Foreign Investors Bring New Skills, Fresh Funds
FROM MARX TO MARKETS: EASTERN EUROPE'S DARING LEAP
GIANT McDonald's golden arches. A new Benetton boutique. A Reebok sneaker store. Sony. Kodak. IBM.From one end to the other of Budapest's main shopping corridor, Vaci Street, the bright signs of Western consumer society are going up. These pioneers have helped turn the Hungarian capital into a Western-style city, bringing consumer goods, much-needed capital and jobs, and above all management and marketing expertise. "The fact that General Electric is here, General Motors is here, Ford is here, brings in a new way of life, brings in the entrepreneur, brings in free market," says George Varga, president of the lighting company Tungsram, bought by General Electric in 1989. "You're really transplanting a culture, not just money." When the foreign investors began to enter, many Hungarians and other East Europeans feared the loss of key economic assets. No longer. Officials in these countries insist a hefty capital inflow will be vital to modernizing their economies, which still are burdened by $60 billion of foreign debt left over from the communists. To attract Western investors, most of the countries of Eastern Europe have passed laws to make their economies as hospitable as possible, offering tax holidays and guaranteeing repatriation of profits in hard currency. "It's just a fairy tale" that Hungarians are selling out their country, says an indignant Mihaly Kupa, Hungary's finance minister. "All these sales of companies are preceded by very, very hard discussions and talks, and of course it's in Hungary's basic interest to have companies like General Electric in Hungary."
Pitfalls for the unwary Despite the incentives, Western investors are cautious. They complain about bloated bureaucracies, archaic production systems, and overmanned factories. These problems cooled much of the initial enthusiasm of some foreign businesses that flocked to Eastern Europe after the fall of the Berlin Wall. But investors with iron stomachs and long horizons have stayed, financing almost 10,000 joint ventures in the former Soviet satellites by the end of last year. Several $100-million-dollar deals already have been signed and consultants say as much as $50 billion could flow in during the next five years. The pioneers in East Europe see an educated labor force, low wages, and especially a pent-up market of 140 million hungry consumers. Sweden's IKEA already manufactures much of its low-cost furniture in the region. IKEA recently opened a giant store in Budapest and plans to expand into Czechoslovakia, Poland, and the Soviet Union. "Wardrobes, kitchens, bookshelves, lamps - Hungarians need it all," says Endre Gussi, the IKEA General Manager in Budapest. "Basic needs, long satisfied in the West, are not yet fulfilled here." The Swedish company not only brings good, affordable furniture to Hungarian consumers. It also brings a dose of competition - and a much-needed example of marketing and management prowess. Right next to the clean, modern IKEA store in Budapest is a drab, concrete department store owned by the state. IKEA took a year from breaking ground to opening its store. The state store took five years. IKEA sales people sport stylish aqua-blue and white outfits and go out of their way to help customers. The state de partment sales people wore baggy brown uniforms and clunky communist boots. "Next door, they have 600 workers, we have only 130," says Mr. Gussi. "That's for the same amount of turnover."
GE buys bulbmaker When General Electric bought the Hungarian light bulb manufacturer Tungsram for $150 million two years ago, the American giant got a leading European brand name, some good product-lines - and top-heavy, old-fashioned management. GE quickly shipped in Mr. Varga as the new boss: Hungarian-born, but American-trained. "There are now 17 American managers working in this company, each of whom has ... contacts with dozens, perhaps hundreds, or even thousands of people practically every week, conveying their way of thinking, their way of managing," Varga says. "We're also sending a number of Hungarians to the United States to look at plants, to attend training courses; they come back and they talk a lot to the people here." Western managers must be sensitive to local conditions. Despite overmanning, Varga and GE decided against huge layoffs. At Tungsram, workers earn only about $3,000 a year compared with about $30,000 in the US. So labor accounts for only a quarter of the cost of making a light bulb, versus half in the US. Raw materials make up most of the rest. Instead of achieving maximum production from a minimum number of workers, GE's American managers cut costs by reducing the amount of materials needed. On one production line, they saved about $500,000 by reducing breakage. On another, investing in a simple measuring device doubled output.
New products planned Management plans to invest at least $15 million a year, three times Tungsram's yearly investment in the 1980s. That should permit the company to develop a family of energy-efficient products, such as top-level auto lights and compact fluorescent bulbs for offices. By 1995, GE hopes Tungsram will have about 12 percent of the European lighting market, up from 10 percent today, on earnings of at least $30 million. "We came in and said, 'You need one of these, one of these, one of these,' and they actively, aggressively grabbed the technology and embraced it," says Gary Weber, a Tungsram vice president. "Yields have increased, wastage has decreased. It's incredible the leverage we got out of small investments." Typically, arriving Westerners are appalled by the featherbedding, nightmarish labor rules, and antediluvian office equipment. An efficient Western factory usually employs two-thirds of its workers on the factory floor and one-third on administrative tasks. In Hungary, the proportions often are reversed. When the British train manufacturer Telfos bought the Ganz Mavag locomotive factory outside Budapest two years ago for $20 million, it inherited production facilities, most of them only a decade old, in decent shape. The firm's offices, by contrast, were a disaster. Unlike GE, Telfos felt it couldn't afford a soft transition. In the finance department, Canadian manager Stephen Kostyal installed computers and laid off 40 of the 58 workers. In all, Mr. Kostyal and his fellow managers laid off 800 of the 1,200 workers they inherited. The savings helped Ganz chalk up a $3 million profit in 1990. This year, however, a crucial contract with Hungarian State Railroads fell through and still more workers may have to go. "When we first came in, it was like we were saviors," Kostyal recalls. "Then we started making cuts and there was animosity."