Hungary’s Dance With Capitalism

In their ardor to court foreign investment, trade officials here tout their country’s cheap labor and desire for Western-style management.

U.S. firms certainly cannot complain about labor costs--many of their workers earn about $160 (10,000 forints) a month--plus they face none of the union headaches that plague firms at home.

And Hungarian managers are enthusiastically embracing capitalist techniques. They are flocking to a Western business college that just opened in a Budapest suburb.

But for those accustomed to operating in a market economy, even the simplest tasks can become daunting in socialist Hungary, which suffers from the calcification brought on by more than 40 years of central planning.

“It’s like hacking your way through the jungle with a machete to get things done,” said Charles Rudd, president of Interconcepts, a firm based in Concord, Calif., that is setting up joint ventures here in computer software and desktop publishing.

“It can take us three to six months to get a variety of permits and government stamps, and two weeks to transfer money from one Budapest bank to another,” said Rudd, whose office telephone here was once disconnected because of his bank’s sluggish transfer of his telephone payment.

Seen as a Gateway

But Rudd and a growing number of American business people say they intend to keep hacking, lured by the potential for long-term profits. Although Hungary’s 10.6 million people constitute a small market, their purchasing power, with their average annual income of about $7,520, is much higher than that of, say, the Chinese, whose annual income averages $330.

And many see Hungary as a gateway to the rest of Eastern Europe and the 280 million consumers in the Soviet Union, most of whom are starved for Western goods.

Today, Hungary hankers especially after firms involved in food processing, tourism, light industry and manufacturing, a commercial attache at the U.S. Embassy in Budapest said.

“They don’t only want the investment, they want the quality control, the overseas marketing skills and the management expertise,” the diplomat said.

The government also gives tax breaks to firms investing in preferred fields, such as electronics, construction and the operation of three-star hotels, said Chaba Rapassay, the deputy director general at the Ministry of Finance.

New laws allow foreign firms to repatriate their profits in hard currency and provide a guarantee against nationalization--an important point for U.S. firms that recall 1948, when Hungary’s new Communist government seized all industry in the name of the proletariat.

As of July, American joint business ventures in Hungary amounted to about 30 firms with a total investment of $320 million, according to Hungarian Minister of Trade Tamas Beck. Beck said 30 more are in the works. And last month’s visit by President Bush only fanned the flame.

“Everyone wanted to sign a contract on July 12,” said Lajos Schmidt, an American lawyer who grew up in Hungary and practices law in both countries. Schmidt has helped structure some of Hungary’s biggest joint ventures, including a deal with the Schwinn Co. to manufacture bicycles at Csepel Co., a giant and nearly bankrupt state factory in Budapest.

Exclusive Boutique to Open

Cosmetics giant Estee Lauder signed a contract during the Bush visit and anticipates $3 million in sales in Hungary the first year, according to company President Leonard A. Lauder.

Lauder’s deal allowed the firm to distribute beauty products in Hungary and to use the profits to buy millions of Hungarian-made glass bottles in which to market lotions and potions throughout Europe. Lauder, who is of Hungarian ancestry, will also open an exclusive boutique on Vaci Street, Budapest’s Rodeo Drive.

Government officials say they are particularly pleased with this deal because it pumps money into the domestic glass industry and avoids taking Lauder’s profits out of the country in hard currency.

The past few weeks have seen a flurry of activity in U.S.-Hungarian business ventures.

Less than two weeks ago, Getz Corp., a San Francisco-based international marketing and trading firm, bought Intercooperation Co., a Budapest-based trading firm with 1988 sales of $70.9 million. A Getz spokesman cited “the wonderful cooperation we’ve received from Hungarian officials.”

Then Citicorp’s Hungarian subsidiary announced the first employee buyout of a Hungarian state firm. Citibank Budapest RT will help a syndicate of investors buy Apisz, a state-owned retail and wholesale stationery supplier with annual sales of $86 million. The new owners include management and employees of Apisz and the Berger family, a leading Austrian supplier of stationery and related goods. Citibank will retain a one-third stake.

Schmidt, the lawyer who was born in Hungary but fled in 1945 when Soviet troops arrived to capture the country from its Nazi occupiers, said the secret to a successful Hungarian business venture is to discuss every detail with your potential partner ahead of time.

Some Layoffs Likely

“The speed with which Americans do deals doesn’t work in Hungary,” he said. “Plus, a lot of Americans come here and think the government should jump around and hold their hand.”

When one of his clients wants to make a Hungarian deal, Schmidt negotiates directly with the Worker’s Council, or factory governing board, for approval.

“We tell them they’ll have modern equipment, make a profit and ultimately increase their work force because they’ll be competitive with the West and not manufacturing a second-class product.”

On the down side for the workers, a U.S. firm’s buying into an existing business usually means some layoffs because most state firms have bloated work forces. It is not unusual for American companies to cut the number of workers at Hungarian enterprises by at least half when they reorganize the work flow.

In the Csepel-Schwinn deal, for instance, a 2,000-person work force was trimmed to about 300. And Hungary’s biggest joint business venture, an ambitious plan to upgrade a glass plant in Oroshaza in southeast Hungary, may cut 700 jobs to 225, although some factory hands will be rehired to renovate an adjacent bottle factory, Schmidt said.

That $115-million deal calls for a subsidiary of Michigan-based Guardian Industries Corp. to start producing float glass, which is used for windows in automobiles and high-rise office buildings. Hungary imports $3 million to $5 million worth of float glass each year from Western countries and must pay for it with its precious hard currency reserves.

Operating under the name Hunguard Float Glass Co., the partners plan to export about 200 metric tons of glass daily by 1991, said Mark Manion, Guardian’s assistant treasurer. “We’ve been very pleased,” said Manion, who adds that government officials went to great lengths to accommodate their U.S. partner.

The Hungarians helped to arrange local financing, agreed to improve an existing road to the plant and to improve telephone lines.

In exchange, Guardian plans to install all new equipment, build a new furnace, expand the factory and add a warehouse.

Mundane Matters Worrisome

Some Hungarian officials paint a grimmer picture of the joint venture process. Zsigmond Jarai, the 33-year-old deputy finance minister, confesses that his government often cannot locate the person at Hungarian enterprises who is authorized to sell assets and negotiate terms.

“The problem is, we don’t know exactly who owns these companies,” Jarai said. “The state is the owner, but who is the state?”

That is a question that Hungary will have to answer if it intends to encourage expanded foreign investment and to revitalize its ailing domestic economy, which is crippled by a $19-billion foreign debt and an annual inflation rate of 17%.

But American business people here worry about more mundane matters, such as how to find commercial office space--or a Hungarian manager familiar with Western business skills.

Many Americans here work out of their flats because office space in Budapest is expensive and hard to find. Schmidt and his five lawyers work in a rambling villa in the leafy outskirts of Budapest.

Jarai says the dearth of Western business skills is another big concern.

“It’s very easy to say ‘We have to change the management of a company,’ but now in Hungary there are no new managers to take their place,” he said.

Gabor Varszegi, head of Fotex, a joint venture with Kodak that made $6 million last year, said that he recently placed a 24-year-old graduate of Budapest’s Karl Marx University in charge of one of his divisions.

“I don’t work with old people because they have too much experience in this (Communist central planning) system. I hire young people and I teach them myself,” said the 43-year-old Hungarian millionaire.

Would-be Western-style managers can also enroll in the International Management Center, located in a sprawling, 19th-Century villa outside Budapest. Here, visiting business professors from U.S. and Western European universities teach the basics of capitalism.

Telecommunications Problem

Offerings run from three-day seminars to a 10-month “Young Manager’s Program.” The waiting list is three times as long as the class roster. Students include middle-aged managers sent by their ailing factories as well as young entrepreneurs seeking practical skills.

But for Americans in Hungary, telecommunications poses the most frustrating problem. A U.S. Embassy official grouses that it took eight months to get the fax machine working. Others say it is not unusual to spend 10 or 15 minutes trying to get a phone call through. Some business people send telegrams to each other, even though they are only a few miles apart.

“The telecommunications problems will handicap Hungary from becoming a financial center,” said businessman Rudd. “You can’t send computer data or a telefax without all sorts of interruptions.”

Among the first things that many American companies do when they buy into Hungarian firms is to increase wages to motivate employees.

Hungarian labor would be cheap at even double the average wage. (Hungarian workers average $130 (8,000 forints) a month. U.S. companies here generally pay more.) And in a country where skilled physicians earn no more than construction workers, brains, not brawn, are the best labor bargain.

Western firms can also provide incentives and bonuses to encourage Hungarian staff, an advantage over domestic firms that must pay hefty taxes if employee raises exceed government ceilings. But all businesses are subject to a 43% social security charge on top of employee wages.

None of this appears to deter foreign investors, however. Western-financed hotels are sprouting in Budapest. Each day’s newspapers bring glowing reports of yet another Western business venture. An Adidas sports gear store in the downtown shopping district is rarely without a line, and the lone McDonald’s restaurant in this land of goulash and paprika is always crowded.

Said one American diplomat: “It’s been the low-rent district for a long time. Now’s the time to buy in if you’re interested in long-run returns.”