The Financial Situation

MERRYLE STANLEY RUKEYSER

Reflections on the Recuperating Automobile Industry

FOR many years, pedestrians, whose presence on the surface of the globe has been challenged by fast moving motor vehicles, have hoped in moments of despair that some good fairy would wave her wand across the land and cause the last vestige of automobiles to disappear forever. It has always been difficult for the man on the street to get the viewpoint of the individual seated in the car, and the antagonism on the part of self-propelled folk toward those automatically drawn is neither novel nor startling. However, the quaint notion that automobiles might not last has lately entered other minds. The recent depression in the industry has driven some seers within the industry so far from sane thinking that they are wondering whether—after all—automobiles are not a fad that will soon die out, as bicycles did.

Where will the automobile industry be in 1931? How lined with gold would be the coffers of the individual who could answer this simple inquiry with mathematical precision! With due humility toward the guardian of the secrets of the future, we asked the best informed practical men in the automobile industry to grapple with this question regarding what lies ahead.

"In my opinion," retorted one competent witness from within, "the automobile industry in a decade will be the leading industry of the world, because it deals with that most vital of all human necessities—rapid and economical transportation."

The director of sales of another significant factor replied: "We have never had a 'normal' in our business, but believe that automobiles that are carefully constructed and economical in operating costs will continue to show a healthy growth over a period of years to come."

The vice president of another company whose name is known wherever advertisements are read was more specific. He tried to foresee the future with a greater wealth of detail. "I do not believe that we shall within a period of five years reach the great passenger car totals of 1920," this observer remarked. "Neither do I believe that we shall within the next ten years react to the prewar figures. I should say that over a period of five years our average yearly would be something like 75 per cent of the 1920 total. I entirely eliminate the idea of saturation. The motor car has come to take a great place as an individual medium of transportation, A very great part of our field has not yet been reached.

"The extraordinary business of 1920 was financed largely by large wages and overtime wages. They seem destined not to return for a considerable period, if ever. We shall not again have an opportunity to sell our product to such a great number of persons, for the reason that not so many will have the necessary money to buy. It is not to be forgotten, however, that, whereas six million cars have been sold into homes whose income is $4,000 yearly or less, there are nine million homes with the same income where there has not been a purchase of an automobile. Only one out of three of our farmers owns a car."

DEVERTING to the motor truck aspect, this diagnostician ventured: "I expect to see motor truck sales climb to new heights just as soon as the buying slump ends and production is resumed. The truck business has room for an infinite expansion. Even the sales of 1920 are small compared to what must be when the buying strike ends, when production starts and the world begins to replenish its empty shelves, Only one farmer out of every seventynine has even one motor truck. For 1921 the total truck business will be no better than fifty per cent of 1920. In 1922 it should equal 1920, and thereafter it should climb steadily until the average volume five years from now is not less than twice the big figure of 1920."

Incidentally, in the present period of emergence from paralyzing depression the passenger car trade is improving much more conspicuously than the truck. The latter depends on the revival of business generally, and the sale of trucks is not likely to grow significantly as long as freight cars are idle and the wheels of modern industry turn slowly.

The cause of the heightening of orders for passenger cars was largely due to the weather. An unseasonably warm March thawed out the frozen will to buy. And of a sudden the automobile trade began once more to show activity, Up to the middle of 1920, each day marked the setting of new precedents of quick production and enormous sales, Then the general business recession affected this industry, which suddenly all but ceased to function. At the beginning of 1921, the automobile trade, with emergency brakes clamped down, stood motionless. In December, philosophers of pessimism were expounding their reasons why the collapse of the industry was inevitable.

Spring brought a turn for the better, The usual seasonal improvement in demand, plus the placing of orders that had accumulated during the buyers' strike, stimulated the sensory nerves of the trade, and once more optimism poured into the automobile factories, In March and April, speculators, who in the bear markets of the preceding years, read deflation into quotations on motor stocks with a vengeance, started, on the other hand, to chant refrains about recovery in the industry. The upturn of automobile stocks in Wall Street was rapid, as echoes of labor re-employed and factories once more in motion in Detroit and Cleveland were heard, At the market place for certificates of stock ownership, the bidding up of shares was too rapid, and during the first fortnight in May—when this article was written—the reaction came. A slump in retail sales of cars in April, because of the chilly, unattractive weather and a new wave of price cutting by manufacturers, served as the pretext for the selling of motor and accessory shares, which only a few days before had been so eagerly purchased at the Stock Exchange,

BUT the recent fluctuations in the market value of automobile securities has been so influenced by the manipulative efforts of speculative pools that the quotations of a few weeks offer little assistance to the student of the fundamental outlook for the industry. Incidentally, it may be said that, if the analysis which holds that the automobile industry, after the present business readjustment, will enter into a permanent period of profitable activity is correct, prevailing quotations for the stocks of the most efficient companies are far below what they are likely to be a few years hence. Out of the reconstruction of the industry, which is now in process, the makers of economical cars which find a buying clientele will emerge more powerful than ever. Many of the weaker companies, of which there are scores, will probably pass out of existence, whereas a lesser number will in all likelihood be merged with other units.

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On the basis of past performances, there will be a slump in the automobile business in the fall. Ordinarily, the middle six months of the year are the busiest, with the peak between the second and third quarter. In the fourth quarter of the year, usually the decline in automotive activity is rapid until the dullness of the first quarter is reproduced. If the curve which measures productive efforts in the great capitals of the industry follows the norm for the rest of the current year, no unusual significance should be associated with the recession.

AFTER conditions have become stablized, what will be the new normal in the industry? The search for a "norm" in commerce is elusive. There is no fixed standard, but in a growing country like America, except during occasional spasms of reaction, the trend is upward, particularly in a new industry such as the automotive. The conditions prevailing from the middle of 1919 to July, 1920, were exceptional because the demand for cars had become cumulative, representing in addition to the current wants unplaced orders of previous war years.

Unable to agree upon a normal for the industry, yet needing a foundation on which to build their plans, the accountants of the trade have found refuge in the conception of replacement business as the basic thing. The men who design the cars declare that the life of the average automobile is between five and six years. Therefore, if the species of car owners never turn into the "No, thank you, I prefer to walk" genus, the business of replacing worn out cars with new ones will amount to between 1,000,000 and 1,500,000 machines annually. At present 9,200,000 passenger cars and trucks are in use.

The replacement phase has become fundamental, now that the industry is getting out of its swaddling clothes. But it is useful only as a rough index over a period of years, rather than as a hard and fast guide as to prospects for any one year. In times of recession, with diminished employment of labour and shrinking profits in the realm of give and take, folk are inclined to make

old shoes, hats, and even automobiles do until better conditions swell the contents of their purses. As in all human things, there is bound to be a mortality rate of automotive possessors, but the ranks ought to be kept intact by recruits, as the national wealth grows.

The reaction, from war-time extravagance, too, is curbing extravagance in methods, and is driving the industry toward simplicity and economy of design. Before, the engineer was often thwarted in these efforts by the sales manager who always wanted new devices added to the cars as talking points. Now the tendency is to make economy of construction the point of emphasis in the sales campaign.

R. E. Gardner, Jr., vice president of The Gardner Motor Company, when asked what the industry had learned from the stoppage of business, replied, "In my opinion, the industry has learned, in the big slump just experienced, that primarily the dealer is the weakest link in the business and must be strengthened; that greater values must be given the public; and that cars must be built according to what the people want to buy rather than what the manufacturer wants to sell. Also that service is paramount and advertising essential."

RESPECTING prices, automobile manufacturers have been slow to respond to the dictates of a falling price level. They long tried to resist the trend, and their freedom of action was hindered by price guarantees to buyers. However, by July 1 virtually all of the guarantees will have expired, and the artificial barriers to readjustment effaced. When consumers become assured that cars will become no cheaper, they will buy with confidence. When the farmer, who in the Spring of 1920 bought one-half of the country's production, regains his financial standing and enters the automobile market again, the curve of activity will turn upward. The man on the soil has refrained from buying thus far this year, and, even if all the unfavorable aspects of the situation are suppressed, automobile manufacturers will be fortunate indeed if in the calendar year 1921 they find a market for 65 per cent of the number of cars produced in 1920.