Billy, Alfred, and General Motors

William PELFREY

• Publisher: AMACOM
• Year: 2006
• ISBN:
  9780814429617
• Topic: Business
• Subtopic: Automobile Industry
• Index: Business

This book is the tale not just of the two extraordinary men of its title but also of the formative decades of twentieth-century America, through two world wars and changes in business, industry, politics, and culture.

You couldn't find two more different men. Billy Durant was the consummate salesman, a brilliant wheeler-dealer with grand plans, unflappable energy, and a fondness for the high life. Alfred Sloan was the intellectual, an expert in business strategy and management, master of all things organizational. Together, this odd couple built perhaps the most successful enterprise in U.S. history, General Motors, and with it an industry that has come to define modern life throughout the world.

In Billy, Alfred, and General Motors, business leaders and history buffs alike will discover:

• timeless lessons,
• cautionary tales,
• and motivational inspiration.

The book includes vivid, warts-and-all portraits of the legends of the golden age of the automobile, from Henry Ford, Ransom Olds, and Charles Nash to the brilliant but uncredited David Dunbar Buick and Cadillac founder Henry Leland. The impact of Durant and Sloan on their contemporaries and their industry is matched only by the powerful legacy of their improbable and incredible partnership.

Characters, events, and context -- all are brought skillfully and passionately to life in this meticulously researched and supremely readable book.

CHAPTER ONE
1920: The Fateful Year

It was the year of decision for Alfred Pritchard Sloan, Jr., the gangly, introverted executive with a Brooklyn accent who was on his way to becoming one of the greatest business legends of all time. Within the next three years, Alfred would be credited with the salvation and turnaround of General Motors. From there, he would go on to be hailed as the father of the modern corporation, the master of consumer mass marketing, and the most effective chief executive officer ever.

All of that lay far ahead in the unknown future that fateful summer of 1920, when Sloan had had enough of his former mentor Billy Durant and was contemplating quitting the company that was to become the definition of his own life.

On the surface, things could not have been going better for Alfred that summer. Wealthy beyond his own dreams, he was a General Motors vice president and a member of its board of directors. General Motors itself was the company everyone was watching on Wall Street. Sloan was also universally regarded as one of the most astute and capable up-and-coming executives in the entire automobile industry, which had become a crucial force in America’s economy and seemed poised for even more unprecedented growth.

The General Motors annual report to stockholders for 1920 included a succinct but bullish assessment of the automobile’s growth and its importance:

Records show that the first garage for the storage and repair of motor cars was opened in Boston, Massachusetts, in the spring of 1899. In that year the investment in the industry was $5,768,000, with a production of 3,700 cars, while in 1919 the investment was estimated at $1,800,000,000 and car production at 1,974,300, a three hundred fold growth in capital during the twenty years and a five hundred fold increase in cars manufactured.

The report went on to note that employment in the industry had grown from a little over 13,000 people in 1904 (the year General Motors’ founder Billy Durant turned his full attention to the automobile) to more than 651,000 in 1919. That was a 5,000 percent increase. During the same period, annual wages in the industry had grown from less than $8.5 million to more than $2 billion. Automotive production ranked number one among the nation’s top-ten industries. Men’s and women’s clothing was a distant second, followed by coal, hay (yes, hay!), construction, mining for metals, wheat, cotton, pig iron, and petroleum.

In short, the automobile had become the place to be, and Sloan was close to the driver’s seat.

Yet Alfred Sloan was more uncertain about his future than he had ever been. Despite his own success and the sunny horizons that appeared to be ahead, he saw growing problems where others seemingly failed to see anything beyond a constant flow of black ink and revenue growth. While he felt a moral obligation to stick with and help the enterprise that had given him his greatest opportunity, he also believed the enterprise was threatened by the leadership failings of its visionary founder, who also happened to be the man who had hired him.

In Sloan’s mind, high-flying Billy Durant had fallen victim to the news media’s glowing headlines and his own boundless dreams (as would dozens of other founders of even higher-flying start-ups many years later). Sloan was convinced that too much of General Motors’ growth had been financed through the issuance of stock and Billy’s personal charm, rather than through cash and hard assets. He was also convinced that the dozens of separate business units within the company were out of control. He saw duplication and lack of accountability in all product lines, staffs, and plants; and he blamed it on the lack of clear and firm policies from the central office.

Although Sloan was aware that fellow executives and employees viewed Billy as a genius, he was certain that none of them really knew just how each business unit within General Motors fit with the others, let alone how much each was spending and borrowing or how much total debt was on the books. Each of the company’s five largest automobile divisions (Buick, Oldsmobile, Cadillac, Chevrolet, and Oakland) would have been a fully integrated manufacturer and marketer in its own right if split off from General Motors. Yet, rather than leverage each unit’s strengths to create distinctive brands and enhance the marketing and manufacturing efficiency and effectiveness of the entire enterprise, Durant was letting each division run largely on its own, with internal competition ignored if not encouraged.

What was Alfred to do? Voice his concerns to the founder and risk losing his influence and ability to affect change from within the company? Quit? Or bide his time and hope that if the crisis did come, the company would be able to survive long enough for a new management to right the course?

His answer would make him a legend and forever change the structure and direction of American business, for better or worse.

AMERICA AND THE GENERAL ON A ROLL

While Alfred gnashed his teeth, Billy Durant and the rest of America remained confident in what that year’s Republican Party presidential candidate, Warren G. Harding, called the return to “normalcy,” the word he invented accidentally when stumbling over normality. In his famous campaign stump speech, Harding nailed the mood of the country, proclaiming, “America’s need is not heroics but healing, not nostrums but normalcy, not revolution but restoration . . . not surgery but serenity.”

There was little outcry when the Ku Klux Klan launched an unprecedented (and successful) nationwide recruitment drive the year Harding was elected. Nor was there much concern that the mercurial Henry Ford, universally regarded as the most innovative and savvy industrialist of the day, was using his own wholly owned weekly newspaper, the Dearborn Independent, to spread his belief that all the nation’s ills were caused by Jews.

Progressivism on all fronts—political, social, and economic—was a far more resonant theme with most Americans than were the Klan and Ford’s hatred and paranoia. For the first time ever, more people in the United States were living in cities than on farms. Despite the passage of the Eighteenth Amendment to the U.S. Constitution the previous year, banning the sale and drinking of alcohol, women’s skirts were getting shorter and bootleg liquor was ubiquitous. A new term, “the Jazz Age,” was in vogue to describe the hedonistic tastes of a generation determined to put memories of war and doing-without behind it. Women had just been given the right to vote, and the sky had failed to fall as a result.

The faults that Alfred Sloan saw in Billy Durant’s loose management style and his lack of consistent policies and controls were both unseen and irrelevant to the country in general and General Motors’ investors in particular. Thanks to the unprecedented mobilization required by America’s entry into World War I, the country’s annual investment in new manufacturing plants and equipment had soared from $600 million in 1915 to $2.5 billion in 1918. At war’s end, both business and consumers were eager to refocus production on consumer goods.

The automobile industry, which had diverted only a fraction of its production to the war effort, was especially eager to meet Americans’ apparently insatiable demand for the machine that gave mobility to their daily lives and their dreams. Detroit, Michigan, where General Motors was building a new headquarters that was to be the largest office building in the world, was the fastest-growing city in the nation. Its population had more than doubled in ten years, from under 467,000 people in 1910 to nearly 994,000 people in 1920. More significant for the future (but little noted at the time), the percentage of Detroit’s African-American population nearly quadrupled during that period, growing from 1.2 percent in 1910 to 4 percent in 1920. ¹

There seemed to be even more reason for confidence and optimism in General Motors’ own performance. Durant proudly referred to the company as “my baby,” and its numbers seemed to justify the pride. The General’s fixed assets in plants and equipment had grown from $19 million in 1912 to $179 million in 1919. Total car and truck sales for 1919 were nearly double the previous year’s. More impressive, profits for that same twelve-month period were up more than 500 percent. And things were looking even better for the current year, with car and truck sales up 45 percent over the first quarter of 1919. ²

Although General Motors was still a distant second to Ford Motor Company, which had a market share of 42 percent compared to the General’s 11 percent, Durant was widely seen as the only competitor with even a chance of catching Henry Ford. On Wall Street even more than in Detroit, Billy and his General Motors were the names to watch in the automotive race. During the years 1914–1920, the market value of the General’s stock had more than quadrupled.

Most remarkable of all was an increase in employment from 49,118 people at the end of 1918 to 85,980 at the end of 1919. The vast majority of these new employees were migrating from the rural South of the United States or Europe to the General’s key plants in Michigan. Billy explained in his letter to stockholders that the company had initiated an unprecedented program of building new housing to help the affected local communities as well as the employees and their families. A grand total of $2.5 million was allocated for new employee housing in 1919, making it the company’s fifth-largest capital expenditure. Arthur Pound, son-in-law of an early General Motors executive, described the motive in the company’s first and only officially sanctioned history, The Turning Wheel, a book completely sympathetic to the company’s view on all events and issues, published at the height of the Great Depression:

A new spirit of brotherhood was abroad in the land, and General Motors was one of the first to respond to it. Owing to the uncertainties attendant upon the change from war activities to peacetime pursuits, the Corporation considered it necessary to have the basic needs and living standards of its employees studied, to the end that wage rates would be fair and living conditions acceptable to thousands of families likely to move into cities where General Motors was rapidly expanding its operations. Accordingly, the Executive Committee, consisting of Messrs Durant, Haskell, and Chrysler [Walter P. Chrysler, a General Motors vice president at the time], was directed to investigate industrial conditions affecting the plants of the Corporation. ³

That same year, 1919, saw the birth of a company-matched employee investment plan covering all units of General Motors: a precursor of today’s 401(k) plans, with employees investing up to 20 percent of their wages or salary and the company matching every penny invested by the employee.

To cap it all off, General Motors had also made several key acquisitions in 1919, guided by Billy’s vision of even more uninterrupted growth and consolidation in the industry. These purchases included controlling interest in a company called Fisher Body, which would become crucial to the corporation’s future production volume and efficiency, and complete ownership of Dayton, Ohio–based Frigidaire, which had originally been called Guardian Frigerator. Intrigued with the latter company’s attempt to develop an electric refrigerator, Billy had purchased it with $100,000 of his own money, renamed it Frigidaire, and sold it to General Motors, his baby, for the same amount. Under the General’s umbrella, Frigidaire dominated the growing refrigerator business within a year of the purchase and would soon also dominate the air-conditioning business.

Billy’s baby had also established a new business unit in 1919 called General Motors Acceptance Corporation (GMAC), whose initial purpose was to “assist dealers in financing their purchase of General Motors’ products, and also to finance, to some extent, retail sales.” GMAC would soon revolutionize the way Americans bought and paid for all big-ticket purchases with what came to be known as installment buying, the precursor of revolving credit and today’s credit card.

Billy concluded his letter to stockholders with a typically succinct and optimistic assessment of the future, noting that the first quarter of 1920 had also been a good one:

There is no diminution in the demand for your product, the number of passenger cars, trucks, and tractors sold for the first quarter of 1920 to March 31 being 119,779, as compared with 82,456 for the corresponding period of the previous year, an increase of 45.2 percent. The net profits for this period, before deducting federal taxes, are estimated upwards of $26,500,000.00. Your directors take pleasure in acknowledging their appreciation of the loyalty and efficiency of your officers and employees.

Why, then, should Alfred Sloan worry?

LOSING A MAN NAMED CHRYSLER

Sloan’s doubts about Durant’s leadership had begun surfacing in the spring of 1919, when General Motors was gaining momentum on what appeared to be an unstoppable roll. The catalyst was the abrupt resignation of one of Durant’s most able lieutenants and Sloan’s best friend, Walter P. Chrysler.

Chrysler had been brought to General Motors in 1911 by then-president Charles Nash, who had been hired by Durant as a blacksmith in his carriage factory in 1890, long before anyone had foreseen a General Motors. By 1916, Chrysler was in charge of all General Motors’ manufacturing and was the highest-paid man in the entire auto industry, with annual salary and bonus exceeding $600,000. By 1919, Chrysler and Sloan were widely viewed as the two most capable of all the “new” generation of automobile executives born after the Civil War.

In Chrysler’s autobiography, Life of an American Workman, published in 1937 and cowritten with Boyden Sparkes (the same ghostwriter Sloan was to use for his first memoir four years later), there is great warmth and respect for Durant as a person:

I cannot hope to find words to express the charm of the man. He has the most winning personality of anyone I’ve ever known. He could coax a bird right down out of a tree, I think. I remember the first time my wife and I entered his home. The walls were hung with magnificent tapestries. I had never experienced luxury to compare with Billy Durant’s house. In five minutes he had me feeling as if I owned the place. ⁴

Yet there is also disdain for Billy’s leadership style....

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgments
• A Note on Sources and Permissions
• Introduction: What They Wrought
• 1 1920: The Fateful Year
• 2 A Precocious Dropout Forges His First Empire
• 3 A Quiet Student Becomes a First-Class Supplier
• 4 A New Machine Creates a New Order
• 5 Restless in Flint, Antsy in New York
• 6 The Dropout’s Next Big Thing
• 7 Birth of a General
• 8 Shooting for the Stars
• 9 Down but Hardly Out
• 10 Beating the Odds with Chevrolet
• 11 A Boardroom Coup Like None Before or Since
• 12 The Founder’s Grip Slips Again
• 13 A Last Good-Bye to the Baby
• 14 Alfred Pulls the Ranks Together
• 15 From Transformation to Domination
• Epilogue: What’s Good for General Motors . . .
• Chronology of Key Events
• Notes
• Selected Bibliography
• Index
• About the Author