“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.
- Angus Maddison Data on World GDP
- IMF World Economic Outlook 2015
- “The East India Company: Trade and Conquest from 1600” by Antony Wild