Effective Supply Chain Management
The Global Ascendancy of the Netherlands, circa 1600-1799
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Premise #1: All the Money in the World Spent on Feeling Good
(credit: Ry Cooder, ‘Fool for a Cigarette’)
(credit: Ry Cooder, ‘Fool for a Cigarette’)
Premise #2: Scarcity Drives Price and Profit
Premise #3: The Middleman Makes the Moolah
Premise #4: There is Nothing Quite Like a Monopoly
Premise #5: O quam cito transit gloria mundi (monopolies don't last.)
OK, re Premise #1: It isn’t the lower rungs of Maslow’s hierarchy (food, clothing, shelter) that drive the economy – it’s the pursuit of feeling good. Our modern economy is based nearly entirely on elective consumer spending for designer sunglasses, iTunes, and large flat-panel TVs. In prior centuries, the “feel good” products were… spices. Nutmeg, cloves, mace, cinnamon, etc.
Re Premise #2: If cocaine were available on every streetcorner, by the bushel, would it still cost $$$-per-whiff? (Oops, I hear that actually it is available on pretty much every street corner, in any quantity you want, so that may not be the best example… but you get the idea). Anyway, until very recently, spices were SCARCE… and hence enormously expensive. To some extent this remains true. Saffron for example is still worth more than gold, by weight.
Re Premise #3: As a rule, it isn’t the producer of a good who reaps the majority of financial reward. Nor is it often the final seller. Going back to the example above… the farmer in Peru makes diddly, the retail guy on the corner makes squat… but the supply-chain managers are driving Ferraris, paid for out of petty cash.
Re Premise #4: Just ask Bill G.
So what does this have to do with geopolitics, the VOC, and the Netherlands?
Spices used to travel primarily overland from their origins in Asia, across the Indian subcontinent, through Arabia and Asia Minor to reach the Mediterranean, from which point they moved on to Europe by galley or small sailing ship. For hundreds of years a coalition of Arab and Venetian traders exercised near-monopoly control of the supply chain… and the profit was such that Venice became THE geopolitical powerhouse of Europe. Just how profitable was it? Trust me, it was almost unimaginably profitable. Read on and we’ll get an idea.
The final alternative to the Arab/Venetian supply chain was closed by the fall of Constantinople in 1453, cementing the monopoly. The cost of spices spiked even higher… and European merchants began a literal search for an opportunity to break the monopoly.
The search was for a sea-route between Europe and Asia, which would enable direct access to spices via a simpler supply chain. The specific grail of the search was a tiny set of islands, the single location where certain spices grew. For sake of simplicity, let’s just call these islands the Spice Islands. The goal: development of an alternative supply chain, with profits flowing to the new middlemen who developed it.
It was by no means a certainty that finding such a route was possible, but key maritime nations – notably Portugal and Spain – gave it a shot. An unintended consequence, resulting from the misconceptions of one mariner explorer under contract to Spain -- Christopher Columbus -- was the discovery of the Americas. Another mariner, under contract to Portugal – Vasco de Gama – eventually reached India in 1498, via the Cape of Good Hope in the south of Africa. He loaded up on spices and returned alive to Europe… but the supply chain was still inelegant, as he was unable to discover the actual source of the spices and deal directly with the growers. A third mariner, under contract to Spain – Ferdinand Magellan – led the first circumnavigation of the world in 1522. He was killed in the process, but his fleet did reach the Spice Islands themselves, and returned with a load of spices. A new supply chain had been formed.
What happened as a result? Take a look at Venice now. Nice tourist destination, but not exactly a geopolitical powerhouse. Geopolitical power migrated rather abruptly to a new center: the Iberian states. With the direct profits from spice importation, combined with silver and gold looted from the Americas (an unforseen economic windfall, stemming directly from the search for an improved spice supply chain), Portugal and Spain dominated Europe economically in the 16th century.
Alas for Portugal and Spain, they blew it. They stayed in competition, rather than establishing a collusion to control the market via a duopoly (almost as good as a monopoly but not quite). Further, the Portugese subcontracted spice distribution rights into northwestern Europe to the Dutch. When Spain absorbed Portugal in the late 16th century, they did find themselves in a monopoly position to control sea routes for the spice trade and… they raised prices while simultaneously cutting the Dutch out of the picture.
The Dutch weren’t very happy at all. To address the problem, they founded the world’s first limited liability, joint stock company in 1602: the Dutch East India Company (or more properly, the VOC… Vereenigde Oost-Indische Compagnie) and gave that company an exclusive charter to develop and exploit the spice trade. And did the VOC ever! By the late 17th century the VOC was the world’s richest company, with tens of thousands of employees, hundreds of ships, and paying an annual dividend of between 20% - 40% to investors. (Over a 200 year period, average annual dividend was 18%.)
The VOC weren’t nice guys. In fact, they were real bastards. But effective.
-- I was born and grew up in what was originally a Dutch colony... the American state of Delaware.
-- If you live in New York, you are living in the former Dutch colony of Niew Amsterdam. (Incidentally, did you know the Dutch traded Niew Amsterdam to the English? They traded Manhattan for an island you have probably never heard of: Run, in the Banda Islands. What made Run special? It was forested in nutmeg trees. New York in exchange for Run? Probably not such a bad deal, when you consider the Dutch originally ‘bought’ Niew Amsterdam from the native Americans for something like 24 dollars.)
-- My favorite dive destination, Bonaire, is a tiny place in the Caribbean Ocean. Bonaire happens to be technically a Dutch municipality.
-- Modern Indonesia… was a Dutch colony for several hundred years, in fact, up until World War II.
-- For ~250 years, Japan was entirely closed to trade with Europe, with a sole exception: the VOC, who were allowed to land several ships per year on the island of Dejima in Nagasaki harbor.
-- The area that became the country of South Africa… was originally colonised by the Dutch, to grow fresh foodstuffs for VOC ships in transit.
Keep looking, and you’ll find legacies of Dutch geopolitical dominance all around the globe.
The VOC went bankrupt through corruption, mismanagement and most importantly – their loss of control over their monopoly of the spice supply chain, as other nations (notably England and the emerging United States of America) horned in.
It may be coincidence that the Netherlands, although still an incredible trade powerhouse, is realistically no longer THE defining geopolitical powerhouse as it was in the 17th century. But unless it is coincidence… it would seem to support the thesis that Geopolitical Primacy is a function of effective Supply Chain Management.
One last fact. I’ve read that investors in the first Dutch ship returning to Holland from the Spice Islands… realized a 400% return on their investment. (It's true that a substantial percentage of the crew died on that voyage, but then... there is always some level of tension between capital and labor.)
