My Years With General Motors

by Alfred P. Sloan Jr.

  Although we dealt with each country as a separate proposition, a pattern of sorts began to emerge in our overseas operations during the 1920s. We gradually perceived that two main kinds of marketing situations predominated abroad. The first of these situations was largely confined to Western Europe. Superficially, our export business to the Continent appeared to be thriving. But it became increasingly clear that, in the long run, our European export and distribution systems were threatened by economic nationalism. We continued to press our export business there as best we could, and we backed up this position by building assembly plants in several European countries. The assembly plants made it possible for us to identify ourselves more closely with the local economies by utilizing local management and labor. Moreover, as we gained experience with local supply conditions, we made increasing use of local sources for such items as tires, glass, upholstery, and the like. In other words, we could ship unassembled cars from the United States without these items, and purchase and install them locally if the economics justified. This had another advantage, compared with exporting complete cars, in that it resulted in lower duty payments. (Today, American automobiles are assembled by General Motors in Belgium, Denmark, and Switzerland.) But the conviction grew that our future in Europe lay in producing cars there. The case for European production was stated vigorously and insistently by James D. Mooney, who was head of our Export Companies. However, the Executive Committee of the corporation, of which I was chairman, remained doubtful about the wisdom of our becoming producers abroad until close to the end of the 1920s.

  A different kind of marketing situation prevailed in large areas of the world outside of Europe—areas which were not heavily industrialized. No manufacturing operations would be feasible in these areas for many years. Accordingly, our efforts there had to be primarily in exports, with both SUP and CKD shipments playing a role. Our assembly operations outside of Europe today are in the Republic of South Africa, Peru, Mexico, Venezuela, Australia, New Zealand, and Uruguay.

  Though our unit sales overseas have grown more than eight times since 1925, I think it is fair to state that the character of the operations and our basic overseas marketing strategy were both established in the twenties.

  Our first thoughts about securing a European production base concerned the Citroen Company in France. Negotiations for the acquisition of a half-interest in Citroen consumed several weeks during the summer and early fall of 1919. In that year, as mentioned earlier, Mr. Durant sent a group of General Motors executives abroad to make a study of the European automobile industry, and it was this group, consisting of Mr. Haskell as chairman, Mr. Kettering, Mr. Mott, Mr. Chrysler, Mr. Champion, and myself, that did the actual negotiating. Andre Citroen was an aggressive, imaginative businessman, and as it happened he was interested in selling his company. At the end of our stay in France we were still uncertain about the wisdom of acquiring the property. I recall that, the night before we were due to sail back, we sat up until early in the morning in a room in the Hotel Crillon, arguing at great length about the issue. In a general way, we were for the acquisition, but there were some specific difficulties. For one thing, the French government did not like the idea of American interests taking over an enterprise that had contributed importantly to the war effort. For another, the production facilities did not appeal to us, and it was clear that if we undertook to run Citroen, an investment running far beyond the initial cost would be required. Furthermore, the company's management then was not entirely adequate. At one point that evening, we discussed a proposal that either Mr. Chrysler or myself move to France and run the company. I was personally not interested in this proposition, and I argued that, in general, our own management at home was not strong enough to supply the top men that would be needed to operate Citroen.

  I sometimes wonder just how different the history of the industry would have been if either Mr. Chrysler or I had offered to operate Citroen for General Motors. In those days when the industry was new and expanding explosively, its future was shaped by a small number of individuals who took leading positions; as often as not, the capital went to these men rather than the men to the capital. At any rate, a few hours before we were due to sail, we decided not to buy Citroen. The company was later taken over by the Michelin Company, which did very well with it. General Motors never has established an automobile-producing company in France; somehow, the time and circumstances have never seemed quite right. However, we do have a large Frigidaire operation in France, and we are an important manufacturer there of spark plugs and some other components for the automobile industry.

  Our next effort to secure a manufacturing position abroad was made in England. The future of American cars in the British market looked poor in the early 1920s. The so-called McKenna duties raised a formidable tariff barrier to all foreign vehicles. In addition, motorcar license fees were assessed per unit of horsepower. The formula for determining horsepower greatly favored a small-bore, long-stroke, high-speed engine, and penalized the American engine, the bore of which was nearly equal to the stroke. And since insurance costs were generally related to the license fees, the owner of an American car was doubly penalized. Altogether, the fees, insurance, and garage charges on a Chevrolet touring car in England in 1925 came to one pound sterling a week (about $250 a year) — all this before normal operating costs. By contrast, the owner of an English-made Austin had fixed charges of perhaps eleven shillings a week (about $138 a year), and his first cost was lower too.

  While the export of American cars to England was inhibited by these circumstances, British manufacturers faced some difficulties of their own. By the mid-twenties, a large number of British producers had come into the automobile industry, but their combined volume amounted to only about 160,000 cars and trucks, split up into a large number of designs and price levels. The British producers therefore lacked many of the economies associated with American mass-production techniques, and their prices were chronically depressed. In gaining a manufacturing base, then, we had to think of the long-term prospects; there was no hope of large immediate gains.

  Our first efforts were directed to acquiring the Austin Company. It produced nearly 12,000 cars in 1924, which in England at that time was fairly substantial production. Mr. Mooney, then vice president in charge of the General Motors Export Companies (now the Overseas Operations Division), discussed the prospects of acquiring Austin with me and with others in the corporation several times during 1924-25. We saw that Austin had managed to build up its volume and profits even when the protection of the McKenna duties was temporarily suspended. (They were removed on August 1, 1924, then re-established on July 1, 1925.) Mr. Mooney inspected the Austin properties in the spring of 1925, and wrote a report recommending that we buy them. In July a committee went to England to look into the question further. It included Fred Fisher, Donaldson Brown, John Pratt, and of course Mr. Mooney. In August the committee sent me the following cable:

  Committee agrees unanimously English Company will be of advantage to General Motors Export Company. STOP. Think we can buy all certificates of common stock Austin million pounds sterling leaving outstanding million six hundred thousand pounds cumulative preferred stock requiring 130,000 pound[s] sterling 3,000 [or 133,000] pounds sterling dividend [total in dollars: $5,495,050]. Think we can earn at least 20% on our investment in addition to protection and increased earnings on our American Manufacturers. STOP. Conservative estimate net assets after deduction liability two million pounds sterling plus 600 thousand pounds sterling goodwill [total: $12,610,000]. STOP. Are we authorized to close in the event of unanimous agreement among ourselves.

  On the same day I cabled this answer:

  Finance Committee stated meeting June 18th would approve any recommendation Executive Committee. STOP. Assuming your Committee unanimously agree without reservation desirability purchase and fairness price we satisfied go ahead and authorize you do so. STOP. Impossible we here pass any judgment propriety of purchase or amount proposed p
ay. STOP. When deal actually made kindly cable so I can make suitable announcement. STOP. Conditions here continue very satisfactory, all well, regards.

  The deal never was consummated. I will not recapitulate here all the obstacles which arose in the course of negotiations, except to say that the principal disagreement concerned the manner in which Austin valued its assets. On September 11 Mr. Mooney cabled me that our offer had been withdrawn.

  As I recall the incident, I was actually relieved to hear this news. For it seemed to me that Austin had largely the same disadvantages that had bothered me about Citroen six years earlier; its physical plant then was in poor condition and its management was weak. And I still had some doubts whether our own management was strong enough to make up for Austin's deficiencies; indeed, the continued dilution of our management strength as we expanded overseas and at home was a problem all during the 1920s.

  The reader may wonder why, in these circumstances, I had ever authorized our team in England to close the Austin deal in the first place. The answer, essentially, is that I always tried to run General Motors by a policy of conciliation rather than coercion; and when a majority was opposed to my thinking, I was often disposed to give way. I might add that the top officers of General Motors who were involved in this situation were men of unusual talents and strong convictions, and as president I felt I should respect their judgments. But notice, in my cable to our group in England, that I placed the responsibility for the deal squarely on their shoulders. They would have to validate it.

  Soon after the Austin deal fell through, we entered into negotiations to purchase Vauxhall Motors, Ltd., a much smaller concern in England. This acquisition in the latter part of 1925 was a much less controversial matter in General Motors. Vauxhall manufactured a relatively high-priced car, roughly comparable in size to our Buick, and had an annual volume of only about 1500 units. It was in no sense a substitute for Austin; indeed, I looked on it only as a kind of experiment in overseas manufacturing. The experiment seemed appealing, however; and the investment required of us was only $2,575,291.

  Vauxhall lost money in the first few years after we took it over, and it gradually became clear to us that we would have to develop a smaller car if we hoped to capture a much larger share of the British market. Mr. Mooney was eager to begin this development as rapidly as possible. He also saw Vauxhall as a precedent for expansion of our production operations in other countries. My own feelings about the future of our overseas operations were much less clear than his at this time, and in general I took the line in the next few years that we should move slowly and cautiously until we had worked out a clear policy for overseas operations.

  The peculiar fact is that, although we had made the gestures I have described toward producing abroad, and had taken on Vauxhall, the Executive Committee had not yet crystallized an overseas policy. The decisive debate on this subject in the corporation began in 1928. In January 1928, while I was still concerned with keeping our position flexible, I offered to the Executive Committee a preliminary formulation as follows:

  THAT recognizing the desirability of employing additional capital for the purpose of increasing the Corporation's profits and developing its business, the Executive Committee will consider favorably, as to principle, the employment of capital for manufacturing purposes in overseas manufacturing countries, either in the form of employment of such capital on its own account or through association with foreign manufacturers.

  Thus I expressed my opinion as to the desirability of overseas manufacturing in principle. This view of mine was considered at length by the Executive Committee on January 26 and ordered filed without any concrete action. It was clear that we were still in search of a policy. By this time, the broad policy issues had come to center on several specific issues: Should we expand Vauxhall, or should we write it off as a bad investment? Was it really necessary to manufacture in Europe? Or could a modified Chevrolet, exported from the United States, compete with European cars in the European market? We were especially uncertain what to do in Germany. If we decided to produce there, should we expand our Berlin assembly plant into a manufacturing operation, or should we affiliate with some other producer? Our overseas operations men, especially Mr. Mooney, were inclined to favor expansion of existing facilities, while I rather preferred affiliation with a German producer. There were certainly substantial reasons for supporting either approach.

  The question of manufacturing abroad was discussed in the Executive Committee again on March 29, and still again on April 12; at the latter meeting we discussed particularly the question whether we should manufacture a small car in England and Germany. As a matter of fact, that question was discussed by the Executive Committee through practically the entire year of 1928. There was a strong sentiment that our export organization should be limited to selling American products abroad and should not get into overseas manufacture. Meanwhile, I was interested in a suggestion that we create in the United States an organization to design a modified "small-bore" Chevrolet—a car that would escape the heavy horsepower tax in England and Germany. I felt that if this were done, it might prove unnecessary to develop a new small car at Vauxhall or to go into production in Germany; or, if it should become necessary to produce such a car abroad, we would at least have a design available. In any case, I wanted the facts established to everyone's satisfaction before proceeding further in either country.

  At a meeting of the Executive Committee on June 4, 1928, I urged that each member talk to Mr. Mooney individually, in the hope that these discussions might clarify our thinking. In July Mr. Mooney addressed a long memorandum to me, detailing his point of view on all the issues. A few weeks later I conveyed this memorandum to the Executive Committee, together with my own comments on the points raised by Mr. Mooney. Perhaps the simplest way of describing the contending views, and of re-creating some of the atmosphere of the discussion, is to quote some excerpts from his memorandum.

  One of the first points made by Mr. Mooney concerned the desirability of continuing expansion by the Export Company. He pointed out that "over the past five years the Export Division has increased its dollar volume from $20,000,000. to $250,000,000. . . . Our general problem ... is to raise our total dollar volume in Export from its present level of $250,000,000. to $500,000,000. in the shortest possible time, and to provide a means that will maintain a continuing increase into the future . . ."

  Mr. Mooney pointed out further that ". . . the lowest price product that we can offer for sale in the world markets today, which is the Chevrolet, costs the user approximately 75% more than it does the user in the United States, and the user in the world markets has approximately only 60% of the money of the United States user to pay for it. Therefore, the Chevrolet when put down in world markets is not in the largest volume area, and is in a relatively high price class."

  Mr. Mooney made his case for the expansion of Vauxhall along these lines:

  (1) We had already started on a manufacturing program which we proposed to expand by adding another car model.

  (2) We had a large and growing distribution system in England, and an investment in the Vauxhall plant that had to be safeguarded.

  (3) The fact that the British Empire covered 38 per cent of the world markets outside of the United States and Canada was important in the consideration of England as a source for export markets.

  The discussion then turned to the question of our future dealings in Germany, on which Mr. Mooney made his case with the following salient points:

  (1) We already had an established organization in the form of the General Motors assembly plant in Berlin.

  (2) We proposed to manufacture a car model at this plant, rather than acquire an interest in the Opel automobile company.

  (3) Since the automobile industry in Germany was in its formative state, the time was right to establish a successful manufacturing operation.

  (4) Our existing investment had to be safeguarded.

  (5) Not only was the domestic
German market potentially large, but Germany was also in a good position to export to neighboring countries.

  I agreed with some of his main points, and on some others I was, as I have already suggested, frankly undecided. The one clear point of disagreement between myself and Mr. Mooney concerned an aspect of what our policy should be in Germany. I viewed the case there something like this: If the idea was to make a very small car, much smaller than the Chevrolet—assuming that was an economic thing to do—then we might be better off dealing directly with Opel. I felt that we would get off to a better start that way than we would by trying to compete on our own in a country with which we were largely unfamiliar.

  During the following six months our policy in Germany was finally established. In October 1928 I made an inspection trip to Europe, accompanied by John Thomas Smith, who was general counsel of General Motors, and Charles T. Fisher. We visited our export and assembly operations throughout Europe and also visited Adam Opel A.G. My prior interest in acquiring Opel was stimulated by this visit, so much so that I negotiated an option for General Motors to buy Opel. The option was to expire on April 1, 1929, and we agreed, subject to further examination of the company, that we would pay about $30 million if we bought it.

  I reported this arrangement to the Executive Committee on November 9, 1928. The committee was generally sympathetic to the idea of buying Opel, and it was agreed that we should look further into the property. At a committee meeting on November 22, 1928, we decided to appoint a study group to do just that. The group finally agreed upon consisted of Mr. Smith, who was to be in charge, together with Albert Bradley, general assistant treasurer, C. B. Durham, the head of manufacturing at Buick, and E. K. Wennerlund, who was an expert on factory arrangement and flow of material. Before the group sailed, I gave Mr. Smith a formal memorandum outlining the situation as I saw it. I asked him to bear these questions in mind: