The Purpose of Production

In the annals of management, few stories illustrate the essence of true innovation as vividly as Henry Ford's creation of the assembly line. It was not, as popular myth might suggest, an invention born of a fascination with mechanical efficiency or a desire to revolutionize factory processes for their own sake. Rather, Ford's breakthrough stemmed from a singular, customer-focused vision: to sell millions of automobiles at a price point of $500 each, making personal transportation accessible to the average American worker. This was no abstract engineering pursuit; it was a deliberate strategy to create and satisfy a vast market that did not yet exist. The assembly line emerged as a means to that end—reducing production costs from over $800 per Model T in 1908 to under $300 by 1914, enabling the $500 retail price that unlocked explosive demand.

Ford understood a fundamental principle of business: production is not an end in itself but a tool to serve the customer. As I have long argued, the purpose of a business is to create a customer, and all innovations must align with that purpose. Ford did not ask, "How can I build a better factory?" He asked, "At what price will millions of people buy a car?" This question drove every decision, from standardizing parts to streamlining workflows. By 1921, Ford Motor Company commanded over 55% of the U.S. automobile market, not because of superior machinery alone, but because the machinery served a clear market reality. Managers today would do well to remember that technology and processes are servants, not masters, of customer needs.

This lesson takes on renewed urgency when we examine the current challenges facing China's manufacturing sector. Over the past decade, China has built an unparalleled industrial apparatus—vast assembly lines, automated factories, and supply chains spanning everything from electric vehicles to solar panels and semiconductors. Yet, this expansion often appears driven by a mindset of "cheaper, better" production for its own sake, rather than a deep understanding of global customer demand at specific price points. The result? Overcapacity on a staggering scale, leading to economic distortions that echo the pitfalls Ford avoided.

Consider the electric vehicle (EV) industry, where China produces more than 60% of the world's supply. In 2024 alone, Chinese manufacturers churned out over 9 million EVs, far exceeding domestic and global demand. This surplus has led to aggressive exporting at below-cost prices—dumping, in economic terms—prompting tariffs from the European Union (up to 38% on Chinese EVs) and the United States (100% duties). Why this mismatch? Because the focus has been on scaling production to achieve ever-lower unit costs and technological superiority, without rigorously mapping customer willingness to pay. In mature markets like Europe and North America, consumers demand not just cheap EVs but reliable ones with robust charging infrastructure, long-term service support, and alignment with environmental regulations. Chinese firms, subsidized by state incentives, have prioritized output metrics—gigafactories rising overnight—over market segmentation. As a result, inventories pile up, factories idle, and deflationary pressures ripple through the economy.

This pattern repeats across sectors. In steel, China produces over half the world's output, yet chronic overcapacity has depressed global prices and invited trade barriers. Solar panels? China dominates 80% of production, but excess supply has crashed prices by 50% in recent years, squeezing margins even for domestic players. The "cheaper, better" ethos, while admirable in its ambition, neglects the Druckerian imperative: Know thy customer. What price will Indian households pay for solar installations amid subsidy cuts? At what point do American automakers integrate Chinese batteries without risking supply chain vulnerabilities? Without answering these, production becomes a liability, not an asset.

The consequences for China's economy are profound. GDP growth slowed to 4.7% in the second quarter of 2024, hampered by deflation, youth unemployment nearing 15%, and a property sector crisis that has eroded consumer confidence. Foreign direct investment turned negative in 2023 for the first time in decades, as multinationals diversify away from overreliance on Chinese manufacturing. This is not failure due to lack of capability—China's engineers and factories are world-class—but due to a misalignment of purpose. Assembly lines built for the sake of assembly lines breed inefficiency: wasted capital, environmental strain (China's industrial emissions account for 30% of global totals), and geopolitical tensions.

What, then, are the management lessons for leaders in China and beyond? First, innovation must begin with the market, not the machine. Conduct rigorous customer analysis—segment by price sensitivity, geography, and needs—before scaling production. Ford's $500 target was not arbitrary; it was calibrated to the average worker's wage. Modern tools like data analytics and AI can refine this further, predicting demand curves with precision.

Second, avoid the trap of state-directed overproduction. While government support can accelerate growth, it must be tethered to market signals. Subsidies that prioritize volume over value distort incentives, leading to what economists call "malinvestment." Instead, foster entrepreneurial ecosystems where firms compete on customer insight, not just cost.

Third, embrace decentralization and knowledge work. China's top-down model excels at replication but struggles with adaptive innovation. Empower managers and workers as knowledge contributors, as I advocated in my writings on the knowledge society. This shifts the focus from "how much can we produce?" to "what does the customer truly value?"

In the end, Ford's legacy endures because he innovated with purpose. For China to reclaim its momentum, it must do the same: redefine production not as an idol of efficiency, but as a bridge to the customer. Only then will its assembly lines propel prosperity, rather than impede it. Managers everywhere should heed this: Build for the market you know, not the factory you dream. Note: This was written with the aid of Grok.