IV. DAVID BUICK, BILLY DURANT, ALFRED SLOAN, AND THE MODERN CAR INDUSTRY

David Buick was a Scotsman, a partner in a substantial Detroit plumbing supply business, and an owner of twenty-five patents, with a focus on gasoline engines. Around the turn of the century, after several years of selling stationary engines, he started experimenting with marine engines and automobiles. Soon after, Buick and his team came up with a more efficient engine design with a compact combustion chamber and faster fuel-burn rate. The design was known in Europe, but the Buick designers were the first to take full advantage of it, realizing high ratios of power to weight and fuel consumption for the time.²²

Buick raised money from carriage makers in Flint to finance a small production run of “Buick Model Bs” in 1904, featuring the new, more powerful, engine. With the Buick order book filling up, Buick and his other backers turned to William Crapo “Billy” Durant for working capital. Durant was a self-made millionaire, whose carriage company was the biggest in the country, and probably the world. Although Durant claimed to dislike automobiles almost on principle, a road test of the Buick made him a convert. Convinced that the automobile was “the next big thing,” Durant leaped headlong into the industry.

Headlong, in fact, was the only way Billy Durant knew how to jump. His family had long roots in Flint. His mother’s father had been a successful lumberman, mayor of Flint, and governor of Michigan. His father, on the other hand, was a charmer but something of a wastrel. Billy was also a charmer, and a natural salesman, but with drive, a knack for business, boundless energy, and vision. Bored with high school, he had scored a string of modest successes in small local enterprises, when in 1886, still only twenty-four, he encountered a horse carriage with a spring seat that gave an unusually smooth ride. Interested, he took a train 120 miles to the small town where it was made, hoping to become an investor; instead he ended up buying the rights. Eighteen years later, Flint was “the carriage capital of the world,” and Durant was rich, bored with carriages, fascinated with Wall Street, and spending most of his time in New York.

In November 1904, with Durant putting up the bulk of the money, the Buick Motor Company was recapitalized with subscriptions of $500,000, with Durant in effective control, a new factory, and a production group drawn mostly from the carriage industry. Durant understood talent and enticed people like Charles Stewart Mott, reputedly the country’s best axle maker, to move his production to Flint and gradually integrate it into the Buick organization. David Buick fared less well. He was a director of the company for several years, but had “faded away” by 1908. He had a number of unsuccessful business ventures, apparently did not keep his auto stock, and before his death in 1929 was employed as a trades teacher in Detroit.²³

Durant was a legendary salesman. Even before the new factory was ready, he took one of the model cars to the New York City auto show and came back with 1,108 orders. Walter Chrysler, a semi legendary figure himself, later wrote of Durant: “I cannot find words to express the charm of the man. He has the most winning personality I’ve ever known. He could coax a bird right down out of a tree.”²⁴

And the company was surely on a roll:

Note that Buick’s sales tripled in 1907, the year of a famous banking crash. All the car companies cut inventories once the crash hit, except Durant. Even when Buick agencies stopped taking cars, he kept producing them, storing them however he could. When the economy snapped back, Buick’s inventory advantage allowed him to steal substantial new share.²⁵

Durant enthusiastically supported Buick’s entry into racing, and liked hand-picking daredevil drivers, one of whom, a stocky Belgian named Louis Chevrolet, eventually saw his name enshrined in the pantheon of industrial history. Durant also converted his carriage company’s dealerships into Buick agencies, giving him the most “exposed” automobile in the country. Durant was not a production guy, but kept a finger on the pulse of the company, especially from talking to the agencies. Everyone loved the engines, but customers continued to complain about the quality of Buick parts, drawing hurricanes of Durant inquiries onto the engineers and production staff.²⁶

Durant had only one gear—a charge-ahead focus on market share. He flirted with an attempt to roll up the entire industry with Morgan financing, but dropped the idea because of the Morgan group’s ultracautious concern for profits. So Durant created a holding company of his own—General Motors, incorporated in September 1908, with William Eaton, a prominent Michigan businessman as president and himself as vice-president. (Durant almost always chose to be a vice-president of the companies he controlled, so he could focus on deal making and sales, free of administrivia.) Shortly thereafter, he inked the acquisition of the Olds Motor Vehicle Company, which had separated from its founder, Ransom Olds, and was struggling. Durant furnished it with a new product, essentially a bigger and more powerful Buick, at a higher price point. Before the year was out, he had also acquired Albert Champion’s high-performance spark plugs and a car body-making company. The next year, Durant shifted into high gear, buying the Oakland Motor Car Company, later to become GM’s Pontiac division, and Henry Leland’s Cadillac Motor Company, plus twenty other companies, including five more struggling car companies, a wheel maker, and various parts and lamp makers.²⁷

The economy was flat in 1910, not nearly a crisis, but enough to shake Durant’s high-wire debt practices. GM entered 1910 with some $15 million in debt, by no means an egregious amount. Buick, by itself, earned $10 million a year on $30 million in sales and Cadillac made 50 percent net margins on $4+ million in sales. But Durant, wary of the coils of powerful Wall Street bankers, had spread his borrowing among some two hundred small banks, GM suppliers, and dealerships, all of it short term and with his personal guarantee. The blip in the lending market terrified the small banks, forcing Durant to accept a humiliating deal with two bigger players, Boston’s Lee, Higginson and New York’s J. & W. Seligman. Although he stayed on the board, he lost control of the company—a new president was brought in, who recruited Walter Chrysler as production manager. The industry recovered strongly after the 1910 slump, just as Durant had predicted. But GM, now infused with banker sensibilities, was content to reap tidy profits, avoid risk, and pay off its debt—precisely the banker playbook that Durant, and Henry Ford, so abhorred. ²⁸

But Durant was irrepressible. In late 1910, without resigning his GM directorship, he financed three new automobile companies in Flint, including Chevrolet, with Louis Chevrolet as chief designer. Durant had decided to challenge Ford for control of the low-end market by creating a reliable car, at only a modest price premium to the Ford, but with style and sex appeal. All three of his companies produced prototypes before the end of 1911. None of them was what Durant was looking for, but by combining the best features of the three, he eventually came up with a good first-cut under the Chevrolet brand. (Louis Chevrolet left in a huff when Durant changed his designs, but he had a fine subsequent career in racing.)

Durant created another holding company in 1912, featuring his new Chevrolet design. He quickly raised $2.5 million in private subscriptions, and in late 1913, Chevrolet introduced two models and sold 5,000 of them. Durant feverishly added capacity, and opened Chevrolet assembly plants in New York and other major cities, so customers could see how they were made. According to Durant, Chevrolet had booked 46,611 cash-secured sales by June 19. Production was still catching up, however, and completed 1915 sales were just 13,292—good, but not a blowout. Lift-off came in 1916, with 70,701 sales.^* Durant’s Chevrolet was the new darling of Wall Street, and Durant had created a plausible vehicle for making a triumphant return to GM.²⁹

But there was now a new player in the GM game, the DuPont company, which had just completed a consolidation of the country’s explosive manufacturers. Pierre Du Pont and his finance guru, John Raskob, had both made substantial investments in GM for their personal accounts and for a company investment trust. The following year, with GM’s $15 million note soon to be discharged, and the bankers’ operating authority about to end, GM’s stock went on a surprising run, suggesting to Raskob that it was in play. The action, of course, was from Durant who was building a carefully concealed takeover position.

A New York banker, who happened to be close to both Durant and Pierre Du Pont, passed on an invitation to Du Pont to join the GM board. Du Pont tentatively accepted, but at his first meeting found himself in the middle of a proxy fight between Durant and the bankers. One of the bankers finally proposed that each of the proxy combatants have the same number of directors, and that Pierre take the chairmanship and name three more directors—he picked Raskob and two other DuPont veterans.³⁰

Durant continued to increase his GM holdings, at one point offering five shares of Chevrolet for one of GM, a trade that even senior GM managers jumped at. Once he had a clear majority, Durant replaced the board with one comprising mostly GM executives. The headlines shouted, “Chevrolet Company Will Acquire Control of General Motors.” Du Pont and Raskob tendered their resignations, but Durant asked them to stay, with Du Pont retaining the chairmanship and Raskob chairing the finance committee. Durant anointed Walter Chrysler as the president, locking him in with a high-pay package and a three-year contract.³¹

Durant’s first moves were brilliant. He bought the Delco battery company, two roller bearing companies, a lighting company, a specialty steel company, and a wheel company, consolidating them all as the United Motors Company, headed by the redoubtable Alfred P. Sloan, who had founded one of the newly acquired ball bearing companies. Chevrolet, along with the existing GM car brands—Buick, Olds, Oakwood (Pontiac), Cadillac, and GM Trucks—made a formidable combination, and it got stronger when he closed an all-cash $26.7 million deal for the Fisher Body company, which was well worth it. Raskob was closely involved, effectively managing the stock syndication for United Motors.

Raskob’s assignment from Du Pont was to keep Durant from running wild. Durant basically ignored him: in 1916 all the GM businesses minted money, as did all of the in-house Durant supporters, which by that point included Raskob. But Durant was still flying without a risk barometer, eschewing budgets and financial controls, freely transferring money between companies, and keeping no one fully informed. He got away with it until the war declaration of April 1917 sent financial markets into a tailspin. Durant, who had once again built his control position with heavy margin debt, was dangerously exposed, as to a lesser extent was Raskob.

Pierre Du Pont and Raskob went back a long way, and if Du Pont criticized him, it was done very privately. Raskob fully informed the DuPont board of the troubles Durant was in, but also recommended a rescue plan. DuPont was earning rivers of money from its explosives business, especially now that the Americans were in the war, and had amassed a cash mountain nearing $100 million. Raskob proposed that DuPont—the company—make a $25 million investment in GM. GM’s dividends would help support a diversification program, and the acquisition would lock up GM as a major customer for their paints, varnishes, and other new businesses. Durant’s profligacies would be contained by putting Raskob in charge of finance. Even with Pierre Du Pont’s strong support, the proposal just squeaked through a skeptical board.

Surprisingly, Raskob remained more of a Durant enabler than a curb. Pundits had expected that the year 1919 would see a typical postwar economic crash. Instead, there was a boom—a hollow one, to be sure, for it was driven primarily by price inflation. GM’s 1919 sales were nearly half a billion dollars, with net profits of $60 million. Durant, without any objections from Raskob, was buying everything in sight. Some acquisitions, like the Fisher and the Frigidaire companies, turned out be long-term solid performers, but Raskob was once again standing idly by as Durant built another dangerous tower of debt. A measure of Raskob’s cluelessness is that in early 1920, he marveled that in just a little more than three years, Durant had increased GM’s assets eightfold—which should have been a source of alarm.

When the Fed cracked down hard on inflation in the spring of 1920, the automobile market crashed, and Raskob finally realized how exposed Durant and GM were. He brought in accounting help from DuPont, and discovered that the production divisions were losing millions of dollars a month. Durant’s records were an utter tangle. After a difficult meeting, Raskob asked him whether he owed “six or twenty-six million dollars;” Durant said he would have to get back to him. Raskob and Du Pont turned to the Morgan bankers, who regarded Durant as a gambler and liar. They paid off the Durant debt by structuring a large loan secured by his stock. Durant complained that the valuation of his stock was unrealistically low, which was true, but such were the rewards of recklessness. The board was reorganized, with a strong Morgan presence, and Durant was unceremoniously separated from any management role. Pierre Du Pont replaced Durant as president, with Raskob in charge of budgets and finances. Alfred Sloan was drafted from United Motors to act as Du Pont’s principal assistant, with a broad mission to impose order on the company.³²

The 1920–1921 recession ran roughly from midyear to midyear. GM’s 1920 full-year net profits, reflecting a strong first half, came in at $37 million, but collapsed to a loss of $39 million in 1921, a $76 million swing. Profits recovered strongly in 1922, to $51 million. In 1923, with the company stabilized, Du Pont retired from the presidency, with Sloan as his anointed successor. Sloan was cadaverously thin, hyper-intelligent, a tireless workaholic, and utterly methodical—just the solution for GM. He set about creating the famous GM organization, an adroit combination of centralization and decentralization. The company’s “center” concentrated on broad policy making, like defining the markets for its product divisions, combined with tight budgeting and detailed statistical and financial controls. There were central research and engineering laboratories, but the division presidents had primary responsibility for product and design decisions. Much of it is astringently laid out, with generous samplings of his policy memoranda, in Sloan’s My Years with General Motors, which is still holy scripture at American business schools.

My Years may underplay the enormous contribution made by good manufacturing practice, and particularly the use of common parts across several product lines. Sloan, for example, pushed hard to have Pontiacs manufactured in Chevrolet factories with mostly Chevrolet parts. As he said, the move would “give us everything for which we have been waiting, namely, the lowest-priced 6-cylinder car that is possible constructed with Chevrolet parts.” Walter Chrysler later “hard-wired” the system by consolidating engineering into one central staff to maximize parts-sharing. Production machines were also designed with cross-platform usage in mind, by simplifying jig and fixture changes rather than building a new machine.³³

Under Sloan’s steady hand, GM’s sales hit the $1.5 billion mark in 1928, with $272 million in net profits, $1.2 billion in assets, a minuscule $2.2 million of debt, and a large cash trove. Its fortunate shareholders received dividends of $174 million, or 12 percent of sales, leaving plenty of cash to feed its investment requirements. It was one of just three industrial companies with that level of revenues—the others were US Steel and Standard Oil of New Jersey—but GM had more than double the profits of the other two.³⁴ The Ford revenue stream, in 1929, his best year to that point, was just over half of GM’s, and GM’s workers were better paid than Ford’s.