Studebaker Announces Plans to Abandon U.S. Auto Production Summary

  • Last updated on November 10, 2022

The termination of Studebaker production ended an era of independent automobile manufacturing and demonstrated that auto firms would need to be lean, efficient, and large to survive in the new economy.

Summary of Event

On December 9, 1963, Studebaker became the last significant independent firm completely to end automobile production in the United States. Consolidation of the U.S. automobile industry between 1925 and 1963 reduced the number of major automobile producers from forty-four to four. The 1987 merger of Chrysler Chrysler and American Motors American Motors Corporation reduced the U.S. industry to three firms. The closing of Studebaker signaled that only large and efficient automobile firms could survive. Studebaker Corporation Automobiles [kw]Studebaker Announces Plans to Abandon U.S. Auto Production (Dec. 9, 1963) [kw]U.S. Auto Production, Studebaker Announces Plans to Abandon (Dec. 9, 1963) [kw]Auto Production, Studebaker Announces Plans to Abandon U.S. (Dec. 9, 1963) Studebaker Corporation Automobiles [g]North America;Dec. 9, 1963: Studebaker Announces Plans to Abandon U.S. Auto Production[07750] [g]United States;Dec. 9, 1963: Studebaker Announces Plans to Abandon U.S. Auto Production[07750] [c]Manufacturing and industry;Dec. 9, 1963: Studebaker Announces Plans to Abandon U.S. Auto Production[07750] [c]Business and labor;Dec. 9, 1963: Studebaker Announces Plans to Abandon U.S. Auto Production[07750] Burlingame, Byers A. Egbert, Sherwood H. Hoffman, Paul G. Vance, Harold S. Nance, James J. Churchill, Harold E. Grundy, Gordon

All of U.S. industry felt the direct and indirect effects of the Studebaker closing. Studebaker, founded in 1852, had been the largest employer in South Bend, Indiana, for many years. Many of its seven thousand former employees were left without pensions when the plants closed. That situation caused major reform in federal legislation governing pension plans.

Until the late 1950’s, Studebaker was the largest of the U.S. independent automobile firms, those not affiliated with General Motors, Ford, or Chrysler. These included Packard, Hudson, Nash, Willys, and Kaiser-Fraser. The independents experienced growth following World War II. In 1948, they held 19 percent of the automobile market. Automobile competition intensified in the 1950’s and 1960’s. General Motors, Ford, and Chrysler introduced new products and production and marketing strategies. By the time of Studebaker closing in 1963, the market share of the independents had declined to 7 percent.

Following reorganization from bankruptcy in the 1930’s, Studebaker had continuity of management under Paul G. Hoffman and Harold S. Vance, who between them controlled the positions of company president and chairman of the board of directors between 1933 and 1953. The company was profitable for each year from 1939 to 1953. After successfully introducing the first postwar new model of car in 1947, Studebaker reached a production peak of 318,000 cars and trucks in 1950. Production problems with redesigned 1953 models raised costs, and sales were disappointing. By 1954, Studebaker was operating at a loss and produced only about 100,000 cars and trucks.

In late 1954, Studebaker was purchased by a financially stronger Packard Motor Car Company Packard Motor Car Company , which had been founded in 1899. Following the merger, James J. Nance, who had been president of Packard, became the president of Studebaker-Packard Corporation (S-P). Under Nance, Studebaker-Packard attempted to become the fourth full-line producer of automobiles in the United States. Packards would be high-priced luxury cars, the Packard Clipper the medium-priced car, and Studebakers low-priced cars and trucks.

Studebaker-Packard produced 201,000 vehicles in 1955, but output dropped to 108,000 in 1956. Financial losses of $100 million from 1954 to 1956 caused the firm to abandon its full-line concept and undertake a corporate downsizing to become more efficient. The Packard plants in Detroit, Michigan, were closed, and all car and truck output was consolidated at South Bend.

To avoid bankruptcy, S-P sold a Packard engine plant and former Studebaker truck plant to the Curtiss-Wright Corporation for $25 million. Curtiss-Wright used the facilities for defense work. Curtiss-Wright also provided management advisory services to S-P until 1958. In late 1956, Nance resigned. Harold E. Churchill, general manager of the Studebaker Division, became president of Studebaker-Packard.

Financial losses continued in 1957 and 1958. In 1958, Studebaker-Packard reduced its debt from $55 million to $16 million by issuing stock to creditors and began a diversification plan through the acquisition of nonautomobile businesses.

The Lark compact car, the sporty Hawk model, and Studebaker trucks were the only vehicles produced in 1959. Churchill sought to duplicate the success of American Motors Corporation (AMC) with the small and fuel-efficient Studebaker Lark. The merger of the Nash-Kelvinator Corporation and Hudson Motor Car Company in 1954 had created American Motors. The success of its compact Rambler enabled AMC output to increase from 112,000 units in 1954 to 186,000 units in 1958.

The success of the Lark enabled Studebaker-Packard to earn a profit exceeding $28 million on output of 164,000 vehicles in 1959. In 1960, however, the Big Three automakers introduced their own compact cars. This increased competition resulted in S-P output declining to 118,200 units in 1960. Profits that year of less than $1 millon were a result of the nonautomotive diversified operations, the profits of which offset automobile losses.

Declining profits resulted in the removal of Churchill as president, although he continued as a director. The new president was Sherwood H. Egbert, who had been executive vice president of the McCulloch Chain Saw Company. Egbert undertook an aggressive product development program. The Lark and Hawk were restyled for 1962, and the fiberglass-bodied, high-performance Avanti was introduced in 1963.

Egbert intensified the diversification of the Studebaker Corporation, which had dropped Packard from its name in 1962. By 1963, the nonautomotive divisions included an oil additives producer, appliance manufacturers, and a small tractor producer. Nonautomotive divisions were profitable, but the automotive division lost $37 million between 1960 and 1963.

Automotive production declined in 1961 to 87,000 units but increased in 1962 to 101,000 cars and trucks. In 1962, a forty-two-day strike by the United Auto Workers union, over a work rules dispute, kept 1962 production below its potential. In 1963, sales difficulties again occurred, and production dropped below 90,000 vehicles.

Sales of the extensively restyled 1964 Studebaker cars were disappointing. By November, 1963, production was at a rate of less than 65,000 units per year. The break-even point, the production level at which the company began to earn profits, was about 120,000 units, and maximum efficiency (where costs per unit were lowest) required output of about 250,000 vehicles per year.

On November 22, 1963, the Studebaker board elected Byers A. Burlingame as president and chief executive officer to replace Egbert, who was having serious health problems. Burlingame had begun working at Packard in 1925 and had been vice president for finance of Studebaker. Burlingame and the board concluded that costs could not be reduced and sales could not be increased sufficiently to continue production in South Bend. Furthermore, funds were not available to modernize the plants, many of which were more than forty years old and were inefficient. On December 9, 1963, Studebaker Corporation announced that output of automobiles would end in South Bend. Studebaker passenger car production was to be continued at the Hamilton, Ontario, Canada assembly plant.

Significance

The Canadian operation and automotive division were managed by Gordon, president of Studebaker of Canada since 1958. Canadian output of 17,438 vehicles in 1964 and 18,592 in 1965 was insufficient to cover the overhead and selling costs in the United States and Canada. The Studebaker board concluded that added investment in the automotive division would not yield sufficient returns. On March 4, 1966, Burlingame announced that losses in the automotive division were irreversible and that all Studebaker auto production was to be discontinued.

The Studebaker Corporation nonautomotive divisions enabled the corporation to earn more than $16 million in 1966, following cessation of automobile production. Later, through a series of mergers, Studebaker became part of the McGraw-Edison Corporation. In 1985, Cooper Industries, an industrial equipment producer, purchased McGraw-Edison.

The 1963 Studebaker Avanti.

There were two important effects of the ending of U.S. automobile production by Studebaker. One impact involved the remaining automobile manufacturers, which, in an era of consolidation and global competition, required large volumes and efficient operations to survive. The other impact involved reform of pension plan legislation in the United States.

The high fixed costs of developing new cars and equipping plants to build them require high-volume output to minimize costs per unit. Lowest unit costs generally require an output of at least 250,000 per year in auto assembly plants and 500,000 units per year in engine plants. General Motors, Ford, and Chrysler had capacities much larger than did Studebaker or the other independents. GM was capable of producing more than five million vehicles per year. Ford was able to produce in excess of four million vehicles, and Chrysler’s capacity exceeded two million units. Studebaker management in the late 1950’s was aware of the need to increase volume to be efficient. The failure of the S-P full-line strategy prompted unsuccessful attempts to merge with Chrysler, Ford, and International Harvester, a truck producer.

Automotive industry mergers occurring after 1950 had as their objective the attainment of greater manufacturing efficiencies. The result was that by 1987 the U.S. auto industry consisted of only three firms. The first postwar merger was in 1953, between the Kaiser-Fraser Corporation and Willys-Overland. Kaiser-Fraser entered the automotive industry in 1947 and in 1948 reached peak output of 181,000 cars. Willys-Overland, founded in 1903, produced the Jeep vehicle and a compact passenger car. The merged company terminated auto output in 1955 and concentrated on Jeep production. In 1969, Kaiser-Jeep Corporation was purchased by American Motors, which had been formed in 1954 through the Nash and Hudson merger.

American Motors produced more than 400,000 cars in 1962 and 1963 but was unable to maintain sales at that level even after combining with Jeep. Renault of France bought control of AMC in the early 1980’s. The Renault investment was insufficient to develop AMC and Jeep vehicles that could consistently sell in volumes large enough for efficient low-cost production.

The failure of Studebaker and consolidation of other firms indicated that independent auto firms lacked the capital resources to become lean producers that could utilize multiskilled workers and flexible automated machinery to efficiently produce large numbers of vehicles. By the early 1980’s, Ford and Chrysler had invested the capital to become lean producers. General Motors began to adopt lean production practices later in the 1980’s. The major Japanese firms—Toyota, Nissan, and Honda—had begun using lean production in the 1970’s.

The end of Studebaker production had an impact beyond the auto industry. Studebaker had implemented a pension plan for hourly employees, effective in 1951. The plan was to be fully funded in thirty years. When Studebaker closed its South Bend plants in 1963, the pension fund was large enough to provide full benefits both to already retired workers and to active employees down to the age of sixty. Because the plan was not fully funded, workers between the age of forty and fifty received only 15 percent of promised benefits. Workers under the age of forty received nothing.

The Studebaker pension problem received widespread publicity. Public concern led various government agencies and Congress to undertake studies on pension plans in the late 1960’s. In response, the Employee Retirement Income Security Act Employee Retirement Income Security Act (1974) (ERISA) of 1974 established minimum vesting standards and insurance for pension plan termination. Under ERISA, if a pension plan terminates without sufficient funds to meet obligations, those obligations are assumed by the Pension Benefit Guarantee Corporation (PBGC), part of the U.S. Labor Department. Each company or union with a plan covered by ERISA makes insurance premium payments to the PBGC to cover the costs of the insurance protection. Studebaker Corporation Automobiles

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Edwards, Charles E. Dynamics of the United States Automobile Industry. Columbia: University of South Carolina Press, 1965. A comprehensive analysis of the manufacturing, marketing, and management problems of independent automobile producers. The text is supplemented by helpful tables and graphs on the operations of the independents from 1946 to 1963. The operation of the Big Three auto firms is not covered in depth. Accessible to a general readership.
  • citation-type="booksimple"

    xlink:type="simple">Hammer, Richard. “Welcome, Sherwood Egbert.” Fortune 64 (December, 1961): 94-97, 152-163. A survey article covering the business history of Studebaker in the 1956-1961 period. Emphasized are the role of individuals associated with Studebaker and the decision-making process of the firm. The declining position of independent firms receives adequate coverage. Written in journalistic style, the article is easy to read.
  • citation-type="booksimple"

    xlink:type="simple">Harris, William B. “The Breakdown of Studebaker-Packard.” Fortune 54 (October, 1956): 139-141, 222-232. Covered in detail are the Studebaker-Packard merger and subsequent downsizing of the firm, excessive costs at Studebaker, and the Curtiss-Wright agreement. One of the best sources of information on the financial problems at Studebaker-Packard in the mid-1950’s and the attempts to obtain additional financing for the company.
  • citation-type="booksimple"

    xlink:type="simple">Moritz, Michael, and Barrett Seaman. Going for Broke: The Chrysler Story. Garden City, N.Y.: Doubleday, 1981. A comprehensive history of the Chrysler Corporation and its refinancing in 1980. Extensive coverage of Chrysler and the independent auto producers. Written in a popular and accessible style. Contains helpful footnotes and a bibliography but lacks summary statistical tables or graphs.
  • citation-type="booksimple"

    xlink:type="simple">Schulz, James H. The Economics of Aging. 7th ed. Westport, Conn.: Auburn House, 2001. Chapter 8 provides a discussion of the pension situation at Studebaker. The Employee Retirement Income Security Act (ERISA) is explained in detail, as are the problems of underfunded pension plans in general. Thorough discussion of Social Security and private pension plans. Presents a detailed and well-organized analysis of a complex topic.
  • citation-type="booksimple"

    xlink:type="simple">Sobel, Robert. Car Wars. New York: E. P. Dutton, 1984. A postwar automobile industry business history. Chapters 3 and 4 highlight the introduction of compact cars by American Motors, Studebaker, and the Big Three. Emphasis on the transition of the industry from the 1950’s to the 1980’s.
  • citation-type="booksimple"

    xlink:type="simple">White, Lawrence J. The Automobile Industry Since 1945. Cambridge, Mass.: Harvard University Press, 1971. Some knowledge of economic theory is helpful in understanding this book. Provides important coverage of the economic trends influencing the auto industry during the period that Studebaker was in decline. An important volume that is essential reading for persons interested in a careful economic assessment of both the Big Three and the independent auto producers. Excellent footnotes and bibliography.
  • citation-type="booksimple"

    xlink:type="simple">Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine That Changed the World. New York: Rawson Associates, 1990. Results of the Massachusetts Institute of Technology’s five-year study of the global automobile industry. A definitive work on the concept of lean production of automobiles. Contains thorough analysis and comparison of the European, American, and Japanese automotive industries. Easily understood graphs and tables. Comprehensive footnotes and bibliography.

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