III. AND THEN CAME FORD

Henry Ford once described the mission of his Model T as follows:

I will build a motor car for the great multitude. It will be large enough for the family but small enough for the individual to run and care for. It will be constructed of the best material, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary will be unable to own one—and to enjoy with his family the blessing of hours of pleasure in God’s great open spaces.⁸

The automobile was not an American invention, and Henry Ford was not the first in the industry. While he was a fine intuitive engineer in the American tinkerer tradition, his genius lay both in perceiving that the automobile could be a mass-market consumer product and then in creating the production and marketing systems to make his vision a reality.

Henry Ford was born in 1863, the oldest of six children on a prosperous farm in Dearborn, Michigan. He had little interest in farming but had a pronounced mechanical bent—as a young boy he made his own tools for repairing watches. By the time he was sixteen, a confident youth, lean and athletic, he left the farm for Detroit, had a string of mechanical employments, and became a qualified machinist. His next few years were spent moving between mechanical jobs in Detroit and working in Dearborn, both lumbering and repairing farm machinery. Along the way he became obsessed with the idea of building a practical car. Recently married, he finally moved permanently back to Detroit and took a job as a machinist at the Detroit Edison generating plant.

Ford’s ability to fix almost any machine became a legend in Detroit machining circles. Within a few years, he was made Detroit Edison’s chief engineer, essentially the primary troubleshooter, on call 24/7. His managers knew of his inventive interests, and they were anxious to keep him, so they allowed him to set up a workshop at the company and more or less come and go as he pleased.

Ford finished a prototype working car, the Quadricycle, in 1896. Another local inventor had his own horseless carriage out on the roads three months earlier, but Ford’s was by far the more advanced machine, with a rear-mounted, two-cylinder, four-stroke engine^* and a sophisticated transmission with a neutral, low, and high gear, but no reverse, and a top speed of twenty miles per hour.

At the time, the leadership in automotive technology clearly rested in Germany. Nikolaus Otto had patented a one-cylinder, four-stroke engine in 1867, although he manufactured them for stationery uses. (Ford had repaired one in a Dearborn neighbor’s threshing machine.) Gottlieb Daimler, who managed Otto’s engine factory, and Karl Benz had both used them in prototype automobiles in the 1880s and had joined to form what is now Daimler AG in 1890.

The excitement over automobiles at the turn of the twentieth century was something like the dotcom boom at the turn of the twenty-first. More than five hundred automotive startups were founded within a decade, most of which quickly failed. The Duryea brothers, Frank and Charles of Springfield, Massachusetts, opened the first commercial plant in 1895, and were the first to actually sell a car. Elwood Haynes, an Indiana metallurgist, opened his factory in 1896, and may have been the first American car maker to make a profit. Ransom E. Olds’s company opened in 1897, then relocated to Detroit and sold six hundred cars in 1901. Olds is also credited with the first automotive assembly line.

Ford’s resolve had been greatly reinforced by a conversation with Thomas Edison at a 1896 New York technical conference for Edison engineers. Learning that Ford had built a “gas car,” Edison pressed him for details, then, according to Ford:

banged his fist on the table and said: “Young man, that’s the thing: you have it. Electric cars must keep to power stations. The storage battery is too heavy. Steam cars won’t do it either, for they have to carry a boiler and fire. Your car is self-contained—it carries its own power plant—no fire, no boiler, no smoke, no steam. You have the thing. Keep at it.”⁹

Ford joined the ranks of manufacturing hopefuls the next year. After building a much improved Quadricycle, with a more passenger-friendly design, he raised $2,500 from a small circle of businessmen to finance a demonstration model. The new car sufficiently impressed Thomas Murphy, a Detroit banker, businessman, and car aficionado, that he led a local syndicate that raised $150,000 in 1899. Ford severed his ties with Detroit Edison to manage his first car company.

The venture was a failure, possibly because the investors insisted on a heavier, more upscale car than Ford wanted to build. But a second venture financed by Murphy failed as well. This time Murphy gave Ford his head on the design, but, almost fecklessly, Ford spent most of his time on a racing car. Frustrated, Murphy asked a local engineer, Henry Leland—a charter member of America’s machinist hall of fame—to review the company’s operations. Ford left in a huff—which might have been Murphy’s intention. Leland took over, and he and Murphy created the Cadillac Motor Company.^* Ford finished his racing car and actually won two races against the then-national champion racer.

Ford’s racing success prompted new interest from investors. Alexander Malcomson, a local coal magnate and a serial investor, agreed to finance a demonstration model that Ford called the Model A (not to be confused with the 1927 Model A that succeeded the famous Model T). The car was finished in early 1903, and a financing was closed in June—a very tight $49,000.

Ford quickly set up a factory and contracted out all the parts manufacture, enough to make 650 cars. By later standards, the cars were dogs, but as Allan Nevins points out, “Nobody in 1903–04 expected a car to run dependably.”¹⁰ Events confirm Nevins’ point. The first sale came on July 15, 1903, for $850 to a Chicago dentist. By the end of the summer, the company was already in the black; in November they paid their first dividend. Within two years, the company had built a new factory ten times bigger than the first plant and employed three hundred men making twenty-five cars a day. Sales the first three years averaged 1,681 cars at an average annual net of $217,000.¹¹

Yet again, internal conflicts threatened to derail the enterprise. At the founding, Malcomson had been designated as the business administrator. Instead, he appointed a young subordinate, James Couzens, to act in his stead. Couzens turned out to be a brilliant manager, the perfect man for a high-growth startup. He installed accounting, cost-tracking, and inventory-control systems, and built a formidable sales and dealership network. Ford was impressed, and the two slowly bonded; by about 1905, they thought alike on almost every critical issue.

Then Malcomson decided to reclaim his place as business manager. In particular, he wanted to shift the emphasis to a high-end, more luxurious, and heavier car. Sensing a coming clash, Ford took it to the board, and over the next year, he and the board majority rather brutally squeezed out Malcomson. Ford was made president, with Couzens as number two.^†

The new Model N, introduced in 1906, was a turning point. The first version sold for $500, cheaper than the Model A, although it was a far better car. With a vertical four-cylinder, fifteen hp engine, positioned in the front, it was even lighter, but far more powerful than its predecessors, with a top speed of forty-five miles per hour. It also had better brakes, better springs, and a smoother two-speed planetary transmission. Ford announced that they would produce 10,000 of them in 1906, more than five times their previous single-year production record. No other automobile manufacturer had ever come close to such numbers.

The car drew raves from the trade journals—“distinctly the most important mechanical traction event of 1906,” said an editorialist.¹² One dealer sent Couzens a check for $30,000 to secure his hoped-for three hundred cars. By May, Couzens was sending money back to avid customers to keep the order backlog within reason. In the event, they produced 8,250 cars, all of them sold before they rolled out of the factory. Ford was disappointed by the shortfall, but the ramp-up was still a signal accomplishment, for it was the same year that they internalized the manufacture of their engines, axles, and transmissions, which required opening a new factory and hiring a new workforce.

Ford was determined to write a new chapter in the history of mass production. Americans, at least outside of the slave-based South, had long embraced mass manufacturing. Well before the Civil War, the average farmer could buy factory-made stoves, and mass-produced shoes and clothing, soap, candles, and clocks. By the 1880s, packaged fresh meat and varieties of canned goods diversified diets. Branded goods like Heinz foods, Campbell’s soups, Ivory soap, and Lucky Strike cigarettes were all well-established before the turn of the century. Henry Ford’s Model T took it to a new level. It was a superb car, one of the best made up to that time, and Ford insisted on driving the price down to the point where almost any working family could afford it.

Achieving mass production of cars entailed first making all parts to such a fine degree of precision that they would be truly interchangeable—any part would fit accurately to any chassis. Rather than apply skills to machining individual parts, Ford lavished his ingenuity on designing and prototyping the high-precision machine tools to produce parts that needed no fitting. Ford didn’t do it by himself; as usual he surrounded himself with a superb crew. But the vision was his, as in the main were the strategy, the mechanical designs, and the factory. He dreamed of a great car, sold at low costs, and in such volumes that costs would always fall, driving ever greater volume and cost reductions. And at a deep practical level, he understood how to make that happen.

The design of the Model T stretched over 1907; it was accomplished by an elite team in a cramped room in the production factory. For much of that year, Ford spent a great part of his day with the designers—the usual routine was that he would roughly sketch what he wanted, and they would take it from there, iterating through multiple sketches and blueprints until they finally got it right. The car that emerged made maximum use of the newest, lightest steel alloys, and incorporated greatly improved transmission gearing, and a much better carburetor. It was also very rugged. Ford intentionally targeted a rural market, so the Model T was something of an all-terrain vehicle, with a suspension system that allowed considerable independent adjustment for each wheel, perfect for deeply rutted rural roads. Ford also insisted on making it easy to repair. Some farmers reconfigured their Model Ts to work as tractors.

The production system evolved over a number of years. First, the machinery lines were reconfigured to match the sequence of manufacturing instead of being grouped by machine type. Attention was lavished on redesigning parts to facilitate automated manufacturing. The engine block became a single casting, instead of two separate casts that had to be welded together; that was difficult, but once achieved, it paid dividends forever. The use of vanadium steel, the best and most expensive new alloy, allowed a shift from machining small parts to much faster and cheaper precision stamping; taking full advantage of that required redesigning hundreds of parts. Cylinder blocks had to be machined to close tolerances and drilled, tapped, and milled to accommodate hundreds of connections and insertions. There were no skilled machinists involved, only operators to load the parts, start the machines, and send the finished work on its way.

Creating the final Ford factory took about seven years. After automating the machining of individual parts, the team shifted attention to the subassembly. The magneto-flywheel (the starter) had always been assembled by one man working from an ordered array of all of its parts. Breaking up the job among several men, each concentrating on a specific task, improved productivity by about a third. The next step was to design the part’s moving assembly line. The line for each big subassembly took a while to get right—the work specification for each station, the speed of the line, its height and placement of the work pieces to minimize bending and stretching. When it went into production, magneto-flywheel assembly time was reduced by factor of four. The chassis was the most spectacular success: assembly time was reduced eightfold, from 12.5 hours to only 1.5 hours. The last, and quite extraordinary, step was to choreograph the entire plant, from the foundry through three major subassembly lines to the final assembly, assuring that end to end, everything cohered to produce a stream of identical automobiles in ever-growing numbers.¹³

Early Ford Assembly Line: “Fordism” dramatically increased manufacturing productivity. The men hated the mind-numbing tedium of performing the same small task over and over every day. Ford secured their loyalty by paying about twice the prevailing manufacturing wage.

The beauty of the Ford system was that, even with such enormous productivity gains, he was driving output so hard that his workforce exploded—between 1910 and 1913, factory employees almost quintupled, from 3,000 to 14,000. The men did not like the line, but Ford secured their loyalty with his March 1, 1914, announcement of the $5 per day, eight-hour day, about double the previous wage. A famous lament from a worker’s wife in a letter to Ford was: “The chain system you have is a slave driver! My God!, Mr. Ford.… That $5 a day is a blessing—a bigger one than you know but oh they earn it.”¹⁴

Nevins has described the $5 per day wage as an act of magnanimity on the part of Ford. Doubling the wage was clearly generous, for it took years for other companies to catch up to the Ford pay scale. But Ford got more than spiritual solace from it. His factories suffered from extreme absenteeism, a consequence of the long hours of absolutely unremitting work at the preset pace of the mechanical line. Men could “automatize” the job—work purely on reflex—but as one worker said, “If I keep putting on Nut No. 86 for about 86 more days, I will be Nut No. 86 in the… bughouse.” Like most other factories of the time, Ford tolerated arbitrary foremen and disciplinary practices, inconsistent pay scales, and vile conditions on factory floors. A measure of the Ford workers’ hatred of the line was an appalling turnover rate of 370 percent in 1913, almost twice as much as the still-high average of 200 percent at the other big Detroit manufacturers. To maintain an average force of 13,600 men, the company had to hire 50,500 men annually. A 10 percent daily absentee rate also required bringing on 1,300–1,400 replacement workers each day—while most men could be trained for an assembly line job in less than an hour, the delay in filling a slot was disruptive of schedules.

The company’s personnel department, after conducting a study in 1913, made a number of changes, including granting a 15 percent overall pay raise, reining in abusive foremen, and improving plant conditions. For a short time, the absenteeism dropped, but then it spiked up again at the end of the year, and in January Ford and Couzens made the decision to adopt the $5 per day wage. That contradicts the Nevins assertion that, while there had been serious management issues when the line first became effective, the personnel department had effectively solved them.

Classical economics assumes that, within skill bands, workers are interchangeable, and that markets clear, assuring that like companies will pay like amounts to similar workers. Difficulty in recruiting workers is a sure sign of below-market wages; while long lines at the hiring gate suggests that the proprietors are paying too much. The solution in both cases is to ensure that wages are adjusted to the market-clearing level. More recently, economists have identified the “efficiency wage”—an above-market wage designed to improve employee morale and productivity. The position of the Ford company is something of an anomaly. It had no trouble finding men—the application queue at the front gate each morning was almost a tourist attraction. And despite the worker churn, the Ford system produced staggering profits. Its 1912 earnings were 132 percent of tangible assets, and its bottom-line return on sales was an eye-popping 31 percent. So was the famous $5 per day pay package an efficiency wage, adopted to improve productivity and profits over the long run? Or was it an enlightened act of corporate statesmanship to elevate the status and earning power of the ordinary worker, as Ford, and Nevins, portrayed it?^*

The answer is likely a mix of the two. Ford and Couzens were complicated people. Ford was never much motivated by money, and Couzens, although he was a demanding boss and a hard negotiator, took pride in his business ethics. The two of them made the decision to double the company’s wage bill pretty much by themselves, with only minimum consultation with their directors. (Ford held 58.5 percent of the voting shares.) If their only objective had been to sweeten labor relations, a much smaller increase, perhaps to $3.50 would have sufficed. The Ford personnel department also began to sponsor citizenship training (for their many immigrant workers) and literacy training, and hired social workers to assist in disruptive family problems. Turnover dropped like a rock after the new wage policy was installed, but it still cost them about half of their gaudy profits. In short, it is reasonable to take Ford and Couzens at their word when they said that directors, managers, and shareholders had been making extraordinary financial gains, and the time had come to share the bounty with their workers; but at the same time, they must have been aware that a smoothly running plant and attentive workers would make it much easier to achieve their volume objectives.¹⁵

For the next decade and a half, Ford dominated the automobile industry. When the Model T was first introduced in 1908, it sold a then-spectacular 11,000 cars its first year. As Ford phased in his production system, the company roughly doubled sales each year, hitting the 500,000 mark in 1915–1916, which would have been inconceivable with traditional manufacturing methods. The economies of scale were demonstrated in 1913, when Ford Motors accounted for nearly half of all automobile sales: Ford sold 261,000 cars against the rest of the industry’s 287,000. But Ford did it with 13,000 employees, while the 299 other companies required 66,000 employees, or five times as many.¹⁶