How GM Beat Ford

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1:35Pushkin. Too quick? No, it was perfect. Pushkin. Stop. You got it.

1:54Henry Ford had a dream, a dream we talked about last week on the show. His dream was to make a car that was cheap enough and reliable enough for the masses. And amazingly, he did it. Created the Model T. He invented mass production, the modern assembly line. And by 1920, most of the cars on the road in America were Model Ts. Ford was world famous. He was on his way to becoming the richest man in the world. But he was also about to get beat within just a few years. He was going to get beat by a company that realized something that he never did. Americans don't just want a simple, cheap, utilitarian car.

2:36We want fashion. We want status. We want the new thing. And we are not afraid to borrow money to get it. I'm Jacob Goldstein. And I'm Robert Smith. And this is Business History, a show about the history of business. Last week on the show, we talked about the rise of Ford. It is a show about the history of business. Today on the show, we're talking about General Motors, GM, the company that came along and beat Ford. The story of General Motors starts with one Billy Durant, high school dropout, door-to-door cigar salesman. I like him already. Wildly charismatic. Walter Chrysler, that Chrysler, the guy who started Chrysler, said Billy Durant could talk the birds down out of the trees.

3:21Sounds like Orpheus. Billy Durant grew up in Flint, Michigan. And in 1886, when he was in his mid-20s, he started the Flint Road Cart Company, built it into the biggest, like, horse-drawn cart company in America. These are carts that you hook up to a horse. Horse, yes, 1886. Sure. It's the horse full carriage. Yes. And once he basically got rich from his cart business, he went off to New York to live the high life and play the stock market. This was no Henry Ford toiling away, tinkering with the next big thing. No. He just wanted to be a rich guy in New York, so that's what he did. Until 1904, when a local wagon business back in Flint, Michigan, had just purchased the Buick Motor Company, founded by one David Buick.

4:12All these guys named after cars. All these guys. What a crazy coincidence. Buick was a great engineer and a terrible businessman. Familiar founder combo. Buick had sold just 37 cars in 1903. Not 370, but 37. And so this cart company that has bought Buick recruits Billy Durant to come back and make this company work. Billy Durant's not a car guy. He's a finance guy. He's smoking cigars in the club in Manhattan. From Flint. He's a hometown guy. And so he comes back from New York to Flint just to see what's going on. And he goes for a ride in a Buick, possibly the third time in his life that he's been in a car.

4:55But he likes it. It's a smooth ride. He decides he's going to drive it around for two months and see how this whole car thing works. And it works. He drives it through, you know, creek beds on dirt roads. And he thinks, yes, this is a good car. Cars are going to be big. I will take over Buick and I will make it succeed. I can sell this thing. I can sell this. Yes, that is Billy Durant's worldview. And in fact, there is this lovely description of Durant at this time, written later by his daughter Marjorie, about what it was like. Please. There were men at dinner. There were men at the front door.

5:32The parlor was often full of men. And behind closed doors, there were other men. They talked and they listened. But my father mostly listened. When he did talk, it was like a violin beginning to play. Those present had to listen. I know. They all said the same thing then that they do now. Durant is the greatest salesman I ever knew. It's a lovely piece of writing, isn't it? The repetition of the word men. Yeah. So Durant knows how to sell cars and Buick is growing. In fact, it becomes the biggest car manufacturer in America. But as we talked about last week, there are lots of little car manufacturers in America in the early 1900s.

6:12423 different companies by one count that I saw. And these are little shops with guys building cars one by one. This is before Henry Ford brings mass production and economy of scale to cars. And it's clear already that there's going to be consolidation in the industry. This is the era of J.P. Morgan, you know, U.S. Steel, General Electric. And J.P. Morgan, the great consolidator, decides it's time to create an automotive trust, consolidate the car industry by merging the biggest players together. And early in 1908, Morgan's son-in-law gets Billy Durant of Buick and Henry Ford of Ford to come to a meeting in New York, along with the heads of a couple other big car companies.

6:56By the way, this is J.P. Morgan's whole day is everyone comes from an industry. He melds them together and then takes on the next industry the next hour. I mean, there is antitrust law at this point. There is not antitrust enforcement quite yet. And so they get to the meeting. They get to New York, and Henry Ford is skeptical. He's already dreaming of selling a car to the masses, selling a cheap car. And, you know, the point of consolidation of forming a trust is to sell a car for more money. He doesn't want to make fewer cars and charge more. Which is the monopolist playbook. But, you know, everybody has their price.

7:30And he says, I will sell you my share of the Ford Motor Company for cash. Three million dollars. Which was clearly a huge sum. Yeah, nobody was going to pay it. Too much. And the deal falls apart. It's fun to think of what could have been, though. And importantly for our story, this meeting gives Billy Durant an idea. Oh, somebody's going to consolidate the car market. This deal didn't work, but some deal will work. Somebody's going to win. I'm Billy Durant. Why shouldn't it be me? So instead of calling the birds from the trees, he's calling the companies to him. Yes. And he is literally calling the companies to him.

8:12There is this story that he gets back to Flint in the middle of the night one time and he calls at three in the morning this little struggling car company called Oldsmobile and tells the head of Oldsmobile, look, consolidation is coming and I'm going to create a holding company. And together, we'll have the holding company start by acquiring Oldsmobile and Buick. Apes together strong. Diamond hands. Diamond hands. And the head of Oldsmobile is in. And so in September of 1908, Durant creates his holding company. And he gives it one of those great old school generic company names like U.S. Steel or National Lead.

8:56General Motors. Such a boring name. especially in this industry where everyone is making bespoke cars named after themselves. I think it's because he knows the brand is not going to be General Motors, right? He already knows there's going to be Buick and Oldsmobile and everything else he can get his hands on. So Duran has this big idea, this holding company idea. And crucially, from his years on Wall Street, he knows how stocks work. He knows that stocks are a tool. You start a company, you can issue pieces of paper. This time it was literal pieces of paper, stock certificates. And use the proceeds from selling those pieces of paper to buy real companies.

9:38He is about to do this to go on one of the greatest buying sprees in business history. Over the next year and a half, GM will acquire majority control of a major company every month, month after month. Starts with Buick and Oldsmobile. A few months later, in early 1909, he buys a struggling car company called Oakland, which will later be renamed for the town where it's headquartered in Michigan, Pontiac. A few months after that, he buys a company focused on the high end of the market, Cadillac, which, remember, from last week was founded by Henry Ford. Buys a couple little truck companies that eventually become GMC Trucks.

10:17So he's going hard at horizontal integration, right? Which is buying up companies that do the same thing. You're just like, everyone makes a car. Makes a car, sells a car. But Billy's also getting into vertical integration, right? Different parts of the supply chain. So he buys companies that make axles, rims, engines. Buys a company that makes spark plugs, becomes AC spark plugs. Buys Fisher Body, which becomes this famous part of GM. Spends$7 million to buy a company that makes electric headlamps. Company turns out to be a fraud. No. Fake innovation. Like they had backdated their patents or something and GE owned the patents.

10:53And Durant had to write down the entire investment. But he's Billy Durant. By 1910, General Motors is selling 21 different models made by 10 different manufacturers. And just to be clear, there is no synergy here. It's not one giant factory with everyone working together. No, it is a total mess assembled by this manic salesman who just wants to make deals. And this is around the time that the Model T Ford starts to take off. The price is getting cheaper. It's the best-selling car in the country. It's one car getting more and more efficient every time while Billy Durant is creating an empire, an inefficient empire.

11:35Yes, and Ford is winning and GM is losing very clearly at this point. So by the middle of 1910, GM owes millions of dollars to its suppliers. They've got all this inventory on hand. They lay off a third of their workforce, and Billy has to go to the bankers for loans. And the bankers look at GM, and the whole company is a mess. They can't even tell who's doing what. Each subcompany has its own books. And the bankers are like, look, we are not going to put money into Billy Durant. Yes, GM is a real company. They're making cars. But if we're going to put money into this, Billy Durant has got to go.

12:15So now Billy Durant is out at GM. We're going to take a break and we're going to come back. And then Billy Durant is going to create a company to compete against GM. Can't stop this guy. In fact, because he's Billy Durant, he's actually going to create four companies to compete against GM.

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15:11That's the end of the ads. When the bankers fired Billy Durant from his job running GM, they also stopped production of GM's low-end Buick. And that low-end Buick was GM's strongest competitor to the Ford Model T. And I guess the bankers were like, let's not even try and compete on that one. Ford is clearly winning there. Let's leave that end of the market to him. And Billy Durant was like, opportunity. Low end of the market, I can compete there. And like a lot of founders today, he was still this charismatic guy. We were talking about this. Our producer, Gabriel, was like, yes, like Adam Neumann.

15:52I started WeWork, blew up, and got more money to start some new thing. Billy Durant was like that. He was a gifted salesman. People still wanted to invest in him. So he started issuing stock and creating companies, created four companies. And there's one that we really care about. He started it with a famous Swiss race car driver named Louis Chevrolet. Amazing. I thought it was like an Explorer or something Chevrolet. Yeah, a town in Michigan or something. No, it was a Swiss race car driver. It started out badly, and Durant ended up buying out Louis Chevrolet for$10 ,000 and rolled up all of these companies he had started into one company, into Chevrolet, with one mission.

16:33create a car that can compete with the Ford Model T. And he can't quite compete on price. Like, Ford is just too far ahead. But he builds slightly nicer and slightly more expensive cars. Because if you're competing with a car for the poor, as Henry Ford put it, maybe there are people who think of themselves as not quite as poor as my neighbor and want to show it off. Yeah, and, you know, big markets get a lot of niches. There are, in fact, a lot of niches. I think of like the Galapagos and like all the finches with each little beak. As the car market is growing, there are more profitable niches.

17:08And a Durant finds one in the slightly more expensive than a Model T niche. In 1915, he launches a car called the 490, the Chevy 490, which is supposed to cost$490, the price of a Model T around this time. Yes. Actually cost$550. Most Billy Durant thing ever. Total salesman move. But it's a hit anyway. You pull him in with this and then show him a larger number. It's called the 490, but let me talk to the guy in the back room. Yeah, the manager says, we just can't make that deal. We're giving him away. So now Durant is making money. People are actually buying this car anyways. You know what he's doing with the money he's making?

17:47He is secretly buying up stock in GM. The company started and then got kicked out of. And he has this dream of taking back his baby, taking back GM. He goes to the people who sold him their companies when he was at GM. They, of course, still have GM stock. They agree to back him. And he also gets to know Pierre DuPont, very important figure. Of the chemical family? Of the chemical family, DuPont. He is the chairman of the board of GM also at this time, and he is running DuPont. And at the time, DuPont was largely in the explosives and gunpowder business. This is 1915. World War I. All of a sudden, his products are very popular.

18:29It's a good time to be in the explosives and gunpowder business. So DuPont's taking his blood money, basically, and investing it in GM. And Billy Durant gets DuPont on his side. And a few months later, Billy Durant goes to a GM board meeting and drops the bomb. He says, I and Chevrolet now control a majority of the shares of General Motors, and there's nothing you can do about it. I'm back. Charm beats organization. I guess so. I guess so. He charmed his way back, at least for now. And he does the thing again. He does the thing again, issuing stock, buying companies. Building factories, buying companies, borrowing money, making more cars.

19:12Again, there is a downturn. This time it's the recession of 1920. And Billy Durant is in trouble again. And he's in trouble personally because very much in keeping with his character, Billy Durant has been busy borrowing money to buy GM stock. And the collateral he uses for those loans is the GM stock he already owns. And so now that the stock price is falling, the lenders are like, we need our money back. And in order to give them their money back, he's got to sell the stock. And this is a bad situation to be in. This happens in every recession. The people who have borrowed the most, who are the most extended, are the ones that go under.

19:52And you have this cyclical fire sale potential where you got to sell the asset to pay back the loan and that makes the price go down. And that's extremely bad. And so Pierre DuPont, chairman of the board, decides to figure out what's going on with Billy Durant, the man he backed. He says, OK, how much money have you borrowed and who have you borrowed it from? And Durant's like, um, he starts looking around his desk. He's got all these papers with like handwritten notes. It's worse than DuPont thought. DuPont writes a letter to his brother just after this. Read this line from this letter. Mr. Durant stated that he had no personal books or accounts and was unable to give definitive statements.

20:32He doesn't know how much he owes or who he owes it to. So somebody got all Durant's papers together and edited it up. And in fact, he owed$30 million. And he gets fired again. and DuPont and some other bankers bail him out and they fire him. But there was this one key thing Billy Durant had done a few years earlier when he was vertically integrating, back when he was buying up all those parts company. This is the engine motor company you talked about? It's actually even more boring than that. It's a company that sold roller bearings. These things that are kind of like ball bearings. Are they like cylindrical?

21:12I think so. Maybe they're a disc. They go between the axle and the wheel to reduce friction. And the company is not important because of the roller bearings, but because of the guy who was running the roller bearing company, a guy named Alfred Sloan. He is kind of also like a human roller bearing. He is not exciting, not flashy, but very good at reducing friction. Oh, nice. Yeah. He's good at making things more efficient. And Billy had brought Sloan in to GM to run those parts companies that he bought up. And once Billy is gone, Alfred Sloan, the human roller bearing, is going to turn GM into the efficient machine that's going to beat Henry Ford.

21:54And also he will create the model that is going to transform corporations around the world in the 20th century. In fact, it's going to create what we think of as a corporation. Kind of. That's after the break.

22:42We'll be right back. stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500. Then you can invest in a few clicks. Generated assets are like ETFs with infinite possibilities, completely customizable and based on your thesis, not someone else's. Go to public.com slash podcast and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash podcast. Paid for by public investing. Brokered services by Open to the Public Investing, Inc., member FINRA and SIPC. Advisory services by Public Advisors, LLC, SEC Registered Advisor. Generated assets is an

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24:30Okay, we're back from the break. Billy Durant is out. And Alfred Sloan is in. And they're these opposites, but they're these just beautiful form of opposites that you often see in corporate life these days. You first of all have the cowboy, the charismatic founder, right? Great salesman, has the dream, can't really add up debts, but that doesn't matter because he's selling people on what it can be, you know, constantly future focused. And then when the cowboy gets in trouble, story old as time, the board brings in the roller bearing, the human roller bearing to count things, put things in files, in file cabinets.

25:10Yeah, make things more efficient, more orderly. And a really interesting thing about this story is the broader historical context. Because this is the 1920s when Sloan is coming in. This is the moment when the boring guys, the managers, are ascendant. You know, if you think about it, if you go back a few decades, it was all cowboys. It was Carnegie and Ford and Billy Durant. But then once you get into the 20s and 30s, things have settled down. You know, the country has industrialized. You don't have all these new companies coming along doing things nobody's ever done before. And in fact, when I was working on today's episode, I looked at a list of the most valuable companies in 1995, right before the dot-com boom.