My Years With General Motors

by Alfred P. Sloan Jr.

  To meet this situation I made it a practice throughout the 1920s and early thirties to make personal visits to dealers. I fitted up a private railroad car as an office and in the company of several associates went into almost every city in the United States, visiting from five to ten dealers a day. I would meet them in their own places of business, talk with them across their own desks in their "closing rooms" and ask them for suggestions and criticism concerning their relations with the corporation, the character of the product, the corporation's policies, the trend of consumer demand, their view of the future, and many other things of interest in the business. I made careful notes of all the points that came up, and when I got back home I studied them. I did this because I realized that, irrespective of how efficient our regular organization might be, there is a special value in personal contact, and furthermore, as chief executive officer of the corporation, my interest was primarily in general policies. This time and effort-consuming approach to the problem was particularly effective under the circumstances existing at that time, when we knew so little about the facts of distribution in the field. Many things that we learned were subsequently reflected in our dealer selling agreements, and communications in particular were put on an established basis through councils and in other ways which at least in part served to meet the same need.

  From the field studies that we made, I was able to see the historic change that was under way during the middle and late twenties, that the economic position of the dealers was becoming less satisfactory than it had been, and that our franchises were less in demand. It was clear that something had to be done not only in the interest of our dealers whose businesses were at stake, but in the interest of the enterprise as a whole. We had to distribute cars on a sound and economic basis for all concerned.

  I noted the dealers' predicament in the changing conditions in an address I made to the Automobile Editors of American Newspapers on September 28, 1927, in connection with a meeting at our Proving Ground at Milford, Michigan. Speaking of past practices in the industry as a whole, I made this observation:

  The sole idea was to make as many cars as the factory could possibly turn out and then the sales department would force the dealers to take and pay for those cars irrespective of the economic justification of so doing— I mean, irrespective of the dealers' ability to properly merchandise such cars. That certainly was wrong and it is just as wrong in other industries as it was in our industry. The quicker merchandise can be moved from the raw material to the ultimate consumer and the minimum amount of merchandise, of whatever it may consist, involved in the "float," so to speak, the more efficient and more stable industry becomes ... It is absolutely against the policy of General Motors to require dealers to take cars in excess of what they properly should take. Naturally, once in a while in the closing out of a model, our dealers must necessarily help us. They appreciate their responsibility and never object to doing so . . .

  This statement of policy in 1927 started a new approach to producer-dealer relations in General Motors, based upon the recognition of the community of interest between the corporation and its dealers and of the interdependence of our interests.

  The central and continuing problems of automobile distribution, which first arose in the twenties and thirties, are inherent in the nature of the business. These are, broadly, the penetration of markets, the liquidation of inventories at the end of a model run, dealer economics, and the general difficulty of two-way communication between the manufacturer and its dealers on all of their mutual business affairs.

  Our intention, naturally, was to penetrate the market as effectively as possible, and since in the end this had to be carried out by our dealers, it was necessary to have the appropriate number of dealers, each of the appropriate size and in the appropriate location. The difficulty was to determine these locations. In the 1920s we did not know as much as we do now about the automobile market. We began then to make economic studies of the market and its potential in terms of population, income, past performance, business cycle, and the like.

  With this kind of information we were able to take up the problem of placing dealers in relation to the market potential. In a community of a few thousand inhabitants, for example, the problem was simple. A single dealer could do everything necessary to penetrate the market, and we and the dealer could judge on the basis of our studies what his goals should be and how well he performed in relation to those goals. But in the larger urban communities, those with a million inhabitants or more, the problem was complicated.

  Hence we studied a larger community, first as a whole, to determine its likely potential for any particular line of cars. Then we broke it down on a neighborhood basis to determine the potential of its constituent parts. With that information we were able to place dealers through the territory largely on the basis of neighborhood potential. It was, of course, necessary for the dealers to have the individual capital, plant, overhead, and organization appropriate to the size of the area served.

  This strikes me as a rational approach to the problem of distribution. It provides basic advantages for both the dealer and the manufacturer. The dealer, as I have said, is a specialist in his area, and knows its character and inhabitants better than anyone else could. Also, it is often more convenient for a customer to deal with a local merchant from many standpoints, including service. And it provides the manufacturer with a microscopic understanding of his distribution problems. Naturally we expected a dealer to give his first attention to his immediate market and to perform well in it.

  The problem of liquidating an old model to make way for a new one—and to keep inventory losses at a minimum— is a permanent feature of the business except in periods when there is a strong sellers' market. This problem first appeared in an important way in the late 1920s. It occurs because the dealers must establish estimates of their requirements three months in advance, based on prospective demand. The corporation takes these estimates into account in establishing its final production schedules. These must be determined months in advance, and if the expected demand is upset by changing conditions, the problem of liquidation of the current model may become abnormal. But normal or abnormal, it is a problem to be met.

  In the early twenties the cars the dealers had on hand at the time the new model was announced, had to be liquidated at their own expense. After a good deal of study, we came to the conclusion that it would be only fair for the corporation to share the responsibility for liquidation of the old model. My recollection is that we provided allowances for liquidation at the end of the model year as early as the second half of the 1920s. In 1930 we made it a matter of policy to help the dealer dispose of his excess stock at the end of the model year. For the dealer who had "taken his contract," we granted an allowance on the unsold, new vehicles in stock when new models were announced. The allowance was limited to those cars in excess of 3 per cent of the estimated quantity of new vehicles to be handled by the dealer, as provided for in the selling agreement. The amount of such allowance was determined by General Motors. At times the amount and basis of computation has differed. At present the rebate is 5 per cent of the list price on every new unused ear of the model being discontinued in dealers' stock and unsold at the time of the new model announcement.

  This policy, I believe, was new in the industry when we began it. It reflected our desire to protect dealers against unreasonable product-depreciation losses and to place the responsibility for reasonable production schedules in the later months of the model year on the management of the divisions. It imposed a penalty on the factory in the form of an automatic assessment if for any reason there was an excess supply of cars in the model year.

  A theoretical solution of the annual production and sales cycle, one might think, would be to have no stock in dealers' hands when the new ear is announced. But that is neither possible nor desirable for a number of reasons, from both the manufacturer's and the dealer's standpoint. Competitively we must do as much business as can be done
in each month of the year. And at the end of the model year the pipelines of distribution must be emptied as the new cars come through. Furthermore, it is often desirable to have some stocks of old ears on hand to do business during the early period of the new model run when the new models are first coming through. For these reasons the problem is a permanent one and all in the day's work.

  Although in the 1920s we had made great advances in getting the fails about General Motors' economic position, we did not then have the Facts regarding the economic position of our dealers, and so were handicapped in thinking through dealer problems, When a dealer's profit position was failing, we had no way of knowing whether this was due to a new-car problem, a used-car problem, a Service problem, :i parts problem, or some other problem. Without such facts it was impossible to put any sound distribution policy into effect.

  In the Proving Ground address which I mentioned earlier, I made the following observations on this subject:

  ... I want to outline to you what I believe to be a great weakness in the automotive industry today and what General Motors is trying to do to correct that weakness.

  I have stated frankly to General Motors dealers in almost every city in the United stales, that I was deeply concerned with the fad that many of them, oven those who wore carrying on in a reasonably efficient manner, were not making the return on their capital that they should. Right here lot mo say that so tar as General Motors dealers are concerned, from what facts I have — realize there has boon much improvement during the past two or three years, hut interested as the management of Genera] Motors must he in every Step, from the raw material to the ultimate consumer, and recognizing that this chain of circumstances is no stronger than its weakest link, I feel a great deal of uncertainty as to the operating position of our dealer organization as a whole. 1 hope that this feeling of uncertainty is unwarranted. I am sure that with a responsibility SO great, all elements of uncertainty must he eliminated and that our dealers should know the facts about their Operating position as clearly and as scientifically as I have outlined to you we feel that we know the facts about General Motors operating position.

  This brings us back to . . . two words—proper accounting. Many of our dealers, and the same thing applies to dealers oi other organizations, have good accounting systems. Many of them have indifferent ones and 1 regret to say that too large a percentage of them have practically no accounting system at all. Many of those who have accounting systems, through lack of their being properly developed, are not able to effectively use them. In other words, they are not so developed that they give the dealer the facts about his business; where the leaks are; what he should do to improve his position. As I said before, uncertainty must be eliminated. Uncertainty and efficiency are as far apart as the North Pole is from the South. If I could wave a magic wand over our dealer organisation, with the result that every dealer would have a proper accounting System, could know the facts about his business and could intelligently deal with the many details incident to his business in an intelligent manner as a result thereof, I would be willing to pay for that accomplishment an enormous sum and I would be fully justified in doing so. It would be the best investment General Motors ever made.

  Accordingly, in 1927 WHO set up an organization called Motors Accounting Company. We developed a standardized accounting system applicable to all dealers and sent a stall into the field to help install it and to establish an audit system. Later, as dealers became more experienced in the financial end of their business, and under the pressure of depression economies, we modified the reviewing procedure. We developed a sampling system for auditing by which we were able to get a cross-section Alvis applicable to the whole setup. To this end the accounting records of a group of approximately 1300 automobile dealers (representing about 10 per cent of dealers or 30 per cent of General Motors unit sales) are still reviewed regularly at General Motors' own expense. In addition, General Motors gets monthly financial statements from 83 per cent of its dealers or 96 per cent of General Motors unit sales. This was a big and expensive effort but it enabled each division of General Motors and the central office to look through the whole distribution system, dealer by dealer and group by group, and determine just where the weaknesses were and what should be done about them. Furthermore, the dealer himself could not only judge his own complicated business intelligently but also compare his operations, item by item, with group averages. Often the soft spots would be discovered in time to make corrections before harm was done.

  Soft spots, of course, on occasion had a way of making themselves known. In the late twenties General Motors put up considerable capital to save a couple of strategic dealerships from bankruptcy and suffered a loss of $200,000. One thought leads to another, however, and when we got this one generalized, we realized that our broad purpose should be not only to reduce dealer turnover by stabilizing dealerships but furthermore to assist capable individuals who lacked capital to become the owners of profitable General Motors dealerships. Albert L. Deane, then a vice president of GMAC, and Donaldson Brown worked these thoughts into a practical program. We took action on the idea in June 1929 by setting up Motors Holding Corporation with Mr. Deane as its first president. In 1936 this subsidiary became the Motors Holding Division. The function of this division was to furnish capital to dealerships, and in doing so to assume temporarily the rights and duties of a shareholder in those dealerships. We put $2,500,000 into it to start. When we got past the experimental stage, we realized that this was one of the best ideas we ever had in the distribution field. We also realized that its real value was not in the first idea of salvaging bankruptcies but in the second idea of grubstaking capable men— not only with capital but with management advice and training in sound dealer operations.

  Motors Holding developed management techniques for dealers which increased the profit possibilities of dealerships. It found qualified operators, backed them with adequate capital, and enabled them to produce profits sufficient to retire Motors Holding's interest and become independent.

  In my time it worked this way, and with some alterations in financial details it still does: The prospective dealer invested his available funds in the dealership. Motors Holding put up the balance of the capital needed. (At present the dealer usually puts up a minimum of 25 per cent of the total required capital.) When the arrangement was established, the dealer got in addition to his salary a bonus, which was provided by Motors Holding through its relinquishment of a portion of the profit which would otherwise accrue to its investment. This bonus was equivalent to 50 per cent of Motors Holding's earnings above 8 per cent on its investment. Motors Holding retained the voting control of the dealership until all of the Motors Holding investment had been bought out.

  Several changes in the bonus arrangements were made in later years. At present the bonus is paid directly by the dealership to the operator and is therefore a direct expense of the dealership corporation. It amounts to 33% per cent of the profits in excess of 15 per cent a year on total invested capital including notes. Originally the dealer was required to apply his entire bonus to buy out Motors Holding's share of the capital stock. Subsequently, it was found that the dealer's personal income taxes did not enable him to carry out this provision and now the dealer need apply only 50 per cent of his bonus to purchase Motors Holding's stock, although he may, of course, apply the entire amount. The result has been that as earnings accumulate the dealer becomes the owner of all the stock in the dealership. As it turned out, the assistance provided by Motors Holding was so highly valued that dealers often resisted purchasing the last shares of Motors Holding's investment.

  From its inception through December 31, 1962, Motors Holding in the United States and Canada invested more than $150 million in a total of 1850 dealerships, most of them in the automobile field. Of these dealerships, 1393 have retired Motors Holding's investment, and at the end of 1962, current investments in 457 dealerships totaled nearly $32 million. Of our approximately 565 alumni dealers s
till operating through 1962, many rank among the outstanding dealers of the United States and Canada. In some instances operators who were qualified in all other respects but lacked the established minimum investment were enabled through the Motors Holding plan to become sole owners of their businesses. Some, starting with very modest investments, became millionaires. And the plan has been profitable to General Motors too.

  Motors Holding dealers produce approximately the same results as other General Motors dealers with like potentials. This applies from both a standpoint of sales and of net profits, thus fulfilling one of the original objectives in the conception of the activity.

  Of the 1850 investments in dealerships made by Motors Holding in the United States and Canada, it has been necessary to liquidate only 198 because of subnormal operations, 62 during the depression period 1929 through 1935, and 136 since then.

  Although Motors Holding dealers' new-car sales have never attained 6 per cent of the total General Motors Corporation sales, they have nevertheless sold since 1929—during the period of Motors Holding's investment—more than three million new cars with a total profit to these dealerships, before bonus, of more than $150 million.

  The corporation has authorized successive increases in the funds available for investment in Motors Holding dealerships in the United States and Canada, and in May 1957 the authorized maximum investment was increased to $47,000,000, of which $7,000,000 is now available for financing real estate.

  Through its intimate association with dealers in the Motors Holding operation, General Motors has obtained a clearer and more sympathetic knowledge of dealers' problems. Motors Holding has also provided the corporation with a better knowledge of the retail market and consumer preferences. But more important than anything else, it has been useful in the development and maintenance of a strong, well-managed, adequately capitalized dealer body.