaged in by the automo bile industry, but in its contribution to the final victory it probably rates as high as any. The "Red Ball Express" which kept allied armies in France supplied after the break out from the Normandy beachhead, was merely the most spec tacular of many occasions on which truck transportation kept advances moving when by ordinary logistic calculations they should have been brought to a halt because of the destruc tion of rail lines. 41
There was likewise no major production problem in volved in manufacturing the jeep, which was perhaps the most distinctive contribution of the American automobile industry to the war effort and would survive the war to find widespread adoption as a peacetime vehicle. The de sign of the jeep was a work of Captain Robert G. Houie of the United States Army, working in cooperation with Colonel
Arthur ¥. S. Herrington, a co-founder of the Marmon-
Herrington Company for the purpose of developing all-wheel- drive vehicles. A prototype was put on display at Fort
Benning, Georgia, in March, 1940. Initially, the jeep was to be built by the American Bantam Car Company, a firm that had been trying without much success to put a small car on the American market. Within a short time, however, the de mand outran this company's production capacity, and the as sistance of Willys-Overland and Ford was involved. With
Willys as the principal producer, some 660,000 jeeps were built for war use.
It was also logical that the War Department should turn to the automobile industry for help in building tanks.
This was a more complicated production problem than making military trucks or jeeps. Tanks could not be built on automobile assembly lines; they required the construction of 42 new factories, run by men who for the most part had never seen a tank before. The first automobile company to be ap proached on tank manufacture was Chrysler. It undertook the task in June, 1940, beginning by sending a selected team to the Rock Island Arsenal to examine a tank and take
186 pounds of blueprints back to Detroit. Ground was broken for a new plant in September, and regular production was achieved in the following April. This was just the start; other automobile manufacturers were rapidly drawn in al though Chrysler remained the principal builder of tanks.
A tank was at least a motorized vehicle. Simultan eously the automotive industry was turning its skills and techniques to completely novel and unfamiliar products; artillery and shells, gun mountings, machine guns, fire- control systems, small-arms ammunition, fuses*--all the com plex equipment of twentieth-century war. The scope of this diversity can be gauged by the fact that of General Motors' eventual $12 billion worth of military production, two- thirds was in items the company had never made before. For the time being, however, in 1940 and 1941, most of the ef fort had to go into planning and preparation, somewhat to the disappointment of an impatient public, which had come to expect miracles from the automobile manufacturers and 43 had no idea of the unavoidable delays incurred in starting from nothing to design and build weapons of war.
Aircraft Production
Among the wartime activities of the automobile in dustry the one that was most highly publicized and drew both the most lavish praise and sharpest criticism, was the industry's participation in the quantity manufacture of air planes . Of all the knotty problems to be solved in mobil izing the industry, this was beyond all question the knot tiest. Because of a superficial resemblance between the power plants of the automobile and the airplane, the two industries were widely regarded as related enterprises, but in their techniques of production they were about as far apart as they could be.
The Ford Motor Company ventured into the manufacture of B-24 "Liberator" bombers. For this, a vast factory was begun in 1941 at Willow Run in Ypsilanti, Michigan, under the general supervision of Charles E. Sorensen and with am bitious plans for using mass-production techniques on a scale never previously attempted in aircraft manufacturing.
In 1944, the Willow Run plant was pushing out Liberators at the rate of four and five hundred a month and were ahead of 44 schedule. It was another example in a triumph of the mass- production technique.
The following list of products produced by motor, body, parts and accessories companies, is as comprehensive a tabulation of the automotive industry's production for
World War II as has been possible to obtain. This informa tion was compiled in 1947.
TABLE 2-3
WAR PRODUCTS PRODUCED BY AUTOMOBILE COMPANIES
4,131,000 Engines
Aircraft 455,552
Marine 168,776
Tank 257,117
Military Trucks 3,250,000
5,947,000 Guns
Carbines and Rifles 3,388,897
Machine Guns 2,276,204
Anti-Aircraft 156,313
Other Guns 125,527
2,812,000 Tanks and Trucks
Tanks 49,058
Amphibian Tanks 5,115 45
TABLE 2-3 - Continued
Gun Carriages (Tank Type) 24,147
Gun Carriages, other, and Armored Cars 126,839
Military Trucks (1940-46) 2,600,687
Airplanes 22,160
Helicopters 219
Gliders 4,290
Source: Freedom's Arsenal: The Story of the Automotive Council for War Production (Detroit: Automobile Manufacturers Association, 1950), pp. 199-201.
TABLE 2-4
AUTOMOTIVE INDUSTRY PERCENTAGE OF TOTAL WAR OUTPUT
Complete Airplanes 10
Machine Guns 47
Carbines 56
Tanks 57
Armored Cars 100
Scout Cars and Carriers 92
Torpedoes 10
Land Mines 10
Marine Mines 3
Army Helmets 85 46
TABLE 2-4 - Continued
Aircraft Bombs 87
Source: Ibid., p. 201.
Post War
Among the established passenger car manufacturers.
General Motors was the best equipped to make the transition from war to peace. It lost Knudsen, who during the war was given the rank of lieutenant-general and devoted himself to expediting the production of military materials. He died in 1948, and his successor at General Motors was Charles E.
Wilson (1890-1961), later Secretary of Defense in the
Eisenhower administration. He was known to the business world as "Engine Charlie" to distinguish him from another
Charlie E. Wilson, who was president of General Electric and accordingly identified as "Electric Charlie." General
Motors, with its flexible organization and its diversity of operations, was in excellent condition to maintain its auto motive leadership.
Chrysler, likewise, made a satisfactory adjustment.
It had no change of management; K. T. Keller, who became president when Walter Chrysler retired, remained in that post until 1950. In addition, Chrysler's role as the 47 country's leading manufacturer of tanks was interrupted only temporarily. The independents--Hudson, Nash, Packland,
Studebaker, and Willys--emerged from the war with high hopes for booming the motor-vehicle market in the future.
Studebaker, in fact, was the first of manufacturers to get back to full-scale operations, with a car whose design was apparently inspired by a ferryboat, in that it gave the im pression of being double-ended. While the postwar shortage lasted, the independents did reasonably well, climbing to
50 per cent of the passenger car market in 1949. However, once the Big Three got their assembly lines rolling normally, the inability of the small-scale producer to compete effec tively again made itself manifest. It was significant that the independents abandoned the low-priced car market. Even
Hudson, who with Essex and Terraplane had occupied an es tablished position in this market, made no effort to return to it. Willys-Overland perhaps should be considered an ex ception because it continued to manufacture jeeps for peace time use, but the jeep was a special case. It was not really competitive with conventional passenger automobiles, and in any event, it did not sell well enough to restire
Willys-Overland's former glory.
Henry Ford, II, the grandson of the old Henry Ford, 48 freshly out of the Navy was made vice-president of Ford
Motors late in 1943. For a time it seemed to be an empty title. It is alleged that his attempts to exercise author ity were blocked by his grandfather's interference. Never theless, the Ford picture was brighter than it looked.
Henry Ford, II, may have come to the company without experi ence in its management, but both at college (Yale) and in the Navy he had made a point of keeping himself as fully in formed about its affairs as he could. The strong woman of the Ford family, Mrs. Henry Ford, the elder, had not inter- ferred in the operation of the business while her husband was in possession of his faculties, but once the elder Ford began to fail, she became a strong aid and ally to her grandson.
It took time and effort to wear down old Henry's reluctance to surrender his control, but it was finally achieved; and on September 21, 1945, Henry Ford, II, was elected president of the Ford Motor Company, with a free hand to manage it as he chose. Harry Bennett, who was be lieved to have been an aspirant for the office, received his walking papers the same day although he was given a month to wind up his affairs. The founder of the company went into complete retirement for the two years more that he had 49
to live, a senile invalid with his great days far behind
him.
After Henry, II, took over the organization, the
structure of the Ford Motor Company was comprehensively
overhauled. The deficits were replaced by profits, and in
1950 Ford finally recovered from Chrysler, second place
among automobile producers. When the fiftieth anniversary
of the company arrived in 1953, it could celebrate its past
with the assurance that it also had a future. By compari
son, Studebaker was simultaneously observing its hundredth
year as a vehicle manufacturer, but it was an open question
as to how much longer it would be able to continue.
Motor-vehicle output in 1950 topped 8,000,000 for
the first time in automotive history, but while this record was being made the new era was interrupted by the Communist
invasion of the Republic of Korea. American military forces went into action on the other side of the world while at
home automobile men patiently put away their plans for ex pansion of civilian production and began to recall what they knew about the manufacture of tanks, guns, aircraft engines,
and wing sections. As it turned out, the Korean conflict
did not cause a major disturbance of the civilian economy.
There were restrictions on production but nothing on the 50 scale of the Second World War.
In the last three or four years, the automobile business booms as never before. In 1965, factory sales al most reached 10 million cars. (See Table 2-5.)
TABLE 2-5
HISTORICAL MOTOR VEHICLE STATISTICS
Registration Factory Sale value Year (thousand) Number (thousand)
1900 8 4,192 4,899
1905 79 25,000 40,000
1910 469 187,000 225,000
1915 2,491 969,930 701,778
1920 9,239 2,227,349 2,232,420
1925 20,069 4,265,830 2,916,770 1926 22,200 4,300,934 3,092,188 1927 23,033 3,401,326 2,584,802 1928 24,689 4,358,759 3,032,708 1929 26,705 5,337,087 3,413,148 1930 24,750 3,362,820 2,034,835 1931 26,094 2,380,426 1,373,691 1932 24,391 1,331,860 754,485 1933 24,159 1,889,817 948,806 1934 25,262 2,737,070 1,467,260 1935 16,546 3,971,241 2,088,834 1936 28,507 4,461,462 2,478,467 1937 30,059 4,820,219 2,778,277 1938 29,814 2,508,407 1,570,950 1939 31,010 3,588,889 2,260,018 1940 32,453 4,472,286 2,938,474 1941 34,894 4,840,502 3,637,006 1942 33,004 1,041,524 1,591,270 51
TABLE 2-5 - Continued
Registration Factory Sale Value Year (thousand) Number (thousand)
1943 30,888 699,828 1,451,896 1944 30,479 738,134 1,701,376 1945 31,035 725,215 1,239,210 1946 34,373 3,089,565 3,023,028 1947 37,841 4,797,621 5,667,730 1948 41,086 5,285,544 6,750,898 1949 44,690 6,253,651 8,044,892 1950 49,195 8,003,056 10,175,885 1951 51,949 6,765,263 9,565,134 1952 53,301 5,538,959 8,774,903 1953 56,255 7,323,214 11,091,640 1954 58,543 6,601,071 9,878,113 1955 62,727 9,169,276 14,473,844 1956 65,183 6,920,590 11,832,403 1957 67,159 7,220,520 13,281,102 1958 68,328 5,135,106 9,740,393 1959 71,526 6,728,629 12,873,140 1960 73,922 7,869,271 14,514,914 1961 68,432 6,676,511 12,441,530 1962 82,748 8,173,408 15,653r465 1963 86,193 9,100,436 17,517,422 1964 87,910 9,292,275 17,955,000
Selected from Automobile Manufacturers Association, Automo bile of America (Detroit: Wayne State University Press, 1962), and Automobile Facts and Figures, 1965.
Here is a fact in which the automobile industry is big business and is growing into an oligopoly. The big is becoming bigger, and little could not survive at all. The
Big Three--General Motors, Ford and Chrysler--raised in their positions as first, third, and fifth industries in TABLE 2-6
U. S. PASSENGER CAR PRODUCTION BY MAKES 1960-1964
Company and Make 1960 1961 1962 1963 1964
American Motors Corp. 485,745 372,485 454,784 480,365 393,863 Chrysler Corp. Plymouth 483,969 310,445 331,079 496,412 571,229 Dodge 411,666 220,779 251,722 421,301 505,094 Chrysler 104,249 117,446 134,008 130,009 165,729 Total 1,019,295 648,670 716,809 1,047,722 1,242,162 Ford Motor Company Ford 1,511,504 1,345,121 1,565,928 1,638,066 1,787,535 Mercury 359,818 311,635 335,446 292,086 320,658 Lincoln 20,683 33,180 33,829 33,717 37,750 Total 1,892,005 1,689,936 1,935,203 1,963,869 2,145,943 General Motors Corp. Cheyrolet 1,873,618 1,604,824 2,161,409 2,303,315 2,114,718 Pontiac 450,206 360,336 547,350 625,268 693,634 Oldsmobile 402,612 321,838 458,359 504,555 510,931 Buick 307,804 291,285 415,892 479,399 482,731 Cadillac 158,941 148,298 158,528 164,735 154,623 Total 3,193,181 2,726,581 3,741,538 4,077,272 3,956,637 Studebaker Corp. 105,902 78,664 86,974 67,918 577 Checker Motors Corp. 6,980 5,693 8,026 7,231 6,310 Total Passenger Cars 6,703,108 5,522,019 6,943,334 7,644,377 7,745,492
Copied from Automobile Facts and Figures , 1965, p. 8. 53
1965 from second, fourth, and sixth in previous years in the
500 United States industrial corporations, respectively. The
"little" American Motor dropped from fourth to fifth, and sales dropped out of the billion-dollar club which seems to become real little. No other automobile manufacturer is ranged in the 500 largest United States industrial corpora tions and could not be considered important in the industry.
(See Table 2-6, United States Passenger Car Production by
Makers, 1960-1965.)
In the following chapter, a discussion has been pre pared on the reasons and characteristics of an oligopolistic business of the United States automobile industry.
Fortune Magazine, July 15, 1966, p. 230. CHAPTER III
THE CHARACTERISTICS OF AN OLIGOPOLISTIC
BUSINESS OF THE UNITED STATES
AUTOMOBILE INDUSTRY
In Chapter II, a brief history of the American
automobile industry was presented. In the early period,
there were hundreds of manufacturers who went into the auto mobile business; but most of them lived so briefly and so
obscurely that neither their coming nor their departure was
a matter of any moment. Almost from its early Oldsmobile period, the history of the automobile industry has been the history of not more than twenty companies, who have account
ed for at least 95 per cent of the total output of automo biles .
The concentration of automobile production is illus
trated by a study of Massachusetts registration in 1916. At
the beginning of 1916, there were approximately 100,000 automobiles in Massachusetts. Of these automobiles, 66,255
--two-thirds of the total—were divided among twelve lead
ing manufacturers. The twelve leaders and the registrations
54 55
were:
TABLE 3-1
MASSACHUSETTS CARS OF MAJOR MAKES 1916
Ford 25,900
Buick 7,919
Cadillac 5,812
Overland 5,122
Studebaker . 3,570
Maxwell 3,386
Hudson 3,119
Packard 3,102
Chalmers 2,495
Metz 2,031
Reo 2,005
Rierce-Arrow 1,794
Source: Ward's Automobile Statistics Book, 1940.
Among the next seven in order of popularity (Steven-
Duryea, Oakland, Jeffery, White, Hupp, Pope, and Stanley) there were 8,258 registrations. So the first nineteen manu facturers had 74,513 registrations, or almost exactly three cars out of every four.
The remaining 25,000 automobiles included not less 56 than 657 makes, most of -which were no longer being produced.
They were divided as follows:
TABLE 3-2
MASSACHUSETTS CARS OF MINOR MAKES 1916
Makes Number Cars Each
16 500 - 1,000
19 200 - 500
26 100 - 200
32 50 - 100
41 25 - 50
59 10 - 25
62 5-10
29 4
31 3
70 2
272 1
Source: Ibid.
There were, then, 676 makes of cars in Massachusetts in 1916. Allowing for cars that had no makes in Massachusetts by that time, it is safe to say that from 1892 to 1916, at least 700 makes of automobile manufacturers were exhibited at the National Automobile Show in 1916--and nearly everyone 57
(except Ford) who made an automobile was represented in the show. In round numbers, however, let us say that there were 100 automobile manufacturers in 1916 . Since the
Massachusetts figures show that at some time before 1916, it allows that 600 of them must have not only appeared but disappeared as well. Thus, the mortality rate in the auto mobile industry apparently was extremely high.
But this mortality was largely an infant mortality.
It is reasonable to conclude that the 272 manufacturers who had only one car in Massachusetts in 1916 could never have had many cars anywhere at any time. The same reasoning holds good with respect to the 192 manufacturers who sup plied from two to ten units in the 1916 Massachusetts census.
And even the 132 manufacturers with from ten to 100
Massachusetts cars in 1916 were probably never outstanding elements in the motorcar field.
There are, today, only three automobile manufac turers (General Motors, Ford, and Chrysler) whose position can be considered at all robust. From an economic stand point, the history of the automobile business is the history of how almost the entire output of the industry falls into these three strong hands. But the position of the industry today should not be contrasted with its position in some 58 quite mythical period in which, hundreds of makes of automo biles rolled merrily along. The competitive aspects of the industry are not illustrated by the failure of several hun dred companies which never were of any importance except in their owner's eyes. We, then, talk about the characteris tics of the automobile industry which concentrates in a few hands.
The Question of Size
There was a widespread belief that a firm of sub stantial size was a necessity for participation in the
.American automobile industry. A former president of Chrysler
Corporation, for example, stated this concisely:
The making and selling of automobiles as we know it in the United States is a large-scale undertaking. To build and equip modern factories geared to assembly-line production requires extensive capital outlays that place this industry automatically outside the category of small business.... Equally important is selling those products. And here the fact of first importance is that we sell automobiles in a national market.-*-
An independent observer, writing in Fortune, indi cated the significance of firm size even more succinctly:
United States Senate, Committee of the Judiciary, Subcommittee on Anti-Trust and Monopoly, Hearings, A Study of the Anti-Trust Laws, Part I (Washington, D. C: U. S. Government Printing Office, 1955), p. 344. 59
To be a successful automobile manufacturer requires only three conditions: (1) a gigantic, smooth-running organization, of both men and facilities, to build a car; (2) a car worth building; and (3) a second and equally gigantic organization to sell and service it.-*-
Nature of Manufacturing Economics of Scale
Since at any given time certain factors of produc tion are fixed relative to a firm's volume of output, "indi visibilities" exist in some productive factors which a firm may overcome by enlarging its volume of output. Once a firm commits itself to the use of those productive factors which are technologically available at any particular time, it has committed itself to the bearing of some fixed total charges. Spreading such charges over a large number of units will reduce unit costs if variable charges per unit are not increased. Indeed, from a formal viewpoint al most all deviations from constant returns can be subsumed under indivisibilities.
How do "indivisibilities" of productive factors arise and how does overcoming them lead to lower unit cost operation? The basic answer to this question was provided
2 long ago. The division of labor, specialization, and
^'Lincoln-Mercury Moves Up," Fortune (March, 1952).
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (New York: Random House, Inc., n.d.). 60 standardization accompanying an increase in scale of a firm permits more efficient operation. The more extensive divi sion of labor leads to an increase in the skill of the worker, to eliminate time lost in going from one type of work to another, and to develop specialized machinery to facilitate the work being performed. Specialization of a worker on a job permits him to become an expert in its per formance. Standardization of processes provides opportuni ties for development of machinery to replace human effort.
Once a process is selected, the specialized mechanical and human factors become fixed in relation to volume to output, superior techniques are developed and utilized, fixed facil ities and equipment are introduced, and their integration provides a more efficient flow of work and lower unit costs than could be obtained without the division of labor and use of specialized machinery.
The accomplishment of more extensive use of the di vision of labor, standardization, and specialization—-whether of human or mechanical factors--is a pressure to increase the scale of a firm's operation to permit full utilization of fixed factors of production in order to obtain the lowest unit cost. Thus, technological factors may account for much of the difficulty of small firms in some industries. The 61
development of highly specialized and often very expensive
equipment requires an organization of substantial size to
utilize such equipment fully. With a lapse of time, tech
nological innovations often lead to the development of new
equipment and processes which may serve to introduce some
element of divisibility since variations may be made to meet
the desire of the innovaor; but when a decision must be made
selecting a final production process at any given time, the
factors chosen will, to some extent, be indivisible. Unit
cost savings will accrue to the scale at which all indivi
sible factors integrated in the productive process are being
fully utilized with no waste of productive potential. When
a firm is thus able to use its productive resources most
fully as a result of increased volume of output, it is se
curing maximum benefits of economies of scale. The total
costs may have increased, but unit costs are lowered.
Organization for the Manufacture of Automobiles
The nature of productive processes in the automobile manufacturing industry appears to be such that cost differen
tials may be expected with variations in the scale of the
firm. Extensive use is made of complex processes using
highly specialized material and human resources whose 62 potential capacities may be most fully utilized by a firm, of substantial size.
The process of manufacturing automobiles is generally carried out in a number of stages. The basic materials in volved are primarily metal products although, much use is made of various fabrics and plastics. Sheet metals, metal castings, and other metal products are the basic materials making up most of the weight of an automobile. Many parts are combined into component groups, such as axles, trans missions, engines, or carburetors, before being brought to gether at a later assembly stage with all the other parts and components required for assembly of the completed car.
Many of the parts and components used in final assembly are produced by the car manufacturers; many others are purchased
from outside suppliers. Usually the major parts, components, and bodies are produced by the car manufacturers themselves, although they may not produce all of their requirements.
Leewis D. Crusoe, vice president of Ford Motor
Company has described the organization of production in the
industry as follows:
Automobile facilities are usually provided in basic complements of facilities. In other words, if you are going to put together a shop to make engines, you put together a line, let us say, to make a thousand engines a day, and if you want 2,000 you would put in another 63 complete line, a balance line. It grows in those kinds of multiples. That is the way the industry is tooled, and that is the way the machine tools are built, all related to a given volume.1
The existence of "indivisible" factors in the auto mobile manufacturing industry may occur in "plant complexes" and as the specialized facilities and equipment used in these plants. Some plants make engines, others make bodies, others may make only door handles and body trim. The neces sity for integrating these provides a "plant complex" com parable to the "plant" as it is usually conceived. Automo bile production thus is carried on through integrated "plant complexes." The facilities are built up in a complex fash ion. Bodies and engines are built separately and then brought together with other components for final assembly.
Output apparently is best increased in multiples using facil ities completely duplicating other similar operations. In this way productive facilities are comparatively fixed in relation to output.
The minimum output level required to obtain low cost operation of automobiles was stated by George Romney, presi dent of American Motors Corporation, before the Subcommittee
United States Senate, Committee of the Judiciary, Subcommittee on Anti-Trust and Monopoly, Hearings, A Study of the Anti-Trust Laws, Part II (Washington, D. C: U. S. Government Printing Office, 1955), p. 662. 64
on Anti-Trust and Monopoly of the Senate Committee of the
Judiciary on February 7, 1958. Mr. Romney indicated the
following conditions held in the manufacture and assembly
of cars:
Our studies, based on our experience and that of our competitors, is that optimum manufacturing condi tions are achieved with a production rate of 62.5 cars per hour per assembly line. To absorb the desired ma chine-line and press-line rate, two final assembly lines would be required. Of course, your press line and your machine line are the principal lines on which you depend for work leading up to subassemblies and the ultimate production of the car itself on the assembly line. This would result in production of 1,000 cars per shift. A company that can build between 180,000 and 220,000 cars a year on a 1-shift basis can make a very good pro fit and not take a back seat to anyone in the industry in production efficiency. On a 2-shift basis, annual production of 360,000 to 440,000 cars will achieve ad ditional small economies but beyond that volume only theoretical and insignificant reductions in manufactur ing costs are possible. It is possible to be one of the best without being the biggestA
A second major source of information on the exist
ence of scale economies in the production of automobiles is
that provided by Joe Bain. The estimates of Professor Bain were based on a survey questionnaire response from the managements of the firms engaged in the industry about 1950
conjunction with a study of data on plant size available in
the census of manufactures.
1Ibid., Part VIII, pp. 4044-4048. 65
Although considerable overlap occurs in the estimate.
Professor Bain's estimates of the minimum size needed to
achieve the lowest unit cost range are approximately 50 per
cent higher than those of Mr. Romney. On the basis of his
study of the industry, Professor Bain concludes:
In general, 300,000 units per annum is a low esti mate of what is needed for productive efficiency in any one line; there are probable added advantages to 600,000 units. These estimates refer to production costs alone and not to advantages. As regards the shape of the plant scale curve at smaller outputs, the trend of the esti mates is that costs would be 'moderately' higher at 150,000 units,... Substantially higher at 600,000 units and uneconomical at small scales. But it has been im possible to obtain quantitative estimates of what a 'moderate' cost disadvantage is; the firms of the auto mobile industry seem generally uninterested in publiciz ing their plant and firm scale curves.1
Comparison of Actual Production With Estimated Requirements
If the Bain and Romney estimates regarding manufac
turing scale economies are approximately correct, the auto mobile companies which merged or failed in 1950's have gen
erally been unable to achieve the minimum volume needed to
secure the benefits of manufacturing economies of scale. In postwar period prior to the 1954 mergers among the automo bile companies, only Nash in 1950 and Studebaker for the
-kjoe S. Bain, Barriers to New Competition (Cambridgei Harvard University Press, 1956), p. 274. 66
years 1949-1951 and 1953 exceeded the 180,000 minimum re
quirement estimated by Mr. Romney. Only Studebaker exceeded
the 220,000 unit level in the three-year period 1949-1951.
From 1946 through 1953, Hudson's production ranged from a
low of 67,000 to a high of 138,000 units per year; Hash ranged from 90,000 to 180,000/ Packard from 37,000 to
100,000 and Studebaker from 58,000 to 268,000. In 1954, their outputs fell respectively to 35,000, 41,000, 38,000 and 96,000. In no year from 1946 through 1958 did any of the companies reach the 300,000 minimum estimate by Bain.
(See Table 3-3, page 67.)
It seems quite clear that the financial returns of the above companies have been limited generally by their lower volumes and higher unit costs. If the Bain, Romney estimates are even approximately correct, the future fin ancial health of the remaining small automobile companies seems to depend on their ability to achieve and maintain levels of output of at least 200,000 to 300,000 units per year, and there probably would be additional slight unit cost savings at even higher levels.
The major part of the difficulty was not lack of manufacturing capacity sufficient to achieve lowest unit cost level; however, it was apparently more an inability to TABLE 3-3
THE COMPETITIVE HISTORY OF THE AUTOMOBILE INDUSTRY 1946-1955
Company 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955
Hudson 72,484 83,344 109,497 137,907 134,219 96,847 78,509 66,797 34,806 20,522
Nash 85,169 102,808 104,156 135,328 175,422 140,035 142,507 137,507 41,116 37,197
cr> Packard 36,435 47,875 77,843 97,771 73,155 66,999 66,346 71,079 38,396 52,103
Stude- baker 58,051 102,123 143,120 199,460 268,229 205,514 157,902 161,257 95,914 95,761
Source: Copied from Chrysler Corporation, Financial and Statistical Fact Book (Detroit: R. L. Polk and Company, 1963), p. 53. 68 generate sufficient sales to utilize effectively the capac
ity which, they had available. The big problem is marketing disadvantages for the "little" automobile companies.
Marketing Disadvantages
Marketing customarily includes responsibility for decision making in such areas as pricing, advertising and sales promotion, channels of distribution, and kind of pro duct to be manufactured.
The types of marketing activities most emphasized by the car manufacturers evidently have been influenced by the nature of the market confronting them. The nature of this market appears to have been determined by many factors.
First, the market confronting the domestic automobile indus try appears to be principally the domestic market. Rela tively small portions of the domestically produced cars were exported in the period from 1946 through 1958. Also, it is a market in which there are relatively few sellers. In 1947 there were only nine domestic car manufacturers selling through nationwide dealer organizations in the United States,
At the end of the 1958 period there were only five such
John A. Noware, Marketing Management (Homewood, Illinois: Richard D. Irwin, Inc., 1957), p. 3. 69 organizations in the United States (General Motors, Ford,
Chrysler, American and Studebaker).
Although the number of manufacturers--domestic and foreign--in the domestic market has increased since the up surge in foreign car sales after 1955, major characteristics of this market still appear to be determined by the five domestic manufacturers, and particularly by the Big Three.
In the ten years prior to 1956, the annual penetration of the market by foreign producers amounted to less than one per cent of total sales. Although their share of the market reached 10.17 per cent of new car registrations in 1958, but dropped to 4.89 per cent in 1962, the future is still not good. In the small firms, relative great difficulty in marketing problems may be faced due to their small size.
Pricing
The demand for passenger cars appears to be an ex tremely complex item. On an over-all industry basis, the demandfer new cars may be affected by many factors. Aggre gate income, prices of cars relative to other goods and services, quality of cars, significance of innovations,
Chrysler Corporation, Financial and Statistical Fact Book (Detroit: E. L. Polk and Company, 1963), p. 53. 70 styling, prices of used cars, existing stocks of cars, and many other factors may be significant influences on the overall demand for passenger cars. These items are more responsive to changes in aggregate disposable income than to changes in price. This was a conclusion reached in a pre-war study by Roos and van Szeliske which apparently have received acceptance among the domestic car manufacturers.
The demand for cars from the individual firms ap pear to be more elastic than the demand for all cars. There have been substantial variations in the shares of the market held by cars of different manufacturers from year to year.
The demand for all cars is relatively inelastic. Price cuts by one manufacturer are likely to be followed by all competing firms in the industry. If all firms in the in dustry cut prices, their relative market shares will prob ably remain unchanged; and, if total demand for cars is in elastic with respect to price reductions, total sales re venue will decline.
Within this framework the firms may face intensified marketing problems. Actions of competitors must be considered.
C. F. Roos and Victor von Szeliske, The Dynamics of Automobile Demand (New York: General Motors Corporation, 1939), p. 20. 71
The fiims are likely to be uncertain as to the outcome of price cuts but they probably hare little expectation of be ing able to increase unit sales sufficiently through price adjustments to permit full utilization of productive capac ity. An alternative course of action in the oligopoly sit uation emphasizes nonprice competition as a method of stim ulating sales.
Sales Promotion
Just as the scale of a firm's operations affect its unit manufacturing costs, there may be influences on the ef fectiveness of marketing activities and their unit cost re sulting from changes in volume of output. From the view point of the firm, relative marketing cost advantages per unit also may arise in sales promotion activities from op eration at larger scales.
The sales promotion activities which have received the greatest prominence are style changes and advertising on both the national and local levels. Style changes which result in more rapid planned product obsolescence are used in an effort to stimulate and maintain demand for the par ticular products of the different firms. Advertising is used to communicate the existence of the style changes and to build product identities that appeal to potential 72
customers. In both types of activity, substantial sums of money have been spent annually to sway consumers. Both the
large and small firms have participated in these activities.
Styling Problems of Little Firms
In the case of a passenger car, "style" may be taken
as including both the appearance and engineering features
which make it distinctive and which are used to influence
consumers.
The managements of the domestic car manufacturers
consider styling to be of great importance in stimulating
and maintaining the sales of their cars. The viewpoint of
the car manufacturers is summarized in an early observation
by Ralph C. Epstein in his classic study of the automobile
industry:
Supplying a product is but one side of manufacture in its full economic sense; suiting that product to the demands of the mass of its consumers in the complemen tary necessity without which industrial leadership can not be long maintained.
In the meantime, of course, consumer preferences may
have changed substantially, resulting in high risk related
to style changes. One of the most immediate, but again not
1Ralph C. Epstein, The Automobile Industry (New York: A. ¥. Shaw Company, 1928), p. 284. 73
readily measurable, styling disadvantages of the little
firms appeared in their more limited opportunity for styl
ing diversity. If it possesses product diversification in
the sense of having several different lines of cars follow
ing somewhat different styling patterns, the large firm is
able to spread the risks of styling changes over several
lines. If it has only one line, the small firm must bear
the entire risk of possible error with the one line.
Advertising Limitations of the Small Firms
If new products are being introduced frequently,
advertising occupies an important place in communicating
the changes to the public. Although much advertising prob
ably would be continued without new models, a great deal of
advertising by passenger car manufacturers and their deal
ers appears to be stimulated by the introduction of new
models. Advertising is an essential form of promotion of
the products of different firms.
If the nationwide network of local markets is a mass
market in which prospective customers can best be reached
through mass media, the large firm may be able to communi
cate with its potential customers on a lower unit cost basis
than small firms. Newspapers, radio and television stations,
Source:
Studebaker Packard
G.
Ford
Hudson
Chrysler
AMC
Manufacturer
M.
(Nash)
Advertising
Per
Total
Per
Total
Per
Total
Per Total
Per
Per
Total
Total
Per
Total
Car
Car
Car
Car
Car
Car
Car
Age,
August
75
28,027
13,607
12,50 3,530
3,052 31.00
13.50
13.00
11.00
9,829
27.00 3,727 21.50
2,914 1949
PASSENGER
9,
MANUFACTURER
1959,
30,245
16,981
14,158
13.50
3,577
28.50
2,079
10.50
11.00 12.50
24.50 3,256
19.50
3,383
1950
CAR
p.
26,533
13,024
16,767 84.
16.00
ADVERTISING
3,274
46.50
3,106
12.00
11.50 15.00
32.00 3,104
24.50
3,443 1951
AND
1949-1958
TABLE
PER
23,905 l5165
15,769
17.00
2,661 54.50
14.00 3,617 3-4
16.00
18.00
34.50
2,714
20.50
2,905
1952
CAR
EXPENDITJRE$
REGISTERED
36,879
18,354
19,343
24.50 3,913
14.50 4,167 58.50
12.50 16.50
54.00 3,612
4,412
32.00
1953
46,917
26,267
23,645 48.00
6,424
16.50
15.50
33.00 45.50
5,377 1954
BY
..
..
81,598
48,007 47,585
9,940
67.00
22.50
24.00 39.50
50.00 6,791
1955
..
..
,.
82,166
41,043
44,044
94.50
9,901
27.00
24.00
48.00
49.00
5,626
1956
..
..
72,013
46,628
47,903
70.50 4,766
27.00
28.00
43.50
4,151
35.50
1957
.. ..
63,799
44,043
32,927
42.50
2,130
30.00
36.00
50.50
25.00
5,920 1958 76 seen less frequently. The significance of this factor was illustrated in Chrysler's efforts to get its 1955 model cars in the hands of consumers quickly so as to build up consumer awareness of its new styles. This was a form of advertis ing. Chrysler officials contended, "Our best billboard is a car going away from you on the road."1 The result of this informal type of advertising is likely to a lower degree of consumer acceptance of cars of the small firms because of their smaller volumes and lower frequency of consumer con tact.
Channels of Distribution
Because of the size and weight of automobiles, trans portation plays an important part in the delivered cost of passenger cars. The cost of moving cars from manufacturing facilities to local markets often accounts for a substantial part of final delivered prices.
Although the passenger car manufacturers may be viewed as competing in a nationwide market, this market is made up of many local markets. When local or regional markets have become sufficiently large, the Big Three with
■'■"Chrysler's New Moves Clock--Just in Time, Business Week, May 14, 1955, p. 92. 77
their larger volumes evidently have found it advantageous to
establish branch assembly plants close to such markets. This
resulted in somewhat different patterns of movement of com pleted cars to consumers between the large and small firm
groups.
The small firms followed a process of inward ship ment of raw materials, parts, and components to their cen
tralized fabricating and assembly plants. Many of the parts
and components were secured from suppliers. After assembly,
completed cars were shipped to dealers in the local markets
for final sale to consumers. Rail freight, haulaway truck,
or barge may have been used for transporting cars.
The large firms interposed an additional step. Raw
materials were sent to centralized fabricating plants for
manufacture of many components and parts. Many parts and
components were also purchased from suppliers. After fabri
cation, the parts and components, whether from the firm's
own plants or from a supplier's plant, were then shipped to
branch assembly plants for final assembly. Subsequently,
final shipment of completed cars was made to dealers for
sale to final purchasers. The major difference in the two
patterns was the shipment of parts and components by the
larger firms to their outlying assembly plants for assembly 78 and final shipment to dealers rather than shipment of com pleted cars over the entire distance.
The decentralized operations involved three steps:
(1) the movement of raw materials to fabrication plants,
(2) the movement of parts and components to outlying as sembly plants, and, finally, (3) the movement of completed cars to dealers. The movement of parts and components to outlying assembly plants substituted for some of the move ment of completed cars over comparable distances which would otherwise be required. This difference in the organization and transportation pattern probably resulted in higher transportation costs for cars of the small firms because of their inability to use outlying assembly plants. As noted previously, it has been estimated that volumes of 60,000 units per year are required for efficiency in use of region al assembly plants. CHAPTER IV
CONCLUSIONS
What is the Likely Competitive Trend for the Future?
At the present time, there are only five automobile firms in the United States. Besides the Big Three: General
Motors, Ford and Chrysler, the other two--American and
Studebaker, are struggling on the line of survival and death. A study of the experiences of the American Motors and Studebaker Corporations and their predecessor companies provides considerable insight into the nature of the influ ence at work within and upon the United States automobile industry in the decades following World War II. There were similarities in the experiences of American Motors and
Studebaker, as there had been in the experiences of their predecessors; but, there were also differences. Being the small firms of the automobile industry and having to respond to influences largely beyond their control, they had posi tions in the industry which were very similar; but the out comes of their participation in the industry differed.
American Motors, after a series of lean years, staged a
79 80 tremendous comeback. Studebaker survived, but not as a domestic manufacturer of cars. American Motors had found success in its automotive ventures; Studebaker had found failure. But, this was only a part of the picture.
Technological considerations weighed heavily in the performances of firms of the automobile industry. While obviously not the only facts, the desire to acquire and re tain the economies of large-scale operation was an important stimulus to action in the automobile industry. The mergers among the small firms were attributable in a large measure to anticipations of savings in the unit cost of manufactur ing and selling automobiles in large volume, thereby per mitting profitable sales of their cars at lower, more com petitive prices. Economies of scale clearly existed in virtually every activity related to the design, manufacture, and physical distribution of cars. In addition, there were unit cost advantages of large volume in national advertis ing, dealership distribution and local advertising, and the sales-spurring device of frequent style change; all of which became relatively more important after the beginning in 1953 of a race between Ford and Chevrolet for the first place in industry sales. The requirements for operation at low unit cost, particularly in marketing activities to meet the 81 competitive thrusts of the larger firms of the industry, were generally beyond the levels of output accomplished.
The small firms faced strenuous battles in the market place with the already large Big Three: Chrysler, Ford and
General Motors, who earlier had attained successfully the scales of operation for exploitation of economies of scale and who enjoyed promotional advantages of large market shares in encouraging further sales, especially repeat sales to previously satisfied owners of their makes.
The firms also were confronted with problems not directly related to the scales of their operations; that is, problems which were not based directly on output volume con siderations. Changes in market conditions, including; for example, the over-all relationship of the demand for the supply of automobiles, shifts in consumer preferences and attitudes, changes in credit restrictions on the financing of cars at wholesale and/or retial, variations in the style, quality, and promotion of the cars of the small firms and those of their competitors. Changes in prices and price differentials among the different makes offered by the in dustry presented the firms with difficult problems, includ ing the necessity for frequent readjustment in courses of action. Internal problems and effectiveness of labor and 82 management, wage and other cost problems which, officials of
the small firms considered to be major disadvantages, were
also vital considerations.
American Motors was successful in discovering and
satisfying consumer desires for what came to be known as
the compact car, and Studebaker soon followed with its com
pact Lark; but having formed an expanding market as product
leaders, they faced imitation and direct competition from
the Big Three, who had the advantage, particularly in their
marketing activities and the loyalty of prior purchasers of
their cars. The Big Three quite reasonably could be ex
pected to respond to evidence of an expanding market poten
tial. Alternatively, if the small firms then abandoned the
expanding market segment and moved on to something again new
and different, remaining small and attempting to participate
as product leaders catering to small market segments, they
faced problems of insufficient volumes to take advantage of
the economies of scale. Either course was hazardous.
Clearly, the small firms faced uphill battles in their
struggles for survival and prosperity in the automobile in
dustry.
The problems presented by the threats to the con
tinued survival of the small firms are quite difficult to 83 solre. At the present day, two remaining small firms,
American and Studebaker, are existed. They appear to have the potential to survive for some years into the future.
They probably have the needed manufacturing potential, but they experience serious disadvantages in transportation and other marketing activities. Their most feasible chance to survive appears to be in producing truly distinctive pro ducts for selective segments of the market not in direct competition with the model of the Big Three. They may sur vive as relatively small participants in the industry by successful innovation and appeal to selective market seg ments. It is a big question that remains as to how long the two remaining small firms will survive, and will not result to merger. Both positions of American Motors and
Studebaker in 500 largest industries in the United States dropped sharply from 1964 to 1965. The American Motors
Company's position dropped from 55th to 63rd, and Studebaker from 233rd to 325th. The share of the passenger car sales in the domestic market was 3.71 per cent by American Motors, and Studebaker already moved out from producing passenger cars. (See Table 4-1, The Percentage of Motor Vehicle Pro duction by Makes, page 84.) It seems that the United States
fortune Magazine, July 15, 1966, pp. 234, 242.
85 automobile industry goes to the Big Three strong hands and forms an oligopolistic model in the economy. BIBLIOGRAPHY
Books
Bain, Joe S. Barriers to New Competition. Cambridge: Harvard University Press, 1956.
Chrysler, Walter Percy. Chrysler Corporation; the Story of An American Company. Detroit: Chrysler Corporation, 1955.
Edward, Charles E. Dynamics of the United States Automo bile Industry. Columbia: University of South Carolina Press, 1965.
Epstein, Ralph C. The Automobile Industry. New York: A. ¥. Shaw Company, 1928.
Howard, John A. Marketing Management. Homewood, Illinois: Richard D. Irwin, Inc., 1957.
Kaplan, A. D. H. Big Enterprise in a Competitive System. Washington: The Brookings Institute, 1954.
Kaplan, A. D. H. Small Business: Its Place and Problems. New York: McGraw-Hill Book Company, 1948.
Kennedy, E. D. The Automobile Industry. New York: Reynal and Hitchcock, 1941.
Maxcy, George, and Silberation, Aubrey. The Motor Industry. London: George Allen and Unwin, Ltd., 1959.
Nevins, Allen. Ford, The Times, The Man, The Company. New York: Charles Scribner's Sons, 1954.
Noware, John A. Marketing Management. Homewood, Illinois: Richard D. Irwin, Inc., 1957.
Raw, John B. The American Automobile. Chicago: The Uni versity of Chicago Press, 1965.
86 87
Roos, C. F., and Szeliske, Victor von. The Dynamics of Automobile Demand. New York: General Motors Corporation, 1939.
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Sloan, Alfred P., Jr. My Years With General Motors. New York: Doubleday and Company, Inc., 1964.
Smith, Adam. An Inquiry Into The Nature and Causes of The Wealth of Nations. New York: The Modern Library. Edited by Edwin Cannan, reprint published by Random House, Inc., n.d.
Sorensen, Charles E. My Fourth Year With Ford. New York: W. W. Norton and Company, Inc., 1956.
Stiler, George J. The Theory of Price. New York: The Macmillan Company, 1946.
Vatter, Harold G. Small Enterprise and Oligopoly: A Study of the Butter, Flour, Automobile, and Glass Con tainer Industries. Corvallis, Oregon: Oregon State College Press, 1955.
Other Sources
Automobile Manufacturers Association. A Chronicle of Auto mobile Industry in America. Detroit: Automobile Manufacturers Association, 1952.
Automobile Manufacturers Association. Automobile Facts and Figures. Detroit: Automobile Manufacturers Associa tion, 1965.
Automobile Manufacturers Association. Automobile of America, Detroit: Wayne State University Press, 1962.
Chrysler Corporation. Financial and Statistical Fact Book. Detroit: Chrysler Corporation,1950.
"Chrysler's New Moves Clock--Just in Time," Business Week, May 14, 1955. Time, Inc., Fortune, July 15, 1966.
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U. S. Senate, Committee of the Judiciary, Subcommittee on Anti-Trust and Monopoly, Hearings, A Study of the Anti-Trust Laws. Washington, D. C: U. S. Govern ment Printing Office, 1955.
U. S. Department of Commerce, Bureau of the Census, Statis tical Abstract of the United States, 1914-1917; 1929-1930. Washington, D. C.x U. S. Government Printing Office.
Ward's Automobile Year Book. 28th Edition. Detroit: Powers and Company, 19 66. APPENDIX
89 90
DEVELOPMENT OF THE PROJECT
Project Questions
1. Trace, analyze and interpret the growth of the
industry, its changing structure and competitive
forces at work.
2. Make a factual analyses (a detailed analysis) of
the data bearing on the industry's competitive
process in order to appraise how far the competi
tive process at work answers to the theoretical
frame work of oligopolistic competition.
3. What explanation can be offered for the growing
oligopolistic trend in the industry (the question
is important inasmuch as such degree of oligopoly
that characterizes the U. S. automobile industry
is not to be found in the auto-industries of
other countries)?
4. Drawing from the analysis, appraise what the
future of competition is in this particular in
dustry.
The Project Methodology
1. Use of all published data bearing on the size of
firms, their market production, capacity, sales 91
volume and cost trends;
2. Attempt to collect data from the big firms in
the industry in order to get a glimpse of the
management thinking of the units in the indus
try;
3. Take a period of a decade and examine the fin
ancial and other data in order to develop an
swers to the questions posed.
Project Scope
1. Trace the growth of the Industry, its changing
structure and competitive process as it has
operated in the industry.
2. Make a factual analysis of the factors in the
competitiveness in the industry--to appraise how
and to what extent the competitive process in
the automobile industry answers to the theoreti
cal framework of oligopolistic competition.
3. As far as possible, explain why the industry has
evolved to be characterized by oligopoly.
4. Drawing from the analysis, appraise what the
future holds for the industry and the units in
it.