The interwar motor industry

Topic: BusinessTime Management
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Last updated: April 15, 2019

The pre-war motor industry was in its infancy and suffered from a lack of investment backing, high production costs, an over engineered end product and a saturation of small family orientated manufactures.

Developments in the industry often came from pioneering engineers with components being imported off the continent for the British industry. Britain was lagging behind other European nations. The industry established itself in the inter-war period by relying on entrepreneurs and engineers, such as Herbert Austin who built the first four wheeled English car by 1900.Austin also built the first low horse-power car to substitute the motor-cycle side-car and public transport. The pre-war industry had high production costs with poor managerial leadership with most manufacturers being family run, resulting in little asset growth within the company as profits were quickly distributed to employees or family. No attention was paid to extend asset growth within the company, increase production efficiency and strive towards obtaining economies of scale.Automobiles were still only available to a minority, the middle classes, who were prepared to pay higher prices for quality, aesthetic appeal and performance. In the inter-war period mass production was never reached (stage three on the diffusion curve) but by the end of the 1930s a large component industry had established itself which supplied parts to the motor industry on a mass scale.

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Production costs were also reduced by improved methods of manufacture which was greatly aided by new industrial technology and techniques used over the First World War.Advancements revealed were the standardisation of components for industry and the ability to use a semi-skilled work-force. This led to: ‘The advanced deployment of machinery on a line system to achieve a high degree of continuity in production for annual output levels of 10000 cars in the late 1920s. 1’ However, by the end of the inter-war period there was still a lack of standardization and too much product differentiation, without The War these factors would have been much more dramatic.The War also highlighted the use of vehicles which increased investment interest from companies and private backers alike. Furthermore, the McKenna tariff was introduced in 1915, placing a thirty-three and third percent tax on goods, such as cars, which were heavy on shipping space (Middleton R).

This tariff was not removed until 1963 to protect the home market from imports. Only wealthy elite were able to invest in the motor industry in the pre-war and early in the 1920s, the industry was still in its first stage on the diffusion curve.During the inter-war period the industry progressed from the first stage to the second stage on the diffusion curve. Market size was increased to the middle classes as a whole but it still only had a small target market in relation to the whole population of England, roughly 25% of the population. In not competing on the international market a gradual expansionary path evolved in Britain and resulted in complications for the post war industry. Entrepreneurs, like Herbert Austin, grasped quickly what British consumer preferences were and designed cars specific to the home market.They saw the importance of introducing low horse-power cars with low running costs to infiltrate more widely among middle income groups Entrepreneurs were willing to take risks, innovate and saw potentials in the market.

‘The company’s post-war revival began on the basis of Austin’s own engineering and creative skills. Without his persistence and determination to secure the implementation of his personal manufacturing strategy the company’s colossal financial difficulties would almost certainly engulfed the Longbridge enterprise. 2’Engineers and entrepreneurs had little commercial knowledge, their passion for technical perfection and individuality often clouded their economic decisions. They realised a high price-quality product was required for the English market but often forgot the economic importance of improving input costs. In the inter-war period the managerial roles of Austin and Morris were reduced with boards of directors, with little or no market share in the company, making decisions for the company’s evolution.

Without entrepreneurs opportunities in the market may have been missed along with the potential profits created.Conversely in creating a unique product for the home market entrepreneurs were forfeiting the potential for expanding demand and profit on the international market. Britain needed to produce higher horse-power vehicles in large numbers to increase demand to such markets. Britain had the ability to capitalise from its colonies where empire preference helped boost exports.

Furthermore ‘exports of the major foreign competitors, America, Canada and France failed to regain their pre-depression levels even by 1937. ‘ Britain had an opportunity to increase demand dramatically as its export levels recovered to its pre-depression levels by 1932 and it had much colonial advantage. In not having a high horse-power vehicle for the export market at a reasonable price the British economy was not creating the full potential of this opportunistic and a slightly fortuitist position they had found themselves in. There was only a total of ‘98,500 units exported4’ in comparison to ‘281,500 units sold5’ on the home market in 1937.In the pre-war motor production costs were too high only allowing the wealthy elite to enter the market. The motor industry was in its infancy, production techniques were highly labour intensive with little standardisation and the public were indifferent about the cars practicality. The First World War had a number of effects it illustrated to the public the practicalities of motor vehicles and also introduced new technical advancements to all of Britain’s industries. It affected the motor industry by increasing standardisation of production methods: Of critical importance for the post-war development was the effect of using standard jigs and tools and the subdivision of processes into simple tasks.

6′ Such processes allowed semi-skilled labour to be employed which reduced the quantity of skilled fitters required and speed of production. ‘Up to 1914 no British firm managed to exceed one car per man per annum. 7’ In having increasingly standardised parts running costs were also reduced as new parts for motor vehicles could be made with greater ease as new parts no longer had to be hand crafted.

Modern machinery had improved production techniques and led to increased reliability of the motor vehicles manufactured, consequently consumers no longer had to be sceptical about motor vehicles being unreliable. In the pre-war industry costs remained high along with technical failure this inhibited growth in commercial vehicles and buses. The War also impacted negatively by causing many manufacturers to miss the post-war boom due to plants being converted back to car manufacture from armament production.The US manufactures capitalised on this pent-up demand at the expense of the British manufacturers. In the pre-war economy there were many small family run producers with small batch production which caused slow asset growth of the industry and little development of production. ‘Between 1896 and 1914 no less than 393 firms were founded 280 of which had ceased to exist by the latter year, and almost 200 hundred different types of cars were in production during the period. 8’ The low asset investment of these smaller companies causes less technical innovation and no economies of scale.Methods of production tend to be highly labour intensive which result in lower price-quality, higher running costs and a decrease in the market size of Britain.

This reinforces the point that in the pre-war era cars were seen as a luxury item they were not perceived and often for good reason as a reliable means of travelling, the motor-cycle side-car or public transport were trusted and relied on and hence commonly substituted the motor vehicle. The motor vehicle was only available to the wealthy elite due to high running cost and the initial cost of purchase.The industry needed to encourage large manufacturers to develop, to decrease product differentiation and create more standardisation of component parts. This can lead to the development of more efficient production processes and increasing price-quality of the car. The component industry had a marked impact on the number of manufacturers. This is because the component industry operated on a superior scale to all but the largest manufacturers and all car manufacturers, small and large alike, depended on these external parts.This gave the economies of scale which aloud medium sized companies to compete with the big three manufacturers, Austin, Morris and Ford.

‘In the 1930s Standard, Vauxhall and Rootes intensified their efforts and achieved much more, as the doubling of their combined share of the Big Six car production from 17 percent in 1930 to 34 percent in 1939. 9’ Although the component industry aided in the short term since it gave the product differentiation the inter-war British consumer wanted, it did not aid the post-war development of Britain.When the home market opened up to external markets other large multi-national manufacturers had the ability to out-compete the comparatively small British manufacturers for the working class market. The working classes wanted a mass produced, low hp, low running cost, reliable car with a low purchase price.

Large external manufacturers who didn’t have so much differentiation in their own domestic market, more standardisation of parts and held a greater percentage of their overall internal market resulted in having larger economies of scale in comparison to the British manufacturers.Without the protected home market of the inter-war period and the lack of market diffusion the British manufacturers would have quickly been out-competed by the US market. This is illustrated very clearly by the McKenna import tariff being removed: Except for a brief period of free imports -from August 1924 to July 1925. This duty remained in force and was extended to cover chassis, parts and commercial vehicles. 10′ Britain was not prepared to compete on the international market during the inter-war period and the Government even extended the McKenna tariff to protect the component industry.These policies and the high price quality of British manufacturers kept the middle income market relatively monopolised by the British industry as ‘by the late 1930s they (British manufacturers) were supplying 97 per cent of the domestic market. 11’ The tariffs implemented in Britain were even greater then fascist Germany. The component industry was a short term solution to ‘Britain’s slow growth of new-owner sales between the mid 1920s and the mid 1930s12’ which caused unpredictable and discontinuous progress.

It however prevented large manufacturers such as Austin and Morris gaining a monopolistic control over the home market to the detriment of product quality. The British car manufacturers made best of their situation as it was not feasible for British manufacturers to have the same methods of mass production in the US for example, the size of the market in the US was incomparable to that of immature Britain. ‘In 1924, there were seven residents per motor-car in the USA as against 29 in the UK, 84 in Germany, 147 in Italy and 26 in France.It was not until 1963 that the UK attained the USA’s 1924 level of 7 residents per car13. ‘ The UK market was price inelastic but price-quality elastic to demand in the inter-war period as a result it would not have been economically viable to undertake the massive investment to create mass production. The middle class market had not reached saturation and although the British market was under-exploited it was protected by Government tariffs. The industry could move into mass production naturally when the middle income group market was saturated.If mass production was undertaken there would have been excess supply and price reductions were not crucial to the success of Britain’s motor industry during the inter-war period, the market was much more orientated towards aesthetics and quality of product.

In not adopting the mass production strategy, i. e. minimum inputs for a single unit of output, in the inter-war period managerial and labour relations were not a problem to the development of the industry. Labourers’ wages were determined by bonus payments and piece rates: A system which gave workers the responsibility for setting production targets by linking earnings directly to output- and effort- expended on the job. 14′ This encouraged increased effort by labour to obtain higher productivity which in turn would lead to greater wages, mutual interest for high production had been created both for the employers and employees. New employees entering the industry were generally prepared to work hard in return for higher wages, in the case of Oxford wages were almost twice the average of agricultural workers.The threat of unionism had diminished greatly by the 1930s both by piece rate payment and craft workers, the most unionized section of the industry, dwindling in size dramatically with semi-skilled labour replacing this gap in the market.

At Ford’s (US) Trafford Park and later Dagenham plant in Britain workers productivity had to be enforced by floor mangers. All employees were non-union members and benefited by forced work with higher wages. This strategy gave maximum control to managers with employees easily becoming unemployed for trivial offences.In this management strategy workers had little interest in keeping production targets high, there was no direct benefit for the worker hence labour productivity would have been lower if the British industry used the Fordist employment strategies.

One of the major draw backs of piece rates payments was entrepreneurs and managers lost their ability to set production output, they had demand side constraints. In doing this entrepreneurs and mangers alike would not have had control over production output.The lack of managerial control would have made it hard for Britain’s motor industry to move into mass production. The UK market was one of the most successful in Europe from being one of the least successful in the pre-war period.

Car ownership had increased dramatically in the UK compared to the pre-war British motor-industry which was lagging behind the rest of Europe and being forced to import components and technical advice off the continent. By 1937 this trend had reversed itself with the UK producing ‘379,300 motor cars’ in comparison to the second highest output of Germany which was ‘264,400 motor cars. 5’ Britain held 43% of the overall European production of cars in 1937.This was aided greatly by a rise in real income in Britain over the interwar period which increased demand dramatically in the UK. This was especially noticeable when Britain recovered from the depression of the early 1930s much faster than all other European countries. There was also a large reduction in the price of cars and the increased availability of hire-purchase meant car purchase was now a much more feasible option for a larger proportion of the middle classes.

The average retail price of cars dropped by about 50% between 1924 and the middle of the 1930s. 16′ Along with the purchase price fall in motor-vehicles, which saw the greatest declines in all of Europe and had the lowest prices in Europe by the end of the 1930s in all of Europe the running costs also decreased dramatically. This was due to technical improvements and a fall in the price of petrol over the inter-war period. With the availability of hire-purchase the total running cost was almost more important than the initial purchase price of a car.The hire-purchase statistics for the UK were the best in Europe with a ‘flat rate interest of only 5-7% and average period of instalments was over eighteen months’.

The average interest payments for the rest of Europe were ‘9%17’ with a similar time to fully purchase the vehicle of eighteen months meaning hire purchase was most favourable in Britain and it was the main means by which the middle classes could purchase cars over the inter-war period. Running costs in Britain tended to be quite high but for good reason as Britain wanted to protect its home market.This however resulted in only the middle classes being able to afford a motor vehicle, as annual running costs were more than a third of the initial purchase price of a vehicle. Demand was price elastic to running cost. The average tax for UK residents per 1000cc in 1937 was ‘i?? 1. 67’ where as in France, Germany and the US the taxes per 1000cc were in 1937 were ‘i?? 1. 10, i?? 0. 90 and i?? 0.

2018′ accordingly. The taxes in Britain were so much higher due the implementation of the horse power tax which taxed vehicles i?? per horse-power. This meant it was difficult for the US to infiltrate the market and suited the low horse-power British motor vehicles. These taxes however placed constraints on the size of the market in the UK.

To conclude the British motor industry overcame many of its pre-war difficulties by protecting its home market, by the use of tariffs and taxes and at the same time technically advancing dramatically. Technical advancements reduced total running costs to the industry dramatically.This was aided greatly by Government investment over the First World War and the work of entrepreneurs and engineers such as Herbert Austin. The market however was constrained to the middle classes due to high running costs and an acceptance of manufacturers there was no need to try and reach mass production, as the middle income market was not stagnating. The market however only grew from the wealthy elite being able to afford cars in the pre-war industry, the market extended to all of the middles classes.

This resulted in Britain never being able to reach the same scale of production as the US in the inter-war period but it however made the best of the situation over the short term. The US motor-industry in the pre-war was difficult to compare to Britain simply due to the differences in the scale of the market. The high capital investment required to reach mass production was not a feasible option for the size of the market in Britain. Britain however ended in 1939 being the largest producer of motor-vehicles in all of Europe and the middle class market was not saturated by 1939.Britain’s policy to ‘play it safe’ for short term profitability and for the avoidance of labour relations collapsing was a success in that respect. The piece rates wage payment is a typical example of this as it allowed short term profitability but it led to a loss of control over the industry for managers and entrepreneurs alike. Hire-purchase policies allowed demand to increase dramatically and Britain had the most appealing interest repayments rates in Europe and hence one of the reasons there was so much success.

Britain also had the lowest running costs and prices of cars by the end of the 1930s in comparison with Europe. The industry realised the importance of price-quality, aesthetic appeal and low running costs in capturing its market. Finally by 1939 there were six main manufacturers in the industry and not over 250 as there were pre-war. There was no longer the family run business, decisions for a companies development were now in the hands of a board of directors with little assets in the company. This resulted in asset growth of companies and larger economies of scale.

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