Henry Ford didn’t invent the gas-powered car, nor did he invent the assembly line, but he changed the way we live our lives by introducing the inexpensive, mass-market car — the Model T.
Introduced in 1909, the car carried an average list price of US$3,300* (US$33,800 in 2022 dollars) with an initial annual production of 18,000 cars. By 1922, the price had plunged to US$950* (US$9,800 in 2022 dollars) and annual production had skyrocketed to 1.3 million cars.
(*standardised to 1958 dollars)
Mr. Ford achieved this thanks to a rather unconventional view on prices. He believed Ford should lower the prices offered to consumers first, and then find ways to lower costs and extract a profit. He thought only short-sighted businessmen would consider an 80 dollar car price reduction as a business income reduction of 40 million dollars (based on an annual production of 500,000 cars). He understood that many more people could afford a car priced at US$360 compared to one priced at US$440. Perhaps there would be less profit per car sold, but the increase in the total number of cars sold would more than make up for it.
Ford applied these principles to their supply chain. When they realised that assembling cars outside of Detroit would be cheaper than assembling within it, they started shipping parts to external assembly stations all across the United States and the world. Transportation costs were slashed, as it was much cheaper to transport parts than a fully assembled car. (This practice, it should be noted, continues to this day — but Ford was first).
Ford reduced and repurposed waste on the production line too. A classic example was the six-inch metal circle that came from their stamping operations. Usually it was disposed of, but Mr. Ford’s cost saving mentality was so entrenched in the company that his workers worried about the waste. They tinkered with and eventually repurposed the metal circles into radiator caps. These had the added benefit of being stronger than the ones sold by suppliers and, more importantly, gave them further cost reductions.
But the company was still not satisfied. Ford produced 150,000 metal circles a day, while needing only 20,000 for radiator caps. In his autobiography, Mr. Ford wrote that they continued experimenting to find further uses for the remaining 130,000 metal circles. Much later, Japanese automobile manufacturer Toyota would take this attitude and enshrine it using the phrase ‘kaizen’. Ford simply “never considered any costs as fixed”.
Mr. Ford famously implemented the moving assembly line system in 1913. Instead of having each worker walk around the factory and complete multiple tasks, they would now each stay in one spot and perform the same specialised task. The time needed to build a Model T dropped from about ten to six hours. This allowed Ford to produce 260,000 cars with a mere 13,000 workers in 1914. Meanwhile, the rest of the car industry produced a comparable amount of 287,000 cars, but had to use as many as 66,000 workers.
Similarly, Ford insourced production whenever they could produce it at a lower cost. They even did so for parts as small as a bolt, which enabled them to modestly lower their unit costs. But since they had such a high annual production of cars, the small savings added up to half a million dollars a year (US$8.6 million in 2022). Savings like these, repeated for multiple parts and raw materials, allowed Ford to lower the average material cost per car from US$650 in 1909 to US$150 in 1915.
Mr. Ford achieved these savings without resorting to speculative buying of materials. He disliked the idea of buying more of a certain material just because people believed that its price would increase. In his autobiography:
We have carefully figured, over the years, that buying ahead of requirements does not pay—that the gains on one purchase will be offset by the losses on another, and in the end we have gone to a great deal of trouble without any corresponding benefit. Therefore in our buying we simply get the best price we can for the quantity that we require. We do not buy less if the price be high and we do not buy more if the price be low. We carefully avoid bargain lots in excess of requirements. It was not easy to reach that decision (emphasis added). But in the end speculation will kill any manufacturer. Give him a couple of good purchases on which he makes money and before long he will be thinking more about making money out of buying and selling than out of his legitimate business, and he will smash. The only way to keep out of trouble is to buy what one needs—no more and no less. That course removes one hazard from business.
By the 1920s, Ford had insourced almost every raw material needed to make a car. They made their own glass, iron and wood. Rubber remained the last material they bought, and in large amounts. Following the inexorable logic of insourcing for cost reductions, Ford acquired 5,625 square miles (14,500 square kilometres) of Amazon jungle from the Brazilian government to run their own rubber plantation. This was a ridiculously large piece of land — by comparison, it was larger than Jamaica’s land size of about 4,244 square miles (11,000 square kilometres).
Ford was justifiably worried about rubber because the global supply at the time was dominated by a few European barons. If they formed a cartel, Ford would have no choice but to accept the higher prices. This was unacceptable. The company cleared their piece of the Amazon jungle in 1928 to plant rubber trees, and built a town alongside it to house all the local and American workers. They named it Fordlandia.
Unfortunately, the rubber trees in Fordlandia were planted in dense rows, as was the prevailing wisdom at the time. It made them more vulnerable to the native pests and fungi that fed off the trees. The densely planted rubber trees in Southeast Asia faced no such problems because there weren’t any pests that could affect them. Fordlandia quickly became more of an ‘incubator’ of pests than a productive plantation. Instead of accurate problem analysis, the trees were repeatedly cut down and replanted, preventing any type of productive rubber yield.
Other than the plantation, the people were also poorly managed. While local workers were well-paid, given free food and healthcare, some of the other programs were naively implemented. Fordlandia imposed a foreign nine-to-five work schedule, banned alcohol, and served strange foods like whole-wheat bread and canned peaches (Mr. Ford was a teetotaler and a health-conscious eater). In 1930, a riot erupted and chants of “Brazil for Brazilians; kill all the Americans” echoed around town. Rioters cut the electricity, destroyed punch time clocks (which were also foreign) and caused managers to flee into the jungle. By 1945, Ford abandoned the project, selling Fordlandia back to the Brazilian government for a measly US$244,200. They had spent US$20 million (US$321 million in 2022 dollars) developing the town.
Near the tail end of Mr. Ford’s career, the Ford Motor Company was strikingly unable to deliver on changing consumer tastes. The founder had famously said, in 1909, “any customer can have a car painted any colour that he wants so long as it is black”. Initially, that worked well. It kept costs low and allowed “the great multitude” to own a car of their own. The market share of the Model T surged to a ridiculous 55% in 1921.
However, competitors who caught up with Ford’s low prices offered other amenities like multiple colours and improved designs. Consumers began to perceive the Model T — with its characteristic singular colour — as outdated and unchanging. When Chevrolet introduced a smooth three-speed in the mid-1920s, the Model T still had its antiquated planetary transmission.
Ford employees and Henry’s son, Edsel, knew that they had to adapt to the times, but Mr. Ford wouldn’t have any of it. When they built an updated Model T and surprised him with it, he kicked in the windshield and stomped on the roof. One of the employees described that for Mr. Ford, ‘the Model T was god and we were to put away false images’.
By June 1927, the competition had caught up and Ford rolled off the last Model T from its assembly line. That year, they would go on to make a loss of 65 million dollars. But the deed was done. Cars had become an undeniable part of American culture.
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My Life and Work by Henry Ford. Published in 1922.