Automotive industry Summary

  • Last updated on November 10, 2022

Since the early twentieth century, thousands of businesses, large and small, have participated in the manufacture, marketing, and sale of motor vehicles, providing employment for millions of Americans and requiring huge capital investments.

Gasoline-powered vehicles were invented primarily by Europeans during the late nineteenth century, but they were improved and made into the center of a large-scale industry in the United States. Over the years, many domestic companies have tried to manufacture automobiles, but the vast majority failed to earn a profit. In 1900, there was only one car for every ninety-five hundred Americans; ten years later, the ratio was one car per two hundred; by 1930, the ratio had shrunk to one for every five Americans. The history of the industry has always involved numerous interrelated components, including innovations in technology, marketing strategies, and adaptations to changing needs and cultural values. American manufacturers–particularly General Motors (GM), the Ford Motor Company, and Chrysler Motors–maintained global dominance from the early twentieth century until the last two decades of the century, but thereafter Japanese and Korean products grew more successful, at Detroit’s expense.Automotive industry

The Beginning of the Industry

Many people in many different places were responsible for the invention of the automobile. Étienne Lenoir, a Belgian, made the first successful internal combustion engine in 1860, and twenty-five years later Carl Benz, a German engineer, was the first to build a usable vehicle powered by such an engine. In 1893, Charles E. and J. Frank Duryea, Charles E.Duryea, J. FrankDuryea built America’s first successful automobile in Springfield, Connecticut, and two years later their vehicle prevailed in a car race against German-built competitors. The Duryea car averaged seven miles per hour in the fifty-five-mile race from Chicago to Evanston, Illinois. At this time, accidents and breakdowns were extremely common, and many people looked on motor vehicles as a passing fad.

During the 1890’s, numerous entrepreneurs were competing in an attempt to develop a commercially profitable vehicle. In 1897, Colonel Albert A. Pope, Albert A.Pope of Hartford, Connecticut, established the Pope Manufacturing CompanyPope Manufacturing Company, which is considered the true beginning of the U.S. automobile industry. That same year, Francis and Freeman Stanley began making steam automobiles in Newton, Massachusetts, and they built a few hundred Stanley Steamers before the advantages of the internal combustion engine become clear. The first truly successful company, the Olds Motor WorksOlds Motor Works, founded by Random E. Olds, Random E.Olds in 1899, sold five thousand cars during its first five years of operations. The “Merry Oldsmobile” was dependable, affordable, and simple to operate. Olds was the first to apply the Assembly-line productionassembly-line principle to the automobile and the first to build a factory specifically designed to manufacture automobiles.

In 1902, Henry M. Leland, Henry M.Leland founded the Cadillac Automobile CompanyCadillac Automobile Company, which was named after the founder of Detroit. In 1903, David Dunbar Buick, David DunbarBuick founded the Buick Motor CompanyBuick Motor Company. That same year Henry Ford, HenryFord, an engineer who had failed in two earlier business ventures, established the Ford Motor CompanyFord Motor Company, which for its first three years simply assembled parts supplied by other companies. Although Thomas Alva Edison encouraged Ford to persevere, Edison disdained the noise and pollution of gasoline engines, investing his time and money in an unsuccessful attempt to build an electric car.

The majority of the earliest automobile manufacturers paid a royalty of about 1 percent to the Association of Licensed Motor VehiclesAssociation of Licensed Motor Vehicles (ALAM), which existed only because George Selden, GeorgeSelden had obtained a patent for making automobiles in 1895. Although Selden did not actually build an automobile until 1904, he obtained a patent based on a crude model that he had first submitted in 1877, after observing a two-cycle engine built by George Brayton. Henry Ford refused to pay royalties to ALAM, and after a long legal battle, a federal appellate court in 1911 ruled in Ford’s favor, holding that Selden’s patent applied only to automobiles using the obsolete Brayton engine. Publicity from the litigation helped enhance Ford’s reputation as an opponent of unmerited gain at the public’s expense.

Automobiles Become Mainstream

During the first two decades of the twentieth century, Ford’s company emerged as the leading American manufacturer of automobiles. In 1906, Ford successfully produced a popular vehicle, the Model N, which he priced at $500, significantly undercutting his competition. By 1908, Ford had sold twelve thousand Model Ns. His basic strategy was to design a car for a mass market and then search for the means to produce it as cheaply as possible. Based on his intuition and a long heritage of American manufacturing, he emphasized five principles of production: standardization of product, interchangeability of parts, efficient mechanization, continuous flow production, and the minimal use of skilled labor.

In 1908, Ford introduced his famous Ford Model TModel T, also known as the Tin Lizzie, and he sold ten thousand of the model in the first year. After opening a large Highland Park plant in 1911, Ford controlled 20 percent of the business within a year. In 1913, he introduced the moving assembly line, in which individual workers stayed in one place and performed only one or two simple operations, as the automobiles rolled by them. The resulting efficiency allowed Ford to further reduce prices, quickly propelling the Model T to represent 40 percent of the U.S. market. In 1914, Ford decided to reward workers by paying them $5 per day, which was more than twice the average industrial wage. Continuing to improve his product, Ford was the first manufacturer to use vanadium steel and regional assembly plants.

With the need for military vehicles and trucks during World War I, annual investments in new plants grew from $600 million in 1914 to $2.5 billion in 1918. Detroit was the fastest growing city in the country, going from a population of 465,000 in 1910 to 994,000 in 1920. The prosperity of the 1920’s was a boon to the industry, as was the Federal-Aid Highway Act of 1921[Federal Aid Highway Act of 1921]Federal Highway Act of 1921, which provided states with matching funds for highway construction. During the decade, production soared from 1.1 million units in 1920 to 5.3 million in 1929. President Warren G. Harding observed that “the motorcar has become an indispensable instrument of our political, social, and industrial life.”

For many years, Ford’s River Rouge Complex, which was constructed between 1917 and 1928, was the largest integrated factory in the world. By 1921, the Model T controlled over 55 percent of the U.S. market. Ford continually improved mechanization to employ fewer skilled workers, and by 1914, three-fourths of the company’s workforce was unskilled. Many were immigrants, and it was said that they needed only to understand one command, “hurry up.” Most of the savings from mechanization were passed on to the consumer. The price of the Model T, which was $690 in 1911, dropped to only $265 in 1927, the last year of its production. By then, more than 15 million Model T’s had been sold.

During the 1920’s, General MotorsGeneral Motors (GM) began to challenge Ford’s dominance of the automobile industry. In 1908, William Crapo Durant, William CrapoDurant, a flamboyant businessman, had founded GM as a holding company for Buick, and he then added Oldsmobile, Cadillac, and Pontiac. After Durant lost control of GM to a banking trust in 1910, he and race car driver Louis Chevrolet, LouisChevrolet founded the Chevrolet CompanyChevrolet Company. By 1916, Durant had earned enough money to purchase a controlling interest of GM, and he retook control of the company through a dramatic proxy war. In 1919, Durant successfully established the innovative finance division, General Motors Acceptance CorporationGeneral Motors Acceptance Corporation (GMAC), but he made the bad mistake of overexpanding during an economic downturn. Pierre Du Pont and other investors forced Durant to leave GM in 1920, and they replaced him with the more practical Alfred Sloan, Alfred P.Sloan, who served as president from 1923 to 1946 and as chairman of the board from 1937 to 1956.

Credited with coining the term “professional manager,” Sloan emphasized order, careful research, and joint decisions based on the bottom line. In organizing GM’s autonomous divisions, his goal was “decentralized operations with coordinated control.” In contrast to Henry Ford’s pragmatic view of the automobile as simply a means of transportation, Sloan recognized that an automobile was a personal statement of aspiration and status. Appreciating the differences in consumers, he used the motto “a car for every purse and purpose.” Under Sloan’s leadership, GM’s sales grew from $304 million in 1921 to $1.5 billion in 1929.

During the Great Depression;automotive industryGreat Depression of the 1930’s, the production of automobiles plummeted from 5.5 million units in 1929 to only 1.5 million in 1932. Automobile ownership had already become so firmly entrenched in U.S. culture, though, that gasoline sales declined by only 4 percent. One of the consequences of the Depression was that it forced dozens of small manufacturers out of business. In 1929, the independents held about one-quarter of the market; by 1941, their share was only 10 percent. Passage of the National Labor Relations Act (also called the Wagner Act) in 1935, which established workers’ right to collective bargaining, also had a great impact on the automobile industry. GM was persuaded to negotiate with the United Auto WorkersUnited Auto Workers (UAW) as a result of the Flint Sit-down strike of 1936-1937sit-down strike of 1936-1937. Despite Henry Ford’s disdain for labor unions, a strike combined with government pressure finally coerced him to recognize the UAW in 1941.

After World War II

Although the U.S. government prohibited production of passenger automobiles during World War II[World War 02];automotive industryWorld War II, the industry earned large profits by producing 8.6 million military vehicles, 3.8 million tanks, 2.5 million trucks, and 660,000 jeeps. When production of passenger automobiles was resumed in 1945, there was a tremendous pent-up demand. In 1945, about 25 million vehicles were registered in the country, with more than half older than ten years. In the next five years, some 21 million vehicles were produced, thereby replacing most of the prewar fleet. The UAW effectively took advantage of its bargaining position by negotiating with a single company at a time. With limited competition from foreign imports, U.S. companies avoided costly strikes by agreeing to generous benefits–health care insurance, Retirement plans;automotive industryretirement pensions, and cost-of-living wage adjustments. Few people at the time recognized the extent to which fringe benefits would create onerous “legacy costs” when the number of workers would later plummet.

By the 1960’s, a growing Safety, consumer;automotive industryconsumer movement was calling for governmental controls to force manufacturers to produce automobiles that were safer, consumed less energy, and emitted less pollution. Ralph Nader, RalphNader’s influential book Unsafe at Any Speed (Nader)Unsafe at Any Speed: The Designed-In Dangers of the American Automobile (1965) helped promote this movement. In 1965, Congress first mandated emissions standards in the Environment;airVehicle Air Pollution and Control Act, which would be modified frequently in subsequent years. The National Traffic and Motor Vehicle Safety Act of 1966 mandated a number of improvements for passenger safety. In 1975, moreover, Congress passed the Energy Policy and Conservation Act, which attempted to double the fuel efficiency of new cars by 1985 by mandating the Corporate Average Fuel Economy standards (CAFE) for passenger cars.

Until the 1970’s, American manufacturers increasingly built vehicles that were larger and more powerful. During the 1960’s, a small number of Americans were purchasing small and relatively inexpensive Volkswagens, and during the 1970’s, manufacturers became alarmed about the growing popularity of Japanese imports. Detroit was unprepared for the explosion of oil prices in 1973 and 1979, which increased demand for small, energy-efficient cars. Factories closed, and some 300,000 workers were laid off. After the downturn almost forced Chrysler Motors, bailout of 1979Chrysler Corporation into bankruptcy, Congress in 1979 reluctantly passed legislation guaranteeing Chrysler with a loan of $1.5 billion. By trimming costs, closing old plants, and adding a number of popular models, Chrysler managed to make profits and begin paying off the loan by the mid-1980’s.

With growing automation and the continuing challenge of foreign competition, the number of U.S. autoworkers continued to decline. In 1978, 2.4 million Americans were employed in the industry; four years later, the number dropped to 1.8 million; by 2002, the number had dropped to 1.16 million; and by 2007, there were only 860,000. The share of the market held by the Big Three companies declined from 70 percent in 1998 to 49.4 percent in 2007. With their huge losses, financial analysts warned that one or more of the companies could be forced into bankruptcy. The crisis of the Big Three was due to a combination of factors, including a general decline in demand, legacy costs not faced by competitors, the public’s view that foreign automobiles were of better quality, and rising gasoline prices that caused consumers to prefer smaller vehicles. Toyota had become the largest producer of automobiles in the world. The number of JapanJapanese imports, however, had actually declined since the 1990’s, for by 2007 almost two out of every three Japanese nameplates sold in the United States was domestically made. Another trend was the movement of factories to the South, where labor costs were lower. Whereas the South was home to only 7 percent of automobile workers in 1972, it was home to 17 percent thirty years later.

In 2008, with rising gasoline prices that made sport-utility vehicles (SUVs) and trucks less popular and a credit crisis in the fall, the Big Three (and the Japanese automakers as well, although to a lesser extent) saw their sales and profits drop. In October, the Big Three automakers appealed to the federal government for financial aid, as Chrysler and General Motors faced possible bankruptcies. On December 19, President George W. Bush announced that $13.4 billion in emergency loans would be made available to keep Chrysler and General Motors afloat, with an additional $4 billion to be available in February. However, the automakers were given the loans on condition that they make major concessions and organizational changes by March 31, 2009, to demonstrate that they could return to profitability. Ford, which was in a better financial state, was not expected to make use of the federal loans. On February 18, 2009, General Motors and Chrysler asked for an additional $14 billion in aid, while presenting restructuring plans designed to return their companies to profitability.

Further Reading
  • Halberstam, David. The Reckoning. New York: Morrow, 1986. A well-written account of how and why the automobile industry experienced relative decline as it struggled to meet the challenge of Japanese competition.
  • Maynard, Micheline. The End of Detroit: How the Big Three Lost Their Grip on the American Car Market. New York: Doubleday, 2004. Argues that the Big Three’s decline since the 1990’s was primarily due to the failure to provide quality and fuel efficiency at reasonable cost.
  • Pelfrey, William. Billy, Alfred, and General Motors: The Story of Two Unique Men, a Legendary Company, and a Remarkable Time in American History. New York: AMACOM, 2006. Compelling and scholarly account of how William Crapo Durant founded the company and how Alfred P. Sloan developed it into one of the most successful enterprises in U.S. history.
  • Rae, John R. The American Automobile Industry. Boston: Twayne, 1984. A succinct general history with many fascinating anecdotes, providing an excellent introduction to the topic.
  • Shimokawa, Koichi. The Japanese Automobile Industry: A Business History. London: Athlone Press, 1994. A relatively brief account of the dramatic growth of the Japanese industry after World War II.
  • Watts, Steven. People’s Tycoon: Henry Ford and the American Century. New York: Knopf, 2006. Puts forward the thesis that Ford’s great success was shaped by the emergence of consumer capitalism, bureaucracy, mass culture, and the corporate state.

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