Saturday, February 20, 2016

Henry Ford, business reinvestment, and higher wages leading to lower labor costs

I think the excerpt below, from The Dao of Capital, about Henry Ford shows a few traits that many successful businesses have in common. I specifically thought about and Costco in regards to lowering costs, heavy reinvestment, and selling more goods at a smaller margin; and then Costco and Trader Joe's when I read the part about how higher wages can actually lead to lower overall labor costs (when you get better and more efficient workers who stay longer... and lower employee turnover leads to less time having to train new people, etc.):
Ford stood for the “buying public” and its right to goods and services at the lowest possible cost. He believed it was far better to “sell a large number of cars at a reasonably small margin than to sell fewer cars at a large margin of profit.” With this attitude, he viewed a profit as “far more a fund to insure future progress than it is a payment for past performance.” Paying out profits in the form of dividends, particularly on preferred stock with burdensome payouts, put profits into a few hands rather than back into more roundabout production. As Ford said, “The owners and the workers will get their reward by the increased amount of business the lower prices bring. Industry cannot exist for a class.” (Insufficient capital reinvestment, as we will revisit later on, is essentially capital consumption in lieu of the roundabout.) Focusing on profits over productivity, ends over means, was, in Ford’s words, “trying to drive with the cart before the horse.” 
Ford warned against “the most common error of confusing money and business,” which he blamed on the stock market for leading people to believe that “business is good if there is lively gambling upward in stocks, and bad if the gamblers happen to be forcing stock prices down.” He eloquently viewed the stock market as a “side show,” and little did he know how increasingly true this would be—as so much of investing today is the domain of “punters” over seekers of productive capital. To Ford, like in taijiquan and at the weiqi board, there were two distinct games going on between the stock market and true investment, the former a mere shadow of the latter. Disdainful of finance and suspicious of banks all his life (his abominable stereotypes and prejudices aside), Ford made the “shortsighted finance” of Wall Street his nemesis, viewing it as “strings on a business” in stark opposition to his roundabout redirecting of profits back into the operation and focusing instead on an immediate return. “The majority are so interested in getting the utmost out of the machine that they will give no time to improving it as it runs.” Ford cited the “Parable of the Talents” (interestingly, as Clausewitz did, in Chapter 3) “to whom much is given, of him shall be much required,” thus exhorting entrepreneurs never to sacrifice working capital for the sake of amassing personal fortune. He exposed what he called the “fallacy which has steered our country and other countries wrong on so many matters touching industry—the fallacy that business is money, and that big business is big money.” Make no mistake: Ford was a true-blue capitalist, who believed in making profits, but rather than consuming the capital produced today, saw the infinitely better wisdom of reinvesting intertemporally for a position of greater strategic advantage. 
As Ford Motor Company expanded, the costs were paid for by efficiencies gained through faster output at the last “ring” of production and by eliminating in previous “rings” stockpiles of iron, coal, and steel—all unnecessary inventories that Ford saw as idle waste. By the mid-1920s, he would boast, “We do not own or use a single warehouse.” Ford also didn’t believe in having too much labor on hand, considering hiring two men for the job of one to be a crime against society, although he did have to account for high turnover because of the tedium of the assembly line work. In 1913, turnover reached an unbelievable 370 percent, and Ford hired more than 50,000 people to maintain an average labor force of about 13,600. 
When profits swelled, he paid well for labor, creating an uproar when he doubled the basic wage to $5.00 a day, which triggered a virtual stampede of job seekers. Paying higher wages for labor was not altruistic in Ford’s eyes. Moreover, it wasn’t simply that Ford was trying to pay his workers “enough to buy back the product,” although he did preach a high-wage doctrine after the stock market crash in 1929. Rather, paying relatively high wages was, for Ford, a matter of smart business. He regarded well-paid skilled workers as important as high-grade material. By paying workers well, he effectively lowered his costs because higher wages reduced turnover and the need for constant training of new hires.