EUROPEAN PAPERS ON THE NEW WELFARE

Chapter 2: Glories and Disasters in the Chemical Industry (1959-1965)

4. Competition Problems
The constant temptation and the dream of every entrepreneur is to be able to have the great­est freedom and control over the market. One day, while moderating a debate among about thirty senior business managers, I remember asking them to indicate, in order of precedence, what they considered to be their greatest problem. In the first place they placed competition followed by taxes and State intervention, which were way behind.
In every field agreements of all kinds intended to reduce the effects of instability deriving from competition come into play in one of the fields in which human imagination is at its most fervid and varied. It follows that there is also legislation to protect market agreements and understandings and cartels subject to various restrictions that exist in every industrialised country. In the interests of the consumers and in order to stimulate innovation there are laws in place almost everywhere intended to guarantee a good level of competition.
Sometimes we witness the excessive demonisation of such agreements, even when they appear well structured which was the case with Fertilex SpA. On my return to Milan I was as­­signed to the office of the senior managers who had to take part in the creation of this European enterprise located in Switzerland. Means were sought for containing the volatility of prices in the fertiliser sector. This is a product that costs little in relation to its weight and consequently its warehousing costs as much as its manufacturing costs, to say nothing of its packaging. Whether made of jute or plastic, the product was worth a great deal in some poor countries where the bags were used to make shirts or cloaks by simply cutting the corners to insert the arms.
It only took a period of rain that went on for one or two weeks for it to become difficult to know where to store all those fertilisers that could not be scattered around since there was the risk that they would pour out straight into the drains.
At that time the world market was very much conditioned by China since that country bought several million tons of fertilisers, equivalent to between 10 and 20% of international trade. The “Chinese” price, negotiated in different ways over about two months every year in Beijing, ended up having a great influence on the whole market. Even the East Germans were interested. Communications between them and some European companies were carried out by means of telex messages sent to West Berlin. There, an agent had his colleagues in the German Democratic Republic to the East read these messages and then he returned to the West with the text in his pocket. There is nothing as good as trade for creating unity. And, it must be remembered this was in 1962-63, at the heights of the Cold War.
Fertilex, therefore was founded in an attempt to reduce volatility of prices which, apart from anything else, discouraged investments. During the meetings held with the purpose of creating this organisation I had the pleasure, “historical” in a manner of speaking, of meeting an elderly German jurist who, in the period between the two World Wars, had participated in the foundation of the French-German agreement in the coal and steel sector, the “Montana Union”. This did not prevent the outbreak of the Second World War. However, in a sense the project was given new life after the conflict when, driven by Jean Monnet, the European Coal and Steel Community (ECSC) was founded.
News of the creation of Fertilex was broadcast throughout the world through the spe­cialist press and the economic press in general. A great deal of information was given out on everything, in every sense. Most by far of what was published, however, was inaccurate. On this occasion I understood that in the modern world the best way of being protected from indiscreet attention is not in keeping something a secret but providing excess information. With the internet and all the rest this, today, is increasingly easier and more usual. It is not the quantity of information that counts, but the capacity for distinguishing and selecting it.
This capacity does not appear to me to be at the centre of day to day preoccupations; it should be the case for every educational undertaking.
With the worldwide spread of the news of the creation of Fertilex, prices at first were consolidated. The objective had been partly achieved. Then came the crisis. Everyone every­where was convinced that prices were now guaranteed and under control, and so many new fertiliser factories opened up their doors. Due to the excessive supply there was a return to the starting point and prices fell. The agreement had essentially served merely to move the volatility cycles, not to eliminate them once and for all. Here was an interesting economic and commercial experience.
I drew a number of lessons from my four years of work at Zurich in this sector. I was able to observe that all the service operations (warehousing, transport, distribution and the spread­ing) accounted for more than two thirds of the total cost of these fertilisers. The logis­tics problems were more important than the production ones. The warehousing of fertilisers had to be carried out with due attention paid to avoiding damp, or worse still, rain, otherwise the product would be compacted to the point of becoming a block of unusable cement. It also appeared to me that when a market becomes so huge it only takes a 1% downturn in forecast sales in a very short period (a week) to cause serious problems of vulnerability or volatility in the balance of prices that can then decrease or increase by 50% or more.
Among my tasks was that of producing estimates and keeping accounts of fertiliser production capacity for the whole world. It was not so simple. First of all because the official figures were not necessarily correct. When a scarcity of products occurred it could be found that products that existed in theory were in fact not always available. There was also a very serious technical problem. Many of the large intermediate chemicals constitute what in other sectors are called “fatal” production. This means that the process, once begun, cannot be stopped like you might turn off a tap. The process cannot, must not, be halted except in the case of repairs, controls, checks or maintenance of the tanks in which the chemical reactions take place. It is like one is making soup with various ingredients and once the right heat and mix of the raw materials used have been reached, the whole can no longer be interrupted. For every startup, days, weeks, sometimes even a whole month is required.
What then is meant by “production capacity”? Total capacity over twelve months (impossible to obtain)? That which takes account of the average time needed to start a production cycle? And what about postponements, whether intended or due to accidents?
A margin existed, so that a figure on capacity could vary – just like weather forecasts – according to several factors some of which slipped control. Even today I am a little suspi­cious when I read the statistics on the level at which production capacity is exploited especially when it is claimed that this is used as the basis for productivity calculations. In the fertiliser sector final productivity, the relationship between costs and performance went well beyond the narrow analysis of production capacity that formed only one among the many factors, all characterised by a degree of uncertainty, and in which the service functions were dominant.
This experience of mine ended in 1965. At the end of the summer I got employed at the Battelle Institute in Geneva. Farewell, Zurich and fertilisers!


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