The Rise of the Big Three
...or how I approach the auto industry
1. Why this, why now
The “model” substack starts with this, but I want to focus on content, not autobiography. My main focus will be the global auto industry, but I will write about China’s economy, economics as a science, and Japan, not as an exotic but rather an “ordinary” society. (I read and speak Japanese, living 7 years of living in metro Tokyo with many short visits over the past 50 years.)
2. Mindset
Economics is many things. One is as a body of theory that lives in the world of mathematics. A second is as an approach to understanding reality, using simplifying assumptions to build models that is informed by empirics. (There’s also an empirical side, loosely informed by models.) I will avoid jargon, so no more here.
However, I’m not just trained in economics, I’ve also worked in car factories in Detroit, and visited 120+ factories in a dozen countries for research and as a judge for the Automotive News PACE awards, which recognize innovations developed by suppliers. I’ve “done” business history, using sources in Japanese and German. And so on.
Enough for now. Rather, too much.
3. The Rise of the Big Three: Economies of Scale
Consolidation
Well, Henry Ford’s attempt to use a production line to increase Model T output in the 1910s required the development of easy-to-assemble parts. That’s an old idea, Eli Whitney had staged a demonstration of interchangeable musket parts in 1801. (I use “staged” very deliberately, my great, great, great, great uncle was not above defrauding the US government to stave off bankruptcy.) But in 1908 Henry, like the rest of the industry, bought parts from outside firms and hired experienced fitters to file and bang the parts until they went together.1
The Model T was a hit, and Henry was desperate to milk his success, which required producing at volume. Most of his existing suppliers were too small to meet his demand, plus he’d gone bankrupt twice so there was a rational fear on their part of letting him become their dominant customer. So Henry was forced to invest in production. Most suppliers of the day used general-purpose machines that let them serve multiple customers but limited output. In contrast, Model T volume let Ford, an inveterate tinkerer, develop dedicated machine tools. You had to sell a lot of a car model for that to pay off. The hundreds of small car companies in the US were soon at a major cost disadvantage.
The final straw was the rise of the enclosed (and painted) steel body, developed by the Budd Company and sold initially to the Dodge Brothers, whose car company later became part of Chrysler. Stamping machines big enough to turn out pieces of car bodies were expensive, the dies that went in them were expensive, and you needed a lot of both. Doors and fenders needed 5 or more sets of top and bottom dies to progressively stretch sheet metal for each piece, with separate sets for the right and left. It was a major capital expenditure, and while a few luxury makers such as Cord survived for a while with hand-made bodies, even they eventually succumbed.
Hence the Big Three, with a few others hanging on until the last remnants were absorbed in Chrysler’s purchase of American Motors in 1987. Ironically, by that point – with hindsight – the Big Three was in decline.
Similar forces worked out, albeit only after 1945, in Europe and Japan. Those are separate stories.
Behavior
Ford mis-stepped; that though is not a “scale” story, so I leave for a subsequent post. Chrysler never rose to #2, or did so only during Ford’s dark days of 1926-27. GM went from success to success. And knew what to do with it.
Under Alfred Sloan, GM toyed with 50% of the market from the late 1920s into the 1970s, a fifty year run. What do you do with that? Duh, you price what the market will bear. It helped that antitrust was active during that era. Lowering prices to grab more of the market would have resulted in GM being broken into pieces. (I’ll return to that alternative history when I focus on Japan’s industry.) Well, then, keep prices high.
The result was a company with a 20% return on investment that made GM the most profitable firm globally for much of that period, and when oil companies took over, the most profitable manufacturer. But it also changed GM’s management dynamics. Pushing a successful brand was problematic, that 50% ceiling. Profits were so great that there was no apparent need to improve their factories. Technical progress wasn’t totally stagnant, with radios and automatic transmissions and better metallurgy. So how did you get ahead? – by outmaneuvering rivals in intrafirm political battles. I’ll return to that, and a series of books that shed light on the implications for GM and for the industry – because operating under GM’s price umbrella, Ford and Chrysler were only partly immune from the same disease of dysfunctional management.
The End Game
Economies of scale haven’t gone away; to be efficient, a modern engine or transmission plant turns out as many as a million units a year. However, the market grew, in the US and globally. Ultimately that enabled new entry. Until the 1980s, there were only 3 significant producers, plus American Motors. Today the roster is long, with GM, Ford, Stellantis (the former Chrysler), Toyota, Honda, Nissan, Subaru, Mazda (in Mexico), VW, Hyundai, Kia, Audi (in Mexico) BMW, Mercedes, Volvo, Tesla, and Rivian. I’ve missed one or two floundering EV entrants, but my quick count is that there are now 16 players, many of which also import and sometimes (BMW) export. The dynamics are different.
3. Conclusion
I’ve kept this entry short, and full of teasers.
To foreshadow future topics, I’ll slip into jargon. Here I’ve used arguments driven by scale, with a bit on oligopoly. But cars are also durable goods, differentiated consumer goods, and highly regulated (think 2 tons of emissions-spewing metal moving at 75 mph). There’s also international trade, and economic geography, and technology dynamics, and value chains that stretch from iron mines to recycling scrap metal, all in the service of transportation. I will strive for the story, and try to relegate formal economics to the background.
The original Model T production site survived the vagaries of history, unlike his first assembly line. The Piquette Avenue Plant is now a wonderful Model T museum, with examples of how the simplicity of the design allowed it to be modified (or, as the work truck industry today would phrase it, be “upfitted”) to serve as a bus (well, jitney), a pickup, a snowcat or a luxury vehicle.