In the first place, I hold that it is better to sell a large number of cars at a reasonably small margin than to sell fewer cars at a large margin of profit.
I hold this because it enables a large number of people to buy and enjoy the use of a car and because it gives a larger number of men employment at good wages. Those are aims I have in life. But I would not be counted a success; I would be, in fact, a flat failure if I could not accomplish that and at the same time make a fair amount of profit for myself and the men associated with me in business.
This policy I hold is good business policy because it works—because with each succeeding year we have been able to put our car within the reach of greater and greater numbers, give employment to more and more men, and, at the same time, through the volume of business, increase our own profits beyond anything we had hoped for or even dreamed of when we started.
Bear in mind, every time you reduce the price of the car without reducing the quality, you increase the possible number of purchasers. There are many men who will pay $360 for a car who would not pay $440. We had in round numbers 500,000 buyers of cars on the $440 basis, and I figure that on the $360 basis we can increase the sales to possibly 800,000 cars for the year—less profit on each car, but more cars, more employment of labour, and in the end we shall get all the total profit we ought to make.
And let me say right here, that I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and labourers—with resulting surprisingly enormous benefits to ourselves.
This policy does not agree with the general opinion that a business is to be managed to the end that the stockholders can take out the largest possible amount of cash. Therefore I do not want stockholders in the ordinary sense of the term—they do not help forward the ability to serve. My ambition is to employ more and more men and to spread, in so far as I am able, the benefits of the industrial system that we are working to found; we want to help build lives and homes. This requires that the largest share of the profits be put back into productive enterprise. Hence we have no place for the non-working stockholders. The working stockholder is more anxious to increase his opportunity to serve than to bank dividends.
If it at any time became a question between lowering wages or abolishing dividends, I would abolish dividends. That time is not apt to come, for, as I have pointed out, there is no economy in low wages. It is bad financial policy to reduce wages because it also reduces buying power. If one believes that leadership brings responsibility, then a part of that responsibility is in seeing that those whom one leads shall have an adequate opportunity to earn a living. Finance concerns not merely the profit or solvency of a company; it also comprehends the amount of money that the company turns back to the community through wages. There is no charity in this. There is no charity in proper wages. It is simply that no company can be said to be stable which is not so well managed that it can afford a man an opportunity to do a great deal of work and therefore to earn a good wage.
There is something sacred about wages—they represent homes and families and domestic destinies. People ought to tread very carefully when approaching wages. On the cost sheet, wages are mere figures; out in the world, wages are bread boxes and coal bins, babies' cradles and children's education—family comforts and contentment. On the other hand, there is something just as sacred about capital which is used to provide the means by which work can be made productive. Nobody is helped if our industries are sucked dry of their life-blood. There is something just as sacred about a shop that employs thousands of men as there is about a home. The shop is the mainstay of all the finer things which the home represents. If we want the home to be happy, we must contrive to keep the shop busy. The whole justification of the profits made by the shop is that they are used to make doubly secure the homes dependent on that shop, and to create more jobs for other men. If profits go to swell a personal fortune, that is one thing; if they go to provide a sounder basis for business, better working conditions, better wages, more extended employment—that is quite another thing. Capital thus employed should not be carelessly tampered with. It is for the service of all, though it may be under the direction of one.
Profits belong in three places: they belong to the business—to keep it steady, progressive, and sound. They belong to the men who helped produce them. And they belong also, in part, to the public. A successful business is profitable to all three of these interests—planner, producer, and purchaser.
People whose profits are excessive when measured by any sound standard should be the first to cut prices. But they never are. They pass all their extra costs down the line until the whole burden is borne by the consumer; and besides doing that, they charge the consumer a percentage on the increased charges. Their whole business philosophy is: "Get while the getting is good." They are the speculators, the exploiters, the no-good element that is always injuring legitimate business. There is nothing to be expected from them. They have no vision. They cannot see beyond their own cash registers.
These people can talk more easily about a 10 or 20 per cent. cut in wages than they can about a 10 or 20 per cent. cut in profits. But a business man, surveying the whole community in all its interests and wishing to serve that community, ought to be able to make his contribution to stability.
It has been our policy always to keep on hand a large amount of cash—the cash balance in recent years has usually been in excess of fifty million dollars. This is deposited in banks all over the country, we do not borrow but we have established lines of credit, so that if we so cared we might raise a very large amount of money by bank borrowing. But keeping the cash reserve makes borrowing unnecessary—our provision is only to be prepared to meet an emergency. I have no prejudice against proper borrowing. It is merely that I do not want to run the danger of having the control of the business and hence the particular idea of service to which I am devoted taken into other hands.
A considerable part of finance is in the overcoming of seasonal operation. The flow of money ought to be nearly continuous. One must work steadily in order to work profitably. Shutting down involves great waste. It brings the waste of unemployment of men, the waste of unemployment of equipment, and the waste of restricted future sales through the higher prices of interrupted production. That has been one of the problems we had to meet. We could not manufacture cars to stock during the winter months when purchases are less than in spring or summer. Where or how could any one store half a million cars? And if stored, how could they be shipped in the rush season? And who would find the money to carry such a stock of cars even if they could be stored?
Seasonal work is hard on the working force. Good mechanics will not accept jobs that are good for only part of the year. To work in full force twelve months of the year guarantees workmen of ability, builds up a permanent manufacturing organization, and continually improves the product—the men in the factory, through uninterrupted service, become more familiar with the operations.
The factory must build, the sales department must sell, and the dealer must buy cars all the year through, if each would enjoy the maximum profit to be derived from the business. If the retail buyer will not consider purchasing except in "seasons," a campaign of education needs to be waged, proving the all-the-year-around value of a car rather than the limited-season value. And while the educating is being done, the manufacturer must build, and the dealer must buy, in anticipation of business.
We were the first to meet the problem in the automobile business. The selling of Ford cars is a merchandising proposition. In the days when every car was built to order and 50 cars a month a big output, it was reasonable to wait for the sale before ordering. The manufacturer waited for the order before building.
We very shortly found that we could not do business on order. The factory could not be built large enough—even were it desirable—to make between March and August all the cars that were ordered during those months. Therefore, years ago began the campaign of education to demonstrate that a Ford was not a summer luxury but a year-round necessity. Coupled with that came the education of the dealer into the knowledge that even if he could not sell so many cars in winter as in summer it would pay him to stock in winter for the summer and thus be able to make instant delivery. Both plans have worked out; in most parts of the country cars are used almost as much in winter as in summer. It has been found that they will run in snow, ice, or mud—in anything. Hence the winter sales are constantly growing larger and the seasonal demand is in part lifted from the dealer. And he finds it profitable to buy ahead in anticipation of needs. Thus we have no seasons in the plant; the production, up until the last couple of years, has been continuous excepting for the annual shut downs for inventory. We have had an interruption during the period of extreme depression but it was an interruption made necessary in the process of readjusting ourselves to the market conditions.
In order to attain continuous production and hence a continuous turning over of money we have had to plan our operations with extreme care. The plan of production is worked out very carefully each month between the sales and production departments, with the object of producing enough cars so that those in transit will take care of the orders in hand. Formerly, when we assembled and shipped cars, this was of the highest importance because we had no place in which to store finished cars. Now we ship parts instead of cars and assemble only those required for the Detroit district. That makes the planning no less important, for if the production stream and the order stream are not approximately equal we should be either jammed with unsold parts or behind in our orders. When you are turning out the parts to make 4,000 cars a day, just a very little carelessness in overestimating orders will pile up a finished inventory running into the millions. That makes the balancing of operations an exceedingly delicate matter.
In order to earn the proper profit on our narrow margin we must have a rapid turnover. We make cars to sell, not to store, and a month's unsold production would turn into a sum the interest on which alone would be enormous. The production is planned a year ahead and the number of cars to be made in each month of the year is scheduled, for of course it is a big problem to have the raw materials and such parts as we still buy from the outside flowing in consonance with production. We can no more afford to carry large stocks of finished than we can of raw material. Everything has to move in and move out. And we have had some narrow escapes. Some years ago the plant of the Diamond Manufacturing Company burned down. They were making radiator parts for us and the brass parts—tubings and castings. We had to move quickly or take a big loss. We got together the heads of all our departments, the pattern-makers and the draughtsmen. They worked from twenty-four to forty-eight hours on a stretch. They made new patterns; the Diamond Company leased a plant and got some machinery in by express. We furnished the other equipment for them and in twenty days they were shipping again. We had enough stock on hand to carry us over, say, for seven or eight days, but that fire prevented us shipping cars for ten or fifteen days. Except for our having stock ahead it would have held us up for twenty days—and our expenses would have gone right on.
To repeat. The place in which to finance is the shop. It has never failed us, and once, when it was thought that we were hard up for money, it served rather conclusively to demonstrate how much better finance can be conducted from the inside than from the outside.
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CHAPTER XII
MONEY—MASTER OR SERVANT?
In December, 1920, business the country over was marking time. More automobile plants were closed than were open and quite a number of those which were closed were completely in the charge of bankers. Rumours of bad financial condition were afloat concerning nearly every industrial company, and I became interested when the reports persisted that the Ford Motor Company not only needed money but could not get it. I have become accustomed to all kinds of rumours about our company—so much so, that nowadays I rarely deny any sort of rumour. But these reports differed from all previous ones. They were so exact and circumstantial. I learned that I had overcome my prejudice against borrowing and that I might be found almost any day down in Wall Street, hat in hand, asking for money. And rumour went even further and said that no one would give me money and that I might have to break up and go out of business.
It is true that we did have a problem. In 1919 we had borrowed $70,000,000 on notes to buy the full stock interest in the Ford Motor Company. On this we had $33,000,000 left to pay. We had $18,000,000 in income taxes due or shortly to become due to the Government, and also we intended to pay our usual bonus for the year to the workmen, which amounted to $7,000,000. Altogether, between January 1st and April 18, 1921, we had payments ahead totaling $58,000,000. We had only $20,000,000 in bank. Our balance sheet was more or less common knowledge and I suppose it was taken for granted that we could not raise the $38,000,000 needed without borrowing. For that is quite a large sum of money. Without the aid of Wall Street such a sum could not easily and quickly be raised. We were perfectly good for the money. Two years before we had borrowed $70,000,000. And since our whole property was unencumbered and we had no commercial debts, the matter of lending a large sum to us would not ordinarily have been a matter of moment. In fact, it would have been good banking business.
However, I began to see that our need for money was being industriously circulated as an evidence of impending failure. Then I began to suspect that, although the rumours came in news dispatches from all over the country, they might perhaps be traced to a single source. This belief was further strengthened when we were informed that a very fat financial editor was at Battle Creek sending out bulletins concerning the acuteness of our financial condition. Therefore, I took care not to deny a single rumour. We had made our financial plans and they did not include borrowing money.
I cannot too greatly emphasize that the very worst time to borrow money is when the banking people think that you need money. In the last chapter I outlined our financial principles. We simply applied those principles. We planned a thorough house-cleaning.
