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Wall Street History
https://www.gofundme.com/s3h2w8
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12/22/2000
General Motors: The Early Years
With the recent announcement that General Motors was phasing
out its Oldsmobile division, a historic move, I thought it was a
good time to issue a few comments on the early years for GM.
General Motors was founded in 1908 by William Crapo (Billy)
Durant, a high school grad (important back then) who had earlier
made his fortune in selling carriages. Well, you couldn''t put
anything past ol'' Crapo (this will be the last time I use this name,
promise) and he saw that the future was in automobiles, not
buggies. So in 1904 he gained control of the Buick Co., then in
financial distress (like so many other auto manufacturers would
find themselves in during the early years of the boom).
After the stock market panic of 1907, financing became difficult
for the smallest companies, which existed mainly on lines of
credit from the bankers (much like many telecommunications
outfits today), and Durant proceeded to buy other car builders
and parts companies until he folded them all into the new GM
entity in ''08. Only the strong would survive.
1908 was the same year that Ford went into production with the
Model T. One of Durant''s early collaborators said of the time.
"In this year 1908, many of us thought that the industry was
beset with difficulties and so came the desire to some of us to
form a combination of the principal concerns in the industry.for
the purpose of having one big concern of such dominating
influence in the auto industry as, for instance, the United States
Steel Corporation exercises in the steel industry." [Geisst] And
it was around this time that Oldsmobile was added to General
Motors.
Durant was a flamboyant, outspoken person who loved to
speculate. [In fact, as a Wall Street trader, he has his own
history, which will be covered in a separate story or two down
the road.] Suffice it to say, he was known to vastly overpay for
his acquisitions and in 1910, as auto sales were slumping, Durant
had GM stretched to the limit and the bankers came a callin'' to
take control of the company. Durant lost the reins of the
operation for 5 years.
But during his days in semi-exile, he really was quite the beaver,
founding Chevrolet with Swiss industrialist Louis Chevrolet. By
1915, when he was allowed to return to GM, Chevrolet was so
successful Durant was able to repurchase a controlling interest in
his old company. At the same time Durant induced the du Pont
family to invest a considerable sum, which eventually amounted
to 23% of all GM stock. [DuPont, the company, was more than
happy to have a ready customer for its plastics products.]
Durant ran GM successfully until 1920. For example, GM
manufactured some 247,000 cars and trucks in 1918, employing
50,000 workers. The next year, production rose to 400,000 as
the payroll swelled to 86,000. But then the postwar recession hit
America, and Durant was forced out by the board (having lost
about $90 million in the market in less than 7 months,
speculating on GM stock), with the company now turned over to
Pierre du Pont for a spell. And then the boom came.
Total U.S. auto sales reached 1.4 million in 1921. By 1929 the
figure was 4.5 million, with GM and Ford being joined by
Chrysler as the giants of the auto industry.
And it was during the 1920s that a brilliant engineer turned
industrialist, Alfred Sloan, made his mark on the American
landscape.
Sloan, MIT trained, worked his way up through the GM ranks,
beginning as an expert in the field of ball-bearings. Later on he
would become far better known as a marketing genius.
In 1920, Ford controlled close to 60% of the total car market,
having sold 845,000 that year to GM''s 193,000. But Ford''s
strategy was stiff and mechanical, the goal being to give the
public value at the best possible price. It changed little and it
offered no choice.
General Motors, and Sloan, were interested in a different kind of
consumer; a modern one, who wanted something more than a
black box. This new buyer would want speed, comfort, and
styling. GM introduced new colors, new features and gave the
purchaser a chance to do something Henry Ford viewed as
immoral, buy on credit. Regarding this last bit, by 1925, 3 of 4
GM cars were bought on installment. Historian Paul Johnson
describes the Sloan strategy.
"While Ford made the product as well as (GM) could, then
looked for people to buy it, Sloan did it the other way round. He
produced the widest possible range of cars for the maximum
spread of customers."
General Motors had five brands - Chevrolet, Pontiac,
Oldsmobile, Buick, and Cadillac. Beginning in 1923, each
model would change every year, with the major focus on
appearance.
Sloan himself said of styling, "Today the appearance of a motor-
car is a most important factor in the selling end of the business -
perhaps the most important factor - because every one knows the
car will run."
General Motors was to overtake Ford in the 1920s. Ford was
forced to slash prices while GM''s customers seemed willing to
pay up for something that was a little different. And then things
began to get a bit frothy.
As you would imagine, GM was as much a symbol of the
"Roaring Twenties" as anything else in America. For example, I
came across this gem that is interesting when you consider
what''s going on in today''s investment environment.
In 1925, the total spent on advertising in America hit the $3
billion mark for the first time (GM spent $15 million, itself), but
the ad business wouldn''t see that level of spending again until
1946!
As the decade wore on, riches proliferated. GM''s finance chief,
John J. Raskob (who was later responsible for the construction of
the Empire State Building) did an essay for The Ladies Home
Journal (women accounted for 35% of stock market turnover
back then) titled, "Everybody Ought to be Rich."
Raskob pointed out that a $10,000 investment in GM stock 10
years earlier had grown to more than $1.5 million. And then he
wrote the following.
"It may be said that this is a phenomenal increase and that
conditions are going to be different in the next ten years. That
prophecy may be true, but it is not founded on experience."
How many times did we hear similar statements in the spring of
2000, before the Nasdaq crashed!
Actually, Raskob went on to recommend that through the
application of debt (margin) a small regular investment would
inevitably turn into a large fortune.
Another trend that General Motors was part of in the 20s was
direct investment overseas, to the tune of $20 million (out of a
total American investment of $7.5 billion).
But as you all know, boys and girls, things were beginning to
deteriorate on Wall Street in 1929. On October 4, Alfred Sloan
observed that a sudden dip in car sales announced that the "end
of expansion" was at hand. By the time the Great Crash of 1929
had wound itself down, with the market bottoming on July 8,
1932, the stock of General Motors had fallen from $45 to $3.75.
On that cheery note, Merry Christmas!!
Sources:
"The Great Boom," Robert Sobel
"It Was a Very Good Year," Martin Fridson
"Monopolies in America," Charles Geisst
"The Pursuit of Wealth," Robert Sobel
"A History of the American People," Paul Johnson
Brian Trumbore
**Next week I am going to launch a series on the Internet
debacle. I guarantee you will want to "print and save" it.
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