Mondragon feels pain as it cuts off its own arm

The Mondragon workers co-operative has never had much in common with the average Spanish company. From its low key 1970s style headquarters in the small Basque town bearing its name, to a rule barring its president from earning more than 8 times its lowest paid worker, it stands out as an alternative model of business organisation.

Last month, however, the crisis that has gnawed away at so many of its more conventional Spanish peers, pushing almost 30,000 companies into bankruptcy protection in five years, finally caught up with one of the world's largest collectively owned companies and one of Spain's top 10 companies by turnover.

In November, Mondragon - a conglomerate stretching from banking to supermarkets with revenues - decided to let its oldest member file for protection against its creditors.

The decision to cast aside the loss making Fagor, Europe's fifth biggest white goods manufacturer, which employs 5,600 workers, has caused a rift within the Basque co-operative and prompted a debate over the capacity of its famous business model to weather Spain's crisis.

Employing about 83,000 people, of whom half are collective members, Mondragon has for its entire history allowed its worker-owners to vote on strategic decisions and to reallocate staff across divisions when cutbacks were made.

Yet some in the company now blame Mondragon's complicated structure of worker representation for delaying the necessary restructuring at Fagor until it was too late. "It is like asking a sick man to cut off his own arm," says one senior Mondragon executive, speaking about Fagor, which represented 8 per cent of the group's sales last year. "Our objective has always been to protect employment but employment that is sustainable, not to lose money".

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By the turn of this year, its losses were eating through its cash reserves at a rate that made it clear the company's future was in danger. Yet in spite of mounting losses there had been an assumption by executives in the co-operative that no one member company would be allowed to fail.

Over the summer, a bitter internal debate had begun within the management committee of Mondragon over Fagor's future, people who were present at the talks said, with some heads of member companies refusing to throw what they argued was good money after bad to save it. Eventually the co-operative's general council decided Fagor had no long term future and rejected a plan by its management for a rescue.

"They said you cannot afford to lose such a large amount of money, goodbye," says Pedro Nueno, professor of entrepreneurship at Iese business school at Navarra university, who has spent years studying Mondragon. "The alternative would have been to inflict damage on the rest of the group."

Fagor executives, however, were furious, arguing that the other Mondragon members were choosing to sacrifice a viable business simply to protect their own profitability.

A Mondragon spokesman said that while all efforts were made to save the division, the group decided that after €300m of intercompany aid, no more assistance could be provided. "Solidarity has a limit," he said.

Mondragon therefore rejected a deal brokered by the Spanish and Basque governments in which Fagor would have received some state aid alongside contributions from other Mondragon member companies.

In what appeared the ultimate bitter irony for a member of a co-operative that had proudly stood against opportunistic capitalism, Fagor was forced to approach a group of US hedge funds and private equity companies for emergency investment, but failed to strike a deal.

The company's defenders argue that, far from showing the weaknesses of its business model, Fagor's crisis has in fact shown its strengths. Faced with a painful dilemma, its management showed the discipline to cast aside a business that was no longer viable.

"This is a question of management, not of the collective model of Mondragon", says Mr Nueno. "Kodak went bankrupt because they couldn't catch up with the technology change in their field. Fagor did not innovate fast enough in the way required by their industry".

As Fagor attempts to sift through the wreckage of its bankruptcy to see what it can salvage, the rest of Mondragon will continue as they did before, proud of a collective model that has served it for almost 60 years. The bitterness of Fagor's management and workers, however, will probably hang over the small Basque town for many years to come.

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