How do you play your hand after the game has changed? That's the question giant General Electric Co. (GE
) is pondering as the final countdown for European Union enlargement begins. The answer will certainly influence other multinationals as they consider whether to remain in Eastern Europe or seek cheaper, less developed locales to operate in.
After the collapse of the Iron Curtain, few multinationals leaped into the region with more gusto than GE. The U.S. powerhouse has plowed $1.1 billion into Hungary in the past 12 years, making it one of the country's largest investors. In that time, GE has turned around a state-owned dinosaur, built three new plants, and recruited dozens of world-class scientists.
Yet the Hungary that GE discovered more than a decade ago bears little resemblance to the country now on the brink of joining the EU. Things are more stable, the legal and regulatory environment is more transparent, and local suppliers are more reliable. But doing business is getting more expensive with every passing year, as wages rise and as officials are forced to phase out big tax breaks to comply with EU rules. IBM (IBM
) will shut one factory at the end of November, and Flextronics Corp. (FLEX
) has moved hundreds of jobs to China.
GE says it has no plans to pull up stakes. "The changes don't make me think of Hungary as a more difficult place to invest, as long as the people and the government know they have to be competitive," said GE Chairman and CEO Jeffrey R. Immelt during a visit to Budapest last month. Many observers, however, expect GE to leave the lighting business. That's the heart of the Hungary operation, and a sale would have big consequences for its business here. GE said it would not comment on such speculations.
EU membership seemed a long way off in 1990, when GE Lighting bought Tungsram, a dilapidated, state-owned lightbulb maker. GE Lighting later transferred to Budapest its headquarters for Europe, the Middle East, and Africa, along with three research and development centers. In 1995, GE Capital took over troubled Budapest Bank, one of the country's top ten. GE Power Controls, GE Power Systems, and GE Engine Services also have factories in Hungary.
Some investments, such as Budapest Bank, have underperformed. Excluding the bank, GE Hungary posted a $65 million net profit in 2001, a 1% decline from the previous year, on $790 million in sales.
But GE is not running for the exits. Istvan Szini, managing director of the Hungarian operation, claims much of the ground lost to wage hikes can be recouped by efficiency gains. Productivity has been rising by an average of 7% to 8% a year at GE's local consumer-lighting unit.
GE also is still keen to exploit Hungary's comparatively high levels of education. On Oct. 24, the company announced that it was spending $4.6 million on a Budapest office that will house a customer-service center, as well as back-office operations for GE units across Western Europe. The center, which is scheduled to open by the end of this year, will employ 500 people.
The new investment pleases Hungarian officials even more than new assembly lines. "We have to focus on creating jobs with more added value, and this is a perfect example," says Hungary's Finance Minister Csaba Laszlo. Especially when a giant like GE needs new reasons to stay committed.
By Christopher Condon in Budapest
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Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
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