Capitalism is relatively new in human history.
Prior to capitalism, the way people amassed great wealth was by looting, plundering, and enslaving their fellow man.
Capitalism made it possible to become wealthy by serving your fellow man.
Walter E. Williams
I really enjoyed reading the late Hans Rosling’s (RIP) «Factfulness». Especially his world quiz is worth taking. But what blew me away was this ingenious business strategy:
I always try to be analytical, but even so, I am often floored by my instincts. This particular time, perhaps I had been reading too many cartoons featuring Scrooge McDuck, Donald Duck’s rich, greedy uncle. Perhaps back then I was as lazy in my thinking about commercial pharma as my students were many years later. At any rate, when UNICEF asked me to investigate a bid for a contract to provide malaria tablets to Angola, I got suspicious. The numbers looked odd and all I could think was that I was going to uncover a scam. Some dishonest business was trying to rip off UNICEF and I was going to find out how.
UNICEF runs competitive bids for pharmaceutical companies to provide it with medicines over a ten-year period. The length and size of the contracts make them attractive and bidders tend to offer very good prices. However, on this occasion, a small family business called Rivopharm, based in Lugano in the Swiss Alps, had put in an unbelievably low bid: in fact, the price they wanted per pill was lower than the cost of the raw materials.
My job was to go over there and find out what was going on. I flew to Zürich, then took a small plane to the little airport in Lugano. I was expecting to be met by a representative of a shabby, corner-cutting outfit but was instead whisked away in a limousine and deposited at the most luxurious hotel I had ever been in. I rang home to Agneta and whispered to her, «Silk sheets.»
The next morning I was driven out to the factory to inspect. I shook the manager’s hand then went straight in with my questions: «You buy the raw material from Budapest, turn it into pills, put the pills in containers, put the containers in boxes, put the boxes in a shipping container, and get the container to Genoa. How can you do all of that for less than the cost of the raw materials? Do you get some special price from the Hungarians?»
«We pay the same price as everyone else to the Hungarians,» he told me.
«And you pick me up in a limousine? Where are you making your money?»
He smiled. «It works like this. A few years ago we saw that robotics was going to change this industry. We built this little factory, with the world’s fastest pill-making machine, which we invented. All our other processes are highly automated too. The big companies’ factories look like craftsmen’s workshops compared with us. So, we order supplies from Budapest. On Monday at six a.m. the active ingredient chloroquine arrives here on the train. By Wednesday afternoon, a year’s supply of malaria pills for Angola are packed in boxes ready to ship. By Thursday morning they are at the port in Genoa. UNICEF’s buyer inspects the pills and signs that he received them, and the money is paid that day into our Zürich bank account.»
«But come on. You are selling it for less than you bought it for.»
«That’s right. The Hungarians give us 30 days’ credit and UNICEF pays us after only four of those days. That gives us 26 days left to earn interest while the money is sitting in our account.»
Wow. I couldn’t find words. I hadn’t even thought of that option.
My mind had been blocked with the idea that UNICEF were the good guys and pharma were the bad guys with an evil plot. I had been completely ignorant about the innovative power of small businesses. They turned out to be good guys too, with a fantastic ability to find cheaper solutions.
«Factfulness» by Hans Rosling