Mondragon Miracle, Part 1 of 3: Building the Road We Travel

(2 pm. – promoted by ek hornbeck)

1941, Office of the Archbishop of Spain:

“They just released you?” Archbishop Balbino Oliver eyed the priest standing before his desk with suspicion. Something about the young man unsettled him.

“I believe it was in error. They did not realize I had written so much against Franco. When God spared my life, I enrolled in the seminary.”

He possessed humility. Good. Yet something about the eyes… “Even under the care of the church, Franco may not let you go so easily.”

“Yes, it is best if I left Spain. I could continue my writing in Belgium. I think I can…”

“God granted you a precious gift, my son.” The Bishop leaned back, considering. His left eye. That was it. “It would be unwise to waste the gift with further agitation of forces beyond your control.” Yes, his left eye stared back slightly wider, giving him a permanently quizzical expression. Father Bertolli had mentioned him losing his eye in an accident.

“But the work I’ve been doing…”

“Is against Church official policy.” The Archbishop leaned forward to study the documents the priest had presented him. “You are Basque, no?”

“Yes, but in Belgium…”

“Father Tillous requested an assistant in Mondragon, only 50 miles from where you grew up. Franco is unlikely to bother you, there.”

“Out there, he is unlikely to need to.” The young man bowed his head curtly, murmuring the obligatory goodbye.

The bishop’s gaze followed his receding figure. Even with his back turned, the young man disturbed him. Perhaps something other than his eye then…

Balbino had no way to know, he had just set Don Jose on course to change the world.

History of Mondragon

Don Jose (1941-1955)

*1943: One coop, 24 workers/owners

“Knowledge must be socialized so that power can be democratized.”

Basque is nestled high in the Pyrenees Mountains of Northern Spain. The native population has lived there with its unique culture for all of recorded history. During most of that time, the tiny nation has been occupied.

The Basque Church broke with the Catholic Church during the Spanish Civil War (1936-39), openly opposing Franco in support of the democratically elected, socialist government. The Republicans promised Basque its independence under an amicable split from Spain. After centuries of outside rule, they eagerly threw their support behind the Republicans. Franco struggled to defeat the motivated Basques in their remote mountain location. After he won, he singled them out for deprivation and repression. He banned the Basque language and culture. Their leadership was forced to flee or face the firing squad.

The activist Jesuit priest, Don Jose Maria Arizmendiarrieta (Don Jose), had had his own brush with Franco. After his writings landed him in jail, a clerical error released him, saving him from certain death. He immediately joined the priesthood and returned to Basque, their prodigal son.

He arrived in Mondragon to discover his homeland desperate for social justice and economic security. Centuries of oppression robbed them of any positive vision for their future. Unemployment was high and worker’s unions banned. His countrymen were poor, undereducated and underfed.

Don Jose taught in the apprentice school of Union Carrajera, the main employer of the town. The school only admitted the children of their employees plus 10-12 other students per year–15% of the youth in Mondragon. The other 85% had nothing. Don Jose offered to raise funds in order to expand enrollment. The company firmly refused.

“The socialization of education, the access to it by everyone in the community without discrimination, the granting of opportunities to all persons are fundamental postulates of all social movements of our times. The proclamation of human rights that are not matched by economic and educational guarantees are ephemeral concessions just for show and are destined to produce poor results…These people must be concerned with education, because only slavery Will be found if they follow the path of illiteracy and ignorance instead.”

Don Jose saw his responsibilities to the area not just to uplift the spiritual realm of the people, but to also improve their earthly lot by helping their social and community development–a view that made him a pariah with Church hierarchy. To cure economic poverty, he knew he needed to combat “poverty of intellect” or control of knowledge. The winners of revolutions always commandeered education. These privileged few, eventually reenslaving the masses. Control of knowledge kept the powerful in power and the poor in poverty:  The engineer’s son would always become an engineer, while the son of a laborer always became a laborer. Don Jose wanted to avoid this pitfall in Mondragon. He felt only universal education could help workers avoid becoming a tool of the larger machine and safeguard Mondragon from future tyranny.

“Knowledge is power and in order to democratize power, one must socialize knowledge beforehand. We accomplish nothing, with the proclamation of rights, if afterwards the people whose rights we have proclaimed are incapable of administering those rights or if, to be able to act, these people have no recourse but to count on only a few indispensible members in the group.”

Instead of placing a new school under the control of the Catholic Church, Don Jose traveled around the town presenting a proposal for a school run by democratic control. He was a remarkably bad lecturer–people fell asleep during his sermons. Instead, he met them on the streets, in bars and restaurants. His strength lay in his convictions and his dogged persistence. He placed ballot boxes on street corners. Six hundred respondents pledged cash or other support for his proposed school.

In 1943, he opened a community owned and run school. Not only did he provide training in technical skills, but he also developed a base of young people capable of freethinking. Don Jose made community service part of the curriculum. He wove ethics and social consciousness into his lessons, questioning the conventional labor and social practices. After hours, he educated the adults. Upon graduation, students had 11 years experiencing cooperative ideals. This created a base of workers able to engage in the democratic control of the work place and capable of combating worker subordination. They became the foundation of his cooperative movement.

Five of the graduates from the school’s engineering program went to work in the main conventional business of the area, Union Cerrajera, only to discover management wanted no part of these new ideas. By 1955, the five graduates left Union Cerrajera. Under the tutelage of Don Jose, they traveled the countryside collecting donations from their impoverished neighbors.

They had no business plan. In fact, they did not even know what their new business would produce. Yet, on the strength of people’s trust in Don Jose alone, they were able to raise $361,604 ($2 million in 1990 US dollars) and buy a simple paraffin stove manufacturing business.  They named their new enterprise Ulgor, an acronym based on the initials of their last names. When butane arrived in Spain, they were first to convert and led the butane wave in Spain, setting the standard for Mondragon to be a trendsetter in Spain for the rest of its history.

Expansion (1956-69)

*1958:  149 members

Don Jose started with one co-op of 12 workers under the fascist dictator, Franco. Instead of getting lost in the areas significant disadvantages, he concentrated on Mondragon’s few inherent strengths. They pocessed a tradition of co-operative farming practices and relatively equitable land distribution. A long history of state oppression forced them to become a self-reliant and cohesive people. They had natural resources, including iron ore, coal for steel, and metalwork skills.

Don Jose took advantage of programs the Spanish government already had in place. The government gave coops a great deal of support in the early days, providing 12.5%-20% start-up capital at a low fixed interest rate. Coops paid no corporate tax for the first ten years and half the standard rate after that. Spain’s protectionist import policy after the war further protected the budding cooperatives. They had room to grow and develop without serious competition from powerful and sophisticated foreign companies. They also took advantage of the destruction form the Civil War and WWII, producing goods for growing disposable incomes in the years after the wars.

After the initial seed money gathered from the town as donations, Mondragon’s workers self-capitalized their business, making them worker/owners. In 1959, they created their own bank, Caja Laboral Popular.

In 1969 Spain declared coop members self-employed and thus ineligible for state health care and unemployment benefits. Mondragon created its own system of health care, Lagun Aro. They provided health care service at a lower rate than the state was able to provide. They eventually expanded to provide pensions and life insurance.

Programmed Development (1970-84)

*1974: 45 coops with 17,000 members. Strike at Ulgor.

*1975: Francisco Franco dies.

*1982:  Basque finally wins local autonomy. Mondragon has 20,000 worker/owners, 85 industrial coops, 6 agricultural coops, 2 service coops, 43 cooperative schools, 14 housing coops, 40 stores for its consumer coop, a bank with 120 branches, a research institute, a polytech college, a social security and health care coop.

*1980-83: Spanish Recession

Mondragon expanded at break-neck speed through the 70’s. As they grew, they reorganized into regional subgroups that strategized together. The “Contract of Association” linked the new coops together into a network. A strict policy prohibited direct competition among them. They bought and sold to each other whenever possible. True to its socially conscious roots, the fledgling organization made a commitment to refrain from making weapons, useless luxury goods, or pollute the environment.

In the 1980’s, a severe recession hit Spain. Unemployment hovered around 20%. To weather the storm, Mondragon spent all accumulated profits on wages. They pulled in their investments, investing more cautiously, and attempting to diversify their business model. Wages dropped by 15% throughout the cooperative. Hours were cut without effecting pay, with the guarantee that unworked hours would be made up later in the year.

When these measures failed, the management and worker/owners met for three days. Finally, the workers agreed to hold a lottery, and 20% of the workforce was laid off with 80% pay. Some of these workers transferred to other coops within Mondragon. Some were retrained or retired early. At the end of the year, workers still out of work came back at full pay and another set was laid off.

During the decade long crisis, Basque lost 150,000 jobs but Mondragon created 4,200 jobs (an increase of 36%). During that time, only 104 (0.6%) ended up briefly unemployed with 80% of their salary.

“Teaching should be ongoing in order to be effective. Tools and machines need to be continuously renewed but above all there has to be a renewal in the mentality of human beings because they are destined to be the masters or these tools.”

While 80% of traditional start up businesses fail, Mondragon’s success rate for new ventures has been 80-90% from the beginning. One of the reasons is its internal capital fund (see Organization in Part II). But Saiolan also deserves some of the credit. In 1981, Mondragon founded an incubator for new products offering budding entrepreneurs coaching, technical resources, funding and help with business plans. In all, 285 entrepreneurs have been helped to create their own company under the Mondragon system.

Mondragon also created an R&D center (Ikerlan) to incubate and refine new ideas before implementing them. The R&D center works closely with the business school. Ikerlan research is commonly given as coursework to one of the classes, creating student incentive by letting students know their homework will create new enterprises. Ikerlan played a key role in keeping Mondragon on Spain’s cutting edge and creating well-researched successful ventures. Mondragon manufactured Spain’s first computer chips. They lead Spain’s industry in wind, solar, and hydrogen power as well as communications, health industry, and food.

This is not to say it has always been all harps and roses at Mondragon. In 1974, their oldest and biggest cooperative, Ulgor, went on strike.

Ulgor bought a refrigeration manufacturing business, adding it to their stove manufacturing and increasing workers to 3,500. The new workers were given little ideological training in cooperativism. In Mondragon, wages were set by a formula taking into account the difficulty of the job, personal performance, experience level, and interpersonal skills. The management at the failing Fagor refrigeration plant exceeded the salaries of the successful Ulgor plant, while labor at Ulgor made more than Fagor’s workers.

Ulgor grew large so fast, communication between management and labor was compromised. Management unilaterally convened a committee to reassess the difficulty of various jobs. They filled the committee from their own ranks and, not surprisingly, the committee adjusted engineering and management wages up while dropping relations and assembly jobs down. Wages dropped for 22% of the jobs and supervisors were given power to grant merit points that increased some worker’s wages. This was widely seen as an attempt to value mental work over physical–something Don Jose was against.

Workers argued monotony should be part of the formula for wages. They wanted some control over supervisors to counter the merit credit system. When the Governing Council refused to hear the request from workers, 700 of them left the factory. The strike only lasted one day, but 24 leaders of the strike, two thirds of them women, were “fired”.

Only the General Assembly could actually fire a worker. Since the General Assembly would not meet for four months, the workers were provisionally “fired”. Management had four months to give “informational chats” before the General Assembly met. The bars became an ideological battlefield in those months, creating a deep rift in Mondragon society that is still felt today.

When the General Assembly met, it upheld the firings. The fired workers were not readmitted to their jobs until 1978, when the workers launched a general campaign on their behalf.

Adaptation to Market Forces (1985-90)

*1986: Spain opens its economy to Europe.

*1987:  Mondragon does $1.6 billion in business, 19% for export out of Spain

*1989: Spain opens its economy to the World. Basque adopts Mondragon-style business as the official economic policy of the fledgling nation.

*1990: Mondragon has 21,241 members, more than 100 coops, $2.6 billion in assets, schools with 6,500 students

Globalization hit Mondragon hard. We have all witnessed local companies collapse when faced by giants like Wal-mart. In response to this threat, Mondragon centralized their leadership, to make it as nimble as other multi-nationals. They expanded their reach–first across Spain and then around the globe.

To avoid import tariffs, Mondragon purchased subsidiaries in China, Mexico and Brazil creating an influx of nonmember, international workers. They took advantage of NAFTA to import their home appliances into the US. To date, the coop has not offered full membership to all of its workers. (Some of these countries have laws prohibiting cooperative organizations.)

In recent years, Mondragon has restricted membership. They argue that members are guaranteed a lifetime job, so over expansion of membership in uncertain times puts current members at too much financial risk. Additionally, to insure new members are suited to cooperative work and responsibilities they have initiated a one year probationary period. Many workers do not have the maturity or far-sighted vision to work in the cooperative setting.

Centralization (1991-present)

*1996:  Mondragon is the 15th largest business in Spain with 86 production coops, 44 educational institutions, 7 agricultural coops, 15 building coops, 66,000 members

*1997:  Mondragon does $5 billion in sales, has financial assets of $7.5 billion. It is the leading producer of domestic appliances and machine tools in Spain, third largest supplier of automotive components in Europe. Mondragon University is founded.

*1999: External nonvoting capital is allowed into MCC equity and now comprises 13% of equity.

*2003:  Mondragon has 75,000 members, 160 coops (135 industrial, 6 financial, 14 distribution). Spain’s seventh largest business. Mondragon teaches multi-lingual classes and has 4,000 students. Their college has four university level programs: engineering, business, humanities-enterprise, and teaching. Their consumer coop, Eroski, is Spain’s third largest grocer.

*2007: Mondragon has 100,000 worker/owners and another 30,000 employees, $24 billion in generated revenues. One quarter of the products scheduled to be made by the company in 2012 are not yet in production. The Bank has 389 branches over all of Spain. Their educational system has 45,000 students. Eroski successfully keeps Wal-mart at bay by out competing them!

In 1991, Mondragon reorganized again into Mondragon Cooperative Corporation (MCC) with three major business arms: Financial, Industrial, and Retail/Distribution with divisions under each branch. Each division has its own bank but they are organized under the Central Inter-cooperative Fund (FCI) which is financed by 10% of profits of member coops.

“Such co-ops outstrip all types of capitalist firms in productivity not in spite of being democratic, but to the extent that they are.”Levine and Tyson

Mondragon did well in the financial crisis of the 1980’s because it was structured to share the wealth and the burden. This has allowed it to weather the most recent economic instability as well.

With its relaxed, welcoming workplace atmosphere, including childcare and European style coffee bars in the break room, you might think Mondragon would not be able to compete with multi-nationals in the age of globalization. You’d be wrong. It has equaled or out preformed conventionally owned rivals in both productivity and per capita profit since its inception. The Mondragon model is required reading for both Harvard business school and Stanford law students for that reason.

Mondragon has survived the onslaught of multinationals and the push for globalization, but at some cost. Many of the original social values of Mondragon have been displaced for the sake of market efficiency. They are more centralized and hierarchical. They hired non-member workers, and increased the pay differential between workers and management. This led to a gap in power and increased dissatisfaction for the workers. Just-in-time inventorying, work-movement monitors, and swing shifts were introduced. These sorts of changes left the workers feeling their responsibility and stress had increased, while self-determination declined.

Mondragon has been a local force in the Basque nation. The town of Mondragon, with its population of 23,000, is nestled in unspoiled countryside with smooth roads and no billboards. The area is solidly middle class without the extremes of mansions or shanties. The Basques enjoy a strong sense of community that is friendly and trusting.

Mondragon, however, is big enough to be an economic force, particularly in light of today’s collapsing markets and they have yet to step into that role.

In 2009, the General Assembly voted to open membership to non-Basques within Spain. One of the many criticisms leveled at Mondragon is their use of non-member workers. Nine percent of employees are not members. Most work in Eroski, the largest supermarket chain in Spain and most are women.

Next time, I detail how Mondragon’s unique organization created their success.


Skip to comment form

  1. has always touted Mondragon as some thing really special, and I was aware of some of this, but really appreciate the detailed history.

    • RUKind on August 3, 2011 at 22:24

    Looking forward to parts two and three.

Comments have been disabled.