New Kids on the Bloc

By John Greenwald

The political revolution that swept through Eastern Europe last year was just the beginning. Now comes a rush of new business ventures that will open the region to the rest of the world and change the way East Europeans work, play and shop. In Hungary, General Electric paid $150 million last January for control of Tungsram, one of the world's largest light-bulb makers. GE plans to light up Europe by selling the bulbs across the Continent. In Poland, Italian automaker Fiat, in partnership with a Polish company, plans to build 1.5 million subcompacts during the next ten years. In East Germany, Coca-Cola is pouring out $140 million to turn six aging state-owned soft-drink plants into gleaming Coke bottlers.

Rushing to cash in on the East's sudden escape from more than four decades of communist rule, capitalists are lured by low wage rates, an educated labor force and a pent-up market of nearly 140 million consumers in the heart of Europe. Companies from Turin to Tokyo are setting up joint ventures with local firms, and as eager executives flock to the region, such grand hotels as the Budapest Forum and the new Warsaw Marriott buzz with high-stakes deals. "Learning how to invest profitably in Eastern Europe is the hot new game of the 1990s," says Paul Horne, chief international economist for Smith Barney.

The players are lining up swiftly. Western companies have already established some 3,000 East European ventures valued at anywhere from $100,000 for restaurants to more than $100 million for giant industrial complexes. The most popular places for business: Hungary (pop. 10.6 million) and Poland (pop. 38.2 million). Each has attracted more than 1,000 ventures, in part by passing laws that give generous tax breaks to foreign investors.

In spite of the gold rush, the awakening region has pitfalls to investment that can deter all but the hardiest risk takers. Since East European currencies cannot be readily converted into dollars or other hard cash, Westerners must often take their profits in bartered goods, such as clothing or foodstuffs, which can be sold in other Western countries. At the same time, the area remains plagued by grasping bureaucrats, archaic trade rules and primitive roads, phone systems and factories. Says Jan Vanous, research director of Plan-Econ, a Washington-based consulting group that studies Eastern Europe: "Investing there is really for people who know what they are doing and have a strategic vision." Quite a few adventurous companies have followed that advice:

HUNGARY

GE had Western customers in mind when it acquired a majority stake in Tungsram in the largest direct investment in Eastern Europe since World War II. The transaction gave GE control of a respected 100-year-old company that last year exported nearly two-thirds of its output, or $180 million worth of bulbs, to West European countries, which pay in hard currency. The deal boosts GE's meager 1% share of Western Europe's lighting market to 9%. That share could prove particularly valuable if the European Community decides to impose quotas on non-Community products after it becomes economically unified in 1992.

Schwinn pedaled after profits in Hungary and the West last year when the Chicago-based company bought control of Csepel, Hungary's bicycle monopoly, for $1 million. Before Schwinn arrived, Csepel was producing a single bulky model. To get the venture up to speed, Schwinn doubled the average wage of Csepel employees, to about $210 a month, and demanded that they work full eight-hour shifts instead of leaving early to moonlight. Schwinn installed new painting and welding equipment and developed sporty new models. The company expects the improvements to pay off later this year when the joint venture starts exporting a new line of low-priced, 18-gear mountain bikes to the U.S. and West Germany.

The race to bring capitalist know-how to Hungary has produced a contest between two telecommunications companies, Colorado-based U S West and Atlanta's Contel Cellular. In a $10 million joint venture with the Hungarian state telephone company, U S West is installing a cellular-phone system in Budapest that is to begin service by the end of the year. Contel has linked with private Hungarian partners to form a competing $35 million venture that will start service in Budapest by early 1991.

While Japanese automakers have lagged behind their Western counterparts as investors in East European countries, Suzuki Motor formed a $132 million joint venture in January to build small cars in Hungary. The agreement, which was reached after five years of negotiation, calls for the company to produce 15,000 Suzuki Swifts a year starting in 1992.

POLAND

In an ingenious deal, ICL, a British electronics giant, launched a 1988 joint venture called Furnel International with six Polish partners to make an unlikely combination of computers and furniture. Furnel exports the moderately priced furniture to Western store chains and uses the currency that it earns to buy computer parts from ICL. The venture then assembles the components in Poland and sells the computers to Polish buyers. ICL thus manages to tap markets in both Poland and the West and receive its payment in hard currency.

Meanwhile, Polish television viewers have become accustomed to glitzy commercials for Benetton sportswear on Poland's two state-run channels. The 30-second spots were placed by Italian media magnate Silvio Berlusconi, who operates Italy's three largest private TV stations and controls the most extensive film library on the Continent. Berlusconi receives a placement fee from Benetton, which has established two stores in Poland.

Fiat, which has produced cars in Poland for more than 50 years, is shifting into high gear. Next year the Turin-based company will start building the first of 1.5 million Micro subcompacts in a ten-year venture with FSM, one of Poland's major car companies. To help recoup its investment, Fiat plans to export one-third of the Micros (estimated retail price: $6,000) to Western Europe.

EAST GERMANY

The economic union with West Germany, which takes effect July 1, has made East Germany (pop. 16.6 million) particularly attractive to Western companies. The investors include Pilz, a West German audio firm that is building a compact- disc plant as part of a $140 million venture with East Germany's Robotron. The factory will have the capacity to press 24 million CDs a year when it opens in 1992.

Like Pilz, many companies view East Germany as an extension of the West German market. The U.S. consumer-products giant Philip Morris plans to produce 10 million cigarettes a year at a Dresden plant that the company is acquiring from VEB Kombinat Tabak, East Germany's state-owned tobacco company. "We really don't consider East Germany part of Eastern Europe," says John Dollisson, a Philip Morris vice president. "Selling in Dresden should be the same as selling in Munich or Hamburg."

General Motors too is headed for East Germany. GM plans to build 150,000 Opels a year in the country with Automobilwerk Eisenach, its East German partner, by the mid 1990s. Industry experts say GM's total investment in the deal could reach $600 million. Yet that will represent only part of GM's foray into Eastern Europe. Among other deals, the automaker plans to produce 200,000 engines and 20,000 Opels a year in Hungary in a $150 million venture with RABA, the country's state-owned truck manufacturer.

CZECHOSLOVAKIA

To speed its transformation to a market-based economy, Czechoslovakia (pop. 15.6 million) plans to triple the capacity of its overworked telephone system. In June the government chose U S West and Philadelphia-based Bell Atlantic to build a cellular-phone network beginning this fall. The U.S. firms will share a 49% stake in the venture.

BULGARIA

As capitalism brings new wealth and competitive pressure to Eastern Europe, many people may decide to head for the beach. To accommodate them, Paris-based Club Med plans to open a resort next year on the Black Sea coast of Bulgaria (pop. 9 million). The facility will include a 600-room hotel and will share a golf course with a twelve-year-old Club Med in a nearby town. Says Jean-Luc Oizan-Chapon, Club Med's chief operating officer: "We were here before the doors were open, and now our time has come."

ROMANIA

The new firms that are racing to Eastern Europe could take a lesson from the patience shown by Minneapolis-based Control Data, which since 1973 has built disk drives and other computer products in Romania (pop. 23 million). The joint venture with a Romanian company, which took five years to turn a profit, exports half its output to the West. "The biggest problem was the lack of the business environment that we in the West are used to," recalls Helmut Koller, Control Data's marketing director for Eastern Europe. "We basically had to create our own suppliers."

Eastern Europe remains a risky, often maddening place to do business. One of the first tasks of Western companies is to retrain local labor forces that grew slack under communism and lack disciplined work habits. Simple bookkeeping can be a major problem: East European companies have been taught to follow central plans, and know little about Western-style profit-and-loss statements. At the same time, Eastern Europe's infrastructure is woefully inadequate for modern industry and commerce. A recent study by the Chicago Federal Reserve Bank estimated that the region would require 274,000 miles of new roads to reach the level of highway development found in Western Europe. Estimated cost: as much as $130 billion.

While most East Europeans welcome the torrent of Western investment, they often have mixed feelings about the changes that it brings. Some fear that the capitalist invasion may replace communism with a new and more subtle form of economic domination. Says Richard Gordon, a director of the Massachusetts- based Polish American Business Education Foundation: "There are still doubts in many people's minds about selling off parts of their national patrimony to foreigners."

Many Westerners are likewise cautious as they weigh the benefits and risks of venturing into Eastern Europe. Some firms are waiting to gauge the political and economic turmoil that still roils the region. But those companies that fail to consider Eastern Europe today run the risk of being left out of what may well be tomorrow's land of opportunity.

With reporting by Veit V. Dengler/Vienna and Stephen Pomper/New York