It was not difficult to see in 1925 and 1926 that Chevrolet was closing in on Ford. In 1925 Chevrolet had about 481,000 U.S. factory sales of cars and trucks, while Ford had approximately two million factory sales. In 1926 Chevrolet moved up to about 692,000 factory sales of cars and trucks, while Ford moved down to about 1,550,000. His precious volume, which was the foundation of his position, was fast disappearing. He could not continue losing sales and maintain his profits. And so, for engineering and market reasons, the Model T fell. And yet not many observers expected so catastrophic and almost whimsical a fall as Mr. Ford chose to take in May 1927 when he shut down his great River Rouge plant completely and kept it shut down for nearly a year to retool, leaving the field to Chevrolet unopposed and opening it up for Mr. Chrysler's Plymouth. Mr. Ford regained sales leadership again in 1929, 1930 and 1935, but, speaking in terms of generalities, he had lost the lead to General Motors. Mr. Ford, who had had so many brilliant insights in earlier years, seemed never to understand how completely the market had changed from the one in which he made his name and to winch he was accustomed.
Go back for a moment to the first four-million car-and-truck year, 1923. From then to 1929, setting aside variations in the years, there was a seven-year plateau in new-car sales. And yet the total number of cars in use, as I have shown, continued to rise. While the total market, including used cars, expanded, the new-car market leveled off, and, as I have said, the role of the new car was to cover scrappage and growth in car ownership. Meanwhile the used cars at much lower prices dropped down to fill the demand at various levels for basic transportation. Mr. Ford failed to realize that it was not necessary for new cars to meet the need for basic transportation. On this basis alone Mr. Ford's concept of the American market did not adequately fit the realities after 1923. The basic-transportation market in the United States (unlike Europe) since then has been met mainly by the used car.
When first-car buyers returned to the market for the second round, with the old car as a first payment on the new car, they were selling basic transportation and demanding something more than that in the new car. Middle-income buyers, assisted by the trade-in and installment financing, created the demand, not for basic transportation, but for progress in new cars, for comfort, convenience, power, and style. This was the actual trend of American life and those who adapted to it prospered.
It was thus that the four elements with which I began the discussion in this chapter, installment selling, the used-car trade-in, the closed-car body, and the annual model, interacted in the 1920s to transform the market. But I have not completed the picture. What of the annual model?
The annual model was not a declared policy of General Motors, or of anyone, I believe, in the 1920s. It was, however, inherent in the policy of creating a bigger and better package each year. With this concept necessarily went the need for salesmanship.
At a General Sales Committee meeting on July 29, 1925, I stated our commercial policy as follows:
We have elected, as a large Corporation, to build quality products sold at fair prices and while there are others in the industry who do not follow quite this policy, I am sure that we are in pretty general agreement that it is the correct policy. At the same time, however, we must admit that such a policy throws the added responsibility upon our sales departments to get the cost of quality plus a profit on quality.
In justice to our sales departments, it is a fact that we have been handicapped by past reputation in connection with certain of our products, but as we pass into our new manufacturing year we have a line of cars that we can be proud of, without exception. I believe that we will all agree that these new products are thoroughly dependable and priced in the proper levels, both competitively and from the standpoint of costs. Some of the reductions in sales prices have come out of savings in cost, particularly in closed bodies, as a result of Fisher's increased volume; other savings have been effected through changes in design which have not affected quality. At the same time, however, it must be recognized that we have reduced our profits.
To give some idea of what this means, I might say that if we take our earnings for the past six months of 1925 and re-figure these earnings on the basis of the new list prices and the new costs—in other words, the new spread between cost and selling price—and assume the volume to be the same, we would have reduced our profits by about twenty-five percent.
As we are now running, General Motors hasn't increased its volume of business very much. Our success during the first half of the year results from a favorable margin between costs and selling prices. Our sales to consumers so far this year are just about the same as last year and while our prices have not been out of line, except in a few instances, our price line-up as of August first should certainly place us in a position to expand our sales in relation to competition. In fact, the only justification for our new prices, as I see it, is on the assumption that we are going to get added volume, and this added volume will mean a greater responsibility on our sales departments. With our present line-up as regards prices and quality, we must agree that it is a question of selling, directly up to our sales organizations.
I then gave a pep talk on avoiding inertia in large-scale operations and concluded my remarks on commercial policy with the observation that the industry had at that time entered a new period:
There are many things in connection with marketing concerning which we should be more progressive and aggressive. In my judgment, General Motors as a whole is relatively weak in sales endeavor. As a matter of fact, the entire automobile industry has been built up by and around people of mechanical and technical characteristics, rather than commercial, and I think we are just beginning to realize the great importance of the commercial side of the business.
As events proved, I was mistaken in worrying about the inertia of General Motors— like a football coach roasting a championship team. The words "quality products sold at fair prices" described the basic policy of selling the bigger and better car—a policy consistent with the product plan of 1921. Along with this went a policy of building strong dealer organizations in each of the divisions. We believed it was essential to have a prosperous, energetic, strategically located body of dealers to do the selling and the trading. There is a chapter on that subject later on.
So it was all of a piece. You started on a course with a policy and things not foreseen fell into place. When it came to the product, the policy meant continuous, eternal change. I have described some of the changes we made in the K Model Chevrolet in 1925. In that same year we began work on a new six-cylinder Chevrolet engine. In 1926, in the Cadillac Division, we introduced styling as a separate concept and, for the first time, as a specialization in the industry. In 1927 and 1928 we made styling changes in Chevrolet. In 1928 we put four-wheel brakes on the Chevrolet and lengthened its wheel base by four inches for the new six-cylinder engine. But we held off the new engine until 1929, after Mr. Ford had come out with his four-cylinder Model A.
At the General Sales Committee meeting on July 29, 1925, mentioned above, we called our new cars "annual models" but did our best to avoid a formal commitment to the concept. The record of this discussion is entitled, "Annual Models Versus Constant Improvement." The colloquy that took place under this heading, the only one I have a record of in the 1920s, may be of some interest:
MR. SLOAN: While the bringing out of yearly models results in many disadvantages and, for that reason, we are all against yearly models, I don't see just what can be done about it.
MR. [Richard H.] GRANT [general sales manager of Chevrolet]: I am against the yearly model idea and I think that instead of holding up our improvements until some given date of the year, we should work them in gradually and say nothing about them.
MR. SLOAN: Of course, that might be best in connection with some changes, but in the case of a different body it presents serious difficulties.
MR. GRANT: The question is "Shall we have Yearly Models?" I say "No", we should not have ["] yearly
models." We ought to make all invisible changes without announcement. Now when we change the lines or change the bodies, then I think we have to have a new model, but I don't think there should be anything yearly about it. It might be a year and seven months or two years between the introduction of models. I don't feel we should concentrate everything on the first of August. On the other hand, I don't think we ought to follow the Dodge policy and say we will never have any new models.
MR. SLOAN: When you adopt their policy you are just saying that industry does not develop. Although you can make a few minor changes, the time certainly comes when you are forced to bring out a new model. You can say you are not going to do it, but you will have to do it sooner or later. The only two concerns who have successfully followed that policy are Dodge and Ford. Now Ford is bringing out a new model for the very reasons we are talking about. He has been driven to it. Dodge was driven to it in the beginning of 1923. The 31-State Report [on new-car registrations] showed how they had been slipping. Now we are all in the same fix and I think General Motors as a policy has been too easily influenced to make changes, but I think that was due to the fact that our products were not sufficiently stabilized.
MR. GRANT: Maybe the way this was put up here was a little confusing. If this means that if we had a bang-up new model to bring out and weren't going to capitalize on it, then I am not in harmony with it, but I do believe that the thought of the yearly model ought to be gotten away from and we should only bring out a model when we have a necessity of bringing it out and then we should handle it to our best advantage and advertise it. I think the people who are advertising this policy of not eve[r] bringing out a new model are storing up a lot of grief for themselves. Lines are going to change and bodies are going to change.
MR. [Lynn] McNAUGHTON [general sales manager of Cadillac]: We have felt in getting away from the name of a model we might get the attention of the public on the name "CADILLAC", instead of the designation of the model, and we are not going to call the new car by any model name, but it is just a new line of Cadillac cars. For the past three or four months people have asked us when we were going to bring out the new V-65 but we are not going to have anything else except, so far as the public is concerned, a new line of Cadillac cars without model designation. We are going to advertise the Cadillac instead of the model.
MR. SLOAN: Of course, there is one thing about it from the Fisher Body standpoint. The strain on their organization in bringing out all these dies at one time is something terrific and well nigh impossible.
MR. GRANT: I think what we ought to do is change our method of handling our policy and I think we ought to get a new model out when we have an advantage in getting a new model out, but I don't think we ought to set a date of August first, and I don't think if we are going to have changes in two different divisions they should necessarily come out on August 1st. It might serve one division better to come out January 1st like we did last year.
MR. SLOAN: You are really forced to change on August 1st, because any other date runs into your selling season. It must be done between August 1st and November 1st. You certainly wouldn't want to come out January 1st, as a matter of policy, unless you were driven to it as Chevrolet was last year.
MR. GRANT: It looks this year, from the way we are heading, January 1st might be a good time, yet you take the year after that it might be the poorest time, because I don't think we are going to have much stock on hand January 1st.
MR. [Dan S.] EDDINS [general sales manager of Olds]: If we could throw a new model in production the first of December we would build up the stock by spring to meet the spring demand but from January 1st to February 1st your plants can't get underway. On the other hand, other manufacturers bringing in their lines on August 1st would beat us to it and get a lot of our business.
MR. SLOAN: Between August 1st and September 1st is about the only logical time because if you move it back from August 1st you will minimize your spring business and if you attempt to change on November 1st there will be thousands of cars on the hands of your dealers which will be very hard to sell. You would have to liquidate your merchandise in an off season.
MR. GRANT: I think we ought to keep our policy just as it is but work to the end of avoiding as many drastic model changes as we can. In other words, we should change our method of manipulating the present policy.
General Motors in fact had annual models in the twenties, every year after 1923, and has had them ever since, but as the discussion above shows, we had not in 1925 formulated the concept in the way it is known today. When we did formulate it I cannot say. It was a matter of evolution. Eventually the fact that we made yearly changes, and the recognition of the necessity of change, forced us into regularizing change. When change became regularized, some time in the 1930s, we began to speak of annual models. I do not believe the elder Mr. Ford ever really cared for the idea. Anyway his Model A, which he brought out in 1928, as fine a little car as it was in its time, it seems to me was another expression of his concept of a static-model utility car.
At the time when Ford's plants were shut down for lack of a new model design, I thought that both his and our policies would survive—Ford's in the form of the new car, which would express the old policy adapted to the then higher state of the art. In other words, I had no idea in 1927 that the old Ford policy was washed out and that the General Motors policy of upgraded cars had won in a much larger sense than was reflected in the rise in sales of Chevrolet.
FRB index of industrial production, 1920 - 1929
Chapter 10 - Policy Creation
The transformation of the automobile market was essentially complete in 1929. If Mr. Ford, in that pivotal year in the modern economy, still held stubbornly to his old concept in his new Model A, he was counterbalanced by Mr. Chrysler, who had come up from nowhere with tremendous vitality and with a market policy similar to General Motors'. The fact that Mr. Ford built nearly two million of the five million U.S.-produced cars and trucks sold that year was only incidental from the long-term point of view— it was a splurge, not the sign of a trend.
And General Motors itself had been transformed from the formless aggregation of 1920 into an integrated, effective enterprise. Its management philosophy of decentralization with co-ordinated control was working adequately for its time. Its financial method had become a kind of second nature, and a constantly evolving creative process. Its line of cars expressed the variety that Mr. Durant had originated and, in principle, the price classes set forth in the product plan of 1921. And perhaps I should add in passing that, although we had reached an all-time peak in the export of cars, we had started on a new course overseas with our own manufacturing operations in England (1925) and Germany (1929). In all of these matters the corporation reflected the trend of affairs in the economy. Doubtless it influenced some of those trends. Our progress in the automobile industry influenced other large-scale American enterprises to study and adopt our methods, particularly decentralization and financial control.
Not being a historian, I pass over much in this period that is of general interest to continue the story I set out to tell about the progress of General Motors.
The great depression of the early 1930s, despite its contracting effect, did not alter qualitatively the general characteristics of the enterprise except in one particular. Contraction required increasing co-ordination. That is, we had to find ways to react swiftly to this most difficult kind of change and to economize. These needs were to lead to the last basic modifications in the General Motors scheme of organization. In fact, the changes began before the stock-market crash in October 1929 in anticipation of a new situation, but before we had any real idea of what was coming.
For one thing, because of the tremendous success of Chevrolet, I wanted to spread the benefits of its management to the corporation as a whole by placing Chevrolet men in strategic positions. Mr. Grant and Mr. Hunt of Chevrolet were elected vice presidents of the corporation on May 9, 1929, with staff responsibility
for sales and engineering, respectively. At the same time, C. E. Wilson, formerly of Delco-Remy, was elected vice president for manufacturing. A few years later Mr. Knudsen, who had been general manager of Chevrolet, was elected an executive vice president and put in charge of all car, truck, and body manufacturing operations. Thus it might be said that in this period a new executive group moved up in rank and into the general corporate area where their influence would affect the entire corporation.
We had at that time, however, only a modest staff organization outside of finance, Mr. Kettering's laboratories, and the work associated with the inter-divisional committees. When we had occasion for an advanced engineering project we created a special "product study group" and placed it in a manufacturing division. The election of these men therefore was a new beginning in staff activity, which would eventually displace the old inter-divisional committees and develop into the great staff organization we have today. The stories of these staffs belong to later chapters in this book. I shall discuss here only how they bear upon certain general developments in co-ordination.
The national economy reached its peak, up to that time, in the late spring and early summer of 1929, after which industrial production decreased sharply, while the stock market continued on and up to its debacle in October. (Note 10-1.) On July 18 I made a statement to the Operations Committee expressing anxiety as to whether the corporation was capable of reacting to change, and declaring myself for new forms of co-ordination to that end as follows:
... I feel that we have been weak in that we have not been in a position or have not perhaps from the standpoint of policy, followed through on the many constructive suggestions involving programs and policies that have been developed. The usual reaction in the minds of all of us is, against any change, and I feel that our administration has been subject to criticism for not insisting upon changes and losing too much time in selling an idea and in not dealing promptly and effectively with weaknesses that are known to exist. It is for that reason that I have felt for some time past that we must have a more effective and definite form of coordination. Expressed otherwise, the resistance against progress has been greater than the man power to effect progress; therefore, progress has been slow. This now I feel has got to be changed if the Corporation is going to maintain its position, let alone improve it. We can not wait so long to do things as we have because competition is becoming keener and the problem is daily becoming harder. The remarks I am making are not directed so much to the ordinary business routine as they are to the recognition of new necessities in the form of better general principles and policies to carry out those principles, also better and more effective forms of detail organizations . . .
My Years With General Motors Page 21