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Anti-Capitalist Meetup: Fagor Goes Bankrupt – Trouble in Camelot by Geminijen

No one should be surprised these days when yet another company goes belly-up in these difficult financial times, especially in devastated economies such as Spain. Yet the bankruptcy of Fagor, the flagship cooperative in the Mondragon Cooperative Corporation (MCC) has shaken many anti-capitalists around the world as akin to witnessing the ending of Camelot. The fact that at least two of the other largest cooperatives in the Mondragon network, Caja Laboral (the bank and financial center of the corporation) and Eroski (a chain of retail stores throughout Europe) are in dire financial straits has only added to the ominous threat.

Fagor, with its 5,600 workers, is a relatively small part of the whole. Even so, Trevino (Fagor’s CEO) warns that its fall “will have an uncontrollable domino effect on the rest of the group with major social implications.” He believes Fagor’s liquidation would create a €480m hole at Mondragon, including inter-group loans and payments the group’s insurance arm would have to make on Fagor workers’ unemployment policies.
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Mondragon has promised to find new jobs or offer early-retirement terms for as many as it can of Fagor’s Spanish workers, but this is a tall order in a country with 27% unemployment. Besides their jobs, workers stand to lose the money they had invested in the co-op if it is liquidated.

Demystifying the Mondragon Myth

For the last 50 some years, the growth of what is now the Mondragon Cooperative Corporation has given many anarchists, socialists and other progressives in the cooperative movement the hope that yes, Virginia, there really is a viable alternative to Capitalism or, at the very least, an economic system that could provide a transition to socialism. Moreover, although many socialists won’t easily admit it, there is often the underlying hope that somehow this transition could occur “peacefully”, without a real class struggle ending in state ownership; that somehow, within the belly of the beast of capitalism, the cooperative model could “out compete” the capitalist multinationals at their own game and become the dominant economic paradigm.

Yet, as one blogger commented in Alternatives to Capitalism,

“There is no escaping the need to challenge Wall Street and the other big financial centers across the world for political and economic power which requires a well-organized and intense class struggle […] something the promoters of these cooperative schemes try to evade as they try to convince workers there are ways around bringing mines, mills and factories under public ownership which is going to require the nationalization of entire industries.”

Unfortunately, many of Mondragon’s supporters (of which I am one) tend to promote the Mondragon model in a very schizophrenic way. On one hand we talk about the ideology of cooperation over competition in an almost mythological way. We talk about how Mondragon was started in 1956 by Father José María Arizmendiarrieta, a priest who, in the shadow of the fascist dictator Franco, began a cooperative with five workers in the isolated, impoverished Basque region in northern Spain.

We talk about how it is the Father’s vision of worker-owned and worker managed cooperative enterprises, based on democratic control, equality and cooperation among the workers, that makes Mondragon different than other capitalist enterprises.

All the workers in a cooperative would be owners. All workers would have one share and one vote. All workers would have an equal voice in decision-making and setting the company’s policies. Workers would elect their own managers who could not make more than twice the highest paid worker. Cooperatives would remain small (no more than 500 people) and educate all incoming workers so that the cooperative way of life, focusing on the workers and the needs of the community they lived in, would not be replaced by the competitive greed of capitalism. The cooperatives would form a network of manufactured goods and service cooperatives that would support each other.

Yet, when we promote the Mondragon model to others, we tend to evaluate the success of the “Father’s vision” based on capitalist measurements of success–how much money do the coops pull in and how big are the enterprises(the capitalists’ bottom line). After all, if we are going to create a cooperative economy, we have to be able to compete with “the big boys” on their own terms. We seem to have forgotten measurements such as workers stability, democratic decision making, and making products which will enhance our communities, instead of for profit maximization.

So we point to the fact that Mondragon developed into a world-wide network of cooperatives that boasts $14 billion in total revenues, distributed among 110 cooperatives, 147 subsidiary companies, eight foundations and a benefit society with total assets of 35.8 billion euros. The MCC currently employs over 80,000 people, 32,000 of which are coop members, and include in their products manufactured goods as diverse as washing machines and high end bicycles as well as financial products such as hedge funds and a network of retail stores that span Europe. Fagor alone, has over 5,600 employees in 5 factories in Spain and eight other non-cooperative factories in China, France, Poland and Morocco, and the ratio of the CEO’s salary is limited to 10 times that of the highest paid worker.

A cursory reading of the above litany promoting Mondragon’s huge financial success when compared to the ideological model clearly indicates some serious contradictions between theory and practice. Fagor far exceeds the recommended size for a cooperative; the majority of workers in the Mondragon Cooperative Corporation are no longer cooperative members with voting rights but hired employees. Even among the coop members the conditions have changed – it is no longer one vote per share but one vote per coop member no matter how many shares they own. And while the CEO can only make 10 times what the highest worker makes (which is exponentially lower than traditional capitalist CEOs who make 200-300 times what a worker makes), it is still a much greater degree of inequality than in the original cooperatives.
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Can we develop large scale global economies that can compete with a capitalist system without losing our cooperative soul?

In Mondragon and Globalization, Basque Country and Ghosts, Mondragon managers discuss why Mondragon has succeeded as a cooperative business: “Sustainability, worker participation (sovereignty), education, integration, diversification, innovation and flexibility.

How are these terms used in investor-controlled companies? How do we talk about cooperative businesses outside of the dominant paradigm? As part of this we discussed the pillars or keys to success:

• Control and use of capital
• Redefinition of labor/management relations
• Management education
• cooperative development
• lack of “silo” mentality—horizontal and vertical integration
• Inter-cooperative fund mechanism.

All of these are the key to Mondragon’s success. It is hard to imagine that they would be the same cooperative without a commitment to these pillars. Of course, Mondragon, like the rest of the cooperative world, is an island in a capitalist ocean. The problems of capitalism can’t help but creep into our cooperatives because we are part of society and societal norms get determined through a capitalist lens (for now).

Did Fagor Need to Go Bankrupt?

As a practical and real world matter, three decisions exposed Fagor to trouble just before the recession hit Spain in 2008:

1) When the large multinational moved production to low-wage Asian countries, Fagor, also opened some private non-coop companies in low wage countries to take advantage of cheap parts for its products. However, it refused to close most of its assembly lines in high wage countries such as Spain and France to preserve worker-owners’ jobs in keeping with the cooperative principal prioritizing worker security and local job stability.

This policy decision led to two different interpretations:

According to the Wall Street Journal, by keeping the cooperative workers jobs in Spain and France, instead of moving the whole operation to low wage countries, MCC could no longer compete with those multinationals who use solely cheap outsourced labor. This led to loss of sales and profits in the parent country and raised Fagor’s debt burden which made it more financially vulnerable.

However, according to Gar Alperovitz, a supporter of Mondragon, much of the sales plummeted in Spain due a housing recession which was the product of the overall capitalist created banking crisis of 2008 not due to FAGOR’s policy decisions – if people don’t have houses, they will not buy domestic products such as washing machines, cooking ware, etc. no matter what the price.

2) Fagor acquired a French appliance company to try to achieve the scale to compete with Whirlpool Corp. and Electrolux in the free-market global economy. This however, again led to a massive increase in debt and more financial vulnerability.

3) Fagor sank €6 million into the Driron, a refrigerator-size invention that could dry and iron clothes at the same time. A €1,875 price tag and clunky look made it MCC’s Edsel. Again, given the over-heated speculation in the global market, was this a wise time, from the point of view of the workers’ job security to make an expensive speculative investment?

Alperovitz, in an analysis in Truth Out Now, places the blame for the bankruptcy on the cooperative community’s attempt to utilize an internal cooperative model in the MCC while trying to compete in a free market economy without taking into account the mechanisms of the dominant capitalist economic model. He suggests that, if we wish to encourage a cooperative economy we must also include systemic changes in both trade and the domestic market if cooperatives are to survive.

Alperovitz suggested a form of planned trade is necessary in the global market.

According to Alperovitz:

“A serious “next stage” systemic design almost certainly will have to adopt one or another form of “planned trade” rather than “free market trade” – else the fate of specific firms, and specific groups of workers, and also the communities in which both exist, become subject to the ever-intensifying challenges as corporations play one low-wage country off against another, with the destruction of wage standards and firms (cooperative or otherwise) the inevitable result (http://www.truth-out.org/news/item/19704-mondragon-and-the-system-problem).”

In fact, Mondragon did attempt a limited form of planned trade that incorporated both capitalist and planned trade strategies by trying to keep open plants in both the high wage and low wage countries in a policy known as co- or multi-location.

The second challenge according to Alperovitz, takes us beyond the question of planning in connection with trade to planning in connection with the domestic market:

“It was never the goal of the Mondragón Corporation to seek a planning solution to the problems of the Spanish economy. Nor was “changing the system” part and parcel of its primary mission. It always sought to compete successfully in the existing system, at the same time demonstrating a superior form of internal organization. Americans concerned about fundamental, longer-term change need to ponder this particular point carefully. The challenge any system-changing vision presents is at least twofold: First, how to include new models of cooperative organization in a larger strategy that includes managing (and restructuring) the wider economy in its goals; second, how to begin to think through much more carefully issues of sectoral planning within larger democratic or participatory planning goals (http://www.truth-out.org/news/item/19704-mondragon-and-the-system-problem).”

Alperovitz sites nationalization done briefly in the auto sector in the United States during the 2008 crisis as one example of systemic change in the broader economy. As an example of sectoral planning, Alperovitz sites the transportation sector suggesting each part of transportation cooperative network be designed to enhance and support the other parts. With vertical and horizontal planning, it would be difficult for outside marauding multinationals to penetrate the network, Both examples involve state planning, much as Venezuela has started doing in its communal community councils.

How far has Mondragon deviated from the original model?

It is important to recognize when quantitative change has become qualitative. Here are a few additional indicators of how the MCC has strayed from the cooperative principals:

1) While each year, Mondragon University and other education centers within its industrial cooperatives teaches workers cooperative principles, the economic educational component is based on traditional neoclassical capitalist economics.

2) Since its entry into the global market during the 1990s when it reoriented its development goals to compete in a global economy, it has abandoned the cooperative principal of keeping cooperative control in local communities. Instead of using networking of local cooperatives as support for each other and as a buffer against rapacious capitalist outsourcing, it has developed 25 partnerships between local parent cooperatives in high wage countries and private non-cooperative companies in low wage countries. In a 1999-2006 study MCC justifies this major deviation from cooperative principals by saying that they will be more competitive with the pricing of capitalist multinationals so that they will have to lay of fewer workers in the cooperatives and that they can eventually educate and introduce worker cooperatives in their non-cooperative companies in low wage countries.

3) Although Mondragon was able to save all its cooperative workers in the first economic meltdown in 2008 all the workers had to agree to take a 20% pay cut and give back some of the equity they had acquired over the years as owners so they could pay back some of the debt some of the larger, more globally oriented coops had acquired although the workers in the coops had little decision-making power in the acquisition of these debts.
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4) Although the MCC was able to save its cooperative workers in 2008, they laid off all their temporary workers in Spain (about 40% of the workforce and mostly women) who had never had any decision making power, job security or equity in the cooperatives. The same fate may await many of the non-cooperative employees in the Eroski coops in foreign countries.

5) Some of Caja Laboral’s newer coop projects are hedge funds which have a very bad record as far as encouraging risky capitalist speculation.

6) Trevino, the current manager of Fagor wanted to take Fagor in the restructuring and move it to Poland and restart it as a regular capitalist shareholding corporation.

7) The majority of Eroski’s workers, the large retail chain that spans Europe, are not coop members and have no voting, job security or equity rights;

8) For decades, the giant network of industrial and retail cooperatives of Mondragon was held up as an international model of solidarity — whenever one co-op got into trouble, the rest of the Mondragón Corporation would rescue it with cash or take on workers at risk of losing their jobs. In this year of 2013, the Mondragon Corp voted for the first time, to let one of the coops (Fagor) go bankrupt. Of the 109 remaining coops, all but three coops wanted to continue to bail Fagor out but the Board of Directors of Caja Laboral and Eroski, the other two largest coops (which also happen to be the two coops that have strayed furthest from the coop model in terms of a nondemocratic hierarchy and risky financial speculation) voted to let Fagor go bankrupt and, since the vote has to be unanimous, broke the solidarity pact that has been the backbone of the Mondragon model.

For those of us who have never seen the cooperative movement as an end in itself, but as a way of organizing workers as part of a transition to socialism, the rational has been that the coops are still a lot better than the purely capitalist enterprises (I agree). The question then becomes when do quantitative changes become qualitative? And do we just proceed as usual, rationalizing that most of the network is still functioning even though it took a hit, or do we step back and say we have to recognize the need for larger systemic changes. Do we put all our efforts into fighting for the nationalization of industries and, as some socialists believe, and refuse to be distracted by the cooperative model (even though socialist nationalization is a project that is nowhere on the immediate horizon?) Or are there other options in between?

One final question remains – Is the structural problem strictly due to the external dynamics of capitalism as Alperovitz maintains or, in addition to the systemic changes we must make, must we also re-examine how the culture of capitalism, like a Trojan horse, has corrupted the internal culture of the cooperatives themselves?

Sources

1) Trouble in workers’ paradise. The collapse of Spain’s Fagor tests the world’s largest group of co-operatives. Nov 9th 2013 | MADRID | From the print edition, The Economist

2) Mondragon: An alternative to capitalism or part of the capitalist scheme of things?

3) October 13, 2007 Mondragon and Globalization, Basque Country and GhostsFiled under: Management — Tags: innovation, mondragon — John McNamara @ 2:38 pm

4) Mondragón and the System Problem Friday, 01 November 2013 09:04 By Gar Alperovitz and Thomas M Hanna, Truthout | Op-Ed; republished: http://www.garalperovitz.com/2013/11/mondragon-and-the-system-problem/

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