03/11/09 Gaithersburg, Maryland “Although most Americans think of the 1930s as a decade of economic stagnation, the period was far from being one of unalloyed decline.”
– Robert Sobel, The Age of Giant Corporations
Robert Sobel’s book is our chief guide for the second leg of the Great Depression Survival Guide. As his book’s title lets on, it was the larger companies that did the best.
To illustrate this point, let’s start with the auto industry. In 1929, the auto industry sold more cars than it ever sold before – 5.3 million units. But the wrecking ball called the Great Depression hit the auto industry especially hard. By 1932, only 1.3 million units were sold.
As you might imagine, plenty of automakers never made it out of the Great Depression. Moon, Kissell, Elcar, Marmon and others all disappeared. What they all had in common was that they were small. Some were specialty carmakers, serving a small niche that got a lot smaller – too small to make a business out of it. Novelties – like Franklin’s air-cooled engines – were desirable when times were good, but no one wanted to pay for them when times turned bad.
But the Big Three – GM, Ford and Chrysler – survived. In fact, the falling away of the competition helped that. It allowed them to fill in and consolidate markets. So we have our first takeaway.
The survivors often had large-scale operations and were leaders in their industries. Smaller companies had a harder time dealing with the Great Depression, as Sobel shows in his book. But the sales and profits of the largest companies increased during the 1930s.
What else did the Great Depression survivors have in common? Here are more of my thoughts based on Sobel’s research…
The survivors were self-financing. They didn’t need their bankers as a source of funds. In fact, most of large Corporate America didn’t need their bankers for loans. The flush times of the 1920s led to the near disappearance of corporate bank debt by 1929. Banks had to go elsewhere to find borrowers. They began to finance real estate heavily and broker loans for the purchase of stocks and bonds. Ultimately, the banks got in trouble with these bets, but most of larger industrial America stood on its own bottom.
Take the Gulf Oil Co., for instance. In 1929, the company produced 90 million barrels of oil. It was like granite as far as financial strength goes. In the 1930s, Gulf was able to expand operations, gain a foothold in the rich Kuwaiti oil fields, increase its advertising budget, pursue undersea exploration and refinance what debt it had at attractive rates. “Most of this would have been impossible were it not for the firm’s strong position on the eve of the Depression,” writes Sobel.
The winners also often had great leaders. GM had Alfred Sloan as its president through 1937. Sloan was a brilliant strategist and organizer. The harsh environment of the 1930s rewarded tight ships and the accumulation of small advantages. These were things at which Sloan excelled.
In fact, Sobel goes on to say that GM actually benefited in a number of ways from the Great Depression. “A management aware of possibilities and [with] adequate financing could hold its own and even flourish during the Depression,” Sobel writes.
Sobel finds other examples in other industries, everything from American Can in the tin industry to the New York Yankees in baseball. “Good leadership and finances could expand and dominate in the 1930s,” Sloan concludes. Hence, we reaffirm once again the value of a good operator, a point I stress in these pages.
Industries that were hard to get into did best. Another other important point here is that Sobel finds industries with high capital costs that kept competitors out did better than those with low barriers to entry.
This one also makes intuitive sense. In a depression, money is tight. And if it takes bucket loads of money to crack into an industry, it’s not likely to happen. The chemical industry held up well in part because to get in the business required heavy capital spending on equipment and research and marketing. Companies like DuPont, Monsanto and Union Carbide held onto market-leading positions simply because there was no threat of new entrants.
Oil refineries, too, were another example. Sobel estimates that one barrel of gasoline capacity required $240 of capital. By the end of the ’30s, it would cost you $320 to add one barrel of capacity. On a per worker basis, the refinery industry was about 10 times more capital-intensive than the typical American manufacturer. Those high costs discouraged new competitors and kept prices for gasoline up. It’s no surprise, then, that price of gasoline did not go down in the 1930s.
Productivity gains helped. Since money was tight and business was slow, you had to be innovative to squeeze out profits. You had to husband your resources carefully, like a caravan mindful of its water supply as it crosses the Sinai Desert.
In the oil business for example, oilmen got much better at finding oil. Necessity is the mother of invention, after all.
Crude prices fell in the 1930s, from $1.27 a barrel in 1929 to only 67 cents a barrel by ’33. So the oil biz had to rely on new technologies to improve results. And it did. For instance, in 1929, about a third of all drilling resulted in a dry hole.
By 1937, that figure was down to 22%.
That’s just one example among many in the oil industry, and other industries as well. In general, Sobel finds that output per man – productivity – increased 20% in the 1930s.
Expanding markets also helped. Despite what you might think, demand for everything didn’t topple over in the 1930s. Demand for gasoline, for instance, declined only in 1932. From then on, the number of cars and trucks on the road went up every year. And so did the demand for gasoline. That helped the oil companies. Oil also got some help from other industries. The rise of aviation in 1930s required fuel. The oil companies made that fuel. And the demand for highways required asphalt, also made by the oil companies.
Some industries today will also see expanding markets for their goods. It seems obvious, but the point was often overlooked at the time – and so, too, it is overlooked today: There is some base-line level of consumption for things like energy, food and water – even in depressions. This base-line consumption is bound to rise, if for no other reason than population rises over time. You can’t say the same thing for decorative balls sold at Target for $4.99 a pop, or for fancy $30 candleholders at Pier 1. If you want to be sure your money sees the other side of this thing, stick with the necessities.
“The principal preoccupation of almost everybody in the 1930s was getting by,” the great A.J. Liebling wrote in May 1963.
It’s a good point to remember as you think about investing today. “Almost everybody” is key, though. For the companies that shared the characteristics highlighted above – such as the large-scale leaders with good financing and top managers in expanding markets – the 1930s was a time of opportunity.
Regards,
Chris Mayer
for The Daily Reckoning
Chris Mayer
Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents.
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Great article, point well taken.
The automobile was fairly new in the 30,s not every family had one, likewise the need for paved roads. The American industrial machine had room to grow, and WW11 put that machine to work.
Today we have two cars in every driveway, lots of paved roads, and we are drowning in debt, a nation of consumers.
In the 1900,s we were a nation of producers, many new inventions were coming on the scene, our industrial might was unmatched. Today I fail to see that level of innovation and or scientific advancement, and we don,t make it here anymore, we have it made some where else.
Maybe the future favors those countries with strong balance sheets and the ability to produce things. Will the US fade quietly from the world scene,and spend the next 30 years paying off our debt? I doubt it. Maybe companies that service the US military machine will lead this country back from the edge of the abyss, worked last time.
We are entering an age of scarcity in America. Like a deflating souffle. We will never be “irrelevant” as long as we have military strength, but our decline will be protracted. We cannot rise above this until we are again a nation of producers.