Joint Ventures With Western Companies on Rise in Hungary
Tucked into the depths of a sprawling, mostly abandoned former textile factory here is a partitioned, florescent-lighted cube crammed with the stainless steel of a modern production line.
A handful of workers in this unlikely place are turning out West German brands of shampoo, hair coloring and peroxide, and they are doing it for less than in any factory in West Germany.
This is one of Hungary’s joint ventures, the enterprises co-owned and operated with Western capitalist companies, and its floor-level view tells much about how well this rapidly expanding form of East-West cooperation works in practice.
Here Schwartzkopf, a company based in Hamburg, West Germany, can use workers making only $142 a month to make its products with machines and raw materials supplied from West Germany.
Its Hungarian partner Caola, meanwhile, can sell Western-quality products in its foreign and domestic markets without investing scarce hard currency.
Both Parties Benefit
It looks like a lucrative operation for both sides, and indeed the books of Schwartzkopf-Caola show a 15% profit on sales of $1.6 million in the first 10 months of operation last year.
Nevertheless, managers here see little prospect that their small production floor will expand further into the abundant surrounding space--or that either partner will soon earn a truly large amount of money.
Like many of its counterparts, the Schwartzkopf-Caola joint venture is stumbling on problems of currency, market and confidence. The West German managers are reluctant to export products made here to their own Western markets. But they have trouble selling them to Caola’s East European clients because of their lack of convertible currencies.
The Hungarians, meanwhile, are willing to participate in the venture only if export sales match the cost of imported raw materials. That means that the factory must remain artificially small, barely able to meet demand on the domestic market.
“It’s not very clear yet what we can do and how we can do it,” said Laszlo Sperber, the on-site manager of the plant. “We could sell 20 times as much--but then we would have problems of equilibrium.”
Both the troubles and the profits of the Hungarian venture are soon likely to be shared by Western and Eastern partners around the region. Anxious to find new sources of investment and Western technology, communist-ruled nations are racing to establish joint ventures or expand those already in place.
Many Russian Ventures
The largest projects may soon be found in the Soviet Union, where more than 100 Western firms have reportedly expressed interest in a joint venture program announced last year.
But Czechoslovakia and Poland also established joint venture plans last year, and Hungary modified its rules to offer Western firms more attractive incentives. Programs already exist in Bulgaria, Romania and Yugoslavia, which created the first such program in 1967.
All of the programs offer Western firms the chance to create a company with a local, state-owned firm, sharing investments, profits and losses. The socialist partner usually hopes to receive up-to-date Western technology, hard currency investment and access to Western export markets through the deal, while the Western firm hopes to take advantage of the cheap, strike-free labor and natural resources of Soviet Bloc countries as well as potentially vast new markets in the East.
In practice, the degree to which communist managers embrace their new capitalist partners varies widely. In conservative Czechoslovakia, joint venture firms are required to have a majority Czechoslovakian ownership and follow almost the same rules as Czechoslovak socialist companies, involving burdensome labor laws, taxes and accounting procedures.
At the other extreme, liberal Hungary allows Western firms to own an unlimited majority interest in the firms and follow capitalist-style procedures for hiring, firing and paying workers, and preserves an initial tax exemption for up to five years.
Changed Regulations
“We’ve changed our legal regulations several times, every time in favor of the foreign partner,” said Laszlo Borbely, the chief of joint venture development in the Ministry of Finance. “All of our steps are meant to convince Western companies that it is reasonable to invest in Hungary.”
The new Hungarian incentives have brought some tangible dividends. In the last year, the number of joint venture firms in the country has risen from 50 to more than 70, and the amount of foreign investment capital, now approaching $100 million, has nearly doubled.
The types of enterprises range from light manufacturing such as Schwartzkopf and Adidas, which makes shoes, to chemical and plastic production and services. Citibank now has a branch in Budapest under a joint venture.
ITT’s West German subsidiary, Sel, is producing color televisions and video recorders, and McDonald’s plans to open its first Soviet Bloc restaurant here by summer.
Still, Borbely said that Hungarian officials remain dissatisfied with the amount of joint investment, and Western diplomats and businessmen say the country is unlikely to meet its goal of attracting $500 million from Western companies for joint investments over five years.
Around the rest of the region, the results are equally uncertain. Despite its strategic nonalignment and relative openness to the West, Yugoslavia attracted only $200 million in 17 years for joint ventures up until 1984.
Few Joint Ventures
Romania has had a joint venture law for 15 years but has only 10 such companies. And Poland has signed only one joint venture so far, involving the completion of a long-abandoned skyscraper in Warsaw by an Austrian firm and its eventual use by the Marriott Corp. for a luxury hotel.
“Our predecessors (in Hungary and elsewhere) know only too well how difficult it is to encourage foreign capitalists to invest their money in socialist countries,” an article in the Polish newspaper Przeglad Tygodniowy commented. “It may turn out that the open door policy has left the door only slightly ajar, and that outside the door, instead of a crowd, nobody will be waiting.”
Some Western investors have shied away from joint venture agreements because of rigid local labor, tax or ownership regulations or onerous requirements to guarantee hard currency sales for the firms.
