My Life and Work
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.
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.
Go back a bit and see what the conditions were. Along in the early part
of 1920 came the first indications that the feverish speculative
business engendered by the war was not going to continue. A few concerns
that had sprung out of the war and had no real reason for existence
failed. People slowed down in their buying. Our own sales kept right
along, but we knew that sooner or later they would drop off. I thought
seriously of cutting prices, but the costs of manufacturing everywhere
were out of control. Labour gave less and less in return for high wages.
The suppliers of raw material refused even to think of coming back to
earth. The very plain warnings of the storm went quite unheeded.
In June our own sales began to be affected. They grew less and less each
month from June on until September. We had to do something to bring our
product within the purchasing power of the public, and not only that, we
had to do something drastic enough to demonstrate to the public that we
were actually playing the game and not just shamming. Therefore in
September we cut the price of the touring car from $575 to $440. We cut
the price far below the cost of production, for we were still making
from stock bought at boom prices. The cut created a considerable
sensation. We received a deal of criticism. It was said that we were
disturbing conditions. That is exactly what we were trying to do. We
wanted to do our part in bringing prices from an artificial to a natural
level. I am firmly of the opinion that if at this time or earlier
manufacturers and distributors had all made drastic cuts in their prices
and had put through thorough house-cleanings we should not have so long
a business depression. Hanging on in the hope of getting higher prices
simply delayed adjustment. Nobody got the higher prices they hoped for,
and if the losses had been taken all at once, not only would the
productive and the buying powers of the country have become harmonized,
but we should have been saved this long period of general idleness.
Hanging on in the hope of higher prices merely made the losses greater,
because those who hung on had to pay interest on their high-priced
stocks and also lost the profits they might have made by working on a
sensible basis. Unemployment cut down wage distribution and thus the
buyer and the seller became more and more separated. There was a lot of
flurried talk of arranging to give vast credits to Europe--the idea
being that thereby the high-priced stocks might be palmed off. Of course
the proposals were not put in any such crude fashion, and I think that
quite a lot of people sincerely believed that if large credits were
extended abroad even without a hope of the payment of either principal
or interest, American business would somehow be benefited. It is true
that if these credits were taken by American banks, those who had
high-priced stocks might have gotten rid of them at a profit, but the
banks would have acquired so much frozen credit that they would have
more nearly resembled ice houses than banks. I suppose it is natural to
hang on to the possibility of profits until the very last moment, but it
is not good business.
Our own sales, after the cut, increased, but soon they began to fall off
again. We were not sufficiently within the purchasing power of the
country to make buying easy. Retail prices generally had not touched
bottom. The public distrusted all prices. We laid our plans for another
cut and we kept our production around one hundred thousand cars a month.
This production was not justified by our sales but we wanted to have as
much as possible of our raw material transformed into finished product
before we shut down. We knew that we would have to shut down in order to
take an inventory and clean house. We wanted to open with another big
cut and to have cars on hand to supply the demand. Then the new cars
could be built out of material bought at lower prices. We determined
that we were going to get lower prices.
We shut down in December with the intention of opening again in about
two weeks. We found so much to do that actually we did not open for
nearly six weeks. The moment that we shut down the rumours concerning
our financial condition became more and more active. I know that a great
many people hoped that we should have to go out after money--for, were
we seeking money, then we should have to come to terms. We did not ask
for money. We did not want money. We had one offer of money. An officer
of a New York bank called on me with a financial plan which included a
large loan and in which also was an arrangement by which a
representative of the bankers would act as treasurer and take charge of
the finance of the company. Those people meant well enough, I am quite
sure. We did not want to borrow money but it so happened that at the
moment we were without a treasurer. To that extent the bankers had
envisaged our condition correctly. I asked my son Edsel to be treasurer
as well as president of the company. That fixed us up as to a treasurer,
so there was really nothing at all that the bankers could do for us.
Then we began our house-cleaning. During the war we had gone into many
kinds of war work and had thus been forced to depart from our principle
of a single product. This had caused many new departments to be added.
The office force had expanded and much of the wastefulness of scattered
production had crept in. War work is rush work and is wasteful work. We
began throwing out everything that did not contribute to the production
of cars.
The only immediate payment scheduled was the purely voluntary one of a
seven-million-dollar bonus to our workmen. There was no obligation to
pay, but we wanted to pay on the first of January. That we paid out of
our cash on hand.
Throughout the country we have thirty-five branches. These are all
assembling plants, but in twenty-two of them parts are also
manufactured. They had stopped the making of parts but they went on
assembling cars. At the time of shutting down we had practically no cars
in Detroit. We had shipped out all the parts, and during January the
Detroit dealers actually had to go as far a field as Chicago and
Columbus to get cars for local needs. The branches shipped to each
dealer, under his yearly quota, enough cars to cover about a month's
sales. The dealers worked hard on sales. During the latter part of
January we called in a skeleton organization of about ten thousand men,
mostly foremen, sub-foremen, and straw bosses, and we started Highland
Park into production. We collected our foreign accounts and sold our
by-products.
Then we were ready for full production. And gradually into full
production we went--on a profitable basis. The house-cleaning swept out