Abstract
This article presents a case study of the rise and fall of the Mondragon cooperative Fagor Electrodomésticos (1959-2013). Fagor, after playing a key role in the creation of the Mondragon cooperative experience, had been transformed into a multinational corporation competing in the global home appliance market. Given Fagor’s role as a leading cooperative, the general question of the viability of workers’ cooperatives is also at stake in its failure.
1. Introduction
The viability of workers’ cooperatives in a capitalist economy has long been a point of debate and analysis since the nineteenth century, as can be seen in the early writings of Karl Marx (Egan 1990). The literature on this issue has traditionally been dominated by the “degeneration thesis,” which asserts that cooperatives are unavoidably destined to suffer either business failure or a gradual degeneration from democratic forms to capitalist forms of organization (e.g., Meister 1984; Webb and Webb 1921). Current literature contends that workers’ cooperatives are more efficient (Pencavel 2014) and resilient (Olsen 2013) than conventional businesses, although the prevalence of capital-owned firms in the actual market economies is undeniable. The case of the Mondragon cooperative complex in the Basque Country has been paradigmatic: since their foundation in 1956, the Mondragon cooperatives have shown tremendous capacity for economic growth and long-term survival, while maintaining their democratic character and social commitment (Whyte and Whyte 1991).
Nevertheless, the collapse of Fagor Electrodomésticos S. Coop in 2013 has been a cataclysm for the Mondragon group, for Basque industry and for the world of workers’ cooperatives and economic democracy in general. Fagor Electrodomésticos (Ulgor) was the first of the Mondragon cooperatives and thus the root of “the cooperative experience of Mondragon” (Ormaechea 2003). Since the 1990s, the acquisition of noncooperative local and foreign firms transformed Fagor into a household manufacturing multinational company. In 2007, Fagor employed around eleven thousand workers in its eighteen production plants and its sales topped €1.8 billion. However, after the crisis that hit the world economy in 2008, Fagor sales fell drastically. Despite the support received from the Mondragon group and from the Basque government, the accumulated losses and the pressure of creditors led to the bankruptcy of Fagor and its subsidiaries in November 2013.
The failure of a significant firm is always of interest for the light it can shed on the causes of bankruptcy and the efficacy of the steps taken to combat the threat thereof. In the case of Fagor, there is also a further point of interest: the general question of the efficiency of cooperatives. In this article, we seek to address two main questions related to the failure of Fagor. First, we begin by exploring the reasons, preconditions, and signs of failure of Fagor because, whereas lack of profitability in a period of general economic crisis may be the immediate cause of the bankruptcy, many underlying factors inhibited Fagor’s ability to compete globally in an industry dominated by large multinationals. We next move on to considering whether the reasons behind the collapse of Fagor are related to the cooperative character of the company, in accordance with the “degeneration thesis.” To this end, we conducted a case study primarily based on face-to-face in-depth interviews with several members of Fagor and the Mondragon Corporation.
We are aware that cooperative history is littered with cases of cooperatives that have disappeared. Whereas it is not our aim to generalize from a single case about the question of the viability of worker cooperatives, this research integrates several strengths to shed light on such an issue. On one hand, Fagor was the oldest and largest industrial cooperative in Mondragon, as well as the second largest industrial cooperative in the world (International Cooperative Alliance-Euricse 2012). Many researchers have also considered it the most representative of the Mondragon cooperative system and have focused their studies on Mondragon on this cooperative (Greenwood and González 1991; Kasmir 1996; Morrison 1997; Whyte and Whyte 1991). On the other hand, the majority of studies that have analyzed the cooperative degeneration have focused either on internal factors or external conditions that could have triggered this process. Furthermore, they provide generalizations from theoretical models and not a detailed analysis of the patterns of change occurring in the organization of the cooperative (Cornforth 1995). Indeed, though cooperatives deal with different combinations of factors and conditions and address them in different ways (Hunt 1992), this article shows an in-depth, comprehensive analysis of these factors and conditions affecting the viability and the democratic nature of Fagor. Results suggest that the viability of cooperatives is mainly subject to the same or similar factors that capitalist firms face in an environment such as the current one, and that the characteristics of cooperatives, such as worker stability, solidarity, and democracy, as well as intercooperation among cooperatives, can allow them to survive the ups and downs of globalized capitalist markets for longer.
The paper is divided into five parts. After this introduction, the second part presents a theoretical framework on cooperative failure in a capitalist economy, showcasing the Mondragon case. The third part details the method used. The fourth part analyzes the rise and fall of Fagor with particular attention to the role of various governance issues during the downfall. The article closes with a discussion of the findings of our research.
2. Literature Review and Theoretical Approach
Following the studies of British co-ops, Sidney Webb and Beatrice Webb (1921: 463–64) explained why there is such a small number of worker cooperatives in capitalist economies in the following terms: “In the relatively few cases in which such enterprises have not eventually succumbed as business concerns they have ceased to be democracies of producers themselves managing their own work; and have become, in effect, associations of capitalists on a small scale.” The Webbs’ assessment raised two kinds of debate: one about the comparative low efficiency of worker co-ops and the other about their degenerative tendencies. Avner Ben-ner (1984) points out that most of the existing literature attempts to explain the liquidation of worker cooperatives, attributing it to members’ shortsightedness, their inability to recover their entire investment through profit distribution, their risk aversion, their lack of accounting of capital as a scarce resource, their inability to settle personal disputes, their lack of discipline in the absence of a central monitor, their low motivation caused by excessive egalitarianism, their desire to keep the size of the cooperative small for social reasons, or difficulties in obtaining credit.
However, evidence on the comparative efficiency for cooperatives and conventional firms, referenced in Bonin, Jones, and Putterman (1993) or in Pencavel (2014), reaches conclusions that give a more positive view of the performance of worker cooperatives. The literature also suggests that democratic organizations survive rather better than conventional firms (Burdin 2014; Olsen 2013; Pérotin 2006). Some attributes of worker cooperatives’ governance, such as the internalization of conflict between workers and owners and better flow of information, profit sharing and participation, workers’ stability, and improved human capital, appear to improve organizational performance and productivity (Ben-ner 1984). This evidence suggests that the marginal presence of cooperatives in actual market economies cannot be explained by the fact that these firms are less likely to survive than capitalist firms (Burdin 2014).
The other debate raised by the Webbs, about the inevitable evolution of co-ops over time in such a way as to lose their distinctive participatory and democratic character, has also been prolific (Miyazaki 1984), including an extensive line of study that questioned the determinism of the theory of degeneration, both from a theoretical point of view (Stryjan 1989) and empirical ones (Cornforth 1995; Storey, Basterretxea, and Salaman 2014). Similarly, several studies addressed the possibilities of maintaining the democratic character of organizations in the long term (Rothschild-Whitt 1986).
The Mondragon group historically has had an excellent survival record of firms with practically no demise, while maintaining their democratic character (Bradley and Gelb 1987; Whyte and Whyte 1991). The worker-owned-and-governed cooperative business model and the supporting organizations developed by Mondragon permitted them to apply novel ways of solving the traditional problems of workers’ cooperatives, summarized by Vanek (1970) and Ben-Ner (1984). Indeed, soon after their founding, the cooperatives of Mondragon acquired a “mythical status” as a working model of an alternative to the capitalist mode of production (Azkarraga, Cheney, and Udaondo 2012: 76). The Mondragon companies became the model for successful cooperative business to follow. The extensive and varied experience of Mondragon provides a rich body of ideas and tools for cooperative development (Bradley and Gelb 1982; Miller 2002; Morrison 1997; Oakeshott 1978; Ridley-Duff 2010; Whyte and Whyte 1991) as well as for businesses who seek to foster labor-management cooperation and decentralization (Malone 2004) or to include values and the community view in consumer- and market-driven businesses (Agirre, Reinares, and Freundlich 2014; Cheney 1999; Mintzberg 2009).
Nevertheless, the challenges of globalization, along with the recent economic crisis, have marred this record of success, and even called into question the Mondragon governance model. On one hand, since the beginning of the 1990s, the most important Mondragon industrial cooperatives have been pursuing a strategy of direct investment—joint ventures, greenfield investment and acquisitions—so that currently, the main nucleus of industrial businesses within the Mondragon system is made up of around twenty-five cooperatives transformed into multinationals which control over one hundred capitalists subsidiaries all over the world. Huet (2000) suggests that these Mondragon cooperatives have been transformed into capitalist multinationals that make profit for cooperative members by the employment of workers of low cost countries.Errasti (2015) emphasizes the hybrid of character of Mondragon’s “coopitalist multinationals” which combine a cooperative nucleus with a capitalist’s periphery, accompanied by an accelerating process of gradual decrease in the ratio of members to hired wage-laborers. Nonetheless, there is research that suggests that this multilocation strategy of Mondragon “global coops” represents a harmonized model of international expansion for cooperatives, as it has succeeded in generating employment and wealth abroad while maintaining and creating employment in the Basque cooperative plants (Luzarraga and Irizar 2012; MacLeod and Reed 2009).
On the other hand, since 2007, as a result of the economic recession, the sales of the Mondragon cooperatives have fallen significantly: by 13 percent in the case of the industrial cooperatives (Mondragon 2012). Most Mondragon cooperatives have so far coped with the crisis without plant closures or the dismissal of worker-owner-members, something accomplished by internationalization and by putting into practice Mondragon solidarity mechanisms (Basterretxea and Albizu 2010; Elortza, Alzola, and Lopez 2012). There is, however, a significant exception, as we have mentioned in the introduction: Fagor Electrodomésticos S. Coop, Mondragon’s flagship industrial cooperative, a major white goods manufacturing multinational, initiated bankruptcy proceedings in October 2013.
Our article analyzes Fagor’s demise, focusing on the first part of the Webbs’ contention—that cooperatives were likely to “succumb as business concerns,” as that is the point that Fagor’s dramatic fall seems most to relate to—and offers some thoughts on whether or to what extent Fagor’s cooperative nature may have been at the root of the failure. To a lesser extent, we also consider the second question, that is, whether Fagor (and Mondragon internationalized cooperatives more generally) has retained its democratic character at the corporate, cooperative, and subsidiary levels.
3. Methodology
The methodology employed for this study is based on the contemporary case study methodology (Yin 2003), which is especially suited to analyze the viability of cooperatives, as most of the works devoted to this topic have been theoretical. With the aim of investigating the causes of the bankruptcy and of providing some systematic follow-up to the Fagor pre- and postclosure developments, we planned several interviews with the actors involved in the process. This was supplemented by documentary evidence from Mondragon (historical aggregate data, internal reports at Fagor and Mondragon—e.g., annual reports, sustainability reports—strategic plans, web pages, in-house magazines, and other published and unpublished documents) and external reports, such as the report of the administrators in charge of the bankruptcy process. Beyond these primary sources, we examined a wide range of secondary sources, including new items from the media archives and published interviews. This mixed method is useful in overcoming several methodological weaknesses inherent in the traditional “degeneration thesis” literature, such as the limited time spans of analysis or the excessive use of secondary sources and historical records (Cornforth 1995).
The oral and documental sources have been instrumental in the results of the investigation, especially to clarify what happened beyond the public information provided by media. During 2014, we carried out seventeen interviews, lasting an hour and a half on average. Interview locations varied from the subject’s place of work to public places and facilities at our university department. The interviewed subjects were told that their identity would remain anonymous and that only the positions they held in the cooperative or the corporation would be revealed. The field study utilized semistructured interviews with members of the standing committee of Mondragon, Corporative managers, Fagor cooperative representatives at the governing council, management, social council and worker members, temporary workers, and other Mondragon cooperative managers. All oral informants in this research have been questioned following in-depth interview semistructured methods. According to Wengraf (2001: 5), an in-depth interview aims to secure more detailed knowledge about the researched question and to “get a sense of how the apparently straight-forward is actually more complicated, of how the ‘surface appearances’ may be quite misleading about ‘depth realities.’”
This research is an attempt to understand, and explain, the whys and the hows of Fagor’s failure, why Fagor went so far in the multinationalization process and took such risks, why Fagor and Mondragon managers did not take the right decisions in time, how the cooperative character of Fagor conditioned its future, and why Mondragon corporation decided not to support Fagor anymore. Despite the difficulties in accessing some sources and the secrecy surrounding some of the facts related to the end of Fagor, this research contributes to the knowledge and understanding of the process under study with new data provided by some players who were directly involved.
4. Case Study: Rise and Fall of Fagor
4.1. The Mondragon model: Cooperative and corporate governance at Fagor
Fagor came into being in 1956 when five ex-students from a technical college in Mondragon, imbued with the Catholic social transformation ideas of the priest José María Arizmendiarrieta, started producing small lamps and heating devices (Ormaechea 2003). Fagor began as a democratically organized shop with production licenses from European firms. Early and rapid growth, protected by the high tariff barriers of Spain’s autarkic economy, transformed Fagor into a large white goods multiplant national company. By 1970, the assembly lines of the Fagor factories employed over three thousand workers, more than 30 percent of the total number of employees of the forty-four Mondragon cooperatives.
Fagor played a key role in launching other industrial cooperatives, including the financial cooperative Caja Laboral, the social security cooperative Lagun Aro and the research cooperative Ikerlan. Ultimately, it inspired the creation of the Mondragon Cooperative Corporation (MCC) in 1991 (Larrañaga 1998). Nowadays, renamed Mondragon, Humanity at Work, the Basque group could be described as a democratic federation; it contains over a hundred cooperatives organized into four areas—industry, finance, retail, and knowledge—with a total workforce of 74,177 and annual sales exceeding €12 billion (Mondragon 2015).
From the very beginning, Fagor defined the governance and the culture of the Mondragon cooperative experience. Its bylaws were developed in 1959 by Arizmendiarrieta and by the founding directors (Ormaechea 2003). The governance of Fagor retained the basic cooperative structure defined in 1959 to the end. This structure included the general assembly, the governing council, the management council, and the worker members’ social council. Fagor also established some of the basic organizational and financial practices of the Mondragon experience: the “open door” policy (the right of all workers to become members), the limitation of wage and salary levels, job stability, the option of transferring their jobs to their children with no additional requirement, entrepreneurial pragmatism, the training of managers, the nonexistence of stockholders (either cooperative workers or outsiders), the distribution of profits among members, reserve funds and educational and community purposes, the pooling of part of the profits among the cooperatives for redistribution, and the creation of supporting organizations such as Caja Laboral in 1959 and later the Ularco regional group in 1964. These formed the set of ideas and principles that created and held together the Mondragon experience.
In 1984, Fagor fully supported the creation of the “Mondragon Cooperative Group,” and later on the MCC, founded in 1991. Being part of MCC, which is more a federation of cooperatives than a holding, is voluntary on the part of the individual cooperatives and, once the general assembly of a cooperative applies for incorporation into the group, it has to accept the group’s existing rules and regulations. The MCC has three main governance bodies, elected by the cooperative members: the cooperative congress (the general assembly of all the Mondragon cooperatives), the standing committee (equivalent to a cooperative’s governing council), and the general council (the executive board of the corporate group). They establish Mondragon’s policy, regulations, and overall strategy and manage different financial funds made up of contributions from the individual cooperatives (Bakaikoa, Errasti, and Begiristain 2004).
4.2. The impressive growth of Fagor
After the end of the Franco dictatorship in 1976, Spain began to open its economy to Europe, and Fagor and the rest of the Basque cooperatives faced new competition in their domestic markets. The leadership of the cooperatives “became convinced that, in key areas, the group held too small a market share to remain competitive” (Greenwood and González 1991: 165). Expressing an opinion common among Mondragon managers, a cooperative manager explained that “growth and internationalization were not just the only way to be competitive, but also the sole means of survival”—that cooperatives must either expand or else succumb to their competitors and perish, as dictated by the popular “grow or die” capitalist adage. Fagor, like many other cooperatives, started its process of external growth through acquisition of local and international firms that eventually transformed the local cooperative into a multinational group.
In general terms, an important feature of the Mondragon multinationals is that international expansion has not been detrimental to local employment (Mondragon 2012). In the words of a Fagor manager, “Fagor became a manufacturing multinational to be able to compete with multinationals that had become established in Spain. International expansion was carried out to preserve the jobs and profitability of the cooperative. Our strategy was based on multi-localization to access new markets and not in de-localization.” At Fagor, as at many other cooperatives of Mondragon, only production that was no longer profitable or feasible in the parent company was transferred to foreign subsidiaries (Clamp 2000; Errasti et al. 2003).
In the late 1980s and early 1990s, Fagor mainly aimed at the North African (Moroccan and Egyptian) and Latin American markets (Argentina), taking over companies in those regions as well as in the Basque Country; this period witnessed, for example, the acquisition of Fabrelec (Edesa), later transformed into a cooperative (Errasti and Mendizabal 2007; Guillen and Garcia-Canal 2011). These efforts, however, had rather mixed outcomes, and in the late 1990s Fagor decided to focus on European markets, establishing in the Basque Country the joint venture Geyser Gastech with the German company Vaillant, and then taking over, with the help of the MCC, the Polish cooker manufacture Wrozamet, a former state-owned company of almost two thousand workers.
The great leap forward came in 2005, when Fagor participated in the takeover of the French competitor Brandt Électroménager, which at the time was as large as Fagor. This operation involved an investment of over €165 million for 88 percent of the equity participation (with Mondragon’s equity participation of 20% amounting to €50 million). Brandt, with 5,500 workers, had six production plants in France and one in Italy, with sales of over €800 million; it aimed to become a leading brand in the French household appliances market, already possessing a market share of 17 percent. By purchasing Brandt, Fagor expected not only to grow in size but also to obtain benefits from synergies achieved through the integration of the two companies’ structures. The purchase of Brandt was the biggest business operation conducted in the history of Mondragon cooperatives up until that moment. As the financial volume of the operation exceeded the limits defined in the social statutes of Fagor, it was submitted to the members’ approval. In an extraordinary general assembly held in 2005, the members of the cooperative expressed their concern about the risks entailed in such an operation and its effect on the company’s financial debt, its cooperative identity, and the members’ working conditions. The result was that 83 percent of Fagor’s members voted in favor of purchasing Brandt.
Later expansion also took Fagor into China with the creation of Shangai Minidomesticos Cookware Co., a small joint venture set-up thanks to a collaboration agreement between Fagor and the Xiangian Stainless Steel Products Company. As a result of this growth, Fagor offered a broad range of small appliances and household equipment for washing, cooking, and refrigeration in over 130 countries—the overall production exceeded 7 million electrical appliances per year (Fagor 2012b). Fagor bazkideak (members), who represented one-third of the total workforce, were confronted with the dynamics of a multinational corporation competing in highly globalized international capitalist markets.
4.3. The bankruptcy
The forceful expansion of the 2000s was quickly followed by a rapid decline. At the peak of the Spanish property bubble in 2006, over 11 thousand people worked for the Fagor multinational group. By 2013, that is, in the midst of the worst recession in recent history, only a little over 5,500 of those jobs remained—around two thousand in the Basque Country. In the same period, Fagor’s sales also fell sharply, and the company experienced a 40 percent drop in turnover. Fagor underwent increasingly severe losses until its definitive closure.
After 2008, Fagor’s turnover began to plummet and the situation progressively worsened. In 2010, the cooperative successfully negotiated—with the help of the corporation—a refinancing of its debt with its creditor banks. At the same time, some valuable assets, such as the logistic facilities in Vitoria-Gasteiz, were sold to private investors. The Fagor plants located in Mondragon were sold for €55 million to the corporation and leased back. Other solidarity measures from the corporation that helped Fagor mitigate its losses included Mondragon area cooperatives’ pooling of a percentage of net surpluses for redistribution and members of these cooperatives taking wage cuts to help Fagor.
Fagor was thus obliged to recognize the inevitable need to adopt adjustment measures to respond to new market conditions. Job losses had primarily affected the Mondragon cooperative plants, although no plant closed down in the period up to 2013: according to our estimates, over 3,000 jobs were cut between 2007 and 2013 in the Basque Country and another 3,500 in the French and Italian subsidiaries (Fagor 2012a). Fagor’s efforts to cope with members’ job losses without resorting to dismissals were based on traditional Mondragon solidarity mechanisms (Elortza et al. 2012). These mainly involved relocation, transferring worker members to surrounding cooperatives, early retirement and deduction in advances (wages) and other measures, such as voluntary redundancies or leaves of absence. These measures were accompanied by more flexible working conditions, an increase in mobility, more flexible work schedules, and an intensification of job pressure.
In December 2012, Fagor’s last strategic plan (2013–2016), designed by the top management, was approved by the general assembly of worker members, with 63.5 percent in favor and a significant 37.5 percent against (Fagor 2012a). The plan, which included more severe adjustment measures at the parent company and at foreign subsidiaries, was supported by the Mondragon Corporation, which was a shareholder in many Fagor subsidiaries. The strategic plan foresaw more than 1,000 jobs cuts in the Fagor cooperative plants and a reduction in production in the Basque Country and France in favor of Poland. In May 2013, after five consecutive years of heavy losses and worsening finances, in an effort to raise cash, Fagor started consuming its assets to stay afloat and again demanded help from the corporation. The corporation worked together with the cooperative in an emergency business plan containing more adjustment measures and spending cuts. To confront the restructuring process, Fagor received a €70 million cash injection through Mondragon Inversiones; six months earlier, it had obtained €50 million from the Basque government.
However, these efforts did not suffice to prevent disaster. By June 2013, Fagor announced losses of €90 million, while production and sales figures again fell. Suppliers had begun to demand cash payment on delivery of raw materials and components, whereas others stopped deliveries of components altogether. During the summer of 2013, the situation of the cooperative continued to worsen. Fagor launched an SOS and a rescue committee was formed, with representatives from the corporation, the Basque government, the Spanish government, and some banks. As cash ran out and losses accumulated, it was obvious that soon Fagor would have consumed the loans from both the corporation and the Basque government, along with all its tangible assets. Eventually, the Mondragon’s top management lost confidence in Fagor and turned off the money tap. On October 15, 2013, Fagor decided to call in the receivers. On November 13, 2013, after 57 years of operation, the flagship of the Basque cooperative movement declared bankruptcy and passed into administrative receivership.
4.4. Members’ view and reflections on the economic causes of Fagor’s collapse
Mondragon personnel and managers tend to see Fagor’s failure as the result of a mixed bag of causes, including business cycles, poor conditions in the overall economy and in the specific market in which Fagor operated, excessive productive and commercial dependence on the Spanish market, underutilization of production facilities, competitive pressure from larger and technologically more advanced firms on one hand and the firms from emerging economies on the other, and excessive debt due to a risky growth strategy. We briefly discuss some of these below.
The cyclical crises of capitalism, with the periodic recurrence of boom and bust, form the basis of the theories of many economists from Karl Marx to John Maynard Keynes, and may provide the primary explanation for Fagor’s downfall. The 1996 to 2007 expansionary phase of the Spanish business cycle, based in part on the real estate boom that fueled the growth of Fagor, ended abruptly in 2007. The number of new houses dropped sharply: by 94 percent between 2006 and 2012 (from 665,000 to only 34,000). Apart from the diminishing sales of electric appliances for new construction, high rates of unemployment and cuts ate into Spaniards’ buying power. As one Fagor manager explained, “everybody knew that the bubble was going to burst, but we did not expect a drop in sales of 50 percent, at most 30 percent. We thought that we hit bottom in 2009, but then the market fell again.”
Fagor was not the only firm experiencing problems during the crisis: the entire electrical household appliance sector found itself up against the toughest situation it had had to face in decades. Intense concentration over a long period had by 2011 left the sector dominated in Europe by a small number of large multinational competitors, such as BSH (20 percent of the market), Electrolux (17 percent), Merloni (11 percent), and Whirlpool (10 percent), in addition to new Asian competitors like LG, Samsung, and Arcelik (Fagor 2012a). As one manager at Fagor pointed out, “we had new competitors from low cost countries, and margins fell significantly; since Fagor was one of the smallest and weakest competitors, with only a 6 percent market share, and the one most dependent on a single declining market, it took the most severe damage from the crisis.” In fact, delocating to the Eastern European countries had become a clear trend in the sector. Meanwhile, Fagor was the European manufacturer with most plants and workers in high-cost countries. As the president of Fagor’s governing council recognized, this came at a cost: “our competitors produced 80 percent in low cost countries, while our ratio was only of 30 percent. We lost competitiveness with our plants in France and in the Basque Country, where the cost per hour was four times higher than in Poland. When we started to move production significantly, it was too late.”
Fagor’s venture to make inroads into foreign markets and achieve the necessary scale to compete in a very oligopolistic sector had been applauded for its vitality and audacity (Guillen and Garcia-Canal 2011). However, it also proved to be its greatest weak spot. The success of the internationalization strategy through the acquisition of large foreign firms depended on two factors: the ability to manage the new companies so as to attain the forecasted synergies and the implementation of an appropriate financial strategy. Neither was quite successful. In the case of Brandt, for instance, many members of both the cooperative and the corporation considered that the profits and synergies achieved were not sufficient to compensate for the high cost of the acquisition. As a manager of the cooperative put it, “Did we pay too much? It was going to be bought by a competitor and we needed to increase our size and our presence in international markets.” In a similar vein, but more forcefully, a corporation manager emphasized that “it’s clear that they paid too much, even if at the General Council everybody voted in favor of the acquisition; but it was another bankrupted mastodon from a high cost country with the same problems of Fagor. Fagor managers were not able to manage it properly and they did not take advantage of the French technology.”
Regarding its financial strategy, Fagor was both audacious and unlucky. It financed the acquisitions with significantly more debt than equity. In addition to the acquisitions, Fagor also invested large sums of money in upgrading its eighteen production plants. And it did so just prior to the collapse of the Spanish market. In our view, if any one event sounded the final death knell for Fagor, it was the enormous debt of more than €1 billion that it had accumulated, which in 2013 included suppliers (€210 million), banks (€380 million), Basque institutions (€75 million), the Mondragon group (€240 million), private investors (€175 million), and worker members (€79 million). Fagor’s debt to total assets ratio increased from 80 percent in 2007 to over 300 percent in 2013.
During its last years, Fagor was competing in a declining market that did not provide the volume, and hence the cash flow, urgently needed to repay its debt. In addition, the real production volume was clearly under Fagor’s actual capacity. As a manager at Fagor explained, “in 2007 with a plant capacity utilization of 80 percent, Fagor sales were €1.8 billion and our debt to total sales ratio was less than 50 percent. Before the crisis, the objective of Fagor was to achieve €2 billion sales to achieve a higher utilization of plants and a reduction in the unitary costs. In both cases we were able to repay the debt. But the crisis meant that in 2010, sales dropped to €1.4 billion, and in 2012 to €1 billion, leading to capacity utilization of 50 percent and a debt to total sales ratio of 100 percent.” The reduced demand resulted in underutilization of resources, leading toward higher production costs, higher prices than those of its direct competitors, lower demands, and the vicious cycle continued. In these circumstances, Fagor did not get the necessary cash flow that was vital to the development of its businesses and to settle the debts. The life of the cooperative was seriously threatened.
Despite the dramatic impact of the economic crisis, some argue that Fagor’s problems precede the recession. Although Fagor experienced incredible sales growth in the decades since incorporation, its profitability and its competitiveness were always very weak. Fagor’s international growth did not improve the performance of its plants in the Basque Country. As a former member of the general council told us, “conventional white goods has been a mature market with low profitability in the last decades; in the long term only the strongest, leanest and the most innovative firms survive. And Fagor was not sufficiently strong, lean and innovative.” Regarding this last remark, Fagor’s R&D research budget of over €40 million was only some 10 percent to 15 percent of that of its largest competitors like Whirlpool or BHS (European Commission 2011).
4.5. Governance issues during the downfall
The report of the bankruptcy administrators (Informe Administradores 2014) assessed Fagor’s actions quite harshly: “The measures taken by the cooperative to adjust its cost structure to the situation that was becoming consolidated in the internal market (Spain) never anticipated negative events but rather always seemed to follow in their wake… no wonder the company entered into an unstoppable path of difficulties.” In a similar, if an even more explicit vein, the minister of industry of the Basque government pointed to “the collective decision making process of the cooperative” as one of the reasons for the collapse of Fagor (Noticias de Gipuzkoa 2013). In fact, both the administrators and the minister raised the issue of the efficiency of democratic governance at Fagor, arguing that democratic forms hampered decision making and made the cooperative inflexible toward the implementation of radical reforms.
Governance problems at the cooperative level
In contrast to its large multinational competitors, where members of the board are professionals representing shareholders, strategic decisions at Fagor were taken by members of management, supported by the governing council, which in turn was made up of worker members of the cooperative. This peculiarity of cooperatives might reasonably be expected to cause institutional instability if radical employment cuts and adjustments become necessary due to a crisis. Even though the “managerial character” of the Fagor cooperatives has been underlined (Kasmir 1996), some managers complained that “all the major decisions have to be explained and agreed with the workers and the social council, which historically has had great power in Fagor. We have discussed strategy, adjustments plans, finance. . . and at the end comes the general assembly.”
In addition, the ability of the governing council of Fagor to oversee the complex activities of a major multinational corporation has been questioned. As a manager at Fagor put it, “the vast majority of cooperative members were probably not able to manage a multinational company with 18 production plants. The complexity of the strategic issues Fagor faced exceeded the capacity of members of the governing council. They could be qualified engineers but they did not master the strategic matters in an environment of increasing international competitiveness.” The management team complained about the lack of support for the governing council to carry out the necessary adjustment measures. “Although,” acknowledged the manager, “it is difficult for the governing council to support a plan when its members are the main ones affected by the job cuts. You cannot ask one hand to amputate the other.”
While the point of reference of multinationals is the rate of profit that is earned elsewhere (Burawoy 1985), the primary point of reference in Fagor was the cooperative’s local success, in terms of job and wealth creation. As we have noted, Fagor endeavored to minimize the job cuts and the social costs of its restructuring measures, especially at the cooperative plants in the Basque Country. The Mondragon solidarity mechanisms and the capacity for sacrifice on the part of members shaped the way in which Fagor dealt with the crisis and with the activity reductions. In the case of Fagor, the measures taken were insufficient. The cooperative nature of Fagor and its emphasis on defending members’ jobs at all costs had a negative effect on the survival of the cooperative. Even though Fagor had managed to downsize plants located in the Basque Country from 5,000 workers to 2,000 during the previous five years, further reductions to half of that were still required. “We had communicated, negotiated and agreed. But we had no time. Probably we postponed it too much. In fact, we should have delocated more production to Poland and earlier. But the managers and the members of the governing council did not dare to submit this proposal before the general assembly until it was too late,” explained a governing council member. The members of the governing council and the management council felt responsible for the job losses deriving from relocation. That responsibility made it very difficult for Fagor to close down plants in the Basque Country and transfer production to Poland to rationalize production and diminish losses. Doing so would have gone against the cooperative ethos: the preservation of local cooperative employment instead of profit maximization.
Whereas some managers expressed frustration over being hamstrung by democratic governance in implementing necessary reforms, members of the governing council and social council complained that there was too little democracy, and the managers’ proposals did not pay sufficient heed to the social aspects of the cooperative. Worker members criticized “the distance from the management and the difficulty in understanding the decisions taken by people ‘above.’” Quoting a representative from a critical organization in the Mondragon cooperatives “Ahots,” “in the field of participation and the role of members, the instruments created 50 years ago and designed for that type of society and that type of much smaller and manageable enterprise are no longer valid.” Nevertheless, the social council of Fagor, while trying to diminish the social costs, wholly supported the view of the governing council and the management regarding the adjustment measures implemented in the last strategic plan. They considered Fagor “to be taking the right steps. When many members’ jobs are at stake, it is not the best moment for disagreements. But of course, we had to defend the members’ rights as workers.” Another member of the social council underlined that “the need to communicate about complex economic issues may delay decisions but we have been supportive with management.”
In addition, the cooperative did not manage to maintain a strong and stable leadership. There had been at least two generational changes in the leadership of the cooperative since the founder’s times; however, historically Mondragon’s cooperatives had overcome the difficulties common to other cooperatives in attracting and retaining valuable managers. Nevertheless, in Fagor’s last eight years, there were four general managers and four presidents of the governing council. Some of them resigned, and other managers got promoted to corporate managerial positions, “even if they were responsible for hasty decisions and the business failure,” as some workers complained. This management turnover undermined effective leadership, something Fagor would have needed to face strategic challenges during the growth period and especially during the decline.
Fagor’s democratic approach to decision making conditioned its strategy, and, in our opinion, was not helpful in trying to stave off failure. However, far more significant in determining failure were the badly timed expansion and the sheer size of the economic downturn, which also brought down many conventional businesses. For example, in July 2014, the home appliance maker Whirlpool absorbed Italian Indesit, following production and financial woes triggered by falling sales, something similar to what happened to Fagor. But the Basque firm, as a cooperative, was constrained in its strategic possibilities. Fagor could neither merge with other companies in the sector nor be absorbed by any other corporation if this operation meant the loss of its cooperative structure, and thus it was only, in July 2014 within the bankruptcy process framework that Fagor could be sold, being acquired in an auction by the multinational CNA group.
Governance problems at the corporate level
The spectacular international growth of Fagor, particularly the acquisition of Brandt, could not have happened without the managerial and financial help of the Mondragon system. During the growth period, the corporation fully supported Fagor’s decisions. As losses at Fagor were growing with increasing financing needs, the aid of the corporation intensified. On one hand, at the time of the closure, Fagor’s debt with the cooperatives of Mondragon amounted to €240 million. On the other hand, the role of the corporation was crucial in the relocation of worker members (as it would be after the closure, but that is beyond our scope here).
The last €70 million cash injection by the corporation, in May 2013, was agreed to by 70 percent of the representatives of the congress of Mondragon. A solidarity fund was created, called the Corporate Fund for Restructuring and Employment. To cover one half of the loan, seven cooperatives making up the Fagor group committed themselves to allocating 30 percent of their profits for five years. The second loan was backed by 1 percent of the wages of all the workers of the cooperatives. To secure the funding, Fagor was required to develop a new feasibility study to adopt harsh austerity measures to bring its losses under control. Fagor members accepted the lowering of their salaries by 6.48 percent—which meant that with the reductions of the previous years, wages were at 80 percent of what they were before the crisis (not adjusted for inflation). A team of monitors was constituted in the corporation to ensure that the agreed reforms were carried out. The president of the governing council of Fagor said “that it was a clear expression of solidarity, one of the principles that are part of our cooperative DNA. In fact, this type of practice, cooperatives helping each other, is common in the corporation and is part of our history.”
In October 2013, it became apparent that the bail-out was insufficient. To keep operating and to deal with the economic and financial reforms, Fagor asked the corporation, Basque government and financial institutions for a second bail-out amounting to €50 million from the corporation and €120 million from the Basque government and financial institutions. Initially, the standing committee of Mondragon, made by the presidents of 22 cooperatives, supported the plan; however, the members of the general council of the corporation decided that there was no reasonable chance that the cooperative could be saved and put on a course of increasing economic strength. In view of the accumulated debt and the growing losses, the majority of the representatives at the general council feared that compromising more resources in Fagor could drag down the whole group. The standing committee and the general council therefore decided to leave Fagor to its fate. No more capital was going to be lent to the cooperative from the corporation. This forced Fagor to file for bankruptcy.
A battle started within Mondragon between the cooperative and the MCC Corporation, both at the technostructural and the social levels. Such conflict had not been seen since the 1974 strike against a new system of job evaluation when seventeen members of Fagor were expelled and reinstated three years later (see, for example, Kasmir 1996; Whyte and Whyte 1991). The corporation managers criticized Fagor managers for perpetuating the illusion that Fagor was viable enough to survive when it in fact was a dying company that was consuming all its resources to meet its operating expenses. One member of the standing committee observed that “Fagor was a black hole and it had lost a lot of money. We had had enough.” Another corporation manager added, “Fagor was too large a company and had run into big problems and most of the cooperatives question the wisdom of supporting it. It wasn’t too big to fail but it was too big to be rescued.” On the other side, the members of the governing council and the managers pleaded until the last minute for a final opportunity to save the cooperative. As the general manager of Fagor put it, “we did not have a feasibility problem; we were in need of funding to carry out the pending reforms.” The managers and the worker members of Fagor and Edesa felt that they had been abandoned by the rest of cooperatives though they were entitled to better treatment: “the cooperative movement began with Fagor. Fagor was the mother cooperative; we helped to launch and to rescue a lot of cooperatives.” One of the most heated moments of the crisis happened when the members of Fagor, some managers included, took part in a demonstration, headed by a banner that read “to defend our jobs” outside the headquarters of the corporation.
Other protests, too, were carried out within Mondragon cooperatives. The worker members of Edesa, the cooperative subsidiary of Fagor in Basauri, “occupied” their plant for 143 days and nights claiming that they did not want to be “forgotten and discriminated against” by Fagor parent company members. The workers of Grumal, another subsidiary of Fagor in the Basque Country that was going to be converted into a cooperative, occupied a square in the town of Mondragon for some days. At the same time, more than one thousand retired and current members of Fagor organized in two groups called “Ordaindu” (pay) and “Eskuratu” (achieve), demanded their lost savings—apart from the capital and the obligatory contributions, they lost the voluntary contributions that Fagor had asked from them, in total around €200 million. Finally, many other private investors protested, both to Fagor and the corporation, against what they considered the fraud of the “financial subordinate participations,” a kind of junk bond issued by the cooperative. Many legal actions were subsequently presented in the courts regarding these issues.
The fall of Fagor signified the end of the “mythical model” and left the Mondragon experience in a profound crisis. The corporation had not been able to manage the process of converting an economically and financially troubled cooperative into a viable firm, as the entrepreneurial division of the Caja Laboral had managed to do with other cooperatives with problems during other recessionary periods in the past (Whyte and Whyte 1991). In fact, since 1991, the corporation has taken over many of the promotion, financial, and coordination functions of Caja Laboral, and both the power of Caja Laboral in the Mondragon cooperatives and its responsibilities have been significantly reduced (Bakaikoa, Errasti, and Begiristain 2004). Caja Laboral nowadays follows the road of the traditional financial entities, under a strict supervision of the Spanish and European financial authorities. In this sense, Caja Laboral avoids concentrating risks on the Mondragon group, but while the rest of cooperatives contribute with the 10 percent of their gross profits to the Central Inter-Cooperative fund managed by the corporation, Caja Laboral does with the 20 percent.
Two months after the fall, the president of the Mondragon Corporation resigned from his post—he had been Fagor’s general manager from 2006 to 2011. The president explained that the corporation has decided to begin a period of “reflection and group discussion to design their future and face the global economic crisis.” In the next Mondragon cooperative congress celebrated after the collapse of Fagor in December 2014, the cooperative members supported the role of the corporation during the crisis. The congress approved a new policy based on “transforming demanding solidarity” (solidaridad exigente transformadora), in the sense, that Mondragon Corporation will keep alive the fundamental principle of intercooperative solidarity in the future, but it will strengthen the control over the cooperatives that could need help from the group.
Governance problems at the subsidiary level
Although the failure of Fagor was the first substantial blow to Mondragon’s record of success at the economic level, multinationalization had already been gnawing away at Mondragon’s success in remaining true to its cooperative principles. The multinationalization of Fagor, similar to other Mondragon multinationals in terms of number of subsidiaries and ratio of foreign and local workers, dramatically transformed its original cooperative nature. The foreign subsidiaries’ workforce of Fagor was made up entirely of nonmember affiliated workers. Of Fagor’s total workforce of 5,634, only 1,600 were worker members. The subsidiaries were affiliated companies with hired wage-laborers owned by the cooperative and the Mondragon Corporation. The members of the board of directors of the subsidiaries were elected by the governing council of the parent cooperative. It was usually formed by representatives of the governing council and of the executive managers of the parent cooperative, with some representative of the general council of Mondragon. There was no doubt that the personnel appointed to top management of the subsidiaries—whether expatriates or locals—were loyal to the parent company and the global strategy.
Labor relations at Mondragon’s foreign plants did not function according to the same principles as those applied in the home cooperatives: not only were the plants not transformed into cooperatives, labor relations either improved only very slightly—arguably the case in the Polish plant Wrozamet-Fagor Mastercook—or did not change notably—the case at the French and Chinese plants (Errasti 2015). Indeed, one can argue that the cooperative nature of the parent company Fagor and its emphasis on defending members’ jobs at all costs did not allow the empowerment and integral development of the foreign subsidiaries. An international division of labor existed within the company, not only because of the division into a cooperative nucleus—with job stability and other worker and owner benefits, such as “making profit for themselves by the employment at wages outside their association”—and a capitalist periphery made up of European, North African, or Asian subsidiaries, but also stemming from the prioritizing of the Mondragon plants over other subsidiaries in terms of jobs, the manufacture of products with higher value added, and core functions such as R&D capacity.
5. Conclusion
The fall of Fagor, the largest industrial cooperative of one of the most important cooperative groups in the world, has signified the end of a unique cooperative business firm, which started as a small factory and became a multinational with subsidiaries all over the world. Despite some of its activity and jobs being rescued by private firms, a singular cooperative firm has ceased to exist, along with many jobs, savings, investments, and business and cooperation know-how.
According to our research, Fagor’s demise was not based on the supposed disadvantages and limitations cooperatives face when compared with the ability of conventional firms to succeed in a capitalist setting (Ben-ner 1984; Bonin, Jones, and Putterman 1993; Vanek 1970). Fagor was able to compete for decades with the largest multinational companies in a highly globalized, competitive sector, with a tremendous capacity for investment and financing, and solid structures of democratic decision making and workers’ participation. In the final analysis, Fagor, a relatively weak and small firm compared with its gigantic multinational competitors with their production plants concentrated in low-cost countries, fell victim to a risky growth strategy to attain economies of scale and a multinational dimension—fuelled by the Mondragon growth vision and an excess of resources during a certain period—that finally collapsed with the economic crisis. The multinationalization strategy has strengthened in general terms the competitiveness of Mondragon cooperatives, and it has been very important to withstand the current crisis (Basterretxea and Albizu 2010; Elortza et al. 2012); however, in the case of Fagor, it went too far, too fast, and took too many risks. The fatal blow for Fagor was dealt by the excessive debt and the sudden drop in sales. When the European economy, and especially the Spanish economy, cracked for Fagor, it was comparable with the lookout on the Titanic seeing the iceberg; there was not too much room for maneuver.
Partial blame might be ascribed to the management of the cooperative and to its decision-making process, in the sense that Fagor’s managers, the members of the governing council, and also the members as whole, were not capable of implementing the necessary radical adjustment measures as comprehensively and quickly as was required—although it should be noted that during the last years they downsized the company to half of its former size and transferred part of its production to Poland; but by then it was much too late. In our view, given that the members were willing to accede to cuts they perceived as necessary, the failure to push through even more radical cuts was due to problems of leadership rather than to the form of governance of the cooperative.
However, the Mondragon Corporation model seemed to be incapable of helping Fagor more without putting the survival of the rest of cooperatives at risk. Its final decision to refuse more financial aid to Fagor can be justified as reasonable—though that notwithstanding, the question of what would have happened had Fagor been given more time will always remain, as indicated by the offers made in the bankruptcy process for the Fagor businesses. One may also wonder whether the corporation could have intervened earlier and more effectively when the threat of failure was not yet imminent but trends were clearly negative, suggesting a need for remedial action that was beyond the capacity of the members of the cooperative. The corporation might, for instance, have stepped in by providing an experienced and stable management team from among Mondragon personnel, not necessarily from within Fagor, capable of dealing with the challenges of relocation and downsizing that the cooperative required during the last years. These should be the most important lessons for the other cooperatives and the corporation.
As to whether Fagor failed as a democracy of producers, in line with the verdict of the Webbs, it seems that it maintained its cooperative nature in the companies in the Basque Country, at least to the extent that democracy can be conceived and practiced in a large market-driven cooperative (Cheney 1999). All the major decisions were formally taken according to democratic principles. Nevertheless, in the foreign subsidiaries it failed, not because it did not convert them into cooperatives allowing the foreign workers to become cooperative members, something unfeasible for many reasons (Flecha and Ngai 2014), but mainly because it did not develop another model more in tune with the participation and cooperation principles, different from the conventional multinationals.
To evaluate the role of Fagor’s cooperative nature in the failure, perhaps a bit of counterfactual speculation might be in order. What might have happened had Fagor not been a cooperative? It is likely that, given the sector’s longstanding concentration process, Fagor would long ago have been absorbed into some large multinational corporation, as happened to many other small European “white goods” firms similar to Fagor (all Spanish white goods firms included). Most of its production would then have moved to a different country. Mondragon’s corporate financial and research platforms, as well as the mechanisms of intersolidarity among the Mondragon cooperatives and the resilience of the members contributed decisively to Fagor’s ability to survive and develop in ways far surpassing the achievements of many other companies in the same industry. Fagor having succeeded for decades made some compromises (notably trying to act more like other multinationals in the foreign arena), but largely maintained its key members’ rights and participation. It finally failed in the midst of a very severe economic downturn that also brought down many other Spanish and European companies. Furthermore, most of Fagor’s members have already been relocated to other Mondragon cooperatives, which would be practically inconceivable in capital-owned companies. Fagor’s failure, then, says less about the viability of cooperatives than about the risks inherent in actual market economies: any business may fail, whatever the size, the juridical nature, or the corporate and institutional support. There remain over one hundred cooperatives of Mondragon group, continuing to exhibit a strong capacity for growth and long-term survival, contradicting the verdict of the Webbs.
Footnotes
Acknowledgements
The authors would like to thank Lur Errasti, Clare Abraham, and Vilja Hulden for their contribution to the research and their comments on earlier drafts. The authors also wish to acknowledge the cooperation of Mondragon cooperatives and companies and particularly to express gratitude to all interviewees for giving their help and time to this research. Many thanks also to the reviewers of the Review of Radical Political Economics for helpful and considerate comments and suggestions for improvements.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.