Another old article (1989) mentioning Mr. Hargitay.
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EUROPE: WHO GAINS FROM THE NEW EUROPE Almost everybody does -- and there's opportunity aplenty for deals. The combined GNP of East Germany, Hungary, and Czechoslovakia is bigger than China's.
( Fortune )
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WITH THE FALL of the Wall and the lifting of the Curtain, Western
managers and investors must rethink their strategies for doing
business in Europe in the 1990s. Suddenly the Old World has gained a
new frontier. East of the Elbe, Communist parties are on the run. A
year from now, or even sooner, most will probably be sharing power --
and some may even be out. Freer politics inevitably will create freer
markets.
The possibilities are huge. Among the 12 members of the European
Community, the campaign to forge a true common market by the end of
1992 was already boosting growth rates and capital spending. Now,
says Percy Barnevik, the lanky Swede who heads Switzerland-based Asea
Brown Boveri (ABB), the world's largest heavy-engineering company,
'the opening of Eastern Europe could prove even more important than
the drive for a single market.'
The combined GNP of East Germany, Hungary, and Czechoslovakia is
larger than that of China. The three countries also have relatively
well-trained and reliable workers who toil for less than a quarter of
what their Western brethren are paid. Give them access to their
developed neighbors' markets and hefty injections of Western capital,
predicts Robert Hormats, vice chairman of ( Goldman Sachs
International, and 'they could become the tigers of Europe.' Morgan
Stanley chief equity strategist Barton Biggs believes that over the
next five years East Germany could prove 'the fastest-growing
economy in the world.' He advises buying West German and possibly
Austrian stocks as the best way to play this emerging market.
Who wins and who loses if the East's backward economies finally
integrate into the global economy and take off? The right answer is
everybody wins and nobody loses -- except, of course, the political
leaders who are toppling. Sure, a lot of investment that might have
flowed to Spain, southern Italy, or other low-labor-cost areas along
Europe's Mediterranean sunbelt could be diverted to Central Europe in
the 1990s.
West Germany's high labor costs, for example, are particularly
hurtful for a mass-market carmaker like Volkswagen. But John Lawson,
an auto industry analyst with Nomura Securities in London, says,
'The opening of the East could prove the salvation of the West
German motor car industry.' East Germany's new Prime Minister, Hans
Modrow, recently suggested that his country would reverse course and
allow Westerners to form joint ventures and make direct investments.
If that happens, why should Volkswagen, whose Wolfsburg headquarters
is just five miles from the East German border, continue to export
capital to distant Barcelona when it can tap workers in nearby Karl
Marx City who speak the same language and cost less than $3 an hour?
BECAUSE EUROPE'S overall growth would accelerate, plenty of other
eager foreign investors -- from the U.S., Japan, possibly even South
America -- will almost surely pour into Spain to fill that gap.
Expanding global markets is not a zero-sum game.
Western Europe has the most to gain from Communism's march toward
freer markets. At $43 billion last year, its exports to the Russians
and their satellites were ten times larger than America's and more
than 11 times larger than Japan's. Within Europe, West German
companies will be the biggest winners, followed by the Austrians,
Italians, French, and Finns. And the big West German banks, along
with Siemens, Mannesmann, and other capital goods makers, will lead
the charge. Last year Deutsche Bank alone financed more than 20% of
West Germany's $15 billion in exports to the East.
American companies will benefit because they will be able to
increase sales to a Western Europe made even more dynamic by its
expanding Eastern frontier. $ Deutsche Bank chief economist Norbert
Walter estimates that the 600,000 ethnic Germans and East Germans who
have emigrated from Eastern Europe this year will add a full
percentage point to West German consumer spending in 1990. Their
hunger for Western goods was poignantly captured by TV images of East
Germans prowling the Kurfurstendamm, West Berlin's main shopping
street. Since West German factories are humming at full capacity,
only a surge in imports will satisfy that demand. And in the slightly
longer run, if peace really does break out between the superpowers,
no Western economy -- or stock market -- ultimately stands to gain
more from falling defense spending than America's.
Farsighted executives had their eyes on these opportunities well
before the Berlin Wall blew open on November 9. In September, General
Electric of the U.S. began negotiating with Hungary's reform-minded
government to buy Tungsram, a state-owned lighting manufacturer with
sizable exports to the West. By mid-November, GE Chairman Jack Welch
had a deal. For $150 million GE bought just over 50% of Tungsram --
plus an option to purchase 20% more if the company's exports can
double. Says Welch: 'We recognize that we are swimming in uncharted
waters. But acquiring Tungsram gives us an entry into a part of the
world that has been held primarily by Siemens and Philips. By
positioning us for a Europe in which, down the road, East and West
will blur, it helps us toward our strategic goal of being No. 1 in
our global markets.'
OTHER COMPANIES with long experience in the East are either
expanding there or contemplating doing so. Fiat has licensed
technology to Polish carmakers since 1921. In 1991, Poland's
state-owned FSM will start exporting more than 50,000 subcompact Fiat
Mickros to the West -- the first time a completely new Fiat car has
been built outside Italy. Fiat is also talking with FSO, another
Polish automaker, about building a medium-size car and is on the
verge of striking a giant joint venture deal with the Soviet Union.
ABB is negotiating with two Polish turbine makers, Domel and
Camech, to form joint ventures to sell components in both Eastern and
Western Europe. Two years ago Eastman Kodak set up a joint venture in
Hungary that sells $5 million of film, cameras, and photo processing
a year. David Harari, Kodak's manager for Eastern Europe, says he is
discussing a deal with Poland 'six to seven times larger.'
Political leaders on both sides have barely begun to grapple with
the challenges of melding Europe's postwar halves. How much aid
should the Western allies offer the East, under what conditions, and
in what form? What if demonstrators filling the streets of Leipzig or
Prague, having won first an inch and then a yard, suddenly demand
unlimited mileage -- a complete break with the Warsaw Pact? How would
Mikhail Gorbachev respond? Will reunification, or at least economic
reintegration, of the two Germanys derail Europe's Project 1992 or
merely slow it? And how and when should the U.S. and the Soviet Union
bring troops home from Central Europe?
The uncertain outlook for Russia's perestroika -- and thus Mikhail
Gorbachev's survival -- guarantees that Western investors in the East
will have to live with higher than average political risk for at
least the next decade. But political risk isn't the worry it used to
be. The Communist bloc is so desperate for Western technology and
capital that even if hard-liners regain control, they're unlikely to
expropriate foreigners' factories or profits. That certainly did not
happen in China after last June's Tiananmen Square massacre.
The bigger risks are economic. If your host government is going to
let inflation explode, fail to deliver vital supplies, and waste
foreign loans on consumer subsidies, you might be wiser to reject his
invitation. Hungary and Poland, which are the most eager to attract
Western investment, are also among the East's biggest debtors.
Forecasters at WEFA Group near Philadelphia estimate that the two
countries' ratios of net debt to hard currency exports are 237% and
500%, respectively.
PARTLY BECAUSE of their troubles -- and because they have made the
greatest strides toward democracy -- the Poles and Hungarians are
furthest ahead in introducing promarket reforms. But will they go far
enough? Says Britain's Philip Hanson, a professor at the University
of Birmingham's Center for Russian and East European studies:
'Serious radical reform -- cutting subsidies, freeing prices, and
allowing convertible currencies -- is acutely painful for large
numbers of ordinary people, who at least temporarily lose their
economic security. That's why I'm not convinced that any of these
countries will make the breakthrough to a true market economy.'
Given the gap between Eastern Europe's vast potential and its
present woes, would-be investors may feel understandably confused
about what they should be doing. Here are tips from old hands in the
region.
-- Place affordable bets. Says Dwayne O. Andreas, chairman of
Archer Daniels Midland and an ardent advocate of more East-West
trade: 'It's like anything else. You don't risk the farm. You risk
three acres.' GE's $150 million purchase of Tungsram is the largest
Western investment in Hungary since World War II. But that investment
is less than 10% of what the company may spend buying back its own
stock next year, and even smaller potatoes compared with GE's total
capital spending budget.
-- Do your homework carefully. Four of the eight Eastern European
countries don't even appear on most Western shopping lists (see
table). Under longtime leader Nicolae Ceausescu, Rumania's once
promising economy is on a quick march back to the 15th century -- a
century tiny Albania never left. Ethnic animosity and hyperinflation
could tear Yugoslavia apart well before the next millennium. Bulgaria
is at least trying harder, but it's a long way from Sophia to Vienna.
At the moment Hungary gives Western investors the most options.
Some 850 foreign joint ventures with outside capital of roughly $1
billion will operate there by year's end. Many have begun in just the
past 12 months. In addition, Hungary's ambitious new privatization
program may well expand if, as expected, an even more promarket
coalition government comes to power in next spring's elections.
Meanwhile, auditors from Price Waterhouse, Ernst & Young, and other
major accounting firms are busily checking the books of Hungarian
companies that plan to list shares on the Eastern bloc's first stock
market, scheduled to open in Budapest next year.
Though Poland shares Hungary's eagerness to attract Western
capital, its economy -- and its accounting practices -- are both in
much worse shape. Says economist Warren Oliver of the London
brokerage firm UBS Phillips & Drew: 'It's simply impossible to know
what you're buying in Poland. I'd challenge GE's acquisitions
department to make sense of the books kept by a Polish state
industry.'
What Poland's Solidarity-led government does offer is a
breathtakingly radical plan to cut subsidies, free prices, and move
quickly to a convertible currency. Says Deutsche Bank's Walter: 'No
Communist country has ever adopted a more conceptually convincing
program for moving to a market-oriented economy. We must all look
more carefully at what could happen in Poland.' Because their break
with the past is so sharp, the Poles can also expect big injections
of Western aid. The U.S. Congress just approved an $852 million
package, while West German Chancellor Helmut Kohl has promised at
least $1.5 billion.
East Germany is almost everyone's favorite turnaround candidate.
Though its economy has been hammered by the migration of many of its
best young workers, that damage can be repaired quickly -- if the
Communists move to adopt fundamental reforms, including free
elections. Should that happen, Jan Vanous, research director of
PlanEcon, a Washington, D.C., consulting firm, believes the annual
flow of private and public money from West Germany alone could
'easily' top $10 billion and continue for at least a decade. Says
he: 'No other East European country can dream of this type of
windfall from making the right political and economic moves. It would
take real talent not to pull the East German economy above the
average standard of living in the Common Market by the year 2000.'
-- Don't leap into Eastern Europe without a hard-currency safety
net. You'll need some way to get your cash out. A system of fully
convertible currencies won't emerge for several more years, possibly
longer. If your main interest is serving the domestic market,
creative bartering is still the only way to change your zlotys or
forints into real money. For example, PepsiCo exports chairs from
timber-rich Poland to its Pizza Hut franchisees in the U.S. in order
to get profits out of its Polish bottling operations.
Manufacturers must make sure they strike the right balance between
exports and local sales. France's Saint Gobain recently joined forces
with Yugoslavia's largest glassmaker. Though a major customer of this
new factory will be state carmaker IMV, which itself exports compacts
in a joint venture with Renault, Saint Gobain earns no hard currency
from those sales. That will come from exports to Greece.
-- Don't expect a quick payoff. Says Juergen Aumueller, president
of American Express Travel Services in Europe: 'Patience is the
key.' Despite the current euphoria, no Eastern European country is
moving from Stalinism to Thatcherism overnight. Outmoded plants and
unpredictable supply lines will continue to make planning an art, not
a science. Richard Norton, PepsiCo's vice president for Eastern
Europe, figures lack of spare parts alone forces plants there to
endure 20% more downtime than their U.S. counterparts.
Corruption will remain endemic, contacts essential. Unless you've
got the % in-house expertise to negotiate this morass, William
Cornelius, director of trade policy for Dow Chemical, suggests it may
be wise not to take a majority stake in an Eastern bloc joint
venture. Says he: 'Without at least 50% of the deal, your partner
may not direct enough of his energies toward solving your company's
problems.'
-- Above all, don't delay. Start exploring the possibilities in
Eastern Europe. The number of companies capable of competing
successfully on world markets, as do Tungsram or Ikarus, a Hungarian
busmaker, is larger than you might think -- but it's still limited.
Demand for these islands of efficiency is sure to rise. Smart
investors, such as America's George Soros and Italy's Carlo de
Benedetti, are already sniffing out opportunities.
Japanese interest is also growing. Daihatsu, Japan's No. 8 auto
company, is talking with Poland's FSO about a joint venture that
would produce 120,000 small cars a year, some for export to the
Soviet Union and the West. Says Stewart White, a partner in the
London law firm of Denton Hall Burgin & Warrens: 'In our new Tokyo
office the first question potential Japanese clients ask these days
is whether we have expertise in East-West trade.'
Early birds will also grab the best local managers. Peter
Hargitay, owner of a private holding company in Zurich that
specializes in communications, finance, and public relations,
expanded into Hungary more than a year ago, just as the latest round
of reforms were launched. By doing so, he was able to recruit Janos
Fekete, the former head of Hungary's National Bank, as chairman of
his subsidiary. Fekete also heads the commission advising Hungary's
Parliament on future economic reforms.
As the world enters a new decade, a new Europe is emerging as
well. What's in doubt isn't the trend but the timing. The day after
the Berlin Wall split apart, David Roche, Morgan Stanley's top
European equity strategist, advised his clients to immediately boost
their stake in German stocks, despite the likelihood that an
overheating economy could temporarily drive up interest rates.
Explains Roche: 'I'm trying to tell people where they're going to
make money over the next five to ten years. Just as markets in the
1980s were defined by Reaganomics and Thatcherism, the 1990s will be
defined by the shifting of the ideological plates that have separated
the world's geopolitical land masses.' Despite the difficulties that
lie ahead, companies that aim to remain globally competitive
shouldn't wait too long to invest ; either time or money in those
changes.
CHART: NOT AVAILABLE
CREDIT: SOURCE: PLANECON, CIA ESTIMATES
CAPTION: HERE'S HOW EASTERN EUROPE STACKS UP
Copyright 1989 Time Inc.
Richard I. Kirkland Jr. REPORTER ASSOCIATE Mark M. Colodny, EUROPE: WHO GAINS FROM THE NEW EUROPE Almost everybody does -- and there's opportunity aplenty for deals. The combined GNP of East Germany, Hungary, and Czechoslovakia is bigger than China's.. , Fortune, 12-18-1989, pp 83. |
