Business history is full of stories of “disruptors” and “disruption,” especially with regard to new technologies (as well as new ways of retailing, lodging, dining, transportation, journalism, and other fields). Many books have been written on innovation, how it works, and how it affects companies.
Kodak invented the digital camera but never really figured it out. AT&T told Steve Jobs that consumers would never use a touch phone. IBM’s brilliant leaders at first thought that there was no market for personal computers beyond electronics hobbyists. Now electric cars and autonomous cars are rising. These patterns repeat over and over.
Yet we still puzzle over why powerful, rich old companies do not see the change coming or are not able to adapt to it, while a few companies do adapt. Big department store operator Dayton-Hudson started their Target stores in 1962, the same year as Kmart and Walmart. Other department stores tried to learn discounting and make money but failed. Today Target is far bigger than the company’s former competitors combined.
We wonder how the upstarts can take over whole industries from older companies with deeper pockets, how these Davids slay their Goliaths.
Here we briefly examine one of the most significant but seldom reported technological advances of the twentieth century, the diesel locomotive. (Technically diesel-electric locomotives, because the diesel engine powers electrical generators which then turn the wheels.)
The rise of steam power for industry, shipping, and railroads was one of the critical developments of the industrial revolution. By the 1830s, steam locomotives were replacing horse-drawn trains and continued to move passengers and freight around the world for the next century. Considered miracles of the age, these huge and complex machines were found everywhere.
By the 1920s and 1930s, steam locomotive technology had advanced in almost every regard, creating bigger and more powerful locomotives.
Most of these great machines were built by two companies, Baldwin and American Locomotive, known as ALCo. Smaller makers and the railroads themselves also made some “prime movers.” Baldwin was based in Philadelphia and was the largest manufacturer. ALCo was formed as a “trust,” combining many companies in various cities, but over time consolidated production in Schenectady, New York, near General Electric’s main research facilities and factories. By the early twentieth century, both companies were ranked among the sixty-five largest companies in America. They exported their outstanding locomotives all over the world. Thirty years later, both companies had dropped out of the top one hundred companies in one of the steepest falls from grace among companies of that era.
At the same time, Henry Ford’s Model T and other auto makers had proven the convenience, efficiency, and reliability of the internal combustion engine, a completely different technology. Gasoline autos had beaten out electric cars (with their inadequate batteries) and steam cars. But gasoline engines could not move a train of twenty cars or more.
Electricity was another technology that arose in the late nineteenth century. Lighting, industrial power, and especially streetcars and urban elevated lines made good use of the new technology. Some expected railroads to switch to electricity. Electric trains were used in a handful of places and in long tunnels where smoke from steam engines was a problem, such as at Grand Central Station in New York. But stringing wires (“catenary”) over all the lines was too expensive and would require a huge investment in new electric locomotives.
Yet another early stage technology was the diesel engine, which had less risk of fire than gasoline but required extremely heavy, strong engines due to the much higher pressures inside a diesel engine. In Germany, Rudolf Diesel had proven in the 1890s that his diesel engines were more than twice as efficient (in converting fuel to energy) as steam engines. Diesels were used in marine applications but were too heavy for railroad use. Marine diesels weighed as much as forty-five tons for an engine that delivered 450 horsepower, one of the worst weight-to-power ratios ever recorded. Steam locomotives were heavy, but powerful.
In Columbus, Indiana, Clessie Cummins was the chauffeur and mechanic for the wealthy Irwin family. The Irwins had made their fortune by owning many of the toll bridges in southern Indiana, then expanded into banking and other investments. When Clessie Cummins developed new ideas for diesel engines in 1919, the Irwins created the Cummins Engine Company. Their engines were used for small, slow locomotives, such as those used in switching yards, and later used in big highway trucks. Today Cummins engines are sold in almost 200 countries. In 2019, The company’s 50,000+ employees generated over $2 billion in profits on sales in excess of $23 billion. The Irwin family used their resultant wealth to turn Columbus, Indiana, into one of America’s architectural gems. As of 2020, Cummins is one of the most successful of all the companies mentioned in this article.
The big steam locomotive builders dabbled in these new technologies and made test engines. For some applications, they made small gasoline-powered locomotives. They made electric locomotives, with the electrical parts bought from Westinghouse and General Electric. Those two industrial powerhouses continued to hope for the wide adoption of electric locomotives, some of which they manufactured on their own, to no avail. But everything they studied told Baldwin and ALCo that the steam locomotive was the only good solution for mainline railroad work and would continue to be the primary type of locomotive for decades to come. As late as the 1930s, their leaders made speeches about the future of steam and what future steam locomotives might look like in 1980.
The Coming of Change
Around 1917, the total mileage of all American railroads reached its peak. The railroads had built branch lines reaching out from their main lines in order to reach grain growing areas, mines, small towns, and other remote locations. Over time, those lines became less profitable, with less freight and fewer passengers. Yet politicians and regulators usually required the railroads to continue serving those small communities. In order to lower costs, they started using railcars. A railcar is a single-unit car which includes the engine along with passenger and baggage compartments. These proved very popular, saving the expense of using big steam locomotives. And they could be powered by gasoline engines and, soon enough, by diesel engines.
These non-steam developments were not seen as being important by most railroads and certainly not by Baldwin and ALCo. They were sideshows to the big picture. Only steam could be used on the big trains traveling the mainline, long-distance routes at high (40+ mph) speed.
Yet others were noticing the use of gasoline, diesel, and electricity in railroading, nibbling around the edges of a potential business opportunity. The most interesting of these was the Electro-Motive Corporation of La Grange, Illinois. The company was founded in the autumn of 1922 by one Harold Hamilton. After working in the railroad industry, Hamilton had joined the White Automobile Company. White was a pioneer auto maker and went on to create some of the earliest buses and trucks, becoming one of the biggest truck makers. Hamilton was in a good position to think about railroads and about internal combustion engines.
(An aside: also in the 1920s, one of White’s top salesmen, a young man who would likely soon run White, was the son of a domineering Atlanta banker. The son probably joined White to get away from his father. But the father purchased a smaller company, in which the son also invested. The father asked the son to come back to Atlanta to run the little company, which was facing numerous challenges. The son obliged, thinking he might stay a year and at least make good on his own small investment, then return to run White. But the son stayed with the little company and ran it with an iron hand for at least the next fifty years. The son was Robert Woodruff, and the company was Coca-Cola. In the process, Woodruff built one of the most profitable companies in the history of business and perhaps the best-known trademark in the world. Adding yet another chauffeur to our story, Woodruff’s chauffeur’s son Herman Cain ran for President in 2012.)
Back to Harold Hamilton at Electro-Motive (EMC). Under his leadership, the company combined gasoline engines with electrical equipment from General Electric to build railcars which were more reliable, with better parts and service support, than the competition. He then migrated to diesel engines, which were becoming lighter and more powerful. EMC bought its diesel engines from the Winton company of Cleveland, which had been founded by automotive pioneer Alexander Winton (his cars were among the best sellers before the rise of Ford). The EMC railcars were a big hit, and by the mid-1920s EMC was profitable and growing.
At this point, the greatest American industrial company of its time, General Motors, entered our story. A troubled GM had in the 1920s been re-organized by Alfred P. Sloan, who we at the American Business History Center consider the greatest business manager of all time. (Among GM’s key executives when Sloan arrived was former ALCo executive and steam locomotive mechanic Walter Chrysler.)
One of Sloan’s many talented associates was the visionary inventor Charles “Boss” Kettering. Kettering had been the engineer at the National Cash Register Company of Dayton, Ohio. At “the cash,” Kettering had developed a small electric motor to eliminate the need to hand-crank cash registers after every sale. When a friend of Cadillac chief Henry Leland died after having his arm broken from a backfiring auto crank, Leland wanted a better way to start cars. This led him to Kettering and his knowledge of small electric motors. In 1909, Kettering created the Dayton Engineering Laboratories Company (DELCO) to pursue the opportunity. After a great deal of experimentation, Kettering’s electric starter was introduced in the 1910 Cadillacs and soon swept the auto industry. By 1920, DELCO had been purchased by General Motors. Kettering became the driving genius behind innovation, research, and development at GM, and a very wealthy man.
The ever-curious Kettering found the potential of diesel engines interesting. As a result, in 1930 General Motors bought the Winton Engine company. The same year, they bought Winton’s biggest customer, EMC. With EMC came Howard Hamilton. These men began to think of diesel-electric locomotives as potentially useful even on mainline railroads. Combining the engineering and marketing talents of GM and EMC (soon renamed EMD, the Electro-Motive Division of GM), they kept experimenting.
Kettering and Hamilton tried to sell to the railroads, but the problems were many. Diesels were still heavy in order to contain the high compression engines. GM came up with new alloys that were as strong but weighed far less. The railroads, however, showed little interest. While the old steam locomotive makers dabbled, with ALCo (in partnership with General Electric) more successful than Baldwin, their top managements were not believers. The railroads did not know how to operate or service diesels and they did not have the right equipment and workshops, all of which were built around steamers. And diesel-electrics cost two to three times the price of steam locomotives.
Particularly interesting is that Alfred Sloan, wizard though he was, resisted all efforts of his team to go into the diesel (-electric) locomotive market. He saw all the issues the railroads saw. Essentially behind his back, and largely in secret, his very close friend Kettering worked with Hamilton to move the project ahead. (Sloan and Kettering later created the Memorial Sloan-Kettering Cancer Center in New York.)
As this story evolved, a few railroad men expressed interest in diesels. Though yet unproven in real mainline railroad use, diesels continued to be improved by EMD. Steam locomotives provided great power at low cost. But due to their complexity and multitude of moving parts, they were “down,” in the shop, at least one-third of the time, whereas diesels could run 95% of the time. Diesels were far more efficient converters of fuel into power, saving fuel costs. Steamers had to stop for water every 100 miles, and for fuel (coal or oil) every 200 miles. The railroads spent a great deal of money on water, fuel, and hauling those around their systems. These stops made travel slower. The weight of fuel and water made the trains heavier. Diesels did not produce the smoke, fumes, and cinders that were the bane of passengers and railroad workers. Steam locomotives were especially wasteful at low speeds, used in railyards for switching cars between trains. Diesels were far more efficient at low speeds. And they weighed far less than steamers for the same horsepower. Few outside Kettering and Hamilton fully understood these advantages of diesels.
With great courage, Kettering and Hamilton displayed their latest diesel locomotives at the Chicago World’s Fair of 1933-34. This caught the attention of the head of the Chicago, Burlington, and Quincy Railroad, “the Burlington,” Ralph Budd. Budd, in a sense a protégé of the great railroad builder James Hill, had been working on lightweight streamlined trains for his long-distance runs. When he saw the potential of lightweight, fast locomotives, he became determined to try diesel-electrics. Despite Sloan’s resistance, Kettering, Hamilton, and Budd convinced him to let GM build the engines. In a test run in the spring of 1934, an EMD diesel accelerated from a dead stop to 108 miles per hour in six miles, so fast that the taillights fell off, a feat unachievable by steam locomotives. A month later, the Burlington Zephyr lightweight streamlined train was put into operation between Chicago and Denver. It made the first run, over one thousand miles, non-stop, in thirteen hours and five minutes, shaving thirteen hours off the previous record. (You can see the beautiful Zephyr at Chicago’s Museum of Science and Industry.)
While one might think that would have changed the ballgame, driving the railroads to diesels, that did not happen right away. The railroads were not only the nation’s largest users of coal, they were also the biggest hauler of coal, used to power the nation’s cities and homes. Many railroads, like the highly profitable Pennsylvania, the Chesapeake and Ohio, and the Norfolk and Western, ran through coal country and depended on the coal business. And railroad executives, especially those who chose the locomotives, had close, long-term relationships with Baldwin and ALCo. Change would not come easily. So what did Hamilton and EMD do?
Intimately understanding these challenges, EMD first developed intensive, free training programs in the operation and maintenance of diesels. They guaranteed their reliability, offering parts delivery within twenty-four hours, even if that required a chartered plane. GM financed the more expensive diesels for the railroads.
Steam locomotives were always custom-built to the specifications of each railroad. No two batches were the same. But GM understood mass production and interchangeable parts. They rebuffed efforts by railroad men to demand custom-built diesels. You could get your EMD diesel in different color schemes with a few modifications, but they were made on a production line like cars.
The biggest challenge was the railroad men themselves. Few railroad chiefs of “motive power” could see beyond the steam. Neither could their suppliers. Cummins’ executives wrote letters to the rail locomotive buyers describing their diesel engines; they all went unanswered. So Hamilton went over their heads, appealing to the chief executives and financial men at the railroads.
Taken together, these and other initiatives on the part of General Motors created an integrated “system” of selling, marketing, and service that went far beyond the core technical advantages of diesels.
The Great Depression slowed progress on all fronts. Demand even for steam engines declined by 90%. While GM remained healthy during the 1930s, Baldwin went bankrupt and ALCo struggled. Even if they had clearly seen the future of diesels, they had little money to invest in heavy research and development. The government even gave Baldwin and ALCo a break in World War II, when the Navy bought every diesel engine that GM could build, taking them out of the railroad market for a few years, during which time demand for steamers rebounded.
When the dust settled after World War II, the advantages of diesels were clear to the railroads, if not to Baldwin and ALCo. As late as 1948, those companies’ executives still believed in steam. Steamers were cheaper to buy but far costlier to operate and maintain. But by the mid-1950s, all production of new steam locomotives stopped. By about 1960, any remaining steam locomotives were found only on small branches and other less important runs. For about the next twenty years, General Motors’ EMD division sold over 80% of the locomotives sold in America. The Santa Fe Railroad was one of GM’s best customers. Prior to dieselization, the railroad had been spending thousands of dollars just to haul water to its desert stops for the thirsty old steam engines.
GM’s dominance in locomotives, road building equipment, buses, and cars was so great that the federal government spent years trying to break them up, accusing them of antitrust violations. But none of those claims were proven valid, and eventually the government dropped most of the cases.
(We would note that these government actions made GM executives less ambitious. Why grow sales if you would be punished for your success? GM lawyers even tried to stop the 1963 publication of Alfred Sloan’s great book My Years with General Motors, fearing it would help the government’s case, but were unable to stop its publication. Bill Gates has called this book the most important business book of all time.)
The one remaining piece of this story is the rise of General Electric in the locomotive business. Using their electrical technology, they broke up their partnership with ALCo and began making their own locomotives. While Baldwin and ALCo dropped out of the scene, GE engineers made technological improvements and by the 1980s were an effective competitor to GM, eventually taking the lead in diesel locomotive production and dominating the industry.
In recent years, both General Motors and General Electric have fallen from their pinnacles. With so many other issues in their core businesses, both decided to get out of the locomotive industry. Ironically, GE’s factories in Erie, Pennsylvania, now largely moved to Fort Worth, Texas, are now owned by Wabtec. Wabtec is the descendant of the Westinghouse Air Brake Company, the highly successful and durable business created by GE’s arch-rival George Westinghouse, one of the greatest industrialists in American history. EMD has moved from La Grange, Illinois to Muncie, Indiana, under its new owner, Caterpillar Corporation (another modern success, parallel to Cummins). In 2019, Wabtec-GE built 278 new locomotives; Caterpillar-EMD built 102.
We would also note that the greatest and most powerful steam locomotives were also the last ones built. This is a common pattern in changing technologies, which “peak” just before their death. Study the final giant propeller airliners, just before the jet age, and the last stages of steamships.
For those still enamored with those amazing old machines, like us at the American Business History Center, the Union Pacific and other railroads have restored the biggest and best. In 2019, the largest steam locomotive ever built, Union Pacific’s “Big Boy,” took a tour around America. You can watch it in action here and (in slow motion) here, as the last of the great iron horses thunders down the rails.
The railroad remains one of the most powerful and lasting technologies in human history. Today freight trains over a mile long, manned by one or two people, continue to take advantage of the almost friction-free technology of steel wheels rolling on steel rails. (Mainline “road” locomotives are primarily used to get trains started and up to speed and to get them over hills.)
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American Business History Center
Sources: Our American Business History Center library contains thousands of books on railroad history. If you would like book recommendations on any aspect of the industry’s history, do not hesitate to email us or respond to this email.