Control of 59% of Ford Motor Company stock allowed Henry Ford to introduce the Model T in 1909. He added the assembly line in 1913. In 1915, he began acquiring land for the ultimate in industrial vertical integration: the River Rouge complex. In pursuing these plans, Henry Ford would discover that even 59% of the Ford Motor Company shares would not give him total control. To achieve that, he would need to own all of them. The Ford and Tesla parallels and those of their respective founders show history repeating itself.
In 1915, Ford began acquiring 2,000 acres of land along the Rouge River in Detroit. During World War I, the river was dredged and widened enough to allow Great Lakes freighter ships to dock at the site. Henry Ford now planned a massive industrial complex on the site.
He had already begun the process of eliminating reliance on outside suppliers. The Ford Motor Company owned iron mines and limestone quarries in Michigan, Minnesota, and Wisconsin. Ore from those mines was transported on Great Lakes ships owned by Ford Motor Company. When the complex was completed, River Rouge blast furnaces would turn the ore into iron. At the River Rouge foundry, which would be the largest in the world, molten iron would be poured for engine blocks, cylinder heads, and exhaust manifolds. River Rouge electric and open-hearth furnaces would produce steel from the iron that would be processed at River Rouge rolling mills, and then be used at the River Rouge factory to manufacture Ford automobiles and trucks.
Ford recognized that eliminating outside suppliers reduces costs of production – which increases profit. The River Rouge complex was another step, albeit a giant one, in Henry Ford’s vision of selling enormous volumes of automobiles at low prices. Though Henry Ford often spoke as though he were almost philanthropically motivated to continually lower the price of the Model T, it was actually simple business logic. Just as his decision to pay workers $5.00 a day was designed to cut employee turnover and increase plant efficiency, lowering the price of the Model T was a strategy to continually increase sales, undercut competition, and make massive profits.
By now, Henry Ford was a very rich man. So were his remaining investors. The Dodge Brothers received dividends on their 10% of the outstanding Ford Motor Company shares totaling $35,000,000.00 in the 13 years following the company’s founding. But the Dodge brothers were no longer allies of the Ford Motor Company. They had become competitors.
John and Horace Dodge had assembled Fords under contract with the Ford Motor Company. But these were one-year contracts, subject to annual renewal. With Henry Ford owning a majority of the stock, there was risk the contracts would be given to others – and the growth of the automobile industry in Detroit meant that there were many other suppliers available. Even when the contracts were renewed, profit margins were decreasing. So, in 1913, the Dodge brothers ended the contract with Ford Motor Company to produce their own automobile.
Introduced late in 1914, the Dodge model 30/35 was twice the price of a Model T. It also offered more features, including an electric starter and three speed transmission (in contrast to the Model T’s crank and two-speed planetary transmission). More than 10 Model T’s were sold in 1915 for every Dodge sold – but Dodge sales were stong enough to rank it third in total automobile sales for the year.
This meant the Ford Motor Company was paying dividends to a competitor. The Dodge brothers still owned 10% of the Ford Motor Company . In 1915, dividend distributions to Ford Motor Company shareholders had been 66% of profits. In the five years preceding, dividends had been between 40% and 50% of profits.
That was about to end. Henry Ford decided the money would be better spent on building the River Rouge complex. He walked into the Dodges’ offices in 1916 and informed the brothers that the Ford Motor Company dividend would total 1,200,000 in 1916 – a dividend of $120,000.00 for the two brothers – and the rest would be reinvested to build the River Rouge complex.
The Dodge brothers sued.
Their lawsuit wasn’t really about the money. Their goal was blocking construction of the River Rouge complex. The Dodges – though taking the position in court that building the River Rouge complex was wasting corporate assets – fully understood the complex could put other automobile manufacturers, including the Dodge Brothers Motor Company, at a competitive disadvantage they could not overcome. They asked for an injunction blocking construction of the River Rouge complex and ordering Ford Motor Company to issue a $20,000.000.00 dividend to its shareholders.
In the end, the Dodges won almost nothing. They delayed construction of the River Rouge complex for almost two years before the Michigan Supreme Court ruled against them. Though the Court did require Ford Motor Company to pay the special dividend, the amount the Dodges received was only 10% of the total dividend (and they had to pay 70% of that in federal income taxes). The court even ordered them to pay two-thirds of the court costs.
In the meantime, Henry Ford’s emphasis in his trial testimony on producing automobiles at the lowest possible price so more people could afford one had, as he undoubtedly intended, enhanced his public image. Newspaper editorials praised him as a businessman who cared about the needs of ordinary people. He emerged the hero.
The River Rouge complex was completed in 1928. It employed 100,000 workers and was the largest industrial production facility in the world. Though Ford Motor Company sold the steel production facilities in 1989, the River Rouge assembly plant still produces Ford vehicles. A new F-150 rolls off the end of the line at the Rouge every 53 seconds. The River Rouge complex was designated a National Historic Landmark District in 1978.
Even though beset by problems of execution, Elon Musk’s emphasis on vertical integration is conceptually no different than the vision Henry Ford achieved building the River Rouge complex. Musk want to build more Gigafactories and produce every component of Tesla, Inc. products. He is following in Henry Ford’s footsteps and for the same reasons.
Having won in court, Henry Ford set about getting rid of the Dodges and the remaining minority shareholders. He did it by capitalizing on his celebrity status and his public identification with the Ford Motor Company.
Henry Ford first resigned his position as President of the Ford Motor Company and installed his son, Edsel, in that position. Henry Ford then decamped to California, ostensibly on vacation. While in California, he announced he would form a new company. This new company would build a new car, more modern than the Model T at half the price. Newspapers portrayed this new company as a done deal, with the new automobile a concept that would become reality in only the short time it would take to gear up production.
Model T sales dipped as the public awaited the newer, better car.
Ford Motor Company was committed to selling automobiles in large volume at low prices, with the comparatively small profit margin per vehicle more than justified by the massive profits generated by selling enormous numbers of them. If that volume were not maintained, profits would dry up quickly as economies of scale became liabilities of excess capacity and overhead.
The Ford Motor Company did not need Henry Ford as a competitor.
The Dodges and other minority shareholders couldn’t sue. Shareholders, unlike corporate officers or members of a board of directors, have no duty of loyalty to the company in which they hold stock. With Henry Ford no longer an officer of the Ford Motor Company, he was free to develop a competitor – exactly what John and Horace Dodge had done while receiving dividends as Ford Motor Company stockholders.
Faced with this prospect, it began to make sense for minority shareholders, including the Dodges, to sell their stock.
But there were no buyers. There was no market for stock in a company controlled by
Henry Ford and against which Henry Ford planned to compete with a better product.
Eventually, a few adventurous purchasers willing to take that risk appeared and the minority shareholders sold. The real purchaser was Henry Ford acting through agents. Only Couzens, who had resigned as an officer of the company in 1915 and was now the Mayor of Detroit, saw through the scheme. He refused to sell at any price until the real purchaser revealed himself and then demanded a better price than offered the others. He got it. (The irony is that Couzens had long wanted to sell his Ford stock. He considered it a political liability and potential conflict of interest. Couzens would later serve as a United States Senator from Michigan. He died in 1936. Henry Ford was the lead pallbearer at the funeral.)
Henry Ford now owned 100% of the shares of the Ford Motor Company. That stock would give him absolute control over the company until his death.
The times are different now. The laws are different. The market is different, both the stock market and the automobile market.
But one thing is the same. Like Henry Ford before him, Elon Musk has largely erased the distinction between himself and his company. The Ford and Tesla parallels are obvious.
Consider what would happen if Elon Musk were to leave Tesla, Inc. to concentrate exclusively on other enterprises. Without Musk’s vision, the company would lose its magic. Tesla, Inc. shares would drop in value. The immediate sell-off would be only the beginning as the press began looking for a deeper motive – speculating that Musk was really leaving because the company was failing. As the stock price fell, Tesla’s ability to raise capital and borrow funds to refinance debt would dry up. Suppliers would become nervous about carrying Tesla, Inc. receivables.
In this environment, sales of the Model 3 would shrivel. With Musk gone, the glamour would be gone. The Model 3 would no longer be a statement that its owner is a socially conscious and prosperous man or woman of the future. Tesla would be the next orphan car, one built by a company in serious jeopardy of bankruptcy. Without the cash flow of volume Model 3 production, Tesla, Inc would be unable to survive as an independent company.
If that seems an overwrought scenario, ask yourself:
Would you invest in Tesla, Inc. without Elon Musk?
Henry Ford understood the power of celebrity and public image, power he used to implement his vision and control his company’s destiny.
Elon Musk should study Henry Ford.
To start at the beginning, please read Part One of this article.
For a detailed legal analysis of Dodge v. Ford Motor Company and its effect on modern corporate law, see M. Todd Henderson’s analysis in the Chicago Working Paper Series.