Engines that Move Markets
The story of the development of the automobile is a story of two great issues. The first concerned which of three rival technologies would emerge as the source of power for self-propelled vehicles. The second issue was which of the hundreds of companies that set out to make and sell cars would succeed in establishing long-term viable businesses. A third, more tangential, issue was whether leadership in the automobile industry would be seized by the United States or by Europe. Investors at the time had to weigh up all three of these issues.
汽车的故事，首先是三个动力之争：煤气/Gas、电力和石油驱动，看最终谁能胜出；其次是上百家汽车公司谁能长期获胜；第三是汽车工业未来是美国胜出还是欧洲胜出。投资者的投资需要考虑这三个事情，真不容易。
So a dual system developed – railroads for long distances or heavy goods, and horses for shorter journeys.
当时的情景也是双轨制的，长途或者重货用火车；短途还是马车。
By 1870 Daimler’s frustrations made him ready to seek alternatives. His background assisted him in his efforts – he was by now both technically skilled and an experienced operational manager, a relatively rare combination for the time. Initially Daimler joined Maschinenbau-Gesellschaft Karlsruhe as managing director, a company that coincidently had previously employed a gentleman named Carl Benz in its drafting office.
Daimler filled this gap, taking with him a colleague by the name of Wilhelm Maybach.
1870年创业时的戴姆勒已经是老工程师+成熟的管理者了，历史就是这么凑巧，他加入当高管的公司新招了一个人就是卡尔奔驰。同时工作的还有个人叫迈巴赫。百年的戴姆勒奔驰品牌，最初的缘起居然就是1870年的这次偶遇。
Eventually the friction between Otto and Daimler was to reach a point where Langen was forced to bow to Otto’s wishes and remove Daimler from the company.
Daimler was not alone in perceiving the potential for the use of rock-oil distillates. Carl Benz had followed a similar route.
专利上没有戴姆勒的名字让他一气之下离开了公司，走上创业道路。奔驰和他一样，共同在寻找石油提取物的再利用——并不是汽车决定了他们的未来，居然是汽油。
Also like Daimler, Benz was strong-willed and as a consequence had fallen out with his business partners. In Benz’s case, the board of the company he had helped to create refused to consider constructing a road vehicle using the engine he had created. Indeed, the board was sufficiently disturbed by Benz’s protestations that they actually questioned his sanity, and as a consequence probably welcomed his resignation
to specialise in the design and production of gas engines, and when finances permitted, would branch into research on self-powered vehicles. Benz’s stationary two-stroke engine sold well, providing sufficient income for his company to accommodate his interest in transportation.
The problem for Daimler at the time was that the patent on the four-stroke engine belonged to Otto.
In late January 1886 when the courts declared Otto’s patent void, on the basis that it had actually been invented in France before the patent application, with a running model having been manufactured in 1873.
奔驰的两冲程发动机还是卖的不错，虽然是烧汽；同时戴姆勒苦恼的是四冲程发动机的专利属于Otto。直到他和奔驰认识16年后Otto的四冲程专利才作废。
Under the non-compete conditions of his contract with Deutz, Daimler had offered his previous employers his engine patents, an offer Deutz was later to regret spurning
In 1886 both Benz and Daimler had independently produced the first automobiles powered by gasoline. The initial public reaction was an almost total lack of interest. The profits of both men stemmed from the sales of their original stationary engines. Public perception only changed with the 1888 Berlin Engineering Exposition, where Benz won a gold medal for his exhibit. The press now became enamoured with his vehicle and crowds breathlessly followed his demonstrations. Unfortunately sales did not follow. Benz later reminisced that his only prospective customer was removed to a lunatic asylum before the sale could be completed
Daimler did not meet with greater success than Benz.
戴姆勒和奔驰的汽油机都是1886年才做出来。一开始公众根本没有兴趣，只能靠卖固定的发动机养活自己。直到2年后的柏林发动机展会上，奔驰获得金奖才被大家知道。但即便如此，销售额也不行，甚至奔驰后来回忆说他唯一的潜在客户都进了疯人院。
The success of the engines themselves, though, was such that the Daimler Motor Company was established in New York in 1889. Daimler had not limited the uses of his engine to vehicles. More public uses included engines for boats and powering balloons, the latter an experiment that fired the interest of Ferdinand von Zeppelin.
戴姆勒的成功居然是从1889年在美国成立戴姆勒汽车公司开始的，已经是认识奔驰后的快20年了。并且也不是直接上车的，而是用在船上或者飞艇上。
In 1890 he formed the Daimler Motoren Gesellschaft mbH with a capital of 600,000 marks (approximately $11m). In doing so his interest in the company was diluted to one third and he therefore lost control.
It did not take long for the interests of Daimler and the other shareholders to diverge. Daimler wished to develop the vehicle use of his engine, while the other shareholders wished to remain focused on the development and production of the profitable and accepted stationary engines.
1890年，融资了1100万美元，戴姆勒的股权稀释到1/3，失去了控制权。之后很快就出现股东分歧，戴姆勒希望搞汽车发动机，其他股东希望继续搞固定位发动机。
By 1893 Benz had improved on his original three-wheel model and introduced a four-wheel vehicle called the Victoria. Benz built 45 Victorias, most of which were sold in France.
1893年奔驰的首台四缸车——维多利亚就造成了，一共造了45台，大部分卖到了法国。
In Britain, powered vehicles had been greeted by the introduction of the ‘red flag’ legislation that required vehicles to be preceded by a man walking with a red flag.
It effectively stated that a speed limit of 12 km per hour would apply in rural areas and 6 km per hour in urban areas or around tight bends
汽车出现前的法律也很有意思，英国是要求汽车行驶时旁边必须跟个人，还药手持红旗，城区速度不能超过6km/h。
Daimler displayed his vehicle at the exposition and it is recorded that one extremely interested visitor to his stand was an employee of the Detroit Edison Illuminating Company by the name of Henry Ford.
戴姆勒展会上的汽车被当时还在底特律爱迪生电灯公司的员工福特特别有兴趣。
The law in Britain before 1896 specified that at least three men should drive the vehicle, that it should travel no faster than three miles per hour, and that it should also be preceded by a man carrying a red flag. When the laws were repealed in 1896, this allowed the industry to accelerate its efforts; a large number of companies began producing vehicles.
1896年前的英国法律要求开车要3个人，速度还不超过3迈，还要求前进时有人手持红旗。1986年废除给汽车产业带来了新机遇。
While global sales remained low in absolute terms, it was clear that the era of the automobile was on its way. As the press of the time shows, the key was the sequence of races.
虽然当时汽车销量还很少，但汽车时代的来临已经非常清楚，媒体上连续的汽车比赛报道已经非常清楚。
A wealthy commercial magnate in Vienna by the name of Emil Jellinek, working on the principle that if he ordered a large enough quantity he could influence the product, ordered four Daimler automobiles on the condition that they were capable of sustaining speeds in excess of 25 mph.
It was common at the time for drivers to enter races under pseudonyms, and Jellinek followed this practice using the name of his daughter: Mercedes.
梅赛德斯的名字来源居然是Jellinek的女儿，当年一下子订购了4台戴姆勒汽车，要求速度能超过25迈。
An electric car had been designed by William Morrison in Iowa and given a public view in Chicago in 1892, while in 1894 Henry Morris of Philadelphia had built the ‘Electrobat’
最早的纯电动车1892年就造出来了。
In continental Europe, the focus had increasingly been on the creation of larger and more expensive vehicles. The market gap that existed, therefore, was for the affordable horse-and-carriage replacement. This was the gap that inventors in America sought to fill.
当时的欧洲，追求的是更大、更贵的交通工具，主要是替代马车。
There are estimates that in the 20 years that followed the first faltering steps of the Duryea automobile, there were over 1,000 and possibly as many as 1,500 automobile manufacturers in America.
杜利埃汽车制造出来的20年后，美国已经有1500家汽车公司了。
The excitement which increasingly surrounded the development of the horseless carriage almost inevitably attracted individuals who sought to translate this excitement into monetary gain. Some took the arduous and frustrating route of striving to produce better and cheaper vehicles. Others sought easier returns, raising capital based on expectations of future demand without any real intent to fulfil this demand
Although the editorial piece has a somewhat sanctimonious ring to it given the column inches previously devoted to the prospects for Pennington vehicles, it does illustrate the difficulty which faced investors. Not only did the investor have to decide upon the likely success of competing technologies, but even after this verdict had been reached, he had to distinguish between companies some of whom were effectively fraudulent and only incorporated for the purpose of raising funds from investors
The answer for investors presumably lay in waiting for a trading history, the delivery of actual profits and audited statements. Given that at the time the investment had to be based on the future prospects of an exciting new concept this would have effectively meant not participating and leaving the investment to those who would now be described as venture capitalists.
Forms of transportation varied depending upon the distance being travelled. For long distances the steam-powered railroad was the dominant carrier of both people and goods, but for shorter distances there were a number of different options. There were urban passenger railroads powered by either steam or electrical engines. There were horse-drawn carriages and there was the newly developed bicycle. Each of these had advantages over the others but none commanded overwhelming superiority. They therefore co-existed and catered for slightly different requirements depending upon what was being transported, how much flexibility was required and what the budgetary constraint was.
The advent of the bicycle, which gained popularity during the 1880s, had as a by-product increased the demands for improvements to the road system in America, where surfaced roads remained a rarity
There were three main schools of thought on the engine that would power such a vehicle. First, there was the adaptation of the steam engine. Existing steam engines were too heavy to power freestanding vehicles but this power-to-weight ratio was partly a product of what provided the best traction on rails, and a number of inventors sought to adapt the engine to make it better suited for an automobile. Second, there was the electric motor that had emerged to power the new lighting source pioneered by Edison. Finally, there was the gasoline engine which had been developed in Europe and which had begun to stimulate interest in America, most notably with the aforementioned automobile of the Duryea brothers.
The steam engine that powered the railroads had been developed over the preceding 100 years. Its technological properties were therefore well understood
The main apparent obstacle – the time it took to build up steam – appeared to have been solved with the invention of the flash boiler. Just as the gas companies had reacted to the threat posed by the incandescent lamp by improving the gas mantle, so too did the steamers improve their effectiveness in the face of the technological threat from gasoline-powered engines. As a consequence, the steamer became the largest-selling type of automobile in America, with 1,681 being produced in 1900 as compared with 1,575 electric and 936 gasoline automobiles.
US market share of automobile technologies in 1900
In 1896, for example, at the first track races held in America, an electric-powered vehicle won all five races.
Columbia’. It also produced a small number of gasoline cars, but the overwhelming interest was in electric vehicles and by the end of 1898 it had produced nearly 500 electric vehicles as compared with 40 gasoline versions.
In other words, the funds were being raised for the creation of a vehicle based on expected demand, rather than on the ability to produce it. If this was not sufficient warning, the adjoining article concerning the court case of Commodore Vanderbilt’s daughter and her investment in automobiles might have raised concerns.
ndeed there are estimates that it was 20–50% more expensive to purchase and two to three times more expensive to run
Edison had foreseen that the automobile would replace the horse and had somewhat hesitantly suggested that the battery-powered vehicle would prove more economical than the gasoline equivalent. This somewhat reversed his earlier views that experiments on the storage battery were “a catch
Edison began work on the automobile battery in 1899 and two years later felt sufficient progress had been made to form the Edison Storage Battery Company. After numerous setbacks, production of his new battery began
Electric Vehicle Company, at first sight the result would appear impressive as they shared the net profits of over $0.5m ($36m), dividends of $0.325m ($24m) and financial assets of $5m ($360m) in the shape of cash and marketable securities.
Despite this the company managed to achieve a market capitalisation of $20m in 1900 ($1.4bn) before it declined towards receivership seven years later
The early manufacturers of the gasoline automobile came from the same background as their electric and steam contemporaries. They came out of the railroad industry (William Chrysler), the bicycle industry (Alexander Winton, the Duryea brothers), the electrical generation industry (Henry Ford), the electrical parts industry (James Packard), the machinery industry (Ransom Olds) and the horse-carriage industry (Studebaker). All the industries that were either related to, or threatened by, the automobile industry supplied the individuals who were to take the technological leadership from Europe.
it also initially had relatively low barriers to entry.
In the early years the companies that produced automobiles were more assemblers than they were manufacturers.
Between 1900 and 1908 nearly 500 automobile manufacturers entered the industry – and more than 250 exited. Within the same period, nearly 100 companies both entered and exited the industry in the same year.
The question was not so much whether the gasoline car was the vehicle of choice; rather, what size the market would eventually become and the structure it would eventually take.
The barriers to new entrants were relatively low. The technological hurdle was simply the ability to design and produce an automobile from subcontracted parts
So long as production could be pre-sold and suppliers were willing to extend credit, the seed capital and the ongoing working capital did not represent an insurmountable obstacle. The risk for new entrants was therefore relatively low, and in an industry that was both growing and attracting attention the result was pretty much what would have been expected.
As can be seen in figure 6.10, the top 18 companies represented roughly 20% of the number of producers and over 80% of the output. This level of concentration was to remain but with two caveats. First, the total number of producers shrank through consolidation and failure. Second, many of the early top 20% of companies were displaced; it was only as demand grew over the next ten years that a ‘top’ place became relatively entrenched
Ford had gained his engineering background working first on steam engines with the Westinghouse Engine Company and later climbing to the post of chief engineer at the Edison Illuminating Company (later Detroit Edison). He had been encouraged in his fixation with the automobile in a meeting with Thomas Edison and spent all his spare time working on a vehicle.
Eventually the manager of the Edison Illuminating Company offered Ford a further promotion to general superintendent, but only on the condition that he gave up his misguided experimentation with the automobile
Notwithstanding that the backers put up capital of $15,000 (over $1million) it was still a brave move by Ford, who left behind secure compensation, worth well in excess of $100,000 in today’s terms. Unfortunately the backers of the venture desired a relatively rapid return, whereas Ford wished to spend substantial time on experimentation. The difference in outlook left the venture in difficulties. Within 12 months Ford had left and the company had folded.
Twenty-five miles later Ford crossed the winning line, taking the crystal trophy, and perhaps more importantly the $1,000 ($70,000) first prize.
Winning the race against the pioneering Scot had the desired effect and the publicity it generated attracted backers and $30,000 ($2m) for a new company that was named the Henry Ford Company. Unfortunately the disagreements of the previous venture were now repeated. The backers who controlled the company required a production car that could be sold to the public, but Ford wished to work on a racing car. The owners of the company brought in a gentleman by the name of Henry Leland to ensure their wishes were followed and as a consequence Ford left. Leland, a well-known and respected Detroit engineer, then took control of the company and proceeded to produce an automobile called the Cadillac.
Through Malcomson the funds were raised to form the Ford Motor Company. John and Horace Dodge agreed to assist in the creation of the company by accepting stock in return for the supply of components. Dodge Brothers was a prominent supplier of chassis, engines and transmissions and while the 10% of the company which Ford had to offer them eventually led to recrimination and litigation, without their early support Ford could never have succeeded. In this way Ford managed to raise $28,000 ($1.7m) from Malcomson and the supply of components from the Dodge b
The first car, the Model A, retailed at $850 ($55,000) and immediately attracted sufficient demand to keep the workforce fully occupied. A year later the $800 Model C was produced. Despite the company’s apparent success, reflected in its ability to pay a 10% dividend
$365,000 ($22m) of sales were recorded in the month of June 1905. Unfortunately for Malcomson, the speed trial was the final straw for Ford and he resolved to control his own destiny. Malcomson wished for high-priced vehicles, Ford the opposite – a view succinctly summed up in the quote: “A car should not have any more cylinders than a cow has teats.”⁵⁵ The battle over product strategy and control ended after an extended stormy period in 1906, with Malcomson selling his shares to Ford for $175,000 (over $10m).
than marketing was required: a meaningful technological shift was necessary. This was what Ford achieved with the Model T. In 1908, when the Model T was unveiled, total US auto production stood at roughly 65,000 vehicles. In 1907, Ford’s production was just over 8,000 vehicles, and during the transition period with the introduction of the new model, the figure fell by about 25%.
As far as the main protagonists were concerned, the financial market troubles of 1907 helped to push both the Electric Vehicle Company and Pope Manufacturing into receivership
This was a genuine first-mover advantage. Being first to the market allowed a large increase in sales, which helped lower unit costs, which in turn allowed prices to continue to fall and increased the competitive pressure on other participants. The cost advantage created an insurmountable barrier so long as the technology embodied in the vehicle was not overtaken.
the company’s return on assets continued to exceed 60% up to 1914, with stable margins causing both sales and net income to grow at an annual compound rate in excess of 65% in the same period
Inevitably the overwhelming success of the Model T carried with it the danger of Ford becoming a one-product company. The irony was that few outside investors succeeded in sharing in the exceptional returns that Ford’s success achieved. Both Malcomson and the Dodge brothers sold their shares back to Ford after falling out with him.
1919 was determined by the Internal Revenue Service to be $250m ($11bn). For the original investors, this meant that a $100 investment in 1903 had become worth $355,000.
Unfortunately for aspirant investors, the initial $28,000 in capital raised at the inception of the company did not require to be augmented over the period. The very success of the company precluded the opportunity for equity investors to participate.
The financial crisis of 1907 had impacted a couple of the early backers, allowing Ford to buy back shares at the same price that had been paid to Malcomson
In the same year that Ford introduced the Model T, William Durant began the process of trying to consolidate the automobile industry by acquisition
In 1907, agreement seemed close in efforts to combine four of the largest producers: Buick、Maxwell-Briscoe, Reo and Ford
This led to the deal collapsing and Durant moving on to incorporate the General Motors Company in 1908. With GM incorporated, Durant initiated a buying spree, purchasing Cadillac, Oldsmobile and Oakland (subsequently Pontiac).
A downturn in the market in 1920 caught the company short of cash and allowed Henry Ford to purchase the concern for $8m (over $200m). A similar fate was to befall General Motors
History records that twice in its early years General Motors would have gone into liquidation had it not been bailed out by injections of capital
Durant’s rule seems to have been to purchase anything available in a potentially related business with whatever funds were on hand at the time. Shareholder value was not high on his list of priorities.
When the downturn came, GM was caught with inflated inventories and the unavoidable losses that accompany such a position. When Du Pont stepped in to underwrite his overgeared stock position, Durant was replaced by Alfred Sloan. GM then set off down a different path from where it eventually challenged and overtook Ford as the industry leader.
For the investor, the lessons were relatively clear. A visionary is not necessarily, or even likely, to be able to manage the vision he creates. Durant’s personal financial affairs were as unstructured as the company he led. After one example of the Durant management style, the second period should not have come as much of a surprise, particularly when declining margins and stock dilution were obvious, though not all brokers at the time showed much awareness of the real position.
Bicycle manufacturers formed one large grouping, while another emerged from the producers of horse-drawn carriages. The most notable company in this second category was Studebaker
December 1910, Studebaker had acquired control of E-M-F and formed the Studebaker Corporation. The new company was incorporated in New Jersey in February 1911, and with the aid of Goldman Sachs and Lehman it sold $13.5m (over $700m) of convertible stock and $30m ($1.5bn) of common stock.
As a consequence, Studebaker was placed in the hands of the receivers in early 1933, with Erskine committing suicide some months later.
The early years in the automotive business for Studebaker had been almost an unqualified success. The company made use of its sales and distribution network, at the same time building on its existing skill base to become a top producer of automobiles. The problems came with the increasing pressure for volume production, which Studebaker could only achieve through entry into the low-cost vehicle market. Repeated attempts to achieve this met with failure and were exacerbated by poor financial decisions, ultimately leading the company into receivership.
companies, first Garford and then, in 1910, the Everett-Metzger-Flanders Company (E-M-F). The new company that this created, renamed the Studebaker Corporation, incorporated in February 1911 and raised some $43m
New facilities allowed the company to produce almost as many gasoline automobiles in 1911 as it had in its entire history up to that point. The new Studebaker Corporation made an impressive debut. Sales by volume tripled; in value they doubled.
falling behind its major competitors. In 1911 Studebaker’s profits were roughly half those of General Motors, yet by 1916 GM was three and a half times the size and by 1919 six times. The same was evident for Ford.
The root cause of lagging growth was Studebaker’s lack of exposure to the low-priced automobile, which was by far the fastest growing segment of the market. This did not make the company a bad investment, simply one which would not fully participate in the growth of the industry
The main point, though, is that based on some slight technical knowledge the stock promoters were able to raise huge sums of capital on the back of a mere concept, even in the face of an ongoing diatribe from a respected trade journal. Ironically the concept – a mass-produced, low-cost automobile – was absolutely the correct one to back, it was simply that the proprietors either had no intent or no ability to achieve any goal other than removing funds from investors’ pockets
The investor, for example, had to hold on to General Motors through its periods of financial difficulty – but know to sell Studebaker when it began to struggle in the mid-1920s.
In 1895 he formed the British Motor Syndicate with a share capital of £150,000 ($55m), with which he first purchased the British Daimler rights and then proceeded to do the same with all other available patents. The Syndicate’s main business was the leasing of patents and in some ways it can be seen as a precursor of the Electric Vehicle Company.
The British Motor Syndicate went into liquidation in 1901 following a lawsuit loss which undermined its licensing model. It was finally bought out in 1907 for a total sum of £1,000 (under $300,000).
While the automobile industry had always displayed characteristics of concentration, even before its explosive growth occurred, a place in the top grouping only provided some security around 10–15 years after the industry emerged.
Secular growth might have been strong but it was not exempt from cyclical influences. Companies that did not quickly cut their cloth to any economic downturn soon discovered the penalties a capital-intensive industry inflicts on those with product which cannot be sold and whose cash flow does not cover financing and operating costs
Even the companies that did eventually succeed did so only after a rocky road. Henry Ford was successful only on his third corporate attempt and only after splitting with his partners over the strategic direction of the company. General Motors had to be rescued twice and Chrysler was effectively a company resuscitated from previous misfortune
From that point forward automobile production became an expanding market, but with a price point that was being continually lowered. Those that could not compete were forced to exit, in many cases moving in a very short period from a position of profitability and apparent stability to liquidation.
There were many forces driving this, but principal among them was the initially fragile financial base of the majority of companies and the greater capital required for increased production volume and distribution
On both sides of the Atlantic, and latterly the Pacific, the investor was faced with the same issue: selecting a small number of survivors from a large number of initial competitors
Growth alone was not sufficient to underpin an investment. Returns might have been potentially very strong, but given the downside they needed to be. Equally, the investor needed to pay close attention to the profitability of the industry, since top-line growth alone proved no guarantee of income growth