by Kenneth L. Hess
September 23, 1984, updated June 9, 1996
A case study of the growth of automotive transportation provides an enlightening picture of how technological, social, and economic factors interplay to change the environment in which we live. The development of a major technology such as the automobile can contribute to economic growth in a massive way as the automobile did in the early decades of this century. When a technology saturates its market as the automobile did in the late twenties, it can also accelerate economic decline. Indeed the automobile contributed to the severity of the Great Depression.
Since Charles and Franklin Duryea offered the first American motor vehicle to the public in 1893, the growth of automotive transportation in the United States has undergone a natural evolution to a state of maturity.
The growth of almost anything can be described by the characteristic "S" curve with the increasing parameter on the vertical axis and time on the horizontal axis. Cyril Stanley Smith has eloquently described this phenomena:
A new thing of any kind whatsoever begins as a local anomaly, a region of misfit within the preexisting structure. This first nucleus is indistinguishable from the few fluctuations whose time has not yet come and the innumerable fluctuations which the future will merely erase. Once growth from an effective nucleus is under way, however, it is then driven by the very type of interlock that at first opposed it: it has become the new orthodoxy....With ideas or with technical or social inventions, people eventually come to accept the new as unthinkingly as they had first opposed it, and they modify their lives, interactions, and investments accordingly. But growth too has its limits. Eventually the new structure will have grown to its proper size in relation to the things with which it interacts, and a new balance must be established. The end of growth, like its beginning, is within a structure that is unpredictable in advance.
Exhibit 1 shows an idealized "S" curve. One expects the growth of automotive transportation to approximate this classic shape.
An appropriate way to measure the auto's growth is to look at its market penetration, the number of cars actually sold relative to potential sales. Penetration can be calculated by dividing total automobile registrations by the number of driving age individuals. Plotting this ratio against time (Exhibit 2) shows that the automobile has gone through two "S" shaped periods of growth separated by a period of stagnation. This stagnation occurred at a penetration of about one car for every three or four individuals, about one car per family. Penetration is now close to one car per driving age individual. Why should there be two distinct phases of growth?
Ones first guess might be that the stagnation was the result of the Great Depression followed by the special case of World War II (when the output of private automobiles was nil); that would be an oversimplification. An economic downturn, even a major one, affects the consumption of goods on a selective basis. The sales of home refrigerators continued to increase through the deepest parts of the Depression (Exhibit 3). It is more likely that the interruption of the auto's growth was caused by a shift in the underlying forces of growth that was exacerbated by the poor economic climate.
Indeed, one finds that the auto's first growth phase saw it replace other modes of transportation. When replacement was complete by the late 1920's, growth stagnated. At the close of World War II automotive growth was re-established by an increased need for personal transportation, a much different phenomenon than replacement. Let's examine the details.
The entrepreneurs and inventors who started the first growth phase around the turn of the century had a simple objective--to produce a vehicle reliable enough to get somewhere and back under its own power. Automobiles originated from diverse combinations of a steam, electric, or internal combustion engine; a carriage or buggy; and bicycle parts such as wheels, sprockets, and chains. Anyone who saw one of these vehicles in the 1890's would have thought it an anomaly. Few of the early automobiles met the desired standard of reliability; they had little value except as a toy. Yet, automotive transportation quickly improved -- funded during the first ten years of its life by the patronage of wealthy individuals looking for a novelty.
Hundreds of innovations were required to achieve reliable performance. They appeared separately on different vehicles, but were quickly synthesized by successful products such as the Ford Model T. By 1920, these improvements resulted in a vehicle not unlike those of today (although obviously, there have been many improvements since then). The vehicle rode on four wheels covered by fenders and turned using a steering wheel. Power was provided by an internal combustion, piston engine which ran on a mixture of gasoline and air detonated by an electric spark; the power was transmitted to the wheels through a transmission and a differential. Brakes at the wheels slowed the vehicle. The ride was cushioned by inflated rubber tires and a system of springs. Electric headlights allowed the driver to see at night. Bumpers were added to reduce damage in a collision. Electric starters and a closed body were available. The simple objective of making a vehicle reliable enough to go somewhere and back had been met. By 1925, the average auto accumulated over 25,000 miles before it headed to the junk yard, by 1930 about 40,000. Refinements in the manufacturing and marketing process reduced the cost to the point where the average person could afford to purchase such a vehicle.
Common rules of the road and associated symbols like the octagonal stop sign were also developed during the first growth phase. The roads themselves were paved. Installment financing became popular even though most banks opposed it at the time. Independent auto dealers became the main distribution channel and service stations began popping up. The primary objective of most affiliated innovations was to make the automobile easier to own and operate.
As vehicles were produced which had the capabilities and the low price required to replace other means of transportation, people began to buy them for everyday use.
Horses and horse-drawn vehicles were, of course, the primary form of transportation replaced by the automobile. Even today antique automobiles are often called horseless carriages, correctly suggesting their genealogy. With incredible correlation, the production of automobiles was substituted for that of horse-drawn vehicles on a one-for-one basis as shown in Exhibit 4. By the early 1920's carriage production had dropped a full order of magnitude.
The number of horses on farms followed a similar pattern. Peaking in 1915, there were two horses for every three members of the farm population. By 1930 the farm horse population was down by a third whether measured in absolute numbers or per capita.
These trends were underlined by the transition of many individuals and companies from the carriage business to the automotive business. For example, Studebaker, founded in 1852, was the world's largest producer of horse-drawn vehicles. During the company's first 58 years it shipped over one million horse-drawn vehicles of all types and large quantities of harness. Studebaker began experimenting with a "horseless vehicle" in 1897. The company's first automotive product was offered two years later when Studebaker produced bodies for electric runabouts made by another firm. Then Studebaker sold its own line of electric runabouts from 1902 through 1912 before finally offering a family of gasoline vehicles from 1904 to 1966. By 1918 the annual capacity of Studebaker automobile plants was 100,000 units. This surpassed the capacity of its horse-drawn vehicle plants by one third. Two other examples involve divisions of General Motors. The Fisher brothers originally built carriages with their father in Norwalk, Ohio. They founded Fisher Body in 1908 to supply the auto industry and were acquired by General Motors in 1919. Edward M. Murphy, the owner of the Pontiac Buggy Company, organized the Oakland Motor Car Company in 1907. This later became the Pontiac Division of General Motors. Of course, other less prescient or capable carriage manufacturers simply went out of business as automotive transportation grew.
Railroad passenger traffic was also impacted by the growth of the automobile. Rail passenger-miles traveled per capita fell steadily from 1920 to 1929 decreasing over 40 percent before the Great Depression set in (Exhibit 5). One cannot state precisely how much of this travel was actually replaced by the automobile, but it is reasonable to assume that a majority of it was.
All-in-all as much as two-thirds of the total automotive production in the late 1920's was displacing horse and rail transportation. This is a crude but useful estimate which involves several simplifications. First, it assumes that the production of one auto replaces the need to produce one carriage. In reality, an auto could often replace more than one horse-drawn vehicle. Moreover, it assumes that the production of carriages per capita would have remained at the same level as at the turn of the century if it were not for the automobile. Finally, it assumes that one rail passenger-mile is replaced by one auto vehicle-mile. In actuality, an auto vehicle-mile would replace more than one rail passenger mile because the average auto carries more than one person at a time.
Bicycles became popular in the U. S. during the 1890's; the auto certainly displaced some of them as well. Since bicycle usage is not accurately recorded, the amount of displacement is difficult to determine.
Like the carriage industry, however, the bicycle industry contributed people, components, capital, and ideas to automotive transportation. In addition, the bicycle created demand for the automobile. An automotive pioneer, Hiram Percy Maxim, described it this way:
It has been the habit to give the gasoline engine all the credit for bringing the automobile--in my opinion this is the wrong explanation....We could have built steam vehicles in 1880, or indeed in 1870. But we did not. We waited until 1895.
The reason why we did not build road vehicles before this, in my opinion, was because the bicycle had not yet come in numbers and had not directed men's minds to the possibilities of independent long-distance travel over the ordinary highway. We thought the railroad was good enough. The bicycle created a new demand which it was beyond the ability of the railroad to supply. Then it came about that the bicycle could not satisfy the demand which it had created. A mechanically propelled vehicle was wanted instead of a foot-propelled one, and we know now that the automobile was the answer.
The balance of automobiles on the road were fulfilling needs that only a motor vehicle could satisfy. The auto combined some of the speed and range of a train with the flexibility of schedule and itinerary that personal transportation like a horse or bicycle provided. A case in point involves the national park system. Often difficult to reach by horse or train, the auto made it easily accessible by the average city dweller. The results were astounding. Between 1920 and 1929 attendance at national parks and forests increased by about a factor of three; approximately 90 percent of the visitors in l929 arrived by automobile. Of course, not all cars were purchased for utilitarian reasons. Undoubtedly, many automobiles were purchased to obtain social objectives such as status.
By the close of the 1920's there were approximately three cars registered for every four households. The automobile had literally generated an explosion in personal transportation.
In spite of this strong penetration, society had not changed enough to require an automobile in every circumstance. In an urban setting of the early 1900's before the automobile became popular, horses and carriages were generally owned by the well-to-do. The common citizen could reach his place of employment by foot, bicycle, or public transit. The corner store was only a short distance away and often it would provide a delivery service. Even with the widespread availability of automotive transportation, the environment had not changed significantly by 1929. Less than two decades had passed since but one person in a hundred had a car. If not every urban family had a need for a car even fewer had a need for more than one. Consider the role of women in society. They still played a minor role in the work force and domestic needs such as shopping continued to be met by close-by "mom and pop" stores. A woman's need for personal transportation such as an automobile was small. Statistics on the number of women drivers support this argument. Driver's license records are not readily available (a majority of states did not require drivers to be licensed until the 1930's), but a survey by Hanff-Metzger, Inc. found that only 24.3 percent of all drivers in the late 1920's were women. One car was sufficient for most urban families.
Because of the greater distance which had to be traveled during day-to-day life, the resident of a rural area had more need for personal transportation than a city dweller. By 1929 there were about 5.0 to 5.5 million autos and trucks on 6.5 million farms.
Thus, for the society of the 1920's and 30's one auto for every three or four driving age individuals was more than enough; a car was often considered a luxury, not a necessity. It is easily understood that the penetration of the automobile leveled off during this period of time.
Without surprise, the relationship between the automobile and the economy was a strong one. Innovations drive economic growth, and the ones that perfected the automobile were no exception. From a negligible base in 1900, automotive transportation grew to comprise 7.9 percent of total personal consumption expenditures in 1929, or 6.1 billion dollars. This includes expenditures for new autos, net purchases of used autos, tires and parts, servicing, parking, storage, rental, gasoline, oil, tolls, and insurance premiums less claims paid. Employment in motor vehicle manufacturing rose to about 500,000 people by 1929 (this number does not include those working in auto distribution, services, or some accessory manufacturing). These figures are substantially larger than the contribution to the economy made by horse drawn transportation at the turn of the century; the value of horse-drawn vehicles was equivalent to less than one half percent of the GNP in 1899. New auto sales alone were equivalent to more than two percent of the GNP in 1929. Thus, the growth of automotive transportation generated real growth in the economy.
Conversely, year-to-year automobile sales were affected by short term swings in the business cycle, but this impact was confined to a series of fluctuations around the long term trend.
The auto's penetration leveled off beginning in the latter part of the 1920's and this too had a substantial affect on the economy. Automobiles manufactured for first time buyers and multiple-car owners peaked at approximately 2.9 million units in l923. By 1927, 72 percent of all automobiles manufactured were replacements for those being scrapped (although a temporary increase in new buyers occurred before the Great Depression began). During this same span of time, output was flat within the range of annual fluctuations (Exhibit 6). Automobile manufacturers reflected this changing market by slowing capital investment. As reported by the Motor Vehicle Manufacturers Association, net tangible assets of United States automobile manufacturers (not including parts, accessory, body, and tire manufacturers) decreased from a high of 1.65 billion dollars in 1926 to 1.52 billion dollars in 1929, and to 0.91 billion dollars in 1938.
The saturation of the auto market also had an impact on some of the manufacturers themselves. Even Henry Ford had significant problems. As the used car market blossomed, it became the primary source for basic transportation. The Model T was less and less suited for the new car market and Ford shut down to retool for about a year beginning in 1927. The number of companies manufacturing automobiles peaked at several hundred around 1909 and began to decline shortly thereafter. By 1929 only a few dozen auto manufacturers remained. Even the Great Depression did not significantly alter the smooth trend of auto company failures established by the changing demands of the market and the inability of various manufacturers to adjust.
To the extent that automotive growth slowed because of market saturation, the automobile was actually one of many contributors to the severity of the economic decline during the Great Depression. Most of the salient trends were well underway before the depression began. More cars were being sold as replacements than as first automobiles, the industry's capital investment was falling, and marginal auto manufacturers were failing.
The first growth phase ended with the automobile as the primary form of personal transportation in the United States. Innovations had roughly adapted the automobile to its environment and it grew until it had replaced all its competitors. Refinement of the automobile continues to the present, but the tables turned during the 1930's. The environment began adapting to the automobile. Adaptation had occurred before this; installment financing and other innovations were mentioned earlier. The difference is that those initial innovations supported automotive transportation; the new ones required it.
Beginning after World War II, the second growth phase came from a tremendous increase in society's requirement for personal transportation. Most outstanding was the increase in female drivers to almost equal the number of males. This was brought about by a complex package of innovations and changes in living and purchasing patterns of which supermarkets, suburbs, and shopping centers are representative examples.
The supermarket itself was the culmination of numerous innovations as pointed out by Daniel J. Boorstin. One of the first to occur was self-service. In 1916 Clarence Saunders opened a chain named Piggly Wiggly. The customer entered at a turnstile and was forced to follow a single maze-like path past all the goods to exit at the check-out. Another development was the drive-in market (one with large amounts of parking space) which drew people from a wider area than other stores. Finally, the growth of home refrigeration allowed people to buy in greater quantities which often required the automobile for transport home. Value was created with each innovation. Self-service reduced labor expenses and the large volumes developed by drive-in markets gave them economies of scale in purchasing and advertising. The consumer received lower prices. Large weekly purchases were more convenient than small daily ones. A store offering a wide assortment of goods, combining all the above innovations was dubbed a supermarket.
Boorstin described one of the first supermarkets:
...San Francisco's Crystal Palace, opened in 1923 in a large steel-frame building on the site of a former baseball diamond and circus ground with 68,000 square feet of selling area and parking for 4,350 cars (one hour free). Offering food, drugs, tobacco, liquor (after 1934), jewelry, a barber shop, a beauty parlor, and a cleaning establishment, the store by 1937 had set sales records of 51,000 pounds of sugar in one hour, five carloads of eggs in a month; in a single year it sold 200 tons of lemons, 250 tons of oranges, and 300 tons of apples. By this time other supermarkets were beginning to show comparable sales.
On one hand, complex innovations like supermarkets were made possible by the existence of the automobile, on the other hand their growth (by replacing the nearby corner grocery) made the automobile more of a necessity. The relationship was tightly intertwined. In spite of a growing, more urban population, the number of grocery stores topped out in the late 1930's and declined by 40 percent through the postwar years as the larger supermarket became dominant. Sales per store increased dramatically.
The growth of the suburbs was another environmental change that made the auto more of a necessity. Suburbs first developed after the Civil War when electric street cars expanded the boundaries of many cities. Along the street car line sub-developments or suburbs popped up. Many times the street car owner and land developer were one in the same. Of course, the auto made urban decentralization even easier for the developer and more convenient for the consumer. The increased distance to almost anything and the lack of public transportation which characterized the post-World War II suburb made the automobile much more than a luxury.
The suburban shopping center began and grew at a pace similar to the supermarket. Built in 1922, the Country Club Plaza in Kansas City was one of the first. According to Boorstin, more than one third of the nation's retail trade in metropolitan areas was going through shopping centers by 1950.
Fast, drive-in food establishments appeared later than these other innovations. The first Dairy Queen appeared in 1939. In 1954 Ray Kroc bought a six store chain called McDonalds and what followed is common knowledge.
One can cite many other examples of innovations or societal changes that were enabled by the auto while at the same time making the auto even more desirable and necessary, everything from freeways to drive-in movies, but the point is well established. During the 1950's and 1960's the auto grew because of a complex societal transformation that the auto itself initiated.
The urban housewife of 1925 who could do well without a car was transformed into the suburban housewife of 1960 who required a car to do all her shopping or to pick the kids up after school. Just as important to the growth of the automobile were the women who entered the labor force. As of 1980 a majority of married women were working outside the home and typically they had even more need for an auto than the modern housewife. Women became the predominant source of growth for automotive transportation in the 1950's, 60's, and 70's. Although the number of driving age men with a driving license increased 37 percent during this period of time, that of women increased by a factor of three. The multi-car family became commonplace.
Of course the auto itself saw hundreds of improvements during the second growth phase, however, they were of a different nature than those that occurred during the first. Having already met the basic objective to produce reliable transportation, the engineers concentrated on improving the efficiency, safety, comfort, and emission levels of the automobile. The result as described by former General Motors CEO Alfred P. Sloan was a transformation from a loose assemblage of parts and mechanisms to a complex, closely integrated piece of machinery.
Some of the innovations include: high octane fuels and high compression engines (1930's), improved suspensions (1930's), the automatic transmission (about 1940), power brakes and steering (1950's), car air conditioning (1950's), and so on. Impressive as some of these innovations were, they were not as important to the continued growth of the automobile as were the developments elsewhere in society.
During the second growth phase the auto's relationship with the overall economy was also different than in the first. Rather than serving as an engine of economic growth, personal consumption expenditures on automotive transportation were flat at a rate equivalent to about 8 percent of the total gross national product. Although this is a higher percentage than in the first phase, the entire adjustment occurred in several years immediately following World War II. For the balance of the second phase automotive expenditures grew at roughly the same rate as the overall economy. The portion of these expenditures on new cars has actually been trending downward since 1950. Employment by firms engaged in motor vehicle and equipment manufacturing peaked in the late 1970's at approximately one million individuals--twice the employment of 1929.
Ultimately, automotive transportation began showing signs of maturity in the decade of the 1970's as demographic changes became significant to its growth. For the first time in its history, the growth of automotive transportation (as measured by total registrations) was not primarily due to increased market penetration. Penetration did increase, there were more autos per person, but demographic effects accounted for a higher proportion of new car registrations. An increase in the driving age population led to the major part of the growth; the baby boom individuals had reached car buying age and buy they did. A new United States retail sales record occurred in 1973 when 11.4 million automobiles were sold (a record eclipsed once since then in 1986).
The rate of increase of penetration has since slowed to almost zero. It is likely that the current penetration represents the close of the second growth phase.
If one adds pick-up trucks and vans bought for personal use to the total of registered automobiles, the decade of the nineties began with about 0.97 such vehicles for every driving age individual.
There are still a number of driving age individuals who live in special situations that do not require automobile ownership. Dense urban centers with extensive public transportation like New York City, make it easy to live without a car and sometimes difficult to live with one. Many people living in such a setting will never purchase an automobile. Several percent of the driving age individuals are still in high school with little need to have an auto of their own. The same can be said of many college students. A small percentage of the population is institutionalized with no ability to access personal transportation. Finally, some individuals do without an automobile for economic reasons.
Since a fraction of the driving age population still does not need a vehicle in spite of what we have described as its necessity, an increase in penetration would require many people to have more than one vehicle. At the present, well under 10 percent of the population are two car people. Certainly this quantity has room to grow, but there are no signs that this is happening in any significant way.
Whereas the first growth phase ended with just under one car per family, the second growth phase is ending with just under one car per person.
At the same time, the environment is changing in a way which is reducing the need for personal transportation by replacing it with personal communications and computational ability. The trend of innovations that once made the auto more of a necessity has reversed to begin eliminating the need for it. For example, increasingly sophisticated entertainment alternatives will continue to become available right in the home, transcending the need to travel. Experiments are taking place which would allow shopping, banking, and work to occur in the home using personal computers. All these innovations will gradually reduce the need for the automobile and at the same time offer other things for people to spend their money on.
Given that the auto's penetration has leveled off, the key determinants of auto sales will change substantially. Quite simply, the fraction of sales which represented growth in automotive transportation is no longer present. The more a car is used the faster it wears out and must be replaced. Thus, usage will be more important than ever to future auto sales. In a similar fashion the decision of whether to repair or replace a car will take on first order significance to auto sales. Demographic effects first became significant during the 70's and they will remain important.
Interestingly, while demand for automobiles has fallen, innovation in vehicle design and production is accelerating. The auto must adapt to its environment once again because of changes wrought by increased fuel prices, emission controls, and quality consciousness. It is important for the health of the industry that this activity does not divert auto manufacturers away from a creative understanding of the new determinants of auto sales.
Many factors influence the growth of an invention in its environment. The case of the automobile demonstrates how quickly the factors can change in magnitude and direction. Catastrophic changes in the underlying demand for a product result, magnifying the influence of cyclical economic conditions. The forecasting of such turning points requires the analysis of a hierarchy of forces unique to each invention and each moment of time.
© Copyright 1996, Kenneth L. Hess, All rights reserved.
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