Chapter 16
Whenever the automobile market shifts from a buyers' to a sellers' or a sellers' to a buyers' market, a turbulence takes place in the industry, which disturbs both producers and dealers, and certain adjustments have to be made to meet the changing conditions. Some of these adjustments are commonplace, but since history never exactly repeats itself, there is always some element of novelty to be met. So it is in the present and so it has been throughout the development of the dealer system of distribution.
When I was chief executive officer of General Motors, I gave a large part of my attention to dealer relations, amounting at times, you might say, almost to a specialization. I did so because the experience of the 1920s, when the modern problems of automobile distribution took shape, taught me that a stable dealer organization is a necessary condition for the progress and stability of an enterprise in this industry.
Contrary to this, the prevailing attitude of the industry in the early twenties was rather that the manufacturer should attend to the product, the prices, the advertising and promotion, and leave the rest of the elements of distribution to the dealer to work out. There were some who minimized the role of the dealer. They assumed that the customer was for the most part sold before he entered a dealer's salesroom, and so neglected to develop a stable dealer organization. The soundness of the individual dealer's position and the complexity of the internal problems of his organization and market were not considered to be the concern of the manufacturer.
From my point of view, the welfare of the more than 13,700 General Motors passenger-car dealers in the United States, with their $2 billion or so of invested capital, must be a major concern of the corporation. The franchise system of distribution makes sense only if you have a group of sound, prosperous dealers as business associates. I have never been interested in business relationships that are not of benefit to all concerned. It is my belief that everyone should hold up his end of the relationship and be rewarded accordingly.
The significance of the dealer in automobile distribution is twofold. First, as in many industries, the dealer makes the direct personal contact with the customer; he makes and closes the deal that sells the car. The producer's contact, on the other hand, is with the dealer, not the customer, except to the extent that the producer speaks to the public as a whole through advertising, automobile shows, and other instrumentalities—and I might add that the product on the streets and highways is a persuasive message to the consumer.
Second, in the automobile industry, the dealer is franchised. What is a franchised dealer? If you imagined a spectrum of the types of retail distribution in the United States, you would find typically at one end the merchant, such as the corner grocer, who sells numerous and often competing products made by various manufacturers, and whose only relationship with any manufacturer is that of a conventional buyer. At the other end of the spectrum is a merchant—for example, a gas-station owner—who is the agent of a single manufacturer, even sometimes a branch or subsidiary of a manufacturer. In this spectrum, the franchised automobile dealer, in his relation to the manufacturer, lies somewhere between the above extremes. Legally he is not the agent of the manufacturer. Yet in his community he is identified with the manufacturer's product. Generally speaking he is assigned an area of sales responsibility for cultivation. However, he is not restricted from selling elsewhere, and the other dealers are free to sell in his area.
The individual franchised dealer, usually a substantial businessman in his local community, meets the customer, often as a neighbor, trades with him, and services the product sold. The personality, 1 acquaintance, and standing of the dealer as a local merchant are basic to the type of franchise distribution which has become the custom in the automobile industry. Our entire sales approach is based upon this system of individually financed merchants, to whom we offer a potential profit opportunity based upon the General Motors franchise.
Both the dealer and the manufacturer in their relationship have special rights and undertake special obligations. They sign a selling agreement that involves conditions; in other words, the relationship of dealer and producer is governed by the franchise. The dealer agrees to provide capital, a place of business, an adequate number of salesmen, mechanics for service, and the like. He is expected to cultivate his area of responsibility, and to stock and sell spare parts, and so on. In return for such franchise obligations, the manufacturer sells almost entirely through the franchised dealer. Dealers as a group obtain the privilege of selling the manufactured, trademarked products and are supported in their sales effort by the general merchandising activities of the manufacturer. The manufacturer makes large investments in tooling for the annual model change and in research and engineering development to ensure that his product is desirable. A special feature of the franchise system is the amount and type of assistance that the manufacturer renders to the automobile dealer. This includes technical help and programs in all phases of the dealer's business, such as sales and service, advertising, business management, and specialized factory-conducted training programs designed to assist in every phase of the dealer's operation.
The automobile is not like the usual product that customers buy "off the shelf" every day. It is a highly complex mechanical product. It represents a large investment for the average purchaser. He expects to operate it, perhaps daily, yet the chances are he possesses little or no mechanical knowledge. He depends on his dealer to service and maintain the product for him.
Therefore the dealer must not only make a substantial investment in facilities and organization for the display and sale of his product —which is practically the sole function of the average retail establishment—but he must also provide facilities and an organization to service the product after it is sold and throughout its useful life. Beyond this, he must be prepared to take in trade, recondition, and sell one or two used cars on the average for each new car sold, since he may need to resell the used car on a trading basis.
Both the manufacturer and the franchised dealer undertake normal and related business risks, the dealer in his investment in selling and service facilities, the manufacturer in his investment in producing facilities, including engineering development and high annual tooling costs. Both depend upon the appeal the manufacturer gives to the product and the ability of the franchised dealer efficiently to sell and service the product.
The achievement of our two goals in distribution—namely, the economic movement of the product, and a stable network of franchised dealers who move the product—has taken much thought and work over many years, for the problems are complicated, they change to some extent with changing circumstances, and the solutions have not always immediately presented themselves. Policies and practices that were satisfactory at one time may not be best suited to later conditions. A "new model," so to speak, in dealer relations may be needed from time to time.
Before 1920 automobile distribution was based in the main upon distributor-wholesalers who subcontracted to dealers in their jurisdiction. But in the course of time, manufacturers, generally speaking, took over the wholesale function for more intensive cultivation, and the franchised dealers maintained the retail function.
The question might arise why the automobile industry adopted tins form of distribution. The answer, I think, in part is that automobile manufacturers could not without great difficulty have undertaken to merchandise their own product. When the used car came into the picture in a big way in the 1920s as a trade-in on a new car, the merchandising of automobiles became more a trading proposition than an ordinary selling proposition. Organizing and supervising the necessary thousands of complex trading institutions would have been difficult for the manufacturer; trading is a knack not easy to fit into the conventional type of a managerially controlled scheme of organization. So the retail automobile business grew up with the franchised-dealer type of organization.
Between 1923 and 1929 the leveling of demand for new cars logically resulted in a change of emphasis in the industry from production to distribution. On the sales end that meant a change from easy selling to hard selling. Dealer problems of an entirely new nature began to arise.
To meet this situation I made it a practice throughout the 1920s and early thirties to make personal visits to dealers. I fitted up a private railroad car as an office and in the company of several associates went into almost every city in the United States, visiting from five to ten dealers a day. I would meet them in their own places of business, talk with them across their own desks in their "closing rooms" and ask them for suggestions and criticism concerning their relations with the corporation, the character of the product, the corporation's policies, the trend of consumer demand, their view of the future, and many other things of interest in the business. I made careful notes of all the points that came up, and when I got back home I studied them. I did this because I realized that, irrespective of how efficient our regular organization might be, there is a special value in personal contact, and furthermore, as chief executive officer of the corporation, my interest was primarily in general policies. This time and effort-consuming approach to the problem was particularly effective under the circumstances existing at that time, when we knew so little about the facts of distribution in the field. Many things that we learned were subsequently reflected in our dealer selling agreements, and communications in particular were put on an established basis through councils and in other ways which at least in part served to meet the same need.
From the field studies that we made, I was able to see the historic change that was under way during the middle and late twenties, that the economic position of the dealers was becoming less satisfactory than it had been, and that our franchises were less in demand. It was clear that something had to be done not only in the interest of our dealers whose businesses were at stake, but in the interest of the enterprise as a whole. We had to distribute cars on a sound and economic basis for all concerned.
I noted the dealers' predicament in the changing conditions in an address I made to the Automobile Editors of American Newspapers on September 28, 1927, in connection with a meeting at our Proving Ground at Milford, Michigan. Speaking of past practices in the industry as a whole, I made this observation:
The sole idea was to make as many cars as the factory could possibly turn out and then the sales department would force the dealers to take and pay for those cars irrespective of the economic justification of so doing— I mean, irrespective of the dealers' ability to properly merchandise such cars. That certainly was wrong and it is just as wrong in other industries as it was in our industry. The quicker merchandise can be moved from the raw material to the ultimate consumer and the minimum amount of merchandise, of whatever it may consist, involved in the "float," so to speak, the more efficient and more stable industry becomes ... It is absolutely against the policy of General Motors to require dealers to take cars in excess of what they properly should take. Naturally, once in a while in the closing out of a model, our dealers must necessarily help us. They appreciate their responsibility and never object to doing so . . .
This statement of policy in 1927 started a new approach to producer-dealer relations in General Motors, based upon the recognition of the community of interest between the corporation and its dealers and of the interdependence of our interests.
The central and continuing problems of automobile distribution, which first arose in the twenties and thirties, are inherent in the nature of the business. These are, broadly, the penetration of markets, the liquidation of inventories at the end of a model run, dealer economics, and the general difficulty of two-way communication between the manufacturer and its dealers on all of their mutual business affairs.
Our intention, naturally, was to penetrate the market as effectively as possible, and since in the end this had to be carried out by our dealers, it was necessary to have the appropriate number of dealers, each of the appropriate size and in the appropriate location. The difficulty was to determine these locations. In the 1920s we did not know as much as we do now about the automobile market. We began then to make economic studies of the market and its potential in terms of population, income, past performance, business cycle, and the like.
With this kind of information we were able to take up the problem of placing dealers in relation to the market potential. In a community of a few thousand inhabitants, for example, the problem was simple. A single dealer could do everything necessary to penetrate the market, and we and the dealer could judge on the basis of our studies what his goals should be and how well he performed in relation to those goals. But in the larger urban communities, those with a million inhabitants or more, the problem was complicated.
Hence we studied a larger community, first as a whole, to determine its likely potential for any particular line of cars. Then we broke it down on a neighborhood basis to determine the potential of its constituent parts. With that information we were able to place dealers through the territory largely on the basis of neighborhood potential. It was, of course, necessary for the dealers to have the individual capital, plant, overhead, and organization appropriate to the size of the area served.
This strikes me as a rational approach to the problem of distribution. It provides basic advantages for both the dealer and the manufacturer. The dealer, as I have said, is a specialist in his area, and knows its character and inhabitants better than anyone else could. Also, it is often more convenient for a customer to deal with a local merchant from many standpoints, including service. And it provides the manufacturer with a microscopic understanding of his distribution problems. Naturally we expected a dealer to give his first attention to his immediate market and to perform well in it.
The problem of liquidating an old model to make way for a new one—and to keep inventory losses at a minimum— is a permanent feature of the business except in periods when there is a strong sellers' market. This problem first appeared in an important way in the late 1920s. It occurs because the dealers must establish estimates of their requirements three months in advance, based on prospective demand. The corporation takes these estimates into account in establishing its final production schedules. These must be determined months in advance, and if the expected demand is upset by changing conditions, the problem of liquidation of the current model may become abnormal. But normal or abnormal, it is a problem to be met.
In the early twenties the cars the dealers had on hand at the time the new model was announced, had to be liquidated at their own expense. After a good deal of study, we came to the conclusion that it would be only fair for the corporation to share the responsibility for liquidation of the old model. My recollection is that we provided allowances for liquidation at the end of the model year as early as the second half of the 1920s. In 1930 we made it a matter of policy to help the dealer dispose of his excess stock at the end of the model year. For the dealer who had "taken his contract," we granted an allowance on the unsold, new vehicles in stock when new models were announced. The allowance was limited to those cars in excess of 3 per cent of the estimated quantity of new vehicles to be handled by the dealer, as provided for in the selling agreement. The amount of such allowance was determined by General Motors. At times the amount and basis of computation has differed. At present the rebate is 5 per cent of the list price on every new unused ear of the model being discontinued in dealers' stock and unsold at the time of the new model announcement.
This policy, I believe, was new in the industry when we began it. It reflected our desire to protect dealers against unreasonable product-depreciation losses and to place the responsibility for reasonable production schedules in the later months of the model year on the management of the divisions. It imposed a penalty on the factory in the form of an automatic assessment if for any reason there was an excess supply of cars in the model year.
A theoretical solution of the annual production and sales cycle, one might think, would be to have no stock in dealers' hands when the new ear is announced. But that is neither possible nor desirable for a number of reasons, from both the manufacturer's and the dealer's standpoint. Competitively we must do as much business as can be done in each month of the year. And at the end of the model year the pipelines of distribution must be emptied as the new cars come through. Furthermore, it is often desirable to have some stocks of old ears on hand to do business during the early period of the new model run when the new models are first coming through. For these reasons the problem is a permanent one and all in the day's work.
Although in the 1920s we had made great advances in getting the fails about General Motors' economic position, we did not then have the Facts regarding the economic position of our dealers, and so were handicapped in thinking through dealer problems, When a dealer's profit position was failing, we had no way of knowing whether this was due to a new-car problem, a used-car problem, a Service problem, :i parts problem, or some other problem. Without such facts it was impossible to put any sound distribution policy into effect.
In the Proving Ground address which I mentioned earlier, I made the following observations on this subject:
... I want to outline to you what I believe to be a great weakness in the automotive industry today and what General Motors is trying to do to correct that weakness.
I have stated frankly to General Motors dealers in almost every city in the United stales, that I was deeply concerned with the fad that many of them, oven those who wore carrying on in a reasonably efficient manner, were not making the return on their capital that they should. Right here lot mo say that so tar as General Motors dealers are concerned, from what facts I have — realize there has boon much improvement during the past two or three years, hut interested as the management of Genera] Motors must he in every Step, from the raw material to the ultimate consumer, and recognizing that this chain of circumstances is no stronger than its weakest link, I feel a great deal of uncertainty as to the operating position of our dealer organization as a whole. 1 hope that this feeling of uncertainty is unwarranted. I am sure that with a responsibility SO great, all elements of uncertainty must he eliminated and that our dealers should know the facts about their Operating position as clearly and as scientifically as I have outlined to you we feel that we know the facts about General Motors operating position.
This brings us back to . . . two words—proper accounting. Many of our dealers, and the same thing applies to dealers oi other organizations, have good accounting systems. Many of them have indifferent ones and 1 regret to say that too large a percentage of them have practically no accounting system at all. Many of those who have accounting systems, through lack of their being properly developed, are not able to effectively use them. In other words, they are not so developed that they give the dealer the facts about his business; where the leaks are; what he should do to improve his position. As I said before, uncertainty must be eliminated. Uncertainty and efficiency are as far apart as the North Pole is from the South. If I could wave a magic wand over our dealer organisation, with the result that every dealer would have a proper accounting System, could know the facts about his business and could intelligently deal with the many details incident to his business in an intelligent manner as a result thereof, I would be willing to pay for that accomplishment an enormous sum and I would be fully justified in doing so. It would be the best investment General Motors ever made.
Accordingly, in 1927 WHO set up an organization called Motors Accounting Company. We developed a standardized accounting system applicable to all dealers and sent a stall into the field to help install it and to establish an audit system. Later, as dealers became more experienced in the financial end of their business, and under the pressure of depression economies, we modified the reviewing procedure. We developed a sampling system for auditing by which we were able to get a cross-section Alvis applicable to the whole setup. To this end the accounting records of a group of approximately 1300 automobile dealers (representing about 10 per cent of dealers or 30 per cent of General Motors unit sales) are still reviewed regularly at General Motors' own expense. In addition, General Motors gets monthly financial statements from 83 per cent of its dealers or 96 per cent of General Motors unit sales. This was a big and expensive effort but it enabled each division of General Motors and the central office to look through the whole distribution system, dealer by dealer and group by group, and determine just where the weaknesses were and what should be done about them. Furthermore, the dealer himself could not only judge his own complicated business intelligently but also compare his operations, item by item, with group averages. Often the soft spots would be discovered in time to make corrections before harm was done.
Soft spots, of course, on occasion had a way of making themselves known. In the late twenties General Motors put up considerable capital to save a couple of strategic dealerships from bankruptcy and suffered a loss of $200,000. One thought leads to another, however, and when we got this one generalized, we realized that our broad purpose should be not only to reduce dealer turnover by stabilizing dealerships but furthermore to assist capable individuals who lacked capital to become the owners of profitable General Motors dealerships. Albert L. Deane, then a vice president of GMAC, and Donaldson Brown worked these thoughts into a practical program. We took action on the idea in June 1929 by setting up Motors Holding Corporation with Mr. Deane as its first president. In 1936 this subsidiary became the Motors Holding Division. The function of this division was to furnish capital to dealerships, and in doing so to assume temporarily the rights and duties of a shareholder in those dealerships. We put $2,500,000 into it to start. When we got past the experimental stage, we realized that this was one of the best ideas we ever had in the distribution field. We also realized that its real value was not in the first idea of salvaging bankruptcies but in the second idea of grubstaking capable men— not only with capital but with management advice and training in sound dealer operations.
Motors Holding developed management techniques for dealers which increased the profit possibilities of dealerships. It found qualified operators, backed them with adequate capital, and enabled them to produce profits sufficient to retire Motors Holding's interest and become independent.
In my time it worked this way, and with some alterations in financial details it still does: The prospective dealer invested his available funds in the dealership. Motors Holding put up the balance of the capital needed. (At present the dealer usually puts up a minimum of 25 per cent of the total required capital.) When the arrangement was established, the dealer got in addition to his salary a bonus, which was provided by Motors Holding through its relinquishment of a portion of the profit which would otherwise accrue to its investment. This bonus was equivalent to 50 per cent of Motors Holding's earnings above 8 per cent on its investment. Motors Holding retained the voting control of the dealership until all of the Motors Holding investment had been bought out.
Several changes in the bonus arrangements were made in later years. At present the bonus is paid directly by the dealership to the operator and is therefore a direct expense of the dealership corporation. It amounts to 33% per cent of the profits in excess of 15 per cent a year on total invested capital including notes. Originally the dealer was required to apply his entire bonus to buy out Motors Holding's share of the capital stock. Subsequently, it was found that the dealer's personal income taxes did not enable him to carry out this provision and now the dealer need apply only 50 per cent of his bonus to purchase Motors Holding's stock, although he may, of course, apply the entire amount. The result has been that as earnings accumulate the dealer becomes the owner of all the stock in the dealership. As it turned out, the assistance provided by Motors Holding was so highly valued that dealers often resisted purchasing the last shares of Motors Holding's investment.
From its inception through December 31, 1962, Motors Holding in the United States and Canada invested more than $150 million in a total of 1850 dealerships, most of them in the automobile field. Of these dealerships, 1393 have retired Motors Holding's investment, and at the end of 1962, current investments in 457 dealerships totaled nearly $32 million. Of our approximately 565 alumni dealers still operating through 1962, many rank among the outstanding dealers of the United States and Canada. In some instances operators who were qualified in all other respects but lacked the established minimum investment were enabled through the Motors Holding plan to become sole owners of their businesses. Some, starting with very modest investments, became millionaires. And the plan has been profitable to General Motors too.
Motors Holding dealers produce approximately the same results as other General Motors dealers with like potentials. This applies from both a standpoint of sales and of net profits, thus fulfilling one of the original objectives in the conception of the activity.
Of the 1850 investments in dealerships made by Motors Holding in the United States and Canada, it has been necessary to liquidate only 198 because of subnormal operations, 62 during the depression period 1929 through 1935, and 136 since then.
Although Motors Holding dealers' new-car sales have never attained 6 per cent of the total General Motors Corporation sales, they have nevertheless sold since 1929—during the period of Motors Holding's investment—more than three million new cars with a total profit to these dealerships, before bonus, of more than $150 million.
The corporation has authorized successive increases in the funds available for investment in Motors Holding dealerships in the United States and Canada, and in May 1957 the authorized maximum investment was increased to $47,000,000, of which $7,000,000 is now available for financing real estate.
Through its intimate association with dealers in the Motors Holding operation, General Motors has obtained a clearer and more sympathetic knowledge of dealers' problems. Motors Holding has also provided the corporation with a better knowledge of the retail market and consumer preferences. But more important than anything else, it has been useful in the development and maintenance of a strong, well-managed, adequately capitalized dealer body.
General Motors was, I believe, a pioneer among industrial companies in the United States and Canada in making such "character loans" of equity capital to small businessmen and in recognizing that one of the greatest needs of the economy was a source of risk capital for small businesses. Two of General Motors' competitors now operate similar plans, Ford since 1950 and Chrysler since 1954. As Herbert M. Gould, a former general manager of Motors Holding put it: "When your competitors follow you, that's the medal in business."
What the manufacturer and the dealers needed most at the end of the 1920s was a better means of communicating and a sound contractual relationship. We had, of course, zone and regional executives, who were in constant contact with the dealers on day-today matters of business. But there were many problems of broad, corporation-wide policy that required closer contact and information leading to some definite co-operative actions. As I have said, the other general officers and I made frequent field visits to the dealers. These visits made clear to us that the dealers appreciated having a direct contact with corporate as well as divisional executives. It was equally clear that something more substantial was needed than these occasional visits. Out of these early field trips, therefore, grew a related idea, that of bringing representative groups of dealers into the conference rooms of General Motors. This idea took shape in the creation in 1934 of an important and unique institution in General Motors, the General Motors Dealer Council.
The Dealer Council was originally a body of forty-eight dealers, divided into four panels of twelve each. It met with a group of corporate executives at the top level of corporation responsibility. We formed the council to hold a continuing series of round-table discussions on distribution policies. Each year for many years I chose a different panel of dealers, representing all car-manufacturing divisions, all sections of the country, and all types of territory and capital commitment. They brought to the council a broad diversification of dealer problems and thinking.
As president of the corporation I was chairman of the council. The vice president in charge of the Distribution Staff and other top officials of General Motors were also members. The first job of the council was the long process of working out the general policies for improved dealer relations. Our meetings dealt with policy and not the administration of policy.
The principal specific work done by the Dealer Council was to hold discussions aimed at the development of policies on which an equitable dealer selling agreement could be based. This selling agreement, when achieved, was to add value to the General Motors franchise, which in recent years has supported a retail business of as much as $18 billion a year.
In a talk on the Dealer Council on September 15, 1.937, I reviewed my experience in the meetings of the council, as follows:
The meetings of the various Council Groups during the past three years have been bright spots in my operating experience. I value most highly the personal contacts and the friendships that have developed as a result of same. That alone would justify the plan, from my standpoint. And the opportunity to discuss such interesting problems. It has stimulated our thinking and I am sure has accelerated our progress. I have been particularly impressed with the broad approach to these problems by every member of the Council. I am encouraged by the practically unanimous desire to solve these problems from the standpoint of fundamental soundness rather than from the easier approach of expediency. This is particularly interesting in a period where expediency seems to be the keynote of our national thinking. This point of fundamental approach was particularly impressed upon me at the very first meeting. We were just coming out of the depression. Heavy losses had been sustained by almost every one engaged in business—the dealer body being no exception to the rule. Anxiety with respect to the possibility of future profits, was naturally the dominating subject before the Council. Many suggestions were made, analyzed and subsequently discussed. And it is gratifying that the unanimous opinion was that we should tackle the essential question of profit, not from the standpoint of inflation, but from the standpoint of getting our house in order, finding ways and means of eliminating deductions from the gross that we already had—better efficiency, in other words, rather than passing our inefficiency on to the public in the form of a higher retail price. Subsequent experience has justified that kind of a decision—and it always will, in the final analysis.
As Chairman of the Council, at all our meetings I have tried to impress upon the members, the sincere desire of the Corporation's executives to aggressively tackle any problem likely to result in a more satisfactory relationship, and as rapidly and consistently as possible. Naturally, in a business as large as General Motors, where there are many groups that must be consulted and viewpoints reconciled, progress must necessarily be slow. I have been concerned with the fact that perhaps some of our Council members, and many of our dealers who necessarily cannot be familiar with what we are doing, have felt that we should move more rapidly. It is natural that they should feel that way. It is comparatively easy to lay down a policy in a relatively small number of words, but the application of that policy, in an administrative way, in a country as large as the United States, with a scope of operations such as we conduct, must necessarily be a matter of evolution— it cannot be a matter of revolution—patience is essential. I cannot over-emphasize that point. And superimposed upon these practical difficulties is the still hardest problem of changing the viewpoint of a large organization with respect to any particular way of doing any particular thing. We all know how great is the inertia of the human mind.
The dealer selling agreement was a pioneer work in co-operative business relationships. Its technical details have evolved over the years, and some of them are complex. Some of the important features were designed to meet problems unique in the automobile industry.
The question of cancellation of a selling agreement naturally is a serious matter both for the dealer and for the manufacturer. If the dealer operating in a certain area is not doing the job he should, is not delivering a reasonable amount of the potential business of the area, or for some other reason is inefficient, how should a change be effected? It must be remembered that he usually has a substantial amount of his own capital tied up in the business. He owns used cars. He has parts. He has a showroom and product signs.
In the early days of the industry, the dealer's franchise was just canceled and a new dealer was appointed, and that was that. The problem of liquidating the dealership was left to the dealer. During the 1930s the agreement generally in use in the industry provided for an indefinite term which could be terminated without cause by the manufacturer on ninety days' notice and by the dealer on thirty days' notice. Provision also was made for cancellation by the manufacturer for cause, with, of course, the validity of such cause always subject to test in the courts.
In considering this problem, it must be recognized that the dealer, as I have said before, can sell the assets of the business, but he cannot sell the franchise since he does not own it. Therefore, it seemed desirable to have a definite, liberal policy to protect the dealer from capital losses in case of cancellation, even if the cancellation was due to his inefficiency. We adopted a policy which included the following arrangements: The corporation would take back from the dealer, at the price he had paid, any new cars that he had on hand. The corporation would take back certain product signs and special tools. The corporation would take back the parts that he had on hand, provided they were not for models beyond a certain age. If the dealer had a lease which could not be transferred to another dealer, and so incurred a loss on liquidation, the corporation would participate in the loss. The corporation in effect gave the dealer a check for his unencumbered assets and for a certain amount of liability on the lease.
In 1940 we recognized complaints that on occasion selling agreements of dealers had been canceled just as the best selling season was about to commence. The result was that the outgoing dealer operated his business at low profit or no profit for a substantial period prior to termination of the selling agreement, while the newly appointed dealer undertook his operation at the beginning of the profitable selling season. Therefore we incorporated in our selling agreement a provision to the effect that termination without cause on three months' written notice could be accomplished only by giving the notice in the month of April, May, or June, to be effective in the month of July, August, or September. In 1944 General Motors introduced a selling agreement for a specific period, which provided for expiration at the end of two years following the resumption of production after the war (actually a term of more than three years) . Later the term was set at one year. At present each dealer is offered the option of an agreement for one year, five years, or for an indefinite period. All of these agreements permit termination only for cause, although upon expiration of the term there is no obligation to renew.
Another unusual General Motors dealer institution, set up in January 1938, was a Dealer Relations Board. It acted as a review body, and enabled the dealer who had a complaint to appeal directly to the top executives of the corporation. I was the first chairman of this board, which consisted also of three other top executives. Sometimes we would listen to a case all day. After getting a complete report from the dealer and the division, we rendered a decision binding on General Motors. The chief benefit of the board was a preventive one. Divisions made very sure they had a sound case and were observing all the equities in taking action against any dealer, for it was the division itself, as well as the dealer, that came up for executive review.
I would like to indulge in a sentiment and in a certain amount of pride, and tell this story. In 1948, after I had retired as chief executive officer, three General Motors dealers came into my office and said that the dealers as a body wanted to show their appreciation of what I had done in advancing the opportunities of the dealer organization. They said they knew of my interest in cancer research and would like to create a fund to help me in that activity. A year later they came back and handed me a check in the amount of $1,525,000 for the Alfred P. Sloan Foundation, and since then dealers have sent in additional contributions to the fund. This became known as the General Motors Dealer Appreciation Fund for Cancer and Medical Research. I invested this fund mainly in General Motors common stock, and the original fund is now worth more than $8.75 million and earns more than a quarter of a million dollars a year.
Here I shall draw together a few strands of thought and carry them through to contemporary problems. Between 1939 and 1941 General Motors and its dealers enjoyed increasing prosperity. Then came the war and what amounted to a new way of life for us all. No cars were manufactured in the United States during the war period, and stocks of new cars on hand were sold under government regulation. Some dealers liquidated their businesses voluntarily, and many went into various branches of the armed forces. A few took on war-production subcontracts, but for most of those who remained active, the principal business was service and some trade in used cars. The service phase of their operations increased substantially as people came to realize the importance of keeping their cars in condition during the war. To the extent permitted under government regulations, we manufactured functional parts and made them available to dealers. This enabled dealers to render a constructive service in sustaining the automotive transportation system of the United States.
The declaration of war caused a wave of apprehension to pass over the dealer body. Shortly after our entrance into the war, I sent a special message to the dealers outlining certain policy decisions made with a view to maintaining dealer organization and dealer morale. These policies included:
(1) An offer to buy back new cars, parts, and accessories that the dealer elected to return (within certain limits). This was for the protection of a dealer who might be drafted or who for any reason wished to terminate his selling agreement.
(2) Preferential consideration after the war for reappointment if the dealer closed his business on conditions which were mutually agreeable to the dealer and the division.
(3) A special allotment plan for new cars, for two years following resumption of car production, to those dealers who remained in business during the war period.
During the war the number of General Motors dealers in the United States dropped from 17,360 in June 1941 to 13,791 in February 1944, a net reduction of 3569. Most of the decrease was concentrated in smaller communities. Some of the dealers who remained were no longer ideally located with respect to the postwar redistribution of population. There had been a movement from the cities to the suburbs and also a movement from the eastern and central states to the southeast, southwest, and Pacific Coast areas.
In accordance with our long-standing distribution policies, we resurveyed individual areas. In some cases we found that an area could support more than one dealer. Our recruitment of new dealers continued as required until 1956, when a moratorium on additional appointments was declared. Tins remained in effect until late in 1957. However, due to a decrease of dealerships in metropolitan areas, and to other causes, at the end of 1962 the General Motors passenger-car dealer body in the United States totaled about 13,700, about the same as 1944, despite the growth of the automobile market.
While the number of dealers had decreased, the number of General Motors passenger cars in operation had increased from about 11.7 million in 1941 to about 24.6 million in 1958, an increase of 13 million, or 111 per cent. The number of General Motors passenger cars in operation continued to increase, and as of 1962 totaled 28.7 million, an increase of 17 million over 1941, or 145 per cent. The average individual dealer's business thereby increased as follows:
In 1941, the peak prewar year, the average General Motors car dealer sold about 107 new vehicles. In 1955 he sold 222 new units, an increase of 107 per cent. In 1962 he sold 269 new units, an increase of 151 per cent over 1941.
In 1941 the average number of General Motors vehicles in operation per car dealer was 710. This represented his total service potential. By 1958 this potential had grown to 1601 units, an increase of 125 per cent, and by 1962 this potential had increased to 2095, an increase of 195 per cent. (Note 16-1.) Since i960 the average volume of business of dealers has been 2.5 times the 1939-41 average in constant dollars. Their net worth of more than $2 billion is 2.7 times the 1941 figure, again in constant dollars, which shows how the individual General Motors dealer has been growing with the economy and with the corporation.
Immediately after the war, market conditions changed radically. We had to meet the tremendous pent-up demand for cars created by the stoppage of production during the war and the wearing out of existing cars. Material shortages were the limiting factor on production. General Motors recognized that serious problems were in store for the customer, the dealer, and the factory. The customer's problem was to get transportation. Usually he was willing to pay a premium for it, and in many cases he sought preferred delivery. The manufacturer was faced with the problem of allocations to the dealer. The dealer's problem was how to distribute his car allotments.
General Motors had a plan on March 2, 1942, for allocation of cars to dealers. It was known as "The Sloan Plan" because I had promulgated it. It was in operation from October 1945 to October 31, 1947, and proved to be both equitable and satisfactory. It ensured the dealer a fair allocation of cars based on his 1941 performance record, and it reduced to a minimum claims of favoritism in distribution. It gave us a rule for a situation which might otherwise have got out of hand.
During the period of shortages, competitive market conditions were practically nonexistent. Our recommended resale prices were substantially below what buyers were willing to pay, and our dealers always establish their own retail prices. But in the face of such urgent demand, the inevitable result was that a second or "gray" market came into existence. It frequently happened that, when a customer drove out of a dealer's place of business with a new car, he would not get beyond the first stop light before somebody, perhaps a used-car dealer, would drive up and offer to take the car off his hands at a substantial premium over the price he had paid for it. This was the beginning of some new postwar distribution problems.
One of the most difficult problems was "bootlegging," or the wholesaling of new cars by franchised dealers to used-car lots. This phenomenon can exist both in periods of ample supply and in periods of shortage such as existed after World War II. As the situation actually developed, it was not until the latter part of 1953 that supply began to catch up with demand in some lines of cars. I would like to emphasize "began" because many lines continued in short supply into 1954 and, in the case of Cadillac, into 1957.
Beginning about 1950, certain abuses and bad merchandising practices had begun to flourish. Some had been in existence before the war but had been dormant during the forties. Others represented an outgrowth of the unusual conditions of the early postwar years. Bootlegging, for example, had existed before the war in scattered areas, but now, encouraged by an apparently new legal climate, it returned in epidemic and malignant form.
This new legal climate, as I call it, was established in the late 1940s as a result of interpretations of court decisions later expanded by opinions of the Department of Justice. These legal trends indicated to us that clauses in our selling agreement relating to bootlegging and territorial security might be considered unduly restrictive of the dealer's freedom of action. Both these clauses were reluctantly dropped from the selling agreement in 1949 upon the insistence of legal counsel. We foresaw serious consequences in the dealer setup even though at the time the effect was negligible because dealers were having difficulty getting enough cars to supply their own regular customers.
During the first half of the 1950s the "bootlegging" situation became serious. New models of General Motors cars were in the bootleg market even before there was sufficient production to supply dealers with necessary stocks for display and sales purposes. The corporation urged the dealers not to move cars into the bootleg market. It also submitted to the Department of Justice for consideration a proposed new clause for the selling agreement which would have required dealers to offer cars back to General Motors before disposing of them in bootleg channels. The Attorney General's opinion was to the effect that "the Department of Justice cannot undertake to waive the institution of criminal proceedings with respect to such contractual provisions should we decide to test their legality if they are incorporated in General Motors Corporation selling agreements, since they raise important questions under the anti-trust laws."
Thus blocked in its efforts to contract with dealers for the repurchase of cars which the dealer thought surplus, General Motors next advised dealers that for the balance of the 1955 model year it was "prepared to repurchase, or to arrange for the repurchase by other General Motors dealers in other areas, at the respective prices paid by the original purchasing authorized Distributors or Dealers, any such new and unused passenger cars that might be considered excess supply." The purpose of this was to allow dealers to liquidate through authorized channels any cars believed to be in excess. Only a few dealers took advantage of this offer, either because they had no surplus cars or they preferred to sell to a bootlegger at a small profit—contrary, in my opinion, to their own self-interest from the broad point of view. It was the franchised dealers who supplied and supported the bootlegger, for the latter could not obtain cars except through some franchised dealer. Our efforts continued to be limited to trying to adjust our production schedules to realistic appraisals of the market and the competitive situation.
Our various attempts over the years to curb the practice of bootlegging have been hampered by practical limitations beyond our control. However, there was a sharp decrease in the practice during the second half of the 1950s. We believe in the franchise system of distribution and have sought to provide opportunity that would be reflected in quality dealers, but the franchised dealers as well as the corporation must support the opportunity if it is to last and prosper. The concept of "The GM Quality Dealer Program," founded on the proper placement of dealers based on analysis of territories, goes back to the 1920s when Richard H. Grant, General Motors' great sales executive of a generation ago, and William Holler, another of our top sales executives, first established it. But policies based on this concept may be idealizations. Sound policies are often modified by the impact of outside forces over which one has no control.
Another recurrent practice which for a time adversely affected the dealer's ability to operate as a quality dealer, and which was obviously unfair to the customer, was "price packing." Price packing means adding something to the manufacturer's suggested retail price of the product. This enabled the dealer to offer an apparently excessive allowance for the used car trade-in. A dealer is able to make any allowance whatsoever on the car to be traded in, provided that he is also able to name the price on the new car to be sold. This practice was neither sound nor desirable, and I have often said so in addresses to dealers. However, to condemn the practice did not cause its disappearance, especially where the power to control did not exist. We tried to discourage the pack, but the forces approving the practice were too strong. Eventually we came to the conclusion that only by individual and voluntary action on the part of the dealers could this evil practice be wiped out.
In 1958 Congress enacted legislation requiring the manufacturer to affix a label on the window glass of each new car shipped to a dealer. This label contains detailed information on the various elements making up the manufacturer's suggested retail price. There is every evidence that through this law the evil of price packing of the type I have described has been practically eliminated.
The shift from a sellers' to a buyers' market, accompanied by "blitz" or high-pressure selling, further complicated the market from 1954 through 1958. Perhaps the transition could have been executed more smoothly by all concerned. It may be that the publicly raised hue and cry was of benefit in calling attention to needed adjustments to the new conditions. But in my opinion the responsibility for equitable co-operation between dealers and manufacturers is not for a legislative body to work out. It is a joint responsibility of manufacturers and dealers. We are in a competitive business, and a lost position is difficult and sometimes impossible to regain.
In 1955 General Motors made a study of the new developments, and worked out a new selling agreement, which became effective March 1, 1956. I mention only its highlights: a choice among a five year, one-year, or continuing agreement (99.2 per cent of the dealers were operating under the five-year term in 1962); a liberalization of the policy of the dealer's right to nominate a qualified person to succeed him upon his death or incapacity; a spelling out of the basis for evaluating dealer sales performance, and a number of changes improving the dealer's economic position under prevailing conditions.
A long-term selling-agreement period, such as five years, even though subject to cancellation on ninety days' notice for nonperformance, must contemplate a freeze of many significant distribution factors—all normally subject to change—such as shifting population, product potentiality, dealer efficiency, economic trends, and competition. The effect of such a policy on the efficiency and aggressiveness of the dealer organization can only be evaluated by time and experience.
Among other important changes in General Motors' distribution policy was the appointment of an outside impartial umpire, a retired United States district court judge in place of the Dealer Relations Board, to hear and determine appeals by dealers from decisions of the divisions. Another was in the method of electing the divisional dealers' councils. Dealers are first elected at the zone level; these dealers then elect representatives who converge at the regional level and elect a representative from the region, and the dealers so elected constitute the national council.
The group of dealers comprising the General Motors Council, now known as the President's Dealer Advisory Council, has always been appointed by General Motors rather than elected. We have felt that this method, because of the particular setup of General Motors—made up as it is of five car divisions and one truck division —would require quite a complicated arrangement if the council of dealers was to be on an elected basis. Membership on the various groups of this council reflects sizes of dealerships, sizes of dealers' communities, and geographical location, as well as numbers in each division.
Much has been done, and much remains to be done. Problems exist which, if allowed to continue unsolved, could well mean the end of the franchise system as we know it. But what are the alternatives? There are only two that I know of: either manufacturer-owned, manager-operated dealerships, or the selling of cars by anyone and everyone, as cigarettes are sold—with the manufacturer maintaining a system of service agencies. I look askance at either of these changes. I believe that the franchise system, which has long prevailed in the automobile industry, is the best one for manufacturers, dealers, and consumers.