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Eastward, Ho! The Pioneers Plunge In


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EASTWARD, HO! THE PIONEERS PLUNGE IN

Don't tell Leif Johansson that investing in Eastern Europe can try the patience of a saint. For two years, Johansson, the major-appliance chief for Sweden's Electrolux, had been searching without success for the right buyout. Then, in 1990, Hungary put its state-owned refrigerator maker, Lehel, on the block. But by that time, Electrolux had company. General Electric, Whirlpool, and Bosch-Siemens also wanted a shot at the Hungarian prize.

After six months of hard negotiations, Johansson finally prevailed in March with a restructuring-and-expansion plan that may cost Electrolux as much as $83 million. But in the end, that could prove cheap if the Swedes succeed in getting their new brand name into even a fraction of Eastern Europe's 100 million households that are starved for appliances. Muses Johansson: "Not many refrigerators, bad stoves, few washing machines, no dishwashers: We see a consumer market."

DEBT-LADEN. So do a lot of others. From General Motors Corp. and Volkswagen to individual investors backing everything from posh restaurants to commercial radio stations, Westerners are pumping increasing sums into Eastern Europe's emerging economies (table). A hefty capital inflow will be key to modernizing the East, which still is crippled by $60 billion in foreign debt and decades of Communist misrule. Eastern leaders are also desperate for Western technology, management, and marketing knowhow to provide better jobs and put more locally made consumer goods in the shops. But right now, cash still is king. "Come and see me," Polish President Lech Walesa recently pleaded to investors in Chicago. "I'll show you where the business is."

Since communism crumbled in 1989, investors have been looking hard at Poland, Hungary, and Czechoslovakia. By the end of last year, 9,700 foreign joint ventures had been established in the three countries.

Executives make no bones about the difficulties of doing business in the decrepit East. "Forty percent interest rates, 35% inflation. That's a hostile environment," says Steven Bina, president of the American Chamber of Commerce in Budapest. But the money keeps coming despite such hardships: The region has already attracted $1.2 billion. By 1993, estimates PlanEcon Inc., a Washington-based data service, the three leading states could be getting $3.5 billion a year from investors abroad. The new European Bank for Reconstruction

& Development, with $13 billion in capital, will put even more into the region.

How well Walesa and other Eastern leaders attract foreign cash may seal their political fates. Trying to make their economies as hospitable as possible, all three countries are pushing privatization, offering tax holidays, and guaranteeing repatriation of profits to spur investment. They also have launched plans to make local currencies convertible to dollars or German marks.

MORE UPHEAVALS. But the widespread factory closures and unemployment resulting from free-market moves are likely to continue until foreign capital starts to give the economies a lift. Sooner or later, warns John P. Birkelund, chairman of Dillon, Read & Co. and head of the $ 240 million Polish-American Enterprise Fund, "if standards of living don't recover, people will begin to say the old system wasn't so bad after all."

Birkelund's fund is one of three the Bush Administration established in Poland, Hungary, and Czechoslovakia to provide home mortgages and loans for small to midsize businesses. Such modest ventures may be the model for much of the East's rebirth as it shakes off the mentality of the command economy. Lacking the $75 billion in state aid that Bonn is pumping into eastern Germany this year, the rest of the former East bloc is being forced to follow a far more measured pace.

Even the East's biggest corporate booster by far, Germany's Volkswagen, will spread its $6.1 billion plan to rebuild Czech carmaker Skoda over the next 10 years. Still, acting without haste may pay off just as handily. By the end of the decade, estimates an aide to Chairman Carl H. Hahn, VW could be selling 500,000 Czech-made Skodas and Volkswagens throughout Europe.

Volkswagen's takeover dwarfs Eastern deals by other major Western investors. Coca-Cola Co., for example, is spending only $30 million to open bottling plants in Poland. Schwinn Bicycle Co. is making 275,000 bikes a year in Hungary for export to Western Europe and North America. And Stanley Works plans to export pliers and other hand tools from a new Polish joint venture.

WARSAW TRACT. Then there's the Polish-American Fund's projects. The fund has set up commercial banks in Warsaw and Krakow, providing them with $6 million in equity apiece and a staff of small-business lending experts from Chicago's South Shore Bank. The fund also will offer home mortgages at 10% to help renters become homeownersin American-built housing.

The mortgages will finance the purchases of 80 single-family houses to be built by Indianapolis-based Curtis International Ltd., a unit of SerVaas of the Netherlands. Unable to obtain enough high-quality building materials in Poland, Curtis will supply its subdivision with American-made lumber, shingles, windows, and carpets. But if the project is successful, Curtis hopes numerous small Polish manufacturers will spring up to supply future developments.

Before it could get started, Curtis had to train Polish construction workers. But that's only one of the headaches Western investors face in the East, where vestiges of the Communist past pop up at every turn. Just ask George Lang, a Hungarian emigre and proprietor of New York's tony Cafe des Artistes. Lang returned to Budapest in 1990 to perform "a labor of love" by taking over the 79-year-old Gundel restaurant, a state-owned culinary landmark that had lost its luster. Along with cosmetics heir Ronald S. Lauder, Lang offered the government $8 million for a 50% stake. But after a year of negotiations, the restaurant remains in state hands.

IN THE SOUP. Lang's bid was accepted in March, but he hasn't been told who his local partner will be. He has also been faced with demands for payments by heirs of the restaurant's founder. "If there is any problem for a foreign businessman," says Lang, "it is the natives' fear of making the wrong decision. If they sell something, they know it will be very difficult to take it back."

For most investors, just setting up an office is an obstacle course. France's Compagnie Generale de Batiment et de Construction had to corral 66 signatures before it could build the $140 million Atrium Hotel in Prague. And in Budapest, American Express Co. was obliged to obtain separate licenses to sell travelers' checks, cash them, and disburse local currency. Says Eddy Buehlmann, senior vice-president at American Express Travel Related Services Co.: "The laws are not catching up with developments on the political and economic side."

Still, neither investor gave up. The Atrium is slated to be completed in July, three months ahead of schedule, and CGB now is building another in Bratislava. AmEx, meanwhile, is up and running in Budapest, offering cash dispensers to Western tourists and hard-currency credit cards to some 300,000 well-heeled Hungarians with a taste for travel and pricey consumer goods. In June, an AmEx office will open in Warsaw.

ILLEGAL CLONES. Sometimes, quick thinking helps cut through the postcommunist fog. That was the case with Digital Equipment Corp. Western trade sanctions against the former Soviet bloc had forced it to largely abandon its Eastern Europe operations at the start of the 1980s. In DEC's absence, thousands of locally made illegal clones found their way into offices across the region.

Now, with Western technology curbs easing, is back. It found that the knockoffs were of high quality and fully compatible with the original gear. So DEC formed a joint venture with the two state organizations partly responsible for the piracy. That is expected to ease DEC's entry into areas the government is trying to automate, including banking, telecommunications, and education.

Not every Eastern venture is as promising. But so far, there is no shortage of new investors willing to place a bet on the rebirth of the East. "We deal with Asian and Latin American countries," reasons Johansson of Electrolux. "If we can deal with those, why can't we succeed in Eastern Europe?" The entire region has its future riding on a bet that he and others will succeed.John Templeman in Bonn, with Ken Olsen in Budapest, David Greising in Chicago, Jonathan Kapstein in Brussels, and William Glasgall in New York


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