Tuesday, March 18, 2014

What Happens When Super-Successful Capitalists Fail?

"We will get our men in Brazil.  We are not going to South America to make money, but to develop that wonderful and fertile land ... We'll train the Brazilians and they will work as well as any others."

Henry Ford (1863 - 1947), regarding Fordlandia

"The Ford Motor Company in Brazil is said to be one of the best equipped and most liberally funded expeditions that ever entered the region."

Unknown author of "The Ford Motor Company of Brazil." The Inter-American Review, July 1929
What happens when a very successful capitalist is thwarted by other capitalists and warlord dictators in other parts of the globe?

Have you ever heard of Fordlandia?

In the early 20th century a huge majority of the world's rubber supply was held by a cartel made up of British and Dutch "rubber barons."  The only source of rubber at that time was from a South American rubber tree called havea brasiliensis.  Its sap was the fount of natural latex.  Brazil was the largest producer.  In the 1870s smugglers, capitalists all, privily carted seeds from this South American tree to various large plantations in the Far East.  Production from these plantations eventually overtook and crushed Brazilian production, and their control by the above "rubber barons" strangled the world's rubber supply, becoming the largest producers.

In the 1920s, Ford's business was booming and he needed rubber!  He had only one source for rubber to make his zillions of needed automobile tires.  He decided to do what every bona fide capitalist does - HE DECIDED TO COMPETE!

He competed by integrating vertically.  He would produce his own rubber!  Where would a very nice place to grow havea brasiliensis be?  Very good - Brazil.  In 1929 Ford contacted the Brazilian gubment, who graciously provided him a specialist named Villares to look over the Amazon for a suitable location for Ford's desired rubber plantation.  The hope was to bring the rubber business back to Brazil.

(Side note here:  it turned out later that the Brazilian gubment did not trust foreign investors and Villares was actually the landowner of the property he "found" for Ford.  Villares knew it was hilly and rocky and unsuitable for a rubber plantation.  Not knowing all this Ford went along with the deal because the Brazilian gubment conceded him up to 2.5 million acres.  Ford's part of the deal was a 7% kick back of future profits to the gubment.  Ford actually purchased the useless land from Villares.)

A location was found along a tributary of the Amazon called the Tapajos River.  The 15,000 square miles of land was to produce enough rubber annually to supply 8 million tires a year.  Feverishly Ford began building his new utopia in 1930.  In addition to factory buildings, a town flourished with as many as 10,000 residents.  A host of other businesses grew up as well - restaurants, barber shops, shoemakers, butchers, you name it.  There was a hospital, library, and a hotel!  Fordlandia was established.

Ford's first mistake was to get his best engineers and factory supervisors to work, instead of hiring horticulturalists, to manage the plantation.  Razing thousands of acres of land he planted thousands of saplings.  And all very close together.  To Ford's thinking more was better.  However, heavy rains washed the rich topsoil away, so Ford razed more land and planted more saplings!

An acre of Brazilian jungle naturally contains an average of 7 rubber trees per acre.  They mingle with the other plant species, but are not too close together.  This is for a reason - drought, insects and a deadly leaf fungus.  Too close together the trees' leaves pass this fungus easily from tree to tree.  Nature knows what it is doing.

In addition, there was much disaffection among workers, who did not want to work 9-5 (the heat of the day) or eat American cuisine.  Ford also wanted them to participate in American cultural activities like square dancing and sing-a-longs (in English).  The prohibition on alcohol was a big downer for the workers as well,  and they eventually rioted.  The workers were paid twice the going daily wage, but that was not enough.

The lack of sapling growth and worker unhappiness caused Ford to do two things - he hired a plant pathologist, Dr. James Weir, and moved to another location in 1933.  Finding Belterra, about 80 miles away, he began again.  Weir brought thousands of saplings from the Far East to plant at Belterra.  By 1940 only 500 workers remained at Fordlandia while some 2,500 worked at Belterra.

In 1942 only 750 tons of latex was produced at Belterra, far short of the 38,000 ton goal Ford had set.  And something else happened.  The Japanese during World War II virtually shut off the rubber supply from the Far East.  Anticipating this, the United States had previously begun a large program to develop synthetic rubber.

Ford's rubber plantation failed in a big way.  Two economic principles combined to doom him - 
1.  Product differentiation and 
2.  Substitution.

By 1945 synthetic rubber was indeed developed and there was no longer the desperate need for Ford's latex.  He finally abandoned his dream, selling his interests to the Brazilian gubment for $250,000, after losing today's equivalent of $200 million!  As recently as 1987 Belterra  was producing latex, but not at a commercially-viable rate.  Fordlandia is abandoned today, and a tourist stop.

Ford's capitalist attempt ended in a complete failure.  It started with a land scam and ended in a huge financial loss.  Free enterprise makes no guarantees.  He did proclaim Fordlandia to be a "sociological success," however!   That was probably a disaster too, but having not ever visited, Ford never saw this for himself.


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