$Unique_ID{COW01624} $Pretitle{365} $Title{Hungary Working Together} $Subtitle{} $Author{Hezsef Rotyis} $Affiliation{Embassy of Hungary, Washington DC} $Subject{hungary business hungarian companies consulting foreign ibm company new small} $Date{1990} $Log{Table 1.*0162401.tab } Country: Hungary Book: Foreign Policy Basics Author: Hezsef Rotyis Affiliation: Embassy of Hungary, Washington DC Date: 1990 Working Together JOINT VENTURES IN HUNGARY In 1968 a "new economic management system" was introduced in Hungary, representing so to say the first step towards a market economy. But not much was achieved at that time. Four or five years later the then Soviet leadership under Brezhnev curbed the process, even if it could not entirely be brought to a halt. A private sector was beginning to take shape, in the form of economic working associations of private people and of joint ventures. People began to show signs of an entrepreneurial spirit. The foundation of joint ventures was first made possible by a Finance Minister decree issued late in 1972, with conditions appearing not too favourable. Every two or three years improvements were made in the conditions, and from January 1, 1989, they can definitely be considered as attractive. Until December 31, 1987, 130 joint ventures had been established, in 1988 140 more and in 1989 700 more were set up. In September, 1990, over 2500 joint ventures and fully foreign-owned companies were on record. The major increase of recent years can be attributed to the favourable terms and conditions, of which just a few will be mentioned here: highly favourable profit taxation, full guarantee (including an American OPIC guarantee) on foreign partner's property in Hungary; exemption from duty for physical contributions; possibility for the firms to acquire real estate; existence of a stock exchange in Budapest; arrangements for the transfer of profits without limitation; activity of the Joint Venture Club aimed at the representation of interests; and last but not least the fact that since 1968 there have been many people with entrepreneurial spirit in Hungary. The number of companies including US partners has increased at a similar rate to that referred to above. The figures given in the Table refer to the 610 companies which were already actually operating late in 1989 and of which detailed particulars are available. At end-1987 there were five, at end-1988 there were ten, and at end-1989 there were 49 companies (out of 610, corresponding to 8 per cent) which included US partners. The Table shows the number of companies by sectors in which US firms hold interests and the capital share they represent. Just a few comments on this: [See Table 1.: Companies Founded with the Participation of US Firms and Operatice as of December 31, 1989] There are many more joint ventures in the field of services than in industry. The total and foreign capital by company in the field of industry is made to appear high by Tungsram Rt's total capital of USD 88.9 million, of which 44.5 million (slightly more than 50 per cent) is US capital. -In the field of services, total and US capital by company is made to appear high by the total capital of USD 3.5 million of Intercooperation Rt, a company concerned with foreign trading activity, whose capital is fully owned by the foreign partner (i.e. this is a fully US-owned company). -The foreign share approximates 50 per cent as regards total and industrial activity, and almost 60 per cent in the field of services, just due to Intercooperation. - Among service activities a great variety are represented. Here are the names of some of the major US partners: = Consulting company: Arthur Young, NY, = McDonald's Restaurant Operation Inc., Delaware, = Publishing, publicity: IDG Communications Inc., Framingham; McCann Erickson Worldwide, NY; Ogilvy and Mather Worldwide, NY; = Trade: Dupont de Nemours and Co. Inc., Delaware; Getz Ltd. Partnership, Delaware; and Getz International Inc., San Francisco (owners of Intercooperation mentioned above). - Lack of space only permits the mention here that the service field includes firms concerned with trading in securities, software, tourism, education, and film making and distribution. - Industrial activities cover the manufacture of, among others, rubber, car components, hydraulics pipes, screws, intraocular lenses, plastic basic materials, and naturally of various illuminants by Tungsram Rt. - The figures in the Table do not cover the 80 per cent bank interest in Hungary of Citicorp Overseas Investment Corp., Delaware, represented by Citibank Budapest Rt. I. Toldi-Osz How far is Hungary? Looking at a map it can be seen that the USA and Hungary are not so far away from each other. How can it be, then, that Americans and Hungarians know almost nothing about each other. They only have stereotyped ideas in their mind when the other country is mentioned. This fact points to a distance of light years, not to some thousands of miles. In the modern history of the two nations it was not always so. From the birth of the American nation to the 1990s the historic and economic relations between the USA and Hungary showed signs of improvement. This improvement was also supported by almost 2 million Hungarian immigrants. These people, trying their hand in the land of freedom, were emerging from the melting pot as Americans, while remaining somewhat Hungarian their in own minds. Unfortunately, the political events of the 20th century increased the gap between the USA and Hungary. The increasing German orientation of Hungary did not allow for an improvement. The process of separation was heightened even further after the end of the World War II by Hungary becoming a Soviet-controlled communist country. After the nadir of the relationship in 1956, the weakening of the communist dictatorship opened new horizons for restoring links between the USA and Hungary. The return of the Holy Crown by President Carter and the first presidental visit to Hungary by President Bush in 1989 were considered as signs of a renaissance in the relationship. New developments in politics and economics can offer promising challenges to American investors. Some of the investors have already been active in business, for example in industry (GM, Ford, Schwimm), in investing in the Hungarian infrastructure (US West), and in show business (Walt Disney, Time-Warner). Without underestimating the importance of these investments, we would propose that there is another very important area in which Hungary is in need of help from American firms. This is in the field of management consulting and auditing activity. In readjusting to a market economy, Hungary has had to face up to several unforeseen problems. One of them has been the lack of economic know-how offered by management consulting firms. These firms did not exist in Hungary until 1989 when Ernst & Whinney and Arthur Young set up their own offices in Budapest. They have since merged worldwide, and are known as Ernst & Young Rt in Hungary. Ernst & Young Rt is able to provide both Hungarian and international investors with professional services ranging from advice on doing business in Hungary, right through to business valuations and audits. Our objective is to provide an excellent service to our clients. In so doing, we promote international co-operation, which thereby contributes to a reduction in the distance between our countries. Janos Meszaros Ernst & Young For a Cleaner Environment ICF/Chem-Consult, American-Hungarian Consulting and Service Ltd has been recently established. The company is a joint venture between Chemolimpex and ICF Consulting Associates, a US management-consulting firm. ICF/Chem-Consult has been created primarily to provide management and environmental consulting services in Hungary and other Eastern European countries. Chemolimpex and ICF Consulting Associates each own 50 per cent of the JV. Dr. Charles Gitzendanner, a Senior Vice President at ICF Consulting Assoc., is Managing Director on the American side and Dr. Maria Panczel, of Chemolimpex, the same on the Hungarian side. The latter gave us the following information. Chemolimpex, the Hungarian partner is one of the most successful Hungarian foreign trading companies with an annual turnover of more than 98 billion forints. It has a widespread marketing network in European and overseas countries and is involved in a number of business ventures. This involvement includes ownership of companies active in foreign trade, industrial production, transportation, publicity and other fields of business as well as significant investments in Hungarian and foreign companies. ICF Consulting Associates is a relatively large American management consulting firm. It has annual sales of $20 million and employs about 100 people. Its headquarters is located in Washington D.C., and it has offices in Atlanta, Georgia; Chicago, Illinois; Denver, Colorado; Philadelphia (Downingtown), Pennsylvania; and Los Angeles, Palo Alto and San Francisco, California. The owner of ICF Consulting is ACR (American Capital and Research Corporation), a large US professional services company with annual sales well over $500 million. Its corporate office is in Fairfax, Virginia. ACR has more than 3800 employees and has 14 affiliate companies which provide environmental, engineering, construction management, health sciences, information technology, contract mediation, health care and management consulting and investment services. The new joint venture, ICF/Chem-Consult will provide management and environmental consulting services. The management consulting services will include strategic and operational planning, organization planning and design, cost reduction, marketing, manufacturing, computer-based systems, human resources, and business relationships and investment support. The services will be provided to Hungarian and other Eastern European companies and governments as well as to US companies interested in doing business in this area. Most assignments will be led by Western consultants from ICF Consulting Associates and other ACR companies and they will be supported by Hungarian consultants who will be trained in Western methodologics and will be given consulting experience on projects in the US. Mr. Janos Sandor, consultant at ICF/Chem-Consult added that the company wanted to concentrate its activity rather on industrial environmental problems than on communal environmental issues. They intend to put in tenders to obtain assignments in the framework of the PHARE Programme. mm IBM Hungary IBM Hungary, fully owned subsidiary of IBM World Trade Corporation, traces its origins to 1936. The story of this IBM subsidiary is unique and outstanding, a saga of real life in the second half of the twentieth century. Established in 1936 as Elektromos Konyvelo Gepek Kft., re-baptized in 1939 to Watson Electric Accounting Machines Ltd., IBM Hungary assumed its present name in 1947. During the following 40 years of the Cold War it was single-handed and maintained the banner of free enterprise despite overwhelming odds. It is one of the few Hungarian fully foreign owned companies that was not nationalized and was the only IBM subsidiary in the Eastern Bloc countries that did not close down during the Cold War. The other exceptional fact is that this IBM subsidiary was run for 20 years by a woman General Manager doing an outstandingly difficult job during the Cold War just by keeping the company alive. Having overcome the times of restricted business relations with the West, IBM Hungary is now facing a complete change. The de-regulation of COCOM regulations this year and the possibilities for foreign companies to invest in Hungary implemented by a freely elected government have enlarged the whole scope of the data processing scenario. The demands of IBM Hungary's customers are growing rapidly. The recently established joint ventures, banks, auditing companies, trade and transport enterprises etc. require the same computers, networks and services as they are using throughout the world. IBM Hungary is ready to face these demands. It is now connected to the IBM international worldwide network to provide a better, faster and more efficient response to customer requests. The order and delivery time of IBM machines is now as short as in any other European country, the prices of IBM Hungary are on the same level as in Germany. The full IBM product range is still partly restricted by COCOM regulations, but IBM Hungary has announced the PS/2 models, the AS/400 line, the RISC/6000 and some of the new ES/390 family. With the firm plan of extending the IBM Information Network Services this year to Budapest to get access to the worldwide network, sending within seconds a message from the US to Budapest and having the answer the same day, a broad range of business relation possibilities is evolving. Hence IBM Hungary with its exceptional history will be a fully fledged IBM subsidiary, with an undoubtedly bright future. Textiles and more! The Hungarian trading house Hungarotex considers the US to be of growing importance. This market has opened up to Hungarotex products since the granting of the Most Favoured Nation treatment to Hungary. To make the most of this, a trading company was founded in 1979 under the style Hungarotex /USA/ Inc. This New York based company has continuously increased its sales from 1979. By 1989 it represented 57% of all Hungarian light industry exports to the US and also took on the representation of other Hungarian companies dealing in textile products. Hungarotex' sales include among others cotton piece goods, cotton yarn, viscose thread, sewing yarn and household textiles; from among technical textile goods polypropylene woven bags, hemp string for upholstery - while raw cotton, synthetic fibres and yarns figure on the company's overseas import list. Traditional wollen products are the pure wool and blended fabrics for gents' suits and trousers; in this field Hungarotex is able to supply Hungarian scoured wool and slivers. A comparatively new item in exports to the US is rabbit hair felt for hat-making. The export of ready-made garments is represented by ladies' blouses made in jobwork and by ready-made gents' shirts. Food exports are growing in importance, mainly canned vegetables, aseptic fruit puree and honey. Hungarotex trading house is one of the Hungarian specialized companies with extensive foreign trading traditions. Until 1985 it dealt exclusively in the export of Hungarian textile and textile clothing products, importing at the same time raw materials, accessories and piece goods needed for their production. From 1985, while retaining traditional activities, it started to export and import non-textile products. Its present product range includes: raw materials such as cotton, wool, synthetic fibres, accessories, down, feathers, bedding and ready-made garments filled with down or feather, various yarns, embroidery threads, cotton, wool and rayon piece goods for garments, domestic and household textiles, carpets and decoration fabrics. While the company used to deal mostly in textiles, now its profile has been extended to ready-made garments including knitwear, leather and fur products, completed by shoes and hats. The offer of packaging material - including bags for agricultural and chemical uses, various binding materials from thin threads and twines to thick cords - is widening. Similarly, the food offer is developing, accounting now for about 10 per cent, of the company's convertible currency exports. Hungarotex managers also see promising possibilities in intellectual products, machine leasing, components, mainly for technical development in the textile, textile clothing, packaging material and food sectors. Beside export-import and domestic business Hungarotex also engages in third market deals, ensures production facilities for export goods that meet demands both in the domestic and foreign markets, and also commissions such production in Hungary and abroad. It has joined in the foundation of new commercial, production, developing and servicing companies with domestic and foreign participation. It takes an active part also in exports and imports for technical development, for importing high technologies to Hungary. In accordance with its ever widening export activities and with changing conditions in Hungary, Hungarotex maintains business contacts with several hundred Hungarian enterprises which may be large concerns, industrial co-operatives or small-scale, private firms. Several thousand buyers and sellers figure on the list of its foreign partners. The company has an annual average turnover of about 600 million USD. In export-import deals accounted in convertible currencies the first place is taken by the developed industrial countries of Europe and overseas, while business with the Far East is growing. To back up its ever diversifying activities, Hungarotex maintains in some 22 countries market organizations, a network of joint ventures, own companies and representation offices which help its work from New York to Tokyo, from Stockholm to Singapore. The principle underlying the company's business philosophy is to be shortly transformed into a company limited by shares. SEED The Foundation for Small Enterprise Economic Development (SEED) was established in February 1990 by a Consortium consisting of Hungarian ministries, the University of Economics, other organizations of the State administration, representatives of the private sector and the International Management Centre. The purpose of SEED is to support a number of viable business projects and individual entrepreneurs helping them overcome their problems in establishing and growing their new ventures in the difficult but challenging climate existing in Hungary. The specific objects of the Foundation are to: - advise entrepreneurs on the problems of starting new ventures, - give regular consultancy and other support services needed by these new businesses, - collect and disseminate information about modern business methods and techniques, - provide, organize, and support training by means seminars and consultants, - promote the establishment of professional organizations that will: look after the interests of small businesses; provide the necessary administrative and technical support; and ensure that the requisite legal and taxation systems required to nurture small businesses is established as rapidly as possible, - provide the necessary consultancy and financial support to help develop venture capital organizations and science and business parks for new business ventures and engage in any other activity necessary to support the establishment of small businesses, - organize the establishment of an informal venture capital network in Hungary, - co-operate with foreign entities to ensure that the latest techniques, equipment and training are available to support local business entrepreneurs. In order to help accomplish these objectives SEED received a very small initial equity capital of Fts 21 million ($300,000). This was an initial funding without any guarantee of any follow-on funding. Foreign help was also obtained in the form of training and money. These two sources of funds allowed some of the following projects to be started: - Entrepreneurial Library - To provide entrepreneurs and small businesses with the best and newest information and support literature available. - Business Incubator Network - To develop a national business incubator policy and system and to operate several business incubators mainly in the Budapest area. - Start-up Training - To develop and give a short course on a regular basis on how to start and grow a new venture. - Curriculum - To introduce the enterprise as a world view curriculum in the high schools in Hungary. - "How-to" Material - To develop and provide entrepreneurs with appropriate "how-to" booklets and pamphlets on selected topics. - Consulting - To establish a consulting service for Hungarian entrepreneurs and small businesses to help them successfully develop companies for Hungarian and western markets. - Advisor Training - To establish a support network for entrepreneurs and small businesses and train the advisors involved. - Privatization - To assist in the process of privatization by providing information, techniques, training, consultancy and help in obtaining funding. Each of these projects will be done to the extent possible in cooperation with Hungarian and foreign partners, with care being taken to ensure there is no overlap or duplication of efforts. In this period of economic and political change in Hungary, SEED has already undertaken measures to support a policy for establishing and developing small businesses. And, SEED will continue its advocacy efforts in the future. Although SEED has received some funding from the Hungarian Government and outside groups such as ARCO Chemical Europe Inc. (England) and the U.S. Agency for International Development (United States), more support from American public and private organizations and individuals is needed to establish and develop the entrepreneurial spirit and entrepreneurship in Hungary as it has developed and impacted the economic development of the United States. Given the important role that entrepreneurship and small businesses play in economic development in western economies, nobody in Hungary today questions the necessity of developing the entrepreneurial small scale business sector in Hungary. While it is important to establish the National Office for Development of Small Enterprises, it is also important to establish a separate entity for supporting small enterprises directly. It is in this area of helping to improve the very poor infrastructure for small businesses that the SEED Foundation plays an essential role. For more information contact: Agnes Tibor, Managing Director SEED, 1119 Budapest, Andor u. 60. fax: (361)18-12-959.