Going to Market in East Bloc : Political Changes Can Mean Profits for Western Business

As the Iron Curtain has crumbled over the past several months, local businessmen James Harrell and Paul Armstrong have been devouring all the news they can about the fast-paced changes sweeping the Soviet Union and the rest of Eastern Europe.

During the past year, both Harrell and Armstrong have formed separate companies with the idea of tapping the potential created by the extraordinary political and economic changes that have taken place in Eastern Europe.

The two fledgling companies have yet to strike up any major business deals in Eastern Europe. But both men believe they are getting in on the ground floor of a market that could offer significant potential during this decade.

Harrell, 37, is one of three local founders of Intertrade, an international marketing and management firm in Laguna Niguel. The other founders are Kim Martello and Robert Ludovise.

Until now, Intertrade’s primary activity has been in the area of commodities trading. The company organized a $2.1-million transaction that involved shipping manure from the Soviet Union to Brazil.

Intertrade currently is involved in negotiating several joint venture deals in Poland, none of which has been completed. Among the projects in the works are deals to establish a small medical clinic at a Polish hospital in cooperation with the Polish government, and another that involves setting up a biomedical research center. The firm also hopes to complete a nonprofit venture to donate a large number of typewriters to Romania.

“Our feeling is that there are plenty of opportunities for companies right in our own back yard (in Orange County) to deal with Eastern Europe,” Harrell said.

A native of Huntington Beach, Harrell also runs a one-man consulting company specializing in cross-cultural management. Harrell is a former executive with World Vision who has set up relief projects in Cambodia for the Monrovia, Calif.-based international development agency. He formerly worked for the Defense Department as a Flemish interpreter in Belgium.

Armstrong, 31, is a founder of RHA Group, a business services firm specializing in the Soviet Union. In October, RHA opened an office in Moscow headed by Andrei Lefebvre, a Moscow native who formerly headed a public relations and marketing company in Long Beach.

Before founding RHA in July, Armstrong helped organize a recent effort by Irvine-based American PC to sell personal computers to the Soviet Union. He left the company before the deal was announced in September by Phoenix Group International, an Irvine firm that owns a majority interest in American PC.

RHA’s first project in the Soviet Union involves organizing weeklong, industry-specific tours for Western business people.

In a recent interview with Times staff writer David Olmos, Harrell and Armstrong discussed the topic of doing business in the Soviet Union and Eastern Europe and offered some suggestions for companies interested in getting involved in those countries.

Q. After last year’s events in Eastern Europe, many people are talking about doing business there these days. How do you view the opportunities for doing business over there?

A. Harrell: I think that we make the common mistake in this country when we lump lots of nations together. We do it when we refer to Asia. It’s similar to referring to someone as Caucasian. Eastern Europe is a mix of lots of different economies. They have been under alliance economically as the Warsaw Pact. But that started dissolving eight to 10 years ago. In some nations, there is tremendous opportunity immediately. In other nations, the opportunity is there but the infrastructure for developing a trading base isn’t in place. Ask yourself what it would be like if for most of your life you had not been allowed to trade freely--to apply your energy to making a profit for yourself, your company or your family--and then suddenly the restrictions were removed and you could trade freely. That’s the potential for Eastern Europe.

Q. We hear a lot about how difficult it is for Western business people to do business in the Soviet Union and Eastern Europe from an everyday standpoint. How difficult is it?

A. Armstrong: In the Soviet Union, there is a lack of structure and a lack of business knowledge of things we take for granted, such as letters of credit, the cost of money, interest rates and ownership. These simple matters can turn into difficult and complex problems. But this is all part of what we consider a long-term approach. We’re hoping the people we deal with in those countries learn these business concepts and the structures we need in order to do business successfully. I was in the Soviet Union for a week in December. Just getting out of the hotel and finding a taxi was a nightmare. It took a half-hour to flag down a taxi. Getting a document faxed or photocopied can turn into a two-hour ordeal. And once you find a copier or fax, there’s the question of whether the machine works. If you want to make a phone call to the United States from Moscow, you usually have to order the call a day in advance.

A. Harrell: There are very limited lines of access. In Poland, for example, of 149 phone lines into the country, there are only 37 outgoing lines. This is because of decades of conditioning where people have not been encouraged to be productive. It was not in your best interest to be productive or entrepreneurial because your actions might be suspect. This is a mentality that has to change. With our company, we find we are providing primarily financial and managerial expertise. In Poland they have some of the most skilled professionals in Eastern Europe because they trained in the West. But they got back to Poland and did hard labor work because you made more money. There was no motivation to be a doctor or other professional.

Q. Don’t these everyday problems related to doing business in Eastern Europe--for example, the poor phone service or shortage of business equipment--also create opportunities for American companies?

A. Harrell: There is a tremendous shortage of hotel rooms in the Soviet Union and all over Eastern Europe. Intertrade was recently negotiating with an agency that was given sole rights for the city of Moscow to develop a 500- to 700-acre site for a hotel and business center. At this point, there is no real place for international business people to come and have conferences and learn about markets and prepare for doing business. We are having similar negotiations for a hotel and conference center in Warsaw.

Q. What about the potential for supplying consumer products to the Soviet Union or Eastern Europe?

A. Armstrong: There is lots of potential, but the question is, what are the high-priority items? Is a television or a VCR a high-priority item compared to feeding people? Nevertheless, every now and then there is a huge order from these countries for consumer items such as razor blades or stockings or things like that.

A. Harrell: Look at what the East Germans were buying in the West after the Berlin Wall came down. They were buying fresh fruit like bananas and oranges. The Western mind often confuses luxury items versus necessity items. Our life style is such that having a TV is virtually a necessity to us. Obviously, to people of a different life style, that’s the last thing they’d consider. Necessity items are those things that will either feed them today or feed them tomorrow.

Q. There are a lot of computer, biomedical and biotechnology companies in Orange County. Based on your experiences in Eastern Europe, do you see these as areas of opportunity for local companies?

A. Harrell: I think there is great potential in Orange County in those areas. But here are two main issues companies must face. One is that the technology must be appropriate to the country. Some of our technology might be more advanced than what the lesser-developed countries of Eastern Europe actually need. The second issue is that most high-tech goods will have to be paid for in hard currency. Very few computer companies are willing to trade computers for steer manure. That’s where companies such as Intertrade can step in, by bartering commodities that allow these countries to obtain the hard currency. Also, Orange County firms will have to make sure their products are competitively priced on the world market, because the Japanese and others will be trying to sell there too.

Q. If you were going to give some specific tips to business people for doing business in Eastern Europe, what would you tell them?

A. Harrell: More than just selling a specific product, Orange County entrepreneurs will make a foothold in Moscow or Warsaw or Prague if they’re able to go in knowing the culture, being sensitive to the business practices and being flexible in negotiations.

A. Armstrong: When you go into these markets, you cannot expect to come out with a deal. A company must go in and anticipate that it will take a year or 18 months to get a contract, big or small. You have to cultivate business and personal relationships. You need to get to the point where these people are comfortable with you and don’t think you’re going to leave them high and dry.

Q. So the factor of trust between the negotiating parties is more important in these countries?

A. Harrell: Culturally, countries such as the Soviet Union or the cultures of Asia and Latin America base their relationships on trust. A written contract is icing on the cake. Putting something in writing means much less than having a trust relationship develop. From our Western linear perspective, our culture wants to have something in writing to verify an agreement. If you’re going to do business in Moscow or Warsaw, the tendency will be that the negotiation will be ongoing. What you get on paper might look to a Western investor as something that is non-negotiable. It will look very rudimentary and very unsophisticated. But it’s what’s behind the piece of paper in the negotiations that’s important. If you just keep that frame of mind, you can be successful.

Q. Any other tips you have to offer? What about the importance of having a representative in the country where you’re doing business?

A. Armstrong: You have to follow up on your business deals. It’s important to have your own office or a representative over there who can knock on doors. You need to have someone who is oriented toward Western concepts of business, that time is money.

A. Harrell: It’s absolutely essential to have some point of contact. It isn’t like going shopping at the local mall. You really have to know through your contact the atmosphere, the awareness within the business environment and the necessary officials. The conditions are changing so rapidly within the last five or six months. Not only is it changing in each country, but it’s also changing regionally because of global attitudes that have changed during the past few months.

Q. How about the facilities that exist?

A. Harrell: I think there is something analogous in Eastern Europe to what happened after World War II in Western Europe. Basically, an infrastructure doesn’t exist. Everything that now is available will be new. They will have new modern technology in the new facilities that will house joint ventures or manufacturing plants because they don’t really have existing buildings to be used. They don’t have car dealerships; they need cars. They don’t have things that we take for granted. Anything now going into Eastern Europe now is relatively new. So as their structures are put into place, they will be far superior to most of those in the rest of Europe. What you’re looking at are societies and economies that have been without structure from the standpoint of privatization. They have not been private. So, the slate is clean and it’s time now to help build structures in those countries.

Q. Are there differences between opportunities in Soviet Union and Eastern Europe?

A. Armstrong: In Poland and Hungary, they’ve had this economic evolution of being closer to the West for 10 or 20 years. In the Soviet Union, which has been so isolated, one of the problems we have now is that they don’t have a clue. It’s going to take five to 10 years just to shift the bureaucracy. We all know how difficult it is to change these huge bureaucracies and how they have their own inertia.

A. Harrell: I think the Soviet Union in that way is a very different picture from most of the smaller nations in Eastern Europe. The structure that does exist is so big that getting that to change will not be as easy--nor will it happen so quickly--as it has in Eastern Europe.

Q. No one really predicted that the political and economic changes in Eastern Europe would happen so quickly. Using last year’s crackdown on the pro-democracy movement in China as an example of how a situation can quickly reverse directions, is there some concern that a similar thing could occur in Eastern Europe?

A. Armstrong: People feel a strong tie toward Western Europe and toward the West in general. They see what the West has done economically, and many people want something similar. They see themselves as nations that have stagnated economically for 40 years and now there is time to be like everyone else. In China, you don’t have the telecommunications, you don’t have the Western European television, you don’t have the influx of Western Europeans into the country.

A. Harrell: It’s a historical and cultural issue. There is absolutely no similarity between what happened in China and what happened in Eastern Europe. I believe that what has happened to date will not stop, depending on the nation involved. There are large numbers of ex-patriots who have been waiting for these days. At our company, we have a lot of people coming to us who are from Romania, Hungary or Poland asking how they can help. There’s much more than just business and wanting to make a profit. There’s a loyalty and allegiance to give something back to their country. The approximately 9 million Poles who live outside their country go back regularly. Their families still live there, their money goes there, they go back to visit regularly.

A. Armstrong: You have these colonies of immigrants outside of the East Bloc that have established business communities that will help establish ties with these countries.

A. Harrell: I think one of the biggest potential limitations for U.S. and Southern California business involves the right attitude to have for doing business in Eastern Europe. The business and the trade are there. The relationships that are there must be for the long term, not just the short term. And there is no deal to get. The real thing you’re doing is developing a trust relationship for years to come. For the most part, there is not a negative attitude of American business versus Japanese business or any other kind. There are negative attitudes toward a lack of trust. We feel Southern California could really go to the forefront in terms of foreign investment in Eastern Europe.

A. Armstrong: In Eastern Europe, business is very difficult and I don’t think any company can do it all by itself. I think a team approach is essential for success. It’s self-defeating to think you can go in and do it all by yourself.

Q. I would imagine that you would probably favor some U.S. government moves to ease trade restrictions for Eastern European countries?

A. Armstrong: We really hope the U.S. government sees fit to give most-favored-nation status to all the East Bloc countries and the Soviet Union. I believe that would help stabilize the economic situation there. It would allow us to import basic consumer items such as clothing or basic machinery. Now we’re faced with bringing these products in with 50% or 90% tariffs. It just blows us out of the water.

A. Harrell: On the export side, I think the trade rules between the United States and Eastern Europe. It will change when American businesses petition and say we should have the right to sell in the Soviet Union.