My Years With General Motors

by Alfred P. Sloan Jr.

  General Motors was, I believe, a pioneer among industrial companies in the United States and Canada in making such "character loans" of equity capital to small businessmen and in recognizing that one of the greatest needs of the economy was a source of risk capital for small businesses. Two of General Motors' competitors now operate similar plans, Ford since 1950 and Chrysler since 1954. As Herbert M. Gould, a former general manager of Motors Holding put it: "When your competitors follow you, that's the medal in business."

  What the manufacturer and the dealers needed most at the end of the 1920s was a better means of communicating and a sound contractual relationship. We had, of course, zone and regional executives, who were in constant contact with the dealers on day-today matters of business. But there were many problems of broad, corporation-wide policy that required closer contact and information leading to some definite co-operative actions. As I have said, the other general officers and I made frequent field visits to the dealers. These visits made clear to us that the dealers appreciated having a direct contact with corporate as well as divisional executives. It was equally clear that something more substantial was needed than these occasional visits. Out of these early field trips, therefore, grew a related idea, that of bringing representative groups of dealers into the conference rooms of General Motors. This idea took shape in the creation in 1934 of an important and unique institution in General Motors, the General Motors Dealer Council.

  The Dealer Council was originally a body of forty-eight dealers, divided into four panels of twelve each. It met with a group of corporate executives at the top level of corporation responsibility. We formed the council to hold a continuing series of round-table discussions on distribution policies. Each year for many years I chose a different panel of dealers, representing all car-manufacturing divisions, all sections of the country, and all types of territory and capital commitment. They brought to the council a broad diversification of dealer problems and thinking.

  As president of the corporation I was chairman of the council. The vice president in charge of the Distribution Staff and other top officials of General Motors were also members. The first job of the council was the long process of working out the general policies for improved dealer relations. Our meetings dealt with policy and not the administration of policy.

  The principal specific work done by the Dealer Council was to hold discussions aimed at the development of policies on which an equitable dealer selling agreement could be based. This selling agreement, when achieved, was to add value to the General Motors franchise, which in recent years has supported a retail business of as much as $18 billion a year.

  In a talk on the Dealer Council on September 15, 1.937, I reviewed my experience in the meetings of the council, as follows:

  The meetings of the various Council Groups during the past three years have been bright spots in my operating experience. I value most highly the personal contacts and the friendships that have developed as a result of same. That alone would justify the plan, from my standpoint. And the opportunity to discuss such interesting problems. It has stimulated our thinking and I am sure has accelerated our progress. I have been particularly impressed with the broad approach to these problems by every member of the Council. I am encouraged by the practically unanimous desire to solve these problems from the standpoint of fundamental soundness rather than from the easier approach of expediency. This is particularly interesting in a period where expediency seems to be the keynote of our national thinking. This point of fundamental approach was particularly impressed upon me at the very first meeting. We were just coming out of the depression. Heavy losses had been sustained by almost every one engaged in business—the dealer body being no exception to the rule. Anxiety with respect to the possibility of future profits, was naturally the dominating subject before the Council. Many suggestions were made, analyzed and subsequently discussed. And it is gratifying that the unanimous opinion was that we should tackle the essential question of profit, not from the standpoint of inflation, but from the standpoint of getting our house in order, finding ways and means of eliminating deductions from the gross that we already had—better efficiency, in other words, rather than passing our inefficiency on to the public in the form of a higher retail price. Subsequent experience has justified that kind of a decision—and it always will, in the final analysis.

  As Chairman of the Council, at all our meetings I have tried to impress upon the members, the sincere desire of the Corporation's executives to aggressively tackle any problem likely to result in a more satisfactory relationship, and as rapidly and consistently as possible. Naturally, in a business as large as General Motors, where there are many groups that must be consulted and viewpoints reconciled, progress must necessarily be slow. I have been concerned with the fact that perhaps some of our Council members, and many of our dealers who necessarily cannot be familiar with what we are doing, have felt that we should move more rapidly. It is natural that they should feel that way. It is comparatively easy to lay down a policy in a relatively small number of words, but the application of that policy, in an administrative way, in a country as large as the United States, with a scope of operations such as we conduct, must necessarily be a matter of evolution— it cannot be a matter of revolution—patience is essential. I cannot over-emphasize that point. And superimposed upon these practical difficulties is the still hardest problem of changing the viewpoint of a large organization with respect to any particular way of doing any particular thing. We all know how great is the inertia of the human mind.

  The dealer selling agreement was a pioneer work in co-operative business relationships. Its technical details have evolved over the years, and some of them are complex. Some of the important features were designed to meet problems unique in the automobile industry.

  The question of cancellation of a selling agreement naturally is a serious matter both for the dealer and for the manufacturer. If the dealer operating in a certain area is not doing the job he should, is not delivering a reasonable amount of the potential business of the area, or for some other reason is inefficient, how should a change be effected? It must be remembered that he usually has a substantial amount of his own capital tied up in the business. He owns used cars. He has parts. He has a showroom and product signs.

  In the early days of the industry, the dealer's franchise was just canceled and a new dealer was appointed, and that was that. The problem of liquidating the dealership was left to the dealer. During the 1930s the agreement generally in use in the industry provided for an indefinite term which could be terminated without cause by the manufacturer on ninety days' notice and by the dealer on thirty days' notice. Provision also was made for cancellation by the manufacturer for cause, with, of course, the validity of such cause always subject to test in the courts.

  In considering this problem, it must be recognized that the dealer, as I have said before, can sell the assets of the business, but he cannot sell the franchise since he does not own it. Therefore, it seemed desirable to have a definite, liberal policy to protect the dealer from capital losses in case of cancellation, even if the cancellation was due to his inefficiency. We adopted a policy which included the following arrangements: The corporation would take back from the dealer, at the price he had paid, any new cars that he had on hand. The corporation would take back certain product signs and special tools. The corporation would take back the parts that he had on hand, provided they were not for models beyond a certain age. If the dealer had a lease which could not be transferred to another dealer, and so incurred a loss on liquidation, the corporation would participate in the loss. The corporation in effect gave the dealer a check for his unencumbered assets and for a certain amount of liability on the lease.

  In 1940 we recognized complaints that on occasion selling agreements of dealers had been canceled just as the best selling season was about to commence. The result was that the outgoing dealer operated his business at low profit or no profit for a substantial period p
rior to termination of the selling agreement, while the newly appointed dealer undertook his operation at the beginning of the profitable selling season. Therefore we incorporated in our selling agreement a provision to the effect that termination without cause on three months' written notice could be accomplished only by giving the notice in the month of April, May, or June, to be effective in the month of July, August, or September. In 1944 General Motors introduced a selling agreement for a specific period, which provided for expiration at the end of two years following the resumption of production after the war (actually a term of more than three years) . Later the term was set at one year. At present each dealer is offered the option of an agreement for one year, five years, or for an indefinite period. All of these agreements permit termination only for cause, although upon expiration of the term there is no obligation to renew.

  Another unusual General Motors dealer institution, set up in January 1938, was a Dealer Relations Board. It acted as a review body, and enabled the dealer who had a complaint to appeal directly to the top executives of the corporation. I was the first chairman of this board, which consisted also of three other top executives. Sometimes we would listen to a case all day. After getting a complete report from the dealer and the division, we rendered a decision binding on General Motors. The chief benefit of the board was a preventive one. Divisions made very sure they had a sound case and were observing all the equities in taking action against any dealer, for it was the division itself, as well as the dealer, that came up for executive review.

  I would like to indulge in a sentiment and in a certain amount of pride, and tell this story. In 1948, after I had retired as chief executive officer, three General Motors dealers came into my office and said that the dealers as a body wanted to show their appreciation of what I had done in advancing the opportunities of the dealer organization. They said they knew of my interest in cancer research and would like to create a fund to help me in that activity. A year later they came back and handed me a check in the amount of $1,525,000 for the Alfred P. Sloan Foundation, and since then dealers have sent in additional contributions to the fund. This became known as the General Motors Dealer Appreciation Fund for Cancer and Medical Research. I invested this fund mainly in General Motors common stock, and the original fund is now worth more than $8.75 million and earns more than a quarter of a million dollars a year.

  Here I shall draw together a few strands of thought and carry them through to contemporary problems. Between 1939 and 1941 General Motors and its dealers enjoyed increasing prosperity. Then came the war and what amounted to a new way of life for us all. No cars were manufactured in the United States during the war period, and stocks of new cars on hand were sold under government regulation. Some dealers liquidated their businesses voluntarily, and many went into various branches of the armed forces. A few took on war-production subcontracts, but for most of those who remained active, the principal business was service and some trade in used cars. The service phase of their operations increased substantially as people came to realize the importance of keeping their cars in condition during the war. To the extent permitted under government regulations, we manufactured functional parts and made them available to dealers. This enabled dealers to render a constructive service in sustaining the automotive transportation system of the United States.

  The declaration of war caused a wave of apprehension to pass over the dealer body. Shortly after our entrance into the war, I sent a special message to the dealers outlining certain policy decisions made with a view to maintaining dealer organization and dealer morale. These policies included:

  (1) An offer to buy back new cars, parts, and accessories that the dealer elected to return (within certain limits). This was for the protection of a dealer who might be drafted or who for any reason wished to terminate his selling agreement.

  (2) Preferential consideration after the war for reappointment if the dealer closed his business on conditions which were mutually agreeable to the dealer and the division.

  (3) A special allotment plan for new cars, for two years following resumption of car production, to those dealers who remained in business during the war period.

  During the war the number of General Motors dealers in the United States dropped from 17,360 in June 1941 to 13,791 in February 1944, a net reduction of 3569. Most of the decrease was concentrated in smaller communities. Some of the dealers who remained were no longer ideally located with respect to the postwar redistribution of population. There had been a movement from the cities to the suburbs and also a movement from the eastern and central states to the southeast, southwest, and Pacific Coast areas.

  In accordance with our long-standing distribution policies, we resurveyed individual areas. In some cases we found that an area could support more than one dealer. Our recruitment of new dealers continued as required until 1956, when a moratorium on additional appointments was declared. Tins remained in effect until late in 1957. However, due to a decrease of dealerships in metropolitan areas, and to other causes, at the end of 1962 the General Motors passenger-car dealer body in the United States totaled about 13,700, about the same as 1944, despite the growth of the automobile market.

  While the number of dealers had decreased, the number of General Motors passenger cars in operation had increased from about 11.7 million in 1941 to about 24.6 million in 1958, an increase of 13 million, or 111 per cent. The number of General Motors passenger cars in operation continued to increase, and as of 1962 totaled 28.7 million, an increase of 17 million over 1941, or 145 per cent. The average individual dealer's business thereby increased as follows:

  In 1941, the peak prewar year, the average General Motors car dealer sold about 107 new vehicles. In 1955 he sold 222 new units, an increase of 107 per cent. In 1962 he sold 269 new units, an increase of 151 per cent over 1941.

  In 1941 the average number of General Motors vehicles in operation per car dealer was 710. This represented his total service potential. By 1958 this potential had grown to 1601 units, an increase of 125 per cent, and by 1962 this potential had increased to 2095, an increase of 195 per cent. (Note 16-1.) Since i960 the average volume of business of dealers has been 2.5 times the 1939-41 average in constant dollars. Their net worth of more than $2 billion is 2.7 times the 1941 figure, again in constant dollars, which shows how the individual General Motors dealer has been growing with the economy and with the corporation.

  Immediately after the war, market conditions changed radically. We had to meet the tremendous pent-up demand for cars created by the stoppage of production during the war and the wearing out of existing cars. Material shortages were the limiting factor on production. General Motors recognized that serious problems were in store for the customer, the dealer, and the factory. The customer's problem was to get transportation. Usually he was willing to pay a premium for it, and in many cases he sought preferred delivery. The manufacturer was faced with the problem of allocations to the dealer. The dealer's problem was how to distribute his car allotments.

  General Motors had a plan on March 2, 1942, for allocation of cars to dealers. It was known as "The Sloan Plan" because I had promulgated it. It was in operation from October 1945 to October 31, 1947, and proved to be both equitable and satisfactory. It ensured the dealer a fair allocation of cars based on his 1941 performance record, and it reduced to a minimum claims of favoritism in distribution. It gave us a rule for a situation which might otherwise have got out of hand.

  During the period of shortages, competitive market conditions were practically nonexistent. Our recommended resale prices were substantially below what buyers were willing to pay, and our dealers always establish their own retail prices. But in the face of such urgent demand, the inevitable result was that a second or "gray" market came into existence. It frequently happened that, when a customer drove out of a dealer's place of business with a new car, he would not get beyond the first stop light before somebody, perhaps a used-car dealer, would drive up and offer to take the car of
f his hands at a substantial premium over the price he had paid for it. This was the beginning of some new postwar distribution problems.

  One of the most difficult problems was "bootlegging," or the wholesaling of new cars by franchised dealers to used-car lots. This phenomenon can exist both in periods of ample supply and in periods of shortage such as existed after World War II. As the situation actually developed, it was not until the latter part of 1953 that supply began to catch up with demand in some lines of cars. I would like to emphasize "began" because many lines continued in short supply into 1954 and, in the case of Cadillac, into 1957.

  Beginning about 1950, certain abuses and bad merchandising practices had begun to flourish. Some had been in existence before the war but had been dormant during the forties. Others represented an outgrowth of the unusual conditions of the early postwar years. Bootlegging, for example, had existed before the war in scattered areas, but now, encouraged by an apparently new legal climate, it returned in epidemic and malignant form.

  This new legal climate, as I call it, was established in the late 1940s as a result of interpretations of court decisions later expanded by opinions of the Department of Justice. These legal trends indicated to us that clauses in our selling agreement relating to bootlegging and territorial security might be considered unduly restrictive of the dealer's freedom of action. Both these clauses were reluctantly dropped from the selling agreement in 1949 upon the insistence of legal counsel. We foresaw serious consequences in the dealer setup even though at the time the effect was negligible because dealers were having difficulty getting enough cars to supply their own regular customers.

  During the first half of the 1950s the "bootlegging" situation became serious. New models of General Motors cars were in the bootleg market even before there was sufficient production to supply dealers with necessary stocks for display and sales purposes. The corporation urged the dealers not to move cars into the bootleg market. It also submitted to the Department of Justice for consideration a proposed new clause for the selling agreement which would have required dealers to offer cars back to General Motors before disposing of them in bootleg channels. The Attorney General's opinion was to the effect that "the Department of Justice cannot undertake to waive the institution of criminal proceedings with respect to such contractual provisions should we decide to test their legality if they are incorporated in General Motors Corporation selling agreements, since they raise important questions under the anti-trust laws."