CHAPTER 2

Operation of the Motor Vehicle Industry

The motor vehicle industry encompasses a large number of actors. At the center of the industry are a small number of corporations, most of which include the word “Motor” as part of their name. Informally, these corporations are usually called automakers or carmakers even though they typically manufacture trucks as well as cars. Ten carmakers are responsible for producing and selling nearly three-fourths of the world’s motor vehicles. The names of these carmakers rank among the world’s products with the highest consumer recognition. This chapter and the next two focus on these few carmakers.

The handful of carmakers are supported by thousands of manufacturers of parts and commodities that go into the fabrication of vehicles. A car contains between 10,000 and 30,000 parts, depending on the vehicle and the counting method.1 (Does each screw count as a separate part? Is a piston one part or six?) Roughly 70% of the value added in the manufacture of a motor vehicle is accounted for by the several thousand independent suppliers, leaving only 30% for the carmakers. At the other end of the production process, the actual sale of vehicles is handled by many tens of thousands of independent dealers. The parts supply sector of the industry is discussed in Chapter 5 and the distribution sector in Chapter 4.

Principal Activities of Carmakers

A carmaker undertakes three principal types of operations. First, it operates assembly plants, which are large factories where thousands of parts are put together into finished vehicles. Second, it conducts extensive research and development operations prior to the decision to ­manufacture a ­particular vehicle. Third, it coordinates marketing operations to make the public aware of the attributes of its particular models.

Assembly Operations

A typical assembly plant is built with the capacity to turn out approximately one finished vehicle per minute, sixty vehicles per hour. With two eight-hour daily shifts of workers, that speed works out to an annual output of roughly one-quarter million vehicles. Some assembly plants can achieve a higher output by scheduling a third shift, although a continuous three-shift operation makes it difficult to schedule down time for maintenance and repairs. Some assembly plants double output by adding a second line, that is, essentially running two assembly operations under one roof.

Worldwide, approximately 275 assembly plants produce at least 100,000 vehicles annually on a regular basis. Several hundred other assembly plants either produce a smaller number of vehicles by design, or operate regularly at less than half of capacity. Most assembly plants are located in regions of the world that minimize the cost of shipping to customers (Figure 2.1). The adage in the motor vehicle industry is “build them where you sell them.”

Motor vehicle assembly is a classic example of an industry that locates in accordance with Alfred Weber’s industrial location theory. In his ­Theory of the Location of Industries, published in German in 1909, Weber argued that the optimal location for a factory is the point that minimizes the aggregate costs of bringing in raw materials and shipping out finished products. If the cost of bringing in raw materials is less than the cost of shipping out finished products, according to Weber, then the optimal location for a factory is pulled relatively close to the customers. Car assembly is such an example: a large number of relatively compact parts are fabricated into a final product that is relatively bulky, fragile, and expensive to ship to customers, so assembly operations are optimally located close to customers.

The fundamental operation of the assembly plant has not changed dramatically since the Ford Motor Company’s innovations in the early 20th century. Before Ford’s innovations, a vehicle was assembled in a ­single spot in the factory, with most operations performed as the partially assembled vehicle sat on sawhorses. Each type of tool and machine was stored in a particular location elsewhere in the factory. Materials to perform a particular machining operation would be carried through the factory to the machine. When a particular tool was needed, it was retrieved from its specified location, carried to the partially assembled vehicle, and returned to storage when no longer needed.

Ford’s first innovation was to arrange in a logical sequence each operation needed to assemble a vehicle, as well as the tools and machinery needed to complete each operation. In an era when factories occupied multiple stories, Ford opened a four-story assembly plant in 1910 in Highland Park, Michigan, in which relatively light-weight parts, such as upholstery and wheels, were made on the upper two floors, and the heavier parts, such as bodies and engines, on the lower two floors. The specific types of tools and machinery needed to complete a particular operation were placed where the operation was performed in the Highland Park assembly plant, rather than grouped together in one storage area, as was the case in older assembly plants.

Ford’s second innovation was the moving assembly line, installed at Highland Park over a one-year period of trial-and-error experiments in 1913 and 1914, beginning with specific operations, and ultimately extending to the entire production process. A continuously moving belt carried partially completed vehicles from one station to the next, ­permitting each task to be performed by groups of workers positioned along in a logical sequence. Needed parts, materials, tools, and machines for each operation were either placed within reach of the workers, or brought to them on the moving line.

Modern assembly plants have refined the logical sequencing of the operations and the design of the individual tasks performed along the moving line, but the fundamental structure of the production process introduced by Ford a century ago is still used in nearly all assembly plants. The principal exception is a handful of assembly plants that produce small volumes of luxury or sports cars.

An assembly plant is typically divided into three main sets of operations. The first is the body build-up. The sides, roof, and fenders are welded to the frame to create the body. Most of the welding of the frame is done by robots. Doors, hood, and trunk panels are stamped from steel or molded from plastic and hung onto the body. The body panels are sometimes stamped at separate facilities and shipped to the assembly plants although in some cases, the stamping facility is adjacent to the assembly plant. The end result of this first set of operations is known as a “body-in-white.” Most vehicles are built through unitized construction, which involves welding the frame of front, rear, and side rails into an underbody. Top and side frames are then welded to the underbody to form a shell.

The second set of operations occurs in the paint shop. The body is cleaned, primed with an undercoat, painted in one of many colors, baked, and sealed with a protective coating. The coating operations, like the body build-up, are done primarily by robots. To assure a clean, even coat, the vehicles pass through sealed chambers that are inaccessible to visitors and even to most employees. Typically, a primer layer is applied to steel and plastic components to smooth out irregularities and imperfections and to improve resistance to chipping. A basecoat layer provides most of the coloring. A final clearcoat layer provides most of the protection. The coatings are often applied through electrocoating, in which the body parts are electrically charged and immersed in a bath consisting of oppositely charged deionized water. The paint particles are attracted to the surface, neutralized, and baked into a film.

The third set of operations in an assembly plant is the final assembly. The painted body moves along a constantly moving assembly line at a rate of roughly one per minute. As the body passes each work station, one or more workers attach a particular part. The line changes elevation depending on the part to be installed. The engine and transmission are inserted from below. The doors are removed to facilitate installation of seats, instrument panel, and other interior parts. Glass, wheels, tires, ­suspension—the various parts are attached in a logical sequence as the vehicle moves along the line. The final step is to turn the ignition and drive away the vehicle. The body drop was the most dramatic and widely photographed feature of Ford’s original moving assembly line. Some pickup trucks still have body drop, but most light vehicles are built through unitized construction.

Research and Development Operations

Carmakers update their vehicles every year, sometimes substantially and sometimes merely cosmetically. They introduce entirely new models every few years. The development of a new or substantially revised model takes several years of work at a cost of several billion dollars. Extensive research and development operations precede the introduction of new and improved models.

R&D operations are especially complex in part because many actors with widely varying expertise are involved. The principal actors in vehicle development include:

• product planners, who assess the need for a new or substantially revised vehicle of a particular style at a particular price point;

• market analysts, who identify the demographic characteristics of the primary targeted customers such as age group, gender, income, and place of residence;

• stylists, who design the exterior and interior appearance of the vehicle;

• advanced engineers, who develop broad parameters such as engine size, dimensions, and weight;

• detail engineers, who develop specifications for particular parts of the vehicle such as the engine, transmission, and body;

• consumer surveyors, who analyze customer reaction to proposed designs and features of the vehicle;

• financial analysts, who calculate the potential return on investment of the new vehicle and the impact of varying design and engineering concepts on the vehicle’s profitability;

• production engineers, who design tool, dies, and machinery needed to assemble the vehicle;

• factory managers, who determine the arrangements of the facilities that will ultimately assemble the vehicle; and

• quality control experts, who test the vehicle and the individual parts to assure their performance even under extreme conditions.

The various actors must frequently adjudicate among differing perspectives because the training and priorities of one set of actors may not result in the same preferences as those of other actors. For example, engineers may push for use of a part that financial analysts calculate is not cost effective, consumer analysts demonstrate is unimportant to customers, and production engineers determine is too complicated to actually manufacture. An innovative style may be shot down by unfavorable reactions from the consumer researchers, engineers, and financial analysts. Team members may be pulled between the judgment of other team members and the judgment of the supervisors in their functional areas of expertise.

R&D operations are also complex because the marketing, engineering, management, and finance people working on one project must communicate with their counterparts working on other current or recently completed projects. Because of the high cost of developing new and revised vehicles, the project teams seek to share as many parts as possible to save money. Factory-level production and management team members work to ensure that the new vehicle is as compatible as possible with existing vehicles already being built in the company’s assembly plants. Marketing-oriented team members seek a clear and distinct market niche in order to minimize overlap and cannibalizing of other projects.

Yet, even as vehicles have become more complex, and the development process has involved more diverse contributors, carmakers have substantially reduced the amount of time needed to develop vehicles. An entirely new vehicle can roll off the assembly line within two or three years of start of development, about half of the time typically needed ­during the second half of the 20th century. Computer-assisted design and testing as well as allocating more responsibility to the project team, have contributed to the reduction in development time.

Marketing Operations

The third major responsibility of carmakers is to market their vehicles to the public. Carmakers do not sell their products directly to the public, relying instead on independent dealers, as discussed in Chapter 4. Nonetheless, carmakers are among the biggest spenders on advertising. Together, carmakers spent around $14 billion on advertising in the United States in 2012 according to Advertising Age. General Motors Company (GM) spent more on advertising in the United States than any other company except Procter & Gamble. Ford ranked seventh, Chrysler fifteenth, and Toyota sixteenth. The automotive industry’s spending on advertising included $6 billion for TV; $2 billion for newspapers, magazines, radio, and Internet ads; and $6 billion for search-engine marketing, online videos, and social media.

As a result of heavy spending on advertising for more than a century, carmakers have made their names and those of their individual makes and models among the most recognized of all consumer products. The high cost of creating high name recognition has discouraged carmakers from adopting new names. It has also discouraged them from terminating slow-selling brands.

Through the decades, carmakers have been able to market their vehicles in tune with the changing values and priorities of its customers, and they have embraced the many changes in marketing strategies and advertising media through the 20th century. During the first decade of the 20th century, when the sale of sheet music was a leading method of generating revenue, a popular song In My Merry Oldsmobile had a chorus beginning “Come away with me, Lucille / In my merry Oldsmobile.” The song both reflected and helped maintain Oldsmobile’s position as the first high-volume, low-priced car in the United States. As a GM make between 1908 and 2004, Oldsmobile frequently used the melody in its advertising.

Ford captured half the new-vehicle market in the United States and the world during the 1910s by selling a single model, the Model T. For most of the eighteen-year run of Model T, it was famously produced in only one color, black. The company’s newspaper and magazine advertising communicated Henry Ford’s vision of the car as a low-cost, practical machine, useful for farm chores and deliveries.

GM passed Ford as the best-selling carmaker during the 1920s by offering vehicles with attractive styling. GM’s long-time head Alfred P. Sloan set out to sell what he called “a car for every purse and purpose.” GM’s marketing strategy worked because it both reflected and shaped the American class structure. GM created a hierarchy of makes, differentiated by price, appealing to people in each social class. A person owning one GM make was instantly identified as belonging to a different social class than an owner of another make. As families became richer and more highly placed in society, they moved up a “ladder of consumption” by trading in their lower status car for a higher status one. In 1955, for example, GM’s luxury Cadillac make accounted for 5% of the company’s sales, its lowest-price Chevrolet make accounted for 56%, and its three medium-priced makes between 10% and 15% each (Figure 2.2). GM positioned its products to conform closely to the distribution of U.S. income, with a broad base and narrow top.

GM secured its dominant position in the North American market during the 1950s by advertising heavily on the newly ascendant advertising medium of TV. Popular singers sang “See the USA in your Chevrolet,” reinforcing the French pronunciation of the car’s last syllable. GM’s Pontiac make was advertised to have high performance, Oldsmobile to have advanced technology, Buick to have professional reliability, and Cadillac to have wealthy and powerful owners—this despite the fact that the five makes differed more in appearance than in mechanics.

Carmakers have fashioned their advertising to changing social conventions. During the Roaring 20s, vehicles were marketed to women who had been discouraged from driving until then. Vehicles were advertised to be like jet airplanes in the 1950s, to be part of the counterculture in the 1960s, to be energy efficient in the 1970s, to be built with high quality in the 1980s, and to be rugged in the 1990s. In the early 21st century, carmakers reached out to advertise in media of special interest to African Americans, Hispanics, and gays. Carmakers are now among the leaders in advertising through social media, which is expected to take more than one-half of the automotive industry’s advertising budget in the mid-2010s.

History of Motor Vehicle Operations

Nineteenth-century enthusiasts struggled with what to name the new machine. The titles of leading 19th century magazines, such as Motor Age and The Horseless Age, reflected the uncertainty.

• “Automobile” was constructed in the United States from the French for self and moving. French, in turn, got the word from the Greek autos and the Latin mobilis. But the French themselves did not adopt the word “automobile,” preferring voiture, a more general word for vehicle, and the French use the word “auto” as a shortening of autobus, the formal term for “bus.”

• “Car” comes to the English language through the Celtic karros and ultimately from the Latin carrum, meaning wheeled vehicle. The British called the new machine a “motor car,” now shortened to “car,” but for much of the 20th century shortened to “motor.” The American use of “car” comes from shortening “horseless carriage.” “Carriage” in turn came to English through the French cariage, meaning carry.

• “Truck” may have been derived from the Greek word trochos, which means wheel. Before the invention of motor vehicles, “truck” referred to a wheeled vehicle suitable for carrying a heavy load. The British most often refer to this type of vehicle as a “lorry.” The etymology of “lorry” is unknown, possibly related to a version of lurry, a once obscure and now archaic word in a British dialect meaning to pull or drag.

• “Vehicle” comes from the Latin vehiculum, another word for carriage or conveyance.

European Pioneers

The United States would become the dominant producer of motor vehicles in the early 20th century, but Europeans were responsible for designing and building the first practical motor vehicles in the 19th century. The Benz Patent Motorwagen has the strongest legal claim to be the world’s first gasoline-powered vehicle because Karl Benz (1844–1929) was issued a patent for it in 1886. The Motorwagen was a three-wheeled vehicle made of steel tubing, powered by a four-stroke gasoline engine mounted under the seat and connected by bicycle-style chains to drive the rear wheels.

Gottlieb Daimler (1834–1900) and Wilhelm Maybach (1846–1929) are especially important in the development of the modern internal combustion engine. Daimler was a director and Maybach the chief designer at Deutz-AG-Gasmotorenfabrik, an engine manufacturer half-owned by Nikolaus Otto (1832–1891). In 1877, Otto had patented a four-stroke engine that proved to be the approach used in the gasoline-powered motor vehicle engine. In a four-stroke engine, a piston moves in and out of a cylinder in four stages or strokes:

• The first stroke, intake, fills the cylinder with gasoline, pushing the piston out.

• The second stroke, compression, closes the cylinder, and pushes the piston in, compressing the fuel.

• The third stroke, ignition, ignites the gas in the cylinder, causing the piston to push out.

• The fourth stroke, exhaust, opens the cylinder, draining the spent fuel and letting the piston push in.

Otto’s engine proved unreliable and inefficient, so Daimler and Maybach set out to improve it. After disagreements with Otto, they left Deutz and formed their own company. They built a working gasoline-powered engine in 1885 and installed it under a four-wheel carriage a year later, two months after Benz had applied for his patent, but before it had been issued. Working 100 kilometers from each other, Benz and Daimler were unaware of each other’s work. The two German neighbors produced rival luxury cars until they merged in 1926.

More than a century before Benz and Daimler’s innovations, Nicholas-Joseph Cugnot (1725–1804) built the first self-propelled vehicle large enough and strong enough to carry people. Cugnot’s fardier à vapeur (steam-powered cart) first ran in 1769. An improved model built two years later, and still operable today, is displayed at the Musée des Arts et Métiers in Paris. Into the 19th century, steam proved more amenable to powering train locomotives and ships than road-driven vehicles. Rail ties and water surfaces offered less friction than the primitive roads of that era, and the considerable amount of time needed to heat up the boiler made steam more suitable for long-distance rail and sea travel than for short road trips.

An 1884 steam-powered de Dion-Bouton et Trépardoux is considered to be the oldest vehicle still driven on public roads (in England). Founded in 1883 by Jules-Albert de Dion (1856–1946), Georges Bouton (1847–1938), and Charles Trépardoux (1853–1920), the French company was a leading steam carmaker in 1900, producing 400 vehicles in that year. A de Dion finished first in the world’s first officially organized car race—a 50-kilometer route from Paris to Rouen, France, in 1894—but the judges did not award it the top prize on the grounds that it needed a passenger to stoke the boiler.

Inventors of electric cars include Gustave Trouvé (1839–1902), who demonstrated a three-wheeled vehicle in Paris in 1881, and Andreas Flocken (1845–1913), who built the first four-wheeled vehicle called the Elektrowagen in 1888 in Cobourg, Germany. As the internal combustion engine became the dominant power source in the first decade of the 20th century, the pioneering electric carmakers faded into obscurity.

France was the world leader in motor vehicle production in 1900. That year, 62,000 vehicles were produced worldwide, 30,000 of them in France. The French carmaker Panhard et Levassor was the leading carmaker in 1900, selling 1,000 vehicles that year. Panhard et Levassor, established in 1887 by René Panhard (1841–1908) and Émile Levassor (1843–1897), was responsible for so many key innovations that the standard design of the car became known in the early 20th century as the Systeme Panhard. Among the features attributed to Panhard are fitting an engine with four cylinders, mounting the gasoline engine in the front of the vehicle instead of underneath the seat, steering the vehicle with a wheel instead of a tiller, attaching a transmission with gears to the rear wheels, and engaging a clutch to change gears. Panhard et Levassor’s carmaking operations were acquired by Citroën in 1965.

Leadership Passes to the United States

During the first decade of the 20th century, leadership of the world’s auto industry passed from Europe to the United States. Several Americans competed for the recognition of having built the first car in the United States. Among the stronger claims are:

• Gottfried Schloemer (1842–1921) built what may have been the first gasoline-powered car driven in the United States in 1889 in Milwaukee. The engine was ordered by Schloemer from the Sintz Gas Engine Company of Grand Rapids, Michigan.

• Henry Nadig (1843–1930) was widely witnessed driving a horseless carriage in 1889 in Allentown, Pennsylvania. Because his vehicle was disturbing horses, he was ordered to operate it only at night. A replica is displayed in America on Wheels, a transportation museum in Allentown.

• John William Lambert (1860–1952) may have built the first horseless carriage for sale in Ohio City, Ohio, in 1891, but he abandoned the initiative when no customers came forward.

• Charles H. Black (1852–1918) mounted a Benz engine on a carriage and drove it in Indianapolis in 1891. He may have been the first person in the country to be issued a driver’s license in Chicago and the first to have paid a claim after causing an accident, both in 1892.

• Elwood P. Haynes (1857–1925) is cited by the Encyclopaedia Britannica and the Smithsonian Institution as the second to build and successfully road test a gasoline-powered vehicle in the United States—in Kokomo, Indiana, in 1894—but the first to build a vehicle powered solely by gas rather than capable of also being hitched to a horse.

Overlooking all of the above claims, the Smithsonian and Britannica instead give credit for the first successfully road-tested gasoline-powered vehicle in the United States to the vehicle built in 1893 by the brothers Charles E. Duryea (1861–1938) and J. Frank Duryea (1869–1967) in Springfield, Massachusetts. Although probably not actually the first, the Duryea brothers are clearly the preeminent pioneers of the U.S. auto industry for two reasons: (1) they were the first to win an official race in the United States, (2) they were the first to build cars for sale in the United States—and actually sell them.

The first race in the United States was sponsored by the Chicago Times-Herald on November 28, 1895. The 52.4 mile (84.3 kilometer) race through the streets of Chicago and Evanston was won by J. Frank Duryea in 10 hours 23 minutes, of which 7 hours 53 minutes were running time. Second place was won by a Benz driven by Oscar B. Mueller. The race was originally set for November 2 from Chicago to Milwaukee, but it was scrubbed because few of the 83 cars entered were actually in the city and operable. Only six cars showed up for the rescheduled race on Thanksgiving Day, and only two finished in the snowy, cold, and muddy conditions.

Taking advantage of the publicity from winning the race, the Duryea Motor Wagon Company became the first company organized for the purpose of building vehicles and selling them to the public. Four were delivered in 1895 and nine more in 1896. The Duryea brothers disagreed over sharing credit between the two of them. Frank was the driver and the sole brother in Springfield as the company was getting started. Charles claimed that the vehicle was based on a model that he had developed several years earlier.

The editors of Automobile Quarterly magazine have unearthed more than 3,000 firms organized to build motor vehicles in the United States during the late 1890s and the first years of the 20th century. It is difficult to identify a precise total number of carmakers because few of them ever advanced from building experimental prototypes to producing vehicles for sale.

The two best-selling vehicles in the United States around 1900 were Columbia and Locomobile. The Columbia car was produced by the Pope Manufacturing Company beginning in 1897. Albert A. Pope (1843–1909) established the company in 1877 to manufacture bicycles, and by the dawn of the automotive age, he was known as the King of Bicycles. Records compiled by Automotive News attributed to Columbia 100 of a total of 157 cars sold in the United States in 1898 and 440 of 1,049 sold in 1899. Pope spun off Columbia in 1899 as an independent company, but it was snapped up by a holding company called the Electric Vehicle Company (EVC), which was trying to create a monopoly as described in the next section. Pope went on to acquire a number of small carmakers, but none could match the rapid growth of competitors during the first decade of the 20th century. Pope declared bankruptcy during the Panic of 1907, and he exited the auto industry altogether in 1915.

The Locomobile Company of America was founded in 1899 by John B. Walker (1847–1931), editor and publisher of Cosmopolitan magazine. According to Automotive News, Locomobile accounted for 750 of 2,288 cars sold in the United States in 1900, 1,500 of 3,178 sold in 1901, and 2,750 of 7,753 sold in 1902. For the first five years, all Locomobile cars were steam powered, based on designs purchased from the Stanley ­brothers. The company switched to gas-powered engines in 1904 and remained in business through 1927.

Thwarting Monopolies

Several attempts were made to consolidate early U.S. carmakers into a trust (monopoly), as was happening at the time with railroads, steel, petroleum, and other important sectors of the economy. Pope had created a bicycle trust by acquiring most of the key U.S. patents covering bicycles. EVC, a holding company, tried to monopolize control of manufacturing electric cars, which in 1900 held 40% of the U.S. market and were especially popular in large cities as taxicabs. EVC had been founded as the Electric Storage Battery Company in 1897 by Isaac L. Rice (1850–1915), a pioneer in developing electric-powered submarines. The carmaking operations were taken over in 1899 by New York politician and businessman William C. Whitney (1841–1904) and Peter A. B. Widener (1834–1915), a Philadelphia businessman who invested in street railway companies. Competition from gas-powered cars forced EVC out of the motor vehicle production business after 1900. However, EVC continued to play a leading role, through the Selden patent, in attempts during the first decade of the 20th century to monopolize the U.S. motor vehicle industry.

The Selden patent was a patent held by George B. Selden (1846–1922), a Rochester, New York, lawyer. In 1879, Selden initiated the process of filing a patent on “a liquid-hydrocarbon engine of the compression type” for use in a four-wheeled vehicle. Selden is said to have been inspired to construct a small internal combustion engine after seeing a large one made by George Brayton (1830–1892) at the 1876 Centennial Exposition in Philadelphia. Whether he had actually installed the engine in a vehicle is disputed by automotive historians.

Selden used legal tactics to delay the implementation of the patent for 16 years. Each year, he filed a minor amendment to the patent application, thereby requiring the U.S. Patent Office to conduct a fresh review. By doing this, Selden maintained his claim but put off the start of the 17 year period of exclusive rights granted by a patent. Finally, in 1895, when commercial production of motor vehicles for sale to the public was about to start, Selden was issued patent number 549,160. Thus, at the dawn of the motor vehicle age, George Selden held the sole legal right to sell a motor vehicle, even though he never did so himself.

Holding a valuable patent but lacking the resources to enforce it, Selden sold the rights to the patent in 1899 to EVC, which in turn initiated suits for patent infringement against leading carmakers. In retaliation, several carmakers organized the Manufacturers Mutual Association in 1902, renamed a year later the Association of Licensed Automobile Manufacturers (ALAM). ALAM and EVC negotiated a settlement in 1903 to jointly enforce the Selden patent.

ALAM leased to its members the right to manufacture and sell cars under the Selden patent; within a year, 32 carmakers joined. ALAM licensees paid a fee of 1.25% of the retail price of every gasoline-powered car they sold; ALAM kept 0.5% and turned over 0.75 % to EVC. ALAM ran advertisements threatening not only carmakers that had not paid license fees but also dealers and consumers. For example, one advertisement stated “any person making, selling or using such machines [gasoline-powered cars] made or sold by any unlicensed manufacturers or importers will be liable to prosecution for infringement.”2

Henry Ford applied for an ALAM license in 1903, but he was turned down on the grounds that he had not yet constructed an operable gasoline engine. Vowing revenge, Ford fought the monopoly with provocative advertisements challenging the legitimacy of the patent. Calling Ford’s bluff, ALAM sued him for patent infringement. In 1909, the U.S. District Court upheld the Selden patent, concluding that patent 549,160 did indeed bring together the essential elements of a gasoline-powered car. Several companies, including General Motors, then agreed to pay ALAM royalties of 0.8% on every vehicle they had produced since 1903. Henry Ford refused to pay ­royalties, pending an appeal, but he placed $12 ­million in an escrow account to cover eventual payments to ALAM. To calm jittery sellers and buyers of Ford cars, Ford arranged a $6 million bond with the National Casualty Company to cover the potential legal liability of every dealer and owner of Ford cars.

In 1911, the U.S. Court of Appeals reversed the District Court decision. The Selden patent was found valid for vehicles powered by a Brayton-type two-stroke engine. But because nearly all motor vehicles were powered by an Otto-type four-stroke engine, the decision rendered the Selden patent worthless as it applied to motor vehicles. As the patent’s seventeen-year enforcement period was due to expire in 1912 anyway, ALAM did not appeal the decision to the U.S. Supreme Court, and the organization dissolved. ALAM’s technical efforts were taken over by the Society of Automobile (changed in 1917 to Automotive) Engineers (SAE), which had been founded in 1905 to promote technical standardization among the hundreds of carmakers in the early years of the industry. A century later, SAE continues to be the principal organization promoting technical standards in the industry. The demise of the Selden patent freed the U.S. auto industry from monopolistic licensing practices.

Clustering in Southeastern Michigan

Most histories of the auto industry assert that southeastern Michigan became the industry’s home early in the 20th century by accident. For example, John B. Rae says:

With due allowance for the influence of economic and geographic factors, Detroit became the capital of the automotive kingdom because it happened to possess a unique group of individuals with both business and technical ability who became interested in the possibilities of the motor vehicle.3

In reality, although southeastern Michigan was home to talented inventors, a clustering of inventive genius does not spring in isolation from the local industrial climate. The distinctive features of doing business in southeastern Michigan encouraged motor vehicle producers to operate there during the industry’s formative years. According to the 1904 U.S. Census of Manufactures, the first to break out carmakers, 42% of all U.S. cars were assembled in Michigan.

Southeastern Michigan attracted or retained the most successful carmakers because the mechanics and engineers most skilled in the key operations for motor vehicle production were already clustered in the region. In particular, skilled operations had to be found for three essential ­components—an engine to propel the vehicle, a drivetrain to convert engine power to motion, and a chassis strong enough to hold both passengers and the power source. These problems were solved largely through operations borrowed from industries already in southeastern Michigan.

In 1900, only 22% of the roughly 4,000 vehicles sold in the United States had gasoline engines. Steam powered 40% of the vehicles, and electricity 38%. In the 20th century, though, the competition quickly ended: gasoline engines accounted for 83% of sales in 1905, compared to only 12% steam and 5% electricity. Steam-powered cars were easier to manufacture than gasoline-powered cars, and they cost about the same to operate. But steam quickly reached a technological dead-end after 1901, delivering a much less favorable ratio of horsepower to engine weight than gasoline.

Cars with electric engines were especially popular in the large northeastern urban areas, such as New York and Philadelphia, where they were used for deliveries and as taxis. They were quieter and cleaner than the competitors, and easier to operate especially for women. But electric cars were unsuitable outside big cities as they were not powerful enough to traverse unpaved rural roads and had to be recharged every 30 kilometers or so. And the cost of electricity made their cost per distance more than double the cost of cars with other power sources. Had electricity emerged as the dominant source of power, U.S. automotive manufacturing may have clustered in the Northeast instead of the Midwest.

Prior to their adaptation for motor vehicles, gasoline-powered engines were being sold in 1900 primarily for two other purposes. First, small stationery engines were used to generate intermittent power for farm implements and industrial machines in rural settings that lacked access to the urban-centered electricity grid. The leading producer of stationery gas engines was Ransom E. Olds (1864–1950), who set up the first car assembly plant in Detroit in 1901. Second, gasoline engines were also used to power boats. The leading producer of marine engines, Detroit-based Leland & Faulconer, founded in 1890, became a major supplier of car engines and gained a reputation for making precision castings. Its co-founder Henry M. Leland (1843–1932) went on to be president of the Cadillac and the Lincoln car companies.

In addition to Leland & Faulconer, the other leading Detroit-area parts supplier to early carmakers was Dodge Brothers. Dodge made most of the parts for Ford’s first cars in 1903, including engines, transmissions, axles, and frames. John Dodge (1864–1920) and Horace Dodge (1868–1920) established a machine shop in Detroit in 1900 to make parts for steam engines and bicycles. They became the first machine shop to concentrate on manufacturing automotive parts in 1901, when Olds gave them a contract. In 1903, Ford ordered engines, transmissions, and axles from the Dodge Brothers, but lacking sufficient cash, paid for the first order largely in shares of the company. Dodge remained Ford’s most important supplier until 1914 when Dodge terminated the relationship and two years later began to produce its own cars.

Flint was the center for wagon and carriage production in the United States in 1900. The nation’s largest producer of carriages at the time was Durant-Dort Carriage Co. The company was organized in 1886 as the Flint Road Car Co. by William C. Durant (1861–1947), a local entrepreneur, and J. Dallas Dort, manager of a hardware store. Carriage-makers clustered in Flint to take advantage of its proximity to Michigan’s extensive hardwood forests. Durant’s grandfather Henry Howland Crapo (1804–1869) acquired control over 5,000 hectares of pine forests east of Flint. The timber was cut and floated down the Flint River to Crapo’s Flint saw mills. Crapo was elected mayor of Flint in 1860 and governor of Michigan in 1864. Durant built his carriage company into the nation’s largest through vertical integration. At a time when carriages sold by competing companies were made under contract with independent manufacturers, Durant-Dort established subsidiaries to manufacture carriage bodies, wheels, axles, upholstery, springs, varnish, and whip sockets.

Southeastern Michigan also became the center of auto production because of the availability of venture capital, much like Silicon Valley a century later. Carmaking has always been capital intensive. The large assembly plant, the multitude of specialized tools and machinery, the thousands of parts—acquiring all of these assets took a lot of capital a century ago. It is still the case, as robots replace humans for many of the assembly operations, and R&D initiatives become more elaborate.

In 1900, the principal source of financing for industrial development was the large banks clustered in New York City and other northeastern cities. Given that the northeast was also the center of the market for cars in 1900, carmakers naturally looked to that part of the country for capital and factories. However, eastern bankers would not provide adequate financing to the infant car industry. The auto industry was considered too risky.

Turned away by the banks, carmakers turned to sources of capital in Michigan. The leading auto industry venture capitalists proved to be Michigan-based speculators rather than banks. In 1900, much of Michigan’s wealth had been produced in three resource-based industries—copper, iron, and lumber. Copper was discovered in Michigan’s Upper Peninsula in 1847, and until the late 1880s the state was the world’s leading producer. Detroit became the largest producer of iron ships and a national center for other iron products. Michigan’s extensive hardwood forests provided lumber for carriage makers. Auto industry pioneers found that people who had made their fortunes in these and related industries in the 20th century were looking for new investment opportunities in the new century. These investors were known as the Princes of Griswold Street, the street where Detroit’s financial institutions were clustered.

After failing to obtain financing in New York, Olds’ assembly operations were underwritten by Samuel L. Smith, who had made a fortune investing in Michigan’s copper and lumber industries through the Michigan Land and Lumber Co. Smith, like Olds, was a Lansing native. Smith became the principal investor in the Olds Motor Works Co in 1899, holding 99.8% of the shares. He became President and his son Fred secretary and treasurer of the Olds Motor Works Co.

Henry Ford also secured capital from wealthy Michigan individuals rather than from banks. Backers of Ford’s first venture in 1899 included William Maybury (1848–1909) and William H. Murphy, who had made fortunes in real estate. Maybury was also Mayor of Detroit. Ford’s second attempt at starting a car company was financed by Murphy and James and Hugh McMillan, who controlled the Detroit Dry Dock Co where Ford had once worked. After two failures, even most Detroit financiers shunned Ford. For his third venture—the one that succeeded—Ford secured most of his funds from Alexander Y. Malcomson (1865–1923), a coal merchant. Meanwhile, Murphy took control of the second failed Ford company in 1902. He brought in Henry Leland to run the firm, which was renamed the Cadillac Automobile Company.