My Years With General Motors

by Alfred P. Sloan Jr.

  When we came to the postwar period, however, despite our liquidity, we were to meet all the financial questions again, including the necessity of providing for large capital expenditures and obtaining additional capital funds through debt as well as stock issues.

  The Postwar Era—1946 to 1963

  Over the seventeen years 1946 to 1963, our plant expenditures came to more than $7 billion. This amount was nearly seven times the value of the plant at the start of the period. Since increased costs, due to inflation, of equipment and construction accounted for a sizable portion of the postwar expenditures, this ratio does not indicate the increase in physical volume. Net working capital during the seventeen years increased $2753 million (from $775 million to $3528 million). Of total plant expenditures, $4.3 billion, or 61 per cent, was covered by provision for depreciation. The rest necessarily had to come from either reinvested earnings or new capital, or some combination of both. During these seventeen years, General Motors earned about $12.5 billion, and retained over $4.5 billion, or about 36 per cent—a larger proportion of earnings than had been our practice in the past, owing to the needs of the business. Even so, to meet the planned expansion we had to go to the capital markets—for the first time, with the minor exceptions noted, since the early twenties—for a total of $846.5 million during the seventeen-year period, of which by the end of 1962 we had made provision for repayment of $225 million. In addition, about $350 million of common stock was issued, principally for purposes of employee programs during the period 1955 through 1962. Hence between reinvestment of earnings and the sale of new securities, the capital employed in the business in this period rose from $1351 million to $6851 million.

  We began our broad planning for this postwar growth long before the war ended. I presented a concept of a postwar program in 1943 in a speech called "The Challenge," which I made to the National Association of Manufacturers. I argued in this speech that, in the postwar period, industry would meet an enormous pent-up demand for its products and we should boldly plan on tin's assumption. In doing so I argued against that body of opinion among economists which prophesied economic doom after the war, and, I might add, it was for me not only a matter of argument but also of laying the money on the line. In other words, we recognized that an urgent need would exist, when the war ended, to convert plants from war to peace production as quickly as possible in order to satisfy consumer demand, provide peacetime jobs, and fulfill our obligations to our shareholders, and that all this represented opportunity. Accordingly we had our staff begin to make long-term studies of demand, projecting our position for five to ten years ahead on the basis of the over-all economic outlook, probable consumer demand, and our productive and financial capacity to meet the demand.

  On the basis of these studies I announced a postwar program calling for the expenditure of $500 million. This was considered a tremendous sum, and the announcement caused considerable comment. It was considerably more than the corporation had spent on new facilities in either the 1920s or 1930s, and was three fourths larger than the value of our net plant at the end of 1944.

  The program, as our 1944 annual report summarized it, involved:

  . . the rearrangement and reorganization of plants, machines and other facilities to be used in producing the cars, trucks and other items that make up General Motors' peacetime products. It calls for the replacement of equipment sold to others during the war. It provides for the modernization of equipment and for replacement of worn tools of all kinds that have been subjected to severe wartime usage. It includes expansion of facilities to meet postwar needs, all in proper balance between short term and long term prospects . . .

  So, two years before the war ended, we in General Motors were preparing for the day when we could return to mass production of cars and trucks. Detailed expansion plans were developed for each division, and we also made plans to renew peacetime relationships with the thousands of suppliers and subcontractors with whom General Motors had done business before the war, many of whom were associated with us in war production. Wherever practicable, for example, we advised our prewar suppliers that they could plan on orders for certain peacetime goods as soon as war conditions permitted. We thereby made it possible for them to make their own postwar plans and reduce the time they needed for reconversion.

  At the time the postwar plan was formulated, we expected that General Motors would be able to finance the full costs out of earnings and depreciation and other reserves. As we converted facilities to war production in 1941, 1942, and 1943, for example, we had set aside reserves of $76 million to cover what we estimated would be the cost of reconverting them back to commercial output. And we had been accumulating very substantial liquid assets against the day when we could again buy new plant and equipment. Thus, at the end of 1944, we had a net working capital of $903 million, including cash and short-term securities totaling $597 million.

  Our wartime estimate of the cost of the postwar expansion program was remarkably accurate, considering the degree of inflation that occurred in the cost of construction and new capital goods. Reconversion costs were $83 million, as compared with our reserve of $76 million. And total plant expenditures from 1945 through 1947, when the first big expansion program was substantially completed, came to $588 million, as compared with our estimate of $500 million.

  Our estimates of our postwar working-capital needs, however, were on the low side. These needs were increased greatly, not only by the expanded volume of business we were to do in the postwar period, but also by the tremendous inflation which occurred. In the prewar period, 1935-39, our year-end net working capital averaged $366 million and our inventories $227 million. For the five postwar years, 1946-50, net working capital had increased to an average of $1099 million and inventories to $728 million.

  By the end of 1945 most of the corporation's plants were closed by the United Automobile Workers strike, and our cash and investment in short-term securities had dropped $219 million, to $378 million. By the time the strike was settled, on March 13, 1946, liquidity was even lower. Labor troubles continued in some of the plants for another sixty days, and strikes in other industries created shortages of materials which held back the rise in production after our own labor troubles had been solved. As a result, the corporation was unable to earn a satisfactory profit during the initial reconversion period, despite the abnormally high level of demand. In 1946 we earned only $87.5 million, which was $21.4 million less than our dividend payments.

  Even before the strike had been settled, the corporation had determined that additional capital might be needed and had requested a study and report on possible financing. By mid1946 arrangements were completed to borrow $125 million on 2/2 per cent twenty and thirty-year notes from a group of eight insurance companies. Other alternatives had been explored, but the private placement of promissory notes with these institutional investors who had a surplus of long-term funds seemed the most expeditious and the cheapest method of financing. The private-placement negotiations were settled quickly and did not entail the waiting period and filing of documents necessary under a public offering.

  The proceeds of this borrowing were received on August 1, 1946, and gave the corporation a good deal more flexibility in meeting its increased capital needs. But the Financial Policy Committee felt that the corporation needed still more capital of a permanent nature, and on August 5, 1946, it authorized Mr. Bradley to negotiate with underwriters "with a view to determining the basis upon which it might be possible to sell a new issue of $125,000,000 preferred stock." The committee had considered other methods of obtaining permanent capital. One factor in our decision was that we could market a preferred-stock issue which we could retire at will, under specified conditions, but which did not have any mandatory provisions requiring retirement by a certain date. As things worked out, however, the public market would not absorb as much preferred stock as we had hoped, except under terms we thought to be too stringent. As a result the issue had to be cut down to $100 m
illion, that is, one million shares of $3.75 preferred offered at par. The stock was offered on November 27, 1946, and yielded the corporation $98 million after underwriting discounts and commissions. This was the first public sale of securities by the corporation in almost twenty years and was a very successful offering.

  Some measure of the drain on our resources during the reconversion period is provided by the fact that our net working capital declined $7 million during 1946, and our cash and short-term securities dropped $42 million, even though we raised $223 million of new capital during the year. Had we not gone to the capital market, our net working capital would have dropped by $230 million during 1946.

  With these new funds, and with the expansion program that had already been prepared, the corporation was ready to move. By 1948 unit sales from our United States and Canadian plants had risen to 2,146,000 cars and trucks—or almost equal to the prewar high established in 1941—and net income rose to $440 million, up from $288 million in 1947 and only $88 million in 1946. Unit sales established an all-time high in 1949, although general business declined, and our profit margin improved, too, so that net income went up to $656 million. We also were able to raise our inventory turnover ratio very substantially: Inventories declined $65 million on a $1 billion rise in sales. And because our expansion program had been completed, our plant expenditures were relatively modest —$273 million in 1948 and 1949, only $64 million more than our provision for depreciation. Our capital position improved so rapidly, in fact, that we decided to prepay the $i25-million note issue in December of 1949, thereby eliminating our debt. We were also able to increase our liquidity and to pay substantial dividends.

  Our next major expansion was an outgrowth of the Korean War. We had learned from experience that wars create a backlog of unsatisfied demand. After a good deal of thought we concluded that the long-run potential of the car market required a large expansion of our productive facilities and justified spending corporation money on new plant facilities for defense production that ultimately could be used for commercial operations. I outlined my views in a letter dated November 17, 1950, to the members of the Financial Policy Committee, with the following recommendations:

  1. We should make a survey, which is under way, to determine the quantitative measurements of the trend of demand over the next ten years, with particular reference to that after five years. Consideration should be given to such peaks as may develop due to deferred demand resulting from the curtailment of production incidental to the rearmament program.

  2. We should develop a broad outline of a master plan to meet such prospective increase in production, if any, as our judgment may determine. This should include ways and means to best carry out such expansion. It should embrace the various categories of production involved in the Corporation's present scheme of things—each category following its own potential. This broad outline should be [filled] in as more facts become available . . .

  3. We shall be called upon to provide facilities for the rearmament program. Such needs should be integrated with the proposed master plans in broad outline so that we shall be able to move more rapidly and efficiently when, and if, the circumstances justify. We should use corporation funds for such new plants needed for armament if that gives us better control over same from the long term position in relation to the master plan. Accelerated depreciation and high taxes make the use of corporation funds all the more feasible. We should avoid conversion. The policy should be, expansion.

  And the policy was expansion indeed. In the four years 1950 through 1953 we spent $1279 million on new plant and equipment —about one third of it for defense facilities. During this period, however, our earnings were restricted by the excess-profits tax and by the fact that the margin on defense business under our policy was lower than on commercial sales. All told, we were able to reinvest $871 million in the business after paying dividends of $1.6 billion, or 65 per cent of net income. These retained earnings, together with $563 million in depreciation accruals, were only $155 million more than plant expenditures of $1279 million. Only the $155 million was available, therefore, to meet other requirements—for example, advances to steel suppliers and the costs of tooling up for defense production. Inflationary costs had left their mark on the corporation's capital structure. Our net working capital had declined slightly between December 31, 1949, and December 31, 1953, despite the need of added capital due to a 76 per cent rise in dollar sales.

  At the beginning of 1954, with our financial resources already under strain, we announced a forward program of plant expenditures calling for an outlay of $1 billion in two years. This program was designed to provide additional capacity for our automotive divisions to meet the needs of an expanding market, and to modernize the existing facilities. We also had to add very substantially to our facilities for the production of automatic transmissions, power steering, power brakes, and V-8 engines.

  With a plant-expenditure program of this magnitude, and the inflationary pressures on costs, it was clear that we would have to raise new capital if we were to continue to pay out a substantial part of each year's earnings in the form of dividends. Toward the end of 1953 the Financial Policy Committee reviewed the problem and determined that a debt issue could be sold to advantage. In contrast to the situation in 1946, however, the insurance companies and other institutional investors did not have any excess funds available; they were, instead, committed for some time ahead. Hence we turned to the public market and in December 1953 sold an issue of $300 million of twenty-five-year 3/4 per cent debentures, netting (after deducting underwriters' fees and commissions) $298.5 million. This, too, was an outstanding success.

  But it was still not enough. In January of 1955 our plant-expenditure program was expanded from $1 billion to $1.5 billion (and later to $2 billion). In analyzing our future capital requirements, therefore, we decided that we would need to raise more outside capital. As Mr. Curtice, then president of the corporation, stated before the United States Senate Committee on Banking and Currency in March of that year:

  Our recent decision to seek further outside capital resulted from our analysis of our forward capital requirements. This analysis was based upon our projections of economic trends and the outlook for the highly competitive automobile market. It led us to the conclusion that additional permanent equity capital in the area of 300 to 350 million dollars is needed if we are to be ready to share in the country's growth and meet expanding needs for the goods we make and at the same time maintain a reasonable dividend policy.

  And so in February 1955 we offered holders of common stock the right to subscribe to 4,380,683 shares of new stock (five-dollar par value) at the rate of one share for each twenty shares held. The subscription price for each new share was $75; at the closing date of the offering, the stock was selling at 96%. The stock offer was underwritten by a group of 330 underwriters, but the underwriters had to subscribe to only 12.8 per cent of the issue. The net proceeds to the corporation approximated $325 million after payment of underwriting fees and commissions. This was the largest industrial common-stock issue in the United States up to that time and was a remarkable success, attesting to the correct evaluation of the market at a time when many experts considered an issue of this size to be a great risk.

  Our stock and debenture issues made it possible for us to carry out our expansion program and at the same time continue our policy of paying liberal dividends. In the three years of expansion 1954 through 1956, we spent $2253 million on new plant and equipment, increasing our gross plant 74 per cent (from $2912 million to $5073 million). Provisions for depreciation totaled $874 million, and after paying out $1620 million or 57 per cent of earnings in dividends, we reinvested $1222 million. As a result, our net working capital increased by $510 million during this period of extraordinary capital expenditures, and our holdings of cash and short-term securities (exclusive of securities earmarked for payment of tax liabilities) almost doubled, from $367 million to $672 million. Our liquidity increase
d still more in 1957, since capital expenditures declined fairly rapidly with the completion of the big expansion program, while depreciation accruals continued to rise.

  We had come through a critical expansion and our financial condition was stronger than ever. The period 1957 through 1962 was to include two recession years (1958 and 1961) and also the best year for dollar sales and earnings in the corporation's history (1962) . In reviewing the events of this period, I feel that they offer indisputable evidence of our financial maturity. The recession year 1958 saw General Motors' sales of U.S.-produced cars and trucks decline 22 per cent from the previous year, yet the accelerated impact that declining unit sales have on earnings was effectively moderated. Earnings in 1958 of $2.22 per share were only 25 per cent less than the $2.99 per share in 1957. These results were due in no small part to the effective and timely financial controls which we had built into our organization over the years.

  Plant expenditures in the 1958-62 period, including the cost of overseas expansion projects, totaled $2.3 billion, or about as much as was spent in the major expansion years of 1954-56. Nevertheless, depreciation accruals were sufficient to finance these expenditures in the United States, while local borrowings were used to finance a portion of the expansion in Germany. As a result, the corporation was able to pay out $3.3 billion in dividends over the period, or 69 per cent of earnings. In addition, net working capital was increased $1.7 billion.

  Taking the postwar period as a whole, therefore, the shareholders fared rather well. Notwithstanding a better than six-fold increase in the stated dollar value of our gross plant—from $1012 million on January 1, 1946, to $7187 million on December 31, 1962—which was financed out of earnings and depreciation reserves, we nevertheless paid shareholders a total of $7951 million or 64 per cent of net income in dividends. Over the period, dividends per share, after adjusting for stock splits, rose from 50 cents per share in 1945 to $3 per share in 1962, and the market price of a share of stock rose from $12.58 to $58.13.