Dutch East India Company (VOC) - The Epic Journey to Becoming Earth's Most Valuable Company

The Dutch East India Company is considered the most valuable company of all time, worth 78 million guilders at its peak. This is approximately $7.9 trillion when adjusted for inflation - more than the worth of Apple, Microsoft and Amazon combined.

But how did a single company rise to the top and garner about 12% of the world's GDP in the 1600s - 1700s by trading pepper and nutmeg? Let’s get into the story.

Disclaimer: I kinda wrote this story with a bias towards the business of the VOC. You’ll find proper documentation of Dutch colonisation of Indonesia in other materials online.

What Do You Know About Spice?

In the 15th century, spice was the oil of the world.

Due to their use in medicine, cooking and as a sign of status, spices like pepper, nutmeg, cinnamon, and cloves were in high demand and only the rich could afford them in large quantities.

At the time, the only primary source of these spices were Asian regions like Indonesia and India. However, ship routes to these regions weren’t popular and only the Portuguese had discovered them.

The Portuguese maintained strict practices that saw them keeping these routes and their trading strategies as top secrets. This granted them a sort of monopoly to impose outrageous prices on their spice products. They would gather spice from their voyages in Asia and upon return, sell them to fellow Europeans for high prices - sometimes 17x the price they purchased them.

The city of Antwerp - of the ancient Dutch Republic - was a key distribution centre for the Portuguese to trade their spice with other European merchants. As a result, Dutch merchants highly benefited from serving as a first-hand distributor of the spice and other goods brought back by Portuguese merchants.

To put it another way, they enjoyed the benefits of serving as the trading capital of the Asian-European spice market. However, everything changed in 1580 when Portugal became a colony of Spain through a personal union that saw both kingdoms sharing one king.

At the time, the Dutch Republic was at war with Spain trying to break free from the latter's colonial rule. In a bid to crumble the Dutch economy, Spain pushed Portugal to move their distribution centre to Hamburg, Germany. This marked the beginning of trouble for the Dutch as the spice trade was pivotal for other of their economic activities.

At this point, they had only two options:

• Surrender to the Spanish and recover the benefit of distributing spice. Or

• Find other means of surviving and maintaining economic strength without being the centre of the Portuguese spice trade.

Like all fierce founders, the Dutch chose the latter. And the adventure begins.

Find The Spice Routes

Dutch traders and farmers went into new types of businesses that helped stabilise their economy. But it’s hard to do other businesses when you’ve had a foretaste of spice money.

For the love of spice, wealthy Dutch merchants formed investment companies to fund voyages aimed at discovering the Portuguese secret routes and other possible routes to Asia. Similar to startup funding today, these voyages carried high risk due to potential occurrences of shipwrecks, diseases, piracy, and supply glut caused by competition from other merchants.

The process involved funding single voyages and liquidating all investments upon return by sharing profits and selling off capital assets.

Some of the first fleets began their expedition between 1591 and 1598, landing in the pepper port of Java and Madura (all of modern-day Indonesia). Many crew members lost their lives, suffering attacks from the Portuguese and natives. Hence, they could only gather a fairly large amount of spice.

More investment groups formed different companies in 1598 and began sending out large numbers of fleets to see if they could break through the resistance. One of the notable fleets, led by Jacob Corneliszoon van Neck, arrived at the Spice islands of Maluku, where they accumulated tons of spices.

Upon return in 1600, the expedition came back with enough spices that yielded an eye-watering 400% profit to investors. But not all of these expeditions were successful as Dutch merchants faced competition from Portugal, Spain, and England who were all scrambling to control the spice trade.

While these would have discouraged most people, these early challenges provided Dutch seamen with the required experience to scale their operations in subsequent expeditions. This showed in an alliance between the Dutch and Muslim Hituese in 1600 to cut out the Portuguese from the spice trade on Ambon Island.

Soon, the Dutch realised that running competitive fleets would harm their chances of growing into a strong economic force that could contend with Spain.

As a result, in 1602, Johan van Oldenbarnevelt, a major leader in the Dutch Republic at the time, pioneered the unification of these different competing investment companies into a single company known as the VOC - Vereenigde Oostindische Compagnie (United or Dutch East India Company).

The VOC

The Dutch government granted the VOC a 21-year charter with a simple goal - increase profits significantly by gaining a monopoly over the Asian-European spice trade.

As opposed to making money off one-time expeditions, the VOC operated as a multinational corporation that could run for years.

The plan was to control the whole process - own fleets of ships, employ its own sailors and labourers, build a navy/army, takeover farmlands and spice plantations, build and control the ports. Using today's business terms, the VOC planned to establish a sort of vertical integration in its system of spice trade.

But how can the VOC achieve this goal with major European powers all aiming for the spice trade? I mean, if I were the VOC, I would strive to see if I could capture a small share of the market from the Portuguese - not try to dethrone them. It’s like a newly formed company saying it wants to take over the smartphone market from Apple.

The VOC understood that engaging in such a huge would require very high capital which would be difficult for it to raise alone even with its new size.

As a result, they decided to raise money by developing the system of joint-stock ownership, where citizens provided the company with funding in exchange for owning a percentage of its shares - the first company to do so in history.

In addition, they created the world's first stock exchange in Amsterdam - the Amsterdam Stock Exchange - making the VOC, the first publicly traded company in the world. Yeah, modern-day capitalism goes as far back as the 17th century.

In 1602, the company raised a total of 6,440,200 guilders to power its business operations.

Note: Guilder was the currency of the Dutch Republic in the 15th century.

For The Love of Spice

The first major success of the VOC came in 1603 when Admiral Jacob van Heemskerck and the ships under his control forcefully captured the Santa Catarina, a powerful Portuguese merchant ship.

The ship contained goods the Portuguese had bought from China and Japan, including Chinese porcelain, bundles of raw silk, and hundreds of ounces of musk - a powerful aromatic substance. Proceeds from its sale significantly increased the capital of the VOC by almost 50%.

With the huge capital at hand, the VOC began by establishing trading posts in Banten, West Java, Tidore, and Banda, while building its headquarters in Ambon Island - which was at the centre of the spice production areas.

Another company, the English East India Company also started entering the Spice Islands and established trading posts in most of the zones where the VOC were trading.

However, the VOC wouldn’t tolerate any competition in the spice business as it could cause the price of spice to fall in the European market.

After a series of disputes between both groups, about 21 workers under the English East India Company were beheaded by Dutch authorities on the grounds of treason.

At this time, an ambitious Jan Pieterszoon Coen was appointed governor-general of the VOC and he catalyzed a key growth period for the company.

One of his first moves was invading Jayakarta with a fleet of nineteen ships. He drove out the natives and renamed the city to Batavia as the new headquarters of the VOC. This move was important because, unlike its earlier headquarters in Banten, Batavia wasn't far from the Asian trade routes and VOC establishments in Japan and India, enabling VOC merchants to gather valuable market information.

Next, he saw the Banda Islands as another important area as it was the only region where nutmeg and mace were grown at the time. He led an army into the islands which killed, starved and drove away natives until they were almost wiped out from the region. He replaced the people with large plantations to grow nutmeg for profit maximisation.

To cement their monopoly, the VOC conquered surrounding Islands by forcing their rulers to sign treaties that granted Dutch merchants monopoly over their spices.

The VOC went on to conquer and colonise several regions in and around Indonesia by replicating this strategy, causing their growth to supercharge above other competitors.

The aim was to ensure they were the only ones who had access to the abundant spice in the Spice Islands so they could restrict supply from getting to the rest of Europe. This would make traders perceive spice as a scarce commodity, driving up prices in the process.

Other times, in competitive markets like the pepper trade, the strategy was to oversupply the market to drive down prices below the level competitors would be encouraged to enter the business. And their great financial power enabled them to wait out any competitor. After which they would gradually increase price to a desirable point where they could recoup all losses.

Jan Pieterszoon Coen also began an intra-Asiatic trading network where the VOC would trade their spice for gold and silver from Japan which they would in turn, exchange for silk, cotton, porcelain, and textiles from India and China. The VOC also engaged in the buying and selling of slaves which formed its major labour force for spice farming, building trading stations, ports, and factories.

At the peak of its golden years in 1669, the VOC was responsible for almost half the entire trade in Europe, with over 50,000 employees, a private army of 10,000 soldiers, 40 warships, and 150 merchant ships.

In 1670, the VOC had grown to become the largest company in the world with an average annual profit of 2.1 million guilders - distributing half as dividends to investors and reinvesting the remainder into the business.

Many historians considered the company to be worth $7.9 trillion today if adjusted for inflation. It's worth noting that the VOC's amazing rise coincided with the Dutch Tulip Mania of the 1630s.

Turbulent Tidings

In 1685, the Japanese military limited the export of gold and silver which powered the VOC Asian-European trading network. And unlike natives of the India Islands which they could force into trading with them, the Japanese had a powerful military.

Soon, other East India companies like the English East India Company, the Danish East India Company, and the French East India Company started rising and were encroaching on the VOC's monopoly.

The competition in the market was so fierce that it crumbled the VOC strategy of low-volume high-profit spice trade as these companies gained access to spice regions and started bringing supplies into the European market.

But it took a long while before the VOC came to the realisation that they couldn't regain their lost monopoly of the spice market.

As profits declined, the VOC began trading other commodities like sugar, tea, cotton, and textiles.

However, with competition in the market, these commodities had a lower profit margin, meaning sales volume would have to increase significantly to keep generating profits as it had previously done with spice trading.

But most of the ships of the VOC at the time weren't large enough for this new trade. Coincidentally, this period was a time of low interest rates and it enabled the VOC to take on debts that helped it to purchase large volumes of commodities from Asia and rebuild larger ships.

Despite the business expansion, profits only rose slightly compared to the capital it borrowed.

In addition, the VOC had earlier conquered a large portion of the Malabar Islands of India and made rulers in the region sign treaties that granted them a monopoly over the trade of black pepper.

However, Raja Marthanda Varma, the ruler of Travancore - a state in Malabar - went against the Dutch treaties and started conquering neighbouring villages. He began trading with VOC competitors, which made the VOC lose huge profits.

In an attempt to forcefully bring him to submission, the VOC sent a troop to wage war against Travancore but were defeated in the battle of Colachel in 1741.

This marked the beginning of several territory losses in the India region for the company, shrinking its trading networks. And this was a gain for the English who were gradually gaining influence in India at the loss of the VOC.

Many VOC staff were also highly corrupt and negligent in duties, mainly because of mistreatment from superiors.

In a bid to restructure the company, the VOC changed its method of choosing directors and governors, opting for those in the political regent class as opposed to trading merchants who share traits of the brilliance and ruthlessness of early VOC leaders who made the company a spice trading powerhouse.

These directors brought many changes to the VOC's system of operation, including how profits were distributed.

In the good years, the long-term average annual profit was about 2.1 million guilders. Under half was distributed as dividends and the remainder was reinvested into the business.

But from the 1680s, long-term average annual profit dropped to about 2 million guilders. Three quarters were distributed as dividends with only one quarter reinvested into the business.

Note: The VOC dividend yield was about 18% of invested capital

At the surface level, all seemed well for the VOC as its share price soared to new highs in 1720. The company went on to retire 5.4 million guilders of long-term debts it had incurred from expansion.

After 1730, the company's revenue plummeted but it continued paying dividends to investors in excess of its profits. Even when profits went down further, VOC directors only slightly reduced those high dividends in a bid to appear profitable and powerful in the eyes of investors.

The directors were financing this excess with the company's liquid capital (cash or its equivalent) in Europe - about 20 million guilders - and drawing down its Asian capital stock by 4 million guilders.

As a result, none of the VOC's profit was being reinvested into the company like it was in its early years.

To replenish the company's liquidity, the directors resorted to short-term financing through anticipatory loans backed by expected revenues from home-bound fleets.

Although the VOC was bleeding money through this mismanagement, the company still had prospects of turning around these losses through another restructuring. As of 1780, the VOC's capital assets plus liquid trading fund totalled about 68 million guilders.

While plans of reformation were going on, the VOC received the final blow.

The Fourth Anglo-Dutch War broke out when the British discovered the Dutch were trading with American merchants. The Dutch were importing tobacco and indigo and, in turn, supplying the latter with ammo and munitions to fuel their quest for independence from British colonial rule.

The British heavily defeated the Dutch both in Europe and across Asia, destroying VOC fleets and taking possession of their valuable cargo in the process. The VOC suffered a devastating loss of 43 million guilders during the war and lost almost all of its influence in Asia.

In an attempt to keep the company afloat, directors borrowed huge sums which sent the VOC's total net assets to zero. The VOC continued running at a loss and couldn’t recover. Its assets were later liquidated in 1790, which marked the end of a business empire which lasted for almost two centuries.

The once most powerful and valuable company in the world lost its power due to poor systems of leadership and an inability to adapt to a changing market.

My Two Cents

• Nothing lasts forever in the world of business. The best corporations know when/how the market is evolving and adapt accordingly.

• Innovation often comes hidden within challenges. The stock market was invented because the VOC faced the challenge of raising high capital for its business operations.

• No business endeavour is worth oppressing and taking human lives. The VOC committed several atrocities against humanity in a bid to maximise profits.

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Until I come your way next week, research your market and ensure to adapt to the demanded changes wisely.

Sources

Dutch East India Company

The Most Evil Company in History

The Dutch East India Company

How The VOC Became The Richest Company...

The Economics of the Dutch East India Company

The First and the Greatest: The Rise and Fall of the United East India Company