Henry Ford, Where Are You When We Need You?

If someone should decide to canonize a "patron saint of business", I've often thought Henry Ford would be a good candidate. He had outstanding technical skills and ingenuity, developing the assembly line method of manufacturing. More fundamentally, though, his vision of the organization of his company was perhaps the greater innovation. Mr. Ford thought the firm should build a simple, inexpensive car and pay the people who did the work well enough so that, amazingly, they themselves could afford to buy it. Indeed, he paid the then-unheard-of sum of $5 a day. This was a remarkable development, in effect democratizing automobile transportation and creating the mobile society of today. Over 19 years, from 1908 to 1927, the company made 15,500,000 of its famous Model T.

A Visionary Company . . .
This beginning and the subsequent decades-long performance of the company – during hard economic times as well as prosperous ones – led prominent management gurus James Collins and Jerry Porras to name the Ford Motor Company one of 18 "visionary companies" in their best-selling business book Built To Last, which was first published in 1994. These companies adhere to an underlying ideology and "vision" of their business that enables them to transcend fads and overcome the occasional glitch to survive for years and years; several were founded in the 1850s, Ford in 1903. Collins and Porras renewed this designation for Ford in the book's paperback edition, issued just four years ago in 2002.

. . . in Big Trouble
This dramatic historic background casts great irony on the present condition of the Ford Motor Company: unpopular products and burdensome labor costs are prompting a major contraction in the scale of the company's operations. A plan for this restructuring was announced last January; the program would close some plants and lay off excess salaried administrative personnel. But closing an auto or truck plant takes time, and this year market circumstances worsened rapidly for American automakers. Then, about two weeks ago, we learned that there would be a new CEO for the firm; bringing in some new energy at the top might help. And last Friday, September 15, the company announced a projected loss for this year of $6 billion, causing more plants to be closed on a faster timetable and a buyout program to be offered to every single one of the 75,000 hourly workers. This "acceleration" of the scale-down program would lead to layoffs for even more salaried workers and the suspension of already-reduced dividend payments to shareholders beginning in the next quarter.

Further, in a statement rare for a big company in a competitive marketplace, Ford conceded that sometime in the near future, Toyota is likely to overtake it as the Number 2 seller of vehicles in this country, behind only General Motors.

What happened? How do visitors to the Geranium Farm website have an interest here?

Ford Illustrates Economic Issues of the Day
What happened to Mr. Ford's company presents a good microcosm of economic issues facing us today: energy, the environment, health care and so on. In one of our early articles, we talked about energy; thankfully, prices have come down from their summer peaks, but Ford and GM in particular have a heavy weight of gas-guzzlers in their product mix and sales at both firms have suffered mightily as a result.

Rising health care costs have hurt Ford. The US auto companies have all had very generous health care plans which until very recently came with no out-of-pocket expense for the employee. Ford and General Motors have renegotiated this benefit, bringing to their employees the deductibles and co-pays so familiar to most of us. Some, especially union leaders, argue that a nationalized health system would be a major help for this problem. But – and you know you'll hear more from us about this – unless health care costs are actually reduced, all we get from nationalization is a change from an insurance burden to a tax burden of the same or greater magnitude. No easy solution here.

Ford's retirees are getting older and much more numerous. For a long time, "30-and-out" described the tenure associated with auto industry pension plans. That meant workers would begin to retire in their mid-50s and possibly draw pension benefits for as many as 30 more years – as long as their entire working career. This policy was affordable, like social security, when life expectancy was 65 or 70. But now, many folks live well beyond 80, putting a strain on pension programs that promise a fixed lifetime benefit. Financing everyone's retirement is another topic we'll have to work on here as well – and none too soon.

Finally, Ford faces the added competition from other global firms. How many of us drive a non-US brand vehicle? More and more. Even if it's built in a US plant, as is increasingly the case, the "foreign" firm has newer plants, a non-unionized labor force and few retirees, so it has lower labor costs and more efficient production facilities.

Solving Ford's Problems Will Teach Lessons to Us All
We’re not here to give management advice to Ford – and anyway, the latest dispatches from Detroit indicate that the new CEO is already hard at work shaking things up. We are here to highlight the fundamental role of such companies in our lives. Recall what we’ve mentioned here: Ford makes cars and trucks that we use for our personal transportation. This is just the beginning. The company gives work to tens of thousands of people, including many who work for suppliers and dealers as well as directly for Ford. The company offers opportunities to those people for personal growth and socialization as well as monetary compensation. That compensation takes the form of cash wages, certain paid time off, health insurance, retirement and other benefits. The company’s profits – when they earn them – are reinvested in new and better products and production methods. Companies, just as individuals, also donate some of their income to charities. Oh yes, they pay taxes, too. They are citizens in their communities.

Thus, analyzing and understanding what happened at Ford is only the first step in a complex lesson to be learned by managements, shareholders, employees, displaced employees, retirees and the health care industry, among other segments of society. We need to get a handle on many of the issues mentioned here, and as we do, these painful lessons can bring benefits to industry and also to the working and consuming public.