Discover more from BIG by Matt Stoller
Koch Industries Looks a Lot Like Amazon
(BIG issue 8-23-2019)
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today I’m going to write about Koch Industries. It’s timely since David Koch, one of the billionaire brothers who own the company, passed away today. I’m also adding a section to BIG called ‘Book in a Paragraph’ which is one question and one answer with an author who wrote a book I find interesting. As it happens, today’s is Chris Leonard’s recently published book Kochland.
The Dialysis Duopoly Spends $100 Million to Protect Profits in California (The American Prospect)
Justice Department Sues to Block Sabre's Acquisition of Farelogix (Department of Justice)
BIG was in Fast Company magazine discussing the New York City power grid, and The Wrap reposted the piece on consolidation in Hollywood. I was on the Realignment podcast with the conservative Hudson Institute discussing Silicon Valley tech giants.
A Book in a Paragraph: Kochland
Welcome to Book in a Paragraph. In this section, I’ll ask authors one question about their work. I’m starting with Chris Leonard, a business reporter who spent seven years reporting on the business strategy behind Koch Industries.
Leonard just published the magnificently well-reported book Kochland: The Secret History of Koch Industries and Corporate Power in America. It’s a fun read, and I learned who really runs the world and how they do it. Here’s one question and one answer:
What's the most surprising thing you discovered when researching your book on Charles Koch and the business structure of Koch Industries?
The most surprising thing was the level of rigor and long-term strategic thinking inside Koch Industries. I thought of Koch as an energy company, when it is in fact a “trading” company. I use the word trading in the broadest possible sense. Koch got its start buying and selling energy commodities like oil and gas. To succeed at that business, Koch had to know about the world than its trading partners. By figuring out hyper-accurate, real-time prices, Koch could buy low and sell high before anyone else knew what was going on. That mentality eventually expanded into “trading” the real world — Koch bought and sold whole companies like pawns on a chessboard. This is how deep learning and patience became central to Koch’s strategic DNA. The company’s traders analyze huge amounts of data about snowfall in California (a predictor of hydroelectric power), customs manifests from the Gulf Coast (a predictor of U.S. energy supplies) and natural gas sales in the U.S. (a predictor of energy prices). Koch employs this same kind of analysis to influencing politics. The game is patient, it relies on deep knowledge of the system,, and Koch tends to win its bets a majority of the time.
I think the coolest and saddest story in Kochland is when they broke a strike at a refining plant in the 1970s by flying replacement workers over the picket line via helicopter. If that sounds interesting you can find the book here.
Relatedly are my observations from the book…
The Koch Conglomerate
Today, billionaire David Koch passed away, so it’s timely to write about the empire that he helped put together. Now, there’s not that much to say about David Koch himself. David is the younger brother of the real power behind the throne, Charles Koch.
But what a throne! Charles and David are together worth more than $100 billion, and Charles’s son Chase is moving the empire deeply into technology through a venture capital arm called Koch Disruptive Technologies. So how does it all work?
The key to understanding the power and reach of Koch Industries - which controls slices of industries as diverse as nylon manufacturing, oil refining, derivatives and chemical trading, pipelines, and agricultural inputs, is to recognize that it is basically a giant private equity fund with investments in core industrial infrastructure, tied together with a trading operation. It’s a conglomerate that uses data and power in one industry to leverage power into another industry.
From the 1960s to today, Charles Koch used a philosophy called Market-Based Management to emphasize constant learning and the opportunistic of information to build power. My favorite example is how the company expanded into nitrogen fertilizer. In 2003, Koch official Steve Packebush pitched the company’s internal private equity arm, led of course by Charles Koch, on massively expanding the company’s nitrogen fertilizer operation by buying a a large money losing plant.
Koch understood this business, because the company already owned a plant in Louisiana. It had dipped its toe into the water, and while it hadn’t done well, it had learned how the business works. One of the key inputs into nitrogen fertilizer is natural gas, and the price of natural gas spiked, causing fertilizer plants all over the country - including Koch’s - to bleed cash. What Packebush realized is that the collapse of the nitrogen fertilizer industry was temporary, and that once a wave of bankruptcies hit, whoever was left would have massive pricing power against farmers who depended on the fertilizer. Charles Koch bought the thesis, and the company spent $290 million for one of the largest plants in the country, a farmer owned co-op plant in Kansas City.
They invested $500 million in the plant over the next ten years, and put a team of fertilizer traders in the plant. These traders bought and sold fertilizer and its inputs globally, syncing up with the massive natural gas trading operation and information from pipelines and refiners that Koch already controlled. Koch established a company of natural gas traders just to buy inputs for his fertilizer operation. Today, Koch Industries generates fantastic amounts of cash from nitrogen fertilizer, and uses this cash to make further acquisitions in related markets. It’s a long-term strategy that relies on deep patience and learning, as well as the willing to make big bets to build power in core areas of economic infrastructure.
Koch Industries, in other words, sounds a lot like Amazon, but in the fossil fuel and agricultural area. Where Amazon has its store of data and its core infrastructure over online retailing, fulfillment, logistics, and cloud computing, Koch has its store of trading data and its core infrastructure in natural gas, oil refining, food inputs, and industrial products. Both rely on no enforcement of antitrust laws, no prohibition on information sharing across subsidiaries, and strong political networks to protect themselves from political interference. The main difference seems to be that Koch is in a different sector of the economy than Amazon.
I don’t have a great conclusion here, except to note that we are living in an era where large conglomerates are more akin to governments than businesses, because our public policy levers enabled power to move from democratic institutions to private ones. Koch Industries is both a consequence of this, and a driver. What Charles Koch built is an important political institution, and I encourage you to read Chris Leonard’s wonderful profile of it: Kochland: The Secret History of Koch Industries and Corporate Power in America.
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P.S. I got an email from a conservative government contractor who disagrees with me about everything in politics. Except my view of contracting.
I am a federal contractor and have been for the last 15 yrs. Before that, I spent 10 yrs working in the commercial side of IT. I have to say, you nailed it brother. The amount of waste in contracting is amazing. There are a lot of reasons for it but it is there. I make my living off of it. I would also say that I find it amazing how many agencies could simply not function anymore without us, how many rely on us to develop their policies for them and to manage their work for them. One thing I see a lot is GS or SES that retire and go work for a contractor in the agency they just left doing essentially the same job for a lot more money. (NOTE: GS and SES are government executive classifications)
Ya know, one of the reasons this happens, at least in IT, is that the GS pay scales and the rules about pay make it hard for the government to compete against the private sector for really good talent. You would never have a GS14 make more than an SES but in the private sector a top cyber security guy can very easily make more than his manager and there is no way your going to convince a guy that can make $200k a year at Bank of America to work at a GS12 rate. Put them on a Firm-Fixed-Price contract and salary does not matter. That is one thing that needs to be fixed.
The other messed up thing is how the government contracts. Too often the contracts do not align with what the government actually needs or the COR (Contracting Officer's Representative) wants or they failed to think through what it is they wanted and so end up spending more.
Another thing, GET PEOPLE OUT OF DC! OMG...If we could move half the work that just HAS to be done on site in DC, MD and NOVA to places like Pittsburgh or Detroit or even Tampa we could save so much money on facilities and labor. Office space in Richmond is a whole lot cheaper than in Arlington. God forbid we allow people to telework from Utah but they can from Prince Georges County. That, and we need to cut down on the number of positions that require a secret clearance or above. TOO many positions that should not be cleared are requiring it. A secret clearance adds about 20% to labor costs because it reduces the pool. A TS/SCI with poly? Add 35% to the salary. So few people qualify and it takes so long to get the clearance done that those that have them are worth gold.
Oh lord. I could go on and on but I wont bore you. Point is, you are right. In the long run we need to move back to having more government staff and fewer contractors and we need a better way to pay and manage them. Fortunately for me I am retiring in 12 years and I do not think that even if they started today they could unfuck this mess in that time.