My Years With General Motors

by Alfred P. Sloan Jr.

  In 1925, as a result of a thorough study by A. L. Deane, then a vice president of GMAC, a modification was adopted which limited the risk on the part of the dealer. Under this revised plan, GMAC agreed to absorb any losses on retail transactions if the collateral could not be returned to the dealer in reasonable condition within ninety days after the first default of the customer. Further, it provided that a certain percentage of the GMAC finance charge would be placed to the credit of the dealer to establish a reserve fund against which any losses on the sale of repossessions could be offset. Thus, to a large extent, the profits of the dealer on all sales were freed from the hazard of being reduced by credit-sale losses.

  Insurance protection against fire, theft, and collision hazards was made available at the same time by the organization of another General Motors subsidiary, General Exchange Insurance Corporation. This company offered insurance to customers who requested it, against physical damage to the car (not against such risks as public liability and property damage). This was important to the dealer since companies insuring automobiles were, in those days, highly selective and the purchaser could not always get the insurance that was often a prerequisite to financing. The idea of finance companies offering physical-damage insurance became broadly accepted, with some modifications, as a standard pattern for finance company relations with dealers. Today the company that offers the physical-damage insurance to installment purchasers is Motors Insurance Corporation, a subsidiary of GMAC.

  At that time some finance companies relieved the dealer from responsibility for the unpaid balance of the retail credit transaction when the customer defaulted. This "non recourse" system had the disadvantage of reducing the dealer's interest in checking the soundness of the original credit. Also, it was more expensive to operate for a number of obvious reasons. Not the least of these was the fact that the finance company was not in a position to sell repossessions at as good prices as a franchised dealer. The purchaser eventually paid for the additional cost involved through a higher finance charge.

  At first GMAC chose not to follow the so-called non recourse route. There were a number of reasons for this. Among them was this matter of cost to the consumer. GMAC felt it undesirable to relieve the dealer of all obligation on retail installment transactions. It felt that its plan, with its guaranty of the return of the collateral, would provide the necessary protection to the dealer at the lowest cost to the purchaser. Experience has proved this to be correct. However, because of competitive pressure, GMAC added a non recourse plan to its service.

  The finance charge itself is an important element of the cost of a car. Throughout the years, both General Motors and GMAC have emphasized this fact. GMAC has pointed out that additional and unnecessary costs are incurred by the purchaser if the repayment time is unnecessarily long and the down payment lower than is justified. GMAC has campaigned against excessive financing charges— I think it fair to say it took the leadership in this matter. The man whose name is associated with GMAC more than anyone else's is John J. Schumann, Jr., who joined GMAC in 1919 and was its president for twenty-five years, from 1929 to 1954. He was a strong leader for sound practices and he put the stamp of his personality on the organization. In uncompromising terms he advanced policies and practices that were guided by the time-tested formula of honesty and square dealing.

  In General Motors' annual report for 1937, in support of Mr. Schumann's policies, I wrote:

  . . . charges to consumers in excess of an equitable minimum are not consistent with the policy of the Corporation in providing services to the end that the public may be adequately served by its dealers, at the lowest sound price.

  History took some interesting turns in this connection. In 1935 GMAC announced the so-called "6% Plan." This told the public that they could get financing for 6 per cent per annum on the initial unpaid balance—the conventional form of computing finance charges and therefore a comparative basis for measuring the charges of competing finance companies. The actual rate on the money advanced, calculated on a true interest basis, was of course higher; but GMAC followed the convention and advertised it. GMAC believed that the "6% Plan" gave the customer a convenient, publicly known yardstick for measuring his actual finance charges. Competition did not like the GMAC "6% Plan." There were complaints to the Federal Trade Commission that this was an "unfair trade practice" which misled the public into believing that the stated finance charge was a simple interest rate. I thought it was made perfectly clear when we said in the advertising that the "6%" was a multiplier (i.e., not an interest rate), but the commission ruled that GMAC must discontinue using the term "67c"—in my opinion, to the advantage of high-rate finance companies and to the disadvantage of the consumer.

  In 1938 the government attacked General Motors and GMAC, charging that General Motors dealers were required to use GMAC's financing service. General Motors denied that it had made such a requirement, and urged that our interest was confined to protecting the customer and to persuading our dealers to follow our policy of low customer rates.

  The government, however, commenced criminal proceedings in South Bend, Indiana, against General Motors Corporation, General Motors Acceptance Corporation, two subsidiary companies, and eighteen executives. The trial was held in the fall of 1939 and terminated in an unusual and apparently inconsistent verdict acquitting all the personal executive defendants and finding the four corporate defendants guilty. Thereafter, the government commenced a civil action against General Motors and GMAC and the same two subsidiary corporations, based on the same charge that General Motors dealers were required to accept GMAC's financing services. In 1952, after a long contest with the Antitrust Division of the Department of Justice, we entered into a consent decree which set ground rules for the relations of General Motors and GMAC with the dealers. We have operated satisfactorily under these rules. Under them GMAC still conducts its business independently in competition with other financing organizations.

  Toward the end of 1955, with a number of General Motors executives, I was requested to appear in Washington at a hearing conducted by the Senate Subcommittee on Antitrust and Monopoly. During this hearing, which was largely related to the issue of "bigness," the position of GMAC was discussed at some length. Some felt that GMAC should be disposed of by General Motors. I was interested in the conclusions in the report of the staff of the subcommittee, which state that General Motors has had a competitive advantage over other manufacturers of cars because it has owned a sales-finance company, and that it should be forced to divest itself of this activity.

  But why? Plenty of money is available to other sellers of cars. The advantage GMAC offers to General Motors is a sympathetic relationship, equitable to the consumer. And I am glad to say that, in providing an economical service to consumers and dealers, it has built a profitable business for General Motors.

  Many others in more or less similar types of industry recognize the value of a sales-finance subsidiary—for example, General Electric Company with its General Electric Credit Corporation, and International Harvester Company with its International Harvester Credit Corporation. The suggestion that General Motors or any other company should be deprived of a sales and distribution tool operated in the interest of the consumer strikes me as very unusual in our scheme of things. To me it would seem that it can stem only from those elements which attacked, for their own gain, the earlier farsighted and public-minded activities of GMAC and the policy that the public should be treated fairly with respect to service and the cost of such service.

  I subscribe to the simple truth expressed by Charles G. Stradella, then president of GMAC, to the subcommittee in 1955. He said:

  In its association with General Motors Corp., GMAC may have advantages. In all probability, there are dealers who are influenced by the assurance of continuity of service, community of interest, fair treatment, et cetera, which go with the association. Lenders [to GMAC] are influenced by the assurance of adequate capitalization, sound management and cons
ervative financial policies and practices. On the other hand, unless these advantages were supported by the record of GMAC and its aggressive pursuance of sound practices, the association would do it little good in the eyes of the parties concerned.

  GMAC helped to bring consumer financing into being in the early days. It has had an influence on keeping the terms of down payments and time span on a reasonably conservative basis. Its disciplinary influence in the direction of reasonable rates to the customer is gradually being taken over by legislation; more than half the states now set maximum rates by state law. I believe the time is not far off when all the states will have rate legislation. In my personal opinion, this is the right procedure provided the states set reasonably low rate ceilings in the consumer's interest.

  While legislation may be desirable to control effectively the maximum charge which the public must pay for the privilege of installment credit, I have never felt that other conditions of the transaction between the dealer and the purchaser, such as down payment and length of time, should be regulated, except in the case of national emergency. This does not mean that I have not been aware, along with others, of the dangers of over expansion of consumer credit. The record is clear that GMAC has been continually interested in discouraging unduly small down payments and in keeping the length of term within reasonable limits. I think I might add that conservative financing is essential to the health of the automobile industry. The man who pays too little down and takes too long to pay will have no equity with which to come back soon for a new car.

  In late 1955 considerable concern was expressed in many quarters that consumer credit might have been over expanded and that down-payment and term control might have become too loose. In my opinion the facts did not warrant such conclusions. There was agitation for legislation to control consumer credit in order to check inflation. In his economic report of January 1956 the President of the United States raised the question whether permanent authority for standby control of consumer credit by some governmental agency would be a useful adjunct to other stabilizing measures. The study of this question was assigned by the President through the Council of Economic Advisers to the board of governors of the Federal Reserve System. We, with many others, responded to the questionnaires issued during the course of the study and stated the reasons for our belief that permanent standby controls, to be operated by a government agency, were unnecessary; that generally the control of consumer credit can safely be left in the hands of consumers and lenders until Congress identifies specific circumstances which dictate otherwise, or a national emergency calls for presidential action. A statement of the Federal Reserve Board released in 1957 found, among other things, that "fluctuations in consumer installment credit have been generally within limits that could be tolerated in a rapidly growing and dynamic economy "; that "a special peacetime authority to regulate consumer installment credit is not now advisable," and that "the broad public interest is better served if potentially unstabilizing credit developments are restrained by the use of general monetary measures and the application of sound public and private fiscal policies." I agree with these ideas

  So far as GMAC is concerned, I would say in brief that it offers a sen-ice related to the product and in the interest of the consumer. The advantages to the customer, the dealer, and the corporation seem obvious to me.

  Chapter 18 - The Corporation Overseas

  Outside the United States and Canada, the free world absorbed more than seven and a half million cars and trucks in 1962 and over eight million in 1963. General Motors has a substantial position in this overseas market, totaling 855,000 vehicles in 1962, and an estimated 1,100,000 in 1963. Our Overseas Operations Division is a large international organization today with assets of over $1.3 billion and about 135,000 employees. This division is responsible for manufacturing, assembling, or warehousing activities in twenty-two foreign countries, for the export of our products from the United States and Canada, and for distributing and servicing General Motors' products in every country in the free world except the United States and Canada—about 150 countries. The 1963 sales of the division are an estimated $2.3 billion.

  Looking back on the rapid growth of this division during the past four decades, one might regard our progress overseas as a kind of natural and inevitable extension of our progress in this country. In reality, there was nothing at all inevitable about it. I have reviewed a number of documents dealing with the formulation in past years of an overseas policy in General Motors. The documents have revived in my mind the long and complex history of that policy, and they have also reminded me of the difficult decisions on which our progress turned. For the overseas market is no mere extension of the United States market. In building up our Overseas Operations Division, we were obliged, almost at the outset, to confront some large, basic questions: We had to decide whether, and to what extent, there was a market abroad for the American car—and if so, which American car offered the best growth prospects. We had to determine whether we wanted to be exporters or overseas producers. When it became clear that we had to engage in some production abroad, the next question was whether to build up our own companies or to buy and develop existing ones. We had to devise some means of living with restrictive regulations and duties. We had to work out a special form of organization that would be suitable overseas. All of these problems were considered fully within the corporation for a period of several years in the 1920s when the basic policies were established.

  Today, General Motors participates in the overseas market in two ways: as an exporter of American cars and trucks, and as a producer abroad of smaller foreign vehicles. In 1962, for example, about 59,000 cars and trucks were exported from the United States and Canada in what are called SUP's, or Single-Unit Packs. This means that the vehicles were shipped fully assembled, and could be made ready for the road with only minor adjustments. Another 46,000 were sent abroad as CKD's, that is, Completely Knocked Down, and they had to be put together at one of ten General Motors assembly plants abroad. (Ordinarily, CKD shipments do not include certain parts—upholstery and tires, for example—which can be supplied locally.) Altogether, over 105,000 General Motors cars and trucks were exported from the United States and Canada; these were all of makes and models available in the United States, and they represented all of the corporation's automotive divisions.

  In addition, in 1962 about 750,000 vehicles were designed and manufactured abroad, and an estimated one million in 1963. The gain in 1963 reflects the introduction of a new small car by Opel. The three principal General Motors overseas car-manufacturing subsidiaries are Adam Opel A.G., in Germany, Vauxhall Motors, Ltd., in England, and General Motors-Holden's Pty. Ltd., in Australia. Each of these companies manufactures relatively small (by American standards) cars, a type which predominates almost everywhere in the overseas market. The three companies are entirely owned by General Motors and all three now have a substantial export business of their own and ship vehicles to countries all over the world. In recent years manufacturing plants have been established in Brazil, where 19,000 trucks and commercial vehicles were produced in 1962, and in Argentina, where production of complete engines and stampings was recently started.

  The corporation's overseas business hinges largely on our overseas production facilities. In 1962 about 88 per cent of all General Motors vehicles sold abroad were produced abroad. This proportion has been rising, and is likely to increase in the years immediately ahead, for major expansion programs have recently been completed by our overseas producers. The corporation's exports from the United States and Canada, on the other hand, are no larger than they were in the 1930s, and are actually smaller than they were in the late 1920s. (In 1928, the peak year for exports, the corporation shipped almost 290,000 vehicles abroad from the United States and Canada.)

  It is easy for Americans to forget how undeveloped this market still is. Its potentialities appear to be almost limitless. In large areas of the world, the motor age is only now dawning. Vast area
s are still not serviced by good roads. Even the industrial nations of Western Europe lag far behind the United States in their use of motor vehicles; the countries in the European Common Market, taken together, have about one vehicle for every nine persons, compared with one for every three persons in this country. General Motors now sells as many vehicles abroad as it sold in the United States as late as 1926.

  In our early gropings toward the development of a policy for overseas business, we were soon made acutely aware of the problems engendered by economic nationalism abroad. From the earliest days of the automobile industry, dollar-poor nations abroad imposed high tariffs and severe quotas upon the import of American cars (and other American products). This nationalism has led many foreign nations to press for production at home, even when the home market appeared too small to sustain an efficient, integrated automobile industry.

  In 1920 the entire overseas market absorbed about 420,000 cars and trucks. About half of these were sold in four industrial nations of Western Europe: Great Britain, France, Germany, and Italy. While this Western European market was the richest, it was also the most difficult to penetrate; for these four countries as a group produced about three quarters of the vehicles they absorbed, and they were determined to exclude effective American competition. The other half of the overseas market consisted of relatively undeveloped nations scattered over the face of the globe. In this "second market," American producers generally had free access.