A New Period of Expansion— 1Q26 through 1929
The rapid growth in our sales through 1925 indicated the need for additional investment in plant and equipment, and in 1926 we began a new period of expansion which extended through 1929. This move was quickly justified, for in 1926 we sold a total of 1,235,000 cars and trucks, an increase of almost 50 per cent over the previous peak volume of 1925. Now, however, unlike the earlier periods, the needed funds were provided out of earnings, provisions for depreciation, and newly issued stock. Altogether, in these four years our investment in non-consolidated subsidiaries and miscellaneous units increased by $121 million and we added some $325 million to our investment in plant and equipment, including the plant and equipment acquired through the purchase of Fisher Body Corporation in 1926.
This program of expansion enlarged our facilities in several directions. We expanded our car-making capacity, especially for the Chevrolet Division, whose unit sales almost doubled in these four years, and for the new Pontiac. We expanded the capacity of our accessory-manufacturing divisions because of the growth in car assembly capacity. We made more components. We expanded our merchandising operations, including overseas assembly plants and warehouses, and so brought our products closer to the ultimate consumers. We had acquired a small manufacturing base, Vauxhall, in England in 1925, and we acquired an 80 per cent interest in a larger one, Adam Opel, in Germany in 1929. And we expanded a number of other activities such as the Frigidaire Division, and made investments in the aviation and diesel fields.
In sum, we more than doubled our gross plant during the period January 1, 1926, to December 31, 1929-from $287 million to $610 million—and our investment in non-consolidated subsidiaries and miscellaneous units rose almost two and one-half times, from $86 million to $207 million. Total assets were increased from $704 million to $1.3 billion. Our unit car and truck sales went from 1.2 million in 1926 to 1.9 million in 1929, while total dollar sales went from $1.1 billion to $1.5 billion.
Thanks to the financial and operating controls, we were able to finance virtually this entire expansion program out of earnings and depreciation and still pay out almost two thirds of net earnings to the shareholders. The only outside financing in this period was an issue of $25 million of 7 per cent preferred stock in 1927. The rest came from retained earnings. In 1926, however, the balance of the assets of Fisher Body Corporation was acquired for 664,720 shares of common stock, of which 638,401 shares were newly issued. Net income rose from $186 million in 1926 to $276 million in 1928— a record high—and $248 million in 1929. All told, we earned $946 million in the four years 1926 through 1929, of which $596 million (63 per cent) was paid to shareholders and the balance of $350 million reinvested in the corporation. Provision for depreciation totaled $115 million in this period.
Taking these two stages together, that is, 1923 through 1925 and 1926 through 1929, this is the record, using the year 1922 for comparison:
General Motors car and truck sales in the United States and Canada quadrupled, from 457,000 in 1922 to 1,899,000 in 1929, and dollar sales more than tripled, from $464 million to $1504 million. Instead of the runaway inventories of the preceding period, we achieved this phenomenal growth in production and sales volume with only a 60 per cent rise in inventories. (Net working capital rose from $125 million on December 31, 1922, to $248 million at the end of 1929, including cash and short-term securities, which rose from $28 million to $127 million.) Gross plant increased from $255 million to $610 million, and capital employed more than doubled, from $405 million to $954 million. Over the seven-year stretch we earned a total of $1186 million, of which $730 million (62 per cent) was paid out to shareholders, and $456 million was retained in the business.
Depression and Recovery—the 1930s
The early 1930s began with the depression, followed by stabilization and expansion in the middle of the decade. It ended with the industry under the influence of the preparation for World War II. With the big depression—from 1930 to 1934—there was contraction in General Motors. But this time, unlike 1920-21, and despite its greater severity, the contraction was orderly. Of necessity, dividend payments were lower in some of these years than in others, but in no year did the corporation fail to earn a profit or pay a dividend. In the years 1931 and 1932 the corporation paid shareholders more than its earnings, which reduced some of the capital accumulated in more prosperous periods.
For the 1930s as a whole, dividend payments totaled 91 per cent of net income, for we found that we had more funds than we could profitably invest under the generally depressed economic conditions of this period.
The most difficult years, of course, were the three following the stock-market crash. I have mentioned earlier that between 1929 and 1932 car and truck production in the United States and Canada fell 75 per cent, from 5.6 million units to only 1.4 million, and that in dollar sales the decline in the industry was even more precipitous—from $5.1 billion at retail to $1.1 billion, or 78 per cent. And yet General Motors was able to earn $248 million in this three year period and to pay shareholders a total of $343 million— $95 million more than the corporation earned. Despite the fact that dividends exceeded earnings, net working capital fell only $26 million, and the corporations holdings of cash and short-term securities actually increased by $45 million, or by 36 per cent, a case you might say of pure liquidation.
What accounts for this exceptional record in a period in which many durable-goods producers failed or came close to bankruptcy? It would be unfair to claim any particular prescience on our part; no more than anyone else did we see the depression coming. I think the story I have told shows that we had simply learned how to react quickly. This was perhaps the greatest payoff of our system of financial and operating controls.
As a result of the speed with which we acted when sales began to fall, we were able to reduce our inventories in line with the sales decline and to control costs so that operations remained profitable. Our sales declined 71 per cent, from $1504 million in 1929 to only $432 million in 1932, but our inventories were reduced 60 per cent, or by $113 million. With this decline of more than $1 billion in sales, net income fell $248 million but we managed to earn $165,000 in 1932 while paying out $63 million in dividends.
In the early thirties, as noted above, we did not feel the need to spend very much for new plant and equipment. In the five years 1930-34, such expenditures totaled $81 million; in 1932 we spent only $5 million. Moreover, during these years we retired some of our surplus plant and equipment. In later years as the plant was needed, we restored some of it to the active account.
By 1935 sales from our United States and Canadian plants had recovered to more than 1.5 million cars and trucks—about 80 per cent of the 1929 peak and a nearly threefold increase in three years. The next year our United States and Canadian car and truck sales approached the 1929 mark and in 1937 they set a record of 1,928,000 units. Net income, however, was $196 million in 1937, which was not up to the $248 million earned in 1929 or the $238 million in 1936. Earnings in 1937 were adversely affected by a six-week strike early in the year and by increasing costs. For example, the average straight-time wage rate for the corporation's U.S. hourly rate employees in 1937 was 20 per cent higher than in 1936 and 28 per cent above the 1929 rate. But since our investment needs were relatively slight, dividend payments totaled $202 million in 1936—the highest on record—and $170 million in 1937; for the two years, dividends were 85 per cent of net income.
This rapid recovery in sales and output meant that our production facilities were again under strain. As noted above, we began to reactivate that part of the idle plant that had not been made obsolete by product or technological change. And we began to need new facilities, too. As output grew rapidly during 1935, we undertook a comprehensive survey of the corporation's manufacturing properties at home and abroad to assess our productive capacity in the light of what appeared to be the future sales possibilities. In the annual report for 1935 I wrote:
The rapid evolution of processing which is constantly going on in the automotive industry, due to the yearly turnover of models, produces a very rapid obsolescence of productive facilities. Naturally, specific tools and machine equipment, when changed, are provided, so far as volume is concerned, in harmony with the sales outlook of the following year. For these reasons, during the years of the depression, the actual capacity of the Corporation's plants for the production of current products had been reduced. In addition, further limitations have been placed on capacity due to the increased number of models apparently necessary to provide the essential coverage of the various markets in which the Corporation is competing. Increased complications of manufacture incident to changed style and added technical features have also had an important influence.
Equally important is the fact that, while the number of hours worked per week by productive workers of industry has been going through a process of reduction, through evolution, the depression period brought about a further demand for the reduction of weekly operating schedules for the workers . . . With the reduction of hours, irrespective of circumstances that might justify such hours, the impossibility of maintaining the annual averages of previous years has tended to reduce the capacity of plant and equipment, as compared with previous years.
The corporation, therefore, in 1935 authorized expenditures to reorganize, readjust, and expand the manufacturing facilities. They eventually exceeded $50 million.
Production and sales continued to expand rapidly, and so we made another survey of General Motors' operating facilities in relation to current and expected demand for its products. We gave consideration to three special factors affecting capacity: the trend toward a shorter work week, the probability of a reduction in operating efficiency, and the likelihood of some interruption of production due to labor difficulties. The latter two expectations proved correct for 1937.
Because of these factors, capacity of the Chevrolet Division was inadequate. The division had been unable to meet the demand for its products during each of the preceding three years. (In both 1935 and 1936 Chevrolet car and truck production topped one million.) Several other divisions had suffered from inadequate capacity, although to a lesser degree, and the development of new products in the General Engine Group and Household Appliance Group had placed these operations in a position where expansion was essential to exploit the new products properly. The capacity shortages, moreover, were not due to bottlenecks in localized areas; the corporation's productive facilities were very well balanced in that respect. But this meant that any fundamental increase in capacity would require expenditures on a broad front. We authorized a program, therefore, calling for an expenditure of more than $60 million for new capacity, in addition to substantial expenditures for modernization and replacement. This expansion program was completed in 1938.
The economy turned sharply downward during the latter part of 1937 and the first half of 1938, and then reversed itself to move upward at a rather rapid rate. Consumer sales of automobiles in the United States generally followed this economic trend. The economy paused during the first half of 1939 and then swung upward in the last half of the year, accelerated by the influence of the outbreak of war in Europe.
Over the decade of the 1930s as a whole, the corporation spent $346 million for new plant and equipment. This was a large capital expenditure in view of the generally liquidationist character of the 1930s, but quite small in comparison with our outlays during the preceding decade. Total capital expenditures, however, were $46 million less than our provision for depreciation. We were able to pay shareholders $1191 million in dividends, 91 per cent of our earnings, between 1930 and 1939, as compared with $797 million in the 1920s. This was done without reducing the corporation's liquidity. On the contrary, net working capital rose from $248 million on January 1, 1930, to $434 million on December 31, 1939. Cash and short-term securities went from $127 million to $290 million. And capital employed rose slightly, from $954 million to $1066 million.
World War II—1940 through 1945
Very large demands were made on General Motors during the next six years, and the corporation, I think I can say, like most of American industry, responded with distinction. When World War II began, General Motors rapidly converted itself from the nation's largest manufacturer of automobiles to the nation's largest producer of war materials. And when the war ended, General Motors rapidly reconverted to peacetime production, a capability, in both instances, that derived from our scheme of management and a great deal of planning.
Car and truck production, however, actually advanced 32 per cent during 1940, as the defense program stimulated purchasing power in the economy at large. General Motors' defense production totaled only $75 million during the year (compared to $1.7 billion of commercial sales), but orders mounted rapidly toward the end of the year and by the end of January 1941 defense contracts with our own and allied governments totaled $683 million. In 1941 defense production came to over $400 million (compared to commercial sales of $2 billion), and by the time of Pearl Harbor defense products were being delivered at the rate of $2 million a day.
Once the United States became a belligerent, of course, all our efforts were given to converting to volume production for all-out war. Total defense production for 1942 came to $1.9 billion, with $352 million of commercial production. By 1943 we had our engineering and production capabilities in full swing and defense production rose to $3.7 billion. In 1944 it rose slightly to a war peak of $3.8 billion; physical production was up even more, that is, by 15 per cent as against 3 per cent in dollar volume, since we reduced our prices as production expanded. After V-E Day, of course, partial reconversion began as war contracts were canceled, and full reconversion got under way after V-J Day. During 1945, therefore, war production dropped off to $2.5 billion and commercial production rose slightly, to $579 million. All told, General Motors produced nearly $12.5 billion of defense products. In producing this immense flow of war material, we made all possible use of our existing facilities, converting and in many instances expanding them, at a cost of over $130 million in the years 1940-44. We also operated some $650 million of plants owned by government agencies.
The war years were not years of high earnings and dividends. Although our sales volume expanded from $1377 million in 1939 to $4262 million in 1944, earnings did not grow. At the beginning of the war, and well before the profit-renegotiation law was passed, we adopted the policy of limiting our profit margin before taxes, on military business, to one half of that realized on civilian business in 1941, when the conditions of a competitive market still prevailed. Wherever possible, we took war-production contracts on a fixed price basis, and we made it a practice to reduce prices as we were able to cut costs. Between 1940 and 1945, therefore, we earned a total of $1070 million on a sales volume of $17,669 million. Of these earnings we paid shareholders a total of $818 million in dividends. Our dividend payments, which had gone to $3.75 per share of the then outstanding $10 par value common stock in 1940 and 1941, were down to $2 per share in 1942 and 1943 and $3 per share in 1944 and 1945.
Although shareholders received 77 per cent of net income during the years 1940-44, our liquidity increased very substantially, owing to the fact that war shortages and priorities made it impossible to replace equipment on a normal schedule. Our capital expenditures of $222 million were less than our provision for depreciation in these five years. Between January 1, 1940, and December 31, 1944, therefore, we increased our net working capital from $434 million to $903 million, and our cash and short-term securities rose from $290 million to $597 million. In 1945 we increased our capital expenditures to a record $114 million; our net working capital declined to $775 million and our cash and short-term securities to $378 million.
The old epochs in our financial history, which reflected both the business cycle and our investment decisions, sometimes separately, more often together, came to an end, and we moved into the great cycle of expansion which we have known since World
War II. A few things should be noted before proceeding.
The strategic question in industrial finance, assuming you have something to work with in the way of a going business, is how to optimize its elements. The latitude for opinion, or subjective judgment, here is wide. But I think it would be generally agreed that, in principle, debt enhances the return on the stockholders' investment, while at the same time increasing the risk involved. It would be agreed, I think, that both Mr. Durant and Mr. Raskob had a strong desire to spend and had little inhibition about debt. Mr. Durant carried this attitude far enough into practice in General Motors to create a situation between 1918 and 1920 that would more than serve the expansion needs of the corporation for the following six years. Even so, the expansion of 1918-20 might have worked without crisis if it had been assisted by management and financial controls. In his personal affairs it was obviously debt that brought disaster to Mr. Durant in the economic slump of 1920. So much for that.
It is equally evident that from 1921 to 1946 the corporation avoided long-term debt. I myself had feelings against debt, perhaps because of what I had seen of it in my experience. And yet I cannot really say that we had an anti-debt policy in that period. The facts show that we were in general able to do without it. We needed little expenditure up to 1926; and from 1926 through 1929 it was not difficult to expand within the framework of earnings while paying dividends at what we considered a reasonable rate. In other words, we paid off and grew, without debt, except for bank loans during short periods in the 1920s. The 1930s being a time of contraction, the question of debt did not arise. During the war years we arranged for a bank credit of $1 billion, through the government, to finance receivables and inventories, but borrowings under these arrangements were limited. The maximum borrowings were $100 million and were outstanding for less than a year.
My Years With General Motors Page 25
