Western Firms Taking It Slow in the East Bloc : Eastern Europe: Predictions of an impending investment boom are exaggerated, experts say. Businessmen are wary of primitive conditions and political instability.

The great foreign investment rush to Eastern Europe is off to a slow--and decidedly cautious--start.

As country after country has broken away from communist domination, headlines have trumpeted a flurry of new ventures in what used to be the Eastern Bloc. Japan’s Daihatsu Motor has proposed a plan for producing compact cars in Poland. West Germany’s Volkswagen is teaming up with an East German auto maker. And just this month, America’s General Electric completed a deal for a majority stake in Tungsram, Hungary’s state-owned lighting maker.

“There are hundreds of foreign investors running around the country,” exulted Kalman Meszaros, managing director of Hungary’s international investment agency.

But appearances may be deceptive. Despite the headlines, analysts say, the overall volume of foreign-backed ventures is modest.

That is bad news for the emerging East European democracies, which are counting on heavy investment from abroad to help provide the resources needed to modernize their economies and push them toward prosperity.

Hungary, which has revamped its foreign ownership laws and is several years ahead of its neighbors in overhauling its economic institutions, has received the lion’s share of foreign investment to date. Poland is a distant second, and Czechoslovakia, East Germany, Romania and Bulgaria remain virtually untouched.

Moreover, U.S. businessmen who have surveyed the prospects in Eastern Europe say predictions of an impending investment boom are greatly exaggerated.

“People think there is a gold mine there, but there isn’t,” said Jenik Radon, a New York-based lawyer who has helped arrange East European ventures for U.S. and other Western businesses. “There are opportunities in Eastern Europe, but you have to have patience.”

As many firms have, Monsanto, the St. Louis-based chemicals manufacturer, has passed up investing in Eastern Europe in favor of exporting there from its Western European plants.

“Sure, you are likely to see increased investments over the next five years, but they’ll be prudent and selective,” said Michael A. Petrilli, Monsanto’s director of international development. “You’re not going to see any company bet the ranch on investment in Eastern Europe.”

With Western aid likely to be limited and borrowing from commercial banks almost impossible, Hungary’s Meszaros calls foreign investment “by far the best way” for cash-short East European economies to obtain badly needed financing, marketing skills and technology.

“We cannot reform our old system within our own means,” Lech Walesa, leader of Poland’s Solidarity Union, said recently. “This is impossible without outside help.”

At least on paper, Eastern Europe is a tempting prospect. It has a virtually untapped market of 120 million consumers, nearly bursting with pent-up demand. It is laden with natural resources and heavy industry. Its work force is reasonably sophisticated. Wage levels are low. Its governments openly welcome foreign ventures. And most Western governments--including that of the United States--are willing to guarantee investment loans.

The Eastern European countries are moving rapidly to revamp their laws to encourage more foreign investment. Poland and Hungary allow private ownership of property and corporations, and they permit foreigners to own 100% of any businesses that they buy or start. Last week, East Germany joined the move by announcing plans to liberalize its own foreign investment rules.

“I’d tell (businessmen) to start looking into it right now,” said U.S. Commerce Secretary Robert A. Mosbacher.

Some businessmen are taking Mosbacher’s advice. Mark Palmer, U.S. ambassador to Hungary, is resigning to head a new consortium of U.S. and Canadian financiers that is planning a series of investments in the region. Their first venture was the purchase of one of the oldest banks in Hungary.

But companies that invest in Eastern Europe also face daunting challenges. After 40 years under communist domination, Eastern Europe suffers from an infrastructure that is primitive by Western standards. The banking system barely functions. Hard currency and foreign goods are difficult to find. Competent managers are almost non-existent. Worker productivity is substandard. Technology is outmoded. Ownership rights are muddled. Shortages abound.

Even more stultifying, the political situation is still too uncertain for investors’ comfort. Not only does the situation in the Soviet Union remain unsettled, but most non-communist East European countries still lack basic stability. Even Poland, which has taken the boldest steps toward creating an attractive investment environment, concedes that its reform efforts could collapse.

As a result, said William T. Archey, vice president for international business at the U.S. Chamber of Commerce, “contrary to everything that you read in the papers, business is taking this one a little more cautiously.”

The companies that are most likely to make it in Eastern Europe “are the ones that have the resources to be patient,” Archey said. “There is going to be no such thing as an overnight payoff.”

Western managers who have started ventures in East Europe echo Archey’s warning.

Zbigniew Puzio, Warsaw-based representative for A. M. Dan, an Australian entrepreneur, recalls the difficulty that he had trying to launch a simple construction project to build homes for senior citizens. Because Poland had no private property, simply obtaining the necessary land took weeks of negotiations, Puzio says. Shortages were so severe that it took months to get needed materials. And workers were so sloppy that he had to rip up some apartments and rebuild them.

“In Warsaw, at least you can find help,” Puzio said with a shrug. “But in Lodz or some of the smaller cities, you can’t even hire the people you need.”

Donald J. Mucha, chairman of Unitronex Corp., a Chicago-area trading company, ran into similar problems when he considered starting a fast-food chain in Poland early last year. With almost all real estate owned by the state, obtaining sites for pizza and chicken stands seemed likely to take years. The state-owned printing monopoly would not provide the logo-embossed cups and plates that he wanted. Ensuring a reliable supply of chicken was all but impossible.

Although Mucha has launched half a dozen successful joint ventures in Poland, this time the obstacles seemed just too formidable, and he shelved the proposal entirely. “I decided it just wasn’t the time,” he said.

Those who are familiar with the East European economies are advising would-be investors to stick to Hungary, Poland, Czechoslovakia and--eventually--East Germany.

They also urge investments in manufacturing operations that are labor-intensive and relatively simple. Archey recommends industries such as food processing, farm-implement manufacturing and “infrastructure” development--such as the establishment of delivery and distribution facilities.

Charles Movit, an analyst at PlanEcon, a Washington-based consulting firm, says some bargains are out there, particularly among the relatively few internationally known East Bloc firms that have reasonably good reputations--Tungsram is one example--”that could be turned around relatively quickly” with an infusion of Western management, capital and some technology.

Although there is a wide opportunity for selling Western-made telecommunications equipment--the telephone systems in all East European countries are shockingly out of date--PlanEcon recommends avoiding high-technology manufacturing because it is too sophisticated for the East Europeans to undertake competitively.

“Any Western manufacturer that sticks its neck out in such an endeavor in the East Bloc should not be surprised if it . . . suffers large losses,” PlanEcon says.

Also wide open is the market for building luxury hotels that are capable of serving Western visitors--a natural for emerging East Bloc economies because the hotels employ local workers, earn their own hard currency from the West and help attract still more foreign investment. U.S.-based Marriott Corp. recently opened such a hotel in Warsaw.

Nick Ward, senior vice president in Marriott’s Bethesda, Md., headquarters, said the Warsaw venture has been successful enough that the company is eyeing “potential projects in most of the capitals of Eastern Europe and the Soviet Union,” as well. “We are hoping that the Warsaw project will act as a springboard to other opportunities” in the region, he said. “We want the Warsaw venture to serve as a precedent.”

Western governments are doing what they can to promote foreign investment in the emerging East European democracies. Along with the guarantees that the United States is providing for investment loans, Mosbacher has led two government-sponsored missions to interest corporate executives in investing in Poland.

But U.S. officials concede that neither mission bore much fruit. “The interest level has picked up substantially, but no one is ready to move yet,” one strategist said.

European firms, while visibly more active in Eastern Europe, are still playing a limited role, according to analysts who are tracking their ventures there. West German firms have a special interest in branching into East Germany, and Austrians have begun channeling investment money back into Hungary, where they have longstanding ties. But even they “are being cautious,” PlanEcon’s Movit said.

All sides agree that not much is likely to happen until East European countries guarantee Western-style property and ownership rights, work rules and access to capital. They also must provide the infrastructure that today’s businesses need to function. And the transition to democracy and a free-market economy must proceed far enough along to win investor confidence.

Estimates for that range from two to 10 years, depending on the country. “The differences among the various East European countries are dramatic,” lawyer Radon said.

For the moment, Western aid seems adequate to finance Eastern Europe’s halting evolution toward capitalism, but strains may develop as the shift gains momentum. Policy-makers hope that the more market oriented of the East European countries, particularly Poland and Hungary, will be able to attract sufficient foreign investment by then to replace existing foreign aid.

Many analysts contend that over the medium term, the optimists may not be wrong. For all his caution about the short run, Mucha, for example, is convinced that Poland and other East European countries offer good long-term possibilities for investors who are willing to wait for their return.

He is starting a Polish investment fund to prove it. “I’m extremely positive on Eastern Europe,” he said.

THE U.S. STAKE IN EASTERN EUROPE

Joint ventures U.S. firms with local with local Country firms offices Bulgaria 4 0 Czechoslovakia 1 8 East Germany 0 4 Hungary 100 50 Poland 36 32 Romania 1 12

Source: U.S. Commerce Department