Monopoly, Mercenaries and Merchandize – Making of the biggest multi-national corporation ever
Lessons from the once dominant East India Company, for the multi-national businesses of tomorrow
“Monopoly is the condition of every successful business.” – Peter Thiel
December 31, 1600 AD is a seminal date in the history of the British Empire. On this day, Queen Elizabeth I signed a royal charter, creating the British East India Company (EIC), a company with a monopoly on trade from the Cape of Good Hope in Africa to Straights of Magellan in South America. The EIC went on to become the largest and most prosperous corporation that the world had ever seen.
The origins of EIC were rather modest. They started with a capital of £68,373, in comparison the Dutch East India Company (formed in 1602) was 8x better funded and enjoyed substantial military firepower. EIC is often accused of using gunboat capitalism to become the most powerful corporation in the world. By 1803, it had an army of 260,000 men, had political control over Indian subcontinent and dominated the global trade of basic commodities that included cotton, silk, indigo dye, salt, saltpetre, tea and opium. The big question is – Why did others, for instance the French, who had an economy more than double the size of Britain in 1600s and similar global ambitions did not produce a worthy rival to the EIC? French could have been the business language of the world had a few aristocrats in Paris, better appreciated the mechanics behind running a multi-national company.
As Asia again becomes a global growth engine, we can learn a lot by examining why the British East India company succeeded where others failed. I have tried to distill four key strategic advantages the company had over its peers:
- Limited Liability Structure: The concept of a limited liability company was unique for its time. EIC pioneered the concept of joint stock ownership as a way of raising the massive amount of capital needed for successful overseas trade, as well as managing the risk inherent in the enterprise. The idea of receiving dividends on the continuous operations of a company was relatively unique in 1600 AD. EIC was a 17th century financial engineering trailblazer and its financial structure allowed it the flexibility to deploy capital at a scale and speed unmatched by its rivals.
- Monopolies at Scale: During 1600s, travelling thousands of miles with unreliable navigation equipment, becoming a victim of pirates and political persecution were some of many risks traders faced while travelling East. A 2011 Economist article sums it well- “In the 17th century, round-the-world voyages were rather like space missions today“. Peter Thiel in a 2014 WSJ article says “Perfect competition is considered both the ideal and the default state in Economics 101… The opposite of perfect competition is monopoly… A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world….In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits”. Changing the world often comes at huge upfront costs, a role perfectly suited for ambitious monopolies like EIC.
- Gunboat Diplomacy: The reputation of EIC as violent raiders is not without a reason. They had a standing army of more than 200,000 men, they had forts, diplomats and even their own currency. This effort was augmented by unprecedented capex by the Royal Navy which helped create an extremely powerful “entry barrier” for future rivals
- Industrial Revolution meets Asia: In 17th Century, India and China accounted for about half of the world’s GDP. Today, this is comparable to the combined GDP share of United States, Japan, Germany, the U.K., France, Italy and Canada. Like many multi-national companies of today, EIC took advanced technological, financial and administrative innovations to a region which dwarfed its domestic market. This coupled with decline in the power of Mughals in India helped the company become a de-facto imperial power in Asia and its business became a massive state owned monopoly.
The history of the British East India Company has lessons which will continue to remain valuable in an increasingly interconnected world. We should however not forget that the brutalities of the company eventually led to the 1857 Mutiny in India and the Opium Wars of China. The company eventually got nationalized by the British Crown in 1858. EIC was a monopoly which was “too big to fail”, its successor is known today as the British Empire.
Sources:
- http://www.theguardian.com/world/2015/mar/04/east-india-company-original-corporate-raiders
- http://www.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536
- Angus Maddison Data on World GDP
- IMF World Economic Outlook 2015
- http://www.economist.com/node/21541753
- “The East India Company: Trade and Conquest from 1600” by Antony Wild
Fascinating examination of a true pioneer of our modern concept of a multi-national corporation. I am curious about why the Dutch, even after providing far greater financing in order to launch the Dutch EIC didn’t better leverage their own powerful navy to better compete with the British. Did you see in your research any evidence to suggest a contentious relationship between the crown and the stock holders of the EIC? Although nationalization wasn’t formalized until the 19th century, what direct influence (i.e. management, strategic direction) did the British government have in the EIC? This was a very enjoyable read, Vaibhav, especially for a history enthusiast like myself!
Keith, thanks for your comment. A few big reasons I could think of behind why the smaller British EIC won over a game which played out across 17th-18th centuries:
1) British East India Company was better at taking political control of the areas it dominated, cutting off the Dutch
2) The British Navy slowly became the most powerful force on the global seas which gave a leg up to the British EIC
3) Dutch EIC paid very heavy dividends rather than reinvesting the cash on forts and improving its scope of influence (Activists existed long before Ackman became popular)
Very enjoyable read indeed.
I would however disagree on your view of monopolies, especially when you quote “A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world…In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits”.
I’d say that many Monopolies fail precisely because they have no incentive to reform themselves or adapt to a new context. They also have no incentive to innovate because there is no competition to fight for market share. Similarly, they don’t need to worry about employees too much because there isn’t competition to headhunt your best employees.
As you say it yourself, the EIC relied probably more on force (physical force i mean) than market dynamics or even the rule of law. This is obviously a model that has been used in history but I would disagree as to its capacity to survive on the long term.
Great post Vaibhav! I am absolutely fascinated by economic history so I found this post to be particularly interesting. One of your comments was very timely insight of what we spoke about in today’s case on Google car: “A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world…Changing the world often comes at huge upfront costs, a role perfectly suited for ambitious monopolies like EIC”.
While I agree with the statement above, there are two things that come to mind that make me question whether the benefits of a monopolistic market outweigh the costs:
1. The lack of competition helps monopolies by allowing them to undertake major projects with huge upfront costs- however, could it also hurt them by not pressuring them to become more efficient and/or thoughtful with their costs? If there aren’t any companies working towards the same goal, I don’t see how they could be motivated to improve their operating models. Despite this, shareholders seeking a particular type of exposure will still allocate their capital to these monopolies because they do not have another option; unfortunately, the returns they receive will not be as high as they could be.
2. What happens when a monopoly shifts away from its original value proposition and actually begins to destroy value (i.e. social, economic well being in the territories they work on)? I am not that knowledgeable on the EIC but, did they have any checks and balances that ensured that their business and operating strategies were aligned to create value for everyone involved?
Great article, Vaibhav! You laid out a really interesting argument. I can see how in the absence of competitive forces, monopolies might have more freedom to plan and execute their long term strategy, which could in theory, lead to positive outcomes. I’ve heard the same argument used in favor of certain authoritarian regimes (for example, in a NY Times op-ed, Chinese Venture capitalist Eric Li argues that the stability afforded by the Chinese political system ushered in a generation of growth and prosperity that propelled China’s economy to its position as the second largest in the world – http://www.nytimes.com/2012/02/16/opinion/why-chinas-political-model-is-superior.html?_r=0).
That being said, I tend to agree with Vincent that competition leads to better outcomes. A company can only self-regulate for so long, before complacency sets in. I’d love to hear from you the causes of EIC’s eventual downfall.