Kibbutz capitalism

Sdot Yam is a fine example of successfully combining the best of the capitalist and socialist models.

kibbutz companies_311 (photo credit: Ariel Jerozolimski)
kibbutz companies_311
(photo credit: Ariel Jerozolimski)
There is broad agreement that as a system for generating and distributing wealth, free-market capitalism is badly flawed, in Israel and abroad. But what can replace it? To paraphrase Winston Churchill’s famous quote about democracy, “It has been said that democracy is the worst form of government except all the others that have been tried,” capitalism is indeed a bad system, except for all the others.
Britain’s Economist business magazine noted recently that while most people worldwide have been hurt by the global slowdown, the world’s billionaires (whose total wealth amounts to a staggering $26 trillion, or 38 percent of world GDP) saw their combined wealth rise by 14 percent just last year alone.
According to the US Forbes magazine, Israel has 13 billionaires – a very large number for a small country. In contrast, China, whose population is almost 200 times greater than Israel, has only 95.
If capitalism is indeed the unequal sharing of wealth while socialism is the equal sharing of poverty, could some hybrid of capitalism and socialism create a more equal sharing of wealth? I found a possible answer in an unlikely place – Kibbutz Sdot Yam, 42 kilometers south of Haifa.
A report in the Israeli business daily The Marker recently had the headline, “Kibbutz set to sell off marble firm for a cool $600 million.” Kibbutz members own 57.8 percent of Caesarstone, a company that makes engineered quartz surfaces for kitchens, bathrooms, floors, stairways and feature walls.
The report, it turns out, was premature; kibbutz members apparently have no intention of selling the company to a capitalist investment firm. But if they did, they would all become instant millionaires, as the profits would be divided equally among them.
How can a socialist kibbutz build a non hi-tech company into a global market leader worth $600 million? I’ve written before about hi-tech kibbutz companies that struck it rich, such as Kibbutz Lehavot Ha- Bashan’s LVT hi-tech firm, which makes state-of-the-art fire suppression systems for the military, or Kibbutz Sasa’s Plasan, which makes revolutionary ceramic armor plating (The Jerusalem Report, August 31, 2009).
It turns out that sometimes socialists can indeed out-capitalist the capitalists. Kibbutz Sdot Yam proved its members could invest in a bold but risky innovation, like capitalists, make a breakthrough discovery, and then build wealth for the long term, eschewing quick short-term profits, unlike today’s capitalists.
Sdot Yam was founded at David Ben- Gurion’s urging in 1936, just north of Haifa on the Mediterranean. Ostensibly a fishing kibbutz, it was really a base for Palyam, the Hagana marine unit that smuggled Jews into Palestine. Yossi Harel, the famous commander of the Exodus, is buried at Sdot Yam. In 1940, the kibbutz moved to its current location just south of Caesarea. Among its most famous members are the heroic World War II paratrooper Hannah Szenes and Olympic windsurfing gold medal winner Gal Fridman.
All major kibbutz decisions are made collectively at a members’ meeting. In 1987, Sdot Yam members approved an $8 million investment, with borrowed money, to buy an Italian production line to make synthetic marble. The result was initially disastrous.
The marble, suitable for Italy, disintegrated in Israel’s harsh climate. The kibbutz struggled to meet payments on the loan and even lacked money, it is said, for food.
The CEO at the time, Menachem Harari, decided to switch to quartz. A breakthrough came in 1992, when Technion Prof. Moshe Narkis discovered a chemical additive that firmly bonded polyester and quartz – a eureka moment. The kibbutz shared their breakthrough with the Italian firm that sold them the machinery, a distinctly anti-capitalist action.
Some say it was a huge error. I think this was brilliant. Caesarstone Sdot-Yam now has a major global competitor, Silestone. The competition validated Caesarstone’s concept of synthetic surfaces and, in the long run, benefited their sales and profits. In an increasingly cost-conscious world, builders and architects are choosing the less costly synthetic marble over the expensive “real thing.” Many entrepreneurs now understand that when imitators spring up, their ideas are not destroyed but rather validated and strengthened.
Caesarstone shares trade on the NASDAQ Stock Market. They are now worth $15, up from $11 in March, defying global bear markets. The reason investment companies are eager to acquire the company is that its future prospects are bright. The company reports its first quarter 2012 revenues are up by 29 percent, to $67.3 million, mostly because of success in the US market. For 2012, the company expects to have sales of $300 million, with pre-tax profits of about $70 million. The company’s gross margin, 42 percent, is remarkable for a non-hi-tech company.
Australia and the US each account for 28 percent of its sales, Israel 14 percent, and the rest of the world the remaining 30 percent. Its current CEO Yosef Shiran is making a major push to build Caesarstone’s brand name. A recent campaign on Israeli television stresses the company’s “drawn from nature” designs, effectively neutralizing the negative “synthetic” image. Like fashion designers, the company regularly shows new designs for its countertops.
How has the kibbutz benefited from the remarkable success of its innovative company? Last year, the company paid the kibbutz some $12.6 million, including nearly $5 million in wages for its 112 kibbutz employees, and $3 million in rent. Kibbutz member Maxim Ohana is chairman of the board. The Israeli private equity firm Tene Investment Funds holds a minority 24.7 percent of Caesarstone shares, but the controlling interest is still owned by Kibbutz Sdot Yam.
Israel’s vibrant start-up sector is characterized by innovative entrepreneurs who launch companies and then “exit,” selling them for a high price and pocketing huge checks. Just before the global crisis, in 2007, some 87 Israeli start-ups were acquired for a total price of $3.79 billion. As a result, with a few exceptions, money flows into Israel, and jobs and innovations tend to flow out.
Perhaps it takes a group of socialists to teach us how to run long-term capitalism.
According to the local business daily Calcalist, the kibbutz secretariat has written to its members, indicating there is no intention of selling Caesarstone. The initiative to sell it comes, apparently, from Tene and its director Ariel Halperin, who have authorized the American bank J.P. Morgan to “shop” Caesarstone to other investment funds. The secretariat letter was written after kibbutz members expressed deep anger at press reports indicating an imminent exit. Apparently, it is the younger kibbutz members in particular who are vehemently opposed.
Investment companies are clearly impressed by Caesarstone’s success and growth in the rich US market, where housing is now beginning to recover – all the more reason to keep control of the company in the hands of the kibbutz’s 711 residents.
If capitalists want to buy you out, then future prospects must be bright. So why sell? There is no sign the world is rushing to start kibbutz-like capitalist ventures. But Caesarstone and Kibbutz Sdot Yam do show the world that you can create wealth even if it is equally shared among everyone.
Let us render unto Caesarstone what is theirs – praise for socialists who out-capitalist the capitalists.