How Henry Ford would deal with the current supply chain turmoil

DEARBORN, Michigan — Henry Ford, the godfather of mass production, was tormented by the prospect of running out of parts and raw materials. Suspicious of financiers—a spirit that animated his fervent anti-Semitism—he was especially distrustful of his purveyors. He was focused on stocking enough materials to ensure his assembly lines could continue to operate without debilitating shortages.

He bought his own coal mines in Kentucky and Virginia, along with railroads to bring their output to his factories. He amassed a fleet of ships that plied the Great Lakes, transporting a steady supply of iron ore and lumber mined from Michigan’s upper peninsula. And he built a huge plant outside Detroit on the Rouge River, a complex of factories designed to handle every stage of turning raw materials into a finished car.

A century later, the Rouge plant is still in operation, but it is suffering from a shortage of a crucial component that would have horrified Ford. The company he founded can’t buy enough semiconductors, the computer chips that are the brains of the modern car.

Ford relies heavily on a single chip supplier located more than 7,000 miles away, in Taiwan. With chip shortages throughout the global economy, Ford and other automakers have been forced to intermittently halt production.

On a recent afternoon at the Rouge, hundreds of workers wielded tools to assemble parts for Ford’s most popular vehicle, the F-150 pickup. In recent months, however, Ford has been forced to store thousands of finished vehicles in lots scattered throughout Dearborn, Henry Ford’s hometown, awaiting the arrival of chips that can bring them to life.

“It’s exactly the kind of thing that Henry Ford feared,” said Matt Anderson, curator of transportation at Henry Ford, a museum in Dearborn that explores his legacy and the history of American innovation. “He became increasingly obsessed with controlling every aspect of his production process.”

Popularly celebrated in his own day, Henry Ford’s legacy provokes condemnation today. He espoused white supremacist sentiments, along with strident anti-Semitism. He unleashed brutal violence against the labor movement that eventually organized his plants. He seized monopoly control of the affordable car market.

Mr. Ford deeply understood that supply chains were fragile and required constant scrutiny and backup planning. Despite his hostility toward unions, he understood the value of generous wages in motivating workers. And he warned that investors’ demands for short-term profits could threaten long-term resilience.

“He recognized that the supply chain, even then, was fraught with risk,” said Mike Skinner, founder of the Henry Ford Heritage Association. If it were around today, “Ford would have been making its own chips,” Skinner added. “No doubt about that”.

The people who run Ford say it’s an oversimplification. The F-150 truck produced in Rouge uses more than 800 types of chips, which requires a reliance on specialists. And potato chips have a limited shelf life, which makes them difficult to store.

“It’s a lot of complexity,” Ford’s industrial platform director Hau Thai-Tang said during a recent interview. For Ford, making its own chips, or even limiting its suppliers to North America, would be “a herculean task that would require a lot of assets and capital, and it just wouldn’t be realistic,” he added.

Yet Ford’s chip sourcing strategy, Thai-Tang acknowledged, has been guided by the interests of a party the company’s founder dismissed as a potential threat to the vitality of his business: the shareholder.

Ford’s adoption of so-called Just-in-Time inventory, in which warehouses are kept tight to minimize costs, “has been driven by capital markets and is focused on return on invested capital,” Thai-Tang said. .

Henry Ford often avoided demands for dividends (payments that make investors rich) and preferred to apply his profits to expansion.

“We are against the type of banker who regards a business as a melon to be cut,” Ford declared in his memoirs.

That tension exploded into public view in 1916 when Ford clashed with some of its earliest investors, the Dodge brothers, who were early innovators in the emerging auto industry.

Ford’s profits the previous year had reached $16 million, and the company had more than $50 million in cash sitting in the bank. Mr. Ford insisted that the money be used to build his new factory, La Rouge.

The Dodge brothers insisted on the dividends and filed a lawsuit in pursuit of it. They petitioned a court for an injunction that would freeze Ford’s expansion plans in the Rouge.

The court obeyed, infuriating Ford: the Dodge brothers were jeopardizing not only their plans for the Rouge, but also the central organizing principle of their company.

“I don’t think we should make such a terrible profit on our cars,” he said on the witness stand during the trial that followed. “My policy has been to force the price of the car down as fast as production allows, and provide the benefits to users and workers.”

The conflict was fueled in part by Mr. Ford’s decision nearly two years earlier to nearly double his workers’ wages to $5 a day, something never seen before. Other business leaders accused him of jeopardizing his business by raising wages across US industry.

Mr. Ford insisted that he was simply being pragmatic. The advent of the assembly line had made the work of making automobiles routine. Many workers bristled at what seemed like a demotion to robotic, repetitive tasks, and quit en masse. Ford proposed higher wages, intended in part to preempt a union drive, as the means of attracting enough workers to produce increasing volumes of cars.

“A low-wage business is always insecure,” he declared.

Given the stupendous success of the Model T, Ford dominated the budget car market. Paying higher wages was therefore a means of protecting their dominance, said Mark J. Roe, a professor at Harvard Law School.

More broadly, Ford described generous wages as the key to fostering the consumer economy he championed, with affordable cars as a means of expanding the contours of cities, opening up new forms of housing, office and leisure.

“Most of the people in the country live on wages,” Ford would write in his memoirs. “The scale of their life, the rate of their wages, determines the prosperity of the country.”

Under withering cross-examination during the Dodge brothers’ lawsuit, Mr. Ford testified that the very purpose of his business was to create jobs and make affordable cars, with the money merely a byproduct, according to an account in Richard Snow’s biography “I Invented the Modern Age.”

“The business is a service, not a bonanza,” Ford said.

The Michigan Supreme Court ultimately rejected that view. “A business corporation is organized and carried on primarily for the benefit of the shareholders,” the court ruled.

That decision now stands as a milestone in the US stockholder’s march to primacy.

The court ruled in favor of the Dodge brothers, ordering Ford to distribute approximately $25 million in dividends, although, through appeal, Ford secured the right to go ahead with construction of the Rouge.

Subsequently, Ford expelled the Dodge brothers, bought their shares and took control of their company.

But today more than half of Ford Motor shares are controlled by Wall Street institutions like Vanguard, the mutual fund company, and BlackRock, the world’s largest asset management company, which now oversees more than $10 trillion.

In the three years before the pandemic, Ford distributed dividends to shareholders that reached $7.9 billion, or 70% of its profits, according to data tabulated by William Lazonick, an economist at the University of Massachusetts Lowell.

Compared to other publicly traded companies, Ford has shown a greater inclination to limit dividends and preserve capital in the face of challenges, Lazonick said.

But chip companies have largely catered to their investors by limiting their capacity, a strategy to keep prices high. The shortage of truckers and warehouse workers is frequently the result of demoting those jobs, with pay cuts as a way to reward shareholders.

Mr. Ford would not have accepted shortages resulting from undue reliance on a supplier that could not meet his company’s demands.

“I would probably fire whoever did that,” said Willy C. Shih, an international trade expert at Harvard Business School. “He knew that he had to gain control of the company before he could deliver the car to the masses.”

The parking lots that now house F-150 trucks waiting for tokens sit in the shadow of Ford’s corporate headquarters in Dearborn. One sits across the street from Henry Ford Elementary School.

Late last year, the company announced a partnership aimed at making chips in the United States.

“We are certainly reflecting on the last two years,” said Mr. Thai-Tang, the Ford executive.

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