TIME: Almanac 1993/TIME Almanac 1993.iso/time/070290/0702207.000

Text File | 1992-08-28 | 10.9 KB | 236 lines

                                                                                BUSINESS, Page 44

New Kids on the Bloc


Bringing money and expertise, Westerners are rushing to invest
in Eastern Europe's freedom. They will find as many obstacles
as opportunities

By JOHN GREENWALD -- Reported by Veit V. Dengler/Vienna and
Stephen Pomper/New York


    The political revolution that swept through Eastern Europe
last year was just the beginning. Now comes a rush of new
business ventures that will open the region to the rest of the
world and change the way East Europeans work, play and shop.
In Hungary, General Electric paid $150 million last January for
control of Tungsram, one of the world's largest light-bulb
makers. GE plans to light up Europe by selling the bulbs across
the Continent. In Poland, Italian automaker Fiat, in
partnership with a Polish company, plans to build 1.5 million
subcompacts during the next ten years. In East Germany,
Coca-Cola is pouring out $140 million to turn six aging
state-owned soft-drink plants into gleaming Coke bottlers.

    Rushing to cash in on the East's sudden escape from more
than four decades of communist rule, capitalists are lured by
low wage rates, an educated labor force and a pent-up market
of nearly 140 million consumers in the heart of Europe.
Companies from Turin to Tokyo are setting up joint ventures
with local firms, and as eager executives flock to the region,
such grand hotels as the Budapest Forum and the new Warsaw
Marriott buzz with high-stakes deals. "Learning how to invest
profitably in Eastern Europe is the hot new game of the 1990s,"
says Paul Horne, chief international economist for Smith
Barney.

    The players are lining up swiftly. Western companies have
already established some 3,000 East European ventures valued
at anywhere from $100,000 for restaurants to more than $100
million for giant industrial complexes. The most popular places
for business: Hungary (pop. 10.6 million) and Poland (pop. 38.2
million). Each has attracted more than 1,000 ventures, in part
by passing laws that give generous tax breaks to foreign
investors.

    In spite of the gold rush, the awakening region has pitfalls
to investment that can deter all but the hardiest risk takers.
Since East European currencies cannot be readily converted into
dollars or other hard cash, Westerners must often take their
profits in bartered goods, such as clothing or foodstuffs,
which can be sold in other Western countries. At the same time,
the area remains plagued by grasping bureaucrats, archaic trade
rules and primitive roads, phone systems and factories. Says
Jan Vanous, research director of Plan-Econ, a Washington-based
consulting group that studies Eastern Europe: "Investing there
is really for people who know what they are doing and have a
strategic vision." Quite a few adventurous companies have
followed that advice:

    HUNGARY

    GE had Western customers in mind when it acquired a majority
stake in Tungsram in the largest direct investment in Eastern
Europe since World War II. The transaction gave GE control of
a respected 100-year-old company that last year exported nearly
two-thirds of its output, or $180 million worth of bulbs, to
West European countries, which pay in hard currency. The deal
boosts GE's meager 1% share of Western Europe's lighting market
to 9%. That share could prove particularly valuable if the
European Community decides to impose quotas on non-Community
products after it becomes economically unified in 1992.

    Schwinn pedaled after profits in Hungary and the West last
year when the Chicago-based company bought control of Csepel,
Hungary's bicycle monopoly, for $1 million. Before Schwinn
arrived, Csepel was producing a single bulky model. To get the
venture up to speed, Schwinn doubled the average wage of Csepel
employees, to about $210 a month, and demanded that they work
full eight-hour shifts instead of leaving early to moonlight.
Schwinn installed new painting and welding equipment and
developed sporty new models. The company expects the
improvements to pay off later this year when the joint venture
starts exporting a new line of low-priced, 18-gear mountain
bikes to the U.S. and West Germany.

    The race to bring capitalist know-how to Hungary has
produced a contest between two telecommunications companies,
Colorado-based US West and Atlanta's Contel Cellular. In a $10
million joint venture with the Hungarian state telephone
company, US West is installing a cellular-phone system in
Budapest that is to begin service by the end of the year.
Contel has linked with private Hungarian partners to form a
competing $35 million venture that will start service in
Budapest by early 1991.

    While Japanese automakers have lagged behind their Western
counterparts as investors in East European countries, Suzuki
Motor formed a $132 million joint venture in January to build
small cars in Hungary. The agreement, which was reached after
five years of negotiation, calls for the company to produce
15,000 Suzuki Swifts a year starting in 1992.

    POLAND

    In an ingenious deal, ICL, a British electronics giant,
launched a 1988 joint venture called Furnel International with
six Polish partners to make an unlikely combination of
computers and furniture. Furnel exports the moderately priced
furniture to Western store chains and uses the currency that
it earns to buy computer parts from ICL. The venture then
assembles the components in Poland and sells the computers to
Polish buyers. ICL thus manages to tap markets in both Poland
and the West and receive its payment in hard currency.

    Meanwhile, Polish television viewers have become accustomed
to glitzy commercials for Benetton sportswear on Poland's two
state-run channels. The 30-second spots were placed by Italian
media magnate Silvio Berlusconi, who operates Italy's three
largest private TV stations and controls the most extensive
film library on the Continent. Berlusconi receives a placement
fee from Benetton, which has established two stores in Poland.

    Fiat, which has produced cars in Poland for more than 50
years, is shifting into high gear. Next year the Turin-based
company will start building the first of 1.5 million Micro
subcompacts in a ten-year venture with FSM, one of Poland's
major car companies. To help recoup its investment, Fiat plans
to export one-third of the Micros (estimated retail price:
$6,000) to Western Europe.

    EAST GERMANY

    The economic union with West Germany, which takes effect
July 1, has made East Germany (pop. 16.6 million) particularly
attractive to Western companies. The investors include Pilz,
a West German audio firm that is building a compact-disc plant
as part of a $140 million venture with East Germany's Robotron.
The factory will have the capacity to press 24 million CDs a
year when it opens in 1992.

    Like Pilz, many companies view East Germany as an extension
of the West German market. The U.S. consumer-products giant
Philip Morris plans to produce 10 million cigarettes a year at
a Dresden plant that the company is acquiring from VEB Kombinat
Tabak, East Germany's state-owned tobacco company. "We really
don't consider East Germany part of Eastern Europe," says John
Dollisson, a Philip Morris vice president. "Selling in Dresden
should be the same as selling in Munich or Hamburg."

    General Motors too is headed for East Germany. GM plans to
build 150,000 Opels a year in the country with Automobilwerk
Eisenach, its East German partner, by the mid 1990s. Industry
experts say GM's total investment in the deal could reach $600
million. Yet that will represent only part of GM's foray into
Eastern Europe. Among other deals, the automaker plans to
produce 200,000 engines and 20,000 Opels a year in Hungary in
a $150 million venture with RABA, the country's state-owned
truck manufacturer.

    CZECHOSLOVAKIA

    To speed its transformation to a market-based economy,
Czechoslovakia (pop. 15.6 million) plans to triple the capacity
of its overworked telephone system. In June the government
chose US West and Philadelphia-based Bell Atlantic to build a
cellular-phone network beginning this fall. The U.S. firms will
share a 49% stake in the venture.

    BULGARIA

    As capitalism brings new wealth and competitive pressure to
Eastern Europe, many people may decide to head for the beach.
To accommodate them, Paris-based Club Med plans to open a
resort next year on the Black Sea coast of Bulgaria (pop. 9
million). The facility will include a 600-room hotel and will
share a golf course with a twelve-year-old Club Med in a nearby
town. Says Jean-Luc Oizan-Chapon, Club Med's chief operating
officer: "We were here before the doors were open, and now our
time has come."

    ROMANIA

    The new firms that are racing to Eastern Europe could take
a lesson from the patience shown by Minneapolis-based Control
Data, which since 1973 has built disk drives and other computer
products in Romania (pop. 23 million). The joint venture with
a Romanian company, which took five years to turn a profit,
exports half its output to the West. "The biggest problem was
the lack of the business environment that we in the West are
used to," recalls Helmut Koller, Control Data's marketing
director for Eastern Europe. "We basically had to create our
own suppliers."

    Eastern Europe remains a risky, often maddening place to do
business. One of the first tasks of Western companies is to
retrain local labor forces that grew slack under communism and
lack disciplined work habits. Simple bookkeeping can be a major
problem: East European companies have been taught to follow
central plans, and know little about Western-style
profit-and-loss statements. At the same time, Eastern Europe's
infrastructure is woefully inadequate for modern industry and
commerce. A recent study by the Chicago Federal Reserve Bank
estimated that the region would require 274,000 miles of new
roads to reach the level of highway development found in Western
Europe. Estimated cost: as much as $130 billion.

    While most East Europeans welcome the torrent of Western
investment, they often have mixed feelings about the changes
that it brings. Some fear that the capitalist invasion may
replace communism with a new and more subtle form of economic
domination. Says Richard Gordon, a director of the
Massachusetts-based Polish American Business Education
Foundation: "There are still doubts in many people's minds about
selling off parts of their national patrimony to foreigners."

    Many Westerners are likewise cautious as they weigh the
benefits and risks of venturing into Eastern Europe. Some firms
are waiting to gauge the political and economic turmoil that
still roils the region. But those companies that fail to
consider Eastern Europe today run the risk of being left out
of what may well be tomorrow's land of opportunity.