The Tyranny of Average Cost - part the nineteenth

With the spectre of inflation, supply chain angst, and the quit rate, here's a NYT report that adds some useful historic perspective. Henry Ford built a soup-to-nuts production process, which is what is described. The point was to keep control of the entire production process, so that meant starting with natural resources and ending with a bunch of Model T's. The olde A&P did something similar in the 50's and 60's with food production.

Yet his management philosophy — and especially his vigilance against getting pinched by suppliers — yields powerful insights about the culprits and lessons of the Great Supply Chain Disruption, which has become a leading source of inflation and product shortages.

What's changed since the making of Rouge, more than anything else, is the Tyranny: the example in the report is computer chips. Put simply, the variety of chips used (800), and the capital equipment needed to make them, makes it infeasible for one customer (Ford Motor Company) to drive down average cost of each chip with such a small output. Which is the reason the number of chip foundaries is down to a handful, with TSMC and Samsung holding about 60%. ASML is the (nearly) sole supplier of lithography machines:

After reporting earnings in July 2021, the company said they had a near monopoly for machines used by TSMC and Samsung Electronics to make the advanced chips. The electronics manufacturers use Extreme ultraviolet lithography equipment to make the latest generations of chips.

Intel, hoping to regain footing, is working with ASML on next-generation machines. The point, kind of obvious, is that neither Ford nor any other end-user of chips can justify so much capital on so little output. That's also the reason that X86 and ARM have become the source of nearly all full spectrum chips. Embedded controller chips, many made on decades old designs and nodes, have a bit more sources.

But chip companies have catered heavily to their investors by limiting their capacity — a strategy to maintain high prices. Shortages of truck drivers and warehouse workers are frequently the result of the downgrading of such jobs, with wages cut as a way to reward shareholders.

Henry was a nasty guy, by today's standards, but he raised blue-collar pay in order to keep them in the building, and the economy running. Oddly, some of today's Tech Titans managed to get away with what Henry was doing until the Dodge brothers, and a court, stopped him: limit dividends and capital dispersion to shareholders. While a white supremacist and anti-Semite, he understood that the macro effects of his business were a Good Thing to much of the rest of the population.