Chapter IV: Automobile Industry as an Investment

A dozen years ago dictionary publishers vied with one another to be the first to announce that new editions of their wordbooks contained the word “automobile.”

Today the automobile industry is the fourth in magnitude—only three others that are larger.

Is your imagination equal to the task of forming a vivid picture of the tremendous activity that has been maintained to produce such results in so short a time?

Do you know of any other industry in which money could have been at work in as great a creative capacity? We will not say in a capacity to produce immediate profits, because so far the automobile industry has been largely in the building, in the creative state.

In 1899 we produced 3,700 automobiles, in this country. In 1915 we produced 842,249 cars, and in 1916 the production reached the unexpected number of 1,617,708 cars.

The value of the production in 1899 was $4,750,000, or about $1,283 a car. In 1916 the value was $972,336,400, an average of a little over $601 a car.

In 1916, also, we produced 92,130 commercial vehicles, valued at $157,000,000.

And this is not all. A comprehensive survey of the automobile industry will include the industries that the automobile has created, as manufacturing tires and accessories, and not to forget the enlarged market for gasoline and oil. As the jokesmiths have it, “It isn’t the original cost, but the upkeep that counts.”

For illustration, in the matter of tires, C. H. Williams, of the Goodyear Tire and Rubber Company, who is in a position to know, said that in 1916 the motorists of the United States took from their wheels and replaced some 9,000,000 tires, representing an expenditure in that year of about $300,000,000 for tires.

Any motorist can draw from his experience and compare the expense for tires with that for gasoline, and from these tire expense figures arrive at a reasonably accurate estimate of the tremendous amount of money that was used in 1916 in paying for gasoline to run automobiles.

By way of an interpolation, it may here be remarked that these tire figures show that there is one problem in the automobile industry that the engineers still have to solve, and that is to produce a wheel that will give satisfactory service without requiring a pneumatic rubber tire.

LITTLE ORIGINAL CAPITAL INVESTED.

The remarkable thing about the automobile industry is that, in comparison with its present magnitude, there has been but little original capital invested in it. Today the industry represents a large investment, to be sure, but the bulk of it is made up of profits on the original small investment. Companies started with small original capitals, made money, and used some of it to enlarge plants and increase outputs, until today we have the gigantic institutions that some of these companies are.

The automobile industry has been and is one of the most convincing of modern proofs of the efficacy of the science of investment in operation.

During the first few years of experimenting, before the engineers produced a car that would run in a reasonably satisfactory manner, the industry offered investors only what might have been called the inventor’s chance. These years were followed by a short period devoted to determining whether there was a market for the automobile.

During the time of experimenting and determining the market the average person could not be expected to become very enthusiastic over an investment in the industry. The average person has not clear vision in matters of this kind, and, lacking vision, he can not bring imagination to his aid.

And in those early days it required clear vision, good imagination and exceptional ability to reason from probability to fact to see the coming greatness of the automobile industry.

A few courageous men had this vision and this ability, and to them is due all credit for the establishing of the industry. In time others might have done it, but these men did it.

The making and marketing of automobiles that would run had but fairly begun when their popularity became so manifest that even an average person could see that the automobile industry was bound to become great and profitable.

Here, then, was an opportunity for scientific investment that was prodigious in possibilities.

Those who were intelligent enough to see it and progressive and courageous enough to avail themselves of it, and did so, today form another set of rich men.

DIFFICULTY IN GETTING CAPITAL.

The industry had great difficulty in getting capital. It was a new line, a new venture. Bankers and other “conservatives” could see nothing in it. They used their pet weapon of crying “speculation”, “hazard”, “risk”, and so on, to keep people from investing in it, and, of course, did not invest in it themselves, or aid it in any way to get started.

But since the beginning of this century, when the automobile industry began growing, many of our people have, among many other things, built the great automobile industry into what it is, and made money. Not only this, but they will build it still greater, and make still more money.

Before we get through with this little analysis we will see that the automobile industry has not been more than half built thus far, and that the really big profits in it are yet to come, because so far much of the profits have been used in building the industry.

This industry is, therefore, a fertile field for scientific investment. Many companies that are quite well established need more capital to enlarge their activities, and there are comparatively new companies, and there will be more, having very good propositions in which the prudent investor can find excellent openings for putting a little money at work under advantageous conditions.

DEALERS PUT UP THEIR OWN MONEY.

In speaking of the early financiering of the automobile industry, it would be unjust not to mention the aid that automobile dealers gave it. It is a fact that if dealers had not supported it in the way they did, it would not be where it is today.

Bankers who could have furnished the money and should have done so, did nothing. They were too “conservative” to recognize a new industry.

And so dealers stepped into the breach and became bankers to the industry.

In the days when the automobile manufacturer was confronted with the problem of getting money to pay for making cars for which he had or could get orders, some financiering genius devised the plan of giving the dealer exclusive territory for the sale of a car. In return the dealer placed an order for a certain number of cars to be delivered in small lots from month to month throughout the period of the agency.

Another consideration for this exclusive agency was that the dealer made a cash deposit on each car at the time of entering into the contract. The monthly shipments were then made C.O.D. for the balance due on the cars in each shipment.

The advance deposit enabled the manufacturer to make cars for the first shipment, and the collection on the shipment enabled him to make cars for the second shipment, and so on.

To manufacture and sell 1,617,708 cars in a year, as we did last year, appears like an impossible task, especially when we consider that only a negligible number was sold abroad.

The fact is that nearly all the manufacturers, especially those of popular cars, could have sold many more, had they had the facilities to make them.

In the midst of this condition some persons of narrow vision were wondering if there was a further market for cars, and were talking learnedly, as they thought, about the point of “saturation” having been reached.

In the meantime the big men in the industry were saying nothing. Instead of talking, they were laying their plans to make and sell twice as many cars in 1917 as in 1916.

PRODUCTION NOT YET AT ITS HEIGHT.

There will come a time when the automobile industry will reach its height in production, but that time has not yet arrived, nor is it within calculable distance.

Statisticians show us that there are over 5,000,000 rich people in this country. Many of these have, and more of them will want, each several cars, each of a different type and for a different purpose.

We have about 8,000,000 farms. Many farmers already have cars, but only a few compared with the many who will have them as soon as they have become convinced of their utilitarian value aside from pleasure. The farmer is a practical person and “must be shown.” Give it time, and the automobile will prove itself to him.

Then we have several million persons who can not be classed among the rich, but who are in such reasonably comfortable circumstances that gradually they will become owners of popular priced cars.

And we must not forget the element that is “keeping up with Lizzie.” Those of this class will also pay toll to the automobile industry.

And so far only between three and four million cars, including pleasure and commercial cars, are registered in this country.

Talk about the point of saturation. As yet it hasn’t begun “casting its shadow before”, much less having arrived.

Nor does it require prophetic vision to say at this time that the commercial car is destined in due time to surpass the pleasure car in number.

So far the commercial car has but fairly been tested. In 1915 we produced 50,369 commercial cars. In 1916 the number reached 92,130. From now on this branch of the industry is likely to increase more rapidly than did that of the pleasure car.

It has already been proved that the commercial car has a possible larger field than has the pleasure car.

A man may not feel that he can afford a pleasure car, but his business is such that a commercial car is profitable in it.

Then again a man may have two or three pleasure cars, but in his business he may have use for two or three hundred commercial cars.

The business world is just beginning to realize the value of the commercial car. Not only does it cost less by the ton or trip to haul in a motor car than with horses, but more can be accomplished in the same time. The teamster may require six hours to make a trip that the motor car driver can make in less than an hour. Business men, great and small, will soon learn this, and the commercial car industry will grow accordingly. In fact, the demand is already ahead of the supply.

TRACTOR AS A PROMISING INVESTMENT.

The tractor, a motor vehicle used to haul other vehicles or machinery, is a product that must also be classed as a branch of the automobile industry.

It has already been demonstrated that a good tractor is the lowest priced power that can be applied in the work of hauling tools or machinery that must move forward to do their work. Also that it is the only form of power with which a man can perform a prodigious amount of work in a day.

The tractor industry is, comparatively, in its infancy, but it has already assumed substantial proportions. It seems destined, in one form and another, to surpass the commercial car industry.

Recently one of the Ford Motor Company’s leading engineers secured a patent on a device to convert an automobile into a tractor. This is done by substituting tractor wheels in place of the rear wheels of the automobile, and by reducing the power transmission gear so that the power of the motor will be used in pulling a load instead of giving speed. In other words, the car in the form of a tractor will be run very slow and the power saved in this way will be applied to pulling the load.

The wheels may be changed in a few minutes from pleasure to tractor, and from tractor to pleasure. With this device the farmer can have his car for pleasure and business trips, and when he gets ready to do farm work he can convert it into a tractor to do the work of half a dozen horses or more, and at very much less expense.

A valuable feature of this invention is that when a car becomes worn out for pleasure use it will still be as good as a new one to form a tractor with this device.

The device was thoroughly tested in all kinds of farm work throughout the season of 1916, and found to work perfectly and highly satisfactorily in every way.

The progress of the automobile industry has surprised some of our ablest economists, and it has given the long-faced, wiseacre, conservative financier a clean knock-out blow.

Having no precedent to guide them but human nature, the economists were unable to arrive at satisfactory conclusions in regard to the future of the industry and it ran away from their estimates.

Mr. J. George Frederick, of the New York Business Bourse, is perhaps in possession of more business facts, figures and data of all kinds than anyone else in this country, and is regarded as one of the highest authorities on business economics.

“Writing on this phase of the automobile industry in the October, 1915, number of the American Review of Reviews, Mr. Frederick said:

“With 2,000,000 automobile owners today, and every indication that the annual production will be more than the 703,000 produced this year, we face in plain facts a probable annual sale of over 1,000,000 automobiles every year, on an average, for the next five years at least. Until the automobile became popular there were about 1,000,000 carriages sold each year, and as these were undoubtedly sold mainly to rural and suburban population there is sound reason to believe that 2,000,000 automobiles per year is not an extravagant future prediction in the slightly more distant future.”

PRODUCTION RAN AWAY FROM ESTIMATES.

Note that this was written at least three months before the close of the year 1915. The production of automobiles for that year, as we have seen, was 139,249 greater than that given by Mr. Frederick at the time he wrote.

The interesting thing in Mr. Frederick’s prediction for the future is that the industry ran away from his estimate the first year after he made his prediction. He prophesied a production of 1,000,000 automobiles a year for the next five years. The following year, 1916, the production reached 1,617,708 cars. This is not against him, because the automobile industry is going forward by such leaps and bounds as to smash all conservatism. His estimate but indicates that his further prediction of a probable production later of 2,000,000 automobiles a year is likely to be more than fulfilled.

In this connection we must take into consideration that the earlier made cars are beginning to wear out and are being replaced by new ones.

Also that many persons who bought so-called cheap cars at first are discarding them and buying higher priced new ones.

The time will come, of course, when the sale of automobiles to new users will begin to decrease, but as these sales decrease the sales of cars to take the place of old ones will increase. When we reach the time when the decrease of the one will equal the increase of the other we will arrive, approximately, at the point of saturation that is now worrying timid and unimaginative persons, and not until then. Every feature of the industry indicates that we have not travelled more than half the distance to reach that point. A more rational estimate is that we have not travelled much more than a fourth of the distance.

Until we reach that point the automobile industry will be in the formative period, in the creative state. It will be growing larger and larger, and will be earning more and more from year to year. But some of the earnings will have to be kept in the business to acquire additional equipment and as a greater working capital. But earnings used in this way will become additional assets back of automobile securities to enhance their values—to create accretive values.

When the saturation point is finally reached the industry will settle down to be one of our most stable and profitable manufacturing lines. Not until then can the tremendous profit possibilities in it be definitely reckoned.

EARLIER THE INVESTMENT, GREATER THE PROFITS.

These conditions being true, it should be clear that the earlier an investment is made in the industry, the greater will be the profits. Spectacular profits will be made before the saturation point is reached, and to get all the tremendous accretive values that accrue in this industry the investment must be made at the beginning. The further removed from the beginning the investment is made, the more the investment will cost and the lesser will be the accretive value as well as the income on the investment.

This is a fundamental principle in the science of investment.

When the saturation point is reached manufacturing automobiles will settle into an industry to supply a daily necessity. There will be keener competition, the price of cars will be lowered, and the profit on each will be correspondingly less. The industry will be similar to those of making hats, plows and shoes. It will carry a substantial profit, but not a spectacular one as now and for many years to come.

It seems, then, that, large as it already is, the automobile industry is still in its comparative infancy—that it has before it a reasonable possibility of more than doubling its present proportions.

While there are several large companies that will continue to produce large numbers of cars each year, it is not reasonable to expect that these companies will grow from this time forward as they have in the past.

The expansion of the industry may rather be looked for in younger and smaller companies that will put out cars to meet some particular demand.

The investor in the industry could scarcely be said to be using good judgment if he undertook to help to build a company to put out a car to compete with the Ford car, for illustration; that is, to put out a car at the same price and that he would expect the public to buy in preference to the Ford. It may be possible that the thing can be done, but off hand it would seem like taking an undue chance.

Nor is a Ford proposition necessary to make money in the automobile industry. This has been demonstrated sufficiently.

The Ford car fills a particular want of many people, but in the main it is a builder of the industry as applied to more elaborate and higher priced cars. It prepares a market for others.

The investor should seek to get into the business of supplying the demand in that market.