The 15-year period from the turn of the century had seen the birth of a new industry and its gradual evolution to maturity. During the initial phase the major issue had been a technological one – which form of power would dominate? In America as in Europe, the gasoline-powered vehicle was still in its infancy and not yet able to demonstrate its superiority over its steam-engine and electric-motor-driven counterparts. It was natural that the possibilities of steam – technology which had been established and improved over 100 years – would be fully tested. There was a large body of knowledge on steam engines, and undoubtedly capital was attracted by the confidence that would have attached itself to a proven science. The electrical-powered vehicle, on the other hand, was viewed in the context of Edison’s success with electric light and the revolution that it was causing in the workplace and the home. Indeed, so far as lighting was concerned, electricity was replacing a close cousin of the very fuel that the gasoline engine was seeking to use. Again it was natural for many to believe that electricity was simply a stronger technology. At the very least, the position was that there were three competing sources of power for the horseless carriage. The various endurance and speed races need to be viewed in this light: they categorically demonstrated the superiority of the gasoline automobile.
The evolution of the US automobile industry can be traced through the examples above of three successful companies – Ford, General Motors and Studebaker – and through industry statistics collected at the time. The three aforementioned examples all emerged from different backgrounds and approached the industry in different ways. Henry Ford relatively quickly settled on producing for the low end of the market and the vehicle he produced was rewarded with explosive growth and massive market share. General Motors attempted to buy market share. Studebaker focused on recreating itself within the new technology, but remained at the expensive end of the market.
The automobile market expanded rapidly but unevenly. The high end continued to grow but was swamped by demand for low-cost vehicles, where the vehicle was important but equally so were the economics of production. The high end remained both relatively unstandardised by comparison and overpopulated by producers. Company mortality rates were high as new entrants sought to attain market position before succumbing to financial pressures. These gradually intensified as growth and falling prices raised the importance of funding and access to capital.
Many estimates exist of the number of companies involved in automobile manufacturing in America. A tightly defined number, which counts only those companies for whom actual production data existed, is around 200. Many multiples of this figure would be possible if fabricators and the speculative producers who raised capital but produced little more than a concept or ‘sample’ vehicle are included. Unfortunately, little documentation remains of their efforts other than brief comments in contemporary accounts. The data referred to here refers to the ‘tightly’ defined number. The mortality rate for companies in this new industry is shown in figure 6.17, which shows the duration of companies in the industry from 1903 to 1926. The high mortality rate is shown by the fact that 50% of the companies survived fewer than six years and over a quarter fewer than three.
6.17 – A high-risk business: failure rates in the automobile industry (1903–1927)
Source: R. C. Epstein, The Automobile Industry: Its Economic and Commercial Development, Chicago and New York: A. W. Shaw Company 1928, pp.176–7.
The mortality rate was closely related to overall business conditions. In the recovery from the difficulties of 1907, and inspired by the returns being earned by Ford and others, a huge number of new entrants were attracted. The number of manufacturers increased by over 600 in the two years to 1910. This is to say nothing of the increasing capacity of existing producers. The number of new entrants was matched by a substantial number of failures. In 1910 over a quarter of automobile companies disappeared, at a time when overall business failures were reducing. This did not deter others from entering the industry and in the following four years the number of manufacturers rose sharply again by some 80%. The next cull took place in the downturn following the end of the immediate post-war boom conditions. Between 1922 and 1926, the percentage of companies failing each year never fell below 10% and averaged nearly 15%. Figure 6.17 clearly shows the two spikes in failure rates, the first being largely a reaction to the number of new entrants in the preceding two years and the second a reflection of the changing economics of the business.
6.18 – A new pricing structure as competition grows
Frequency distribution of companies serving different market segments, 1907, 1913, 1916. All figures inflated to year 2000 using average earnings.
Source: R. C. Epstein, The Automobile Industry: Its Economic and Commercial Development, Chicago and New York: A. W. Shaw Company, 1928, pp.186–7.
The new economics related to the ever-increasing need for size and standardisation. The market expansion continued in the low-cost vehicle segment, where economies of scale were vital. Moreover, it was not only production where economies of scale operated. The provision of credit facilities greatly improved sales volume and only the major companies could obtain access to the type of funds required. In distribution and after-sales service, again the larger manufacturers carried distinct advantages. The trend in vehicle pricing and volume had been clear for some time and companies had sought to react to the change by addressing the lower-priced market. However, there was limited room here and only a small number of companies could succeed.
An indication of the pricing movements can be seen from figure 6.18, which shows the number of companies selling automobiles at different price points in three different time periods. Two things stand out from this figure. Firstly, there is the absolute cost of motor vehicles. In 1907 the median vehicle cost $3,700, which would be the equivalent of paying $212,000 for an automobile today. This was not an everyday tool. Buying an automobile was more akin to the purchase of a luxury yacht. Even with the introduction of the Model T, and the growth of the ‘low’ end market, prices remained high by current standards. By 1916 the median price point was $1,000, equivalent to $45,000 today, with the cheapest model roughly half that figure. (The terms ‘low-’ and ‘mid-range’ vehicles are relative for what began as an expensive luxury item and became one open to the affluent middle classes.) Second, the shift in the distribution over time is clear. The concentration around the lower price points by 1916 indicates clearly where competitive pressures were at their most intense.
By this point, the long-term winners and losers had become much clearer. Of the top ten companies in 1915, only three were not in the top category ten years later. The market had not become more concentrated, as the top decile of companies had always accounted for over 80% of the industry’s output. It was rather that the attrition rate was such that both the overall number of participants was being reduced and the hurdles to entering the top tier were being sharply raised. The penalties for investing in unsuccessful companies were relatively clear. Typically the companies were liquidated and both equity and preferred stock holders lost all of their investment. The rewards for investing in the successful companies were also clear, as shown in figure 6.19.
6.19 – Investment returns for investing in the most successful automobile companies
Source: R. C. Epstein, The Automobile Industry: Its Economic and Commercial Development, Chicago and New York: A. W. Shaw Company 1928, pp.250–2. Respective company annual reports.
6.20 – No doubt about the loser: output of automobiles and horse-drawn vehicles (1896–1920)
Source: US Department of Commerce, Historical Statistics of the United States, Series P318–374. US auto production, data for 1895–1939, US Bureau of Public Roads. Data for 1933, National Automobile Chamber of Commerce, Facts and Figures of the Automobile Industry, p. 10.
More hot air
The efforts of E. J. Pennington were not to be particularly restricted by the condemnation of The Horseless Age, and after his earlie
r ventures had gone by the wayside he embarked upon a new and larger stock scheme. This expanded upon his earlier venture and purported to have a global element, tying in patents from Britain and Europe with operations in America. It was named the Anglo-American Rapid Vehicle and was launched with a capitalisation of $75m ($5bn). The venture included among its promoters individuals who had also been involved in the Lead Cab Trust scheme. The success in raising capital can be judged by the increasing frustration evident in the editorials of The Horseless Age as the journal sought in vain to warn investors of the lack of substance in the venture.
The saga begins with the reporting of Pennington et al’s plans to establish the Anglo-American Rapid Vehicle Company to hold “important patents” such that an inexpensive lightweight vehicle can be produced (ironically at a price point roughly equivalent to the Model T which Henry Ford was to produce some years later).
000,000,000,000
“The end is at hand. ‘Whom the gods would destroy they first make mad.’ Having been detected and foiled in their financiering enterprises of earlier origin, the promoters, with Protean swiftness, have appeared in a new guise, and are girding themselves for a new attack on the public purse. The modest little companies of $10,000,000 and $25,000,000 with which they juggled at the beginning of the year have been abandoned as too small for their mature ambitions (as indeed they are at the present rate of shrinkage); and colossal schemes of $75,000,000 and even $200,000,000 combinations haunt their feverish imaginations. Bedlam is broke loose into the motor business.
“The first chapter of motor romance which appeared the past week, and which is now being served up as a serial by the daily press to whet the public appetite for sensation, pertains to the incorporation in Delaware of the Anglo-American Rapid Vehicle Co., with a capital stock of $75,000,000. The gentle-men who are said to be concerned in this flank movement upon the American investing public are a well-known Philadelphia promoter, formerly heavily interested in storage batteries, and one of the original organizers of the Lead Cab Trust, who, having unloaded his Lead stock, now appears as an advocate of the oil motor; two other promoters of the Quaker City not unknown to fame, and two ex-promoters of English fame – E. J. Pennington and H. J. Lawson, both of whom were leading characters in the questionable transactions of the British Motor Syndicate in England several years ago.
“For reasons best known to themselves, these two jobbers in secondhand promotions have not allowed their names to be mentioned in the public prints in connection with the Delaware enterprise.
“The prospectus of the company announces that the combination owns about 200 patents covering the manufacture of oil motors and vehicles, and that a union of the chief English and American manufacturers of gasoline and kerosene vehicles will be effected, enabling the company to control, etc., in the old familiar siren strain of the stock jobber.
“The British contingent of this Anglo-American alliance are the owners of a miscellaneous assortment of motor vehicle patents, some wholly inapplicable to the industry, some worth-less, most of nominal value and few only which have been upheld in court and are the basis of profitable industry in England, Germany or France.
“As to the American patents which these promoters lay claim to, no list of them has come under our notice, but no specific enumeration is necessary to warrant the assertion that this part of their stock in trade is of little better quality than the other.
“Following the methods of the stock manipulator who wishes to impress the unsuspecting with the idea that he has ‘a good thing,’ these wily gentlemen announce that none of their $75,000,000 stock is for sale, no one who is acquainted with their character and methods will imagine for one moment that they have any intention of manufacturing motor vehicles of any kind further than they think may be required to carry out the stupendous bluff they have undertaken. Manufacturing is not their forte; they prefer to deal in paper. But the season for motor vehicle paper was of short duration; the streets are littered with it, and having been surfeited with water, the public is not likely to drown itself on these gentlemen’s invitation.”
– Horseless Age, 15 November 1899
That the exposé fell on deaf ears was readily apparent from a subsequent issue of the journal:
The Anglo-American Company
“It is learned from Philadelphia sources that the Anglo-American Rapid Vehicle Co., recently incorporated in Delaware with a capital of $75,000,000, proposes to pay $40,000,000 for the motor vehicle factories which it intends to purchase, offer $20,000,000 worth of stock for sale to the public and keep $15,000,000 worth (of stock) in the treasury. The company has opened an office at 20 Broad St., New York.”
– Horseless Age, 29 November 1900
With the new century, the progress of the journal reminded readers of the excesses of the Lead Cab Trust and pointed out links between some of the individuals who had been involved in its promotion and the new Anglo-American venture of Messrs. Pennington and Lawson:
Resume
“Men high in financial and political circles had fastened like vampires upon it and were draining its blood. They had organized for this purpose the most gigantic stock-jobbing scheme in the history of Wall Street.
“The Lead Cab was to be made a household necessity. Companies with an aggregate capitalisation of nearly $150,000,000 were incorporated on – nothing. The storage battery, on the exploitation of which the vast scheme was based, is of limited use in motor vehicles at best … The influence of the promoters of the Lead Cab speculation has been most hostile to the best interests of the industry. They have had at their command all the agencies that political influence, financial prestige and resources could afford. They subsidised the press, intrigued against opposing interests, blustered and misrepresented to bamboozle the public and unload their worthless stocks. They have been only partially successful. The plot is revealed, and they are now on the defensive. The State banking officials have had occasion to investigate some of their peculiar transactions, and the unfortunate stockholders in their watered companies must soon join in the demand for investigation.”
– Horseless Age, 24 January 1900
“The long comedy of the promoters is concluding with a roaring farce. It is the Anglo-American Rapid Vehicle enterprise, recently brought out here by Lead Cab-Corn Pith Gibbs, Liliput Lawson, Parson Pennington and their company of special artists in prevarication, bombast and intimidation. The funniest part of it is that these late interlopers do not realize that they are playing a farce. They actually take themselves seriously and are not aware that the American investor understands them and is tired of their shallow tricks.
“If, when their eyes are finally opened to the facts, they still stand on the side of chicanery and fraud, we shall be proud of their disapproval. From now on the stockjobber and the manufacturer part company. Let the line remain sharply drawn.”
What Does It Cost?
“Does it never occur to the daily newspapers and other hypnotized supporters of the Lead Cab Trust to ask themselves the question, What does it cost? The mere fact that storage battery cabs or omnibuses are put in service proves nothing further than that the promoters have sufficient funds to keep up the bluff. It makes no difference to this class of financiers whether the business is profitable or not, provided they can make the investing public think it is. What becomes of the enterprise after they have unloaded the stock is a matter of absolute indifference to them. The victims can then struggle with the deficit and lay out more money in the hope of turning the balance in favor of the stockholders. The Lead Cab and the Lead ’Bus are preposterous. The maintenance of storage batteries in such service is positively ruinous. Perhaps the investigation into the State Trust Co.’s loans may afford us an inkling of the cost of Lead Cab promotions, if not of the operation of Lead Cabs.”
Lead Cab Financiering
“We quote the following, headed ‘How an Office Boy Got $2,000,000,’ from the New York Herald of Jan. 21. It is the beginning of trou
ble for the Lead Cab Trust:
‘New light was thrown yesterday upon the deal by which the syndicate in control of the State Trust Co. was enabled to borrow $2,000,000 on the collateral note given by Daniel H. Shea, office boy for Thomas F. Ryan. The securities which were pledged to cover the loan were those which had been secured through a compromise between the Storage Battery Co. and the Electric Vehicle Co.’ ”
– Horseless Age, 24 January 1900
The journal returned to the crusade in February where the type of tactics used in stock promotion schemes were set out so that the investor could readily draw parallels. Little new information was contained in the article, which in itself is indicative of the lack of impact that the revelations appeared to have on investors.
We Draw the Line
“Our readers will not be surprised to hear that we have refused the advertisement of the Anglo-American Rapid Vehicle Co. We have taken this stand on grounds of public policy, and for the protection of an industry which the promoters of this enterprise are seeking to debauch. In their attempt to float in the United States a $75,000,000 corporation based on the ownership of foreign patents and on the combination of alleged powerful manufacturers of automobiles, etc., in England and the United States, they have sunk to the level of the ‘green goods’ men whose records appear in the police annals of our large American cities.
Engines That Move Markets (2nd Ed) Page 30