NEW LIGHT IN EASTERN EUROPE? Amid the economic chaos that followed the crash of Communism come signs of emerging entrepreneurship -- and new opportunities to invest.
(FORTUNE Magazine) – A NERVOUS SOBRIETY has set in across Eastern Europe. Two years after the Iron Curtain came crashing down, the region's experiments with capitalism might, to some eyes, seem an excellent advertisement for the virtues of Communism. On paper, at least, the whole region is falling apart. Its collective gross national product will decline an average of 7.3% this year, according to PlanEcon, a Washington, D.C., consulting firm. Unemployment is up -- rising to levels unseen in the region since after World War II. But slowly, surely, a new generation of post-Communist entrepreneurs is emerging, offering the first tangible signs of life amid the rubble of Communism -- and posing new opportunities for Western managers seeking a toehold in the region. Eastern Europeans themselves were surprised by how uncompetitive their industries had become. Once the Soviet economy collapsed, depriving heavily subsidized state industries of a market that would take even the shabbiest widget, managers were forced to compete with Western companies for shares of domestic and foreign markets. They found that after 45 years of Communist mismanagement, they could neither sell their slipshod goods nor find the flexibility to adapt to competitive pressures. The result is a massive recession spreading from Poland's Baltic Sea port of Gdansk to the snow-peaked Vitosha Mountains in Bulgaria. Bad as it is, unemployment would be even higher if the various democratic governments that replaced the Communists had moved more aggressively to shut down fatally wounded state industries. So far most have opted to preserve a modicum of social stability rather than pursue free-market ideas to their logical ends. Even once prosperous enterprises, such as the Wartburg auto plant in East Germany or the showcase Ikarus bus factory in Hungary, have turned out to be nearly hopeless losers. Says Klaus-Heinrich Standke of Berlin's East West Economics Academy: ''To repair these economies is a job that will last into the next century.'' The task will require huge amounts of Western capital. If the West does not ante up, warns Vasile Pilat, a Rumanian economist who founded the Institute of Free Enterprise in Bucharest, ''Eastern Europe will become for Western Europe what Central America is for the U.S. -- a permanent region of instability on its border.'' Czech President Vaclav Havel also argues that Europe's security is irrevocably linked with economic and social stability in the East. Political instability could well spoil the much heralded triumph of capitalism, especially now that the wave of post-Communist euphoria has given way to the hard task of building healthy economies. Nor is history particularly encouraging. Except for Czechoslovakia, which managed to sustain a functioning democracy, every one of these countries dissolved into dictatorships with weak economies during Eastern Europe's last period of freedom -- the 21-year interlude between the world wars. Says Januariusz Goscimski, president of the Polish Club of Private Capital (annual membership fee: $10,000): ''The Communist way of thinking survives everywhere. Our main goal is to explain to people what it means to do business, that businessmen are not crooks.'' ) For Western managers, this situation offers unique opportunities. New investment is needed not just to update a badly deteriorated industrial base but also to impart much-needed Western management skills. Says Dick Niemczycki, 44, a Polish-American who heads the Warsaw-based European operations of Curtis International, a multinational conglomerate with $200 million in sales: ''The place is crawling with opportunities.'' Not that it's easy. Even simple tasks, like making a phone call or cashing a check, can prove remarkably difficult. In Prague, McDonald's has been searching for two years for a suitable site to open a set of golden arches. Ownership of land is the problem: It isn't clear who owns what in Czechoslovakia. Says one flustered Western executive in Prague: ''If you want to try to do business here, you had better bring some aspirin and learn to count to ten.'' After Curtis International purchased the Wojewodzki Water Services Enterprise factory in Mlawa, Poland, last December, workers went on strike because they feared layoffs. Niemczycki went to Mlawa and personally assured employees that there would be no job cuts. Now the plant is turning out TV sets using new Japanese production equipment. And Niemczycki? After his strike-ending intervention, several of the workers asked him to run for parliament from the region in the next elections. Despite the headaches, Eastern Europe does offer 64 million new consumers -- counting just those in countries with essentially convertible currencies -- with enough pent-up demand to empty a host of Wal-Marts in a single afternoon. There is also the opportunity to build a low-cost manufacturing base on Western Europe's doorstep. Here's a rundown on the business outlook across the region:
-- HUNGARY: THE BEST BET With just 10.4 million people, Hungary will never be a big market, yet it attracted $1.25 billion of foreign investment last year. That's more than all other countries in the region combined. Hungary still has lots of problems. The inflation rate remains a stubborn 34% annually and the government is running a hefty deficit. But investors appreciate its political stability, relatively sophisticated business culture, and Western-style banking laws. In addition, Hungary's disciplined and talented work force has been far less strike-prone than Poland's. General Motors, Ford, and Japanese carmaker Suzuki have all broken ground or bought plants in Hungary to produce cars or parts for export to Western Europe. Levi Strauss; Guardian Industries, a Michigan-based glass producer; and Schwinn, the U.S. bicycle maker, have set up operations. McDonald's has four outlets. Says a Western diplomat based in Budapest: ''Hungary is well on its way to becoming a little Belgium, or whatever a prosperous state of ten million looks like.'' Private businesses still account for just 10% of Hungary's GNP, but they are the economy's only expanding sector. More than 2,000 new ones open every month. To harness entrepreneurial energy, the government has sponsored a series of so-called third-party privatizations, transactions that resemble unfriendly takeovers in the West. Under most privatizations, control of an enterprise is turned over to its managers. But if a third party wants to bid, and officials think the bid is more competitive than management's, the third party gets the company. So far, YBL bank and the STYL clothing factory -- the Hungarians are big on all-initial names -- have changed hands in such transactions, but more than 125 other bids are pending. One aggressive shopper is Muszertechnika, an employee-owned computer maker that is one of Hungary's strongest companies. Last year the company had $60 million in sales, including a $5 million contract to build the enormous stadium screens used at the 1990 World Cup soccer matches in Italy. A losing bidder was Sony. Founded in 1981 by Gabor Szeles and Tibor Hejj (see following story), the company has already acquired stodgy state-owned electronics company EVB and turned it into a moneymaker. Says Hejj: ''What ((these companies)) need most is good management.''
-- POLAND: BIG PROMISE, BUT BIGGER PROBLEMS Poland's population of 38.2 million -- almost as big as Spain's -- makes it the region's most promising market. The early months of the Solidarity-led government, now in power for nearly two years, were promising too. The economic shock treatment of Finance Minister Leszek Balcerowicz, 44, tamed inflation and filled the stores with once unavailable consumer goods. In a mere four months he made the zloty, the Polish currency, effectively convertible. By comparison, after World War II, the Italian lira didn't become convertible for all trade purposes until the Common Market was established in the 1950s. Now, though, Balcerowicz is running into greater resistance. His austerity program has led to an estimated 18% to 20% drop in real income and threatens to trigger massive unemployment. He responds that one of his biggest disappointments so far has been the Poles' failure to develop real business skills. Says he: ''The managers are left over from the previous system. Changing the ((behavior of)) enterprises has proved more difficult than we thought.'' Faced with active trade unions and a tradition of maintaining full employment, managers have been remarkably reluctant to institute the restructuring, including big layoffs, that would make their companies competitive. Last May, after a wave of strikes and other forms of pressure, Balcerowicz was forced to devalue the zloty, partly in response to growing pressure to make Polish goods more competitive by softening the government's tight monetary policy. Many would-be entrepreneurs have applied their ingenuity to less-than-noble pursuits. Car theft in Poland has become a $300- million-a-year business. Black marketeers steal cars in West Germany and smuggle them across the border, where they are less traceable. Privatization of the nation's 8,000 industrial enterprises has turned out to be difficult. In the eight months since the program began, just seven have been sold to investors. Even those have yet to undertake the painful restructuring that might make them more profitable. As a result, their shares have performed poorly on Poland's new stock exchange. Only one -- a construction company called Exbud based in Kielce -- has been popular with investors. The stock prices of the others, including the formerly prosperous Krosno glass works, are lower now than when first listed. Fortunately, small private enterprises are more resilient. More than a half- million private companies have been founded in the past two years. Multinationals have located niches as well. Coca-Cola, for example, is building a plant in Poland, the first of 11 planned. It hopes to match Eastern European wages with a ready-made market in a classic formula that Henry Ford would have recognized. ABB, the Swedish-Swiss manufacturer of locomotives and heavy industrial equipment, has formed three joint ventures, employing more than 7,500 Poles to make everything from electronic parts to electric turbines.
Will Poland make it? Says Witold Sulimirski, a Polish-born American who helped found Amerbank, a new Warsaw-based investment bank seeking U.S. capital: ''Poland will have the roughest sailing, but it has tremendous advantages. The market is four times the size of Hungary's, and it's in a good location.'' Adds a Western diplomat serving in the country: ''Poland's strength is its size. There are more people to sell to, and more companies to choose from ((as partners)).''
-- CZECHOSLOVAKIA: AFTER A SLOW START, A SPURT? While Solidarity was forming a government in Poland and Hungary was rewriting its constitution to allow a multiparty system, the Czechs were still living under a neo-Stalinist government. Until its so-called ''velvet revolution'' (because it was smooth and nonviolent) a month after the fall of the Berlin Wall, Czechoslovakia was one of Eastern Europe's more backward-looking states. Entrepreneurs were scarce, and they still are because of the relatively late start. Says Miroslav Svarc, 42, a former carpenter who now runs more than a dozen businesses with total annual sales of $9 million: ''We're still crawling around in our diapers. We could have produced higher-quality goods in the past, but anyone who stood out was hassled.'' The situation might have become a total disaster but for the strong industrial tradition of the Czechs and Slovaks dating back to the Austro- Hungarian empire. The region was one of the best manufacturing areas in Europe -- equal even to Germany. Skoda, the national car works, was once considered BMW's chief rival for Europe's upscale cars. The soft contact lens was invented at the country's Institute of Macromolecular Chemistry in 1965. Says Bohumil Studynka, a former state banking official who now represents General Electric in its search for Czech partners: ''We have brand names that are still renowned for quality. That's quite an achievement.'' As a result, the nation of 15.7 million has quickly reached the top of many lists of Eastern Europe's most promising places. Says Jaroslav Petricek, 45, managing director of CKD Kutna Hora, a 2,000- employee heavy engineering company and one of the few Czech state firms that has proved capable of selling into foreign markets without the protection of a soft currency: ''Our production costs are lower, and our products do not lag behind world levels. Our main objective now is to find a foreign investor'' -- to help retool in return for equity. With so few entrepreneurs, most attention has centered on the big state- owned companies. By 2001, Volkswagen will have invested some $5.1 billion in Czechoslovakia. So far, it has taken a 31% stake in the Skoda factory in Mlada Boleslav, which will rise to 70% by the end of 1995, and 80% of the plant in Bratislava. General Electric and Westinghouse are battling it out * with ABB to acquire pieces of Skoda and other Czech enterprises. General Electric has signed a deal to supply turboprop engines made in Boston to Let, the Czech aircraft maker that once produced most of the Soviet Union's turboprop fleet. Westinghouse is negotiating to become Skoda-Pilzen's principal global partner in the development of coal- and oil-fired power stations. Under the tough leadership of Finance Minister Vaclav Klaus, the government has waged a gallant battle against inflation and begun privatizing small retail businesses. The economy has responded well, showing an unexpected budget surplus in the first quarter of this year. The result so pleased Klaus that he immediately announced a cut in the sales taxes to pass some of the prosperity back to consumers.
-- RUMANIA, ALBANIA, YUGOSLAVIA, AND BULGARIA: ALSO-RANS There is opportunity in some of the Balkan states -- but not for the fainthearted. For now, forget about Yugoslavia and Albania. Ethnic strife and political instability have sidetracked serious economic reform and turned these potentially prosperous economies into nightmares for investors. Bulgaria offers slightly better possibilities, but local entrepreneurs warn darkly that they are not convinced of the government's sincerity in abandoning Communism. The latest conservative backlash now building against Mikhail Gorbachev could spill over to the country that many people still jokingly refer to as the 16th Soviet Republic. The strong of stomach might take a closer look at Rumania -- yes, Rumania. With a population of 23.4 million, this long-suffering land boasts a market second only to Poland's, if it ever gets its problems sorted out. Even in the worst years of Europe's worst neo-Stalinist dictatorship, private property was not outlawed. Local entrepreneurs report that they have never had trouble getting profits out of the country, as long as they are willing to use complex countertrade arrangements. Cristian Dada, 32, a computer programmer, is a case in point. After the revolution he quit his job at the Institute of Cybernetics in Bucharest to set up a small furniture business. In his first year he grossed more than $1 million. Dada buys computers for dollars, sells them in Rumania for lei, the local currency, uses the proceeds to pay 6,000 salaries at his wife's furniture factory, and exports the furniture to Italy. Says he: ''We have come a long way in two years, and I think in two more years' time we will show some serious development. There are many people who want to work here. The country has changed.'' The Bush Administration remains bearish on Rumania, waiting to see more signs of genuine political liberalization before offering trade concessions, but the changes so far are impressive. Says economist Pilat, who supports Rumania's opposition: ''You shouldn't sit on the sidelines. The conditions ((for investing)) are good here. Even if another government comes to power, it won't be anti-Western. We need the West's help too much.'' THE PRIVATE SECTOR in most of the Eastern European countries remains small, but it is already showing that it can tweak the noses of many once prosperous state enterprises. Now the task for government managers is to put the energy of the private sector to work in forcing change elsewhere. If the region is going to compete for foreign investment with the industrializing countries of Asia and Europe's booming Iberian Peninsula, it will have to stay the course set by its post-Communist governments -- no matter how hard the austerity bites. The countries of the old Eastern bloc have a big advantage over Asia as manufacturing sites for Western European companies. High-fashion manufacturers such as Pierre Cardin are already planning to expand their operations in Eastern Europe. Says Jiri Kotas, founder of Czechoslovakia's private Bank of Bohemia: ''A rock-bottom wage in Korea is still a very good wage here. You can hardly tell the difference between a Cardin made there and a Cardin made here.'' Political scientist Francis Fukuyama wrote in a widely quoted essay in 1989 that the collapse of Communism in the U.S.S.R. and Eastern Europe meant, in effect, ''the end of history.'' With Communists sent into early retirement, the peoples of Eastern Europe could look forward to a quiet future of two- party politics and economic prosperity. Historians would not be so lucky. Now that history was over, they'd have little to look forward to besides eternal boredom. But two years of post-Communist politics have already shown that the rumors of history's death were greatly exaggerated. Once proud nations are struggling to get on their feet, fighting the prejudices accumulated in years of Communist occupation and wondering if they can find the strength to overcome their problems and build stable, prosperous free-market economies. They won't be able to do it without help from abroad. And they won't get that help unless they can prove they are worthy of it. The history of Eastern Europe is just beginning.