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Making Cars and Making Money in the Interwar Automobile Industry: Economies of Scale and Scope and the Manufacturing behind the Marketing

Published online by Cambridge University Press:  13 December 2011

Daniel M. G. Raff
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Abstract

Many observers of the American automobile industry have focused on Ford's development of mass production shortly before the First World War; they have then moved to General Motors's success in the 1920s, usually attributing it to a marketing innovation, the introduction of the annual model change. This article argues that the emphasis on GM's marketing strategy is misplaced and that profound changes in the organization of production, exploiting the economies of common parts, were far more fundamental. Rough calculations of the cost structure involved in the rise of the Chevrolet to mass market domination are presented to support this interpretation.

Type
Articles
Information
Business History Review , Volume 65 , Issue 4: The Automobile Industry , Winter 1991 , pp. 721 - 753
Copyright
Copyright © The President and Fellows of Harvard College 1991

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References

1 Rae, John B., The American Automobile Industry (Boston, Mass., 1984Google Scholar); Flink, James J., The Automobile Age (Cambridge, Mass., 1989Google Scholar); Kennedy, E. D., The Automobile Industry: The Coming of Age of Capitalism's Favorite Child (New York, 1941Google Scholar); Nevins, Allan and Hill, Frank Ernest, Ford: Expansion and Challenge, 1915–1933 (New York, 1957Google Scholar); Chandler, Alfred D. Jr, ed., Giant Enterprise: Ford, General Motors, and the Automobile Industry (New York, 1964Google Scholar).

2 Sloan, Alfred P. Jr, My Years with General Motors (Garden City, N.Y., 1964Google Scholar).

3 Chandler, Giant Enterprise, 150 and 155.

4 Flink, The Automobile Age. The point here is underlined by the drift of Flink's first full paragraph on p. 242.

5 See, for example, Thomas, R. P., “Style Change and the Automobile Industry during the Roaring Twenties,” in Business Enterprise and Economic Change: Essays in Honor of Harold F. Williamson, ed. Cain, Louis P. and Uselding, Paul J. (Kent, Ohio, 1973Google Scholar), and Katz, Harold, The Decline of Competition in the Automobile Industry, 1920–1940 (New York, 1977Google Scholar).

6 For example, Hounshell, David A., From the American System to Mass Production, 1800–1932: The Development of Manufacturing Technology in the United States (Baltimore, Md., 1984Google Scholar), and Meyer, Stephen, “The Persistence of Fordism: Workers and Technology in the American Automobile Industry 1900–1960,” in On the Line: Essays in the History of Auto Work, ed. Lichtenstein, Nelson and Meyer, Stephen (Urbana, Ill., 1989), 73–99Google Scholar.

7 Most of the facts drawn on in my analysis are reasonably well known; the contribution here lies principally in what is done with them. Thus both Katz, The Decline of Competition, and Womack, James P. et al. , The Machine That Changed the World (New York, 1990Google Scholar), describe the logical connections explored here. But neither gives the reader any reason to believe that the effects were large enough to matter.

8 Chandler, Alfred D. Jr, and Salsbury, Stephen, Pierre S. du Pont and the Making of the Modern Corporation (New York, 1971), 517Google Scholar, and “General Motors I,” Fortune, Dec. 1938, 148.

9 Sloan, My Years with General Motors, 66.

10 General Motors Corporation, Annual Report (1923), 6.

11 See Meyer, Stephen, The Five-Dollar Day: Labor Management and Social Control in the Ford Motor Company, 1908–1921 (Albany, N.Y., 1981Google Scholar), chap. 2.

12 For example, Ransom Olds and Henry Leland had made early experiments with relatively unskilled assembly of high-tolerance interchangeable parts c. 1904. But the experiments were not pursued effectively.

13 Chapter 6 of Hounshell, From the American System, gives an authoritative account.

14 Ford Additional Tax Case materials in the Automotive History Collection of the Detroit Public Library and the Ford Archives, Dearborn, Mich.

15 Raff, Daniel M. G., “Wage Determination Theory and the Five-Dollar Day at Ford” (Ph.D. diss., Massachusetts Institute of Technology, 1987)Google Scholar, chap. 13.

16 The first references to widespread rising wages in the automotive sector in Detroit in Automotive Industries, the most relevant trade paper of the day, are contemporaneous with the arrival of orders connected with the First World War. This seems unrelated to my argument.

17 For an example, with some photographs and shop-floor diagrams, see “Conveyor System Aids Big Production,” The Automobile, 20 July 1916, 100–104.

18 See, for example, Heasley, Jerry A., The Production Figure Booh for U.S. Cars (Osceola, Wis.Google Scholar), various years. Chapter 10 of the forthcoming revision of Raff, “Wage Determination Theory,” gives a more detailed treatment and a quantitative analysis drawing comparisons to Ford.

19 Hounshell, From the American System, 146–51.

20 See, for example, the minutes for 2 Sept., 23 March, and 19 Jan. 1915, respectively, in the Studebaker National Museum in South Bend, Ind.

21 On the piece rates, see the minutes for 9 Feb. 1914. On the consequences, see the “Report of the Vice-President in Charge of Construction and Engineering,” Secretary of the Corporation files, Supporting Matter for Minutes, Directors' Meeting of 4 Aug. 1914.

22 American Society of Mechanical Engineers Sub-Committee on Machine Shop Practice, “Developments in Machine Shop Practice during the Last Decade” 34 (1912): 858Google Scholar.

23 See, for example,”Newspaper Advertisements of Detroit Car and Parts Factories for More Men,” The Automobile, 22 April 1915, 713.

24 Note well that none of the innovations mentioned in this sentence or the following one were engineering innovations. They were well known in other lines of manufacturing, but they had never been tried and exploited with a product as complex and as physically substantial as a car.

25 Estimates are given in Heasley, Production Figure Book for U.S. Cars.

26 It is possible that, GM aside, this diffusion went on principally through the entry and exit of firms rather than through change in the methods of ongoing firms. See Timothy F. Bresnahan and Daniel M. G. Raff, “Technological Heterogeneity, Adjustment Costs, and the Dynamics of Plant Shut-Down Behavior: The American Motor Vehicle Industry in the Time of the Great Depression,” unpublished MS.

27 See “Government Analysis of Labor: Detroit Strike Reaches Acute Stage: Shortage Will Reach 35,000 Men,” Automotive Industries 38 (25 April 1918): 841Google Scholar, “Detroit Union Workers Demand 44 Hour Week: Formal Demonstration to Claim Wage Increase: Growth of Organized Labor,” ibid. 40 (1 May 1919): 972, and “Detroit Now Faces Labor Shortages,” ibid. (8 May 1919): 1028.

28 Baird, D. G., “Eliminating Needless Cost and Confusion,” Industrial Management 65 (1923): 334–37Google Scholar. The parts in question were purchased from outside GM. It is a measure of how little these initiatives were focused on competitiveness that GM published its specification lists, thereby enabling other manufacturers to share in any upstream economies.

29 See Chandler, Alfred D. Jr, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, Mass., 1962Google Scholar). For their frustrations with Durant's management of GM during the preceding period, see Chandler and Salsbury, Pierre S. du Pont, chap. 17. The du Ponts' ongoing inability to make Durant provide basic accounting information is particularly poignant.

30 See Heasley, Production Figure Book for U.S. Cars.

31 See Sloan, My years with General Motors, for example, 165 and 65, respectively.

32 Knudsen, William S., “For Economical Transportation: How the Chevrolet Motor Company Applies Its Own Slogan to Production,” Industrial Management 76 (1927): 65–68Google Scholar.

33 General Technical Committee minutes for the meeting of 12 Aug. 1925, in the General Motors Institute (GMI) Alumni Foundation's Kettering Papers, Flint, Mich.

34 See “1926—Pontiac—How It Got Started” in the Daniel Wilkerson Papers at GMI: “We were, of course, fighting to hold place in this market against the powerful price sales appeal of the Model-T Ford.” Sloan writes in his autobiography (154) that “[d]espite the success of the K Model Chevrolet, it was still too far from the Ford Model T in price for the gravitational pull we hoped to exert in Mr. Ford's area of the market. It was our intention … to move down in price on the Model T as our position justified it.”

35 For traces of the entreaties, see Sloan, My Years with General Motors, 156. Regarding the outcome, Wilkerson writes, on the page following that quoted earlier: “In the design stage, our organization group responsible for the primary development of the budding Pontiac was the Chevrolet engineering staff. This department produced the drawings, production plans, preliminary manufacturing cost figures, and pilot models…. The pilot model Pontiacs delivered by Chevrolet … made use of a considerable number of standard Chevrolet parts for economy, and also for facilitating future service supply.”

36 Sloan quotes from his memorandum of reactions to it in My Years with General Motors, 157.

37 The cost figures for the month are roughly typical for the year. The figures derive from the Model T cost books in the Ford Archives, accession 736. They appear more accessibly, with a sketchy time series of earlier figures, in Lewchuk, Wayne, American Technology and the British Vehicle Industry (New York, 1987), 45Google Scholar.

38 The calculation that follows assumes that the two companies could operate with a roughly similar degree of backward integration. It is customary to think of Ford as a much more integrated company than GM in this period. But Nevins and Hill are openly skeptical about this; see Nevins and Hill, Ford: Expansion and Challenge, 9. Academic commentary early in the decade identified engines, gears, axels, crankshafts, radiators, electrical equipment, roller bearings, warning signals, spark plugs, bodies, plate glass, and body hardware as components produced within the corporation; see Edmonds, C. C., “Tendencies in the Automoibile Industry,” American Economic Review 13 (Sept. 1923): 426Google Scholar. The policy of top management was to have an assured supply of all items esssential in assembling an automobile; see Chandler and Salsbury, Pierre S. du Pont, 514. Edmonds also observes (433) that Ford purchased “large numbers of bodies” and “[n]umerous parts” from suppliers. Nor did the Ford and Chevrolet product designs differ in ways that would have required notably different skill structures in the labor forces.

39 “Motor Makers War Is Believed Near,” New York Times, 7 June 1926, 34. Since the expectations about Pontiac were stated in terms of expected daily output from a new purpose-built factory, the calculation turns on an assumption about how many days a year the factory would have been expected to operate. Chevrolet factories seem to have operated about three hundred days per year in 1926. See “Ford Closing Stirs a Crop of Rumors,” New York Times, 3 Dec. 1926, 8. Depreciation (“wear-and-tear”) is presumably sensitive to utilization. No handbook survives giving definitions and conventions for Ford cost accounting in this period. McKinsey, James O., Budgetary Control (New York, 1922Google Scholar), was the standard text of the day. It makes clear (189) that estimated depreciation of capital equipment should be incorporated in the overhead figures given in cost accounts. The total in the text has therefore not been further adjusted.

40 A representative Chevrolet for these purposes weighed 2,130 pounds complete, the analogous Ford, 1,961. (Much of the Chevrolet's superior furnishing is said, in the folklore of the trade, to show up in this statistic.) Assuming materials costs to be proportional to weight, this suggests a Chevrolet unit cost of $449.82. A very crude calculation of gross profit margins then puts Ford's at roughly 19 percent, the Chevrolet Division's at roughly 30. Superior finish and materials would cut into this difference, of course, though not by much; the same is true of a marginally more complex engine.

The weight and price data for this calculation come from the Automotive Industries annual statistical issue of 18 Feb. 1926. There is some ambiguity to be resolved in matching those numbers with the cost statistics. But the closeness of this estimated Ford markup to the Ford Company's own figure for 1924 (see, for example, Lewchuk, American Technology, 42, noting that 1924 is the last year reported) suggests that this match is the correct one.

41 Executive Committee meeting of 3 Sept. 1924. This reference and some others that follow come from notes that Alfred Chandler made while researching his 1962 book and has kindly made available to me.

42 Ibid., Executive Committee meeting, 23 June 1925.

43 Ibid., meeting of 30 June 1926.

44 Report to the Executive Committee from J. L. Pratt, 25 April [1934].

45 “General Motors I,” 156.

46 For a summary of the minutes of the meeting, see Sloan, My Years with General Motors, 177. Both cost-accountable management and engineering staffs seem to have been merged.

47 Personal communication to author from Bruce Thomas, Chrysler Corporation Engineering, 1991.

48 Bresnahan, Timothy F. and Raff, Daniel M. G., “Intra-Industry Heterogeneity and the Great Depression: The American Motor Vehicle Industry, 1929–1935,” Journal of Economic History 51 (1991): 317–31CrossRefGoogle Scholar.

49 Or see R. P. Thomas, “Style Change and the Automobile Industry.”

50 Thomas, R. P., An Analysis of the Pattern of Growth in the Automobile Industry, 1895–1929 (New York, 1977Google Scholar).

51 GM depreciated the jigs and fixtures that temporarily dedicated its machine tools over a three-year working life. Ford appears to have depreciated them over four. This variance does not make for a significant difference in overhead burden per unit output. The competitive significance of annual model changes ran through the basically static economies of common parts.

This production strategy did turn out to have a dynamic aspect, however. The long production runs supported more routinized jobs, which had lower training costs. Companies with lower employee training costs are more inclined to respond to cyclically slack demand, all other things equal, by scaling back rather than retaining their labor force until closure is the only option. This is in essence what happened to the population of firms in this industry in the Depression. See Bresnahan and Raff, “Technological Heterogeneity.”

52 Rodolf, Frank, An Industrial History of Flint (Flint, Mich., 1949), 366, 367Google Scholar.

53 Parker, John, “A History of the Packard Motor Car Company from 1899 to 1929” (MA Thesis, Wayne State University, 1949), 81Google Scholar.

54 Edsforth, Ronald, Class Conflict and Cultural Consensus: The Making of a Mass Consumer Society in Flint, Michigan (New Brunswick, N.J., 1987Google Scholar), esp. 114–26, and Babson, Steve, Building the Union: Skilled Workers and Anglo-Gaelic Immigrants in the Rise of the UAW (New Brunswick, N.J., 1991Google Scholar).

55 Keeran, Roger, The Communist Party and the Auto Workers Union (New York, 1980Google Scholar), chap. 2.

56 Accession 1662, box 8, Hagley Museum and Library, Wilmington, Del.

57 See—reading carefully between the lines— Laurence Todd's exculpatory retrospective, “General Motors Baffles the A.F.L.: Auto Combine Too Strong,” in Labor's News: The News Magazine of the Labor Movement, 7 March 1929, 1.

58 In this period, compensation was determined by factory management and not at the corporate level (personal communication to author from Mustafa Mohateram, General Motors Corporation Economics). Statistics permitting comparison of Chevrolet employee earnings to those of Ford employees at this stage are not available: GM did not make public such statistics even at the divisional level, let alone numbers for employees at the more finely disaggregated levels the model suggests, and no such data appear to have survived inside the company. We can, on the other hand, speak of the whole corporation—it was publicly traded and published relatively detailed and expansive annual reports.

59 Table 3 stops in 1930 for several reasons, the most salient of which is that we know that GM increased the degree of common parts utilization early in the Depression as one means of minimizing costs. We also know, from the Fortune writer, what the situation was not long thereafter. The period in doubt is that between the birth of Pontiac and the Depression's real onset.

60 Nevins and Hill believe (Ford: Expansion and Challenge, 459) that during the transition from Model T to Model A production, the average skill level in the Ford work force temporarily increased. This too would tend to put up wages.

61 Two aspects of GM's blue-collar compensation schemes form an interesting afterword to this. One is that by late in the decade the form (piece work, group bonuses, and time rates are the standard categories) as well as the actual levels of compensation were set by local management. The corporate staff gave occasional guidance but no more. These two sorts of decisions could be taken on a plant-wide basis or on a narrower one—departments, (sub-)assembly lines, functional groups, groups whose work was tightly coupled, etc. It was entirely up to the local managers. It is easy to imagine the decisions about the form of the scheme being taken to optimize rather than by force of custom: these managers were by far the most carefully monitored and rewarded in the industry. In the late 1920s there was substantial variety in the schemes in force across the company. The second interesting fact is that this variety seems to have emerged out of a piece-rate system. This raises the possibility that as and where production grew more tightly coupled, optimizing managers sought to make pay more interdependent. Daniel M. G. Raff, “The Puzzling Profusion of Compensation Schemes in the Interwar Automobile Industry,” forthcoming in Information and Coordination: Essays in Economic Business History, ed. Lamoreaux, Naomi and Raff, Daniel M. G. (Chicago, Ill., 1993Google Scholar), gives details and some tests.

62 See, for example, Nevins and Hill, Ford: Expansion and Challenge, and Thomas, An Analysis of the Pattern of Growth.

63 Piore, Michael J. and Sabel, Charles F., The Second Industrial Divide: Possibilities for Prosperity (New York, 1984), 17Google Scholar. To interpret the retreat from rigid singlepurpose tooling as a move toward flexible specialization is thus to conflate opportunity with intention. The opportunity was definitely in the machines, but intentions reside with managers.