Special Report: Fagor Electrodomesticos
Looking to Spain

by Paul Roggema, European correspondent

Standing on the southwest corner of Western Europe is Spanish appliance maker Fagor Electrodomesticos, a hidden jewel within Europe’s large white goods market.

But sometimes it is good to turn around westwards (or better said, southwest) and have a look at Spain, the world’s most popular tourist destination and home of Fagor Electrodomesticos, the Spanish-based and -owned white goods market leader. The Fagor story is an interesting one for two reasons: it is not a part of a major white goods company, and it has a unique cooperative structure.

Fagor in Spain

In the Spanish market, Fagor’s market share is about 21 percent of total sales in the region. The company’s flagship brand is Fagor, which is the region’s number one brand, especially in the mid- and high-end market segments, and has the best position in the service channels. The company’s other brands—Edesa and Aspes—rank third and fifth, respectively. Competition is number-two ranked Balay, a BSH brand, and number-four ranked Zanussi, an Electrolux brand.

Fagor is the appliance maker’s premium brand; Edesa is in the middle section of the market; and Aspes offers value-for-money, for Spain and Portugal only. Then there is Mastercook, for the Polish and Middle-European market. The head office and main production site is in Mondragón, about 1 hr from the Northern coast of Spain, in the heart of the famous Basque region. Other main facilities are nearby. There are also factories in Poland and Morocco. Total workforce of mother company Mondragón Corporación Cooperativa (MCC) is about 66,000. Fagor has about 6,000 employees, 1,900 of which work in international markets.

Pablo Mongelos, CEO, believes in the unique cooperative structure of Fagor. “The biggest advantage is the high commitment of the workers, due to their participation. People relate much more to the company and its results,” he says.

For Fagor, 2003 was a year that brought stability, after the economic and socio-political tensions of 2002. Spain’s GDP growth was 2.4 percent, better than France (0.2 percent) and Germany (0 percent). White goods sales in Spain increased by 10.3 percent. Fagor’s total sales were 910 million euros in 2003, up from 896 million euros in 2002. International sales make up 42 percent of total sales.

As the top appliance brand in Spain, Fagor has the highest customer awareness and loyalty. Many customers like the company’s long tradition and the wide product spectrum. The company is also known by consumers for its standard 5-year warranty (other brands offer 2-year warranties), combined with a 24-hr reaction time service. If the service is not on time, there is no charge. Loyalty within the distribution channels is also high because of the attractive margins and the service levels offered to the retailers.

A plant worker assembles a halogen hob at Fagor’s cooking factory. The company recently transferred hob production to its Polish factory.

Operating in a European Environment

The European white goods market is known as a very fragmented market. All countries have a specific market situation and need a tailor-made approach. This is unlike the U.S. appliance industry, which is considered one market. Still, the three major manufacturers—Swedish Electrolux, Germany’s BSH, and U.S.-based Whirlpool—are present in most markets, mostly joined by the Italian companies, and they all use their different brands to adapt to local situations.

In Spain, England, and Turkey, however, the situation has traditionally been different. A local producer, independent from the major players, has market leadership and leaves little room for the competition, especially in the mid- and upper-market segments.

UK’s Hotpoint ended its independent position in 2002 with the sale to Italy’s Merloni Elettrodomestici, but Turkey’s Arçelik and Fagor of Spain still rule their respective markets.

Fagor, however, realizes that it is not possible to survive against global white goods competitors that are 10 times bigger, so it uses an internationalization strategy: alliances are in place with Elco-Brandt (France) and Vaillant (Germany).

In Europe, Poland is very important to Fagor as a market and a production site. It also provides access to other Middle and Eastern European markets. The second most important region is Portugal, the neighboring country. “Of course the Portuguese and Spanish markets are very linked, thanks to the proximity,” Fagor CEO Pablo Mongelos notes. “We have been working in this market for a very long time.”

The Czech, Hungarian, and French markets are also focal points for Fagor. International growth forecast is 5.1 percent, somewhat higher than expected for the domestic market, which is 2.5 percent.

A new computerized pressure cooker from Fagor can reportedly control hob power based on built-up pressure inside the cooker.

Text.There are several unique aspects to Fagor and its mother company MCC. First, the Basque region leads in Spain in industrial and technical manufacturing, although this was not always the case. With few natural resources, Basque historically was not very suitable for economic development, causing many people to emigrate. But after World War II, the ore mines opened, and business took off. The iron was exported to England and swapped for coal. English industrial tradition spilled over to Basque Country and helped the region achieve its current industrial leadership position.

The history of MCC reflects these circumstances. The foundation of MCC was inspired by a visionary priest José María Arizmendiarrieta, who arrived in Mondragón in 1942. Just 2 years later, he founded a professional engineering school, as he saw that the region needed knowledge and education. (The professional education eventually evolved into the Mondragón Polytechnical University.) His motivation and stimulation led a group of five students to found a cooperative corporation named Ulgor in 1956. Ulgor would transform into Fagor and later into MCC. The appliance business remains the biggest unit within MCC.

After initial business challenges were overcome, the company’s cooperative structure was chosen. This means that all MCC employees own all of the shares of the company and meet once a year to propose and approve the yearly report. In the company’s first few years of operation, however, difficulties arose: there was urgent need for capital, and current laws did not allow workers (who were also owners) into social security and pension plans. As a result, a banking (Caja Laboral) and a social security unit (Lagun-Aro) were formed.

During the 1960s, a large number of cooperatives were added (many of a technical nature) to the existing core company. The MCC bank set up a business investment group, which helped to develop many cooperatives. During the 1970s, more cooperatives were added, but consolidation also took place, until the current structure was created in the 1980s under the MCC label. The regional structure was replaced by business sectors in order to be prepared for the open EC market. Now, MCC is the largest corporation in the Basque region and the seventh largest in Spain, both in sales and workforce. Fagor is still the largest company within the group.

There is no secret MCC formula, but a clever combination of advantages of a cooperative structure (high worker involvement, focus on consensus and collaboration, re-investment of all resources generated) with a business-like approach (defined as company profitability and management efficiency), and a focus on education (academic and professional levels) has certainly lead to its success. MCC currently consists of 168 companies, approximately half of which are cooperatives.

An ABB robot with two tools - a glue nozzle at left and glass plate holder at the right - performs gluing and window mounting together in one station for added accuracy and speed.

Cooperative Capitalism?

The cooperative model cannot be used all the time. In some new companies, joint ventures, and foreign companies, it is difficult to form a cooperative, due to legal problems and lack of experience among workers with the cooperative system, not to mention the initial investment.

“Of course this cooperative structure (common in the agriculture sector) is very unusual for a white goods company,” Mr. Mongelos tells APPLIANCE. “Many managers ask me if I can make all the decisions, and I surely can. I run the company like any other executive. However, decisions to diversify must be approved in the General Assembly, where the 3,000 members of the cooperative gather once a year.”

And when there are no stocks on the market, where does a company go for new capital? “This is always a challenge for a cooperative company, but we found a solution within the existing system,” Mr. Mongelos explains. “All cooperatives were asked to invest more money (about 2 months worth of salaries), which they did, and next to this we issued special bond loans for 60 million euros. Also, a part of the yearly profit is re-invested, while the rest goes to the cooperatives themselves and to social issues.”

Mr. Mongelos says while the structure may be unusual in the global white goods industry, there are other companies in Basque Country that successfully use the model as well.

“The biggest advantage is the high commitment of the workers, due to their participation. People relate much more to the company and its results,” he explains. “Sadly, we cannot use the cooperative model outside of Spain, mostly due to unfit legal situations. In Spain, however, MCC is the biggest cooperative company.”

With consolidation being a clear trend in the white goods sector, Fagor is in a unique position, as a take-over is not possible in a cooperative structure. “Of course, we already did our share of internationalization,” Mr. Mongelos notes. “Next to our six plants in Spain, we have had a Moroccan facility since 1994, and an Argentinean refrigerator factory since 1995, although we sold this operation recently.

“In 1999, we bought Polish manufacturer Wrozamet, located in Wroclaw,” Mr. Mongelos continues. “This was a former communist producer and was totally redesigned. Staff is now 600. We decided to move gas-cooking hobs there, as prices for this product are very competitive. In 2003, we also set up new production lines for washers and refrigerators. Capacities are 150,000 for hobs, 149,000 for washers, and 160,000 for refrigerators. Our Polish Mastercook brand has a 37-percent market share.”

The Spanish factory will now focus on electric as well as induction hobs. “This shows that we make our business decisions according to industry standards,” Mr. Mongelos says.

In the last few years, Fagor has also entered into several international agreements. First, it acquired a 10-percent share in Elco Brandt, the French white goods market leader. “We will share suppliers, plan common innovation projects, and exchange products,” Mr. Mongelos says. “This cooperation is clearly a strategic alliance, for us and for Elco-Brandt. Target for 2003 was product exchange of 360,000 completed machines, and the actual number was 361,780.”

Since 1996, Fagor has also had a joint venture with German heating manufacturer Vaillant called Geyser-Gastech. The company is said to be Europe’s largest water heater factory, producing 800,000 units yearly. The factory is also located in Basque Country.

Fagor also launched gas heaters in the Russian market through an agreement signed in March 2003 with Gazmash, a group of 11 companies producing gas-fired household appliances that belong to the Russian corporation Gazprom. “We will supply Gazmash with parts and components for mounting around 30,000 atmospheric boilers over the next 3 years,” Mr. Mongelos explains. “Russia is an extremely important market, as many aging heaters must be replaced; customers now prefer individual systems. Fagor will be one of the first European companies to penetrate this so-called ‘comfort’ market.”

The company’s newest joint business is with Shanghai Vacuum Flash Company, which makes pressure cookers (850,000 units in 2003). The products are for the Chinese market, as well as French and German markets.

Renovated Cooker Facility

Garagarza in Mondragón is the main Fagor production site, which produces ovens, hobs, dishwashers, and washing machines. The site contains three plants, which together represent 70,000 sq m. Nearby are the company’s St. Andres refrigeration plant and Bassauri water heater plant.

The cooking plant is currently being renovated. “Right now, there is a major redesign under way for the cooking plant under the ‘Horno 2005’ label. Horno is Spanish for ‘oven’,” Juan Galardi, industrial manager, tells APPLIANCE. “A new oven platform is being introduced, which was quite necessary after 15 years. With this platform, many new international demands can be met, such as pyrolytic ovens for France. In the new layout, we use four enamelling lines (white and color), and production capacity is 60-percent higher.”

Mr. Galardi also reveals that gas hob production has been transferred to Fagor’s Polish site, and the Garagaza plant is now focusing on halogen and induction hobs. As a result, current prodution at Garagaza is 400,000 ovens and 400,000 halogen and induction hobs.

“The redesign of the oven consists of a new modular structure with lower production costs,” Mr. Galardi explains. “Material use is more efficient. The new design allows for more features, better energy efficiency, and lower outside temperature. There are more electronic controls and a new, intelligent duct where the control system can control the air outlet.”

A big improvement in production flexibility is the instantaneous change to another model, an improvement from the previous 4-min changeover. Due to this flexibility, Mr. Galardi says no further automation is planned. “Our order reaction time is decreasing. About 5 years ago, we needed 3 weeks; gradually we lowered this to 6 days; and now we want to go to 5 days,” he says.

“In addition to product improvement, new internal targets must be met for the production lines, improving safety, accident prevention, environmental aspects, and cleanliness,” Mr. Galardi adds. Specifically, the company has plans to better adapt its facility and processes to workers with disabilities.

“Because we measure performance based on all the self-managing groups, we can identify areas of improvement,” Mr. Galardi says. “Especially in the oven line, the mentality must shift from the old ‘we-against-them’ toward self responsibility and problem solving. To detect real problems, individual interviews are performed with workers.”

Mr. Galardi says the integration of the different stages of the design process must be tighter, with more multi-disciplinary workgroups. “That is also the reason that the designers are located right in the factory,” he notes. “A tighter integration with other Fagor production sites will lead to better economy-of-scale. For this, we appointed an industrial manager who will set up programs to improve coordination and synergy. Total investment for the new platform is 18 million euros, of which 9 million euros is for the actual factory.”

So what about innovations at other Fagor sites? Mr. Mongelos notes: “Last year we renewed our refrigeration site, the dishwasher line is new, and we are upgrading the cooking and washer lines. Altogether, we have upgraded all of our platforms in a planned time period of 6 years.”

Supplier Relationships

In the past, Fagor used to have its suppliers deliver the parts directly to its plants. Now, there is a third party who does all of the transport, which has helped reduce stock. Of course, the appliance maker says it has a close cooperation with its suppliers, adding that all suppliers are required to implement ISO 9000 standards.

For Fagor, there are two main aspects of its supply chain: internationalization and modularization. Until quite recently, the supply-side market has mainly been local, at most limited to the EU member states. But now the trend has been that no manufacturer can ignore Eastern Europe and Southeast Asia as major supply centers.

Fagor says it has opted for an international purchase management policy, where the Polish, Chinese, and Spanish departments work closely together, while retaining central decision-making for best overall costs, as well as quality and logistics. Parts are grouped into product families, and purchase management focuses on those families that are consumed in two or more businesses. “Our buyers are like our sales force—they are out there in the market place, finding opportunities to exploit and have very specific know-how about the companies supplying us,” Mr. Mongelos explains.

The company’s other purchasing strategy is modularity. “To have products that fit the needs of the end-user and to speed up time-to-market, we use a modular design,” Mr. Mongelos says. “Our suppliers help us by building pre-assembled subsets. Working with subsets means the manufacturing area needed is smaller, and it also reduces assembly costs. The supplier assures product quality, so we can be sure that the functionality will evolve with the market as the supplier has to stay up to date with product development and competitiveness.”

Products & Innovation

In Spain, the average price for white goods is lower than the European average. In recent years, customers have started to realize the added values of extra features, and as a result, the average price is up. For instance, the lowest spin speed washing machines went up from 400 to 700 rpm, and many washing models now feature 1,000 to 1,200 rpm spin speeds.

One of the Fagor’s latest product innovations is a computerized pressure cooker. When required pressure is reached, the cooker sends a message to the hob to reduce heating power; the temperature is kept automatically. The pressure cooker is especially popular in Southern European countries.

In washing, Fagor offers all the industry-standard features such as electronic controls, large load capacity, large door openings, and a top model with an LCD menu interface. The Advanced Balancing System (ABS), which prevents unbalance during spinning, is also heavily promoted by Fagor.

The company’s new refrigerators use the Advanced Control System (ACS), said to offer perfect conservation under extreme temperature conditions. New dishwashers using a new platform will also be launched. Other innovations include Fagor’s Rotex product, which it says is the first gas-fired air-conditioning system for small and medium-sized premises, and its Domoscope Home Intelligence communications system, which is fully Internet-compatible.

“We are integrating not only our own appliances in the home network, but we also want to connect a combi boiler and the PC,” Mr. Mongelos notes. “And [there will be] no new cabling, as all connections are made by power modems.”

Future Developments

Finally, the eternal question: where is Fagor heading for the future? “Of course we realize that we have to be prepared for the European market,” Mr. Mongelos tells APPLIANCE. “Therefore, the strategic direction is clearly an expansion of our current alliances (Elco-Brandt and Vaillant), as well as development of our own foreign operations. Our Polish operations are the gateway to Middle and Eastern Europe, and also for the expanding Turkish market. This internationalization is the most important goal for Fagor.”