“The methods of these men are familiar to all students of human nature and observers of the development of new industries. They first subsidise a servile and venal press, which prostitutes itself by the printing and circulation of the gross exaggerations and misrepresentations of the ‘syndicate.’ They keep themselves in the public eye by every means available. They are noisy and conspicuous in public places, at fashionable hotels and on the streets. They cover themselves with diamonds to excite the cupidity of the vulgar and the artless, swagger about like swashbucklers, and talk glibly of millions made in their enterprises. Often they are suave, sleek and insinuating in demeanor, even obsequious, upon occasion. Or it may be that the real plotters of the scheme are careful to conceal themselves behind the swashbucklers and the braggarts, who are merely deputized to carry through a programme which more crafty men lay out. Generally, large schemes of this kind include in their personnel all classes of talent required to carry through the colossal ‘bluff.’
“Every well-appointed stock-jobbing organization generally includes in its personnel all classes of such financial talent – wheedlers, boodlers, prevaricators, bulldozers and intriguers – each having his special part to play in the great game of ‘bluff.’ The plan unfolds. Principals and henchmen perform their parts with vigor and skill. The weak and the confiding are convinced by the clamor and strong assertion that the ‘syndicate’ is very powerful.”
– Horseless Age, 7 February 1900
Finally, Horseless Age recorded that the main promoters had returned to Britain after finding that their continued efforts were being hampered by the work of the journal in exposing their lack of substance and the fraud being effected on investors. The main point, though, is that based on some slight technical knowledge the stock promoters were able to raise huge sums of capital on the back of a mere concept, even in the face of an ongoing diatribe from a respected trade journal. Ironically the concept – a mass-produced, low-cost automobile – was absolutely the correct one to back, it was simply that the proprietors either had no intent or no ability to achieve any goal other than removing funds from investors’ pockets.
6.21 – More hot air: E. J. Pennington came back for more
Source: Horseless Age, 15 November 1899, 24 January 1900, 7 February 1900, 29 November 1899.
To obtain these high compound rates of returns as an investor, all one had to do was find the 5% of companies which were to manage to stay profitably in business. However, not only had these companies to be selected, they had also to be sold at the appropriate time. The investor, for example, had to hold on to General Motors through its periods of financial difficulty – but know to sell Studebaker when it began to struggle in the mid-1920s. The growth in the sector was undeniable and the speed with which it overtook the horse-drawn carriage sector was startling, although not as startling as the growth which was to follow as the technology advanced and prices fell. It was a vibrant and rewarding sector, but one where fortitude, knowledge and foresight was required if overall growth was to translate into returns for the investor.
The industry in Europe
The automobile began life in Europe but was transplanted to America, which swiftly assumed dominance. Why did this happen? It was nothing to do with technology; through much of the early years – and possibly up until 1910 – the clear technological lead existed in Europe.
The experience in Britain was very similar to that of America in that the background of the early pioneers was in related industries. The established oil engine firm of Crossley Brothers began producing vehicles and spawned an automobile company bearing the same name. The Dennis, Humber and Rover companies all emerged from the cycle industry, and the sheep-shearing industry can lay claim to the antecedents of both the Wolseley (built by Herbert Austin) and the Lagonda (the product of the American engineer Wilbur Gunn). Rolls-Royce was the product of the talents of an electrical crane engineer and an aristocratic racing driver. The British Daimler company emerged from a friendship between an English engineer, F. R. Simms, and Gottlieb Daimler, and this allowed Simms to obtain the British rights to the Daimler name and patents.
Eventually the Daimler Motor Company in Britain emerged from this, but not before it was embroiled in the scheme to control the British automobile industry put together by the financier H. J. Lawson. Lawson had made his fortune in the bicycle industry but had the vision to foresee the future of the automobile industry. In 1895 he formed the British Motor Syndicate with a share capital of £150,000 ($55m), with which he first purchased the British Daimler rights and then proceeded to do the same with all other available patents. The Syndicate’s main business was the leasing of patents and in some ways it can be seen as a precursor of the Electric Vehicle Company. The difficulties the company faced stemmed from the £100,000 purchase of patents from Edward J. Pennington of Chicago, a gentleman who had made many claims of engineering advances but never actually demonstrated one of his vehicles. The British Motor Syndicate went into liquidation in 1901 following a lawsuit loss which undermined its licensing model. It was finally bought out in 1907 for a total sum of £1,000 (under $300,000).
The Syndicate was not Lawson’s only venture to lose money for investors. In 1896 he floated the Great Horseless Carriage Company with a capital of £1m (over $370m). This company sought to design and produce automobiles but lacked the necessary engineering skills to do so and gradually dissipated the capital. Finally, in 1899, there was the Anglo-American Rapid Vehicle Company, which Lawson formed with Pennington. This company was to hold all their respective patents and was capitalised at $75m ($5.4bn). It too fell by the wayside, to the great chagrin of the previously excited investors. Perhaps the investors should not have been quite so surprised, given the involvement not only of Lawson and Pennington, but also a number of the principal figures involved in the Lead Cab Trust affair. Nevertheless, whatever the reputation of the personalities involved, and the repeated warnings of trade journals such as The Horseless Age, large sums were raised from investors on both sides of the Atlantic.
In Europe the companies of Daimler, Benz and Panhard Levassor continued to prosper, as did the Peugeot operation which had begun its foray into automobiles through its association with Daimler. Just as in America and Britain, a large number of companies emerged, many of them French, reflecting the nexus of power in the industry before the turn of the century. Amédée Bollée operated a foundry and engineering company and had built steam cars in the 1870s before progressing to small production runs of high-quality gasoline cars. A number of other French automobile companies obtained licences to Bollée’s technology and began production. In Paris, Louis Renault adapted a De Dion motorised tricycle into a four-wheel vehicle. Taking patents on his improvements, and as a result of the success of his small vehicle, his little workshop grew into a substantial production facility. There were also pioneers in Italy, including Ettore Bugatti who designed a racing car for the Paris–Madrid race, and two cavalry officers by the name of Agnelli and Gropello whose experiments eventually resulted in the Fabbrica Italiana Automobili Torino (FIAT).
It is almost impossible to list all the companies that produced motor vehicles during this time, but over 300 different models of car were advertised in the British magazine The Autocar in 1904. The industry was as fragmented in Europe (if not more so) than it was in America. It was in America, though, that the drive for consolidation emerged with the most force.
Conclusions
While the automobile industry had always displayed characteristics of concentration, even before its explosive growth occurred, a place in the top grouping only provided some security around 10–15 years after the industry emerged. The top grouping appeared relatively stable but was in no way insulated from the influence of the overall economy. Secular growth might have been strong but it was not exempt from cyclical influences. Companies that did not quickly cut their cloth to any economic downturn soon discovered the penalties a capital-intensive industry inflicts on those with produc
t which cannot be sold and whose cash flow does not cover financing and operating costs. The automotive industry began by catering only to the very wealthy. It was an industry with multiple niche producers and at least three different competing technologies. From the very early stages it was clear that the existing technology of the horse-drawn carriage – and to a lesser extent the bicycle – were going to be displaced. Many manufacturers in these sectors sought to hedge their bets by entering the automobile industry, but Studebaker represented one of the few who successfully made the transition.
The ‘losers’ from the old technology were thus fairly easy to spot, but selection of which companies would prove the winners was much more difficult. Literally hundreds of companies sprung up, many of them genuine competitors, some of them effectively stock market scams. For the outsider there was little to distinguish between the genuine and the fake, let alone which of the genuine companies would succeed.
Even the companies that did eventually succeed did so only after a rocky road. Henry Ford was successful only on his third corporate attempt and only after splitting with his partners over the strategic direction of the company. General Motors had to be rescued twice and Chrysler was effectively a company resuscitated from previous misfortune. Furthermore, it was only with the introduction of the Ford Model T, and its impact in bringing the automobile within the range of the affluent middle classes, that the market emerged as a strong growth one. From that point forward automobile production became an expanding market, but with a price point that was being continually lowered. Those that could not compete were forced to exit, in many cases moving in a very short period from a position of profitability and apparent stability to liquidation.
Despite the growth in demand and production, the car industry consolidated from the early part of the century onwards. There were many forces driving this, but principal among them was the initially fragile financial base of the majority of companies and the greater capital required for increased production volume and distribution. While production in the early years had concentrated on high-cost, high-margin vehicles, as the technology improved and the car became a product also for the middle classes the production process itself grew in importance. The economies to be gained from mass production militated against a large number of producers and the industry began an inexorable move towards consolidation.
Consolidation continued from that point forward. The initial very high returns on capital for the fortunate few gradually reduced, even as the consolidation took place, and the rate of growth in net income for participants was on a downward path almost from the 1920s until the 1970s – when, in real terms, profits followed the classic boom-and-bust cycle of a highly capital-intensive and competitive industry. In the early years, American manufacturers undoubtedly gained from the poor road conditions which forced the production of a more lightweight and standardised vehicle than their more technologically advanced European counterparts. In a domestic economy, growing strongly and protected by tariffs, the producers took full advantage to become the major players in the world industry.
There is an irony that external conditions forcing the development of a particular style of vehicle were to pay dividends for non-American producers many decades later. Most consumers outside America pay substantially higher gasoline prices than their US counterparts. As a consequence, fuel efficiency has typically been a factor of much higher importance in the design of automobiles for non-US markets. With the oil price shocks of the 1970s, American auto companies suddenly found themselves overtaken by their foreign, more fuel-efficient, counterparts. On both sides of the Atlantic, and latterly the Pacific, the investor was faced with the same issue: selecting a small number of survivors from a large number of initial competitors. Growth alone was not sufficient to underpin an investment. Returns might have been potentially very strong, but given the downside they needed to be. Equally, the investor needed to pay close attention to the profitability of the industry, since top-line growth alone proved no guarantee of income growth. During the very early stages when the technology was not fully understood and knowledge was not widespread, there existed many unscrupulous or unsubstantiated ventures and individuals who sought to remove funds from investors’ pockets.
* * *
49 S. T. Bushnell, The Truth About Henry Ford, Chicago: Reilly & Lee, 1922, pp.56–57. Quoted in C. Cerf and N. S. Navasky, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, New York: Villard, 1998, p.249.
50 B. R. Kimes, The Star and the Laurel: The Centennial History of Daimler, Mercedes, and Benz, 1886–1986, Mercedes Benz of North America, 1986, p.30.
51 Ibid., p.43.
52 J. J. Flink, America Adopts the Automobile, 1895–1910, Cambridge: The MIT Press, 1970, p.235.
53 Horseless Age, vol. 1, no. 11, September 1896.
54 H. Maxim, Horseless Carriage Days, New York: Harper & Bros, 1937, p.165.
55 P. Collier and D. Horowitz, The Fords: An American Epic, New York: Summit Books, 1987, p.49.
56 J. B. Rae, ‘The Electric Vehicle Company: A Monopoly that Missed’, Business History Review, vol. 29, no. 4, Cambridge: Harvard University Press, December 1955, pp.298–311.
57 J. B. Rae, The American Automobile: A brief history, Chicago: University of Chicago Press, 1965, p.76.
chapter 7
Making Waves
The story of wireless,
from Marconi to Baird
“You could put in this room, De Forest, all the radiotelephone apparatus that the country will ever need.”
W. W. Dean, president of Dean Telephone Company, in 1907 to Lee de Forest
on prospects for the audion
“For God’s sake go down to reception and get rid of a lunatic who’s down there. He says he’s got a machine for seeing by wireless! Watch him – he may have a razor with him.”⁵⁸
Editor of the Daily Express in response to a prospective visit by John Logie Baird, 1925
Marconi and the origins of wireless
The transmission of information at the turn of the century was dominated by two mediums, the telegraph and the telephone. In the US, by now the world’s largest economic power, both media had come to be dominated by a single company. In the case of the telegraph, Western Union had emerged from the Civil War with a growing network of wires and increased its dominance both by acquisition and technological improvement and through its association with Thomas Edison and others. The telephone had been born of the work of Alexander Graham Bell and was thus protected by the patents taken out by its inventor. With the shelter provided by these patents, the Bell Companies grew to create a stranglehold over the telephone that by the end of the patent period was protected by their control of the telephone networks.
Although Bell’s Companies had received public support in the early years as they battled against the giant Western Union, this support waned as they too grew to the point of virtual monopolies. This was an era when many huge companies had emerged and the public had begun to view such concerns as enemies, fostering the increasing use of antitrust legislation to combat the price-fixing combinations that had formed. As the economy grew, so too did the media, whose readership expanded sharply. In the last 30 years of the 19th century, the number of daily newspapers sold in America quadrupled and the number of copies sold rose sixfold.⁵⁹
The radio, like the telephone and electric light, emerged from the great advances in physics that took place during the 19th century. In 1865 the Scottish physicist James Clerk Maxwell put forward his theories on electromagnetic waves in his seminal work ‘A Dynamical Theory of the Electromagnetic Field’. This work sought to provide a unifying theory to explain the transmission of waves and elicited huge excitement in the scientific community, but it was nearly 25 years before conclusive proof of his theories was provided by Heinrich Hertz. Experimentation continued in the universities of Europe but remained at a somewhat abstract level. It took a young man of Irish-Italian extraction to turn the theoreti
cal advances into universal practical applications.
Guglielmo Marconi was born in 1874 and spent his early years at his father’s estates near Bologna. His mother was a member of the wealthy Jameson family of distillers and his father owned large estates in Italy. The commercial experience of his family undoubtedly helped him in the future. Recognising his aptitude and interest in physics, Marconi’s mother arranged a tutelage position with Professor Augusto Righi, Professor of Physics at the University of Bologna. Professor Righi had worked on a device that enabled transmitters and receivers of waves to operate on the same frequency. From him, Marconi gained the necessary background in physics and mathematics – and experience of the rigour of experimental work – that was to be vital in his endeavours in the field of electromagnetic waves.
Marconi returned to his father’s estates with the idea of trying to reproduce and improve on the work of Professor Righi and Heinrich Hertz. His aim was to take the knowledge developed in the fields of telephony and electromagnetic waves and find whether it was possible to transmit information through the atmosphere as waves, in the same way as current passes through conducting wires. The first rudimentary experiments were conducted in the attic of his home. Success came in December 1895, when he was able to transmit a signal nearly ten yards to a receiver, which then rang a bell. (His father suggested that, while it was interesting, there were easier ways to ring a bell.)
Engines That Move Markets (2nd Ed) Page 31