My Years With General Motors

by Alfred P. Sloan Jr.

  Thus blocked in its efforts to contract with dealers for the repurchase of cars which the dealer thought surplus, General Motors next advised dealers that for the balance of the 1955 model year it was "prepared to repurchase, or to arrange for the repurchase by other General Motors dealers in other areas, at the respective prices paid by the original purchasing authorized Distributors or Dealers, any such new and unused passenger cars that might be considered excess supply." The purpose of this was to allow dealers to liquidate through authorized channels any cars believed to be in excess. Only a few dealers took advantage of this offer, either because they had no surplus cars or they preferred to sell to a bootlegger at a small profit—contrary, in my opinion, to their own self-interest from the broad point of view. It was the franchised dealers who supplied and supported the bootlegger, for the latter could not obtain cars except through some franchised dealer. Our efforts continued to be limited to trying to adjust our production schedules to realistic appraisals of the market and the competitive situation.

  Our various attempts over the years to curb the practice of bootlegging have been hampered by practical limitations beyond our control. However, there was a sharp decrease in the practice during the second half of the 1950s. We believe in the franchise system of distribution and have sought to provide opportunity that would be reflected in quality dealers, but the franchised dealers as well as the corporation must support the opportunity if it is to last and prosper. The concept of "The GM Quality Dealer Program," founded on the proper placement of dealers based on analysis of territories, goes back to the 1920s when Richard H. Grant, General Motors' great sales executive of a generation ago, and William Holler, another of our top sales executives, first established it. But policies based on this concept may be idealizations. Sound policies are often modified by the impact of outside forces over which one has no control.

  Another recurrent practice which for a time adversely affected the dealer's ability to operate as a quality dealer, and which was obviously unfair to the customer, was "price packing." Price packing means adding something to the manufacturer's suggested retail price of the product. This enabled the dealer to offer an apparently excessive allowance for the used car trade-in. A dealer is able to make any allowance whatsoever on the car to be traded in, provided that he is also able to name the price on the new car to be sold. This practice was neither sound nor desirable, and I have often said so in addresses to dealers. However, to condemn the practice did not cause its disappearance, especially where the power to control did not exist. We tried to discourage the pack, but the forces approving the practice were too strong. Eventually we came to the conclusion that only by individual and voluntary action on the part of the dealers could this evil practice be wiped out.

  In 1958 Congress enacted legislation requiring the manufacturer to affix a label on the window glass of each new car shipped to a dealer. This label contains detailed information on the various elements making up the manufacturer's suggested retail price. There is every evidence that through this law the evil of price packing of the type I have described has been practically eliminated.

  The shift from a sellers' to a buyers' market, accompanied by "blitz" or high-pressure selling, further complicated the market from 1954 through 1958. Perhaps the transition could have been executed more smoothly by all concerned. It may be that the publicly raised hue and cry was of benefit in calling attention to needed adjustments to the new conditions. But in my opinion the responsibility for equitable co-operation between dealers and manufacturers is not for a legislative body to work out. It is a joint responsibility of manufacturers and dealers. We are in a competitive business, and a lost position is difficult and sometimes impossible to regain.

  In 1955 General Motors made a study of the new developments, and worked out a new selling agreement, which became effective March 1, 1956. I mention only its highlights: a choice among a five year, one-year, or continuing agreement (99.2 per cent of the dealers were operating under the five-year term in 1962); a liberalization of the policy of the dealer's right to nominate a qualified person to succeed him upon his death or incapacity; a spelling out of the basis for evaluating dealer sales performance, and a number of changes improving the dealer's economic position under prevailing conditions.

  A long-term selling-agreement period, such as five years, even though subject to cancellation on ninety days' notice for nonperformance, must contemplate a freeze of many significant distribution factors—all normally subject to change—such as shifting population, product potentiality, dealer efficiency, economic trends, and competition. The effect of such a policy on the efficiency and aggressiveness of the dealer organization can only be evaluated by time and experience.

  Among other important changes in General Motors' distribution policy was the appointment of an outside impartial umpire, a retired United States district court judge in place of the Dealer Relations Board, to hear and determine appeals by dealers from decisions of the divisions. Another was in the method of electing the divisional dealers' councils. Dealers are first elected at the zone level; these dealers then elect representatives who converge at the regional level and elect a representative from the region, and the dealers so elected constitute the national council.

  The group of dealers comprising the General Motors Council, now known as the President's Dealer Advisory Council, has always been appointed by General Motors rather than elected. We have felt that this method, because of the particular setup of General Motors—made up as it is of five car divisions and one truck division —would require quite a complicated arrangement if the council of dealers was to be on an elected basis. Membership on the various groups of this council reflects sizes of dealerships, sizes of dealers' communities, and geographical location, as well as numbers in each division.

  Much has been done, and much remains to be done. Problems exist which, if allowed to continue unsolved, could well mean the end of the franchise system as we know it. But what are the alternatives? There are only two that I know of: either manufacturer-owned, manager-operated dealerships, or the selling of cars by anyone and everyone, as cigarettes are sold—with the manufacturer maintaining a system of service agencies. I look askance at either of these changes. I believe that the franchise system, which has long prevailed in the automobile industry, is the best one for manufacturers, dealers, and consumers.

  Chapter 17 - GMAC

  A stranger to the history of the automobile business might wonder how it happens that General Motors owns one of the most important financial institutions in the United States, through which the corporation is engaged in consumer financing.

  First as to the fact. General Motors subsidiary, the General Motors Acceptance Corporation, in the past few years has extended 16 to 18 per cent of the estimated credit given in connection with car sales in the United States. GMAC seeks business only from General Motors dealers and is in competition with banks, other sales-finance companies, credit unions, and local lending institutions. I say "in competition" because it is not a closed business; the General Motors dealer is free to use any finance service that he chooses and his retail customers may do likewise. GMAC's total annual business currently comes to about $4 billion in retail credit and about $9 billion in wholesale credit extended to dealers to finance purchases from General Motors.

  We got into this business over forty years ago when the need for financing the distribution of automobiles first arose. Mass production brought with it the need for a broad approach to consumer financing, which the banks did not then take kindly to. They neglected—I might say they declined—to meet the need; and so some other means had to be found if the auto industry was to sell cars in large numbers. When GMAC was formed in 1919, facilities for consumer credit on a national basis did not exist. Merchants as far back as I can remember—and before that, I am told—granted time-payment loans for houses, furniture, sewing machines, pianos, and other articles too expensive for most people to buy for cash; and I suppose that
banks must have lent to selected individuals some money that went for that purpose.

  The idea of consumer finance, therefore, was not new in principle. I understand that the Morris Plan banks began financing some automobile purchases around 1910 and that the practice grew from then on. But the application of consumer finance to the automobile in a routine way was still new in 1915 when my friend John N. Willys, then president of the Willys-Overland Company—one of the most successful motorcar manufacturers at that time—persuaded me to become a director of Guaranty Securities Company, which proposed to finance the sale of Willys and other cars. This was one of the first automobile financing institutions, if it was not actually the first, to be formed to fill the vacuum created by the absence of normal credit facilities. It was also my first experience with the installment plan of purchase. At the time I did not have a direct interest in it since I was then still with Hyatt and, of course, not making or selling motorcars. John J. Raskob, as chairman of General Motors' Finance Committee, was instrumental in starting GMAC. From where I was then on the Executive Committee, I supported the idea.

  The public announcement of the formation of GMAC was made with the publication of a letter dated March 15, 1919, from Mr. Durant to J. Amory Haskell, GMAC's first president. Mr. Durant said in part:

  The magnitude of the business has presented new problems in financing which the present banking facilities seem not to be elastic enough to overcome.

  The constantly increasing demands for our products, particularly the passenger cars and commercial vehicles, has correspondingly increased the difficulty of our dealers in commanding at the seasons of the year when most needed the banking accommodation necessary properly to handle the volume of business which their ability as salesmen and the merit of our product as merchandise has developed. This fact leads us to the conclusion that the General Motors Corporation should lend its help to solve these problems. Hence the creation of the General Motors Acceptance Corporation; and the function of that Company will be to supplement the local sources of accommodation to such extent as may be necessary to permit the fullest development of our dealers' business.

  A few words about the difference between the banking and the manufacturing mentalities at that time. The bankers, I suppose, must have had their minds on Barney Oldfield and Sunday outings in landaus along the boulevards then in existence; that is, they thought of the automobile as a sport and a pleasure, and not as the greatest revolution in transportation since the railway. They believed that the extension of consumer credit to the average man was too great a risk. Furthermore, they had a moral objection to financing a luxury, believing apparently that whatever fostered consumption must discourage thrift. Consequently, automobiles were sold to consumers mainly for cash.

  Distributors and dealers, too, had to develop their own sources of financing, largely out of their own capital supplemented with customers' cash deposits and bank credit. This phase of automobile credit worked all right in the early days when distributors had wide territorial contracts and were able to make their sales for cash. It was not too difficult for them to cope with their financial requirements. As the business grew, however, and manufacturers continued to require cash on delivery, dealers simply did not have the funds to finance inventories, not to mention retail installment sales.

  Thus in 1915, about eight years before the automobile industry was to become the largest American business in volume of sales, its distribution system had no routine retail credit structure outside of normal banking channels, and those channels were pretty narrow. The automobile industry had to develop this credit structure itself.

  Today a very high proportion of dealers' stocks are financed, and about two thirds of all new and used automobiles in the United States are bought at retail on the installment plan. The anxieties of those who doubted the soundness of consumer credit have proved groundless.

  In the case of GMAC, the retail loss ratio on installment paper from 1919 to 1929 was approximately one third of 1 per cent of the retail volume purchased. I speak of the GMAC ratio and not of any losses by dealers after a car had been repossessed. In 1930 this ratio rose to one half of 1 per cent; in 1931 to six tenths of 1 per cent, and in 1932 to five sixths of 1 per cent. By 1933 the loss ratio was equivalent to approximately one fifth of 1 per cent. Thus, in the worst of the depression the rate of loss never reached 1 per cent of volume—a remarkable indication of the safety of the system and the integrity of the purchasers.

  When we first undertook the systematic financing of the distribution and sale of General Motors' products, we had no notion that this system of credit would be subjected to a test as severe as the depression or that it could survive such a test so well. We were convinced, however, that if we exercised ordinary care in the risks assumed, financing wholesale and retail distribution and sale of our products would promote a sound demand for automobiles which lack of credit was restricting.

  GMAC today operates directly or through subsidiaries in the United States and Canada and in a number of overseas countries. GMAC was started and still operates specifically to meet the credit needs of General Motors dealers and distributors, and it has always limited its activities to financing the distribution and sale of new and used products by those dealers.

  GMAC provides financing plans for both wholesale and retail transactions. Its wholesale plans provide a service for General Motors dealers whereby they may stock General Motors products under trust receipts or other security documents. The dealer obtains title to the product upon payment of the corresponding obligation and the item may then be sold at retail. Should he fail to pay his obligation upon demand, or to comply with other agreed-upon terms and conditions, GMAC has the right to take back the product.

  From 1919 to 1963 GMAC financed for distributors and dealers, as distinguished from consumers, over 43 million new cars, in addition to other products of the corporation. In the same period GMAC financed a total of over 46 million cars for consumers, 21 million new and 25 million used.

  Its method in retail financing, known as "the GMAC Time Payment Plan," is to buy approved, retail time-sales contracts from General Motors dealers, after they have been concluded between the dealer and the retail purchaser. GMAC is not, however, obligated to buy every contract a dealer submits to it. Nor is the dealer required to offer the contract to GMAC for purchase. For both parties the transaction is voluntary. GMAC has the right to refuse risks it does not wish to assume. The dealer may place his paper elsewhere if he thinks that is to his advantage. If the dealer does submit the contract to GMAC, and all credit factors prove satisfactory, GMAC purchases the obligation. GMAC, and not the dealer, then undertakes collection of all payments from the customer.

  Outside the United States, local laws and other circumstances may dictate that the technical forms of GMAC financing plans and operations differ somewhat from those in this country. With this exception, the U.S. pattern with respect to retail and wholesale plans is followed closely in other parts of the world. It is our experience that prudent financing of wholesale and retail sale and distribution of our products works as well abroad as it does in the United States. On the record, the average consumer at home and abroad is a remarkably good business risk in the field of automobile financing.

  GMAC's basic policies were formulated and refined between 1919 and 1925. In the beginning we had two primary motives, to establish the validity of the system, and to crusade for reasonable rates for the customer. We were interested in making a paying business out of it, and we were also interested in the long-term good will of our customers, and in protecting them from high rates.

  The risks in consumer financing centered around default, repossession, and the used-car market. Hence the importance of the down payment and the length of time over which repayment was to take place, the ability of the purchaser to make payment, and the need in the credit structure of the repossessed car's being worth the balance due. To the dealer, as an endorser of the purchaser's obligation, it was most
important that there be collateral which, if necessary, could be repossessed and resold at a fair price. In the absence of such collateral, the financial burden on the dealer was very heavy.

  We were encouraged by a study of consumer credit along these lines made over a period of years under our sponsorship by the eminent economist Professor E. R. A. Seligman. His two-volume work, The Economics of Installment Selling, the culmination of this study, published in 1927, became a standard work in the field. It had a strong influence, I believe, in bringing about an acceptance of installment selling among bankers, businessmen, and the public.

  Professor Seligman drew some conclusions that are accepted as axiomatic today but then were novel. Installment credit, he said, not only strengthens the motive to save but increases the individual's ability to do so. It not only advances the time of demand but by interaction with the economy actually increases purchasing power. It both stabilizes and increases production, so the cost of financing is outweighed by the advantages gained.

  One early question we had to answer was how much of the financial burden the dealer should carry. We had little experience by which to gauge the magnitude of the risk which dealers would actually assume under their unrestricted endorsement of the purchaser's obligation. In addition to the risk of resale loss on repossessed collateral, there was also the hazard that the collateral, the car itself, might disappear through conversion by the purchaser or confiscation by the government, or become worthless through total or partial collision loss.