This document has been made available in electronic format by the International Co-operative Alliance (ICA) 

Speech by Javier Salaberría (1998)
 

March, 1998
(Source: Studies and Reports. Thirty-first in the series)
The Impact of the European Union’s Enlargement on Co-operatives. Papers presented at a seminar held in Prague 3-4 November 1997,  p. 63-81 )
 

Speaker Javier Salaberría
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“The present paper analyses the opportunities and the challenges which the globalisation and internationalisation of the economy - and especially the European internal market - represent for companies in general and for manufacturing or associated labour co-operatives in particular. It further considers the problems faced and the responses given by the constituent co-operatives of  the MCC (Mondragón Corporación Cooperativa) in its process of internationalisation.”

The European Union: opportunities and challenges
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Though the European Economic and Monetary Union may be analysed from various points of view, we shall focus our attention on the changes involved and on the opportunities and challenges facing manufacturing enterprises.

The European Economic and Monetary Union will bring about a momentous change and will have an enormous impact on the whole industrial fabric of the member states, especially those which - like Spain - have been furthest removed from the rules of free trade. As with any other structural change, the Union will throw up new opportunities and major challenges.

To mention but a few of the many opportunities, we may note:

On the other hand, challenges will have to be faced: All of this faces companies - and not just big ones - with an urgent need to adapt to the process of change.

It is necessary to conduct the analysis of these changes at the highest levels of management, to analyse the impacts most relevant to each company, to share the information obtained throughout the organisation and to foresee and resolve operational problems. However, the fundamental and indispensable need is to carry out an in-depth review of  business strategies in such basic areas as:

This change in strategic planning will, of course, have to go hand in hand with a positive attitude towards the Monetary and Economic Union and to globalisation in general. For this reason, great efforts are needed especially in the search for the new opportunities which the process can offer, for example, defining new strategic approaches, drawing up adjustment policies and implementing actions effectively. At the same time, policies must be designed to neutralise the more significant adverse impacts.

It is necessary to analyse in-depth the required size of each enterprise and to examine the possibilities of arriving at co-operation agreements and alliances with other more global domestic companies or competitors.
 

The response of the MCC co-operatives to the European challenge
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Before proceeding to analyse the problems and the responses of the MCC co-operatives to the European challenge, it is first necessary to give a brief description of  MCC, an analysis of its current situation, its present organisation and the corporation’s key statistics.

Though the MCC corporation may be analysed from various points of view, we shall concentrate for the moment on an analysis of its corporate structure.

The MCC corporation consists of three distinct groups:

The financial group includes the Caja Laboral banking business, the largest co-operative credit institution in Spain, and the activity related to Lagun-Aro, the provident fund of the MCC co-operatives, which is again the largest friendly society in the country.

Caja Laboral offers its full range of financial services to the co-operatives belonging to the corporation and also to third parties.

For its part, Lagun-Aro manages the corporation’s own complementary social security system and focuses its financial activity on optimising the returns on its assets. It is also worth noting the group’s activity in the field of insurance, leasing and other forms of finance-related products.

The distribution group is led by the Eroski Consumer Co-operative, which has developed strongly over recent years and covers the food distribution sectors. Eroski is the leading enterprise in the Basque country for the distribution of consumer products through an extensive network of cash-and-carry establishments, hypermarkets and specialised shops. At the same time, it carries on its own intensive consumer activity. The group includes Consum, the Valencia consumer co-operative, as well as a food grouping with activities which include  livestock, horticulture and food services.

Finally, we come to our focal point, the manufacturing group. This comprises 71 production enterprises - associated labour co-operatives - organised by sector into 7 divisions: automotive, components, construction, industrial equipment, household, engineering and capital goods and tools and machinery.

In 1996, the total sales of the manufacturing group amounted to almost 300 billion pesetas. Of this total, international sales accounted for 44%, as compared with 39% in 1995, figures which clearly show a process of growing internationalisation. Investment during the year came to almost 8 billion. The group employed a workforce of 17 000, the number of jobs having risen by comparison with the previous year.

The various groupings draw together co-operatives which are active in the same sector. The technological domains in which they operate are close to each other and there is a convergence of similar products for the same markets.

Approximately three quarters of export sales go to Europe. Of the remainder, 12% is exported to America, 7% to Asia and just 2% to Eastern Europe. Exports to Africa and Oceania are virtually negligible.

Meanwhile, the imports of the manufacturing group are on the rise: 41 billion pesetas was spent on purchases in other countries, more than 80% in Europe, 15% in Asia and the remainder split between America and Eastern Europe.

To conclude, it should be noted that the MCC corporation operates three R&D centres: Ikerlan, specialising in machine electronics, Ideko specialising in machine tools and the Maier Technology Centre specialising in thermoplastics.

As training plays a crucial role in nearly all co-operative projects, the corporation has established Mondragón Universitatea, the third university of the Basque country. This is a private institution, inspired by co-operative ideals and aimed primarily at the needs of the Basque world of business and, more especially, the requirements of our own co-operatives. It is founded on the accumulated experience of the three former training centres, one specialising in engineering, one in business studies and the third in teacher training, personnel management and the humanities.

Finally, there is the Otalora centre, which is devoted to management training and to co-operative education and the dissemination of co-operative ideas, preferably within the framework of  MCC.

MCC also has a long list of branches, subsidiaries and manufacturing plants abroad. For example, it has factories in Mexico, Holland and the Czech Republic for the manufacture of components for household electrical appliances; in Thailand for the production of electronic components; in Morocco and Argentina for household electrical appliances; in China, Morocco and Brazil for coaches; in France for information technology and telecommunication systems; in China for machine tool automation systems; in France again for automatic assembly systems; and in the United Kingdom for lifting systems.
 
Now that we have a basic idea of the level of internationalisation of the MCC corporation, the time has come to look more specifically at the position adopted by MCC and its response to globalisation in general and to the European challenge in particular.

First of all, MCC would like to break with one traditional view of internationalisation. Whereas until 1995, MCC was a large national group which exported primarily to Europe, its vision of internationalisation for the year 2000 is to establish a business corporation with a commercial presence and capacities to produce and supply on various continents. In other words, the intention is to leave behind the notion of an internationalisation confined to exports, exports which in turn are belated reactions due mainly to saturation or shortages in the internal market. The old  vision was one of commercial outposts, standing in isolation, scattered here and there with little in the way of structure, preferably in countries close at hand or with a similar culture. Typically, they were characterised by their small size and by cultural and linguistic particularities. These export efforts tended to look more at cost than at investment and there was a certain unwillingness to wait for results, combined with a lack of perseverance. In brief, the deployment exercise suffered from a lack of structured planning.

However, as we have already seen, communications are set to improve incredibly and new middle classes are emerging, that is to say millions of consumers with healthy incomes in many countries which we have hitherto left out of consideration. Supply is unifying consumers and hastening the acceptance of new products, while international trade offers more opportunities and the market is becoming more global all the time. There is strong growth in international trade, with lower barriers and with markets broader, deeper and more intense; an improved infrastructure for communications and transport is making travel and trade faster and cheaper. At the same time, through a process of extending democracy, the world is drawing together politically towards market economies and an intensive cultural interchange which favours multi-cultural training and the formation of similar patterns of consumption.

Meanwhile, major clients and the concentration of suppliers which they generate necessitate an outward deployment. To retain the loyalty of these big customers, it is necessary to follow them to wherever they need to cover their requirements. The strategy of the leading international companies is to grow by spreading their products and services to new countries and regions. To this end, they painstakingly analyse consumer needs in order to differentiate local and global segments; they select their key strategic processes and redefine them at international level; they promote common procedures, the rotation of executives and international committees and communication systems as a support for their international processes and culture.

Normally, these leading companies proceed in three stages: they define their business portfolio, they consolidate strategic businesses in key countries and they enter emerging markets.

MCC has, for the first time, drawn up a corporate strategic plan for internationalisation. In the process, it has confirmed that the first stage in the process of internationalisation has already been completed. Thus, the businesses which have achieved positions of leadership in the internal market and developed export capacities have been in the vanguard of internationalisation. Clearly, it is the manufacturing businesses which have led the way, establishing a vast international commercial network with 59 branches and which have seen their exports rise six-fold over the past 15 years.

Today, MCC is a major national group which exports mainly to Europe: 65% of its sales are in the internal market and 79% of its exports go to Europe. Its international production capacity, on the other hand, is still less than 1%, despite the fact that, as we have seen, seven production centres have been established abroad.

Accordingly, MCC must embark on a more intensive phase of the internationalisation of production. However, a new spirit is needed. Whereas, in the past, actions were dictated by opportunism, today, priority must be given to motivations which will enable the corporation to maintain or improve its competitive position in various businesses and on the basis of the strict necessity implied by the globalisation and centralisation of  purchasing by its major customers.

Clearly, the current level of internationalisation of the manufacturing group varies according to the strategy and type of business, i.e. in function of the percentage of exports to sales: depending on whether the business strategy is one of specialisation or a broad range and whether the type of business requires a more or less intensive local presence. What is certain is that there are still large markets in which MCC is far from being a force to reckon with. On the other hand, the increase in international industrial activity has to achieve various objectives, depending on the present level of exports, the size of the company and the different goals pursued (growth and keeping customers, avoiding cycles, improving profitability, etc). Hence, the big internationalised co-operatives will lead the increase in exports.

MCC has pinpointed four types of market to target: priority markets, basic markets, potential markets and limited markets. Taking into account the level of the MCC presence in these markets and their potential in themselves, the corporation has established the fundamental premise that it is necessary to exploit basic markets and to develop priority markets. The basic markets are the biggest outlet for sales at the present time and they are represented by our closest European neighbours. Among the priority markets are, of course, the big markets of the United States, Japan, Korea, China, Brazil, Canada, India and Taiwan. The potential markets include some in Eastern Europe and some in Latin America.

MCC has to retain the loyalty of its major clients. To this end, an analysis has been made of the sectors to which the manufacturing group makes sales, especially those in which sales are concentrated or which are identifiable by a centralised purchasing system (e.g.  automotive and household electrical appliances).

The new stage of internationalisation is to concentrate not only on distribution and sales but also on purchasing and production.

Among the main trends and features to be observed in the internationalisation plans of the manufacturing group, it may be seen that: there are many projects for setting up abroad; the chief focus is the emerging countries; the investments are large; the definition of them may still be limited; we are beginning to focus on services to global clients.

The group has also set itself the objective of doubling the percentage of imports by the year 2000 and they are to come basically from Europe and Asia. The production infrastructure is to be increased more than the commercial. The plan for the year 2000 is to increase from the present 7 manufacturing plants to 29 and from the 59 branches in 1994 to 75.

Production must be directed to the emerging countries and sales to the developed world. Investment in production facilities will be concentrated on capital goods and the automotive industry. These production plants will certainly require a substantial economic contribution. The commercial network will be extended relatively more outside Europe.

The use of the its global brands should enable the group to reduce significantly the cost of internationalisation. However, substantial human resources will be needed for the facilities abroad, such as company directors and executives, commercial representatives and managers for manufacturing and technical plants.

To summarise the key notions underlying the internationalisation of MCC, it can be said that:

All of the foregoing can be reduced to 6 main objectives:

1. Sales and imports are to double by the year 2000 as compared with the 1994 figures. Exports will account for more than 50% of sales.

2. The number of branches and production plants is to increase in the manner described above. They will be regularly established in the markets of Asia and America, just as they are at present in Europe. (This will redraw the map of the world as far as MCC is concerned with regard to both branches and manufacturing plants: production centres will increase in Europe from 3 to 9, from 2 to 6 in Asia, from 1 to 12 in America and from 1 to 2 in Africa; branches will increases in Europe from 38 to 44, in Asia from 10 to 13, in America from 11 to 17 and in Africa from none to 1.)

 It is clear that this internationalisation of MCC will present considerable challenges in the fields of  R&D, sales, production, distribution, marketing management and for the organisation as a whole.

3. With regard to R&D, it is vital to increase coordination between the group’s R&D departments, to ensure technological renewal and to protect know-how in the context of transfers of technology.

4. With regard to purchasing, it will be necessary to find methods of coordinating international purchasing, to obtain access to markets without liquidity and to identify better opportunities.

5. With regard to production, it will be necessary to systematise and improve investment analysis, to manage plants properly from a distance and to develop production structures abroad in a competitive form.

6. With regard to the trademark, the potential of the corporate brand must be maximised, the use of well-known and global trademarks must be promoted and investment in the expansion of our international presence in new markets must be rationalised.

For its part, the group must set about establishing the teams needed for internationalisation, coordinate the international infrastructure, manage the corporate image at world level, as well as information on internationalisation, provide the
co-operatives abroad with legal and financial services, organise out-sourcing and measure and control the progress of internationalisation.
 

Some specific problems relating to the internationalisation  of manufacturing co-operatives
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As we have already seen, globalisation, the internationalisation of trade and production and the huge internal market of Europe present all companies with opportunities and dangers. However, when it comes to manufacturing or associated labour co-operatives, the opportunities tend to be fewer and the problems greater.

First of all, we have to point to the absence of any large-scale co-operative manufacturing sector in the various countries of Europe. As a rule, manufacturing co-operatives are few in number and they tend to be small or medium enterprises. Even in the case of the MCC corporation which we have briefly described, it is impossible to ignore the fact that, in a certain sense, it is rather like a conglomerate, i.e. we are looking at a multi-sector, multi-product group, consisting of enterprises which are also, for the most part, small and medium enterprises. Indeed, what is so remarkable about the Corporation is the fact that it has been capable of developing synergies between firms in the same sector and with a convergent product/market relationship through sectoral groupings. It has then linked and coordinated these sectoral groupings into broader organisations, establishing a very active co-operation and solidarity between them. Finally, it has protected and supported the joint concern through financial institutions and R&D, through support for joint trademarks, the establishment of shared sales and distribution channels and common services of all kinds (e.g. training, supplementary social security system, etc).

In general, however, the co-operative is a small or medium enterprise, which tends to be isolated and somewhat inward-looking. It is clear, however, that co-operative societies have certain characteristics which cannot be discounted as competitive advantages compared with other businesses, such as the involvement and motivation of its members. However, the co-operative enterprise is a society of persons, while the associated labour co-operative is fundamentally a community of labour. Thus, while the cooperative enjoys the benefits of  democratic organisation and displays great internal strength and cohesion, it has difficulty and problems in coming to terms with continuous expansion and especially with international expansion.

Apart from exports, internationalisation also involves such features as the transfer of technology, associations with no subscribed capital stock, subcontracting, the establishment of new subsidiaries, joint-ventures, mergers and acquisitions. It is clear that trading companies are better equipped than co-operatives to navigate these stormy capitalist seas.

Co-operatives are virtually prohibited from merging with other non-co-operative enterprises and the establishment of new foreign subsidiaries or joint ventures almost inevitably has to proceed along non-co-operative lines.

In both the developed and the developing countries, the model of the capitalist company is being extended throughout the world, everywhere with a more or less homogeneous culture and rules. Nowadays, everyone understands the workings of  joint-stock companies, such as multinationals, irrespective of their country of origin. A comparative analysis of commercial companies around the world reveals so much similarity that it is virtually impossible to distinguish a Spanish limited company from its British, American or Hungarian equivalents. Hardly surprising then to find such a degree of company harmonisation within the European Union!

By contrast, manufacturing co-operatives stand out as an exception in the economic systems of the world: the different societies differ greatly in their regulations and live in virtual ignorance of each other.

Although there may be many large co-operatives, relationships between them which go beyond a certain degree of co-operation faced ineluctable problems. Here, it is not just a matter of obtaining the consent of the shareholders but of getting the agreement of labour communities, collections of workers with different individual and group interests -  just one more difficulty arising from the democratic and participatory nature of manufacturing co-operatives.

Another far from negligible problem is the risk of losing the co-operative identity. As we have seen, the merger of a co-operative with a non-co-operative enterprise is virtually unthinkable. Yet the acquisition of an enterprise or the establishment of a new one in another country almost inevitably has to take place along commercial company lines. Thus, the efforts and investments deriving from the community which generated these resources are not reinvested at home but take the form of non-co-operative enterprises, creating employment outside its own territorial boundaries. Certainly, the ultimate aim is to preserve, to maintain and to develop the co-operative and the jobs it provides but there is doubtless a certain contradiction and a risk of the original objectives of the co-operative being weakened or abandoned. This calls, no doubt, for a high degree of maturity on the part of co-operative worker groups and an extra effort to maintain and preserve co-operative values.

To sum up, there is only a limited capacity to reproduce the co-operative system within industry inside the dominant economic system. It is our view that what is needed is a European Co-operative Society Statute which would permit, in some cases at least, not only Inter co-operative collaboration but also a certain level of integration between enterprises.

Another important limitation faced by manufacturing co-operative enterprises is their inability to obtain access to the capital markets. Co-operatives are fundamentally required to be self-financing. If they do not wish to lose their independence, they have to keep generating resources for their own development and expansion and to continue capitalising their surpluses. Co-operatives cannot turn to the stock exchange or to the capital markets to increase their equity.

Perhaps we need to think again about co-operative attitudes to capital. This remark should not be taken the wrong way: there is no question of transforming a co-operative society into a joint stock company. Decision-making powers must remain with the people who constitute the co-operative, i.e. its own workers. Nevertheless, without deviating too far, it should be possible to think up realistic and economically stimulating means of contributing capital to the co-operatives, whether from their own members or from outside sources.

Perhaps it might be possible also to consider recognising a certain degree of participation in the decision-making process, i.e. in management and general meetings, above all for interests acquired by other co-operative entities which supply capital, technology, markets, processes, capital goods and human resources for the creation and development of other co-operatives.

The Basque law of 1993 on co-operatives recognises the possibility of a collaborating member being able to participate - to a limited extent - in decision-making, by virtue of economic or other types of contribution to the activities of the co-operative. This possibility enables co-operatives and their organisations to contribute decisively to the creation of new co-operative activities, bringing to the initial communities of co-operative labour financial support, products, capital goods, access to customers and markets, management teams and the like, which, given the characteristics of the sector and the existing skills, would otherwise be out of the question. It should not create ideological problems for the co-operative movement to concede rights to parties who, though not typical members (i.e. workers), are indeed co-operative. These collaborating members can be enormously effective in creating and maintaining  jobs.

The Basque law on co-operatives has also created a new entity, the so-called “mixed co-operative”, which, though it looks very heterodox from a conventional co-operative viewpoint, is intended to maximise the possibility of maintaining or establishing an enterprise under co-operative form, where a co-operative community finds that a partner, for example with technological expertise, is absolutely necessary to carry out a project but has no interest in participating in a co-operative. The mixed co-operative is simply a co-operative which brings together two types of partner: on the one hand, a collective of co-operative members, with a majority and with its own strict internal rules and, on the other, a nucleus or group of members governed by the rules of a commercial company - more specifically a joint-stock company - having a minority interest in the decision-making organs and in the results of the enterprise. This is a legal entity which has not hitherto been able to make its debut - though attempts have been made on various occasions to establish mixed societies - because  potential capitalist members were lacking, preferring to play according to the rules of their own game, on their own pitch and with their own ball.

These financial and other limitations facing co-operative enterprises suggest that it might be worthwhile introducing amendments or reforms to the law on co-operatives.

In any event, given the virtual absence of real and effective possibilities for a European co-operative solidarity and the lack of any powerful co-operative manufacturing sector in Europe, we must also consider what European resources, programmes and projects are available to co-operatives.

Another problem is the size or scale of the co-operative enterprise. Due to the growing trend towards concentration, the leading companies are getting bigger all the time, increasing their market share and installing themselves in many different countries. Not only do they dominate and overwhelm their competitors but they also require  their suppliers to have the capacity to supply them in different countries, to have technological capabilities based on their own R&D and to have the financial means to make the necessary investments, including going wherever they go. Obviously, competitiveness may equally well depend on market conditions and the particular competitors but, all too often, it is a matter of size: it is difficult to stay afloat in a market which accounts for 100% of the business of one company and only 3% for the other. In many cases, it is impossible to achieve the size needed to compete in the internal market and enterprises are forced to go the way of  internationalisation, a route which requires them to shed their individualism and isolation and to collaborate with other co-operatives in order to create groups.

The basic unit of  MCC is not the isolated co-operative but, as we have already remarked, the sectoral grouping, a second level co-operative with a greater or lesser degree of integration, depending on the extent of technological and market convergence.

Many of the problems referred to above serve not only to illustrate the difficulties but also to point the way to a solution and indicate the actions which the co-operatives need to take if they are to survive and prosper in such a competitive market.

First of all, the small and medium co-operatives must be convinced that there is no real distinction between an internal and an external market; that their market is Europe and the world as a whole; that they must treat exports as normal sales which are central to their business rather than ancillary or residual; and that they must organise themselves for exports, establishing commercial networks and branches, attending  international fairs, taking part in trade delegations organised by the state or by trade organisations. Successful co-operatives will have the possibility to establish subsidiaries or form joint-ventures abroad but, on the whole, co-operatives will come up against problems resulting from their size and lack of resources of one kind or another.

It is, therefore, of the utmost importance that the co-operatives should combine forces to achieve together what would be beyond their reach in isolation. We are talking here about formulas for collaboration between enterprises.

Certainly, the organisations which represent the co-operatives - the Federations and Confederations - can help in this through their role in representing and defending the interests of the co-operatives in general, providing information and facilitating contacts and relations between co-operative enterprises. Nevertheless, the challenge of defending and conquering market share must be taken up directly by the co-operatives themselves. It is they who need to establish the necessary links of collaboration and association, going to the extent, if necessary or possible, of a certain degree of business integration.

From our experience, it seems clear that co-operatives which belong to the same sector and have a certain technological and market convergence are obliged to join forces if they wish to survive and develop.

These combined efforts can take various forms: shared commercial offices or branches, joint R&D projects, specialisation and complementarity of products and activities, entering together into new activities both at home and abroad, combining their financial and human resources, reorganising and restructuring businesses and activities; the list is endless.

Ideally, strategic plans should be drawn up in the light of all of these considerations to take account of the opportunities, challenges and dangers of the global market and to permit a coordinated response and action.

In some cases, the conclusion will be that it makes more sense to join forces than to compete with each other and that this response may include a reasonable degree of business integration.

Javier Salaberria
President of the Confederación de Cooperativas de Euskadi (CSCE), Spain
Member of the ICA European Council