Category: Automobile Industry

MACAULEY’S GHOST KILLS PACKARD’S LAST CHANCE

Barely five years after Packard invested in a new plant to manufacture bodies for the One Twenty, Macauley was outsourcing body production for the Clipper to Briggs Manufacturing Company.  Although this was justified at the time as an expedient to get the car into production because Packard’s own facilities were at capacity producing bodies for existing models, the explanation is suspect.  It is always less expensive to produce automobile bodies in volume in-house.  Subcontracting volume body production occurs when companies lack the capital to invest in their own production facilities and tooling.  Regardless of the ostensible justification, they end up paying more.  The company shifts the capital expense to the subcontractor.  The subcontractor rolls that capital expense into its price, plus a markup for its own profit.

If, however, if a company does not have the capital required to produce in-house, it doesn’t have a choice.

It is realistic to ask whether anything Packard did after the end of World War Two could have continued the company in the automobile business as a long-term going concern.  Macauley’s pre-War decisions not only squandered its profits, but also created a risk-averse corporate culture that prioritized cash over investment and avoided debt at all costs.

The consumer market for automobiles changed enormously during the War.  Those changes would continue after the War ended.

Between 1939 and 1945, the average family income almost doubled.  At War’s end, people had money and were no longer afraid to display their wealth.  The middle class was becoming the dominant segment of the American populace, and the upper-middle class had increased exponentially.  The market for automobiles was similarly transformed.  In 1948, 60% percent of United States households owned an automobile.  In 1955, it was 90% percent.  Between 1946 and 1955, the number of automobiles manufactured annually in the United States quadrupled.  Even more importantly for a brand aimed at the upper middle class, by 1956 the majority of jobs in the United States were “white collar.”

Macauley had hand-picked George Christopher to succeed him as company president in 1942, with Macauley continuing to control the company’s decisions as Chairman of the Board of Directors until he finally left the ship he’d torpedoed, by retiring in 1948.  Together, these two crushed whatever post-War chance Packard had for long-term survival by continuing Macauley’s pattern of reckless decisions masquerading as prudent finance.

General Motors introduced the Hydramatic fully automatic transmission in the 1940 Oldsmobile.  Cadillac offered it as an option for the 1941 model year to instant success: 30 percent of new Cadillacs were so equipped at an option cost of $125.00.  Cadillac introduced a completely new and modern body design for Cadillac in 1948 and followed it in 1949 with an all-new modern high compression V-8.   Mid-year in 1949, Cadillac would introduce a pillarless two-door hardtop.  None of this was occurring in secret – Packard, in common with the other automobile manufacturers, were fully aware of what General Motors was doing.

Yet Macauley and Christopher stuck with same straight eight engine first used in the One Twenty.  Packard’s belated attempt at an automatic transmission was the Ultramatic introduced in 1949.  Similar enough in design to Buick’s Dynaflow that General Motors sued for patent infringement, the Ultramatic was a mediocre design.  It could not actually shift gears.  Rather, it started in the second of its two gears varying speed through the torque converter.  The result was slow acceleration.  (It would be 1955, after Nance had made it a priority, before Packard’s automatic could shift gears – too late and beset by quality problems.)

And then there’s the “bathtub.”

Though the design department at Packard had created the design of a fully new model and Packard had the financing in place to develop it, Macauley and Christopher rejected all proposals for a new post-War  design.  Instead, they accepted Briggs’ proposal to produce a facelifted pre-War Clipper.  That facelift, ironically, ultimately cost enough in new tooling that the savings over a fully new body design were insignificant.

Even as competitors’ truly new models were introduced and Packard sales sank, Christopher still refused to spend the money to develop an entirely new model – which condemned Packard to keep the bloated “bathtub” in showrooms for 1950.

Christopher had been in charge of production as Macauley had driven the Packard brand down-market in the 1930’s, lowering prices and decontenting the product throughout the period in an effort to avoid the consequences of starving the product line of investment.  As company president following the War, he pursued that same strategy.  Packard had recruited new dealers after the War with promises of volume sales – promises that were foolish when made and would be rendered impossible to keep with a dated product subcontracted to an outside supplier.

Christopher’s mindset as Packard president was that of a production man, which is what he’d always been.  To him, fixed costs are spread out over production.  The higher the production, the lower the fixed cost per vehicle produced.  Thus, if you are losing money on existing volume, the way to reduce that loss or turn it into a profit is to increase the volume.  You must sell what you produce, so this means increasing sales.  To increase sales without having to invest in anything new, you must decontent existing models and sell these de-contented models at a lower price.  That spreads fixed costs over greater volume and if the total income from sales exceeds the fixed costs and costs of production, you can claim an operating “profit.”

This is a strategy that postpones doom while still making the balance sheet look good.

The problem with this strategy is that the same reasons people did not want to buy your existing models will ultimately lead them to reject cheaper models that offer even less.  It is a strategy that can succeed only for a short time.  If you are using that strategy to buy time while simultaneously developing new products and bringing them to market, it may work.  If, however, you are doing this only to tread financial waters, the strategy is ultimately its own undoing and the company then drowns in red ink.

Christopher – while Macauley was still Chairman of the Board – even reduced Packard to the level of selling models specifically designed as taxicabs.  It was a decision bizarrely blind to Packard’s place in the luxury market.  This was merely one of the many short-sighted and ultimately disastrous decisions Christopher and, looking over his shoulder, Macauley would make in the years following the end of World War Two.  Nance would be the one to deal with the consequences.

Christopher’s focus on production appears to have blinded him to nature of the post-War automobile market.  The reluctance to invest in a fully new Packard following the War has been attributed to a fear by Packard management – ever in the thrall of Macauley’s corporate risk-averse culture – that the seller’s market existing immediately after the War would become a buyer’s market once the market for new cars was satiated.  Hence, fearing a decline in the market, Packard avoided capital expenditure by turning all body production over to Briggs and withholding investment in a new model with modern drivetrain and chassis.

The excuse doesn’t hold water.  This was a strategy that was designed to keep the company in the black for the benefit of its officers, not to keep the company alive and prosperous into the indefinite future.  Packard in this period was completely controlled by Macauley.  It’s management was in the care off officers selected and promoted to their present positions by Macauley or with his assent.  There was no corporate pension plan, no retirement fund.  They were paid only while the worked.  So, they stayed.

When your livelihood depends on a company’s continued existence, you will be reluctant to take any step that might put that existence at risk in the near term.  Consequently, Packard’s management was not a group disposed to take risks, in business or in their personal lives.  These were men imbued with the Macauley corporate culture, one that husbanded cash, avoided debt, and considered both the epitome of prudent management.

Against this background, the decisions made by Packard management in the years following World War Two are understandable.  Being understandable does not, however, make them justified or right.  We can understand murder, but we don’t condone it.

Packard’s management should have known – since all the other automobile manufacturers did – that in a buyer’s market that you must have the newest, most advanced, most modern, most innovative, and highest quality product to have any chance of succeeding.  If you do not, selling on price will not save you.  It especially will not save you in an economy of rapidly expanding prosperity where the product is highly visible and publicly reflects your social status.

This is not a lesson that Christopher, or anyone else in Packard management, should have needed to learn.

Intentionally continuing an obsolete design with full awareness that the competition would be introducing new models with new designs and advanced technology was an inexcusable decision.  Macauley would eventually conclude that his selection of Christopher as successor was a mistake, a useless belated recognition of error designed to obscure Macauley’s unbroken chain of mistakes by blaming Christopher for the culmination of those mistakes.

Yet, Christopher has a defense.

He didn’t have the money.

Packard’s financial situation had not been improved by the War.  Packard could have realized more income by simply parking its funds in War bonds than it did by manufacturing under wartime cost-plus contracts.  The company entered the War undercapitalized and it exited the War even more  undercapitalized.

Post-War, Packard may have been unsustainable as an automobile manufacturer, no matter what it or its executives did.

Packard in the immediate post-War economy was a pipsqueak among automobile manufacturers.  Other manufacturers made the huge investments necessary to produce entirely new vehicles in competition with General Motors, Inc., Ford Motor Company, and Chrysler Corporation.  None succeeded.

There is a reason.

In 1948, General Motors profit was $440,447,724.  The next year, 1949, its profit was $656,434,232.

In 1948, Packard reported a profit of $24,789,439.  In 1949, as the “bathtub” effect set in, Packard’s profit was $13,406,042.

In these numbers, we see the impact of Macauley’s pre-War decisions squandering Packard’s profits and its position in the emerging luxury automobile market.  It was only in 1949 that Packard  finally decided to develop a new body design –  a board of directors rebellion that would ultimately force Christopher to resign to force that decision.  Packard would end up telling its shareholders in the company’s annual report that the company’s $0.50 per share dividend would be suspended in 1950 to allow for the “outlay of substantial cash for tools and equipment during the first half” of that year.

In other words, with two percent of General Motors’ profits, Packard was going to continue to try to compete with it.

Macauley would retire in 1948, leaving to his successors the dismal task of presiding over a company that could not survive, but that they would nonetheless try to save.

Continued from Part One

Continued at Part Three

See also previous posts: The Real Reason Packard Died and Pat Foster and the Myths of Packard’s Demise.

 

 

ALVAN MACAULEY SQUANDERS
PACKARD’S CAPITAL, WITH LASTING EFFECT

In his Octane magazine column, Jay Leno recently wrote that “one of the final nails in the coffin [of Packard] was bringing in James Nance – a man with absolutely no experience of automobiles who came from a background of selling appliances.”  It’s a common myth, one not unique to Leno.  But it’s wrong.  Nance didn’t kill Packard.  He  saved the company, even though he couldn’t save the brand.

On March 1, 1954 – less than two years after James Nance became President of the Packard Motor Car Company – its treasurer, Walter Grant, wrote a memorandum to him: “Basically, the company is rapidly approaching bankruptcy.”  Grant predicted that, absent decreases in expenses, working capital would be exhausted by the end of June, 1955.  He concluded by advocating merger with one of the two remaining independent automobile manufacturers.

In 1955, the now combined Studebaker-Packard Corporation posted a loss of $29,705,093.

In 1955, General Motors became the first corporation in history to report a profit for a single year exceeding, $1,000,000,000 – as in one billion dollars.

It is laughable to blame James Nance for Packard’s demise.

Packard was doomed long before Nance became its president.

Yes, but did not the ‘merger’ with Studebaker – it was technically an acquisition of Studebaker by Packard, not a merger – kill Packard?  And wasn’t Nance responsible for the merger?

No, and no.

Combining with Studebaker was a desperate move by Packard’s board of directors and management, including but not limited to Nance, to save a doomed company.  They didn’t bother with what we’d today term “due diligence,” did not audit Studebaker’s books, or verify its financial representations.  None of that really mattered.  They were hoping for a miracle.  Without one, they knew their company would die.  There was only one avenue that presented any hope of a different outcome, so they – quite logically – took that chance.  It turned out that the hope was really a chimera, a financial mirage that disappeared almost as soon as the deal was done.  But you cannot fairly blame Nance for any of this.  What he did, or did not do, was largely irrelevant to Packard’s demise.

To understand why Packard failed it is necessary to go back to its earlier near-death experience during the financial depression of the 1930’s.  In the four years before Packard’s introduction of the One Twenty model in 1935, the Packard Motor Company lost $16,400,000.  Introduction of the One Twenty produced instant profits, saving the company from an otherwise inevitable bankruptcy.

The One Twenty was neither a new idea nor a brilliant one.  Alvan Macauley, the company’s president at the time and the man who committed the company to building a modern facility for mass production, had long sought to push Packard down market to increase its customer base and its sales volume.  Adopting mass production methods allowed him to do just that.

There are those – and were even among holdovers within Packard’s management during the 1950’s – who believe the One Twenty “cheapened the brand.”  To them, the One Twenty precipitated a chain of events ultimately resulting in Packard’s downfall.

They are wrong.

The problem was not cheapening Packard’s image, per se.  The problem was the failure of Packard’s management to understand the market into which they were now selling mass-produced automobiles and to properly position the Packard brand in that market.  That failure, in turn, was the product of a risk-adverse corporate culture that focused on avoiding debt and thought of profit only in terms of operating profits, rather than appreciating that any model’s price must contribute to covering the costs of developing its replacement if the company is to be truly profitable.

When we think of Packards of the classic era – what were then considered Senior” models, in contrast to the “Junior” models initiated with the One Twenty – we think of automobiles produced by craftsmen machining chassis parts and producing wood-framed bodies.  These were automobiles produced by obsolete technology, even in their most halcyon days.  In the 1930’s, labor was plentiful and, consequently, inexpensive.  It was machines that were expensive.  When production volume was low, it made economic sense to manufacture with cheap labor rather than expensive machines.  The cost of machine tools could not be profitably amortized over low production volume.

By the 1930’s, however, production techniques had advanced to the point that mass produced automobiles could equal or exceed the quality of those manufactured mostly by individual labor.  Welded steel bodies did not develop squeaks over time.  Bespoke bodies framed with wood did.   Quick drying automotive paints were available for mass produced automobiles and allowed customers to select colors to suit their individual preference.  Custom manufacture was no longer needed to produce automobiles that were individually distinctive.  Technology always improves as it evolves and mass-produced automobiles became more refined with improved performance during the 1930’s.

America’s social structure was also changing, as the middle class grew in size and regained prosperity.

There had always been an upper middle class.  Packard had catered to that clientele – successful doctors, lawyers, and merchants – during the two decades before the Depression.  It was to these customers that Packard had sold most of its production.

These were the customers Packard had lost during the first half of the 1930’s.  The Depression took away their prosperity.  Even those who could still afford to purchase a Packard found it financially prudent not to.  With mass-produced automobiles proving a less expensive alternative, in the first half of the 1930’s Packard’s labor-intensive product line no longer offered an automobile for this clientele.

The One Twenty was actually Packard reaching out to this lost clientele.

This was not “cheapening the brand.”  The One Twenty was not an inexpensive automobile.   This was reintroducing Packard to the upper middle class clientele upon which it had always depended.

It was after introduction of the One Twenty that Packard’s management fumbled, the first in a series of unnecessary and stupid errors by Packard management that doomed the company before James Nance would try to save it.

Introduction of the One Twenty swung Packard from a loss of over $7,000,000 in 1934 to a profit exceeding $3,000,000.  Profit reached $7,000,000 in 1936, before dipping to approximately $3,000,000 in 1937.

By 1938, Packard was again reporting a loss.

As a previous post discussed in greater detail, Macauley was not brilliant for introducing the One Twenty.  He was stupid for continuing the Senior models in production.  Every penny of the losses from 1931 through 1934 were attributable to those models, so it is fair to assume that they continued to lose just as much money in the following years, if not more.   That means Packard  squandered over $20,000,000 in profits from the One Twenty on the Senior models from 1935 through 1938.

That’s an astonishing amount of money.

It also money Packard should have spent on its future, rather than its past.

This, then, was the beginning of the end for Packard.

There was a lesson to be learned in the One Twenty’s success, but it was a lesson that Alvan Macauley and Packard management ignored.  That the market for hand-built bespoke bodied prestige luxury marques had all but disappeared was obvious.  It was also clear, for anyone caring enough to pay attention, that the increasing quality of mass produced automobiles had eliminated much of the quality advantage once enjoyed by automobiles produced at great cost by hand craftsmanship.

These realities were in plain view at the Packard Motor Company.  To produce the One Twenty, it had been necessary for Macauley to create from scratch a mass produced automobile – one using a new, state-of-the art assembly plant to manufacture automobiles in volume, automobiles that had been engineered specifically to be produced by assembly line methods.  That modern facility existed at the same address as the one that produced the Senior models by the same labor intensive methods Packard had used for decades.

It must also have been obvious that the One Twenty would be facing serious competition.  Using the Packard name on the “Junior” line was a marketing and financial necessity.  Companies that had introduced less expensive automobiles under a different brand had largely failed to sell them, losing even more money in the process.  Packard needed to trade on the value of the Packard name to assure sales of the One Twenty.  But the continued value of that name – its prestige – ultimately would depend on the success of this “Junior” line.  Unless those cars were leaders in quality, technology, and value, the supposed prestige transfer from Packards sold to the ultra-wealthy would prove meaningless.

Mistakes of vision are commonly excused by noting that ‘hindsight is always 20-20.’  When offered as an excuse for mismanagement, that is not an acceptable explanation.  The function of corporate management is to have vision, to anticipate the future, to anticipate the market, to consider what might occur and plan for the possibilities – and plan how best to profit in each scenario.

With the One Twenty, Packard – apparently by simple luck born of necessity – had stumbled upon the emerging luxury automobile market that would blossom in the years following World War Two.  That luxury market was not the ultra-rich.  It was the upper middle-class.  Nothing suggests Macauley or anyone else in Packard’s management saw that this emerging market existed.

Others were not so blind.  Lincoln introduced the Zephyr in 1936.  It was  priced at about $1,300.00 and equipped with a flathead derived V-12 engine.  Cadillac introduced the model 36-60 that same year.  Equipped with a  smaller bore version of the V-8 used in larger Cadillac models, the 36-60 was priced at $1,645.00.  In its first year, the “Sixty Series” accounted for half of all Cadillac sales.  These were automobiles with the same prestige nameplates as earlier more costly models but were offered at a price aimed squarely at a prosperous middle class clientele looking for a modern luxury automobile.  These were automobiles competing in the market at which Packard, who priced the One Twenty at from $995.00 to $1095.00 at its 1935 introduction, should have been aiming.

What Macauley should have done was use the profits from the One Twenty to develop and market future models aimed squarely at this upper middle class market – a market that was a natural one for Packard.

What Macauley did do was milk the One Twenty and Packard’s image in the following years with progressively less-expensive models offering fewer features and increasingly  dated styling – for example, introducing six cylinder models below the eight cylinder One-Twenty, sharing its appearance but priced lower.  MacCauley was constantly pushing the brand down market.

This, then, was the true “cheapening of the brand.”

Though Packard did not break out profit and loss by model range, it is evident from events that Packard used the One Twenty’s profits to subsidize continuing production of the “Senior” Packards – squandering those profits by so doing.  It was not until April of 1941 that Packard introduced a model with new and modern styling and a more modern chassis, the Clipper.  Even then, the Clipper carried over the same straight eight cylinder engine and drivetrain originated in the 1935 One Twenty.

In truth, Packard’s supposedly conservative management was disastrously reckless.  Introduction of the One Twenty had changed the nature of the company.  It had been the manufacturer of small volumes of labor intensive luxury automobiles for an exclusive clientele, a market in which it dominated.  It was now a manufacturer of mass production automobiles competing in vastly larger market, one in which it had a relatively small share.  Every resource at the company’s disposal should have been devoted to achieving success in the market in which it could naturally have dominated – the emerging upper middle class market for mass produced luxury automobiles.

Continued in Part Two

See also previous posts: The Real Reason Packard Died and Pat Foster and the Myths of Packard’s Demise.

JAMES NANCE:  THE RIGHT MAN ARRIVES TOO LATE

James Nance would become Packard’s president on May 1, 1952.

By then, the image of Cadillac as the prestige American automobile was cemented in public perception.  On November 5, 1953, a new Broadway production opened at the Belasco Theatre in New York City: “The Solid Gold Cadillac.”   It would run for 526 consecutive performances, closing on February 12, 1955, and become a hit movie the following year.  The title came from the gift given the hero and heroine at the end of the play – the most prestigious gift conceivable: a solid gold Cadillac.  In the public mind, though, the ‘solid gold’ was almost superfluous.  Everyone knew Cadillac was the best.

The new model Packard had introduced for 1951 did not have a V-8 engine.  It did not have an automatic transmission capable of shifting gears.  The bodies were produced by Briggs, not by Packard.  It did not reposition Packard as a luxury, rather than mid-priced, brand.

It was, however, with that new model that James Nance was hired to rescue Packard.

Nance came aboard with some of the work already done.  The president who replaced Christopher at Packard, Hugh Ferry, had taken several steps in the ‘better late than never’ category, decisions that should have been made by Macauley and Christopher.  In January of 1952, he’d secured approval for development of a Packard V-8 engine and construction of a new plant to manufacture it (though the costs were not actually budgeted until after Nance became president).  He introduced Packard’s own two door hardtop, the Mayfair, in February of that year.  It was Ferry who bought the rights to the torsion bar suspension system that would be introduced while Nance was company president.

Yet the legacy of Alvan Macauley and the perpetually capital starved Packard Motor Company he left to his successors influenced even Ferry, though Ferry fully understood the necessity of Packard catching up to its competition to survive.

Ferry had become Packard’s president because someone had to do it and Christopher’s forced departure had occurred suddenly, leaving no time to plan for succession.  Ferry, from the outset, regarded finding his replacement as his top priority.  In the meantime, however, he needed to keep the company alive.  His background was in finance – he’d started as a cost accountant, risen through the ranks to become corporate Secretary and Treasurer, then Vice-President.  He knew as well as anyone the financial condition of the company, the impact of its dismal sales, and the capital expenditures required in the next few years to manufacture new models with modern features.

In short, he knew he needed money.

Ferry took advantage of the government’s need for manufacturing capacity to fight the Korean War and contracted with the United States government to produce diesel engines and the General Electric J-47 turbojet engine.  He expected profits from the government contracts would underwrite the costs of modernizing Packard’s automobile line.  The contracts would potentially generate income (i.e., gross sales, not net profit) of $200,000,000 a year.  A steady flow of profits from those contracts would buy Packard time, financing the ongoing costs of new models and new features and giving Packard the lifeline it needed to keep going until the sales of those new models could sustain it.

Unfortunately, these contracts required that Packard make the investment necessary to produce the products contracted, including building a new manufacturing plant.  This  meant Packard was spending its capital – $17,000,000 of it in total – now and up front.  Ferry viewed that as a down payment on a much larger stream of future revenue.  But it was also meant depriving the automobile business of that same money – to the detriment of the product line the defense business was intended to succor.

In this decision, we see the ghost of Alvan Macauley still haunting Packard.

As he likely saw it, Ferry had two choices.  He could commit the money for capital expenditures needed to fulfill the contracts.  Or he could put that money into the development of new models, powertrains, and features for Packards that would be introduced in the coming years.  The later choice gambled that the company could keep going until it could catch up.  The former promised a revenue stream that would buy the time needed to catch up.

He chose the former.

But there was a third choice.

To raise additional capital to finance the investment needed for the defense contracts, Ferry could have borrowed the money or he could have issued new stock in the company.

He should have done one or the other, or even both.

Borrowing to finance the defense contract investment should have been easy.  Packard was debt-free, reported profits in its annual reports, and the contracts themselves promised a guaranteed revenue stream that would easily repay the principal and interest of the loan.  Issuing stock might have presented more complicated issues, as it would have been viewed as diluting the value of currently issued shares.  But there was a clear rationale for a new issue of stock to finance entry into a new business that promised to increase overall corporate profits to the benefit of all shareholders.

By the early 1950’s, the automobile industry – led by General Motors – was evolving into a three-year model replacement cycle.  A new model would be introduced, slightly face lifted the second year, dramatically face-lifted in the third, and replaced with a completely new model the next year – and the cycle would start again.  That completely new model might carry over the same engines and transmissions, but new tooling would be required for the rest of the car.

From a 2.5 percent share of the United States automobile market in 1948, Packard’s share fell to 2.1 percent in 1949, and dropped again to 1.7 percent in 1950.  In 1951, Packard had a 1.43 percent share.  The effect of this low volume impacted every aspect of its automobile business.  Although it advertised much less, Packard’s advertising cost per vehicle sold was twice that of Cadillac.  Having forsaken its own production facilities to subcontract body production to Briggs, its component costs for bodies were higher than its those of its competitors and it had less control over those costs.  Its deal with Briggs still required it to pay for tooling, and that meant the cost of tooling per vehicle was higher, as well.

This was the point at which Packard needed to invest in its automotive operations.  To do that, it needed all the capital it could muster.  Ferry was probably correct in his belief that Packard needed the profits from the defense contracts to keep the company afloat while the company developed and introduced new models.  But that process also required that Packard make a large investment now in the next generation of Packards that would be introduced.  It needed to use the capital it had to develop new automobiles, not divert it to a government contract.

There is no indication that either borrowing or issuing stock were seriously entertained as options for funding the defense contract investment.  Apart from War years, when Packard had incurred debt offset by receivables, Packard management financed development and production internally and avoided long-term debt.  That culture, dating from Macauley’s years of control, appears to have limited Ferry’s perception of his options.  He understood that he needed to consider the long-term.  He appears not to have understood that there is an opportunity cost to financing internally and that it is sometimes better to rent other people’s money rather than risk your own.

Despite its competitive short-comings, the new Packard body design for the 1951 model year turned a loss in the first three quarters of the year into a $5,200,000 profit for the full year.

But it was a middle-priced car, not a luxury market automobile.  The lowest priced model, the 200, accounted for 71,362 of the 100,713 automobiles produced.  The top line Patrician 400 was almost indistinguishable in outward appearance from the 200 – and available only as a sedan.  The car continued a straight eight engine and the Ultramatic transmission.

It was carried over with only minor trim changes as the 1952 and 1953 models.

In remarks delivered to a group of Packard executives shortly after his election as President, Nance made it clear that he understood where Packard stood and what it ought to do.  He criticized outsourcing production, explaining it created a “vicious circle” of increased costs.  He challenged a system in which design of parts did not consider cost – advocating “planning for costs.”  He insisted that if parts were to be outsourced, the manufacturers of those parts needed to deliver the most advanced technology available.

He then turned to the public perception of the brand and what to do about it:

“To the man in his forties or over, Packard stands for quality.  He still thinks of it as a quality car, an impression he got as a young man.  But to the younger person of say thirty-five, Packard doesn’t stand for anything.  Now, you ask the man on the street today, whether he is twenty-five, fifty, or seventy-five, what Buick stands for and you’ll get a pretty universal answer: it’s a good solid automobile in the upper middle price class.  You ask what Cadillac stands for and every kid on the curbstone can tell you, ‘That’s the best, mister.’  Now we’re supposed to be in three of the five price classes, competing in the top bracket, for example, against Cadillac, the big Buick, and the two Chryslers, and we’re getting a miserable 3 ½ percent of that business.  Packard!  Three and a half percent.

“Now we must make a decision, gentlemen.  And whatever that decision is, I’ll be damned if I’m going to be in a horse race and get left at the quarter pole.  Let’s get in or get out.  If we are going to make a quality car, then let’s get in the race, and if we’re going to abandon the field, then by God let’s do it with honor.  Not by default.”

Nance’s remarks were somewhat self-contradictory.  He acknowledged that Cadillac, not Packard, was perceived as “the best,” but professed to consider Packard still a competitor of Cadillac.  He posited that Packard should not abandon the luxury field by default when his predecessors had already done precisely that.  He was now faced with attempting a return to the luxury market with an automobile plainly produced for the mid-priced market.

The problem Nance faced was one that could only be solved with time.  At best, the existing model dating from 1951 could be dressed up and efforts made to distinguish the Patrician version from the plebian one.  But these could not fundamentally alter the product itself and, consequently, could only lay the groundwork for more dramatic differentiation in new models to come.  Ferry had understood this.  It was the reason he had invested in defense contracts that promised to bring Packard a constant cash flow to buy that time.

Nance immediately started the process of moving back into the luxury automobile market.  He attempted to separate the premium models from those in the mid-price range, renaming the latter Clippers.  To add glamour to the new premium line, he added the Caribbean convertible – at over $5,000 it was squarely in the Cadillac price range (though more directly competitive with the Buick Skylark).  In an effort to match Cadillac’s most premium models, Packard introduced the Packard Derham – a custom formal sedan with an interior divider window separating driver and passenger compartments and padded leather top covering that was based on the Patrician – and contracted with Henny for production of long wheelbase sedans and limousines.  (Derham was an established custom body builder dating to the classic car era of the thirties; Henney was the company that manufactured ambulances and hearses on Packard commercial chassis.)  These were baby steps, but essential to reestablishing the name “Packard” as synonymous with “luxury car.”

Yet, to assuage dealer complaints, the distinction Nance was attempting to create was blurred.  The company’s own consumer surveys had determined that the Packard name was important to retaining owners as repeat buyers.  Understandably, dealers did not want the lower-priced line divorced from that name.  Hence, the Clipper became the “Packard Clipper” in advertising.

The concession was probably considered of little consequence at the time.  The 1953 Clipper and Packard shared the same body – they were obviously the same basic car.

In 1953, Cadillac sold 109,651 automobiles.  Packard sold 90,252.  Though that superficially suggests Packard was competitive, the raw numbers don’t tell the full story.  Cadillacs were sold only in the luxury car market.  Most of Packard’s sales were in the mid-price market.  In that market, Packard competed against Buick with 468,755 automobiles sold in 1953 and Oldsmobile with sales of 344,462 in 1953.  It also competed with Chrysler, DeSoto, and Hudson.  Even Lincoln, with sales of 40,473 automobiles in 1953, outsold Packard in the luxury market.

Seen in this light, it is obvious that Packard was uncompetitive in both luxury and mid-priced ranges.  That is why Nance wanted to move the Packard brand fully into the luxury market and separate its identity from that of the Clipper.  The luxury market was the smaller pond, where prices and profits were higher and where, though the competition with Cadillac would be challenging, at least there were fewer brands competing.

Separating the Packard and Clipper model lines was simply the first step in a plan, initiated under Ferry but revised and accelerated by Nance, to introduce fully new models with V-8 engines.  As adopted by Packard’s executive committee in November of 1952, the 1954 Packard line would receive an entirely new body.  The 1954 Clipper would be a facelift.  In 1955, the V-8 would be introduced, the Packard would receive a facelift, and the Clipper would be all new.  As the plan’s implementation progressed, the 1954 target became 1955.  It was all part of a plan Nance envisioned that spread over five years and aimed at fully reestablishing Packard in the luxury automobile field by 1958.

Cadillac, however, had established itself.  If it were not the “Standard of the World” as it claimed, certainly it was the standard against which any luxury automobile would be compared.  It had the best styling, the best technology, and – as Nance’s “kid at the curbstone already knew – was considered “the best.”

And Cadillac would not be standing still while Packard tried to catch up.

Moreover, even Nance’s plan did not truly change the company’s dependence on selling middle-priced models.  Though it envisioned Packard as again a true competitor in the luxury market against Cadillac, the company itself would still be competing against Buick, Oldsmobile, Chrysler, and others in the middle price market.  Packard’s dealers were too dependent on selling in that market for the company to become exclusively a luxury brand manufacturer.

The rescue plan ended almost before it began.

In early 1953, the Defense Department reduced the jet engine contract from $392 million to $218 million, which equated to a $42 million decrease in 1953 contract revenue.

Then Briggs fell short of production targets, by 5,000 vehicles in the first quarter of 1953.

Packard was still making an operating profit, but the supply of unsold cars was building to 55 days, as the sales of the more expensive models were declining.  This compared to an industry average supply of 31 days.  The backlog of unsold models meant cutting production numbers below break-even to avoid a glut.  The company was still reported a profit for the year, but the drop in sales would continue into 1954, as the models introduced in 1952 entered their third year of production.  Plans to begin production of the 1954 models in October were modified to begin production in January of 1954.

Then the government further cut back on the jet engine contract, reducing the rate of production but extending the duration of the production run.  That again reduced annual contract income.

On January 17, 1952, Walter O. Brigg died.  To pay federal estate taxes, the heirs sold the company to Chrysler Corporation, for whom Briggs had also been manufacturing bodies.  That would ultimately force Packard to again produce bodies itself.

It was then, on March 1, 1954, that company treasurer Walter Grant wrote Nance that “the company is rapidly approaching bankruptcy.”  “Substantial expenditures” were needed to complete the new engine plant (for the V-8) and lease the Connor Avenue body assembly plant from Briggs.  (The lease was $758,568 per year for five years.  Cost of setting up production was projected at $3,000,000.)  At the existing rate of expense, working capital would be exhausted by June 30, 1955.  An $11,000,000 pre-tax loss was expected for the year, and current inventories of unsold models at dealers and Packard inventory exceeded 90 days’ supply.

It was these circumstances that led to the decision to hire investment banking firm Lehman Brothers to evaluate combining with Studebaker.  Their report unequivocally recommended doing so.   The financial press, as well, encouraged the companies to join.  In its August 30, 1954, issue, Time magazine summed up the prevailing view:

“For its part, Packard will get the advantages of the slick styling that has made Studebaker a pacesetter in postwar auto trends, will also get the benefits of Studebaker’s strong dealer organization around the U.S. Packard, which has long had trouble getting dealers to take on its big cars in fringe markets, will start off by doubling up with Studebaker to sell Packards in 1,000 towns too small to support a full-time Packard agency. In turn, Studebaker will profit from Packard’s solid engineering and its strong financial position.”

Packard, however, had no such “strong financial position.”  It merely had cash in the bank.

Packard’s acquisition of Studebaker was completed on October 1, 1954.  Studebaker’s board chairman, Paul G. Hoffman – a business luminary who had served as director of the Marshall Plan in Europe for five years before returning to Studebaker – was given the same role at Studebaker-Packard.  Packard executives later maintained that Studebaker falsified information provided to Packard, including its production break-even volume.  That may be so, but it is equally true that Packard’s board of directors and officers, including Nance, made no effort to have the Studebaker books independently audited before proceeding with the acquisition.

The truth is that none of that mattered.  The acquisition of Studebaker was born of desperation.  It was Packard’s only chance.  With it, the combination might still fail.  It did not matter.  Packard was doomed.  If it did not combine with Studebaker, Packard would be bankrupt – probably within the year.

Studebaker would post a $12 million loss for 1954, while Packard’s loss was $2 million.

James Nance did not save the Packard brand.

That was not his job.  It was not what he was hired to do.

He was hired to save the company.

He did that.

Though saving the Packard brand was one way to save the company, that way would turn out to be impossible.

Yet, Nance still did his job.  He did save the company.

Studebaker-Packard would struggle into the 1960’s manufacturing automobiles and incurring losses throughout, except for the few bright years in which it was able to rebody an obsolete model as the Lark and sell it to a public as an economy car.  Yet, those accumulated losses allowed Studebaker to avoid income taxation as it reorganized itself into a mini conglomerate of divisions, including Onan generators, STP, Gravely commercial grade lawn mowers, Clarke floor machines, that were profitable.  Ultimately, it would exit the automobile business entirely, and – now known only as Studebaker Corporation – be acquired by Worthington Corporation.

In a recent column in the British publication Octane, Jay Leno cites Packard as “a precursor to what happened to the American automobile industry.”  He states, “And one of the final nails in the coffin was bringing in James Nance – a man with absolutely no experience of automobiles who came from a background in selling appliances.”

Leno’s wrong about that.

James Nance did not kill Packard.  That was done by others.

He saved the company.

 

Continued from Part One and Part Two

See also previous posts: The Real Reason Packard Died and Pat Foster and the Myths of Packard’s Demise.