Henry Ford and the Model T

Elon Musk has a lot in common with Henry Ford.  fact, studying Henry Ford could give Mr. Musk guidance in his quest to make Tesla successful.  In the end, Henry Ford won – and won big.  So, too, can Musk.  Parallels of Ford and Musk are revealing.

Like Henry Ford, Musk has his own public image to blur, and ultimately erase, the distinction between his company and himself.  Musk faces challenges for control of Tesla similar to those Henry Ford overcame to win absolute control of Ford Motor Company.

When Elon Musk rails against “shorts-sellers” – stock speculators selling Tesla, Inc. shares for later delivery at a fixed price expecting the stock price will drop, so they can cover deliver shares purchased later for less – he is echoing Henry Ford’s hatred of passive investors who backed his companies with their money, only to overrule his decisions.  When the federal government’s Securities and Exchange Commission sued to bar Musk from control of Tesla, Inc., the threat was reminiscent of the Dodge brothers’ lawsuit against Ford Motor Company.  Musk wants Tesla, Inc. to build multiple “Gigafactories,” like the one it constructed in Nevada so that Tesla can make all components of its products and eliminate outside suppliers.  In this, too, Musk is copying Henry Ford.   The model of vertical integration Musk is pursuing was achieved by Henry Ford a century before, on the banks of the River Rouge in Detroit.  The River Rouge industrial complex turned iron ore from Ford mines into Ford automobiles.

Henry Ford developed his antipathy to passive investors from personal experience with the real cost of outside money.  Ford needed outside investors to bankroll his start-up automobile companies.  Twice, outside investors ended up overruling his decisions, depriving him of control of the companies he created.  The third time turned out differently.  Henry Ford had learned from experience.

It all started with the Detroit Automobile Company.  This was Henry Ford’s first attempt to build a production automobile.  Though the company was founded to manufacture and sell automobiles, Henry Ford did not build automobiles.  Instead, he continued to work on the design.  His investors saw the prospect of profit dimming and demanded he start production.  When he did not, they dissolved the company.

A few of the investors in the Detroit Automobile Company still believed in Henry Ford.  They formed the Henry Ford Company, but again held control.  Henry Ford owned only 17% of the stock.    He did not change his focus on design.  The investors brought in an outside consultant to evaluate the company.  It is an open question whether Henry Ford quit or was fired, but he left the company in exchange for a small payment for his stock.  The outside expert, Henry Leland, was  hired to run the company.  With Ford no longer involved, the Board of Directors adopted Cadillac Automobile Company as its new name.  As Cadillac, under new management, the company thrived.  (And, yes, that is the Cadillac later acquired by General Motors, and Henry Leland did later found Lincoln, only for that company to fail in the depression and be bought by Ford, who then fired Leland.)

Musk, like Henry Ford in his first two automobile ventures, seems to display more talent at design than production.  Musk was the driving force behind developing the Model 3, insisting that it be designed in all respects as an electric automobile, rather than simply a conventional automobile powered by an electric motor.  Every detail was evaluated by its impact on the vehicle’s range before the battery needed recharging.  Even the brakes were designed with that goal in mind.  No detail escaped Musk’s’ attention – it was Musk who insisted the ventilation system have no visible vents.

Yet, Tesla, Inc. has not met the initially announced date for introduction of any new model.  Musk’s many predictions of production volume have been more fantasy than reality – reached, if at all, months late.  The production process for the Model 3 has been dominated by trial and error – emphasis on “error.”  At Musk’s insistence, Tesla, Inc. planned a highly automated assembly line to build the Model 3.  Instead, Tesla ended up producing the Model 3 in a tent.   Automated production of batteries at the Gigafactory was similarly beset with problems, forcing Tesla to assemble batteries by hand.   Today, production of a Tesla Model 3 requires three times as many hours of assembly labor time than Toyota requires to produce a Camry.

Ford 999 - Parallels of Ford and Musk
Ford 999

Henry Ford next built a pair of racing automobiles.  One was named “999” after the New York Central steam locomotive that had made headlines for exceeding 100 mph.  Barney Oldfield campaigned “999” throughout the United States.  In 1904, Henry Ford used the other racer to set a new land speed record.  (The “999” is now in the Henry Ford Museum in Dearborn, Michigan.  The locomotive for which it was named is on display at the Science and Industry Museum in Chicago, Illinois.)  The land speed record and Oldfield’s many victories in “999” brought Henry Ford word-wide fame.  He was now a celebrity whose name was indelibly linked in public perception to the automobile.

Though Henry Ford despised passive investors, he could not make his third try at automobile manufacturing without them.  He needed the money.  He turned to two sources of outside capital.  One was Detroit businessman Alexander Y. Malcomson.  The other was Horace and John Dodge, brothers who operated a successful Detroit machining and manufacturing company.

Malcomson and Henry Ford created a partnership to develop a new automobile.  Malcomson contributed $3000.00.  Ford contributed his skill and experience.  The result was the design for the Ford Model A.  With the design complete, the partnership was dissolved and a new corporation – the Ford Motor Company – was formed to produce the Model A.   Malcomson was now joined by other outside investors, including his clerk, James Couzens, in buying Ford Motor Company stock.  One thousand shares were divided, with Malcomson and Ford each holding 25.5%, Couzens, who became an officer of the company, holding 10% and the two lawyers who contributed the legal work required to form the corporation receiving 5% each.

10% of the stock went to the Dodge brothers.

The Dodge brothers are a story of their own.

By their trade, the Dodge brothers were machinists.  The characterization of them in recent Fiat-Chrysler television commercials as carefree thrill-seekers does them no justice.

John Dodge
John Dodge

In reality, both Dodge brothers had well-deserved reputations as hard-drinking brawlers.   But Horace Dodge’s raw engineering talent combined with John Dodge’s exceptional business acumen had created a business that offered Henry Ford the one thing he lacked

to build the Model A:  production facilities and expertise.

At the time, the Dodge brothers were already well-established in the nascent Detroit automobile industry.  They manufactured engines and transmissions for Oldsmobile – at the time the best-selling automobile brand.   The Oldsmobile contract was a sure thing.  Henry Ford, on the other hand, was a man with two failed ventures behind him.

The Dodges dropped the Oldsmobile contract to build the mechanical components of the Ford Model A.

1903 Ford Model A
1903 Ford Model A

The contribution of Horace and John Dodge to the success of the Ford Motor Company cannot be understated.  The money Malcolmson and his associates invested could not have financed production of the Model A.  It provided the cash advance against the initial parts order demanded by the Dodges.

Horace Dodge
Horace Dodge

The Dodges, however, not only turned the plans for the Model A into the necessary engineering drawings and then produced the parts, but also borrowed $75,000.00 to finance the tooling needed for production.  Even with Malcomson’s backing, that sum would have been beyond Henry Ford’s reach.  To offset the cash advance, the Dodge brothers each gave $5,000.00 promissory notes in exchange for Ford Motor Company stock.

Elon Musk now admits that Tesla, Inc. came close to going broke as it ramped up production of the Model 3.  The near-death experience at the Ford Motor Company came on the eve of Model A production, when cash-on-hand dropped to about $200.00.  Receipts from the first month’s sales solved that problem.  For Ford, the Model A was the money gusher Elon Musk claims the Model 3 will be for Tesla.  Two years after it was introduced, Model A sales totaled more than $3,000,000.00.  Dividends to Ford Motor Company shareholders totaled $200,000.00.

The shareholders had done well.

Henry Ford saw this as an opportunity to manufacture a new model at a much lower price.  He envisioned a vastly increased market for an automobile affordable to millions, not thousands.   Malcomson did not share that vision.  He saw the Model A profits as an opportunity to produce luxury automobiles.  He saw only the existing automobile market and focused on increasing profits per automobile by selling at a higher price.

These were incompatible visions of both the company and the automobile industry.  Henry Ford, who saw automobiles as a product that could be sold to people of ordinary means, was forced to design and built automobiles that were successively more expensive than the models they replaced.  Those automobiles sold well and made large profits.  But they were not the automobiles Henry Ford wanted to build.

To realize his vision, Henry Ford would force Alexander Malcomson and his associates to sell him their stock in Ford Motor Company.

With the connivance of the Dodges and even Couzens, Henry Ford formed the Ford Manufacturing Company.  He then announced that Ford Manufacturing would produce the parts for the new Model N.   The scheme siphoned Ford Motor Company profits to Ford Manufacturing Company by raising the cost paid for parts.

It might seem that Malcolmson and his associates could have stopped this.  But, Henry Ford actually held all the cards.  Implicit in the creation of Ford Manufacturing Company was the threat he would produce automobiles, not merely parts, outside the Ford Motor Company.  Faced with the potential of a Ford Motor Company without Henry Ford, Malcomson and his associates sold out to Henry Ford.

Henry Ford now owned 59% of the Ford Motor Company.

Though perhaps inadvertently, Elon Musk has tested the same tactic.

In June of 2018, Elon Musk tweeted that he was considering taking Tesla, Inc. private and had “secured” funds to do so at $420.00 per share.  Tesla, Inc.’s stock price gained 11% before trading closed for the day.  Musk’s statement also prompted an investigation by the federal government’s Securities and Exchange Commission.  Apparently, the SEC believed Musk was trying to manipulate the price of Tesla stock to the disadvantage of the short-sellers.   In September, claiming that Musk had not, in fact, “secured” financing to take Tesla, Inc. private, the SEC filed suit to bar Musk from exercising management control over the company.

Tesla, Inc. stock dropped 12% in after-hours trading immediately following announcement of the SEC lawsuit.

Within days, perhaps realizing that its own actions were causing far more harm to Tesla, Inc. shareholders than anything Elon Musk had done, the SEC accepted a face-saving settlement.  Musk and Tesla, Inc. agreed to fines that were, for them, token amounts.  Musk agreed to cede the title of Chairman of the Board of Directors to an outside director.  Musk remained Chief Executive Officer, member of the Board of Directors, and firmly in control of Tesla, Inc.

The price of Tesla, Inc. stock gained 15.9% in overnight trading immediately following announcement of the settlement.

While the SEC lawsuit was pending, banking house J. P. Morgan advised clients that Musk’s continued participation in Tesla was “crucial” to the company’s chances for success and without him Tesla would have difficulty raising capital on “amenable” terms.  Even with settlement of the suit, Tesla stock did not recover all value lost after the SEC announced its investigation.  But, the SEC had established, without doubt, that Elon Musk is as indispensable to Tesla, Inc. as Henry Ford was to the Ford Motor Company.

(To be continued in Part Two)[/vc_column_text][/vc_column][/vc_row]


Ralph Kalal

Automobiles always have been Ralph Kalal’s passion. His first real job, in the summer of 1969, was the “new car lot boy’’ for the local Chevrolet dealer – a dealer that also sold the Yenko line. That job gave him the keys, albeit only as temporary custodian, to COPO Camaros, Z-28’s, and SS 396s – cars that now routinely fetch six figures at auction. He has owned a succession of performance cars, including Z28 Camaros and an Impala SS. But he's owned more Corvettes than any other brand or model. The current 70th Anniversary C8 convertible is the sixth. As a writer, he authored “Car Care for Car Guys,” a how-to guidebook to auto repairs for enthusiasts. He served as editor of the "Carhart Chronicle," the quarterly publication of the Wisconsin Society of Automotive Historians twice winning the Old Cars magazine "Golden Quill" award for excellence in a club publication.. For the past fifteen years, he has been employed in the online aftermarket automobile parts industry.