INTERLUDE Why This Has Happened Before: The Locomotive Industry's Hidden Lesson

INTERLUDE

Why This Has Happened Before:
The Locomotive Industry's Hidden Lesson

Part A: The World of Excellence (1825-1940)

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To understand why college athletics is being financialized, you first need to understand how an industry can be excellent, dominant, and doomed—all at the same time.

In 1925, three companies controlled over 90% of the American locomotive market: Baldwin Locomotive Works, the American Locomotive Company (Alco), and Lima Locomotive Works. Together, they were known as the "Big Three." They had been building locomotives for decades—Baldwin since 1825, a full century. They employed tens of thousands of skilled workers. They held relationships with every major railroad. They possessed unmatched engineering expertise.

They were genuinely, demonstrably excellent at what they did.

The Culture of Custom Excellence

The Big Three operated on a model that had worked for over a century: craft production at industrial scale. When a railroad needed locomotives, it didn't just order "a locomotive." It ordered a specific solution to specific problems.

The Pennsylvania Railroad's mountainous terrain demanded different locomotives than the Santa Fe's southwestern routes. The New York Central's flat water-level route required different characteristics than the Southern Pacific's grades over the Sierra Nevada. Climate, coal quality, water chemistry, track weight, bridge clearances—everything influenced design.

So railroad mechanical departments would work with locomotive builders to specify exactly what they needed. The relationship was intimate, technical, collaborative. It was engineer-to-engineer consultation about complex technical problems.

Baldwin's Scale and Approach:

At its peak in 1925, Baldwin produced 2,666 locomotives in a single year from its Eddystone facility—a 616-acre complex designed to build custom locomotives at industrial volumes. Each locomotive was, in a real sense, custom-built to the customer's exact specifications.

This wasn't inefficient or backward. It was exactly what railroads wanted and needed. And they paid premium prices for it.

The Big Three's expertise wasn't just manufacturing—it was consultative engineering. Their engineers understood railroad operations deeply. They could look at a railroad's profile, traffic patterns, and existing fleet, then design exactly the right locomotive. This was their competitive advantage and their profitability.

The Identity: "We Are Locomotive Builders"

These were engineering companies in the deepest sense. Power flowed through engineering departments. Career advancement meant rising through technical ranks. The chief engineer was often the second most important person in the company—sometimes more important than the CEO in practical terms.

Success was measured in technical terms:

• Did the locomotive meet specifications?
• Did it perform as promised?
• Could it pull the required tonnage at the required speed?

These were the metrics that mattered, the achievements that earned recognition, the capabilities that determined professional standing.

The sales force consisted of engineers. Customer relationships were engineer-to-engineer. New hires were engineers. Training focused on technical skills. Promotion rewarded engineering achievement. The entire organizational culture was built around a single identity: we are builders of magnificent machines.

"The Big Three's culture and capabilities were perfectly adapted to their business environment. Everything about their organizational structure made sense. They weren't poorly run companies. They were well-adapted organisms thriving in their native environment."

Remember this. It's crucial. The Big Three were excellent. Their culture wasn't dysfunctional—it was optimized for success in the world as they understood it.

The problem was that their world was about to disappear.

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Part B: The Revolution Nobody Saw (1930-1950)

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In 1930, General Motors acquired two small companies most people had never heard of: the Winton Engine Company and the Electro-Motive Corporation. Winton built diesel engines. Electro-Motive built small rail vehicles—mainly switchers for yard work.

This looked like a minor diversification by the world's largest automaker. In reality, GM had just entered a business they would come to dominate so thoroughly that by 1970, their Electro-Motive Division controlled over 70% of the North American locomotive market.

What EMD Actually Sold

The conventional story is that EMD succeeded through mass production expertise—applying automotive assembly-line techniques to build better, cheaper diesel locomotives. This is true, but it misses the fundamental innovation.

EMD didn't just bring automotive manufacturing to locomotives. They brought automotive financing to locomotives.

General Motors had revolutionized car buying in 1919 by creating GMAC—the General Motors Acceptance Corporation. Before GMAC, you bought a car with cash. After GMAC, you could finance it. This transformed automobiles from luxury purchases into mass-market products.

Now, GM applied the same model to locomotives.

From GMAC's Corporate History:

"We helped financially troubled railroads stay in business by renting and financing locomotives. In the 1950s, we diversified..."

This is the smoking gun. GMAC wasn't just offering payment plans—they were turning locomotives into a financial product. Leasing. Financing. Converting capital expenses into operating expenses.

Here's what happened when a railroad wanted to buy locomotives in the 1940s:

Buying from Baldwin/Alco/Lima	Buying from EMD
1. Custom Specification Work with builder's engineers to develop specifications for your unique requirements.	1. Model Selection Choose from standardized catalog: FT for freight, E-units for passenger. Minimal customization.
2. Custom Design Builder designs to your specs. Each order potentially unique. Long lead times.	2. Quick Configuration Select how many units. Everything else standardized. Quick delivery.
3. Arrange Financing Separately You work with banks to arrange Equipment Trust Certificates. Builder just sells locomotive.	3. Integrated Financing GMAC offers leasing and financing packages. One conversation, one transaction. Convert capital expense to operating expense.
4. Delivery Locomotive delivered. You're responsible for setup, training, integration.	4. Turnkey Service EMD provides operator training, maintenance training, technical support. Smooth transition.
5. You're On Your Own Parts available on request. You handle all maintenance. Builder's involvement minimal after sale.	5. Service Network EMD service centers nationwide. 24/7 parts availability. Field maintenance support. Performance guarantees. Ongoing relationship.

See the difference? These weren't the same product at all.

The System That Changed Everything

EMD's model had four integrated components:

1. Financing (The Hidden Revolution)
Through GMAC, EMD could offer leasing arrangements and integrated financing. For cash-strapped railroads—and many were financially stressed in the 1940s and 1950s—this converted massive capital expenses into manageable operating expenses. The railroad's balance sheet looked better. Cash flow was smoother. Risk transferred to the financing company.

GMAC's history explicitly states they helped keep struggling railroads in business through locomotive financing. For some railroads, this wasn't just convenient—it was the only way they could acquire new motive power at all.

How The Financing Actually Worked:

The traditional method: A railroad wanting to buy $1 million worth of locomotives would establish an Equipment Trust Certificate (ETC). They'd create a trust, sell certificates to investors, use the proceeds to buy the locomotives from the builder (who got paid in cash), then make serial payments to the trust over 10-15 years while the trustee held title to the equipment.

The problem: The railroad had to arrange all of this themselves—negotiate with banks, structure the trust, market the certificates to investors. It was complex, time-consuming, and expensive. And if you were financially troubled, banks might not cooperate at all.

What GMAC changed: "We'll handle everything." One conversation with EMD, and GMAC would structure the financing as a package deal. The railroad got the locomotives immediately, made manageable payments from operating revenue (not capital budgets), and GMAC assumed the complexity and risk. For struggling railroads, GMAC would provide financing when traditional banks wouldn't touch them.

Baldwin couldn't offer this. They sold locomotives for cash. Where the cash came from was the railroad's problem. When a railroad couldn't arrange traditional financing, Baldwin simply couldn't make the sale. EMD/GMAC could—and did.

2. Standardization (The Visible Innovation)
By the late 1940s, EMD had settled on a simple product line. Four or five basic models with minimal variation. When every locomotive is essentially the same, remarkable things become possible:

• True assembly-line production (lower costs)
• Standardized maintenance procedures (operational efficiency)
• Interchangeable parts (simplified logistics)
• One training program applies to entire fleet
• Accumulated knowledge that applies to every unit

The GP7, introduced in 1949, exemplified this. EMD built 2,610 units between 1949 and 1953—all essentially identical. Compare this to Baldwin's custom approach where each order had unique specifications.

3. Service Networks (The Relationship Lock-In)
EMD built service centers strategically located across the country. They maintained comprehensive parts inventories. They provided field maintenance support—EMD technicians who could come to diagnose and repair problems.

This wasn't altruism. Service and parts became ongoing revenue streams. More importantly, they locked customers in. Once a railroad invested in training on EMD equipment, built procedures around EMD specs, and stocked EMD parts, switching to a different manufacturer became expensive and disruptive.

4. Selling to Different Customers
Perhaps most importantly, EMD sold to railroad finance departments and executive suites, not mechanical departments. Their pitch was about total cost of ownership, return on investment, balance sheet impact, and cash flow.

The mechanical departments evaluated technical specs. The finance departments controlled capital budgets. EMD understood who actually made the decision.

"EMD didn't sell locomotives. They sold access to locomotives, with financing, service, and performance guarantees—all optimized for the railroad's financial situation."

The Integration Was Everything

What made EMD's model devastating wasn't any single element. It was how everything worked together:

• Standardization enabled efficient manufacturing AND the service network AND the financing
• Financing made diesels accessible AND worked because standardized equipment had predictable values
• Service network reduced risk AND was viable because standardized equipment allowed expertise to scale

Each element reinforced the others. The system created competitive advantages much greater than the sum of parts.

And critically, EMD was adapting proven approaches from automotive. GMAC already knew how to finance equipment. GM already understood service networks. They weren't inventing these capabilities—they were importing them into an industry that had never seen anything like it.

The Market Reality by 1950:

Total Diesels Delivered: 2,451 units

• EMD: 70% market share
• Alco: 18% market share
• Baldwin: 8% market share

EMD's dominance grew despite the Big Three building technically competitive locomotives. The battle wasn't about engineering anymore. It was about business model.

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Part C: The Blindness (1940-1969)

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Here's the question that haunts this story: How could they not see it?

The people running Baldwin, Alco, and Lima weren't stupid. They had access to the same information anyone else had. They could see EMD's market share growing. They watched the diesel transition unfold over decades. They studied EMD's locomotives.

And yet they failed to recognize a threat that, to us looking backward, seems obvious.

The Identity Trap

Organizations, like people, have identities. "We are locomotive builders." "We are engineers." "We create custom solutions."

For the Big Three, this identity had been forged over decades or centuries of success. It wasn't just what they did—it was who they were.

Now consider what recognizing EMD's actual threat would have required:

What They Would Have Had To Accept:

• Custom engineering—our core capability—is now a liability
• Our relationships with mechanical departments—our key partnerships—are with the wrong people
• Technical superiority—what we've always competed on—doesn't matter anymore
• We need to become a financial services company that happens to make locomotives
• We need capabilities (financing, fleet management, service networks) we've never had
• We need to hire different people and promote them to leadership
• Everything that made us successful is now making us fail

This isn't just difficult to accept. For an organization with strong identity, it's psychologically impossible. Accepting it means admitting you need to stop being yourself.

So they didn't. They found other explanations. They focused on making better locomotives. They believed quality would ultimately prevail. They waited for railroads to recognize the value of custom solutions.

The Organizational Structure Problem

In the Big Three, power resided in engineering departments. Engineers held senior positions. Technical expertise was the path to advancement. This made perfect sense for a business competing on engineering excellence.

But it created a massive blind spot.

Engineers were trained to see technical problems and technical solutions. They evaluated competitors on technical dimensions. They measured success in technical terms. To an engineer, EMD's success must be about superior engineering.

So they studied EMD's technical innovations. They analyzed diesel-electric systems. They tried to match EMD's specifications. This was their job, their training, their expertise.

What they couldn't see—what their training didn't equip them to see—was that the battle was being fought on financial and organizational dimensions.

And the people who might have seen this—finance people, sales people, operations people—didn't have organizational power to be heard. Their perspectives weren't valued the way technical perspectives were.

"Engineers measured horsepower and efficiency. EMD measured customer lifetime value and market penetration. They were playing different games with different scorecards."

The Eddystone Trap

Baldwin's story illustrates how even assets can become traps.

Baldwin's Eddystone plant was enormous—616 acres, designed to build 3,000+ locomotives per year. It represented massive capital investment. And it was designed for craft production of custom steam locomotives.

The plant's layout, tooling, and workflow were optimized for variety and customization. Everything designed around the assumption that each locomotive would be different.

This was exactly wrong for mass production of standardized diesels. Converting Eddystone would have required massive additional investment in a facility already underutilized and carrying enormous fixed costs.

Admitting Eddystone was obsolete meant admitting the company's largest investment had been a mistake. It meant writing off enormous sums. So they didn't. They kept trying to make it work.

This is the sunk cost fallacy at institutional scale. Past success creates commitments that prevent future adaptation.

The Delusion of Technical Superiority

Perhaps the most dangerous blindness was the Big Three's continued belief that technical superiority would ultimately prevail.

For over a century, this had been true. Companies that built the best locomotives won. Technical excellence translated directly to market success.

So when Alco's engineers designed the Century 636 to deliver 3,600 horsepower—more than any EMD unit—they believed they were competing. When their locomotives performed well in service, they expected market share to follow.

But the market no longer worked that way. Technical performance was now one factor among many, and not the decisive one.

A railroad evaluating locomotives wasn't just asking "Which is more powerful?" They were asking:

• Which manufacturer offers better financing?
• Whose service network is more comprehensive?
• Which has standardized parts with our existing fleet?
• Who offers better training and support?
• Which manufacturer will still be in business in ten years?
• Which gives us better total cost of ownership?

On pure technical merit, Alco's Century series often matched or beat EMD. But on the full set of criteria, EMD was clearly superior.

The Big Three kept trying to win on technical dimensions. EMD had moved the competition to strategic and financial dimensions.

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Part D: The Collapse (1951-1969)

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By 1970, the transformation was complete.

1951: Lima Locomotive Works merges with Hamilton (becomes Lima-Hamilton). Effective end of Lima as independent locomotive manufacturer.

1950: Lima-Hamilton merges with Baldwin (becomes Baldwin-Lima-Hamilton). Consolidation of failure—two struggling companies combining in hope of survival.

1956: Baldwin produces its last locomotive—a small diesel switcher. 131 years of locomotive manufacturing ends. Pennsylvania Railroad—Baldwin's oldest, most loyal customer—places order with GM instead.

1969: Alco exits the locomotive business. The last of the Big Three is gone. They were still building technically superior locomotives (Century 636: 3,600 HP) when they closed.

1970: EMD controls over 70% of North American locomotive market. A company that barely existed in the industry 40 years earlier now dominates completely.

What They Had (And It Didn't Matter)

Together, the Big Three possessed:

• Over 250 years of combined locomotive-building experience
• Tens of thousands of skilled workers
• Relationships with every major railroad
• Unmatched locomotive engineering expertise
• Patents on countless innovations
• Technical superiority in many product lines

And none of it mattered, because the game had changed and they didn't know it.

The Final Accounting:

Company	Years in Business	Cause of Death
Baldwin	131 years	Could not escape craft production identity. Eddystone trap. Complex custom diesels nobody wanted.
Lima	82 years	Too small, too late. Lacked resources for new business model.
Alco	68 years	Technical excellence without business model transformation. Copied tactics, missed strategy.

The Pattern Revealed

EMD didn't beat them by building better locomotives. EMD beat them by understanding that locomotives weren't the product anymore.

The product was transportation solutions with financing, service, and fleet management. The product was predictable operating costs and balance sheet optimization. The product was an ongoing relationship, not a one-time sale.

The Big Three were craftsmen in an age that no longer valued craftsmanship. They were engineers in a battle fought on financial terms. They were manufacturers of discrete products in an era of integrated systems.

They died as they had lived: building excellent locomotives that nobody wanted to buy.

"Excellence doesn't protect you from disruption. Sometimes excellence is what makes you vulnerable—because it blinds you to the game change."

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Now, With That Pattern In Mind...

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The locomotive industry's collapse wasn't unique. It was an instance of a pattern—a pattern that repeats across industries and eras.

Most disruption is visible: the superior product defeats the inferior one. Smartphones replace flip phones. Digital cameras replace film. The new technology is obviously better.

But there's another kind of disruption—more dangerous because it's invisible to those experiencing it. This is disruption where:

• Technology may be comparable or even inferior
• Incumbent's products remain excellent
• Market share declines despite technical competence
• The battle is about business model, not product quality
• Competitors sell to different decision-makers
• Identity prevents adaptation

This is what's happening to college athletics right now.

And just like the Big Three, the people running college athletics don't realize the game has changed.

Let's return to Kentucky and Utah. But now you'll see them differently.

Now you'll see what they actually are: the first EMD entrants in a market dominated by Big Three incumbents who don't yet understand they're about to be disrupted out of existence.

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