Leaders and Followers

From the 1950s into the start of the 1970s General Motors was consistently the most profitable firm in the world, earning 40% on investment and 60% on equity. How did they manage that? After all, GM faced competition from Ford and Chrysler. American Motors (formed in 1954 through the merger of Nash and Hudson) was also a nuisance, as were Studebaker and Packard (until their exit in 1958).

1955 Rambler

Now GM benefitted from economies of scale. For example, they were large enough to not just automate engine machining, but to make multiple engines while running their factories at capacity. Ford faced challenges in that regard, because their volume per engine (6-cyclinder vs 8-cylinder) were smaller. Chrysler was at an even greater disadvantage. With a broad product portfolio, one mis-step was not so damaging at GM. A poor selling model really hurt at Ford, whereas Chrysler faced periodic crises. And then there were the truly fringe firms: despite mergers that aimed to increase their scale, Nash, Hudson, Studebaker and Packard all went out of business, while Chrysler acquired American Motors (and hence Jeep) and Chrysler was ultimately acquired by Fiat to form today’s FCA.

Anyway, during the 1905s and into the early 1970s GM held 50% of the market. Their worry, in fact, was not Ford, but the Department of Justice, which threatened to pursue them under then-prevailing anti-monopoly guidelines. Because of its divisional structure, with separate design, engineering, manufacturing and sales operations, the DOJ could realistically break up the firm into 2 or more pieces.

Three pieces of indirect evidence: Ford maintained copious archives. They are a research resource for everything from business history to US racial issues. In contrast, GM kept no archives; corporate policy was to destroy all documents unless needed for a short-term corporate purpose. GM’s fear of being broken in two seems to have pervaded senior management in another way: it led to a culture of deniability. Then there was a corporate reorganization that realigned the divisional structure. In the 1970s that led to a PR nightmare: the installation of engines used in plebeian Chevrolet cars in Oldsmobiles. How could GM dare use the same parts in 2 different products? You might as well have Jaguars, Mercedes and BMWs coming out of the same factory [actually, that happens at the Steyr-Magna plant in Austria].

Well, if GM couldn’t exercise market power to maximize profits by dropping price to raise their market share, then what were they to do? Ford almost went out of business when the founder Henry Ford’s maniacal focus on the Model T led to declining sales, as they had to keep dropping prices to compete against used Model Ts. In the 1920s Alfred Sloan and Pierre DuPont instituted two policies to address that issue. First they reorganized GM’s operations to focus on a range of models, from low-priced entry level ones to Cadillacs at the luxury end. Second, they began regular model changes at GM. Eventually Ford and Chrysler followed suit, with new (or at least “refreshed”) designs launched every year, to great fanfare.

As things developed, GM came out with theirs first each fall, showing them off in huge media events each fall, including tentative list prices. Ford and Chrysler launched their new models a bit later. Think a bit: if you are Ford, what price would you announce? Surprise, surprise: you follow GM’s lead. But isn’t this illegal price-fixing?

One year jumps out as anomalous: 1955. It wasn’t a boom year, but neither was it a recession. Yet sales were 45% higher than in 1954 or 1956, while prices were lower (Bresnahan 1987, 458). Price controls from the Korean War period had been lifted before 1954; import competition didn’t begin until the arrival of the VW Beetle in 1957. However, that was also the first year that the newly created American Motors launched their first new car, the compact Rambler. It was life and death for them: they had to establish a market presence, fast. So did they really sell so many cars as to sway the entire market? What else might have gone on?

Bresnahan, Timothy F. 1987. “Competition and Collusion in the American Automobile Industry: The 1955 Price War.” The Journal of Industrial Economics 35 (4): 457–82.

17 thoughts on “Leaders and Followers

  1. It is shocking to consider that about 40 years ago GM held 50% of the market for automobiles in the United States. I would assume that GM’s profits were greater at this time do to the limited number of suppliers and large portion of the market share they possessed. GM was nearly acting as a monopoly and kept no archives. This likely points to the presence of corruption which can seem to hide itself when there are few competitors to point fingers. GM’s eventual shift to low-priced entry level cars and luxury cars as well as regular model changes caused the business to take off. It would be interesting to look at what important decisions GM made or did not make following this time period that caused their bankruptcy and eventual bailout.

    • No corruption, other than the inevitable person here and there when you have 440,000 employees. But a near-monopoly, yes, and at the time the Department of Justice not only took a hard stance on mergers, they could and did break presumed monopolists into two pieces, or pushed for regulation to encourage lower prices / higher output.

      The single biggest proximate cause of bankruptcy in 2008 was the lack of a national healthcare system in the US. That goes back to the 1947-1950 period under Truman when Big Business pushed for and won the right to be the provider of healthcare insurance and retirement pensions. As it happens, the auto industry was not involved in the politics but did not fight the solution. But then people lived longer, and healthcare costs exploded, and one by one old-line companies filed for bankruptcy – airlines, steel companies, and autos. Ford escaped because they’d run into a crisis earlier on and had fewer retirees and others who qualified for insurance in 2008, when sales fell 40% while demand shifted towards low-margin smaller sedans. Even Toyota went into the red, but they had almost no retirees in the US and in Japan and elsewhere healthcare was not an issue.

  2. The rise of globalism and imported cars has clearly hurt the US auto industry. The opening of global markets and foreign tariffs on the import of US cars without reciprocal tariffs on the import of foreign cars to protect the US automakers puts them at a disadvantage. US labor costs are higher than Asian labor costs and the gap must be closed artificially through price controls. Foreign carmakers are also far more likely to have success with smaller size cars while US buyers almost exclusively buy SUVs and trucks. This has led to the majority of profits for US carmakers being from service based income rather than product sales based income.

    • US tariffs have been higher than Japanese tariffs for a half century. European tariffs are higher but that hasn’t stopped BMW from exporting a lot of cars there – Ford and GM didn’t export to Europe because they had extensive operations throughout UK and the continent, Opel and Vauxhall nad Fordwerke in Germany and UK Ford, dating back to the 1910s.

      Note too the US auto industry is producing more cars than ever – with Honda by some metrics the most American company in our industry.

      Labor costs are 8% or less at the assembler (car company) level. Producing what the market wants and logistics costs and managing the supply chain well dominate differences in labor costs, even a doubling of wages would add only a few hundred dollars a vehicle for those produced in a well-run manufacturing operation.

  3. Global interaction could be a major player in this case, but not for the sake of foreign competition. AMC’s Rambler was merely a re-marketed Nash rambler, but it launched at just the right time. Young veterans from the Korean War were returning home after their active duty commitment was up. As we know, a soldier can enlist for 2-3 years on active service before returning home. Those who signed up in 1952-53 to fight in Korea were returning home in 1954-55. While in the East, they certainly observed compact Japanese cars around military bases and perhaps those cars (and perhaps the local females in them) piqued an interest in the GIs. Upon returning home, they didn’t need to have the big-car taste specific to Americans who were buying GM. Instead, the smaller Rambler may have been more appealing.

    • Actually, there were almost no cars on the road in Japan, other than those imported by GIs themselves. As a poor, developing country in the 1950s, the Japanese market was almost entirely trucks. Only in 1966 did car sales first match truck sales. [Cars may have outsold trucks in the 1920s when Ford had a factory in Japan, making Model Ts and then Model As. The military shut Ford down in 1936, but they kept the land and sold it to buy Mazda in 1979.]

  4. American Motors, in order to make a name for themselves and thus save their company, may have had a strategy of entering the market with a low price point for the Rambler. Maybe they thought that if they sold enough models (even while sacrificing profits) they would be able to establish a market presence that could compete with GM and Ford in the long-run. Since automakers tended to match the price of GM so as to be competitive, we might expect that automakers lowered their prices in 1955 in order to compete with the Rambler, thus leading to the lower prices in ’55 than the years following and preceding. If the price in ’55 was lower than in ’54, and also considering we were exiting the Korean War, it is logical that the demand would rise across the industry.

  5. The American automotive industry championed Sloan’s idea of “dynamic obsolescence.” Multiple sub-categories of dynamic obsolescence have emerged, including contrived durability, prevention of repairs, perceived obsolescence, systemic obsolescence, and programmed obsolescence. I would argue that the most effective of these is perceived obsolescence, which was the strategy that GM used and is probably the most pervasive in modern industries. Perceived obsolescence is most commonly a result of product differentiation. When Sloan convinced GM to 1) focus on a wide-range of models and 2) annually change their models stylistically, he recognized to the idea of perceived obsolescence. With more information available for consumers, it is perhaps harder for producers to get away with contrived durability in the current day in age. However, companies still utilize perceived obsolescence and systemic obsolescence. The most notable example of systemic obsolescence today is with software for cell phones and other mobile devices, as companies update their software to make the use of older devices with older software increasingly difficult or inconvenient.

    • To my knowledge car companies never designed their cars to wear out. Manufacturing methods into the 1970s simply couldn’t maintain tolerances in engines and transmissions necessary for the durability we now take for granted, plus the steels used today hadn’t been invented. Piston rings wore out back then, today they last for the life of a vehicle. But that’s because they’re diamond-coated, made to tolerances of 1-2 micrometers and are (not) rubbing against cylinder liners made of materials that are recent in origin, using lubricants that are silicon-based not carbon-based, and so on.

      So your focus on styling is appropriate. Fashions change – there’s a neat story on Nissan’s new orange color, developed in response to trends at fashion shows in Paris and kitchen displays at Lowes and Home Depot. See Blaszczyk, Regina Lee. 2012. The Color Revolution. Cambridge: MIT Press. It’s a tough read, Regina is a historian who loves fashion so for me there was excess detail on the latter. And entire set of special consulting firms arose to collect and analyze data on color, used by department stores and car companies to try to match their offerings to market trends.

  6. In order to infiltrate the market and create a strong foundation American Motors had to attract a lot of customers in their early days. By offering a lower price than that of GM they were able to capture some of GMs market share. The end of the Korean war likely increased the design for the rambler as well. GIs returning home are usually single and without a lot of excess cash, as such they do not need a full size car. American Motors was likely also trying to build a large foundation to ensure long term success that plays off of consumer loyalty. Not to mention the rambler was very cool looking.

  7. One of the most significant obstacles that GM has faced in the recent years is the changing of consumer preferences. Long gone are the days where cars are the prefered vehicle of choice for many consumers across the globe. GM struggled to maintain their massive share of the market with small, foreign cars entering the market, especially during the oil crises of the 70s and 80s. However, while this steady decrease seemed inevitable, the reinvention of the automobile market primarily focusing on the truck and SUV and not the car was what really ended the reign of GM at the top. While Old GM has been bailed out and the new iteration of GM is still profitable, the years of GM being the largest automobile makers are over. The largest group (Volkswagen) generally focuses on luxury cars, but its subsidiaries such as Porche and Audi have a significant presence in the SUV market as well.

  8. It makes sense that with 50% of market-share that GM would announce their new models first and then the smaller producers would follow suit. Presumably the price that the others offered would be slightly below GM’s on comparable units in order to try and siphon off some of GM’s marketshare. The 1955’s 45% spike in auto-sales is quite the puzzle, and I cannot seem to find an explanation for this increase. Perhaps the entry of AMA into the market promoted a “race-to-the-bottom” in regards to pricing, and that with the price of cars lower across the board more people found car ownership viable. This seems unlikely however given the fact that car companies would have needed to continuously change the price of their vehicles, and widely advertise those changes so that it became a differentiating factor. Wikipedia notes that the Rambler was considered a very affordable car, and that the rambler separated itself from its gas guzzling peers at the time. Perhaps the combination of low sticker price and low cost of ownership in concert with the broader economic conditions of the time opened up car ownership to a previously untapped segment of consumers thus leading to dramatically increased sales.

  9. I feel like China is a good candidate for GM’s future market.
    As we known, China is the world’s largest automotive market and is dictating how the industry as a whole is progressing. With the country’s push to clean its air and move towards only allowing automakers to sell electrified vehicles in the country, every brand is pushing hybrid and electric cars.
    Also, the Chinese government is fully supporting the move to electric vehicles. The Chinese government is quite determined to have this electrification materialize and it has just as much of an opportunity to become a leader in the electrified segment as traditional brands.
    Another aspect is the price of gas. To my knowledge gasoline in China is roughly twice as much as it in the United States. I’m sure consumers would move towards purchasing more efficient vehicles.

  10. I think a huge factor in GM’s profitability is its early diversification in the car market. By selling multiple types of cars (i.e. low priced vs. luxury, new models on an annual basis), GM was able to fragment all potential car buyers into smaller markets with products that appeal to that specific audience. This made a particular car more attractive to the individual buyer, and thus drove demand in the car industry. As GM was the first manufacturer to do such a thing, they gained a first to market advantage that likely made them initially more popular and gave them some market power within the car industry. Surely, this first to market effect would be more pronounced in an industry where so few firms exist, as seen here with GM, Ford, Chrysler, and American Motors.

  11. It is possible that the introduction of American Motor’s Rambler had a domino effect on the rest of the industry. The introduction of an innovative new productive may have invigorated interest in the industry as a whole. As consumers were exposed to American Motor’s advertisements of its new car, they could have been motivated to consider purchasing a new automobile regardless of the manufacturer. However, this increase in demand does not explain the decline in prices of cars in 1954. It could be possible that the influx of a new car manufacturer into the supply of the industry outweighed increased demand for cars. The 7.1% increase in GDP in 1955 compared to the 0.6% decrease in 1954 also caused consumer wealth to increase, motivating them to buy more luxury items such as cars. Car manufacturers may have decreased their prices in a way to compete for the rise in demand. Any of these factors, or ones that have been mentioned in comments above, could have contributed to the combined rise in sales and decline in price in 1955.

    • I agree that introduction of the American Motor’s Rambler had a stringing effect throughout the rest of the car industry. I strongly believe that when entering the market, they low-balled their price in order to sell any cars (obtain market share) fast, as stated in the initial post. In the simple perfect competition model, we see that as firms enter, the supply curve increases and shifts to the right. This lowers the price of cars, and because new cars are fairly elastic goods, a drop in price would result in a large increase in the quantity purchased. This potential cause for the increase in revenue in the car market could have led to the sharp increase in sales. It would be interesting to hear from the executives of each of these companies during this rapid year of growth to understand their point of views and if there was anything illegal going on.

Leave a Comment!

This site uses Akismet to reduce spam. Learn how your comment data is processed.