We just returned from Europe and as always, being among the age-old buildings awakens a sense of history in me. This time around, a visit to the Netherlands reminded me of this country’s Golden Age when it was a leader in the worlds of trade, art, etc.
It was during this prosperous time that the Dutch East India Company was established. For someone like me, with a passion for business and distribution, the VOC (Verenigde Oostindische Compagnie in modern Dutch) is a prime example of business success in distribution.
Of course, the spice trade involved colonisation, war and other unacceptable practices, but there is no denying the strategic brilliance behind the Dutch trading efforts. Here are what I think we can learn from both the rise and the fall of the VOC.
- Strategic alliances: Originally established as a chartered company in 1602, the VOC managed to get a 21-year monopoly on the Dutch spice trade from the Dutch government.
- Be the first: It was the first company in history to issue bonds and shares of stock to the general public. The VOC was the first publicly traded company of the world and the first ever to be listed on an official stock exchange. Considered to be the world’s first true trans-national corporation, meaning that their operations were spread over many countries to sustain high levels of local responsiveness. The first quasi-fictional model of a mega-corporation, with quasi-governmental powers that included waging war, the imprisonment and execution of convicts, negotiation of treaties, establishing colonies and even striking its own coins! Read more.
- Be the best: Statistically, the VOC was the world’s leader in international trade for almost 2 centuries, paying an annual dividend of 18%. “Between 1602 and 1796 the VOC sent almost a million Europeans to work in the Asia trade on 4,785 ships, and netted for their efforts more than 2.5 million tons of Asian trade goods. By contrast, the rest of Europe combined sent only 882,412 people from 1500 to 1795, and the fleet of the English (later British) East India Company, the VOC’s nearest competitor, was a distant second to its total traffic with 2,690 ships and a mere one-fifth the tonnage of goods carried by the VOC. The VOC enjoyed huge profits from its spice monopoly through most of the 17th century.”
- Have a corporate identity: The VOC monogram was possibly the first globally-recognized corporate logo.
- Identify opportunity in a challenging environment: The success of the VOC started from a challenging environment for the Dutch: Antwerp lost its importance as distribution centre to Hamburg / the Portuguese and Spanish crowns united while the Netherlands was at war with Spain / The demand for spices outweighed the supply, making spices, especially pepper, very expensive. Rather than being discouraged, the Dutch were motivated to enter the spice trade themselves.
- Persist: Persisting with their exploration efforts despite substantial fleet losses, the Dutch merchants competed with each other and formed strategic partnerships to give them direct access to sought-after spices and an edge on the Portuguese trade.
- Be strategic: One important part of distribution is to not only ensure supply, but also to manage the demand – and therefore price. So this is what the Dutch did: “Previously, one of the tenets of the VOC pricing policy was to slightly over-supply the pepper market, so as to depress prices below the level where interlopers were encouraged to enter the market (instead of striving for short-term profit maximisation). The wisdom of such a policy was illustrated when a fierce price war with the EIC (English) ensued, as that company flooded the market with new supplies from India. In this struggle for market share, the VOC (which had much larger financial resources) could wait out the EIC. Indeed, by 1683, the latter came close to bankruptcy; its share price plummeted from 600 to 250; and its president Josiah Child was temporarily forced from office.“
- Diversify: When the VOC ran into problems with its low volume-high profit business enterprise with its core business in the spice trade, it diversified and started to import other Asian commodities such as textiles, tea and coffee.
- Keep an eye on the political picture: “There was a steady erosion of intra-Asiatic trade because of changes in the Asiatic political and economic environment that the VOC could do little about. These factors gradually squeezed the company out of Persia, Suratte, the Malabar Coast, and Bengal. The company had to confine its operations to the belt it physically controlled, from Ceylon through the Indonesian archipelago. The volume of this intra-Asiatic trade, and its profitability, therefore had to shrink.”
- Be flexible: “The way the company was organised in Asia (centralised on its hub in Batavia) that initially had offered advantages in gathering market information, began to cause disadvantages in the 18th century, because of the inefficiency of first shipping everything to this central point. This disadvantage was most keenly felt in the tea trade, where competitors like the EIC and the Ostend Company shipped directly from China to Europe.”
- Look after employees: The “venality” of the VOC’s personnel (in the sense of corruption and non-performance of duties), though a problem for all East-India Companies at the time, seems to have plagued the VOC on a larger scale than its competitors. To be sure, the company was not a “good employer”. Salaries were low, and “private-account trading” was officially not allowed. Not surprisingly, it proliferated in the 18th century to the detriment of the company’s performance. From about the 1790s onward, the phrase perished under corruption (vergaan onder corruptie, also abbreviated VOC in Dutch) came to summarise the company’s future.
- Transparent Bookkeeping: “A self-inflicted wound was the VOC’s dividend policy. The dividends distributed by the company had exceeded the surplus it garnered in Europe in every decade but one (1710–1720) from 1690 to 1760. However, in the period up to 1730 the directors shipped resources to Asia to build up the trading capital there. Consolidated bookkeeping therefore probably would have shown that total profits exceeded dividends. In addition, between 1700 and 1740 the company retired 5.4 million guilders of long-term debt. The company therefore was still on a secure financial footing in these years. This changed after 1730. While profits plummeted the bewindhebbers only slightly decreased dividends from the earlier level. Distributed dividends were therefore in excess of earnings in every decade but one (1760–1770). To accomplish this, the Asian capital stock had to be drawn down by 4 million guilders between 1730 and 1780, and the liquid capital available in Europe was reduced by 20 million guilders in the same period. The directors were therefore constrained to replenish the company’s liquidity by resorting to short-term financing from anticipatory loans, backed by expected revenues from home-bound fleets.”