How GM Beat Ford

a few years. He was going to get beat by a company that realized something that he never did. Americans don't just want a simple, cheap, utilitarian car. We want fashion, we want status, we want the new thing, and we are not afraid to borrow money to get it. I'm Jacob Boltstein and I'm Robert Smith, and this is business History, a show but that actually visits. Last week on the show, Pitcha talked about the rise of Ford. It is a

show about the history of business. Today on the show, we're talking about General Motors GM, the company that came along and beat Forard. The story of General Motors starts with one Billy Durant, high school dropout, door to door cigar salesman. I like him already, wildly charismatic. Walter Chrysler, That Chrysler, the guy who started Chrysler said Billy Durant could talk the birds down out of the trees. Sounds

like orpheus. Billy Durant grew up in Flint, Michigan, and in eighteen eighty six, when he was in his mid twenties, the Flint Road Cart Company built it into the biggest like horse drawn cart company. These are cars you hook up to a horse? Cars? Yes, eighteen eighty six. Sure it's the horse full carriage. Yes. And once he basically got rich from his cart business, he went off to New York to live the high life and play the stock market.

thirty seven. And so this cart company that has bought Buick recruits Billy Durant to come back and make this company work. Billy Durant's not a car guy. He's a finance guy. He's smoking cigars in the club in Manhattan from Flint. He's a hometown guy. And so he comes back from New York to Flint just to see what's going on. And he goes for a ride in a Buick, possibly the third time in his life that he's been in a car, but he likes it. It's a smooth ride.

He decides he's going to drive it around for two months and see how this whole car thing works. And it works. He drives it through you know, creek beds on dirt roads, and he thinks, yes, this is a good car. Cars are going to be big. I will take over Buick and I will make it succeed. I can sell this thing. I can sell this Yes, that is Billy Durant's worldview. And in fact, there is this lovely description of Durant at this time written later by

his daughter Marjorie, about what it was like. Please. There were men at dinner, There were men at the front door. The parlor was often full of men, and behind closed doors there were other men. They talked and they listened, but my father mostly listened. When he did talk, it was like a violin beginning to play. Those present had to listen. I know.

shops with guys building cars one by one. This is before Henry Ford brings mass production and economy of scale to cars, and it's clear already that there's gonna be consolidation in the industry. This is the era of GP Morgan. You know US Steel, General Electric, and JP Morgan, the great consolidator, decides it's time to create an automotive trust, consolidate the car industry by merging the biggest players together.

And early in nineteen oh eight, Morgan's son in law gets Billy Durant of Buick and Henry Ford of Ford to come to a meeting in New York, along with the heads of a couple other big car companies.

But you know, everybody has their price, and he says, I will sell you my share of the Ford Motor Company for cash three million dollars, which was clearly a huge sum. Yeah, nobody was going to pay it too much, and the deal falls apart. It's fun to think of what could have been, though, and importantly for our story, this meeting gives Billy Durant an idea, Oh, somebody is going to consolidate the car market. This deal didn't work, but some deal will work. Somebody's going to win. I'm

Billy Durant. Why shouldn't it be me? So instead of calling the birds from the trees, he's calling the companies to him. Yes, and he is literally calling the companies

to him. There is this story that he gets back to Flint in the middle of the night one time and he calls at three in the morning this little struggling car company called Oldsmobile and tells the head of Oldsmobile, Look, consolidation is coming, and I'm going to create a holding company and together we'll have the holding company start by acquiring Oldsmobile and Buick Apes together strong diamond hands, diamond hands, and head of Oldsmobile is in and so in September

of nineteen oh eight, Durant creates his holding company, and he gives it one of those great old school generic company names like USDL or National Led. General Motors such a boring name, especially in this industry where everyone is making bespoke cars named after themselves. I think it's because he knows the brand is not going to be General Motors, right. He already knows there's going to be Buck and Oldsmobile

and everything else he can get his hands on. So Duran has this big idea, this holding company idea, and crucially, from his years on Wall Street, he knows how stocks work. He knows that stocks are a tool. You start a company. You can issue pieces of paper this time it was literal pieces of paper stock certificates, and use the proceeds from selling those pieces of paper to buy real companies. He is about to do this to go on one

of the greatest buying sprees in business history. Over the next year and a half, GM will acquire majority control of a major company every month, month after month. Starts with Buick and Oldsmobile. A few months later, in early nineteen oh nine, he buys a struggling car company called Oakland, which will later be renamed for the town Word's headquartered in Michigan Pontiac. A few months after that, he buys a company focused on the high end of the market, Cadillac,

remember from last week was founded by Henry Ford. Buys a couple little truck companies that eventually become GMC Trucks. So he's going hard at horizontal integration, right.

company that makes electric headlamps. Company turns out to be a fraud, no fake innovation, like they had backdated their patents or something, and GEO on the patent send and Durant had to write down the entire investment. But he's Billy Durant. By nineteen ten, General Motors is selling twenty one different models made by ten different manufacturers and Just to be clear, there is no synergy here. It's not

one giant factory with everyone working together. No, it is a total mess assembled by this manic salesman who just wants to make deals. And this is around the time that the model t Ford starts to take off. The price is getting cheaper. It's the best selling car in the country. It's one car getting more more efficient every time, while Billy Durant is creating an empire, an inefficient empire. Yes, and Ford is winning and GM is losing very clearly at this point. So by the middle of nineteen ten,

GMO's millions of dollars to suppliers. They've got all this inventory on hand. They lay off a third of their workforce, and Billy has to go to the bankers for loans. And the bankers look at gim and the whole company is a mess. They can't even tell who's doing what. Each sub company has its own books, and the bankers are like, look, we are not going to put money into Billy Durant. Yes, GM is a real company, they're making cars. But if we're going to put money into this,

Billy Durant has got to go. So now Billy Durant is out at GM. We're going to take a break and we're going to come back, and then Billy Durant is going to create a company to compete against GM. Can't stop this guy. In fact, because he's Billy Durant, He's actually going to create companies to compete against GM.

That's the end of the ads. When the bankers fired Billy Durant from his job running GM, they also stopped production of GM's low end Buick, and that low end Buick was GM's strongest competitor to the Ford Model T and I guess the bankers were like, let's not even try and compete on that one. Ford is clearly winning there. Let's leave that end of the market to him. And Billy Durant was like opportunity, Yeah, low end of the market. I can compete there. And like a lot of founders today,

he was still this charismatic guy. We were talking about this. Our producer Gabriel was like, yes, like Adam Newman, Yeah, he started, we were blew up and got more money to start some new thing. Billy Grant was like that. He was a gifted salesman. People still wanted to invest in him, so he started issuing stock and creating companies. Created four companies, and there's one that we really care about. He started it with a famous Swiss race car driver

named Louis Chevrolet. Amazing. I thought it was like an explorer or something town in Michigan or something. No, it was a Swiss race car driver. It started out badly, and Durant ended up buying out Louis Chevrolet for ten thousand dollars and rolled up all of these companies he had started into one company, into Chevrolet with one mission, create a car that can compete with the Ford Model T. And he can't quite compete on price, like Ford is

just too far ahead. But he builds slightly nicer and slightly more expensive cars because if you're competing with a car for the poor, as Henry Ford put it, maybe there are people who think of themselves as not quite as poor as my neighbor and want to show it off. Yeah. And you know, big markets get a lot of niches. There are, in fact a lot of niches. I think of like the Galapagos and like all the finches with

each little beak. As the car market is growing, there are more profitable niches and a Durant finds one in the slightly more expensive than a model T Niche. In nineteen fifteen, he launches a car called the four ninety, the Chevy four ninety, which is supposed to cost four hundred and ninety dollars, the price of a model Tea around this time. Yes, actually cost five hundred and fifty dollars. Most Billy Durant thing ever, total salesman move. But it's

a hit anyway. Well, you pull them in with this and then show them a larger number. It's called the four ninety. But let me talk to the guy in the background. Sicher says, we just can't make that deal. We're giving them away. So now Durant is making money. People are actually buying this car. Anyways, you who he's doing with the money he's making. He is secretly buying up stock in GM, company started and then got kicked out of. And he has this dream of taking back

his baby, taken back GM. He goes to the people who sold him their companies when he was at GM. They of course still have GM stock. They agree to back him, and he also gets to know Pierre DuPont, very important the chemical family. Of the chemical family DuPont. He is the chairman of the board of GM also at this time, and he is running DuPont And at the time DuPont was largely in the explosives and gunpowder business. This is nineteen fifteen World War One. All of a sudden,

his products are very popular. Good time to be in the explosives and gunpowder business. So DuPont's taking his blood money basically and investing it in GM, and Billy Durant gets DuPont on his side, and a few months later, Billy Durant goes to a GM board meeting and drops the bomb. He says, I and Chevrolet now control a majority of the shares of General Motors and there's nothing you can do about it. I'm back. Charm beats organization.

I guess so, I guess. So he charmed his way back, at least for now, and he does the thing again. He does the thing again, issuing stock building factories, buying companies, borrowing money, making more cars. Again. There's a downturn. This time it's the recession of nineteen twenty and Billy Durant

is in trouble again. And he's in trouble personally because very much in keeping with his character, Billy Durrant has been busy borrowing money to buy GM stock, and the collateral he uses for those loans is the GM stock he already owns. And so now that the stock price is falling, the lenders are like, we need our money back, and in order to give them their money back, he's got to sell the stock.

like handwritten notes. It's worse than DuPont thought. DuPont writes a letter to his brother just after this. Read this line from this letter, mister Durant stated that he had no personal books or accounts and was unable to give definitive statements. He doesn't know how much he owns or who he owes it to. So somebody got all Durant's papers together and edited up, and in fact he owed thirty million dollars and he has again yes to pond At. Some other bankers bail him out and they fire him.

But there was this one key thing Billy Durant had done a few years earlier when he was a vertically integrating back when he was buying up all those parts company. This is the engine motor company you talked about. It's actually even more boring than that. It's a company that sold roller bearings. These things that are kind of like ball bearings, are cylindrical. Maybe they're just they go between

the axle and the wheel to reduce friction. And the company is not important because of the roller bearings, but because of the guy who was running the roller bearing company, guy named Alfred Sloane. He is kind of also like a human roller bearing. He is not exciting, not flashy, but very good at reducing friction. Oh nice, Yeah, he's good at making things more efficient, and Billy had brought Sloan into GM to run those parts companies that he

bought up. And once Billy is gone, Alfred Sloan, the human roller bearing, is going to turn GM into the efficient machine that's going to beat Henry Ford. And also he will create the model that is going to transform corporations around the world in the twentieth century. In fact, it's going to create what we think of as a corporation. Kind of that's after the break. Okay, we're back from

the break. Billy Durant is out and Alfred Sloan is in, and they're these opposites, but they are these just beautiful.

settled down. You know, the country has ended up realized you don't have all these new companies coming along doing things nobody's ever done before. And in fact, when I was, you know, working on today's episode, I looked at a list of the most valuable companies in nineteen ninety five, right before the dot com boom. The most valuable companies in America at that time were ge Exon originally part of Standard Oil, AT and T, Coca Cola, and Philip Morris.

These companies are one hundred years old at that point. They were started in the late eighteen hundred. They were so, yeah, they're all one hundred year old companies. Yeah yeah, yeah. So they had been run by this managerial class for decades and very different than today. You know, today, if you look at the biggest companies, a lot of them were started by people who are still alive, in many cases still running the company, you know, Elon Musk, Jensen,

wang Mark Zuckerberg. But for most of the twentieth century, American business was not dominated by entrepreneurial cowboys. It was dominated by managers, by people like Alfred Sloan.

back to a manager era. All right. Our manager hero, Alfred Sloan rides in on his boring, slow but safe horse in the early twenties and he is about to invent the model for how managers are going to control American business for essentially the rest of the twentieth century. Becomes president of GM in nineteen twenty three, inherits this total mess from Billy Durant. All these companies have their

own bookkeeping systems. They're all doing their own thing. It's hard even to come pair, like is Cadillac making more money? Is you know, Chevy doing doing better? Under Billy Durant. There is no real GM headquarters. It's just Durant and a few assistants running around calling people and making deals. And Sloan clearly sees that there needs to be more centralization, needs you know, GM needs to be a unified company.

But it's it's interesting and subtle because he also realizes that Cadillac needs to still be Cadillac, and Chevy needs to still be Chevy. They are at some level different with loyalty, with loyalty, even with creativity, Like it is a creative business making cars, there's some style involved. They're going to bring in more style. And so Sloan comes up with this system that is gonna shape big companies

around the US and around the world. And again, it's one of those ideas that seems obvious to us now because it's ubiquitous, but it wasn't obvious at the time, and that is this. Sloan makes each car brand, you know, Chevy, Cadillac, Oldsomobile, its own division, with its own profit and loss line.

It's responsible for its own p and L. And then he creates this small team of senior executives at GM who don't have day to day operating responsibility and whose job is to think big yes, to keep track of the finances, but maybe more importantly, to think about GM's long term strategy, which sounds extremely boring and manager but it is extremely effective. It works, and they start teaching this in schools. This is the rise of the manager class. You went to business school. I have a master's in

business administration. You are the descendant of Alfred Sloan. Right. Part of the reason I think it works so well at GM is because Sloan and the other top managers he brings in as these senior executives, are really good at understanding what's happening in America in the nineteen twenties and at taking that understanding and using it to push the country further, to shape the country in a way.

Of course, that is going to be good for GM, but that has a profound effect on America, on American culture. So I want to point to three key moves it's GM makes around this time. Yes, deren what I've prepared for you this presentation. Okay, three key moves Sloane makes at GM around this time. Move number one. Maybe you have one of those big pointers. This is actually Sloan's language here. This headline for this one, A Car for Every Purse and Purpose Beautiful, comes from the nineteen twenty

four Annual Report. And the idea is GM is going to clearly differentiate its division so that one they're not competing with each other. And two, more interestingly, if you are a car buyer, whatever you need, however much you want to pay, there is a clear GM brand for you.

is you buy a catalgy. I wouldn't know personally, but I admire those who do a car for every purse and purpose for every wallet and want move number one. The boardroom's taking notes. They're looking next slide move number two. Keep the customer dissatisfied, Jadles. Nineteen twenties, Chevrolet started bringing out new models of its cars every year, and within a few years this had spread to all of GM. So every brand is bringing out a new model every year.

And to be clear, it's not like they were re engineering the car on the inside every year. This always confused me.

that is essentially disposable. Yes, Sloan was so committed to this idea of cars in fashion that he actually created a whole department called Art and Color. Remember this is like an heavy industry industry. This is big factories. This is not a thing people thought of as fashion. And so often the new model would be like, oh yeah, the new model. It has some chrome here that the headlamp is a different shape. You don't want that old headlamp shape. Did Henry Ford have an art and color department?

Was black? It was one guy who was like, how about if we had Hardy Foord, It's like keep it black. So there is this key line from Charles Kettering, the head of research at GM around the time. He was the one who had this phrase, keep the customer dissatisfied. He wrote, if everyone were satisfied, no one would buy the new thing because no one would want it. Around the boardroom table, there is a murmur and a stroking of beards. Move number three by now pay later. This

guy's inventing America. This one actually really is this one. Actually we got a credit to Billy Durant. This one started when Durant was running the company. GM created its own finance arm GMAC Financing, the General Motors Acceptance Corporation, because then, as now, most people don't have enough money, you know, in their bank account to just go buy a car. You might be able to get a bank loan,

you might not. And GMAC meant that somebody without enough money in the bank could walk in off the street, get a loan at the dealership, and drive off in a brand new car. To summarize, gentlemen, we have a car for every person purpose. We have new models every year, and we have financing so people can pay for it. And you know, if you zoom out and think about the nineteen twenties, yeah, it's coming at the perfect time

because people have money, people are obsessed with fashion. This is the rise of America or post war everyone wants to spend. Sing's kind of making it happen, right is it is coming at the right time, and it is creating this consumerist, debt driven nineteen twenties culture that we know because we also have the rate at this point and advertising and selling these things. So now think about Henry Ford, who that I don't feel that bad for him, who at the beginning of the decade was on top

of the world. Right, Like, all three of these moves from GM are like anti Ford moves. You know, a car for every purse and purpose. No, for Ford, the car for every person purpose is the Model T. There is one car. It is the car, a new model every year. Absolutely not. In fact, you know, they sold the Model T for what for well over a decade, but it did change on the insight over that time.

They kind of played down the changes because, and I'm reading a quote from him, we believe that when a man buys one of our cars, we should keep it running for him as long as we can and at the lowest upkeep cost. Oh how nive? Oh, I mean kind of nice in its way. So yeah, so that's the Ford quote. Compare that with this famous quote from a GM exec named Harley Earl, actually guy they brought in to start that art and color department in the twenties.

In the fifties, here's the thing he said. In the fifties, here you take it. In nineteen thirty four, the average car ownership was a span of five years. Now it's two years. When it is one year, we will have a perfect score. I kind of hate that. I kind of hate that. Well, Marge, car ownership now is much longer.

money and not in debt and saving. Yeah, and there was this thing at Ford, where you could like save money every week, you like a deposit five bucks every week at the Ford dealer, and when you have enough money, you buy a car. Obviously people would rather just borrow the money today and drive off in a car. And so for all of these reasons, GM passes Ford. At the start of the twenties, Ford's market share was over

fifty percent. By nineteen twenty six, fords market share has fallen to thirty percent, and things are actually about to get worse for Ford. In nineteen twenty seven, Henry Ford finally went along with all the execs who'd been telling him it's time to come up with a new car. The Model T. It's a little bit old by now, so in twenty seven he's finally like, okay, we're gonna do something more modern. They're going to call this new

car the Model A. Back to the beginning. Yeah, they have a prototype, they know the car they're gonna make.

But at this moment, the thing that made Ford great in a way is going to come back to bite them, and that is Ford's factories had been optimized to this wild degree to be incredibly efficient at building the Model T one thing one thing like Remember there was that machine that drilled I think was twenty four holes all at the same time in the engine block for the Model T. Now they got a new engine, that machine is useless now and so in fact, in order to switch over from the Model T to the Model A,

Ford has to shut down production entirely for six months. Six months when they're not making cars, they're just changing over the factory.

were screwed when there were any sort of delays. And the lesson and it comes again and again, is yes, it is a short term view to be super super super efficient. But clearly for Henry Ford this put him way behind GM.

They wanted to be able to trade up to a higher status brand got a raise, and if they didn't get a raise, they want to be able to borrow the money to buy the higher status car. What Alfred Sloane understood that Henry Ford never really did was that this era of mass production that Ford had created gave rise to an era of mass consumption to the modern consumer. And so Sloan and GM did what great companies do. They saw this change in the world, and then they

pulled that change forward to their own benefit. GM pushed Americans to become a nation of consumers, and they capitalized on that consumerism, which is why GM and not Ford, was the biggest carmaker in the world for the rest

of the twentieth century. Boom before you go today, I just want to thank our listener, Professor Umberto Barreto, who wrote to us after he heard the episode about the Origin of Silicon Valley where we talked about Sputnik, the Soviet satellite that came as this huge surprise to America, and he pointed out this really interesting thing that in fact I didn't know, and that is people at the top levels of the government in the United States were

apparently not so surprised by Sputnik. They knew that the Soviets were working on a satellite, and interestingly, like President Eisenhower and others around him were building their own spy satellite at the time, and they kind of liked Sputnik because it was like, oh, now it's okay to shoot up a satellite and fly it over another country, which wasn't clear if that was going to be okay, and they're like, we're going to have our spy satellite go

fly over Russia and find out where their missiles. Soviets did it, we can do it too. Thank you, professor for writing to us. Everybody should write to us. I love getting emails. We're at Business History at Pushkin dot FM. I'm also at Jacob Goldstein on x and I'm on LinkedIn as well. I'm at Radiosmith All the Places That Matter. Today's show was produced by Gabriel Hunter Chang. It was in engineered by Sarah Bruguer and Our showrunner and editor

is Ryan Dilly. My name is Jacob Goldstein. I'm Robert Smith. Thanks for listening.