Defiant Spanish workers stage lock-in, resist layoffs

Household appliance maker Fagor has recently entered bankruptcy, but its workers are not ready to give up their jobs.

FORTUNE — In the town of Basauri, amid the rolling hills of Spain’s Basque Country, some 140 workers at the Edesa appliance factory are taking four-hour shifts as they stage a lock-in.

Their parent company, the household appliance maker Fagor Electrodomésticos, has recently entered bankruptcy, but the Edesa workers are not ready to give up their jobs.

“We’re not business people, but we think that there are areas in the business that can open again and be viable,” says 36-year old Ernesto Pérez, a 15-year veteran of Edesa who is taking part in the lock-in.

Almost 28,000 companies have declared bankruptcy during Spain’s five-year economic crisis, hitting a peak of 2,854 during the first three months of 2013. But Fagor Electrodomésticos is not just any business. Launched in 1956 by a Catholic priest named José María Arizmendiarrieta and five students from a technical college he started in the wake of the Spanish Civil War, Fagor is the foundational unit of Mondragón, the world’s biggest conglomerate of worker-owned cooperatives.

With 80,000 employees and operations in 18 countries outside Spain, Mondragón became a symbol of what a worker-owned cooperative model could achieve. In the late 1980s, Pedro Nueno, a professor of entrepreneurship at the IESE Business School, consulted with Fagor on ways to innovate for the “kitchen of the future.” He says he was struck by the leaders’ long-term vision and by how committed they were considering their low salaries (top executives at Mondragón make less than 10 times the lowest paid worker’s salary).

“A person with the same responsibilities would be getting five times that in another company,” he says.

Similarly, when Richard Wolff, a professor emeritus of economics at the University of Massachusetts, Amherst, visited Fagor two years ago, he was impressed by the seriousness with which management handled buying assembly line equipment, which came from outside the Mondragón family of industrial companies. “They gave me a lecture on policy: You buy within Mondragón if quality or price was competitive. If not, you go outside,” he says.

But such commitment and seriousness has done little to help Fagor recently. Revenues fell from €1.75 billion in 2007 (about $2.58 billion at the time) to €1.28 billion in 2011, and the company has lost money for the last five years, racking up debts of €859 million. During that time, Mondragón lent it some €300 million.

So why did Fagor fail? It’s easy to say that Mondragon’s cooperative model wasn’t up to dealing with economic crisis — that it was too touchy-feely for tough times — but the reality has less to do with ideology than with simple economics.

“Co-operatives are subject to changing tastes, technologies, mismanagement — all the usual reasons why an enterprise can have trouble,” says Wolff. “It would make no more sense to question co-ops because one goes out of business than to look at Detroit and say, ‘Isn’t capitalism a failure.'”

In the case of Fagor, which was the biggest appliance maker in Spain and France, the Spanish housing bubble allowed it to ignore longstanding business problems, says Adrián Zelaia, who spent 25 years at Mondragón, including 10 as secretary general, before leaving in a management dispute in 2010.

As a European maker of mid-range appliances, Fagor did not have the low costs of emerging market brands, nor did it have the superior technology of the top German factories, Zelaia says. To deal with this, the company took advantage of easy credit to expand, most notably by buying the French appliance company Brandt in 2005.

“It was a temptation for medium and large businesses to flee from their problems via acquisitions,” says Zelaia, now president of the Ekai Center, a think tank.

Fagor was thus saddled with debt when the housing bubble burst in 2008. It marked the beginning of the end for the company, which had 5,700 employees, 2,000 of whom were in Spain.

“The housing bubble popped, and that combined with a financial crisis, so credit was cut back, consumption dropped, products came in from low-cost countries, and raw material prices rose,” says Pérez, the worker in the Edesa lock-in. “We’re a cooperative, but we don’t live outside the market.”

To help the firm weather Spain’s economic crisis, Fagor employees used the co-operative’s worker management structure to vote for several pay cuts, eventually reaching some 20%. But that was not enough. When Fagor recently asked Mondaragón for another €50 million to stay afloat, the cooperative conglomerate decided the company wasn’t viable and cut it loose two weeks ago.

Today, Mondragón is moving Fagor workers to other co-operatives in the group. Of the 1,000 to 1,200 that it hopes to relocate or give early retirement, 215 have new jobs in the group, according to Mondragón communications director Javier Marcos.

In Basauri, the workers have settled in. On Sunday, they held a community lunch to thank the cultural groups, businesses, and government offices that have supported the lock-in in part because of the domino effect that a closure could have on the town, which has 42,000 residents.

“We’ll stay until we return to our jobs or they throw us out,” says Pérez. “I don’t know how long that will be.” –Ian Mount, http://management.fortune.cnn.com/2013/11/27/spain-fagor-edesa-protests/