Hungary since Communism: The Transformation of Business

HUNGARY SINCE COMMUNISM

Hungary since Communism

The Transformation of Business

György Bőgel Vincent Edwards Marian Wax

with Tibor Benkő, János Hárskuti, Ildikó Király, Tibor Kovács, Tamás Szabó, Vilmos Szegő, Ervin Török and László Zentai

Foreword by Peter Lawrence

~ MACMILLAN Business

© György Bőgel, Vincent Edwards and Marian Wax 1997 Foreword © Peter Lawrence 1997 Softcover reprint of the hardcover 1st edition 1997 978-0-333-66954-9

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE.

Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published 1997 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG2l 6XS and London Companies and representatives throughout the world

ISBN 978-1-349-14203-3 ISBN 978-1-349-14201-9 (eBook)

DOI 10.1007/978-1-349-14201-9

A catalogue record for this book is available from the British Library.

This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources.

10 9 8 7 6 5 4 3 2 106 05 04 03 02 01 00 99 98 97

Typeset by EXPO Holdings, Malaysia

Contents

List of Figures and Tables Foreword by Peter Lawrence Introduction Acknowledgements

PART I BACKGROUND AND CONTEXT

1 A Political and Social Survey of Hungary's Most Recent Decades On and under the bridge Between 1957 and nowadays A brief summary of people's general conditions

2 The Old System Introduction The Soviet model The Soviet model in Hungary Agriculture Plan failures and the 'guided market' model

3 Workers and 'Managers' Context Workers Managers Worker/manager relations International comparisons Winners and losers

4 Corporate Life, 1985-95 Enterprises still (and/or intended to be) partly or

entirely remaining in state ownership Already privatized companies, state-owned enterprises

in the process of being privatized, or companies to be privatized according to specific plans

The great multi-national companies Major private companies owned by Hungarians,

formerly launched as businesses

v

Vlll

ix xii xvi

3 3 4

17

24 24 25 26 31 32

35 35 38 41 45 47 48

49

53

53 57

58

VI Contents

Small ventures Organizations and ventures operating in agriculture The grey and the black economy The 'background institutions' of the corporate

entrepreneurial sphere

PART II CASE STUDIES

5 MOL Ltd (Hungarian Oil and Gas) Background The gas business The oil business Human resources Financial resources Environmental standards Privatization

6 BERVA The precision engineering industry BERVA Problems in the early 1990s Government policy and foreign direct investment Changes in 1992 The 1994 situation 1996

7 Metrimpex Introduction Developments in foreign trade Metrimpex Strategic renewal The situation in 1994

8 Stollwerck Background The situation in 1991 Opportunity for rescue Brands Investment Computing and MIS Marketing and sales

59 60 61

62

67 67 68 71 75 76 76 77

78 78 81 83 84 84 86 87

89 87 90 91 94 96

99 99

100 102 105 105 106 106

Contents vii

Organization and structure 107 Stollwerck and the confectionery industry in Hungary 108

9 IDR: The Pharmaceutical Industry 110 Background 110 IDR Ltd 118 Role of lOR in the Hungarian pharmaceutical industry 119 Implementation of fundamental changes 120 Analysis of market position 122

10 The 'High-Tech' Industries 125 Introduction 125 Background 126 Computing 126 Data communications 128 The firms 129

PART III PATTERNS AND PROGNOSIS

11 Patterns 139 Proactivity 140 Autonomy and responsibility 141 Investment and restructuring 143 Unbundling 145 International linkages 146 The Hungarian context 147

12 Scenarios for the Future 149 The optimistic script 149 The pessimistic script 151

Notes 154 References 156 Index 158

List of Figures and Tables

Figures

8.1 Quintie's activities 102 8.2 Organizational chart of a Quintie plant 103 9.1 Line of innovation 121

Tables

1.1 Hungary's net debts 11 1.2 Unemployment rate in Hungary 15 1.3 The official changes in the Forint exchange rate 16 5.1 Natural gas prices of selected countries 69 5.2 Domestic sales of gasoline 72 5.3 Market share and efficiency 73 5.4 Breakdown of petrol prices 74 5.5 Educational level of workforce 76 6.1 Size distribution of Hungarian precision engineering

industry, 1990-1 80 6.2 BERV A's turnover, 1989-93 83 7.1 Balance of payments, 1988-93 90 7.2 Language capability 93 7.3 Ages of top management/executives 93 9.1 The top five pharmaceutical companies 115 10.1 Sales and activity of Hungarian computing companies 127 10.2 Growth of Sci-Modem, 1991-96 132 10.2 Sci-Modem's turnover, 1991-95 135

Vlll

Foreword

Communism had the effect of masking the differences between the Eastern Bloc countries. In the period from the end of the Second World War until the 1980s, in fact until 1989 for most of the COMECON countries, communism provided a semblance of uniformity. After all commmunism was at the same time an ideology, a political system, and a means of structuring and organizing the economy. Add to this the drab and constrained nature of everyday life in these countries, and they begin to appear as an undifferentiated agglomeration.

Yet this is only part of the story. These countries always were different. Their peoples not only spoke different languages, but languages belonging to different groups: Slavonic, Teutonic, Romance and Finno-Ugrian. They had different pasts, became independent nation states at different times, and even had radically different experiences in the Second World War, where what later became the German Democratic Republic was part of Nazi Germany, Poland and Czechoslovakia were Nazi victims, Hungary allied itself with the Third Reich and Romania fought on both sides!

Again, while these states had much in common as members of COMECON and the Warsaw Pact, their experiences during the communist period were not identical. Some states rebelled against Soviet domination, some did not. Poland was always more tempestuous, more anti-Russian, less governable than the others; from 1981 onwards model conformist Czechoslovakia, for example, closed its border with Poland to prevent the rot spreading. But the economic experiences of these states also differed under communism. As all these states were integrated under Soviet leadership there was some economic specialization at the level of the nation state. Hungary, for example, made most of the buses for COMECON; the USSR the fighter aircraft; Slovakia much of the heavy weaponry; and so on. Or again, although they were all command economies with high levels of public ownership, these high levels differed from country to country. So, Czechoslovakia and East Germany had only tiny private sectors, while in Poland the private sector was somewhat larger, and Hungary had the largest private sector among the Warsaw Pact countries. The readiness to borrow externally to fund internal economic development was another variable with Hungary again in the lead, in the sense of having the highest international debt among the COMECON countries by the time of the collapse of European communism.

IX

X Foreword

It is important to be sensitive to these differences of the past, because they impact on those of the present and help us to anticipate the future. One of the strengths of this book is that the authors have this sensitivity, this wider East European knowledge, and their collective understanding is enhanced by an interpenetration of insider and outsider viewpoints.

This book is also purposeful. It has been written with the intention of adding to our knowledge and understanding of the most idiosyncratic and individualistic of the East European countries, Hungary. It is not a byproduct of some other activity or assignment. The companies described in the case studies are real, are presented under their current names, and the authors had some choice in deciding which Hungarian organizations to use. The case study accounts are the product of dialogue between the authors and the leading managers in those companies. The cases represent a sober and decent attempt to depict the experiences and tribulations, the challenges and sometimes triumphs of a set of organizations confronted with the dynamic changes in system and society. This is a 'hands-on', 'real-time' excursion, not a pallid 'stay at home' attempt to study system change on the computer screen!

The last 250 years have been dominated by 'big ideas', by overarching ideologies and currents, royalism and democracy, liberty and leadership, capitalism and communism, the free market and the command economy. Yet as the twentieth century draws to its close, all these seem to be in eclipse. The age of the grand narratives seems to be over, replaced by the anti-doctrines of post-modernism and deconstructionism.

The fall of European communism is central to this. The communist ideology was, after all, the grandest of all the narratives. It claimed to explain more, to determine more, to effect a more far-reaching transformation of the human condition. And it is the last of these narratives; it was not qualified out of existence but summarily despatched in Europe in the 1980s.

The authors of this book are imbued with the spirit as well as the fact of that transition. They have not responded to the fall of communism in grand narrative style. They have chosen to explore the transition from the planned economy to the free market in one country, albeit deploying their facility for contextualization and comparison. They have not oversimplified by replacing one grand narrative with another.

It is not the case that the command economies were all the same, any more than that capitalist states are homogeneous. The free market economy seems to work a little better, much of the time, but it is not perfect, and communism was not all evil. The transition from command economy to free market does involve some 'blacks' and 'whites', but there

Foreword xi

are pastel shades as well. Any attempt to capture even a part of the reality of this transition must be alive to this fine-shading, must recognize a multiplicity of causes and effects, and do justice to the role of circumstance as well as human ingenuity.

The authors have responded to this challenge. Their account is not only relativizing and discriminating, but it is the product of humility as well as judgement.

Missoula, Montana PETER LAWRENCE

Introduction

This book is about company change in Hungary. The collapse of the communist regimes of Central and Eastern Europe has had a dramatic impact on the way these countries are organized: politically, economically and socially. In the case studies we focus on individual companies and their development and problems, and on the process of transforming economic organizations used to operating under the conditions of a command economy. More than five years after the collapse of the former regimes the transformation is still ongoing, even though in many respects the transformation in Hungary is more advanced than in other countries of the region. In focusing on companies we also try to identify the broader factors driving (or holding back) the process of adaptation and change.

The book is also about Hungarian managers and their role in the transformation process. According to· Zsuzsanna Ard6' s jocular account (Ard6, 1994), Hungarians are a mass of contradictions. On the one hand they are prone to navel-gazing, self-indulgent and melancholic (they have one of the highest suicide rates in the world). In The Book of Hrabal (Esterhazy, 1993:11) the author muses: 'According to a popular joke, to be born a Hungarian ... is a piece of bad luck.' On the other hand, Hungarians are strongly individualistic with go-ahead egos, bubbling with irrepressible energy. Even under communism Hungarians demonstrated a flair for entrepreneurism, for satisfying personal aspirations which did not sit well with the pure form of the official ideology.·

In a broader sense the book is about the context of Hungary. The year 1956 was a watershed in perceptions of Hungary in Western Europe. Before that Hungary had been seen as the junior partner in the AustroHungarian Empire and a major loser in the Peace Treaties imposed after the First World War; the Treaty of Trianon reduced Hungary to its current dimensions, leaving substantial minorities in Slovakia, Romania, Yugoslavia and territories now part of the Ukraine. A brief communist revolution was followed by the authoritarian regime of Admiral Horthy. Hungary's alliance with Germany resulted in further defeat and Soviet occupation. Writing about 1934, Patrick Leigh Fermor (1988) refers to 'the nearly mythical country of Hungary', with its shepherds and gypsies and great bustards on the Puszta.

That year of 1956 changed popular images of Hungary and awakened interest in and respect for the Hungarians as they rose up for national inde-

xu

Introduction xiii

pendence and personal freedoms. The brief days of the Hungarian Revolution were significant in a number of ways, even though the uprising itself was brutally crushed. The nature of the communist regime which subsequently controlled Hungary was strongly influenced by the impact of the Revolution. Economic constraints were loosened, political pressures were gradually relaxed, and priority was given to satisfying the material needs of the population.

By the middle of the 1980s the gap between ideology and reality had grown so wide that it was no longer possible to paper over the cracks or to continue to subsidize 'goulash' communism by foreign loans. While the collapse of Soviet communism was largely unexpected, it was less of a surprise that the first major breach in the Iron Curtain occurred when Hungary opened its borders with Austria in 1989, thus breaking with the socialist solidarity of the communist regimes and letting thousands of dissatisfied East Germans reach the West.

Change since 1989 has been consistent. One of the authors first visited Budapest in June 1990: the market stalls were resplendent with multicoloured fruits and vegetables, including the ubiquitous peppers. Across Margaret Bridge walked fathers with their children holding McDonald's flags in their hands. However, the images of the new mingle with the old. The majestic nineteenth-century streets of central Budapest contrast with the high-rise housing estates of the suburbs, so typical of eastern Europe. In the gardens of the Grassalkovich palace in G6d6llo - occupied during communist rule by the Soviet military - blocks of flats were constructed, while the palace itself has suffered substantial deterioration.

Visiting in February 1995 Hungary's second city Debrecen, in the east of Hungary, reached from Budapest by crossing the Great Hungarian Plain, on leaving the railway station the highway gantry still indicated traffic lanes leading to Yugoslavia, Romania and the USSR. Images of the past remain a part of the present. And so it is with companies and their managers.

THEORY

At the moment we lack a comprehensive theory of the transformation of former command economies or of companies within these economies. Nee and Stark's (1989) work challenged the traditionally accepted paradigms and concepts of the analysis of socialist societies and economies and proposed a new framework of analysis focusing on institutions and social groups (p.8).

XIV Introduction

Our aim is somewhat more modest in that we wish to observe the impact of the change of political-economic system on individual firms. Up to 1989 the transformation of socialist economies tended to be incremental and adaptive (any truly radical proposals for change met with repression). The events of 1989 brought about a fundamental system-change which was largely unpredicted (it was certainly not predicted by the then prevalent paradigms and theories).

By empirical studies observing and recording the responses and actions of companies in the new circumstances we wish to portray and help to understand what is happening at the level of the firm, and how firms are adapting and changing (or even resisting change). Perhaps by identifying what is happening on the ground, we can provide the basis for valid insights to be used in the development of generalizations and theoretical concepts.

RESEARCH

The main source of data is the testimonies of Hungarian managers themselves, narrating the story of their respective companies. The narratives are told from the viewpoint of senior and middle managers and largely cover the period 1993-6. Each company is in itself 'unique'. However, we have sought to identify common patterns and strands and set them in a context of understanding of the past and the present, by relating the situation of individual companies to the context of the industry and broader economy.

As for the companies themselves, they represent a cross-section of companies in terms of size, activity, industry and stage of transformation. The majority of companies existed under the old regime but have been transformed in varying degrees. The information technology companies are businesses founded in the new conditions of the free market. The companies are active in old and new industries, delivering products (both consumer and industrial) and services as well as engaged in the primary sector. The form of ownership also varies, with some companies privately owned, some still awaiting privatization and some foreign-owned. Some companies are growing, others shrinking, some are still striving to survive, with others conceiving longer-term strategies.

Introduction XV

STRUCTURE

The book is structured into three main parts. Part 1 covers Chapters 1-4. Chapter 1 provides an overview of political

and social developments in Hungary since 1945. Chapter 2 deals with the system of economic management and its evolution under the communist regime. Chapter 3 focuses particularly on the socialist enterprise and the role of (and relationship between) managers and workers, while Chapter 4 discusses the post-communist development of the company system with particular reference to the issue of corporate governance.

Part II comprises Chapters 5-10 which. contain the company case studies. The case studies have been co-authored by Hungarian managers who have knowledge and experience of the case study firms.

In Part III we seek to identify trends and patterns emerging from the case studies (Chapter 11) while in Chapter 12 we attempt a prognosis of the possible development of Hungarian companies, outlining the main alternatives for the future.

AUTHORS

The book is an Anglo-Hungarian production; we hope that by bringing together insiders and outsiders we mitigate the impact of personal subjectivities and reap the benefits of being both close to the object of the investigation and viewing it from a distance.

References

Ard6, Z. (1994), How to be a European? Go Hungarian! BIOGRAF Kiad6ja (bilingual edition).

Esterhazy, P. (1993), The Book ofHrabal, Quartet Books. Leigh Fermor, P. (1988), Between the Woods and the Water, Penguin. Nee, V. and Stark, D. (1989), Remaking the Economic Institutions of Socialism:

China and Eastern Europe, Stanford University Press.

Acknowledgements

The authors interviewed numerous managers within and outside the case study companies and also visited their companies. They were all generous with their time and spoke freely of their companies as well as of the past and present situations in Hungary. We are most grateful to all the managers who assisted us and to those other Hungarians who discussed with us what it was and what it meant (both in the past and in the present) to be a manager in Hungary.

Special thanks go to Agnes Matzon of the Open Business School in Budapest who unstintingly gave of her time to arrange meetings and interviews. The Open Business School has played a leading role in enabling Hungarian managers to gain access to Western management knowledge and skills.

The British authors warmly acknowledge the financial support received from Buckinghamshire College and Buckinghamshire Business School in assisting the research undertaken to write this book.

xvi

Part I

Background and Context

1 A Political and Social Survey of Hungary's Most Recent Decades

ON AND UNDER THE BRIDGE

After many years, a new bridge was opened in 1995 in Budapest. Besides reports covering the opening, one of the domestic newspapers published a caricature. The drawing showed a happy gathering of people in tuxedos and evening gowns on the new bridge just about to open a bottle of champagne, while underneath bagmen are taking cover in the corners.

A contradictory picture: a mingling of success and failure, wealth and poverty, light and dark, development and decline. The caricature is striking: you just have to take a walk in Budapest, watch the news or read the newspapers and you discover the very same shocking contrasts. A few steps from the bulging and fancy shop windows can be found homeless with desperate looks, lying at the entrance of the subway eating something they have just found in dustbins; the recently completed exclusive villas on the Buda side are only a few bus stops from the slums and the deteriorated many-storey prefab settlements surrounding the downtown area; the latest models of luxury cars and 15-year-old Trabants polluting the air are driving side by side; next to the plants of multi-national companies applying high tech one can see factories built in the nineteenth century.

If we had the chance to read the minds of the men and women in the street we would possibly discover contradictions of the very same kind: hope and hopelessness, pride and shame, courage and fear. This picture does not match the one depicted by reports describing the euphoric atmosphere of the collapse of the Wall at the beginning of transition: it is now more complex and colourful, much more diversified. The average citizen ponders and keeps asking: 'Has it been worth while? Has my life become better or worse? Should I go ahead or should I rather take a few steps backwards?' These thoughts are very much mirrored in the ups and downs of the political scenery: recent elections in Poland and Russia show that the political games are not at all over in Central and Eastern Europe, fronts are quickly shifting back and forth, and this is true for Hungary as well.

3

4 Background and Context

The fear of changes and the opposition towards them in company management have for a long time been well known and analysed phenomena. Managers embarking on some restructuring project are usually given the advice to study thoroughly who is going to win and lose by the changes, because the winners will be their allies and the losers their enemies. Of this managers are only too well aware. Restructuring in Hungary also has its winners and losers. The situation is even more complicated, for the majority of people may consider themselves both losers and winners at the same time: they have gained and lost many things in the process of the transition. The question is, which aspect carries or will carry more weight in future in their opinion, and what are their expectations regarding this issue? It has to be taken into account that this is not necessarily an cbjective picture of the balance. The Jews of the Old Testament, after Moses had led them out of Egypt, soon forgot amidst their new hardships about the lash and slavery and the only thing they remembered was that in those times they had always had something to eat and had found some shelter. They finally did reach the Promised Land, but will the peoples of Eastern Europe reach it as well?

With slight cynicism we could say that it is easy for those peoples, who have got nothing to lose, who live in such abject misery, and where dictatorship is so cruel and oppression so unbearable, that any change would bring about something better; in certain cases it may even be worth dying for the changes. In Hungary this has not been the case at all: the aforementioned 'average citizen' did have a lot to lose. During the period 1950-95 the majority of people could feel almost every year that 'it has become somewhat better again', and many of them obviously hoped that this trend would continue after the bloodless revolution. They thought they would keep what they had already got and something extra would take place: free enterprise, the convertibility of the Forint, opening up to the world, and making a lot more money. And there are indeed people to whom all this happened, but others are disappointed, as they have not won anything but have endured losses because of the changes.

We should ask the question anew: what were the gains for the average citizen up to the transition? Let us take a look at the historical facts.

BETWEEN 1957 AND NOWADAYS

Let us go back to 1957, the year after the revolution of 1956. Because of the fighting, the damage to buildings and means of production amounted to several billion Forints and the cut-back in production caused by strikes

A Political and Social Survey of Hungary 5

resulted in even heavier losses. Besides financial damage there was a tremendous mental one. After the suppression of the revolution a real migration started, and nearly 200 000 people crossed the borders for ever including a vast number of intellectuals, skilled workers and students; on the whole it was the most mobile individuals able to speak foreign languages who left the country.

Aid and loans coming from the former socialist bloc and the West significantly contributed to a a quicker recovery of the Hungarian economy than expected. Salaries were raised because of political reasons and the spending power surplus, created this way, was satisfied by imported goods. This decision, in accordance with the political trend evolving by 1957, was initiated by Janos Kadar. The new leadership put an end to the policy of the former establishment under Rakosi: forced development was subordinated to the slow but perceptible raising of the population's living standards. This was aimed at creating a more relaxed atmosphere in domestic policy and the image of a 'human government' after the bloody revenge for the uprising.

There is no doubt that living standards began to rise. The party leadership planned exactly how many washing machines, refrigerators, motorbikes and cars the population should be supplied with. From 1960 on a major industrial programme aimed at the production of consumer goods and appliances was started. In contrast to the policy of the Rakosi era which was opposed to private property, family houses, furnishings, appliances and the so called 'house farms' were accepted as personal property by the 'Civil Law' which came into force in 1959. The 'house farms' were small farms run by a single family, which developed in parallel to prevailing agricultural co-ops created by forced collectivization. One of the system's symbols was television: regular broadcasts started in 1958, and by 1973 the number of subscribers amounted to 2.2 million.

Cultural life became normal as well. Magazines were published again and, from the end of the 1950s, within the limits set by the official policy, the formerly imprisoned or silenced writers were allowed to publish again. Going to the cinema flourished as never before: every year 120-140 million attendances were recorded in the more than 2500 cinemas of the country. The state film studio produced a range of good quality romantic, adventure and comic feature films which can still be enjoyed today. Theatres, once free of the direct interference of authoritarian power, provided outstanding performances, which consistently played to full houses. Churches- although under strictly controlled conditions- were allowed to enlarge their social, charity and cultural activities.


The 'jetsetting' symbol of the era was the nylon shirt. Self-service food stores were opened up: supply was poor, the quality of goods was generally low, but there was no problem with basic supply. Prefab settlements sprang up like mushrooms; the flats were very small and poorly equipped, but many of the people moving in had come from the slums. Within the framework of the 'housing development plan' which came into force in 1961, more than 200 000 new municipal flats were built during the 1960s. This Jed to the immense growth of budgetary expenditure for housing and thus the building of co-op and private apartments began to play a more and more important part from the middle of the 1960s, but such building work was quite highly subsidized by the state as well. Between 1955 and 1962 more than 900 settlements were connected to the electricity network, increasing the total number of electrified settlements to 3251.

In 1961 the Berlin Wall was erected, which was welcomed by the official press in Hungary as a positive step. At about the same time at the conference of the Hungarian Workers' Party in 1962 a new slogan appeared: 'Who is not against us is with us', which was an indication that the party wanted to discontinue the traditional dictatorship of the proletariat. A resolution was passed on the necessity to restore 'socialist legality'. In 1962 the UN took the 'Hungarian issue' off the General Assembly's agenda and a few months later the Hungarian government announced a large-scale amnesty, in the course of which nearly everybody sentenced to prison because of 1956 was set free.

During the following years a number of events signililed that Hungary's economic, cultural and political relationships were getting closer to the West. Literature and film of the period made a substantial contribution to ideological 'detente', to facing the past and its tragic events. This was the time when the films Outlaws, dealing with political reprisals (director: Miklos Jancs6), Cold Days, remembering war crimes (director: Andras Kovacs) and Love, analysing the years in prison and release (director: Karoly Makk) were produced; vast crowds went to see these films.

Besides working, the population paid ever-growing attention to leisure. For example, development of the Lake Balaton area was started, where mainly company and trade union resorts were built. Domestic tourism and that to the neighbouring socialist countries expanded. A typical problem of the period was the underdeveloped state of the infrastructure (road and telephone network, sewerage system and so on). Central planning and real needs were virtually impossible to reconcile. The concept of traffic development, for instance, stipulated the closing down of railways with little traffic and the diversion of that traffic to the roads, but the necessary road network developed only very slowly, because of the lack of financial


means. In investment plans, generally, production investments (mainly in heavy industry) had priority.

Meanwhile publicly optimistic declarations were made at the international conference of the communist parties about the prospects of the socialist economy and society. This was characteristic of the domestic ideology as well. The achievements were at first sight fabulous indeed: in 1962 the growth of Hungary's industrial production was 4}-times of that in 1939, and there was an acceleration in the development of the production of instruments and in telecommunications engineering as well. But in the early 1960s structural problems in the economy appeared: investments had to be cut back, there was stagnation in agriculture, imports grew far beyond the planned level, and heavy industry achieved an unnatural dominance. Expenditure rose steadily; thus, for instance, the energy needs of the country grew between 1958 and 1970 by 83 per cent instead of the 50 per cent planned. This need was covered mainly by imports.

From the middle of the 1960s there was a peculiar attack from the 'left' on growing living standards: a centrally launched discussion about 'fridgesocialism' began: that is about the harm which was being done by the continuous growth of private property to the unselfish 'socialist nature of man' focused on the collective and work. At the same time, because of achievements in supply, Hungary became for the citizens of the neighbouring countries, and gradually even for Western tourists, a pleasant and attractive place to visit. Visas were abolished among the COMECON countries. Driving cars became a mass phenomenon: while in 1960 there were only 18 500 private cars in the country, their number increased in 1965 to 82 640 and by 1970 already more than 200 000 cars were being driven on the roads of Hungary. The majority of cars were of course low quality COMECON products. There were sometimes problems in basic supply: now and again bread, meat or beer disappeared from the shops.

In 1965 preparations for the reform of economic management had been started, and in 1968 the New Economic Mechanism was introduced. It exerted an utterly positive influence on the economy; the population's income grew and by the turn of the decade there was a significant improvement in the foreign trade balance of the country.

Basic issues of the reform regarding employment were regulated by law as well: companies and employees signed pay agreements, the employees' rights were enlarged, and in order to represent their interests more effectively, the area of competence of trade unions was extended. Social rights at the place of work were legally guaranteed. Maternity benefits were introduced: this measure in population policy was unique in Europe and was accompanied by a large-scale propaganda campaign. At the end of


the 1960s two-thirds of the mothers having babies took advantage of these benefits.

There were changes of great importance in agriculture too: from 1967 co-operatives became proprietors of arable land and their direct central control was abolished. House farms, private utilization of co-operativeowned plots and family farming started to play a more and more dominant role. In 1967, around 37 per cent of the income of co-op members' households came from the house farms. Food supply in Hungary was really good when compared to the rest of the socialist bloc and this (among other things) was due to these measures.

The rise of the students movements in Western Europe at the end of the 1960s had an impact on the behaviour of Hungarian students as well. The political authorities saw the Communist Youth Association as representing the interests of students and tried to hinder - sometimes by means of the police - the expression of other ideas. Also, students became members of university and faculty boards. The year 1968 was a 'hot year' because of events in Prague: the strongly developing freedom movement in Czechoslovakia was brought to an end by the military invasion of five socialist countries, with Hungary among them. The events were commented on from totally different angles by the official propaganda and by Radio Free Europe, which had many listeners in Hungary at that time. Nearly everyone was informed of the events by various news sources, but people were undoubtedly much keener on watching the annual Pop Festival which was being broadcast in those days. Yet the political thunderstorm left its traces: on 15 March 1972, on the anniversary of the Hungarian revolution and struggle for freedom in 1848, several thousand students demonstrated for freedom and the national interest. From then on the March celebrations became a 'hot period' every Spring, but until1986 there was no repetition of the big demonstrations against which the police had taken action in 1972.

In intellectual and cultural life gradual, but perceptible, steps were made towards opening up to the world.· Television was immensely popular, tourist groups set out to the West (at least as much in order to purchase certain products as for cultural reasons and relaxation), there was beat music, and books and theatre tickets were extraordinarily cheap. Hungarian film makers were dealing with more 'delicate' topics: quite a number of really outstanding films had their 'double meanings': practically everybody was aware of how things one had seen could be projected on to the dramatic events of the recent past or on to the actual political problems of the present. As the number of publishing houses, magazines and cultural institutions was steadily growing, some kind of competition


set in and it became more and more difficult to impose control from the centre.

Meanwhile, in the early 1970s the development of a full-scale social security system had been brought to its conclusion: crafts- and tradesmen were the last ones to be included- on a compulsory basis- in social security. At the beginning of the 1970s the Hungarian constitution formally guaranteed the basic rights of citizens for everyone except the freedom of speech, the press and of association. Full employment was a constitutional right. Although personal property was accepted by the constitution, it declared on the other hand that private initiative must not offend 'collective interests' and consistently stressed the one-party system and the leading role of the Hungarian Socialist Workers Party (HSWP).

The country started to approach a certain kind of contradictory middleclass welfare which had its bounds, but constantly grew little by little. This situation was encapsulated by a political joke of the time: 'We are the happiest barracks in the camp.' Because goods were available, and it was possible to travel, people wanted to make more money; the number of second and part-time jobs increased heavily. Appealing to the principle of equality, these were centrally restricted, which caused political discontent (but this actually did not go beyond private criticism). At the beginning of the 1970s leftists were lashing the 'obvious middle-class trend' and condemning 'greed', speculation and people's wish to make a lot of money.

Following the reform liberalizing the management of the economy, companies' discretionary powers and the responsibility of their decision makers increased. Consequently intellectual work and the activities of managers were more appreciated than before. The gap between managers' salaries and workers' wages grew, causing discontent in the largest factories (the flagships of the time). This strengthened the position of the reforms' opponents, which led in 1972 to the removal of the 50 biggest industrial companies from the New Economic Mechanism and to a central raising of wages. At the same time the subsidies for consumer goods started to be reduced so these goods began to rise in price.

The domestic opponents of the reform were strengthened by the Brezhnev Doctrine. In 1972 he paid an unexpected visit to Hungary and he is very likely to have had a fierce argument with Janos Kadar. The fact is that in 197 4 the Hungarian reform was forced to retrench, and a tug-ofwar began between reformists and dogmatists which lasted right up to the end of the 1980s. The public knew only very little of the political events behind the scenes, but in the course of everyday life it could perceive the political ups and downs of this tug-of-war. The population could mainly conclude from personal changes in government which wing of the party


was just getting the upper hand, either the orthodox or the reform communists, who were pleading for 'socialism with a human face'. The party in power tried to safeguard 'ideological purity'. This was expressed from time to time in the expulsion of some party members; writers and social scientists were silenced and 'banished' for longer or shorter periods, but politics were significantly more liberal than, say, in the Soviet Union or in East Germany at that time.

In 1972 a five-day working week was generally introduced, at first every other (later, every) week. The increase in leisure time, in parallel with growing salaries, created a greater need for weekend houses and gardens. On Friday nights endless caravans of Trabants and Ladas set out from the cities. Enrichment was restricted by 'ideological bounds': legal regulation prohibited families to have more than one property for everyday occupation and holidays. From 1975 even the size of buildings was limited.

In 1973 the world market was shocked by the first oil crisis. The political leadership in Hungary considered the changes in the world economy to be temporary phenomena and assumed that the prices of Hungarian exports would follow those of oil. They thought that the price explosion would not affect the internal price system of COMECON and still continued to force through economic growth. Spendthrift and optimistic planning went on, whereas strict economic measures were taken in the Western countries. Actually it was only after the second oil price shock in 1979, that it became obvious that the Hungarian economy was severely damaged by rising prices and the lack of an appropriate response.

Yet the growth of living standards did not stop. In 1975 the children's resort at Lake Balaton, the first Hungarian motorway and a new subway line in Budapest were opened, and multiple-function cultural palaces were built one after another in the cities of the country. Bread supply problems had already been solved by the end of the 1960s and, due to the poultryand pig-breeding programme of the 1970s, there was no longer any drop in the meat supply. Following the Western pattern the co-op chain of Skala department stores was built. During the 1970s more than 310 000 new municipal apartments were built, almost exclusively in the form of prefab settlements, and the building of private flats was subsidized. Hungarian villages became more and more city-like, yet there were significant differences in the level of development between the different areas.

In the second half of the 1970s the Hungarian economy proved absolutely incapable of reacting appropriately to world market changes and it turned out that their impact could not be stopped at the Western


borders of the country. The state was forced to raise prices continually, to restrict imports and to obtain more credits. There was a setback in the increase in nominal salaries and the country got deeper and deeper in debt (see Table 1.1). First the conditions for obtaining loans were advantageous indeed because of low interest rates, but by the end of the decade they rose enormously and thus Hungary's debt burden became dramatically heavier.

In 1980-81 a payment crisis occurred in Hungary: as one of the initiators of economic policy at that time put it in a later interview, Hungary got into the situation of financial clinical death. The population perceived this mainly through the fact that a lot of imported goods disappeared all of a sudden from the shops. There was for instance a longer lasting shortage of washing-powder. The official ideology tried to explain the problems by external factors - above all by the deterioration of the exchange relationship in foreign trade - and it was expecting some kind of change in that respect. In 1980 the Hungarian Workers Party was forced to declare that economic growth had to be be slowed down and the planned figures for investments and consumption were to be lowered. In 1981 Hungary applied for membership of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). After Hungary had been granted membership, it embarked on a policy of fulfilling the IMF's conditions in economic policy: this resulted in a largescale increase in prices and devaluations of the currency which severely affected the population.

Year

1975 1977 1978 1984 1985 1987 1989 1990 1991 1992 1993 1994

Table 1.1 Hungary's net debts (in US$ billions)

Debts

2000 3 580 6 141 6 549 8 046

13 683 14 900 15 938 14 554 13 277 14 927 18 900


The reason for the lack of dynamism in the economy was that there were no small and medium enterprises: problems occurred most harshly in the retail trade and services. The economic administration first allowed the running of stores and restaurants on the basis of contracts, then it permitted the setting up of economic units and work teams within companies. These embryonic enterprises were created by the employees of the companies, whereby they earned extra money for extra work. It was a particular socialist form of 'intrapreneurship', offering very low risk and limited opportunities (see also Chapter 3 on the official recognition of secondary activities). Yet these 'semi-ventures' were the seeds of what became true private ventures at the end of the 1980s and the beginning of the 1990s. The new structural forms sprang up like mushrooms: partly because they helped to tackle constant labour shortages and partly because they meant an extra income source for their members. Quite a number of today's successful domestic enterprises started their activities in this way. Private initiatives and the growing number of real and quasi enterprises were accompanied by heavy disputes in the early 1980s.

In 1981 a state of emergency was declared in Poland. Official Hungarian opinion agreed on this step, but at the same time sympathy for the Polish people grew among Hungarians. One of the consequences of the crisis in Poland was that so-called 'Polish markets' appeared in Hungary: crowds of people arrived in Hungary selling cheap products at dumping prices mostly without any official permit or document. These products were of an extremely low quality, but their prices were much lower than those of similar Hungarian or Western goods. Though this kind of trading was illegal, the Hungarian government turned in most of the cases a blind eye to it, for more and more people were getting into a difficult financial situation because of rising prices.

From the middle of the 1980s the landscape of internal affairs became increasingly colourful. The Soviet Union was entering into crisis and clearly turned out to be unable to guarantee the proper economic development of the area. Within the party in power a new wing appeared: the growing group of reform socialists. In the mind of its members Hungary had sooner or later to be integrated into the world economy and world politics. Their goal in internal politics was the gradual introduction of social democratic principles and parliamentary democracy. They wished to change the party in power into a people's party able to achieve good results at free elections as well. In foreign affairs they mainly tried to contact Western European social democrats. Around the same time, radical opposition groups gained strength and sociologists, economists and other intellectuals joined them in growing numbers. By that time the facets of the legal,


semi-legal and illegal political scenery ranged from the 'orthodox' workers' opposition within the party to the radical opposition outside it. The borderline between prohibited and permitted political ideas became more and more blurred: thoughts not allowed to be published in newspapers or studies could clearly be expressed by humorists on television. Official silence about taboo topics in foreign affairs was sometimes broken too, and thus more and more people were dealing with the problems of the Hungarian diaspora. Environmental movements grew stronger; almost from the very beginning their activity had political connotations as well, as they were in striking contrast to the technocratic lobbies and the monolithic decision-making system of economic policy. In 1985 the electoral system was still a single party one, but in the constituencies several candidates could be nominated and consequently a number of local managers and popular intellectuals were elected into Parliament. Some liveliness started to cause ripples in the many decades of calm boredom in that institution.

Meanwhile the (till today) one and only nuclear power station in the country was erected, the first Commodore personal computers (PCs) appeared, albeit much more expensive than in the West, and the software market began to develop. At the same time symptoms of crisis increased too: in the winter of 1985 partial restrictions in energy supply had to be made, the broadcasting time of television was cut back and a fuel shortage occurred. Because of continuing low prices and lack of general interest, neither factories nor households could be convinced of the need for economy.

On 15 March 1986, opponents of the regime started a demonstration in central Budapest, against which the police took action. The already poor image of the Soviet Union deteriorated further after the nuclear catastrophe at Chernobyl. Writers supporting official cultural policy were voted off the board of the Hungarian Writers' Association. Reform forces gained strength from Mikhail Gorbachev's visit to Hungary: the terms glasnost and perestroika became popular in Hungary too. The Soros Foundation started its activities and granted considerable amounts of money to Hungarian science, education and culture, and due to its support many intellectuals got the chance of longer study trips to the West.

Reform measures succeeded one another. In 1986 banking was restructured as a result of which trade banks appeared. In 1987 the income tax system and Value Added Tax (VAT) were introduced. The Stock. Exchange was set up and the domestic capital market grew busier.

In 1987 Janos Kadar resigned after 32 years in power from the position of Secretary-General, and the much younger Karoly Grosz took over. Karoly Grosz, who died in 1996, was a peculiar figure of domestic politi-


cal transition: his role and personality will probably be much discussed. Kadar is said to have dismissed him from central leadership in the 1970s, because of his contacts with the workers' opposition. Yet, after getting into the position of Secretary-General, he embarked on numerous reform measures - or at least he did not hinder them - and he brought a new style into public policy: in contrast to Kadar's seclusion he often gave interviews on television and, in the press, he was ready for dispute and discussion. This was already the period when dailies were no longer absolutely uniform, domestic reports became more exciting than the newsreels of Radio Free Europe, and the public could listen more often to live broadcasts of interesting and fierce discussions. In 1988 the young reform socialist, Miklos Nemeth, became prime minister under Grosz. Instead of the 'old staff' unable to cope with the changes, young reformists became predominant in the top administration of the party. One of the last 'hard line' measures was the expulsion of a few popular intellectuals from the party, which caused considerable opposition among party members. In 1989 Parliament passed the law on association and soon various parties were founded and obtained legal status.

From 1987 on Hungarian citizens could have passports valid for the whole world. Many people used this opportunity for large-scale purchases in the West: taking advantage of currency differences, they bought an immense quantity of refrigerators, audio systems, computers, second-hand cars, and so on. In May 1989 the dismantling of barbed wire at illegal border crossings on the Austro-Hungarian border was started: vast crowds of East German citizens staying in Hungary seized their chance and left for West Germany.

The peaceful transition in 1989 and 1990 was managed by a government composed of pragmatists and reform socialists headed by Nemeth. One of the most important steps in restructuring the economy was the passing of the Company Law, which made possible the large-scale implementation and dissemination of Western property and enterprise forms. Due to structural changes, companies going bankrupt, a growing interest in profit and other factors, unemployment began to increase and unemployment benefit had to be introduced. Regulations hindering the activity of the churches were relaxed and preparations for the restitution of former church property were started. Imre Nagy, the executed leader of the revolution in 1956, and his colleagues were reburied with great ceremony, attracting vast crowds. In 1989, out of the old state party the Hungarian Socialist Party was founded, regarding itself linked to western socialist parties. The government under Nemeth aimed cautiously but decisively at moving Hungary in the direction of European integration. Large-scale pri-


vatization was started in the Summer of 1990. In March of the same year the withdrawal of Soviet troops began.

The participation rate in the first democratic elections in March 1990 was lower than expected: 65.77 per cent of the population went to the polls. Six parties were returned to Parliament: the Hungarian Democratic Forum (HDF: 24.7 per cent), the Independent Party of Small Farmers (IPSF: 11.7 per cent), the Christian Democratic People's Party (CDPP: 6.5 per cent), the Association of Free Democrats (21.4 per cent), the Hungarian Socialist Party ( 10.9 per cent) and the Association of Young Democrats (9 per cent). Thus the so called national-Christian forces won a majority in Parliament. In May 1990 the new government, headed by J6zsef Antall, was formed out of the HDF, the IPSF and the CDPP; its programme contained the primary aim of decreasing inflation and halting the increase in foreign debt.

One of the most disputed measures of the new Parliament was the compensation law. The majority agreed that people had in some way to be compensated for the damage caused by secularization and collectivization, but there was considerable disagreement on the methods. Anyway, compensation began to be awarded in 1990, its success and economic impacts will certainly be discussed for a long time.

In the early 1990s there was a massive increase in unemployment (see Table 1.2). Because of the deficiencies in the statistical system, it is hard to get an exact picture of the issue.

In September 1990 a new government programme was announced: its main goal was to create a social market economy on the basis of the preeminence of private property. This was the time when the first democratic municipal elections were held, putting an end to the former council

Table !.2 Unemployment rate in Hungary

Year Rate(%)

1987 0.1 1988 0.2 1989 0.3 1990 0.4 1991 1.9 1992 I~

1993 13.2 1994 11.4


system. There was a low turn-out at the elections but the independent candidates' success was striking, which according to analysts was a hint that the population was not in fact satisfied with the new parties and institutions.

The new government was obliged to take a number of unpopular measures. Among the most urgent ones was the adjustment of energy prices to those of the world market. In October 1990 fuel prices were raised on average by 65 per cent. Taxi drivers and private carriers protesting against the increase brought traffic to a standstill for several days in most of the country. Between the population and politocracy there was a fierce disagreement over the blockade, which was eventually ended by compromise. Another measure affecting the population badly was the continuous and large-scale devaluation of the Forint (see Table 1.3). The 5000 Forint note was issued in June 1991, showing clearly the increase in inflation.

In the early 1990s transition was signalled by a number of external characteristics too: the country adopted a new coat of arms, many streets were renamed, new coins were minted, a number of institutions received new names, memorials were dismantled, statues were replaced and Miklos Horthy, the governor of the country between the two world wars, whose name stood for a whole epoch, was reburied. Changes in cultural life and education could be enumerated endlessly. Public life became colourful, countless new movements and associations came into existence, and new periodicals and newspapers were published in steeply increasing numbers. A real political war over television and radio was declared which is still raging today. Today there is a widening political scenery ranging from the extreme right to the extreme left.

Year

1980 1985 1990 1991 1992 1993 1994

Table 1.3 The official changes in the Forint exchange rate (based on a 'basket' of hard currencies)

Exchange rtite ( 1979 = 100)

90.4 117.0 200.3 242.0 266.2 306.1 375.5


In 1991 the disintegration of Hungary's southern neighbour Yugoslavia occurred, and in December the Soviet Union officially ceased to exist. In 1992 the history of the Czechoslovak Federal Republic came to an end.

In December 1993 the prime minister of the country, J6zsef Antall, died. His successor was a pragmatist, Peter Boros.

In 1994 elections were held again in Hungary and the Hungarian Socialist Party gained an absolute majority of 54.14 per cent, yet it formed a coalition with the Association of Free Democrats who had won 17.87 per cent of the votes. The former ruling parties were drawn back into opposition. At the municipal elections the independent candidates had once again a spectacular success.

A BRIEF SUMMARY OF PEOPLE'S GENERAL CONDITIONS

Let us come back again to the question asked at the beginning of this chapter: what are the actual gains and losses to Hungary's population because of the transition? It is difficult to draw up a kind of balance sheet without having a proper historical perspective and information, yet we will make an attempt to do so, pointing out right away that nearly all the statements below can be questioned and should indeed be discussed. The method we have chosen is a very simple one: we consider a number of factors which certainly affect people's general conditions and consequently their political opinions. We make no effort to find out whether the enumerated phenomena are the outcome of transition, the brutal logic of economics or possibly of some good or bad political decisions. We do not analyse to what extent these phenomena are linked to some kind of peculiarly Hungarian conditions or to world trends. These versions are probably intertwined in the minds of Hungarians as well.

Birth Rate

Fewer and fewer children are being born in Hungary, and the population is decreasing. This is due to numerous reasons, including undoubtedly the dramatic increase in the cost of bringing up children, the diminishing value of still existing subsidies, the closing down of many institutions for children (such as nurseries and kindergardens) and the fact that families with higher numbers of children can expect a worse standard of living.


School

The quality of Hungarian education is outstanding in global terms. However, recent analysis shows a slight but perceptible decline. Teachers' salaries are extremely low, and fall far behind inflation. This is also the case with the budgets of individual schools. The formerly free education system no longer exists in practice: textbooks and dormitories have become much more expensive, and far more money is needed to make ends meet; in higher education tuition fees have been introduced. It is to be feared that higher education is going to become the privilege of well-to-do people and social mobility will be frozen. On the other hand students have opportunities they have never had before: they can learn and study abroad, participate in exchange programmes and often are in a position to use the most advanced technical devices while learning. As they are well aware of the difficulties in finding jobs, they focus mainly on attaining pragmatic knowledge: the majority speaks foreign languages and knows the way around in this new kind of world, but these people devote themselves less to literature, history and to extending their allround education.

Workplace

There is considerable unemployment, although the rates differ by area and by profession. Unskilled workers have the worst possibilities, but graduates too have great difficulties in finding jobs. Cut-backs in staff and dismissals happen on a regular basis. Most companies do not have the money for retraining and assisting their employees, and the financial situation of the state is not all that promising. In several regions of the country an employment crisis has set in. People who have a job work generally a lot harder than before, and in order to keep their jobs many of them are forced to participate in frequent and demanding training. The net value of average salaries shows a clearly declining tendency. The income scale has widened as never before in the last decades: vast numbers of people are living on 20-30 000 Fts while others receive salaries of 100 000 Fts per month from their companies. An empirical study has even come to the conclusion that the annual incomes of leading banks' top managers are between 20 and 60 million Fts. And this is the case in a country where not long ago there was not much of a difference between the salary of a head of a department and a cleaner.


Property

Property has practically no bounds. The majority's opinion of privatization is probably that the luckiest are those who are closest to the flesh-pots. We cannot speak of 'people's capitalism', or of masses of people possessing shares and bonds. Though crowds sometimes queue for the shares of some companies, their illusions of high dividends soon fade.

Enterprises

There are no legal or political constraints for starting individual or joint types of enterprise. The requisite institutional framework is becoming more and more established. Enterpreneurship is determined by the availability of capital, rate of taxation and market conditions.

Money

Its value is diminishing, and the inflation rate is high. If someone has money, there are countless ways to invest it. For the financially less educated part of the population it is very difficult to choose between the various kinds of bonds and investments: people often feel cheated and sometimes they have good reason for thinking it. The repayment of bank deposits was formerly guaranteed by the state; at present it applies only to a certain proportion of the money invested. Everybody can now hold foreign currency at home and considerable measures have been taken to achieve full convertibility.

Poverty

It is quite hard to draw a reliable picture of the situation, but according to some studies substantial sections of the population are living on the fringes of poverty. There are huge numbers of homeless and bagmen looking for food in waste bins: they are to be seen everywhere. Poverty-stricken refugees arriving from the neighbouring countries, and 'foreign labourers' working hard for a single plate of soup, endure a terrible fate. On one of Budapest's main squares a real slave trade is going on.

Health Care

Apart from some exceptions the basic health care system is functioning. Patients entering state hospitals and clinics see the signs of poverty and


deterioration. For better health care considerable money has to be paid. The salary of staff in the state sector is ridiculously low, but on the other hand there are expensive private clinics as well. Many doctors have or want to start a private business: due to the increasing competition, the quality of paid services has improved and sometimes prices even go down.

Old Age

The death rate in Hungary is one of the highest in Europe and the situation is even getting worse in the short term. Pensions are unable to keep pace with inflation, and prices of medicines keep rising enormously, so retired people are facing gradual impoverishment. According to an opinion poll conducted in the spring of 1996, impoverishment is the thing people fear most after war.

Housing

In Hungary there have been serious housing problems for decades. During the decades before the transition one tried to tackle the problem by building prefab settlements in huge numbers which even today characterize the cities' image. Prefab buildings were not erected to last for ever; thus today's settlements will be tomorrow's slums and this is already partly the case. Currently virtually no apartments are being built by the state, the number of people entitled to state subsidies for building a home has decreased, the value of subsidies has diminished because of inflation and the number of apartments built annually has dropped. Private houses show clearly the differing financial situation of their owners: there is a vast range from many-storey palaces to small flats of 40-50 square metres. Obtaining loans is hindered by high interest rates and building societies of the Western kind are only now about to be launched.

Shopping

In the course of the decades before the transition shopping exemplified numerous negative experiences: some products were simply never available, others disappeared from the shelves from time to time, and in order to get special goods, people were put on long waiting lists (for instance, one had to wait five years for a Lada). Shop assistants did not even greet the customers, but on the other hand basic products were cheap. Presently the situation is just the other way round: supply can compete with that in Western Europe, practically everything is available, one can buy a new


car within a few hours or bread even at night, and traders' behaviour has gradually changed to reflect the new conditions; but prices are high. Wellto-do people can enjoy the advantages of the market which offers substantial supply; those without money are somewhat frustrated by the fancy shop windows and the advertising signs glistening and glittering down on them from everywhere. On the 'Polish' and 'Chinese' and other semi-legal or illegal street markets there is a tremendous amount of smuggled goods, the majority of which are cheap fakes: they are of poor quality and offer no warranty, but at least people can afford them and that is why they are popular.

Travelling

There are practically no restrictions on travelling; everyone may carry a world passport in his or her pocket. Demands range on a wide scale: the rich go on safari in Kenya, middle-class people spend their holidays in cheaper hotels in Greece or on Lake Balaton, the poor do not travel anywhere. The time of cheap holidays for the masses organized by the trade unions is over.

Culture

The decades of culture at a low price have come to an end; books and records have become luxury goods for the masses. Censorship no longer exists, so there is an immense number of publishing houses and a great many works have been published that were not allowed to appear before. As publishing is no longer subsidized, publishers try to make money on crime stories, thrillers, romantic novels, colourful popular science albums for the young: such books virtually flood the book shops, yet offer valuable publications as well. The quality of Hungarian film production does not even come near to that of the 1960s or 1970s. In. theatres the number of comedies and musicals and of vacant seats is increasing heavily. The bankruptcy of a theatre was for decades impossible; today it is certainly possible. Due to satellite broadcasts and cable television, people can watch dozens of domestic and foreign channels. There are numerous soap-operas and commercials, but there are no television plays to be seen anymore, especially those dealing with important social issues; they are generally replaced by classical films. There is an abundance of newspapers and magazines, some of which represent significant cultural values. The quest for sponsors, in order to publish books, produce films, make records, or perform plays and concerts on stage, has become an everyday issue.


The Matter of National Minorities

As a consequence of the Treaty of Trianon after the First World War Hungary's territory became considerably smaller. National minorities are to be found in only small numbers within the present day borders of Hungary. The integration and future of the Gypsy community (probably amounting to several hundred thousand individuals with substantial extremes of lifestyle and financial situation) represents the most serious problem. Hungarian communities are living in vast numbers on the other side of the borders and, because of the question of nationalities, a constant tension has developed in some of our relationships in foreign policy.

Religion

There is now full freedom in this respect; everyone can freely practise his or her religion. From time to time there are controversies about religious instruction in schools, anti-Semitism, the legitimacy of small churches and sects, allocation of subsidies by the state and about their positive or negative impact on society. The major churches regained a significant part of their properties.

Drugs

The drug trade and drug use already existed during socialism, but not on a large scale and there were no official comments on the problem. Hungary is presently an important transit station for the drug trade from the east to the west. The use of drugs and crimes linked to it have become a serious social problem.

Public Safety

This has deteriorated considerably in recent years. Crime statistics show a gloomy picture. Violent robbery, murder and organized crime have vastly increased. From time to time news appears of close connections between politicians and the ('domestic', 'Russian', 'Ukrainian', 'Serb' and so on) Mafia, but there have been no spectacular revelations so far. Though terrorism exists, its extent falls behind that of the West. There has always been prostitution, but in recent years it has become widespread, more conspicuous and semi-legal; a trade in girls is a developed branch of business now. Police salaries are extremely low, corruption happens regularly and thus there is an increasing distrust of the police. So-called intellectual


crime is also becoming widespread, as is fraud in connection with companies, financial manoeuvres and gambling too, taking 'Ltd' responsibility lightly.

Politics

Citizens, if they wish, can join or even found diverse political organizations by following certain basic norms. There is freedom of speech. Opinion research institutes regularly publish their poll results on the popularity of various parties and politicians. There is much contradiction in politics (the most dramatic one is that in certain situations even people with the best intentions are obliged to make highly unpopular decisions), and people can discover quite a few turncoats in public life which makes them mistrustful. If children are asked who their ideal hero is, they are not likely to name politicians. The entanglement of political power and big business is an obvious truth for even the simplest people. All Soviet troops stationed for decades in Hungary were up to the last man withdrawn from Hungary, so it is now a strange turn of fate that in 1995 American troops arrived in Hungary because of the events in former Yugoslavia. Considering Hungary's tremendous debts, the conditions set by the IMF, the role of foreign capital in privatization and the geopolitical situation, a widely discussed issue is to what extent Hungary can keep its independence, or whether it is independent at all.

Peace

Transition in Hungary has so far been taking place peacefully and without bloodshed and riots. It is not easy to forecast the future, yet we have to say that there are no signs that the situation will change, even though wars are raging rather close to the borders of Hungary.

2 The Old System

INTRODUCTION

In order to appreciate the problems and difficulties facing Hungarian companies in this period of so-called transition it is necessary to have an understanding of the former system of economic· management.

The arrangements agreed by the Great Powers for Europe after the Second World War placed Hungary in the Soviet sphere of influence. From 1945 onwards therefore the organization of the economy and of society in general was modelled closely on the ideological principles and practices of the Soviet Union.

An understanding of the evolution of the communist system in Hungary creates a backdrop which illuminates the break from the system and subsequent developments. As highlighted in the Introduction, the Hungarians have a distinctive set of national characteristics, both ethnically and culturally. Moreover, the Hungarians led the way in undermining communism. The events of 1956 were unparalleled in other countries under Soviet control in the early period of communism in Central and Eastern Europe. It was also the Hungarians who sounded the death-knell of the communist regimes when in 1989 they·opened their borders with Austria, permitting the exodus of East Germans and other East Europeans to the West. Once Hungary became an open door, even the hard-line members of the Soviet bloc succumbed.

Another significant dimension of focusing on particularly Hungarian aspects is that they illuminate the ability of the nation state to modify the general Soviet model and adapt it to local circumstances. In this respect, the general situation before 1945 is especially important as it represents a starting point for the application of the Soviet model. To give a comparison, the Soviet model in Hungary was introduced in a predominantly agricultural economy which differed substantially from, for example, an industrialized economy such as Czechoslovakia.

The main theme of this chapter is to examine the Soviet model of the economy and see how it was implemented in Hungary. In particular, the chapter focuses on issues of implementation and seeks to answer the question of whether the interaction of specific Hungarian conditions and internal pressures resulted in a distinctive Hungarian version of the Soviet model. In addition, an assessment is made of the effectiveness of the Hungarian system of economic management.

24

The Old System 25

THE SOVIET MODEL

Michael Barratt Brown ( 1984: 135) identified four non-market relationships as the main features of centrally planned economies on the Soviet model.

First, the plans of individual enterprises were co-ordinated and articulated through a central plan rather than through market mechanisms. Second, goals and priorities were established centrally and not by enterprises individually. Third, investment was planned centrally to achieve strategic aims rather than by individual enterprises seeking to maximize possibly short-term profit objectives. Finally, motivation to perform was derived from social criteria rather than from a desire to maximize individual wealth.

These criteria are further developed by Janos Kornai (1990) in his discussion of the overall coherence of the system. The economic component is only one part of the total system which also incorporates the political and social dimensions. This interrelationship and integration of economic, political and social dimensions created in the former command economies an all-embracing system to ensure that organizations and individuals had little choice but to adhere to the major decisions taken by the key political actors in the Communist Party. Party control of the institutions of society - both ideological and repressive (Althusser, 1970) -restricted scope for dissent and deviation. Overlapping of positions and roles was also aimed at ensuring that people and organizations carried out orders and limited decision-making powers to the means of achieving this.

The implementation of the Soviet model therefore implied not only the management of the economy but also party control of the legal and educational systems, of the police and armed forces, as well as a direct influence on the existence and conduct of all social organizations, including leisuretime associations (such as football and ornithologists' clubs)!

Kornai (1990) explains the coherence of the system by highlighting the main line of causality. The Communist Party's monopoly of political power in conjunction with the predominance of the official ideology influences the ways in which the state organizations operate. The dominant position of the state is buttressed both by the power of the party and by its control of economic organizations and resources. This results in a largely bureaucratic system of economic administration. The preponderance of bureaucratic means of economic administration has as a consequence the establishment of a planning mechanism which is driven by the party and state organizations and feels little need to be responsive to market signals or prices. Combined with this is a stifling


of initiative as orders are passed down the command chain. Achievement of orders and targets is regarded as paramount. Budget constraints are therefore soft (that is, plan achievement takes precedence at the enterprise level over the economics of its achievement). This is left to the central plan which balances total inputs and outputs. Individual enterprises, therefore, need not know whether they operate at a profit or a loss. Balancing of the plan, particularly the costs of inputs and the prices of outputs, is generally achieved by the application of subsidies as the prices of goods are determined primarily by sociopolitical rather than economic criteria.

The overall result of this is a system characterized by a push for growth, the contemporaneous appearance of overmanning and labour shortage and in general of other shortages as well as centrally managed relationships in foreign trade. The system also influenced personal attitudes, behavioural patterns and the culture of organizations. As the economy of shortage created a seller's market, products were very easy to sell and consequently quantity predominated over quality. Companies were product-oriented and not market-driven, with marketing being little more than physical distribution. The problem for companies too was purchasing and it became axiomatic to buy anything that could be bought, irrespective of price, and to maintain substantial reserves of raw materials and other inputs.

According to Kornai, however, the line of causality is not simply linear but 'each group of phenomena is influenced not only by the previous group of phenomena (i.e., merely the group one layer deeper), but by all the deeper factors, directly or indirectly' (Kornai, 1990:361). For example, overmanning results not solely because of soft budget constraints which permit enterprises to take on and hoard labour, but also because of bureaucratic co-ordination which makes labour a cheap resource compared to capital and because of the official ideology which guarantees full employment.

THE SOVIET MODEL IN HUNGARY

The implementation of the Soviet model in Hungary went through a number of distinct stages (Csap6, 1975; Peto, 1990).

The first stage, from 1945 to 1948, has been described as a transitional stage. It is the period in which Hungary had to try to come to terms with the devastation of the Second World War and become resigned to its position within the Soviet sphere of influence, in other words, it was the period

The Old System 27

in which the Hungarian Communist Party took over all the levers of power.

The second stage covers the years from 1948 to 1968 in which the 'classical' or 'directive' model of economic management was implemented. As we shall see, problems with implementation in the Hungarian setting quickly became manifest and some minor corrections were introduced from 1953. However, economic decisions had to play second fiddle to political concerns, especially after the massive popular uprising against communist rule in 1956. Further small reforms were undertaken from 1964, but by then there was a growing awareness of a need for radical change.

The third stage covers the years between 1968 and 1985, the period of the so-called 'guided market model' or New Economic Mechanism. In this period there was an attempt to implement the concept of market socialism, although there was already a certain retrenchment in the late 1960s and early 1970s, the reasons for which are complex and still being evaluated.

The way in which the transformation of agriculture was addressed will be the subject of a separate section.

1945-8

Hungary in 1945 was still a predominantly agrarian economy, with 50 per cent of the labour force employed in agriculture.

The common programme of 19441 professed a continuing commitment to a market economy, although this had been followed by a widespread land reform which had expanded substantially the number of families that owned land by redistributing land previously owned by large landowners.

However, from 1945 there was increasing evidence of a drive to limit the operations of the market and set up a system of direct economic management. This drive was pursued consistently by the Communist Party.

This political direction manifested itself in a number of measures. First, there was the nationalization of certain key activities, such as coal-mining, and of foreign trade. German-owned assets were taken over by the Soviet authorities and formed the basis for the establishment of Hungarian-Soviet mixed enterprises.

Second, as a consequence of the desperate economic situation and the need to continue managing the economy almost on a war basis, at the end of 1945 an enabling act was passed which gave the government powers to act by decree. Economic decision making passed into the hands of the Supreme Economic Council (SEC) which was controlled by the communists. The SEC actively sought to restrict the operation of the market and reduce the proportion of private property.


The economic situation in Hungary in 1945 was truly desperate. The money and capital markets had collapsed and payment was frequently in kind and by barter. In order to maintain economic activity material management bureaus were re-established by the government to collect and distribute raw and primary materials. The collapse of money markets enabled the SEC to play the key role in allocating credit to companies. As a result of the SEC's credit allocation policies the majority of private companies became insolvent and were nationalized (these came to be known as 'dry' nationalizations).

Further measures to constrain the market included the fixing of prices for agricultural products independently of world market prices in 1946 and the nationalization of the banking system in 1947. In 1948 companies employing more than 100 employees were also nationalized. This measure brought the majority of industrial activity under state control. Even though agriculture was still largely in private hands, it had been brought into the overall system of centrally controlled economic management.

The events of the period 1945-8 may appear as piecemeal attempts by the Communist Party to establish its control over the economy but they have to be understood as part of the Party's overall campaign to take over the state. At that time the measures were justified on pragmatic rather than ideological grounds: that is, the economic situation was intolerable and its problems could be solved only if the economy were run, so to speak, on a war-time basis of directives and regulations. However, the nationalizations clearly laid the foundations for an economy on the Soviet model. The communists' take-over of the state in 1948 provided the political means for achieving this overtly.

1948-68

In April 1949 Hungary formally adopted a Soviet-style constitution. The implementation of the Soviet 'directive' model of economic management also got under way.

Csap6 (1975:63) outlines six main principles for the implementation of the 'directive' model in Hungary. First, industrialization had to be promoted to create a modern economy. This was to be financed predominantly by imposing a wide divergence between the prices paid to agricultural producers and those paid by consumers. Second, agriculture was to be 'industrialized' through collectivization. A further aim was to eliminate private ownership in this sector. Third, education and training were to be expanded to meet the requirements of the aforementioned economic goals (although this was also promoted for ideological reasons).

The Old System 29

Fourth, self-sufficiency (autarky) of economic sectors was to be achieved, particularly with regard to steel and machinery. Fifth, the purpose of foreign trade was closely circumscribed and focused on facilitating the import of raw materials and equipment. Sixth, centralized planning was introduced. Plan targets for inputs and outputs were determined in detail by the government and were compulsory. Any proposed amendments to plans had to be approved by superordinate authorities such as the industrial ministries.

Enterprises, moreover, became formal parts of the state administration and enterprise managers were appointed according to political criteria (such as political reliability and party membership). The enterprise thus became integrated in a hierarchical state system of industrial ministries and functional bodies such as local government organizations.

Concomitant with these developments was a change in industrial organization and structure as specialization increased. This took a number of forms. Enterprises became predominantly production units, and activities such as sales and marketing were detached from the control of independent enterprises and co-ordinated centrally. Peto (1990:21) describes the dismemberment of an integrated shoe manufacturer:

A formerly vertically organized leather factory's import and export units were transferred to the leather industry's foreign trade company subordinated to the Ministry of Foreign Trade, its unit for domestic sales became part of the wholesaling leather or shoe enterprise subordinated to the Ministry of Home Trade, and the leather and shoe plants were placed under the supervision of the Ministry of Light Industry, whereas rubber works manufacturing sole [sic] were managed by the Ministry of Heavy Industry.

The impetus to pursue and achieve specialization on the part of enterprises came from a belief that (a) competition was wasteful and unnecessary and (b) economies of scale could be attained by creating units concentrating on limited ranges of activity on a national scale.

The chief tool of economic management, however, was the plan. Plans were basically of three kinds: long-term plans (up to 15 years), mf>diumterm plans (3-7 years) and short-term plans (less than 3 years). In general the medium-term plans laid down broad strategic directions while oneyear plans were concerned with annual targets and implementation. The central plan was broken down to particular ministry/sectoral levels and finally to specific targets for individual enterprises. The direction of plan implementation was largely unidirectional, with enterprises compelled to


fulfil or overfulfil plan targets. Any amendments to plan targets had to be approved by higher authorities.

A number of factors militated against the successful implementation of the centralized planning system. These included difficulties of data collection and processing as well as the sheer complexity of the interrelationships within the system (Kornai, 1990). The dual system of party and state controls also tended to create confusion rather than clarity in an already highly complex situation.

A further factor hampering the implementation of the 'directive' model was Hungary's relative smallness compared to the Soviet Union. Specialization and a striving for economies of scale resulted in the establishment of monopolistic enterprises. A small country such as Hungary was more dependent on foreign trade and could not strive to be selfsufficient in the same way that a large country like the Soviet Union could. With the foundation of COMECON in 1949 Hungary's foreign trade relations became increasingly oriented to its COMECON partners, in particular the Soviet Union. By 1960 over 60 per cent of Hungary's foreign trade was with its COMECON partners. Specialization within COMECON was encouraged and Hungary became a major manufacturer of buses (lkarus), pharmaceuticals and, at a later date, consumer electronics. This specialization was, however, dependent on the overall requirements of the members of COMECON.

The first Five Year Plan (1950-54) focused on the development of the raw material base and heavy industry. However, in spite of coercion its aims were not achieved. Nevertheless it had clearly set the direction in which the Hungarian economy was intended to evolve. The impact of the bureaucracy on economic management was also the subject of criticism and some attempts were made to lessen its influence.

As mentioned above in relation to specialization, the implementation of the Soviet model in Hungary was influenced by external as well as by internal factors. With Stalin's death in 1953 came the 'thaw' under the new Soviet leadership, in particular Nikita Khrushev.The change in direction of internal Soviet policy, especially the aim of improving the living conditions of consumers, was also felt in Hungary. This was reflected in a greater emphasis on the production of consumer goods, in contrast to the earlier concentration on raw materials and capital goods.

1956

The events of 1956 proved a significant watershed in Hungarian politics and had a direct impact on the implementation of the Soviet model. The

The Old System 31

regime was clearly shaken by the scale of popular dissatisfaction and Janos Kadar's rule was typified by a policy of 'doing the same better' rather than 'doing sl3mething different'. Kadar remained in power from November 1956 to the middle of 1988. His period in office was characterized by a stress on continuity, gradualism and a recognized need to fulfi I the population's material needs. Kadar's approach has been frequently described as 'goulash communism'. Society became increasingly depoliticized and in the 1960s a 'second' economy, based on non-state income, was permitted to expand and contribute to rising living standards.

These developments, however, failed to mask the weaknesses of the economic system. From the early 1950s there had been theoretical debates on improving the system, but especially after 1956 they had to be constrained within the framework of the existing political realities. Planning was made more flexible; the number of plan indicators was reduced; and bargaining and informal arrangements became widespread. This was represented by a process of mediation called plan bargaining whereby individual enterprises could influence the contents of the plan. Plan bargaining, however, tended to be an institutionalized game of enterprises asking for lower targets and more resources and higher authorities demanding higher targets and wanting to provide fewer resources. In general, however, plan goals were still not achieved.

In the period 1962-4 there was a further reorganization of enterprise structure which resulted in an increase in the number of enterprises employing over 1000 employees and a corresponding decline in the number of those employing less than 1000. The number of enterprises employing over 1000 employees rose from 197 in 1960 to 254 in 1965. There were 10 enterprises in 1965 with over 10 000 employees (Peto, 1990:40). This reorganization did not lead to the expected improvements in performance and did no more than create large organizations which developed priorities of their own, militating against the aims and purposes of the central plan.

AGRICULTURE

As mentioned at the beginning of this chapter, Hungary in 1945 had a predominantly agrarian economy. One of the principles of the 'directive' model had been to collectivize agriculture.

The Land Reform Act of 1945 had confiscated land from the large estates and distributed it among the peasants, creating a large number of


family smallholdings. Collectivization was announced in 1948 although implementation was not consistently enforced. In 1953 over 55 per cent of land was still owned by around 13 million smallholders who far outnumbered the 376 000 members of co-operative farms (Peto, 1990:19). Several mechanisms were used to ensure that smallholders complied with the state's objectives. However, throughout the 1950s the government was committed to ensuring an adequate supply of foodstuffs to the population rather than facing the risk of insufficient supply or even famine by forcing the pace of collectivization. Collectivization was still professed as a principle, but was for the time being not enforced.

At the end of 1958, however, the government changed tack and accelerated the collectivization process, largely by persuading smallholders that there was no future for private farms. As a concession to joining collectives smallholders were given transitional compensation for loss of income and permitted to retain a proportion of their land for private cultivation. Although the latter measure was intended to be only a temporary concession, it was never revoked and private household plots remained an integral part of the agricultural system. The collectivization programme moved so quickly that by spring 1961 collective farms accounted for 70 per cent of agricultural land (Peto, 1990:37).

The twin principles of collectivization and industrialization had transformed the structure of the Hungarian economy. Agricultural employment dropped from 50 per cent to 39 per cent of employment between 1945 and 1960. Industry, however, still employed only 28 per cent of the total workforce in 1960. By 1970 this position had been reversed, with industry employing 37 per cent and agriculture only 26 per cent of the total workforce (Peto, 1990:39). This shift from agricultural to industrial employment was facilitated by the demands of, and better prospects offered by, industrial enterprises and the exodus of farm workers from agriculture because of collectivization. Although contributing to the change in the structure of employment, collectivization did not provide the expected increase in agricultural productivity and output.

PLAN FAILURES AND THE 'GUIDED MARKET' MODEL

The Second Five Year Plan of 1956-60 and its reformulation for the period 1961-65 were disappointing and failed to ensure the achievement of the respective plans' goals. With the growing realization of these failures there was increasing discussion of the need to overhaul the system and to introduce new economic mechanisms.

The Old System 33

Debates about the inadequacies of the 'directive' model had begun as far back as the early 1950s, as soon as the difficulties of implementation had been revealed. Theoretical discussion had revolved around the issue of ensuring that macroeconomic objectives were achieved and how to do this. The 'directive' model assumed a direct and explicit linkage between the macro plan developed by the state, and the micro plans of individual enterprise. This process had manifestly not worked.

It was argued that the linkage between macro plan and micro plans needed to be mediated through a range of economic mechanisms (such as economic regulatory instruments). Micro plans were to be implemented within the context of a market which was regulated by economic mechanisms so as to ensure compliance with the general aims of the macro plan. In contrast to the 'directive' model, this approach was described as a 'guided market' model (Csap6, 1975).

The debate about economic models was subject to both economic and political considerations, relating to the official ideology, the political situation in Hungary and practice throughout COMECON. Many Hungarian communists objected to the concept of the market, even if guided by the state and the Communist Party. However, from 1965 there was increasing mention of the new economic mechanisms.

How did the 'guided market' model differ from the 'directive' model? First, the macro plan ceased to be compulsory for individual enterprises which were no longer subject to mandatory targets. Targets became increasingly flexible and alternative plans were also developed. 'The underlying principle of the reform was a combination of planned economy with the advantages of the market' (Peto, 1990:45). On the whole this was viewed by the government as basically a technocratic response to the failures of the 'directive' approach rather than as the replacement of the Soviet model.

The substitution of indirect economic mechanisms for plan instructions was a distinctive feature of the Hungarian system of economic management and was not imitated to any substantial degree in any other of the COMECON countries. The so-called reforms, however, did not change the fundamental nature of the system but redistributed power from the central state organizations and the ministries to the bodies responsible for implementing the new economic mechanisms (for example, the Central Bank).

Enterprise autonomy, moreover, while enlarged in theory, remained largely circumscribed, especially for the large state enterprises; for example, enterprises had only limited discretion to amend wage levels (and certainly no discretion to reduce wages). Although various categories


of prices were introduced (administered, limited and free prices) in practice price controls continued to operate. On the whole, the autonomy, flexibility and decentralization promised by the 'guided market' model were considerably constrained. Moreover, improvements in performance were short-lived. It was clearly difficult for enterprises to make use of their autonomy in practice when they were locked into agreements with partners in COMECON and also with Western companies (Barratt Brown, 1984:142).

The 1970s and 1980s

In spite of the 'market mechanisms' of the 'guided market' model the objective conditions of Hungary's situation within COMECON allowed enterprises only a limited space for manoeuvre. 'Guidance' predominated over any semblance of the market. The Hungarian reforms, moreover, were regarded as ideologically suspect by its COMECON partners, especially in the aftermath of the crushing of the Prague Spring in 1968.

The 'oil shock' of 1973 also worked against the development of the 'guided market' model as the government reined in the strands of autonomy enjoyed by companies. However, this retrenchment was also accompanied by a continuing desire on the part of the government to satisfy the material needs of the population. This involved permitting the existence of private enterprise, even if only on a limited scale. A further feature was the increase of economic links with the West, which took the form of hard currency loans and joint ventures, although the government believed it could hold back the effects of the 'oil shock' and other effects of world market forces at Hungary's western border. These developments, however, only served to accentuate the contradictions of the Hungarian economic situation which continued to deteriorate and ultimately contributed to the fall of Kadar in 1988 and the subsequent collapse of the communist regime.

It would be wrong, however, to regard the introduction of the 'guided market' model as a complete failure. In comparison to many of the other countries of Central and Eastern Europe which had remained more closely aligned to the Soviet model, many features such as enterprise autonomy and non-administered prices, both conceptually and practically, provided Hungary with a sounder preparation for its transition to a market economy.

3 Workers and 'Managers'

CONTEXT

Following our presentation of the economic system which prevailed in Hungary under the communist regime, we now intend to explore some of the characteristic features of enterprises themselves. In so doing, we will pay particular attention to the conditions of workers and those who were responsible for directing the workforce as well as to the relationship between workers and their managers.

It is important to emphasize that under the classical 'directive' model of economic management the enterprise was an integrated component of the overall centrally planned system. The enterprise functioned primarily as a production unit and was concerned above all with obtaining and processing inputs (such as raw materials or semi-finished products) and creating finished goods. Accordingly the majority of managers had qualifications and experience in engineering. The driving force for the activities of the enterprise was the plan, each enterprise being allocated a sub-set of the national central plan. The primary economic purpose of the enterprise was to achieve its given plan targets. The task of enterprise management was, therefore, to ensure that the necessary inputs were actually obtained and that the manufacturing process operated with enough efficiency to produce the requisite number of products.

Individual enterprises' managements did not have to concern themselves (or concerned themselves only marginally) with activities which would be considered normal in a market economy. For instance, there was generally no requirement for sales, marketing and distribution. The central plan specified the quantity of goods to be produced, and distribution and sales were in general the responsibility of distinct state organizations with which the enterprise had no direct involvement; as product shortages were normal, and there was normally very limited choice of products, a seller's market prevailed and there was consequently little or no need to undertake any kind of marketing activities.

On the financial side, as enterprises were instructed as to what they should produce, there was little sense in financial management at the enterprise level. As inputs and outputs were specified by the plan, the costs of production were also largely given. There was accounting (or at least book-keeping), but the priority for the enterprise was to achieve output

35


targets. The balancing of the books took place within the context of the national plan and a widespread system of cross-subsidies. In economic terms different enterprises would be working at either a profit or a loss: however, this did not generally impact on the activities of the enterprise (or on the way workers and managers behaved). The overriding priority was to fulfil the plan target, almost irrespective of cost.

This overriding concern with plan fulfilment resulted in a number of distortions, abetted in part by features of the economic and political system. First, the sheer complexity of centralized economic planning could in no way guarantee the implementation of what was proposed. For example, various quantities of different inputs could be specified but this did not necessarily mean that they would be delivered. Management would thus need to resort to other means to obtain necessary raw materials. Second, the predominance and fear of shortage encouraged enterprise management to secure and hoard as many inputs necessary for the production process as possible. For example, stockpiles of raw materials would be built up just in case they might be needed. Additional workers would be employed just in case they were needed for irregular and/or infrequent requirements, to be available to help with the frenetic end-ofyear work to fulfil the plan. Shortages thus went hand in hand with surpluses. Periods of idleness were followed by periods of frenetic activity to catch up.

As mentioned earlier, the enterprise was just one component of a centrally planned economic system. The system was rigidly hierarchical and directive and, to use Kornai's expression, vertical relationships predominated (Kornai, 1990). The pressure to perform came from the plan which embodied the regime's economic goals and these were derived from its overall political and social aims. It is important to stress that the priority for enterprises was to achieve the specified targets, not to produce goods of a particular quality or to satisfy the needs of consumers.

Within the enterprise too relationships were conditioned by the prevailing political ideology. The enterprise was not merely an economic entity but part of an integrated political-social-economic system. The organization of the overall system was consequently reflected within the enterprise, with significant roles played - directly and indirectly - by party and trade union organizations.

Moreover, the official ideology 'idealized' the position of workers. The working class was regarded as the leading class in society, with the party as its vanguard. This ideological position was not without some substance in Hungary. The Communist Party had been instrumental in the transformation of Hungary from a predominantly agrarian society and had

Workers and 'Managers' 37

forced the pace of industrialization, establishing new industrial enterprises. Furthermore, the HSWP had the largest proportion of industrial workers as members of all the Communist Parties of Central and Eastern Europe. In 1979 nearly 60 percent of the HSWP's membership were industrial workers (Crampton, 1994:245), even though some of these industrial workers had actually worked in industry for only a few weeks.

The enterprise was in many respects a microcosm of the wider society, permeated by the official ideology and various (party) political organizations. Reflecting the overall hierarchical structure of society and central planning, the enterprise was also largely vertically structured, with commands originating at the highest level of the state passed down the hierarchical chain, from enterprise director to heads of department and finally down to the shop floor.

Not surprisingly, such a system of economic management was soon found to have numerous shortcomings and inefficiencies. As discussed in the previous chapter it did not take long for criticism of the existing system and pressures to improve or replace it to come to the surface, although it was not until the late 1960s that the introduction of the New Economic Mechanism, with its 'market-guided' elements, altered the nature of the position held by enterprises within the overall system.

At least in theory the 'market-guided' system removed the overt relationship between the central plan and the activities of individual enterprises. Compared to the classical model greater weight was given to horizontal (that is, market) relationships. Plan targets still existed but were no longer binding. Enterprises were encouraged to pay greater attention to consumer demands, to become entrepreneurial, to seek profits and greater efficiency. It is indeed possible to both overestimate and underestimate the impact of the New Economic Mechanism on the activity within enterprises. The New Economic Mechanism was still anchored within the prevailing ideology and the existing institutions of the communist state.

The New Economic Mechanism was intended to promote the responsiveness and efficiency of enterprises, not to create a market economy or to undermine the foundation of the existing social and political system. At best it was intended to reconcile the potentially conflicting interests of the party on the one hand and the rest of society on the other.

The other extreme would be to dismiss the impact of the economic reforms on enterprises. From being purely a component of an integrated system enterprises did acquire some autonomy. This impacted immediately on those directing the enterprises now that they were permitted some freedom of action outside the limits of the plan. When measured against the freedom of action enjoyed by senior managers in companies in


Western market economies, this increase in enterprise discretion appears severely limited. However, when contrasted with the other countries of the region, Hungary was in the forefront of adopting a more marketoriented approach to its economic system (Samli and Jermakowicz, 1983). Out of the communist regimes of Central and Eastern Europe only Yugoslavia was regarded as being more open to market forces.

WORKERS

What were the implications of these changes in economic management for workers within enterprises? How did the experience of being a worker match up with the ideological presentation of the working class as the driving force to a new and better society? In the relative absence of contemporary academic studies, literary works of the period provide us with an insight into the way many Hungarians were thinking about these issues. One of the best known Hungarian novels of the 1960s was Rust Cemetery (Rozsdatemet{i) by Endre Fejes which portrays the life of a working class family. Rust Cemetery paints a dark and pessimistic picture of working-class life, although written at a time when, according to the official ideology, socialism provided the solution to all the problems of the workers. Interestingly, Rust Cemetery reappeared as a play in one of Budapest's theatres in the autumn of 1995 and was once again widely discussed. Peter Esterhazy's Production Novel (Termelesi regeny) was first published in 1979 and gave a grotesque description of everyday life in a bureaucratic society lacking real goals, mission and an integrating ideology. Finally the film Do you know Sunday-Monday? (Ismeri a Szandi Mandit?) is a sarcastic comedy of company life at the end of the 1960s and at the beginning of the 1970s.

While the creations of novelists and film-makers provide only one view of everyday life in Hungary, it is interesting to note the clash between the official ideology, with its positive portrayal of the current and future condition of workers, and the critical withering trea•'llent given to the theme of everyday life by some artists.

Accounts of the experience of workers in Hungary are, however, not solely artistic in origin and there are also some accounts of a sociological nature. The most well known is probably Miklos Haraszti's (1977) autobiographical account of working in Budapest's Red Star Tractor Factory in the early 1970s. The book is both a critical account of the experience of being a production worker and a portrayal of the division between the workers directly involved in production and those employed to direct them (from first-line supervisors to enterprise directors).


Haraszti describes a system which seeks to draw the utmost productivity from production workers at the lowest cost, in particular through the use of piece-rates (rather than hourly wage rates) which deprived workers of personal discretion and autonomy and forced them to maximize productivity (and their own wages). However, maximizing individual productivity often leads to revisions of the norm and a subsequent need to increase productivity further. As Haraszti says: 'The real meaning of piece-rates lies in the incessant increase in production' (Haraszti, 1977:59).

The pressure, moreover, is constantly on individual workers to increase their performance (and wages) and hence there is overt competition between workers to get the better (that is, less problematical) production jobs. Rather than a climate of workers' solidarity there is an intense competition between individual workers, which is exploited by those above them.

Haraszti is scathing in his portrayal of the fragmentary nature of his experience as a factory worker. He sees a clear dividing line between workers involved in production and the rising number of those in nonproductive activities, many of whom are mainly concerned with ensuring the performance of production workers. Haraszti clearly sees a distinction between 'us' and 'them'. He also derides the ideological components of factory life. From the worker's point of view, as portrayed by Haraszti, the factory is a place for the exploitation of the workers who are largely powerless. Numerous groups exist to keep the workers under control, including party organizations and the trade union. Favouritism and the bestowal of personal favours are rife. The life of the industrial worker is portrayed largely as one consisting of exploitation and of physical and mental exhaustion. Not surprisingly, the publication of Haraszti's work met with official disapproval and he was accused of incitement to subversion as the book was considered by the authorities to be liable to stimulate hatred of the state.

A more positive view of the experience of Hungarian industrial workers is given in Laszlo Kiirti' s (1990) study of the Csepel Machine Tool Factory following the economic reforms implemented at the end of the 1970s. The reforms divided the gigantic Csepel Works into a number of smaller units and reorganized factory management, reducing the influence of party control. Attempts were made to introduce greater democracy into the operation of the enterprise. For example, the enterprise director could now be hired by the enterprise executive council rather than being a political appointee. These declined considerably during the 1970s and 1980s and the practice persisted only in the case of executive directors and presidents (Kiirti, 1990:83). Kiirti, moreover, draws particular attention to the


concept of the 'four corners' in which management, party, trade union, youth league and workers participate in a democratic manner in the running of the enterprise. In Kiirti's view, 'workers do possess considerable power on the shop-floor and over the management of their factories' (Kiirti, 1990:62).

Kiirti 's positive evaluation of the position of the workforce may be substantially due to reforms undertaken in the early 1980s. These comprised the break-up of the monopolistic trusts into smaller and more genuinely autonomous enterprises, and the introduction of enterprise councils made up of selected and nominated members including representatives of the workforce elected by secret ballot. The enterprise council, in contrast to the previous practice of ministry nomination of enterprise directors, is empowered to appoint its own chairman. In comparing the situation at the Csepel factory with Haraszti' s account, Kiirti ( 1990:70-1) contrasts the 'us' -'them' conflict of Haraszti 's experience with the pluralistic approach at Csepel which involved workers, management, the party, trade union and youth league. These contrasting images of the position of workers within the enterprise accord well with evolving perceptions of the worker: in the 1970s, primarily as a wage-earner, and in the 1980s, as a co-owner (Petkov and Thirkell, 1991: 189).

Further criticism of Haraszti' s portrayal is contained in the work of Michael Burawoy and Janos Lukacs (1992) which focuses on the experience of workers, including Burawoy himself, in the Lenin Steel Works in Miskolc. The authors refute Haraszti's presentation of the isolation of individual workers and highlight aspects of solidarity between workers and the autonomy of the shop floor. There is evidence of co-operation and solidarity between workers organized in the same brigade. More importantly, Burawoy and Lukacs explore the relative autonomy which had to be accorded to shop-floor workers by enterprise managers. This autonomy is seen as a necessary precondition for the successful operation of the enterprise and was required because of the uncertainties and shortages of the command economy. The shop floor had thus to have a certain autonomy and exercise flexibility in order to overcome operational difficulties. This autonomy was, in general, accepted by line and middle management who recognized its contribution to plan fulfilment and their own success, although it was also seen as a threat to their own authority. Burawoy and Lukacs thus go some way towards refuting the assumption that all enterprises in a command economy operate inefficiently and argue that individual enterprises could under particular circumstances be more efficient than similar firms in capitalist economies.


MANAGERS

We will now turn to the condition and situation of those employed to direct and oversee the activities of workers. It is a moot point whether the term 'manager' can be applied to those in such positions in enterprises of the command economy. Under the classical system of economic management, directors of enterprises and heads of enterprise departments were employed to ensure that plan targets were fulfilled. This key fact circumscribed any discretion that such people might have had. They had no discretion to alter the product range or vary volumes of output without obtaining approval from the superordinate authority. Success was measured by plan fulfilment, not by deviating from what central planning had decided. 'Managers' were thus primarily implementers of decisions rather than decision makers, innovators or entrepreneurs. It was largely a case of doing what you had been instructed to do, or getting approval for anything that was not clearly specified. It was better not to stick one's neck out. Certainly, in seeking to achieve the plan targets, remembering the context of shortages and outdated and antiquated technology, there was considerable scope for ingenuity, for wheeling and dealing, for making sure things were actually done. But this is only one part of being a manager. What was particularly lacking was a dimension of decision making in a strategic sense, a willingness to take risks and to back hunches.

This situation changed to a certain degree with the economic reforms of the late 1960s, but only to a degree. Notwithstanding the increasing importance of horizontal (that is, market) relationships, vertical relationships continued to be pre-eminent. Even though the state had made some concessions to the market, the state's authority retained its dominance, and economic functions and activities remained subservient to the overall political system. Nevertheless, as we will see a little later, even the limited discretion conceded to enterprises did have some influence and changed the modus operandi of enterprise directors and managers.

Kornai ( 1990: 119) outlines the motivations of leaders in the command economy, enumerating a list of factors comprising political and moral conviction, identification with the job, power, prestige, material benefit, the desire for a quiet life and, finally, fear of punishment. Clearly the factors will impact both positively and negatively on the work of 'managers', either spurring them on to better performance or encouraging servility and a preference for keeping one's head down. Individual mangers needed to weigh up the various factors in relation to their own desire for reward and advancement and personal morality.


This naturally leads us on to the question of how and on what basis one became a 'manager' (or enterprise director) under the communist system. Throughout the life-span of the former regime there was a tension between professional competence and political acceptability. Clearly, the regime would not appoint individuals to senior positions who were inimical or even only lukewarm to the regime itself. On the other hand, there was a recognition of the need for certain skills and competencies in managing economic organizations. As a generalization, over the period of communist rule the stress on political acceptability was mitigated in favour of professional competence.

In the late 1940s, with the take-over of power, the regime was concerned to ensure that the newly nationalized enterprises as well as other economic institutions (such as the banks) were directed and managed by individuals who were committed to the official ideology and to establishing a command economy. On account of this party membership, or at least support for the aims of the regime, were important criteria for the appointment of individuals to leadership positions. After 1956, with the decision to try to satisfy the material needs of the population, and with the subsequent decentralization introduced by the New Economic Mechanism, non-party specialists were also employed.

By the 1970s professional competence had gained in importance. However, professional competence in itself was insufficient for the more senior positions in enterprise management. While professional competence was sufficient for those wishing to become middle managers, party political affiliations were essential if one aspired to top management positions.

These requisite party affiliations could be gained through membership of the HWSP or related organizations such as the Youth League. Passive membership would in itself be deemed insufficient and anyone wishing to be considered for a senior managerial position would need to have played an active role in party political or related activities.

A number of other factors played an important role in the career paths of managers. In the early days of the regime working-class origins were considered important and many managers had working-class backgrounds. This fitted in well with the official ideology. On the whole, however, educational qualifications were also of significance. This bias towards class origins re-emerged in the retrenchment of the early 1970s when the regime reined in some of the concessions associated with the New Economic Mechanism (Falus Szikra, 1995:79). Attempts to facilitate the development of young workers for managerial positions were on the whole unsuccessful. Nevertheless, numerous managers were graduates of the evening MarxistLeninist University although their qualifications were popularly disparaged


as Foxi-Maxi diplomas after a well-known cartoon character, despite being highly regarded by the political establishment. With this pressure on educational development one might have expected the younger generation of managers to be more well qualified than their older counterparts. However, this was in fact not the case (Falus Szikra, 1995: 86).

By the 1980s the situation had further changed. The declining significance attached to political allegiances had not in fact been counterbalanced by a greater emphasis on professional competence. Political allegiance in a general sense had yielded in pre-eminence to the exploitation of personal contacts and patronage. By the mid-1980s, according to Babus and Mezes (1985), quoted in Falus Szikra (1995:81 ), 'In Hungary the dominant factors determining advance [sic] and self-assertion were personal relations. Public and political activities were ranked second, leadership ability third. These were followed by servility, knowledge, pushing, the support by the collective, seniority and chance.' A favoured route into top management positions comprised university study, followed by an official position in the party's youth organization. This enabled the individual to gain organizational experience and, more importantly, to make personal contacts to be drawn on when it was time to leave the youth organization (normally when one had reached one's late twenties). After such an experience and with the support of the right contacts one could be appointed to a senior position (maybe even Chief Executive Officer (CEO) or deputy CEO of a large company).

The relative decentralization of economic management introduced with the New Economic Mechanism undoubtedly increased the area of at least top management discretion. So much so, in fact, that already at the beginning of the 1970s there was widespread criticism of managerialism and some concessions in the direction of greater enterprise autonomy were retracted. Nevertheless, there was increased discretion and it manifested itself in a number of ways, particularly with regard to labour: that is, the number of people employed and their overall remuneration (Swain, 1992:162). By Western standards the extent of the increase may appear small and in many respects inconsequential. Compared with the situation in the other countries of the Soviet bloc, however, the Hungarian reforms appeared substantial and to some observers a dangerous development.

It is well known that the command economies had a far narrower spread of wages and salaries in comparison to Western market economies. Incomes were, on average, both lower and less variable. These factors can be largely attributed to ideological reasons, namely that the state provided extensive social services and that it would be ideologically unsound for the incomes of non-workers to exceed excessively those of the working class.


Compared to their counterparts in Bulgaria, Czechoslovakia, Poland and the German Democratic Republic, Hungarian senior managers were regarded as receiving conspicuously high salaries (not including other benefits and perquisites). For example, in the 1970s the salaries of senior managers was approximately twice the national average wage, while those of middle managers was about one-third above the national average. Such wage differentials were particularly conspicuous in a society avowedly based on egalitarianism and the central role of the working class. Such disparities were moreover not limited to a small section of the working population as the number of white-collar positions within companies had mushroomed since 1949 and it was not unusual for a medium-sized company to have six or seven managerial levels (Falus Szikra, 1995:88-9).

Top managers in particular were often regarded as a race apart. They were popularly and jocularly characterized by reference to five objects which were considered as the status symbols of the socialist(!) manager in the old regime. In Hungarian these were known as the 'five Ks': car (kocsi), own house or flat (kegli), dog (kutya), government telephone line (k-vonal) and mistress (kurva). Senior management positions were therefore seen as opportunities to acquire benefits and wealth beyond the reach of normal workers, hence the widespread resentment of what was regarded as excessive privilege.

A key area of management discretion was the allocation of bonuses. A substantial proportion of individual incomes consisted of an element of bonus. This could constitute as much as 200 percent of the basic wage (Pearce, 1993: 119). Bonuses were generally allocated by one's immediate superior. Although one of the criteria for the allocation of the bonus was performance, bonuses were largely awarded as a result of personal connections. The allocation of bonuses tended to resemble an inverted pyramid, with the majority of enterprise funds earmarked for bonuses being awarded to senior managers. For example, the system of distribution of the profit-sharing fund to enterprise members in the late 1960s attracted considerable criticism when it emerged that senior executives could receive 'dividends' equivalent to up to 80 per cent of their salaries while the majority of employees were restricted to a maximum of 15 per cent of their wages. There was widespread condemnation of this approach and it was modified in 1970 (Csap6, 1975: 122-5).The inclusion of bonuses and other perquisites (legal and illegal) in the calculation of incomes would certainly have widened the officially presented gap in incomes between top managers and the rest of the population even further. Not surprisingly, top managers were one of the wealthiest groups in Hungarian society.

It is worth reiterating that the discretion of senior managers within Hungarian enterprises was (by Western standards) severely circumscribed.


In the first instance the overall framework of economic management gave managers limited scope for individual initiative. This was further hampered by a range of government regulations which precluded initiatives at enterprise level (for example, in the area of wage negotiations). The corollary of this limited discretion was that there was also less scope for individual mistakes. Even when errors did occur which necessitated the removal of a senior manager, the response was normally 'forgiving' in that the senior manager would be 'kicked upstairs' to a 'safe' position such as adviser to one of the ministries, member of an enterprise board or director of personnel!

All in all, until the very end of the regime, the criterion of professional competence played at best a subsidiary role in the appointment of top managers. This was for a number of reasons. First, managers in part tended not to be replaced. So, for example, the senior managers appointed in the early post-war period were not replaced as a consequence of the shift of emphasis of the New Economic Mechanism, in spite of the professed greater stress on professional competence. Second, allegiance to the ruling party yielded to the exploitation (and abuse) of personal contacts. Kozak (quoted in Falus Szikra, 1995:77) delivers a withering condemnation of managers in the late 1960s: 'They do not lead because they were led and therefore, they cannot be expected to know how to lead overnight - theoretically it is possible of course that they know how to play the piano even though they have not tried their hand at it.' In general, managers were not replaced as a result of changes in economic policy. As many managers appointed in the early post-war period were relatively young, they remained in office even when the system of economic management shifted in emphasis from central planning to greater decentralization. As Kozak states, it was not easy for those who had been used to being led to become leaders of their enterprises.

This is not to say that all managers lacked or failed to display any of the characteristics of successful managers in the west. In fact Ehrlich and Revesz (1995:17) note the many positive developments which had taken place in Hungarian agriculture, largely because of the entrepreneurism of the managers working in this sector, as well as other positive factors in pharmaceuticals and applied physics.

WORKER-MANAGER RELATIONS

In evaluating worker-manager relationships in Hungarian enterprises it is important to distinguish between formal and informal aspects of the relationship. Initially, the official ideology rejected any possibility of a conflict


between the interests of workers and management. Subsequent recognition of this possibility led to the development of the trade union as mediator. In general, however, the trade union, party and youth organization were seen as arms of managerial domination (Burawoy and Lukacs, 1992: 132). Official attempts to engender motivation, such as special campaigns, brigades and socialist competition, were formally followed but frequently had little substance. Production meetings, regarded as the most effective way for workers to represent their interests directly in the enterprise, were also of limited effect (Swain, 1992: 159).

Throughout the period of communist rule, however, the upper hand was held by 'management'. Adults in Hungary were required by law to have a registered permanent place of employment and the employer's consent was required for a range of activities. The New Economic Mechanism enhanced the power of enterprise directors and managers. As ministry control was weakened, enterprises were able to develop their own relationships with suppliers and buyers, and internal discretion for managers was enlarged. In many respects, the discretion of managers increased throughout the 1980s as the state sought to come to terms with the problems of the economy. As the central authorities began to tackle the issue of persistently loss-making enterprises, management was given the power to make employees redundant, resulting in the emergence of unemployment in a socialist economy. A justification for this departure was sought in the allocation of the sole responsibility for full employment to the state rather than individual enterprises. According to Gyorgy Sziniczki ( 1990: 126), in his study of the Ozd steelworks in northern Hungary, 'managers were left entirely free to determine the number of redundancies, to select which workers were to be fired, and to escape any liability to offer compensation for redundancy'.

This does not mean that workers did not develop their own (informal) strategies to counterbalance the power of management, or to supplement the formal mechanisms such as the trade union. One such practice was 'energy saving' whereby workers sought to economize on the energy they expended in their primary place of employment in order to have enough strength to carry on work in the officially recognized (or unrecognized) sectors of the second economy. Official recognition of secondary activities (as well as the sanctioning of Enterprise Economic Work Partnerships, or EEWPs) were testimony to the official acceptance of the fact that workers were more motivated when working for themselves than for their enterprise (apart from the economic necessity of multiple jobs)! Throughout the 1980s the number of workers involved in EEWPs mushroomed from just under 30 000 in 1982 to over 250 000 in 1987 (Hisrich and Fulop,


1995). However, many of the workers involved in the EEWPs were either essential to the operation of the enterprise or were involved in the party or another official organization.

A second aspect was that of bargaining. Bargaining between enterprises and the competent ministry as a feature of the planning system has already been mentioned. Bargaining, however, was also a widespread feature of the relationship between subordinate and superior, and could cover a broad range of issues, from the nature of the tasks to be undertaken, to the use of enterprise equipment and the level of bonuses. Such practices have, moreover, not simply disappeared with the demise of the old regime (Pearce, 1993). Considerable effort was given to bargaining which detracted from day-to-day operations and in general created an internal atmosphere of competition and distrust.

According to Janos Kollo (1993) workers enjoyed 'everyday power' which counteracted the 'powerful systems of control inside and outside the factory' (p.279). This 'everyday power' was based on three factors. First, there was an excess demand for labour and in practice, in spite of legal restrictions, workers enjoyed considerable mobility. Second, there was widespread involvement in the second economy, involving around two-thirds of the labour force. Third, because of the prevalence of input shortages in the command economy, shirking could be disguised as 'objective difficulties' or 'technological failure' (p.284).

INTERNATIONAL COMPARISONS

To what extent did the relationship between workers and managers in Hungary differ from that prevailing in other COMECON countries? According to Witold Kiezun (quoted in Hickson and Pugh, 1995: 133), Hungarian managers tended to have a less autocratic management style than many of their COMECON counterparts, Polish managers excepted. They were also more likely to voice their criticisms. On the other hand, the motivation of Hungarian managers was lower than that of managers in East Germany or Czechoslovakia. This lower degree of motivation seemed to go hand-in-hand with lower productivity.

The relations between management and workers in Hungary (and Poland) were also more strained than elsewhere in COMECON. As mentioned previously, workers undertook individual and private initiatives to counterbalance the constraints imposed by management in the enterprise. This contrasts with the situation in East Germany where an autocratic and self-disciplined management directed what was perhaps the most highly motivated workforce in


COMECON. Research by Edwards and Lawrence (1994) identified a strong sense of solidarity encompassing workers and managers in East German enterprises. This solidarity united management and workers in the achievement of plan targets and persisted even for a while after the integration of the former GDR in the unified German economy.

WINNERS AND LOSERS

Under state socialism workers were largely controlled by those who managed them, in spite of the worker-centred ideology of the state. As the discretionary powers of management were expanded, it was labour in particular which was the object of this increased discretion (including even, towards the end of the regime, redundancy and unemployment).

Workers were, on the whole, restricted within the enterprise to a certain autonomy and flexibility on the shop floor and more extensively in the second economy and the private sphere. This 'everyday power' in some way compensated for the controls imposed by management within the enterprise. However, the increase in decentralization and the impact of market forces worked to reduce workers' 'everyday power', even though it did not eliminate it completely.

In parallel to the opening-up of the economy to market forces, there was a decline in the influence of party political affiliations. However, rather than giving way to meritocratic criteria, such as professional competence, there was a tendency towards clientelism and patronage, with personal contacts playing an increasingly important role. The erosion of workers' autonomy thus went hand-in-hand with a rise in management prerogative and a network of personal relationships and networks. While, as discussed in Chapter I, workers have in many respects been the losers of the change of regime, on the other hand managers (and also lawyers) have been the 'beneficiaries of socio-economic transformation' (Fa! us Szikra, 1995: 184 ).

The relative weakness of workers has also been compounded by the inability of the trade union movement to recreate itself in a coherent and consistent fashion. The fragmentation of the trade unions, allied to understandable worker resistance to collective organization and a degree of employer reluctance to permit trade union representation, has created a mosaic of experiences in contemporary Hungary. While, in enterprises still owned by the state, trade unions continue to be active, in many newly privatized and acquired companies trade union activity is somewhat patchy and in some cases even excluded.

4 Corporate Life, 1985-95

The decade between 1985 and 1995 can be deemed a special transition period in the history of Hungarian society and the economy. Those talking about the beginning of the 'change of regime' usually mean the happenings of the spring of 1990 or, more particularly, the first free and democratic elections that took place at that time. As a matter of fact, there were more changes happening on the surface of political life in this period than during the preceding two decades. That is, however, the surface only: the transformation process started much earlier in the deeper strata; without this the change of regime would not have happened the way it actually did.

The fact that the 'change of regime' began much earlier in the economy than in politics, can be perceived from the previous chapters of this book: the reform measures date back to 1968, or even to 1953. The 1968 reform was in fact a peculiar experiment towards a market-driven economy: it left capital equipment in state ownership, while enabling companies to take their own decisions in order to increase profit; at the same time, the state was endeavouring to influence economic trends by shaping the different factors and conditions of the economy, mainly the elements of the socalled regulatory system (prices, wages, taxes, interest rates, and so on). Although the particular reform measures brought significant changes, they did not really affect the basic conditions: the economy of shortage, the redistribution of revenues virtually independent of performance, bureaucratic economic control and the policy of full employment remained, and the institutional system of the directed 'socialist market economy' was very primitive. All these factors significantly limited companies' ability to manoeuvre; if they wanted to achieve different goals (such as access to capital resources), they usually did not try to take market measures, but attempted to manage by influencing decision makers on higher levels of the state bureaucracy.

Since the reform steps did not bring the desired results (the most conspicuous sign of which was the country's dramatically increasing foreign indebtedness), the population, the professional circles and the political leadership were not satisfied with them; the 'reform of the reform' - the regular modification of the aforesaid economic regulatory system - was constantly on the agenda. There were many who thought that the problem was not related to socialist principles, to the idea of state ownership, but to

49


implementation (that is, to the elements of the particular system). Therefore it was not the foundations which had to be changed, but the elements of the system which had to be improved, its slips corrected, and the system regulators formulated in a more professional way. As a consequence of these economic problems, this 'regulatory illusion' started to disappear. The newest and latest reform measures themselves were not sufficiently comprehensive or sufficiently complex, or lasting and consistent, and this could not have been otherwise given the external and internal political circumstances, which cannot be discussed in detail here.

In Hungary the second half of the 1980s passed in a spirit of disintegration and erosion of the socialist economy and of the state's economic control, but at the same time the basis for the diverse corporate life of the beginning of the 1990s was created. This corporate life was close to that of a modern market economy both in structure and composition. More and more company managers realized that if they wanted to survive together with their companies among the worsening conditions, then they had to take control of their own destiny. Corporate top management was very varied: there were still the fairly unprofessional 'old fashioned' managers of the preceding era, nominated on political grounds, fitting in with the political decision-making system, while professionals with outstanding qualifications and modern thinking appeared in increasing numbers. The traces of this variety could be found within individual companies as well: quite often some leaders were attempting to introduce modern means of corporate governance (such as strategic planning or modernization of the organization), desperately struggling with variable success against the mentality, reflexes and corporate culture of their old-fashioned fellowmanagers. As the situation of the companies grew more difficult, more and more expertise and market knowledge were needed to cope with the problems, which put the open-thinking, pragmatic intellectuals in a more favourable situation. These people were mainly using the old language and advertising the old objectives to a wider public, but were already thinking and acting in a new way.

The area of manoeuvre in corporate management and corporate governance expanded significantly, even if this expansion was not dramatic. Among others, the centralized human-resources policy of the past had been changed: at some of the companies corporate councils were set up, partly consisting of elected members, which achieved important decisionmaking rights, including the right to nominate the leader of the company. It became possible to set up subsidiaries, and some almost-forgotten means of capital reallocation and the capital market reappeared: for example, bonds, bills of exchange and, later, shares. The state also tried to

Corporate Life, 1985-95 51

encourage competition by dividing some of those huge companies, which had been created as a result of earlier waves of mergers. One of the first decisions of this type affected the monopolistic insurance company: two independent organizations were created, both in state ownership. In the framework of this anti-monopoly policy - which was not capable of changing the shortage-nature of the economy - some sites and factory units were separated out and made independent.

In this period the economy definitely started to divide into legal 'grey' and 'black' spheres. Those in economic control realized that they could not do much about the latter two, so they preferred to direct black market activity into legal channels by introducing various forms of individual and collective ventures. The typical entrepreneurs of the economy of shortage were a peculiar phenomenon: they had to fight fierce and sometimes hopeless battles with the authorities and suffer political attacks, while being the permanent target of cabaret jokes; however, since they happened to find themselves in a market of shortage, showing almost insatiable demand for certain goods and services, they could benefit from a monopoly, and from the fact that - due to their weak bargaining position -customers accepted almost every solution to their needs. In the last decade of socialism, a common picture of entrepreneurs was accepted by the public, making them appear as a kind of Robin Hood battling against an unsympathetic and bureaucratic state, definitely growing rich and becoming the men of the future, so long as they were smart and assiduous enough.

At the end of the 1980s, attacks against the regulatory and institutional order of the economy became bitter, and there was increasing doubt as to whether the basis of the system could be maintained. The economic package of the last government before the change of regime announced widespread liberalization of prices, wages and imports, and at the same time made the monetary policies more rigorous. This latter element was intended to stiffen the limits of state subsidy for companies, demonstrating that the state would not rescue those unable to keep pace with developments. One of the consequences of these measures was that of companies accumulating huge debts; insolvency became an epidemic due to the default on payments, and threatened to paralyse the economy. Many companies realized for the first time in their lives that profitability and solvency do not necessarily go hand in hand, and many financial departments prepared their first cash-flow plans.

The most important institutional measure of the end of the decade was the drafting and enacting of the Company Law. The State Property Agency, responsible for the dilution of state property - that is, for the


management of its privatization - was set up and put under the control of Parliament. The government issued a decree about benefits offered to foreign investors and about the protection of foreign investments, following which the first foreign investors appeared, and an increasing number of joint ventures was set up. The financial and institutional system needed to support private ventures started to develop. The Committee for Deregulation, working alongside the Government, annulled hundreds of stipulations, circulars and instructions. The transformation of state-owned enterprises into public companies - as the first step of the privatization process - began and accelerated, foreign-trading rights were widely extended, capital flow revived, the Stock Exchange was established, a two-tier banking system was introduced and the reform of the tax system was implemented. Hungary's economic relations with the East grew weaker due to the changes taking place in the other socialist countries, especially in the USSR, as a result of which a sharp change in orientation took place around 1988, among both exporters and importers. Companies tried to increase their market share in markets requiring convertible currency. The reform measures generated sympathy in the Western world, which was also demonstrated by the fact that foreign capital showed a preference for Hungary when investing in Central Europe.

After all these events, the change of political regime came with the 1990 elections. As a result of the elections, a moderate right-wing government came into power, taking over the heritage of the previous era. What was included in this heritage? A failing economy; an ideology which had already failed; a huge and increasing foreign debt; the technological gap between Hungary and the developed countries; the developing institutional system of a market economy; the collapse of COMECON; a social welfare support system, which was out of all proportion to what the country could afford; a population which had grown used to considering this as 'natural', but suffering from the economy of shortage, protesting against equality while hardly being able to cope with inequality; inveterate habits, reflexes and culture developed during four decades; an inadequate road network and telecommunications infrastructure; an educational system and cultural life achieving outstanding results in international comparisons, despite all of its difficulties and poverty; and, of course, all the political problems of Central and Eastern Europe, with all of its exploded or still ticking bombs.

It is quite difficult as yet to judge the first half of the 1990s: we have to say that this period was hallmarked by the alternation of heated debates, great hopes and bitter disappointments.

Until the mid-1980s, Hungarian industry had been represented in fact by a few hundred entirely state-owned enterprises, while in agriculture co-


operative farms had prevailed. On the other hand, up-to-date statistics -which are unfortunately not always accurate - show a very complex, colourful picture. Let us glance at the most typical representatives of Hungarian entrepreneurial life.

ENTERPRISES STILL (AND/OR INTENDED TO BE) PARTLY OR ENTIRELY REMAINING IN STATE OWNERSHIP

According to the relevant (and sometimes changing) government decisions, the state intends to maintain control over a part of the companies in the future, for strategic, security or other reasons. Debates are still going on about the vehicles and the institutional system to be used for this purpose. It is in all probability going to be very difficult to reform these companies, but the probability that the methods, style and culture of control inherited from the previous regime will be maintained is highest among this group of companies.

The debates on the privatization of public utilities are especially hot (just like in Britain). Many people think it is very dangerous to privatize these companies because the 'big state monopolies' would become 'big private monopolies'; prices would be raised and services would not necessarily improve. On the other hand the shares of the public utilities would be particularly attractive for private investors on the Budapest Stock Exchange, and in the present financial situation of the country this might be the decisive argument, reducing state involvement to a minimum in the future.

ALREADY PRIVATIZED COMPANIES, STATE-OWNED ENTERPRISES IN THE PROCESS OF BEING PRIVATIZED, OR COMPANIES TO BE PRIVATIZED ACCORDING TO SPECIFIC PLANS

As opposed to, for example, the Czech Republic, Hungary has chosen the 'market' form of privatization: no one receives as a subjective right free coupons to be used for the acquisition of shares (with the sole exception of compensation vouchers due to those who lost property because of nationalization); property acquired has to be paid for. 'Payment' does not necessarily mean purchase for cash, as it is usually a credit deal in practice.

There is much uncertainty in privatization statistics. In fact, not even the meaning of the concept is clear. Can it be considered privatization when, for example, a Hungarian company is bought by a foreign state enterprise


(such as the acquisition of the MAT A V Hungarian Telecommunications Company by Deutsche Telekom in working alliance with Ameritech)? Is it privatization when a river harbour remains in state ownership, but is operated in the long run by an entrepreneur in the framework of a lease contract? According to information from the end of January 1995, approximately half of state property was privatized during the previous four years, with ownership shared by domestic and foreign owners in the proportion of 50-50 per cent. The major part of the proceeds consisted of credit, transfer of property and compensation.

The privatization process had been relatively fast after initial problems were solved; more recently (in 1994 and at the beginning of 1995), however, it slowed down, and at the time of writing this chapter, several question marks have arisen in connection with it. The 1994 elections in all probability also had a role in the slow-down: the new government was quite slow in formulating its conceptions for privatization, in taking the necessary legislative, institutional and other measures; all these factors made the package of objectives for privatization obscure, generated institutional and personal uncertainty and weakened the co-operation between companies and the state. Slow-down nevertheless is a natural phenomenon as well: those parts of the state property which are attractive for investors are usually sold the fastest, while the remaining parts are more and more difficult to sell and, obviously, there will be quite a few companies remaining for a long time to come in the possession of the state.

As the first step in privatization, state enterprises were incorporated. Meanwhile quite a lot of them were divided up because it would be easier to sell them in smaller parts. This happened, for example, with the large trust for dairy products. Some companies were reorganized as holdings: this was the case with Pannonplast, a rather successful company (now quoted on the Stock Exchange), where the management initiated this change, after considering the argument that smaller limited companies would be more attractive to focused, professional investors; they have proved to be right.

There are various forms and methods of privatization: it can be initiated and controlled by the company or the state; it could be carried out with consultant organizations acting as intermediaries, with or without capital increase; there is an Employee Shareholder Programme; management buyouts; assignments for property management; there are auctions, public and closed tenders; there is a stock exchange; and there are entirely individual actions.

Privatization is driven by various interests and goals, one of which is the replacement of state control - which proved a fiasco - with much more


efficient forms of ownership typical of the developed world. The decisions are obviously affected by the state's intention to raise money somehow, in order to reduce its debts using privatization proceeds. It is evident to experts that privatization proceeds can be counted on only for as long as the saleable state enterprises are divested; it is a crucial issue for the country to have enough revenues generated by the expanding private sector by that time, in order to avoid the country's bankruptcy on account of its inability to finance and repay its loans. Since the state is under considerable pressure concerning the repayment of debts, putting aside other reasons, it may happen that decisions which are irrational from other aspects are made, like endeavouring to divest property which is easy to sell, or ignoring the consequences (such as privatizing the distribution channels earlier than the means of production). Political aspects also influence privatization decisions quite often: if, for example, 5000 people are dismissed from a privatized company as a direct result, then this facttaking into account the members of the families as well - could mean I 0 000 lost votes at the following elections. The charges of selling out the 'national industries' (such as the food industry) are often raised; severe tensions may arise in regions dependent on one company; geopolitical considerations may also play a role in decision making. The role and interest of corporate managers in privatization is contradictory, too: they negotiate the sale of property not belonging to them (belonging in fact to everyone, that is, to no-one); theoretically they are supposed to demand the highest price possible from the buyers, but they obviously know that they are facing their future owners, on whom their managerial position will depend. If, on the other hand, they significantly improve the profitability of the company, they weaken their own chances as potential buyers.

All these contradictions add to the fact that the publication of corporate information in Hungary -alongside the relevant regulation- is primitive (it is much easier to acquire the annual report of a foreign company than that of a domestic enterprise located in the neighbouring street); the parties involved are currently in the phase of learning the rules and techniques of corporate governance.

The valuation of property to be sold is one of the critical issues of privatization. Since state property had not been available on the market for decades, there were no domestic experts in valuation. For many people it is still difficult to understand the difference between the book value of assets and the market value of a company as a whole, without even mentioning that valuation is not an exact science. The public is always displeased when two well-known foreign consultancy firms carry out the


appraisal of the same company shortly after each other, arriving at completely different results. The privatization process has been accompanied by smaller and greater scandals, and we could also say that there is always some scandal going on, which does nothing for the public judgement of privatization: the view which is making privatization appear as an obscure or dark transaction where only speculators succeed has been accepted by many people, and not without some grounds. The scandal triggering the hottest debates recently was that of the Hungarhotels: the privatization of this company was under way but at the end the government suddenly changed its mind; the events received somewhat negative publicity in the West, and the privatization of the hotel chain has been in limbo for months.

A definite and uniform picture cannot be given about the life and fate of privatized companies. There are companies that have apparently benefited from privatization: the quality of products and services has improved, and their attitude towards clients has changed. Others, as if they do not trust in the permanence of the new situation, try to exploit the still existing monopolies or shortage situations according to certain 'milk the cow' tactics. There are also those companies which are frequently 'changing' owners, proving that their purchase was motivated by speculation and that their price was probably much lower than their real value, if every middleman can make money out of the transactions. Privatization credit deals are based on the assumption that the new owner would pay back the loans from the profit of the company; this could cause a shortage of investment funds later on, the consequences of which cannot yet be assessed.

The new owners usually start to reorganize the processes of the company following privatization, which quite often results in a significant reduction of the staff; the current rate of unemployment is between 10 and 12 per cent (it increased rapidly at the beginning of the 1990s, stagnated in 1994 and started to increase again in the first months of 1995). Most Hungarian companies do not have enough funds to support their dismissed employees, or to provide retraining opportunities. In addition to this situation, Hungarian employees - for several reasons - are far less mobile, than, for example, Americans.

Some signals make us think that several companies prefer to prosper by improving their sales activities or carrying out various financial transactions instead of focusing on production, quality improvement or technical development; this way of thinking gained ground also because revenues had gone down first in the field of production and only later in the spheres of commerce and finance. Positive factors are, however, that in many places apparent changes have taken place in certain corporate func-


tions and the organizational and control systems in general: marketing and financial departments have become stronger; besides traditional financial accountancy serving the state and the tax authorities only, management accountancy has gained ground as well; the basic task of personnel managers is no longer to inform the authorities about company matters and to consider the political aspects of personnel decision making. Quite a few companies deal with strategic planning, although this is often nothing more than formulating a strategy of survival. The decentralized, flexible organizational forms well known in the West, based on divisions, projects and teams, and different versions of holdings have appeared and have started to spread after the several decades of monopoly of centralized functional organizations. Companies have stopped their policy of selfsufficiency which was a feature of the economy of shortage: they focus their profile, they sub-contract some of their activities that used to be carried out internally and they reduce their raw material inventories, while increasing the finished goods stock on hand.

THE GREAT MULTI-NATIONAL COMPANIES

Some of these (such as Shell) appeared on the scene of the Hungarian economy well before the political change of regime. They are still present in production and services in huge numbers, applying various forms of capital investment: acquiring smaller or greater stakes in Hungarian companies during privatization, launching green field investments (as, for example, Suzuki in Esztergom), setting up subsidiary offices, concluding strategic alliances and franchise agreements, and so on. Tungsram, bought by General Electric, is the leading company in the domestic sphere of multi-nationals.

Several different views and opinions have gained ground about the intention, strategy and role played in the privatization process by the great multi-national companies in Hungary. Many people are concerned about domestic industry: they think that the multi-nationals will conquer all areas after a while, and Hungarian owned companies will only be in a service relationship to them, playing a supplier role. According to others, the international 'giants' are buying market shares here, not companies; they would cut back production, while occupying the channels of sales and distribution, and would export the profit by applying internal prices and other accounting methods. On the other hand, some people say that the multi-national companies do play and will play a major role in introducing and transferring modern technology, and that these 'citadels' of


technology will have a radiating effect, forcing domestic industry to catch up with them, while enabling tens of thousands of people to become familiar with modern technical and market skills. The truth is probably not onesided: the multi-nationals surely apply various strategies.

The assessment of Hungarian investments by foreign investors is altering: it used to be the most positive among the East European countries at the beginning of the 1990s, but by 1995 the situation has declined somewhat: at the beginning of the year Hungary was ranked third after the Czech Republic and Poland. The multi-national companies contribute significantly to the development of the domestic management culture, by trying to introduce their own organizational and control systems to Hungary. In the case of several companies bought by multi-national enterprises, the trend is that the top management positions of the newly privatized firm are occupied by foreigners for a while, who start major training programmes, and gradually get replaced by domestic managers; this tendency is driven by cost-reduction efforts too. Particular strategies can be seen which aim to cope with the differences in culture: certain international companies try to eliminate contradictions and sources of conflict by trying to enforce the introduction of their own culture (that is, the cultural reprogramming of the local staff) by training courses and other means. Others prefer to make use of the positive elements of the local culture. Sometimes examples of 'negative adjustment' to the situation can also be seen: some companies provide a lower level of service to their Hungarian clients than they provide at home, since the requirements of an average East European client are lower.

MAJOR PRIVATE COMPANIES OWNED BY HUNGARIANS, FORMERLY LAUNCHED AS BUSINESSES

Some domestic private companies have experienced brilliant careers in recent years, especially in brain-intensive industries such as software engineering, where the competitive advantages of the Hungarian educational system, which is generally still regarded positively, could be utilized. A few of them had already started their activities in the last years of the former regime. The economy of shortage at that time provided spectacular chances of growth in certain fields: an enormous vacuum had to be filled, and those who moved quickest could gain larger slices of the cake. As a matter of interest, the first great failures and bankruptcies in the private sector were also linked to this rapidly growing circle of companies. This latter phenomenon can be explained by several reasons. One of the reasons


was the 'classical' children's disease caused by rapid growth: the control system and the skill of the managers could not keep pace with the increasing dimensions, the management was unable to change, decentralize and set up modern management information systems; they controlled the great company the same way as they had directed the small venture. Another reason was that the market was mature and crowded; there was the ruthless expansion of professional and financially strong multi-national companies; it was the end of the era of easy growth, and the beginning of a buyer's market. The third reason is a financial one: several companies financed the rapid growth from enormous loans which should have been repaid when the market became crowded and competition intensified. The best example of these trends could be the market for office equipment: the leading group of players has entirely changed in the space of a couple of years and certain companies, which used to be cited as leading examples, have completely disappeared from the scene. It is pleasing, however, that some domestic private ventures have been able to keep pace with the leading group, achieving international success as well, by following a policy of gradual growth and relying on the intellectual capital of domestic experts.

SMALL VENTURES

There are around 100 000 small ventures in Hungary, which represents a great change from the previous era. Following the lifting of legal and political restrictions, the greatest number of small ventures appeared in those areas where barriers to entry were low: no special expertise, large capital or special tools were needed. The ground floors of houses became crowded with small shops, and garages were turned into mechanics' workshops. There had been barely a dozen publishers in Hungary prior to the political change of regime, while a couple of years later there were already several hundred of them.

The entrepreneurs themselves can be grouped in various types. There are those who consider the venture as their profession: they like independence, they can cope with the risk and enjoy competition. The second group consists of the so-called 'forced entrepreneurs': people dismissed from their jobs, having no alternative; people with low salaries, who have become part-time entrepreneurs; students trying to survive financially during their studies. Their common feature is that if they had a stable and well-paid job, they would not even think about being an entrepreneur. The third group - which is quite large - consists of the entrepreneurs of the


sleeping ventures: these businesses are in operation only from an administrative point of view; the owners account for their personal income as 'revenues', their expenses as 'costs'; they try to evade tax payments, registering their personal car as a corporate vehicle or making their holidays appear as business trips, with the aim of making life cheaper.

The entrepreneurial image, the picture gaining ground in the mind of the public, has changed significantly in the last three or four years. We have already mentioned that in the earlier decades people had deemed entrepreneurs to be a kind of hero (rather enviously), struggling through bureaucracy and proving that there is a chance of getting on individually as well. This image has become much more complex: the 'real' entrepreneurs are still respected, but the title 'entrepreneur' may also have a negative meaning, referring to an uneducated person who is regarded a social climber, has become suddenly rich, and fishes in troubled waters.

ORGANIZATIONS AND VENTURES OPERATING IN AGRICULTURE

Prior to the political change of regime, Hungarian agriculture had been represented by farmers co-operatives and state farms, with some space for individual ventures at the same time, especially in household farming plots and gardens. The institution of farmers' co-operatives got into the crossfire of political attacks at the time of the change of regime, and the battle is still going on. Meanwhile gross production in agriculture - which used to be the 'success industry' of Hungarian socialism- went down significantly: if we consider the relevant data for 1989 (the last year of the previous regime) as 100 per cent, then the same figure for 1993 is 67 per cent.

The transformation of agriculture - which is not yet completed - has been hindered by the uncertainty pertaining to property and the slow process of legislation. Due to the fierce political debates and attacks, the leaders of the former farmers' co-operatives, including several welltrained, modern-thinking experts, have given up and left their profession or have started private businesses. The industry faces unanswered questions: are the several small private ventures - appearing after the compensation of former owners and the partial disintegration of the co-operatives -going to be fit for survival in a period when the Eastern markets are in ruins, while the Western markets are protected by strong barriers to entry? Is there any hope of developing modern family farming estates, which are competitive in size and well equipped? Will the word 'co-operative' lose its negative meaning inherited from the former era, and will the existing or


future co-operatives be able to integrate several small private farming estates in a way that creates organizations capable of entering the European market, without impairing the independence of members, while at the same time making use of the power of being organized and going in the same direction (as in Ireland, for example)? Are we not going to face a situation where the size of the cycles which are typical of the production of certain plants and animal species will increase as a result of the lack of co-ordination? What is the optimal size of a farming estate from an economic point of view? At the same time there are several signals indicating that the new integration of agriculture will come not from the industry itself, but from the distribution of agricultural products which has now become a key factor because of declining demand, and from the foodprocessing industry.

THE GREY AND THE BLACK ECONOMY

The proportion of the black economy in the national economy is assessed to be around 20-25 per cent by certain exrerts. It is almost impossible to draw a sharp line between the illegal and legal economic activities, or to distinguish definitely between the black and grey spheres. Organized economic crime dealing with large sums of money can be found at one end of the scale, while farmers performing work for 'barter' for each other, or peasants selling from their own gardens wit'lout an invoice, represent the other end. The preceding one, the sphere belonging to the category of 'heavy criminality', is growing globally, and this is encouraged by the economic and political uncertainty of some of the neighbouring countries.

People of small means basically do not consider the black market as an enemy, but as a source of goods or services provided at lower prices. It is a well-known fact that the same product costs more 'with an invoice', than 'without an invoice' (that is, the transaction is carried out by bypassing the tax authority). The cheap black markets play a 'socio-political' role as well, and the authorities ignore their activities to a certain extent: winding them up would provoke indignation from the public. The black market also creates competition: in areas close to the border foreign 'guest workers' are often employed illegally for very low wages, which spoils the competitiveness of those not willing or unable to employ such manpower. In the given economic situation, almost all legal ventures are forced to use cost- and tax-saving 'grey' legal and financial solutions that are formally in order, but do not reflect reality. These things do not displease the public in a country where this sort of swindle against the state bureaucracy has been deemed a positive act for decades.


THE 'BACKGROUND INSTITUTIONS' OF THE CORPORATEENTREPRENEURIAL SPHERE

These have also undergone significant changes in parallel with the economic and political change of regime; their detailed analysis would require a separate study.

The most important series of measures have been in all probability the formulation of the system of financial institutions: first of all, the introduction of the two-tier banking system. The new commercial banks -unsurprisingly - were not immediately able to carry out their functions entirely on a European level. Most of their employees could be deemed 'beginners' in the maze of the market economy, just as with the managements of companies: the creditors learned together with the loan-raisers, sometimes causing damage to each other. The privatization of the domestic commercial banks has been progressing quite slowly so far, but several foreign banks have opened branches in Hungary. The Budapest Stock Exchange has been working reasonably for some years, although the number of companies floated is still small. Insurance is no longer a state monopoly, and there are no insurmountable barriers for foreign competitors entering the market.

Up to the second half of the 1980s, the sphere of corporate advisers and consultants had been represented by ministerial institutions operating under different names, while the advisory commissions had not usually been established by the companies, but by the ministries supervising them. Sometimes foreign consultants also took part in these activities. In the second half of the 1980s, some companies established a direct relationship with well-known foreign consulting firms through credit programmes devised by the World Bank, but the solutions proposed by the aforementioned firms were mostly 'alien to the system' at that time. Since the political change of regime, fierce competition has evolved: nowadays there are several consultancy firms operating in Hungary, including the greatest and most well-known international firms. The situation concerning management training has developed similarly to that pertaining to the consultancy market. Companies willing to train their employees may choose from several educational institutions and training programmes.

We have tried to give an overall picture of the most important groups of stakeholders in the life of the Hungarian economy, in order to describe the changes that took place at the time of the change of regime. Their fate is inseparable from the general development of economic, social and political life. This development struggles against severe difficulties, and is


neither abating nor straightforward. The present Hungarian economy demonstrates positive and negative symptoms at the same time: the economy started to grow in 1994, but has been showing signs of crisis as well. In the spring of 1995 the Government resolved to take particularly hard measures in order to reverse some negative tendencies. In Chapter 12 we will try to outline the initial results and potential outcomes, but one has to be very cautious: the success of these steps can be judged only from an appropriate distance in time.

Part II

Case Studies

5 MOL Ltd (Hungarian Oil and Gas)*

The case of MOL covers a multiplicity of issues resulting from the government's decision to terminate MOL's monopoly position and to break up the enterprise into a number of privatized companies. The case of MOL is also significant because it represents the largest single privatization to date in Central and Eastern Europe.

The nature of MOL's monopoly was in addition immeasurably affected by the liberalization of the Hungarian market and the entry of major foreign competitors in the oil business. This had a comprehensive impact on MOL's activities, from prospecting and refining through to retailing. On balance foreign competition threatened MOL's position, even though it could also offer some opportunities (for example, in the refining of crude).

Further factors which were detrimental to MOL were the- by Western standards - high energy consumption rates and the need to implement appropriate and acceptable environmental standards. Internally, apart from coming to terms with restructuring, the company had to grapple with a range of human resource issues (for example, the need for the employees to achieve a level of qualification which would assist the company to be competitive internationally).

BACKGROUND

Until the 1990s MOL Ltd was the monopoly supplier in Hungary of both oil and natural gas. MOL is the largest Hungarian enterprise, with sales (in I 994) of over 264 bn Fts and over 18 000 employees, but with losses of nearly 1.3 bn Fts. 1 By 1995 it still controlled 69 per cent of the petrol wholesale market and 74 per cent of the gas and oil wholesale markets. However, it only accounted for 35 per cent of the retail petrol market and 38 per cent of the diesel retail market. Moreover, regional gas distributors depended historically entirely upon MOL for supplies.

About 50 per cent of gas used in Hungary comes from indigenous production, with the remainder being imported mainly from the Commonwealth of

' This chapter is co-authored by Tibor Benko and Ervin Torok.

67

68 Case Studies

Independent States (CIS). As regards oil, 25 per cent is indigenous and 75 per cent imported. However, the domestic oilfields in current use are becoming exhausted and imports have been affected by the conflict in the former Yugoslavia: the main pipelines for oil are the two Friendship pipelines from the Former Soviet Union and the Adria pipeline from the Middle East via the former Yugoslavia. The oil coming from the CIS has a much higher sulphur content than Arabian oil. The Hungarian refineries can cope with this but the resulting emissions are more detrimental to the environment. Within Hungary MOL operates 1000 crude oil wells, 300 natural gas wells, three refineries, and controls 5400 kilometres of oil and gas pipelines.

Gas forms a much higher proportion of energy supplies than in Western Europe and total energy consumption is much higher than in other countries. This is for two main reasons: energy prices were deliberately held down by governments operating the planned economy, and inefficient industrial processes consumed more energy. Furthermore, there were no energy conservation policies to encourage more efficient usage.

Large-scale hydrocarbon exploration started in 1938 in Zala county in western Hungary with the formation of Hungarian-American Petroleum Ltd (MAORT). After the war this was changed to Hungarian-Russian Petroleum Co. (MASZOLAJ). In 1957 the OKGT (National Oil and Gas Trust) was founded; its activities included exploration, exploitation, refining and trading activities and the trust controlled every aspect of the petroleum business and, later, the gas industry. After 1990 the company was reorganized, in preparation for privatization. No fewer than 15 of the 23 former subsidiaries - member firms of the trust - representing manufacturing and service industries were divested, followed by the establishment of a hi-divisional (upstream and downstream) operational structure. On 1 October 1991 MOL Ltd came into being.

Upstream activities include the search for hydrocarbon fuel, exploitation and transportation through pipelines; downstream activities include the acquisition of crude oil, refining crude into gasoline and other products, the marketing of these products and connected trade activities.

In the oil divisions, the company is completely vertically integrated, from the exploration phase through to the retailing of petrol via MOL-2000 filling stations (which are the refurbished former Afor stations).

The next two sections take a separate look at the gas and oil activities.

THE GAS BUSINESS

Gas accounts for approximately 30 per cent of domestic energy consumption, including 16 per cent of power and 46 per cent of heating. Domestic gas

MOL Ltd 69

reserves are located mainly in the Alf6ld region of south-central Hungary. The Hungarian State Geological Institute estimates that the reserves will last approximately till the year 2010. The resources are decreasing and the annual output of 5 bn cubic metres is beginning to fall, with the need to import (for example, from the CIS) beginning to rise to over 50 per cent.

Pricing Policy

Traditionally 50 per cent of natural gas supply has been imported by Mineralimpex, the state-owned trading company, which is Hungary's second largest enterprise and holds exclusive rights to import gas. Its revenue for 1994 was estimated at 68 billion Fts, with profits of 82 million Fts. 2 Mineralimpex sells imported gas to MOL and MOL in turn sells the gas to the five regional distribution companies and the Budapest Gas Company. These distributors were originally part of the OKGT until the company was restructured as MOL, and they now operate as separate companies.

The five regional companies are Tigaz (the largest, based in north-east Hungary); Kogaz; Degaz; Egaz; and Ddgaz.

As a consequence of current government policy MOL cannot charge the distribution companies as much as it pays to Mineralimpex, which purchases the gas at world prices. MOL projects that at current prices it would lose more than 70 billion Fts from its natural gas operations in 1996 and is, in effect, subsidizing the gas prices.

Consumer gas prices in Hungary have traditionally been low. Prices were 80 per cent higher in Italy and 65 per cent higher in Britain, before the 1995 price rises (see below). MOL, in 1994, produced the comparison of prices which can be seen in Table 5.1.

Table 5.1 Natural gas prices of selected countries3

(in Fts per cubic metre, including VAT)

Country Price

Italy 56.9 Germany 39.6 France 38.3 Belgium 36.8 Netherlands 30.7 Great Britain 29.1 Hungary 9.8

70 Case Studies

Approximately 70 per cent of gas sales are to industry, including MVM (Magyar Villamos Muvek Rt), the electricity company, and the remainder goes to private consumers. The company lost 1.3 billion Fts in 1994, mainly because of the underpricing of gas and the losses on the imports. From January 1995 MOL's gas prices for distribution companies rose by 6 per cent and prices to industrial consumers rose 10 per cent. Prices for domestic consumers increased by 30 per cent. Consumer prices were increased again in September 1995, by 8 per cent, and further rises were scheduled for 1996.

Sectoral Analysis of the Market

Gas will continue to play an important role in domestic energy. Domestic demand for connections has been high in recent years, influenced by the uneconomically low prices. As new distribution systems are constructed and existing ones expanded, demand will increase further. On the basis of these developments and the expected evolution of urban households, it is projected that residential demand could grow from 2.0 billion cubic metres in 1992 to 3.2-3.7 billion cubic metres in the year 2010.

Commercial sales are estimated at 35-40 per cent of residential sales over the same period and are forecast to reach 1.2-1.3 billion cubic metres by 2010.

Under the former regime residential areas were constructed with integrated heating systems. Gas consumption in the district heating market, however, is unlikely to increase as no more of these systems will be built, but this still accounts for 2 billion cubic metres of gas consumption per annum.

Hungarian industry uses more energy than Western European industry, partly because of the comparatively low efficiency of its industrial processes. However, older heavy industries are already declining. The introduction of modern industries and improvements generated by the privatization process should lead to a decrease in energy-intensive industries, the growth of small to medium-sized industries and an improved control of costs in order to compete on both the domestic and international markets. Industries are likely to seek more efficient and less polluting processes. Industrial demand is projected to rise from 3.85 bn cubic metres in 1990 to 4.3 bn cubic metres in 2010.

The power market consumes much larger volumes of gas than in Western Europe. Gas-fired plants are used for both heat and power generation (16 per cent and 46 per cent respectively). Higher demand for electricity will be partly offset by efficiency gains in the industry. The forecast

MOL Ltd 71

for supply to MVM is projected to remain at the level of 2.5 bn cu.m. per annum.

The total forecast for gas in 2010 is therefore about 16.2 bn cu.m. Without further development of indigenous supplies, there will have to be a large increase in imports. Construction of a gas link between Austria and Hungary was begun in 1995. It. will be 118 kilometres long and run from Baumgarten to Gyor, with a capacity of 4 bn cubic metres. Completion is scheduled for 1996, at a cost of $US30 million.

Underground storage facilities can be used to even out seasonal fluctuations in demand, but these will also have to be increased so that surplus gas can be stored in summer for use in winter, to give greater security of supply.

MOL's gas division has a good infrastructure, financial resources for new investment and the ability to borrow. At the moment profitability is declining as the cost of imported gas rises, and while prices are kept low. However, prices are expected to increase eventually and there will be a reduction in mining tax from 40 to 12 per cent, which should improve current profitability and enable new, smaller operations to become more profitable. The new mining law will also force MOL to take up its options on new fields of production by 1997 or lose the concessions.

The industry can rely on expert engineers. However, middle management is typical of managements trained under the former economic system. Furthermore few people speak English, which is the language of the international energy industries.

THE OIL BUSINESS

Since liberalization the aggressive marketing of the major multi-nationals has posed a great threat to MOL. Before 1990 MOL owned every filling station in Hungary which went by the name of Afor. Now MOL owns only 305 out of a previous total of 1260 stations. About 100 are the modernized MOL-2000 stations, but the remainder are very old and unattractive. MOL's share of the petroleum retail market, with 35 per cent, still leaves the firm as the market leader, although this is only by operating the largest retail chain, not because it operates efficiently. Shell has 22 per cent of the retail market with 90 stations.

MOL operates 1000 crude oil wells, which produce around 4700 tonnes/day (t/d). The refining capacity is 32 000 tid of crude and there is constant excess capacity. The average volume processed in 1993 was 21 150 t/d (5990 t/d petrol, 8450 t/d gas oil). The refineries are supplied

72 Case Studies

through a pipeline network of 5400 kilometres. The filling stations service a daily average of 125 000 motorists through a retail network of 305 stations (MOL-2000 plus Afor) and there are also 260 road tankers involved in distribution.

As MOL has to import 75 per cent of its crude oil it encounters exchange rate risks and has to take account of inflation, which is over 20 per cent in Hungary but only 2-3 per cent in the USA. Oil prices have fluctuated sharply in recent years, which contributes to the problems of financial management.

Product Mix

There are four types of gasoline sold at the retail filling stations: leaded gasoline (either Premium or Super), and unleaded (either Eurosuper or Euronormal). The bestselling type is Premium, but the use of unleaded is increasing (see Table 5.2).

Gasoline brands as such are all basically the same and so companies find it difficult to build product loyalty. They therefore try to build retailer loyalty. Competition is fierce, with the major multi-nationals offering courteous service, sufficient pumps to minimize queues, and modern facilities and shops. MOL-2000 filling stations offer the same high quality of service but there are only 100 of these out of the total of 305, with the remainder still greatly in need of refurbishment, so that MOL is gradually losing market share.

An 'index of efficiency' can be constructed by dividing each company's market share by the number of retail outlets it owns. MOL has a very low ranking compared with its major competitors (see Table 5.3).

The competitors are more efficient partly because they are located in areas of heavy traffic, whereas MOL is spread nationally.

Table 5.2 Domestic sales of gasoline (in metric tonnes)

Premium Super Eurosuper 95 Euronormal 91 Diesel

1991

731 328 114

0 1944

1992

877 291 145 44

1754

1993

880 264 192 84

1689

MOL Ltd 73

Table 5.3 Market share and efficiency

Company Filling Market Efficiency Ranking stations share index

MOL 305 35 0.12 6 Shell 90 22 0.24 3 Avanti 44 n.a. n.a. n.a. OMV 25 5 0.20 4 Q8 24 4 0.17 5 Total 23 n.a. n.a. n.a. Aral 15 6 0.29 2 BP 17 8 0.47 I Agip 15 n.a n.a. n.a. Other 752 20 n.a. n.a.

n.a. =not available.

The price structure encourages the black market as there are three different taxes levied on automobile fuel, plus VAT, but taxes are not payable for heating or household purposes. The price difference between heating oil and diesel is 40 Fts/litre which induces black market activity. The techniques to avoid tax are endless and include importing heating oil and selling it as diesel, by not adding paint or by removing it. This results in high profits for the seller and worse fuel for the user. The problem is worsening with the liberalization of imports and the increased number of small independent filling stations (see Table 5.4).

The Need for Restructuring

Following the introduction of the market system many people cannot afford new cars, or even to maintain their old ones, so expenditure on fuel is decreasing. The general recession and restructuring of firms are limiting the purchasing power of households and firms and this is consequently impacting on MOL.

The majority of world oil resources has been discovered and remaining ones will require increasingly sophisticated technologies to retrieve them. Research and development in automobile manufacturing are aimed, among other things, at a reduction in the petrol consumption of engines, and research efforts are also being directed towards the search for alternative non-fossile fuels. The cumulative effect of these trends is to reduce

74 Case Studies

Table 5.4 Breakdown of petrol prices (Fts)

Type

Super Premium Euro- Euro- Diesel normal super

Retail price 25.3 23.3 26.4 28.0 19.0 Consumer tax 33.1 33.1 28.0 28.0 23.0 Environmental fee 0.8 0.8 0.8 0.8 0.8 Road tax 6.0 6.0 6.0 6.0 6.0

Total 65.2 63.2 61.2 62.8 48.8 VAT 16.3 15.8 15.3 15.7 12.2 Final price 81.5 79.0 76.5 78.5 61.0

market share, in the short run, and to induce restructuring in industry in the long run. The short-run trends are being countered by aggressive marketing by the multi-nationals, which MOL is trying to emulate.

Imports

In the early 1990s the majority of imports came via the Friendship pipelines since the Adria pipeline was out of action because of the conflict in the former Yugoslavia. However, crude oil purchases from the CIS are less reliable than they used to be. With a diminishing number of exporters in the CIS, there is an upward pressure on prices, but with the decline in the CIS's domestic oil demand, the volume for export has increased, allowing prices to fall. Despite these contradictory pressures MOL is currently obtaining enough oil from the CIS. However,in 1995 an agreement was reached for MOL to purchase 15 per cent of the Adria pipeline, which runs from Croatia through Hungary to Austria and the Czech and Slovak Republics.

As well as the loss of retail market share, the wholesale market is threatened because of relaxed import restrictions and the increase in the amount of contract processing by other parties. For example, Shell is importing its own raw material and using MOL refineries. Within 200 kilometres of MOL's biggest refinery in Szahalombatta there are two underutilized refineries: one in Slovakia and one in Austria. Both could supply filling

MOL Ltd 75

stations in western Hungary. Only OMV and Avanti use them at present but they represent a further threat to MOL.

MOL's own oilfields are ageing, and there is pressure to take up options on potential new fields. The fields it currently owns are reserved until April 1997; at that time MOL will have to bid for oilfield concessions against foreign firms. Foreign companies are already being allowed to explore for oil in Hungary. In August 1994 four multi-national companies were awarded rights to gas and oil exploration in Hungary. These companies are mainly American - the Blue Star Corporation, Coastal Oil and Gas Corporation and Occidental Corporation - and the German sister company of Mobil, Mobil Erdgas-Erdol GmbH. No concession fee was paid but there will be a 15 per cent tax, based on the amount produced. Under the new Mining Law the companies are allowed four years for exploration, which can be extended for a further two. Production cannot begin until at least one year after the conclusion of the exploration period.

All of the fields are near those operated by MOL and two of the firms -Blue Star and Occidental -plan to sell their crude oil directly to MOL for refining. A huge amount of capital will be required but Hungary can offer a stable market and a pipeline into the rest of Central and Eastern Europe. The companies can also take advantage of the existing infrastructure as they would not have to build completely new pipelines, but only relatively short connections to the existing network.

MOL saw these developments as a basis for new business relationships. Only one of its three refineries, Dunai (south of Budapest), operates at full capacity, but it may not be possible for the others to be more fully utilized without improvements to their conversion capacity. The technically inferior Tisza refinery in north-eastern Hungary is designed only to refine crude oil from the former Soviet Union, which is of lower quality than oil found in Hungary, and in 1990 was operating at 15 per cent capacity. The Zala refinery used to process heavy Hungarian crude into asphalt.

HUMAN RESOURCES

The downstream employees represented 6500 out of the total 22 000 in December 1993. Only a minority have higher educational qualifications (see Table 5.5).

The majority possess transferable skills but are not used to changing workplace frequently. Special technical skills are only required to a small extent for refining processes. Interest in learning is high and young engineers are keen to study management and economics. Great emphasis is

76 Case Studies

Table 5.5 Educational level of the workforce

Qualification

University and college Technical school Grammar school Primary school and on-the-job training

Total (per cent)

19 23 27 31

now being placed on language courses and on-the-job training. However, as may be expected, few managers have a 'Western' managerial background and there is a lack of motivation. Wages and salaries are higher than the national average but considerably lower than those of competitors (15 multi-nationals). MOL has instituted a system of fringe benefits designed with the objective of retaining staff by fostering a sense of loyalty: subsidized meals, overalls, health services, financial support for home buyers and builders, and assistance at times of bereavement or disabling accidents are included as part of the system.

FINANCIAL RESOURCES

Financial institutions regard MOL as a reliable and attractive client. Revenue is seasonal, and is often exaggerated by tax obligations. Clients of MOL are often unable to meet payments, which means carrying debt. In 1993 MOL began to turn short-term borrowing into medium- and longterm instruments more in keeping with the period of recovery envisaged for its own investments. It is claimed that the industry carries high fixed costs because the government requires strategic stockpiling, although in fact Hungary, at the end of 1994, had a 20-day reserve of petrol, whereas most European states generally have over 100 days' reserve.

ENVIRONMENTAL STANDARDS

From I January 1992 new standards came into force in Hungary for the quality of motor oils and gasoline; these are in some respects more rigorous than EU norms. For example, since April 1992 diesel fuel can contain only 0.2 per cent sulphur. In July 1994 Hungary signed the Oslo Treaty regard-

MOL Ltd 77

ing the emission of sulphur, which must be reduced by 58--68 per cent by the end of 1996. Environmental considerations are now considered to be very important.

PRIVATIZATION

Much of the future of the company depends on the results of privatization, which finally took place at the end of 1995.

The privatization of the energy companies was long expected and long delayed. The delay was because of a mixture of political indecision, following the election in 1994 of a more socialist-oriented Government, and the need to resolve important practical and strategic questions.

The Government wished MOL to continue as an integrated oil and gas company, but its size, including considerable overmanning, made it an awkward investment, although potentially very lucrative. Many potential investors would only be interested in either the oil or the gas division, while others might only be interested in the wholesale or retail parts of the oil division. In August 1995 it was announced that 35 per cent of the shares of the company would be sold, 33 per cent by international private placement and 2 per cent to Hungarian domestic investors via the Budapest Stock Exchange. 3 per cent would be offered to employees. The five gas distribution companies were also offered for sale by tender. This constituted the largest privatization, to date, in Central Europe.

By the end of November the employee share sale was completed, with 90 per cent of employees buying 5.4 million shares at 1400 Fts per share. The international private placement of MOL shares generated $150 million.

Competition for the gas distribution companies was fierce, with bids coming from the UK (British Gas), France, Germany and Italy. Tenders were invited for 50 per cent plus one share in each company. The bidder who won Tigaz, the largest region, was excluded from acquiring any others. Bidders were also limited to winning two of the remaining regions.

Italgas won Tigaz with an offer of $172 million, which meant it could not acquire any of the others, even though it was also the highest bidder for Kogaz and Degaz. Degaz and Egaz went to Gaz de France and a German consortium ofRuhrgas and VEW took Ddgaz. The fifth company, Kogaz, went to a second round of bidding, since its two highest bidders, Italgas and Gaz de France; were now effectively out of the running. Kogaz was eventually acquired by a German consortium of Bayernwerk and EVN Energie.

6 BERVA*

The BERV A case study identifies a number of key issues which have manifested themselves in the process of transforming Hungarian enterprises. BERVA, a traditional engineering company, has had to come to terms with the loss of its traditional markets, particularly in the former Soviet Union, as well as the changes in the domestic and other markets it continues to serve. Additionally, BERVA has experienced a change in the relationships between its suppliers and customers, coupled to the increasing involvement of foreign companies as potential 'partners' and competitors.

The intensified need to compete has forced BERV A to review the status of its technology infrastructure and has contributed to a fundamental restructuring of the organization. A key issue which remains as yet unresolved is privatization and ownership. Although technically privatized, BERVA's assets are owned primarily by Hungarian banks. Banks are playing a significant role in the Hungarian privatization process as they retain a majority shareholding in many companies. While the banks provide working capital, they are often unwilling to commit the long-term resources required for companies to invest in modern plant and equipment.

THE PRECISION ENGINEERING INDUSTRY1

Precision engineering comprises a wide variety of products and components used in all sectors of industry, including public and private services, and therefore any decline in its performance can have farreaching implications for the rest of the economy. In a healthy economy there is a strong demand for precision engineering products: ageing populations require extra health care and therefore more medical equipment; various kinds of measuring, monitoring and controlling equipment are invaluable in helping to reduce costs and improve quality in manufacturing industries of all kinds.

During the 1980s demand for precision engineering products grew, but following the major changes in the economy in the early 1990s, produc-

* This chapter is co-authored by Tibor Kovacs.

78

BERVA 79

tion and employment in this sector declined sharply, and more than the average for the economy as a whole.

Hungarian precision engineering companies have a successful history, based on their own research and development and a highly skilled labour force. Until the Second World War the Hungarian industry was well integrated into the world market for both civil and military products and cooperated with major international firms such as Siemens, AEG and Philips. After the war all companies were nationalized and management methods were altered to comply with central planning and the demands of the Soviet-dominated Council for Mutual Economic Aid (CMEA or COMECON). As a result the Hungarian precision engineering industry lost its international competitiveness. However, from the early 1960s many companies began to forge new links with Western companies; they imported Western technology through licence and know-how agreements (see below, BERV A and Mecman) and exported products in bulk to the CMEA and developing countries at a premium price. Western countries were effectively blocked from entering the CMEA market directly, while domestic research and development attempted to develop advanced products (or replicate them via reverse engineering).

The decision to restructure the economy in 1989-90 changed the situation dramatically for precision engineering firms, as it did for most other industries. By 1992 the industry's output had fallen to under 50 per cent of its 1988 level. Exports fell sharply because of the collapse of the Soviet economy: the majority of output had been sold to the former Soviet Union, either directly or as components of other products. Nevertheless some products continued to be sold to CIS states, particularly those which are vital to the control of large energy systems or communications networks. The buyers, such as oil and gas companies, may offer 'hard' goods for barter or open letters of credit. They are often locked into particular operating systems since the costs of switching would be too high. Other commercial products have suffered more, particularly as they now compete with those of Western and newly industrialized countries.

The domestic market also suffered, partly as a consequence of the general collapse of CMEA, but also because of import liberalization, particularly in the consumer goods industries. Hun~arian companies lost much of their former market share and many went bankrupt. Companies that have survived are still in financial difficulties. Moreover banks are often reluctant to lend them money in such an uncertain market. Most of the companies require reorganization and restructuring if they are to attract new investors.

80 Case Studies

One of the problems that precision engineering companies have is that, like other former socialist companies, they are highly vertically integrated. In order to avoid the problems caused by shortages and lack of competition they became self-sufficient in all processes necessary for their production. This resulted in both underutilized machinery and bottlenecks, and proved a costly solution to the structural problems of the economy. Now it also hinders privatization in many cases, since foreign investors do not want to buy companies with a heterogeneous collection of technologies: for example, an in-house foundry is not economical and Western companies are used to relying on specialized suppliers for raw materials and components. In addition domestic investors lack capital and this factor makes them more interested in smaller companies.

In order to seek new opportunities and to survive, individual plants of large companies have often become separate legal entities and have been given more autonomy in day-to-day issues, but not in strategic ones. In most cases they are still in state ownership, either directly or through ownership by other state enterprises such as banks. Because of these organizational changes the number of legal companies has increased, but as they are still largely controlled by their former headquarters, they are not in reality autonomous businesses. To be properly competitive they must become truly independent and must learn how to implement all aspects of business, including finance and marketing, in addition to manufacturing, which was their main role previously. Table 6.1 illustrates the increase in the number of small companies in the early 1990s.

Table 6.1 Size distribution of Hungarian precision engineering Industry, 1990-1 (%)

Size (employment) Number of firms Employment Sales

1990 1991 1990 1991 1990 1991

0-20 59.6 65.7 2.4 4.6 8.2 13.4 21-50 16.7 15.0 4.7 6.7 8.2 9.2 51-100 5.4 7.0 3.2 7.3 5.4 10.4

101-300 8.8 7.0 11.5 15.8 16.7 19.9 301-500 2.5 2.0 7.5 11.0 9.1 13.0 501-1000 3.5 1.5 20.8 13.9 18.3 8.9

1001 + 3.5 1.8 49.9 40.7 34.2 25.1

Source: Havas (1993).

BERVA 81

Companies have started to introduce new products and technologies, in addition to improving their former products, either on the basis of their own research and development or by purchasing licences. Those which have been privatized by foreign investors are in a much better situation than the rest, in terms of access to new ideas as well as finance. However, privatization could have adverse effects on Hungarian research and development personnel, who are used to being involved in exciting projects, as well as in the decision-making process. Since decisions on technological issues are now made by the foreign parent companies, this could engender conflicting feelings in the existing research and development staff who, despite their access to improved funding and facilities, might have less influence on research and development strategy. Their motivation might be impaired without adequate safeguards for the use of their expertise, especially as there is a widespread view that the accumulated skills and experience of engineers and blue-collar workers need to be preserved, and updated as necessary.

In most cases, privatization by foreign investors appears to be the most viable solution to the problems of companies in the sector. This in turn will require that the companies, and the whole precision engineering industry, should be restructured. The current task is therefore to determine the appropriate size and internal organization to allow fast adjustment and attract potential investors. Firms vary in the extent to which they lag behind their Western competitors, from only a little, in terms of technology, product quality and the skills of their workers, to quite considerable differences. In many cases the organizational structure and managerial behaviour have already changed. Further efforts to improve quality and strengthen marketing require new resources. The industry will inevitably contract, but the extent to which it will do so depends on several factors. These include the ability to gain access to new markets, and to regain former markets; the amount of new finance injected; the introduction of new management techniques; and action by the government to aid restructuring (such as maintaining vocational training opportunities, facilitating privatization, and assisting export activities).

BERVA

The history of the BERV A Precision Assembly Unit Manufacturing Company Ltd illustrates many of the situations and problems faced by companies in the precision engineering sector.

82 Case Studies

The company was first established as the Precision Fitting Factory (Finomszerelvenygydr, or FE) in Northern Hungary in 1951. The site chosen was a secluded valley outside the historic town of Eger, about 60 miles north-west of Budapest. This site in the Berva valley was selected because the first products made were military equipment and security was· important. The factory stretches for over two kilometres along the valley, surrounded by wooded hills where weapons used to be tested and has a total area of 220 000 sq. m. The company is still the largest employer in Eger.

In 1957 the first steps were taken to switch to non-military production, with the manufacturing of different products, such as small motorcycles and coffee percolators. In 1962 BERVA started to produce refrigerating compressor units for domestic refrigerators. These compressors have been one of the company's main products ever since.

In 1967 FE signed a long-term co-operation contract with AB Mecman of Sweden, one of the pioneers of the pneumatics industry in Europe, for the production of various pneumatic elements and components. A more substantial agreement was signed in 1972, as this gave FE access to the entire Mecman range of products. Since then many pneumatic elements and systems have been initiated and produced by FE/BERV A. BERV A paid both licence fees and royalties.

Pneumatic elements are a variety of cylinders, valves and fittings which are components of industrial automation machines and light industrial machines (for example, in the textile, leather and food industries). Vehicle pneumatics are also produced, including door actuators for buses and coaches and gas springs. A recent contract with the newly established Magyar Suzuki car firm has led to the production of shock absorbers for cars.

BERV A also has many applied technology and service departments, since under the previous economic system plants strove to be selfsufficient units. Thus the factory includes facilities for machining, cold forming and the production of aluminium. and zinc alloys; plastics processing; surface and heat treatments; laboratories for measuring and testing; and toolmaking and maintenance departments.

BERV A is considered to be one of the three most advanced companies in the precision engineering industry in Hungary, with an estimated 50 per cent of the pneumatic market in 1992. The main competitor, FESTO, had a market share of 30 to 35 per cent in 1992, with the rest of the market divided among smaller firms. The main reasons for BERV A's market lead are the highly skilled workforce and the Mecman products. The plant and equipment are outdated (by Western standards) and production is labour-

BERVA 83

intensive. The workshops are in need of modernizing -particularly the compressor workshop - but strict quality control ensures that products are of a high standard.

In 1992 FE was transformed into a company limited by shares and renamed BERV A Company Ltd, in preparation for privatization. The State Property Agency held 93 per cent of the shares, with the remainder going to the State Development Institute and the local government.

PROBLEMS IN THE EARLY 1990s

In the 1980s BERVA had been very profitable; pneumatic products accounted for 60 per cent, compressors for 20 per cent and bus components for 20 per cent of output. The firm suffered a dramatic reduction in turnover in 1991 and 1992 and started to record losses. The two main reasons for this were the collapse of the traditional Eastern European markets, and the start of the recession in Hungary. Since 50 per cent of sales of pneumatics were in Hungary and 30 per cent to Eastern Europe (with the remaining 20 per cent of sales to Mecman), the fall in both these markets led to a 50 per cent drop in the company's profits. Sales in Eastern Europe fell to 10-15 per cent of the 1989 level and domestic sales fell by 50 per cent. Sales to the West also fell by 15-20 per cent.

This decline mirrored the general decline in the whole economy and in the engineering industry in particular. Table 6.2 contains the figures for BERVA's overall turnover in the period 1989-93. The decline in turnover was obvious and dramatic, although it was the fall in the sales of pneumatics which was giving particular cause for concern.

Year

1989 1990 1991 1992 1993

Table 6.2 BERVA's turnover 1989-93

Turnover (in million Fts)

2412 2435 2467 1795 1222

84 Case Studies

GOVERNMENT POLICY AND FOREIGN DIRECT INVESTMENT

The engineering industry is one of the strongest industries in Hungary and contributes a considerable proportion of hard currency earnings. However, import liberalization created strong competition for firms such as BERV A. The Ministry of Industry and Trade believes that the future of Hungary's engineering industry lies in the manufacture of spare parts and components. Major investment took place in the early 1990s in the automotive sector, especially in components manufacturing. German and American companies predominate, but in 1991 Magyar Suzuki built a 'green field' plant in Esztergom. In 1993 around 20 000 Swifts and Sedans were produced, mainly for Hungary and Western Europe, but with some vehicles destined for the former Soviet Union. BERV A won a contract to produce shock absorbers for this firm.

In 1991 Electrolux acquired Lehel, the leading Hungarian manufacturer of refrigerators and household appliances. Electrolux began a major improvement programme in the former Lehel factory which supplies 60 per cent of the Hungarian refrigerator market and 35-40 per cent of the chest freezer market. BERV A continues to supply the compressors for this company's refrigerators.

CHANGES IN 1992

In the early 1990s BERVA suffered severe losses because of the disappearance of its markets and owed large debts to two state banks. Investment was needed to modernize the plant and to secure the future of the firm. In view of the long-term close co-operation with AB Mecman, an obvious solution seemed to be to set up a joint venture between the two firms. In 1991 BERV A and Mecman had already formed a joint venture for commercial purposes under the name of Mecman Eger Kft. This joint venture company bought pneumatic elements from the two parent companies and sold them in Eastern Europe. However, in 1993 the activity of this joint venture company was extended with the production of the Mecman pneumatic elements. The company sold these elements to the traditional Hungarian and Eastern European markets. The joint venture's products were produced partly by the company itself and bought partly from both parent companies.

Mecman Eger Kft was owned by BERV A and Mecman and operated as an independent company. The advantages were not all on BERVA's side. An assessment of the firm at that date produced the following analysis.

BERVA 85

Although some production techniques were particularly outdated -mainly in valve production - most of the pneumatic products were of top quality because of the existing Mecman licence. The company had widespread commercial contacts, which were particularly important for the industrial markets. BERVA's prices were low, mainly because of low wage levels. Furthermore there were no comparable competitors as yet, although the open market would increasingly lead to more competition and former customers would decrease as the recession deepened.

The organization of the firm was strictly controlled, which was beneficial for quality control, but as production was labour-intensive and wage levels were low, motivation was suffering. Decision making was bureaucratic and the firm's structure was still not sufficiently marketoriented.

BERV A had well-educated engineers and skilled workers, in development departments as well as in production units. There was a new, younger management team, which was receptive to new ideas and methods. However, salary levels were low and poorly differentiated. Unemployment is high in this part of Hungary and BERVA remains attractive to skilled workers because of its high technological level for the area; but as more foreign joint ventures enter the area, good staff are likely to be lured away by higher salaries.

The main problem was finance. There was a large amount of short-term debt at high rates of interest, owed to two state banks, and there was no money for improvements. Two disused factories, at Reves and Petervasara, were offered for sale but had still not been sold by the spring of 1996. The main opportunity for new capital was seen as a joint venture, especially if the partner was a foreign company and owned more than 50 per cent of the equity, since the company would then not pay tax for 5 years.

The industrial pneumatics group was the most profitable, so this was the most obvious candidate for the new joint venture. The advantages for Mecman would be the acquisition of an important supplier of products and parts, with a skilled and cheap labour force, and a marketing partner already selling Mecman products. Mecman could invest a relatively small sum to acquire 51 per cent of the company and thus secure its long-term interests in this important field.

Accordingly the joint venture was established, with BERV A and Mecman as the owners, with BERVA supplying the machines, tools and most of the stocks and Mecman contributing 100 per cent of the cash, enabling Mecman to own 51 per cent of the shares. The new company rented existing buildings from BERV A Co. Ltd and also bought in services, such as toolmaking and maintenance.

86 Case Studies

Since most of the staff were from BERVA, it was practical to choose an organizational structure which was familiar to them. The company structure was a relatively straightforward functional one with a Managing Director, and four others: the Financial, Marketing, Production and Technical Directors. Later, as production increased, a matrix or other more suitable structure could be introduced.

THE 1994 SITUATION

Although the profit projections for the joint venture were favourable, and likely to be fulfilled, BERV A Co. Ltd itself was still in financial difficulties. No 'real' privatization offer had been received by the State Property Agency and so the two creditor banks offered to buy the company themselves for a small sum, and this was agreed. The Commercial and Credit Bank Ltd and the Post and Savings Bank now jointly own 93 per cent of the shares. (The State Development Institute and the Local Government Authority own the remainder of the shares.) Thus the firm was effectively still state-owned. The banks had promised to let the company continue operating but they invested no new money, and were still insisting on full repayment of their debts. The Board of Directors comprised representatives from the two banks, plus the legal advisor from the Eger Mayor's office and the Managing Director, who had been BERV A's Chief Engineer.

As a result of the economic situation the number of employees was reduced from 3200 in 1989 to 1050 by the beginning of 1994, with nonproduction workers particularly hard hit, but because of the expansion of compressor production and the Magyar Suzuki contract, 200 more workers were employed, bringing the overall total to 1200 by the end of 1994.

The continuing financial problems forced BERV A Co. Ltd to sell its shares in Mecman Eger Ltd in November 1994 to obtain cash, although it still received rent for the buildings and payments for tools and services, worth about 100 million Fts in 1994. In December 1994 a crisis meeting of the Board of Directors produced a debt consolidation programme, which involved the elimination of one part of the debt to the banks and a longer repayment period for the rest. The banks also agreed to provide liquidity for daily requirements as the cash flow was poor.

The basic business situation seemed to be improving at the end of 1994. The 'green' refrigerator compressors represented 60 per cent of turnover. BERV A was hopeful of retaining its 20-year-old relationship with Electrolux Magyar (formerly Lehel). Compressors are considered a

BERVA 87

special product serving the industrial market. Under the planned economy, BERVA was the main manufacturer of these products within Hungary so there was no major domestic competitor, but now that the market had been opened, Electrolux was free to purchase from anyone, so the sales and marketing effort needed to be strengthened. Approximately 20 per cent of compressor production was being exported to the former Soviet Union and there were also exports to Poland and to Italy, which were conducted through Technoimpex. The sales of compressors are in fact only limited by the capacity of the outdated plant. The compressor workshop is producing its maximum possible capacity, currently 600 000 units a year, but the firm could sell more if it could produce them. This was a particular disadvantage for BERV A as Electrolux was planning to increase the output of its Hungarian refrigerator plant in 1995 and 1996.

The remaining 40 per cent of BERV A's output was represented by pneumatic elements not included in the joint venture (25 per cent of output) and automotive parts (15 per cent of output). Products included door actuators for buses (of which 90 per cent were sold domestically and the remainder went to Slovakia and the former Soviet Union) and the shock absorbers for Magyar Suzuki. Small quantities of pneumatic elements were also sold to Sweden, Finland and Germany. However, this area of the firm was working at only 75 per cent capacity, which was accounting for most of the losses of the firm. In spite of intensive sales efforts is was proving difficult to fill the spare capacity.

1996

The situation in the spring of 1996 was not fundamentally different from previous years although BERV A had been able to improve sales and profitablity. Turnover in 1994 had risen to 1957 million Fts (from 1222 million Fts in 1993); in 1995 it soared to 3679 million Fts. At the same time the average workforce in 1995 was only marginally higher than in 1993. Improvements in productivity were going hand in hand with the enhancement of quality assembly, for example, by introducing and implementing ISO 9000 standards.

However, BERV A was still looking for a buyer who would be willing to invest in upgrading its machines and equipment. The outdated compressor plant was working at 110 per cent capacity and the assembly of shock absorbers had tripled in value from 200 million to 600 million Fts from 1994 to 1995. Compressors now accounted for two-thirds of production,

88 Case Studies

automative parts for around one-quarter, with a range of other products accounting for the rest of the output.

The possibility of Mecman increasing its involvement in BERV A evaporated when Mecman was itself bought out by a large German conglomerate, although BERV A still benefits financially from the continued use of its facilities.

Restructuring of the company's debt provided a breathing space for BERVA to raise its productivity and the operating situation has since 1993 been steadily improving. In 1995 BERVA just failed to break even; however, it aims to achieve an operating profit in 1996.

7 Metrirnpex *

The case study illustrates some of the issues facing a former foreign trade organization as a consequence of the loss of its monopoly position. Metrimpex has had to come to terms with its own autonomy in a context of new market relationships, including an upsurge in competition from new entrants to the industry.

The case study includes an analysis of market requirements and internal competences. The review also deals with the development of a product portfolio in a situation of substantial market and organizational fluidity.

INTRODUCTION

Under the former regime's system of economic management, foreign trade had been considered a state monopoly. In order to carry out operations in foreign trade . (both imports and exports) foreign trade organizations (FTOs) were set up to implement the foreign trade decisions of central planners. With the adoption of the New Economic Mechanism in the late 1960s FTOs also acted as intermediaries between Hungarian enterprises and their foreign clients and suppliers. As the majority of foreign trade took place between COMECON partners, FTOs usually conducted business with their counterparts in other socialist countries, who in their turn were also working according to national economic plans.

Due to its international dimension there w'as considerable status attached to employment as a manager in a FTO. For example, such a manager could anticipate substantial foreign travel and some remuneration in hard currency. Both factors appeared very attractive under the former regime.

In the mid-1980s there were around 25 large FTOs in Hungary, each with responsibility for a specific sector of economic activity: for example, Ferrunion for iron and steel, Elektroimpex for the electrical industry, Medimpex for pharmaceuticals, Agrimpex for agricultural products and Mineralimpex for oil and gas.

* This chapter is co-authored by Janos Harskuti.

89

90 Case Studies

However, by the end of the 1980s, with the further liberalization of the economic system, there were about 100 large enterprises which had themselves acquired the right to conduct their own foreign trade. After 1990, moreover, FTOs no longer enjoyed any kind of monopoly over foreign trade: any company could now import and export its raw materials and goods and make its own international contacts. As a consequence the purpose and scope of the established FTOs were fundamentally called into question and there was an explosion of new foreign trade companies in Hungary.

DEVELOPMENTS IN FOREIGN TRADE

Between 1990 and 1992 Hungarian trade was liberalized very rapidly and there was great excitement about record increases in exports. However, the liberalization of foreign trade concealed the fact that Hungarian industrial production was stagnating. Imported goods began to flood the market while Hungarian goods remained on the shelves. The deregulation was aimed at accelerating the establishment of a free market, and the initial response was favourable as stores filled up with Western goods. Then domestic producers began to protest that the process was leading them towards debt, if not bankruptcy. They began to press for the reintroduction of quotas on imported goods and the lifting of import taxes on raw materials and spare parts. The pre-1994 government was reluctant to antagonize Western business and the current account deteriorated severely after 1992, as the following figures in Table 7.1 show.

The final current account balance for 1994 was estimated at a deficit of $3900 million. As part of a general economic package announced at the beginning of March 1995, the government hoped to cut imports by imposing an 8 per cent surcharge on most goods, effective from 20 March, and

Table 7.1 Balance of payments, 1988-93 (US$m)

Trade balance Current account balance

*January-August only.

1988 1989 1990 1991 1992 1993 1994*

489 537 348 -807 -1437 127

189 -48 -3246 -2270 267 324 -3455 -2523

Source: National Bank of Hungary.

Metrimpex 91

to boost exports by devaluing the Forint by 28 per cent over the course of the year, by monthly markdowns of 1.9 per cent in the first half of the year, reducing to 1.3 per cent in the second half. Hungary's gross foreign debt at the beginning of 1995 stood at $28 billion, which represented the highest, per person, in Eastern Europe. 1

The proportion of exports going to developed countries is increasing and amounted to 71.7 per cent of exports in the period January-August 1994, with a corresponding decline in the value of exports to former socialist countries. Almost 70 per cent of imports came from developed countries in the period January-August 1994, with the expansion continuing to be dominated by passenger cars and pharmaceutical products.

In the autumn of 1994 the new government imposed import taxes on certain agricultural goods in order to aid domestic food industry producers. However, at the same time subsidies were reduced or removed in every branch of industry, leaving the agri-producers no better off. The 8 per cent tariff of March 1995 applied to agricultural goods and there were protests from Hungary's agricultural trading partners, including those in the EU. In view of Hungary's aspiration to join the EU by the year 2000 the situation was particularly complex.

The Hungarian experience of liberalization demonstrated that its effects can be negative if there is not, at the same time, a package of measures to protect domestic producer and consumer interests: for example, through a comprehensive customs policy, and the upgrading of domestic regulations to meet internationally accepted standards of quality, hygiene and environmental protection. The liberalization policy in Hungary was prepared haphazardly, with no rational policy regarding customs fees. Hungarian analysts believed at the time that the government urgently needed to remedy the situation, and the package of March 1995 was seen as a start in this direction. However, without well thought-out policies to ease economic transition and to underpin foreign trade liberalization, the government concentrated on trying to ease internal problems and prevent the collapse of strategic industries, although not always successfully.

METRIMPEX

The experiences of Metrimpex may be considered as representative of the issues facing FTOs following the decision to introduce a market system. Metrimpex had been the foreign trade agency for the instrument engineering industry: 80 per cent of total exports went to socialist countries and the remaining 20 per cent to the West. Within that 80 per cent, over half went to

92 Case Studies

the Soviet Union. Following liberalization Metrimpex faced strong competition for the first time in its history. The new competitors included previous clients, new companies, and executives breaking away from Metrimpex to set up their own companies, using experience gained with Metrimpex. Joint ventures built up their own networks for trading. A reduced number of domestic companies continued to work with Metrimpex (mainly those that did not have the resources to conduct foreign trade for themselves).

Metrimpex was also threatened by other companies headhunting its experienced managers with the offer of better salaries. These companies wanted to use the expertise of Metrimpex's staff to form their own FTOs. But if Metrimpex wanted to expand and restructure, it needed well-trained managers itself and had to find ways to retain them.

To master the new challenges the organization needed to devise a new corporate strategy and create an entrepreneurial culture which had hitherto been lacking.

Metrimpex's main competitors in 1992 (in per cent) were:

Multi-nationals Joint ventures Established entrepreneurs Newcomers

30 30 20 20

Organizational change was essential. The structure of the company was rigid and hierarchical. There was little delegation of authority and little room for initiative, with no real human resource policy. Knowledge of English and modern management techniques were lacking: there was an overwhelming majority of Russian-speaking sales executives, but with the collapse of the Soviet system, Russian was no longer required. At the time of this study, language ability was estimated as is shown in Table 7.2.

Older graduates/executives were not aware of modern management techniques but the proportion of younger executives was very low (see Table 7.3).

Metrimpex faced many of the typical problems challenging the survival of companies accustomed to operating under the former system. There were numerous problems in marketing and sales. The previous system relied on quotas: no real sales expertise was required. Metrimpex had the monopoly of international trade in its field. The collapse of the old system meant that a marketing strategy had to be developed and implemented. Furthermore, sales activity requires 'real' salesmanship.

Metrimpex had advantages in that it was well known and had good connections and a good reputation. It had established an international network and set up representative offices in several countries in Europe, Asia, Africa,

Metrimpex

Table 7.2 Language capability

Languages spoken %

Russian 60 German 30 English 26 Spanish 12 French 11

Table 7.3 Ages of top management/executives(%)

50+ years 40-49 years 35-39 years Under 35 years

Top managers

32 29 24 15

93

Executives

15 30 25 30

South America and had sound distribution channels. Employees had acquired competence, knowledge and experience. At national level, too, there were strong connections. Metrimpex had a solid reputation and financial stability which could provide a basis for the new company strategy.

Another advantage of the company was that it was already highly computei:ized and had good telecommunications, which could serve as a basis for expansion.

Although after-sales service (which is particularly important in a highly technical field such as instrument engineering) was underdeveloped, the company did run service stations in many countries and was therefore able to train users in the use of the products it supplied.

The product portfolio was similar for both exports and imports. The main exports handled by Metrimpex were: computer hardware and software; electronic measuring instruments; scientific research instruments; control instrumentation; testing instruments; office and laboratory equipment; educational equipment. However, many of these products, although satisfactory for the old Eastern European markets, did not compare or compete with more advanced Western products.

Imports were of the same types of product as they supplemented the domestic choice available. In former times Metrimpex had provided a

94 Case Studies

service to over 800 Hungarian enterprises and imported goods from nearly 30 countries.

However, Metrimpex had not paid enough attention to building up general distribution and selling channels on the domestic market. The 'stars' in Metrimpex's portfolio were computer hardware and software and products for the telecommunications and automobile industries. Unfortunately Metrimpex's customers now had access to alternative sources of supply and the attractiveness of Metrimpex's portfolio was diminishing year by year. The only factor slowing down this process was that Metrimpex was in a relatively strong financial position and was able to give credit to its partners.

Due to the artificial nature of the old-style 'market' and its dependence on manufacturers themselves, the majority of export products were either mature or in decline; very few were in development or growth phases. In imports the picture was slightly different because the needs of the domestic market were more likely to follow international trends, so the portfolio contained a higher proportion of up-to-date products.

The company's financial structure was sound but turnover and profit began to decline sharply, although liquidity was good and there was little long-term debt (see Table 7.4).

As with many companies in the former system, the organizational structure was very centralized, rigid and highly hierarchical. The formal structure was very strong and based on function rather than business orientation. However, the old routines no longer applied and new ones needed to be put in place.

STRATEGIC RENEWAL

It was clear that if nothing was changed the company would slowly collapse. A possible strategy for renewal and survival suggested that the

Turnover Net profit

Table 7.4 Financial data, 1988-91 (in billion Fts)

1988

23.0 0.8

1990

20.0 0.54

1991

10-11 0.09

Metrimpex 95

organization should withdraw from certain sectors, such as exports of obsolete equipment to Eastern European markets. It should then devise new strategies for new markets: Metrimpex could enhance its share of new markets by concentrating, for example, on environmental protection, biotechnology and specific Hungarian inventions.

In more mature markets - such as computer hardware and software, and barter and countertrade - the company could build up new distribution channels, improve its national network, set up service stations and provide more financial help for partners.

Diversification was considered a further possibility, including backward integration (putting money into manufacturing enterprises, for exports) and forward integration (building an integrated sales network, for imports).

According to the strategy proposal the planning process ought to be based on the formation of strategic business units (SBUs), which would function as independent profit centres.

The identified market segments were:

Export joint ventures with selected domestic partners barter/countertrade computer software environmental instrumentation biotechnology general trading

Import computer hardware/software automatization technology general trading

Each product group would operate as an integrated SBU covering activities such as retailing, servicing and financial support.

The new marketing strategy would be conceived as both internal and external. As well as market research and market segmentation for external marketing it was also considered necessary to 'sell' the new methods of working to the existing management. There was a need to change the corporate culture of the enterprise and to educate and persuade managers to implement the new plans and procedures.

As part of the reorganization of the structure the finance departments would be strengthened. More specialists, better-structured units, and stricter and stronger co-operation between finance units were proposed.

96 Case Studies

It was also suggested that a strategic planning group be set up, and an independent controlling unit put in place, on the lines of the German management model.

However, the overriding priority was the creation of a new corporate culture in order to overcome resistance to change and encourage the commitment of managers to the new-style company.

THE SITUATION IN 1994

The company's main response had been to diversify its actiVIties. It continued with the domestic distribution of a variety of imports, mainly consumer goods, such as clothing, sometimes on an exclusive basis. It also purchased shops, so that it was functioning on both the wholesale and retail levels.

It lost a very large proportion of its old markets and the turnover continued to decline dramatically. The number of employees was reduced from 450 to 230, but with more redundancies expected.

The foreign representative offices were transformed into legal companies trading in their own right. The most important of these were in Prague and Berlin and dealt with a variety of goods; and also in Nigeria and Brazil, dealing in educational equipment, such as laboratory equipment for universities and computers for schools. There continued to be some direct business in Russia; for example, due to the purchase of some shops in Moscow for the sale of consumer products. Barter is often used: for instance, for petrol. However, the Romanian, Polish and Bulgarian offices were closed.

Furthermore, Metrimpex seemed to miss opportunities to invest in new areas and to fail to take advantage of its substantial cash assets. The organization was reluctant to sack people, so that it was overmanned for a long time; and when it finally let them go, it paid them what seemed (to many) excessive redundancy payments. It also lost money because of the way it helped to finance its old partners. Because of the personal relationships between the directors of Metrimpex and other Hungarian firms, Metrimpex financed their struggle to survive by giving them considerable trade credit. However, many of the companies went bankrupt nevertheless and Metrimpex lost its money. The need to replenish its cash reserves has been met by selling surplus property, released by the decline in company SIZe.

Metrimpex's situation was in part a consequence of the top management, who seemed unable to change their methods and culture. The major-

Metrimpex 97

ity of middle managers was also already in their forties. Nearly all the senior managers had been in the company for 25 years or more, which is not always an encouraging recipe for innovation. Even when the younger executives began to leave in large numbers for better prospects there was no action for change. After 'retirement' many of the older managers returned as 'advisers'.

There are apparently talented managers in the overseas offices which still exist, but they prefer to stay where they are as they are better off financially and have more freedom of action than if they returned to Hungary.

A further problem was the method of privatization used. Instead of seeking new investors, who might have reformed the company and sought new markets, a 'management buy-out' was organized, with the workers also buying shares with their privatization vouchers, the price paid being repayable eventually from profits. This caused problems for the workers as they were unclear about their roles. The mix of status - owners and employees - sometimes appeared to create confusion. Sometimes the employees take an active role and elect a director or dismiss one, and sometimes they take no interest at all in what is happening. They have powers but do not know yet seem to know how to exercise them, and neither do they yet appreciate how firms operate in a market system.

In 1994 a new CEO was appointed. He appeared to recognize that the diversification of activities was the key to survival. He confirmed that the new profile of Metrimpex included domestic trade, forwarding, trading with computers and consumer articles. 'We sold a technical-educational system to the Far East and our position there is competitive and just as competitive in the sale of certain spare parts to European countries' .Z

The majority of foreign trade companies have found themselves in a very similar position to Metrimpex, losing markets, partners, money and reputation. Many of them have already gone bankrupt. The ones that have survived have often done so because they had a very strong position vis-avis their domestic partners. For example, Medimpex, the pharmaceutical trade company, fulfils the financial functions for certain drug companies which they are unable to carry out themselves; Medimpex was ranked forty-second in a list of the top 100 Hungarian companies in 1994, down from thirty-fifth in 1993.3

Other trading companies have also managed to transform themselves successfully. For example, Transelektro selected certain product areas and purchased factories making turbines for power generation, which they now sell to countries such as Kuwait and Turkey. They tender profitably for business in developing markets. The President of Transelektro Co. Ltd

98 Case Studies

considers it an achievement that their 1994 turnover, from the company's business in domestic trade, wholesale and retail trade, and warehousing, on top of their traditional activities, had reached 50 per cent of the turnover for their former best year.4

Many FTOs, however, have massively shrunk or disappeared altogether. The continuing existence of Hungary's second largest company, Mineralimpex, which imports hydrocarbons for MOL and is partly owned by MOL, is uncertain as the restructuring of the economy and industry continues.5 Mineralimpex used to import 75 per cent of Hungary's petroleum. However, MOL has developed its own trading organization which is now ten times larger than Mineralimpex. To make matters worse for Mineralimpex, it was itself incorporated into MOL in May 1995.

Despite the optimistic outlook of the new CEO of Metrimpex, the changing environment for FTOs and the continuing challenges to the company, together with the general decline in the instrument engineering industry, indicate that Metrimpex may still face a period of trial and adjustment.

8 Quintie*

This case study is illustrative of the way foreign direct investment, in this example acquisition, can help to transform an organization. Acquisition provided the company with access to the new owner's resources, comprising knowledge of marketing and brands and new technology for production and management information systems (MISs). The former pre-eminence of production has given way to an emphasis on the marketing, selling and distribution of a streamlined product portfolio of international and domestic brands. In tune with general trends this overall process of change has resulted in a much slimmer organization. An interesting aspect of the case study concerns the influence of Hungarian consumer tastes on the company's product lines. This is evident in the adaptation of products to local tastes and in the revival of sales of traditional products and lines.

BACKGROUND

In 1991 a company called Quintie was the leading confectionery producer in Hungary and one of the largest companies in the industry in Eastern Europe. It had four main factories, the largest being in Budapest, producing altogether 63 000 metric tonnes of product, divided among nearly 900 lines (including coffee), with 2886 employees. It had 57 per cent of the Hungarian market for confectionery and was listed as the twenty-ninth largest firm overall in Hungary. Despite this apparently sound position, there were many growing problems, some linked to the general economic situation and some specific to the firm.

Under the planned economic system firms like Quintie had no direct links with their market. They were production-oriented rather than marketdriven. Until 1991 there were 10 wholesalers in the country plus three nationwide food retail chains. The wholesalers supplied 49 distributors, who in turn supplied 19 000 points of sale. Quintie's production was handled mainly by the wholesalers, whose policy was were controlled by the state. As the economy began its transition to a market economy, problems multiplied for Quintie.

* This chapter is co-authored by Laszlo Zentai.

99

100 Case Studies

In 1990-91 nearly all the nationwide retail chains were sold to foreign investors, who began to phase out Hungarian products. Then the government began to sell the local points of sale to private entrepreneurs, who often turned out to be poor financial risks, with a high rate of bankruptcy. The net result of these changes was that Quintie no longer had security of sales outlets and had to compete for shelf space with other manufacturers.

With the opening-up of the Hungarian economy to foreign companies, many multi-national firms entered the market and competitors such as Nestle, Mars, Douwe Egberts, United Biscuits and Eduscho posed a serious threat to Quintie. These new competitors had a glamorous image, supported by heavy advertising of specific brands. Food prices in Hungary had traditionally been kept artificially low, but now the food processing industry was losing its subsidies and was having to face the multi-national competition on its own, with limited financial resources.

Quintie was also threatened by other factors. The deepening recession in Hungary was eroding the purchasing power of the middle-income groups who were Quintie's main customers. Upper-income groups were less likely to suffer financially, but on the other hand were more likely to eat Western 'premium' brands (provided they were not also influenced by Western 'health' concerns). Finally, the size of the population was declining, which meant that there would be fewer child customers, another of the firm's main markets.

THE SITUATION IN 1991

A detailed analysis of the firm in 1991 indicated that there were many aspects requiring improvement, but there were also positive indicators for its future.

The technology was outdated and needed replacing, particularly in the areas of packaging and the production of low-calorie products. The installation of computer-aided manufacture (CAM) was considered necessary. There was also a need for an up-to-date MIS. The only mainframe computers available were some old Soviet computers, which were off-line and unreliable.

Labour was another major problem area, with the paradox of there being both too much and too little. Under the previous economic system there had been no overt unemployment. Managements were generally encouraged to retain workers even if production was unprofitable. On the other hand, the firm's inadequate technology led to the use of labour-

Quintie 101

intensive production methods, for which there was often insufficient skilled labour. Wage rates were very low compared with Western rates, but the real cost of labour was high because of the large social security and fringe benefits. Finally, Quintie could draw on good engineers and technical staff but, as with most Hungarian firms, it lacked good marketing, controlling and accounting personnel.

The source of supplies qf many raw materials was domestic and, even with inflation, these were still cheaper than imports. Sugar and flour were Hungarian, although cocoa and coffee were obviously imported. All packaging was sourced domestically.

The product portfolio was far too broad. In 1991 Quintie had around 850 lines but 104 accounted for 80 per cent of sales. Part of the reason for this was that the four main factories tended to work independently, building up autonomous product lines. There were also few well-known individual brands. Products had hitherto been known generically: for example, 'chocolate' and 'chewing-gum'. The need for branding had been apparent since the 1970s but there had been no resources to finance branding operations. Therefore when the new Western products appeared on the market, there was no brand loyalty to inhibit customers from switching their purchases. There were, however, several successful export lines, including an unusually shaped chewing-gum for the small children's segment (popular in the USA) and the company's famous chocolatecovered cherries.

Quintie was more vertically integrated than other Hungarian companies, owning, for example, its own purchasing organization, cherry plantation, a plant producing 'milk crumb' and even some retail outlets, but it had diversified backwards, forwards and horizontally into far too many businesses, some of which were totally unrelated to the core business (see Figure 8.1).

The management structure was flat at headquarters, but unnecessarily complicated at local levels, with some managers having a multiplicity of functions (see Figure 8.2). In addition, there was no clear direction as to whether the factories were production or marketing centres. Thus there was no unified marketing strategy.

On the positive side there were a number of factors: the company's products were of high quality (at least, by Eastern European standards); prices were competitive; the market share was still the largest in Hungary; there were good relations with the banking system; the company owned valuable land assets which could at some point be capitalized; the financial management was basically sound; and the company had an effective research and development department.

102

Production of Competitors'

Products

Production of Complementary Products

Case Studies

MNCs = Multi-national corporations

Figure 8.1 Quintie's activities

However, there remained a range of problems: brand awareness was lacking; the recession was deepening; marketing was underdeveloped; a large debt had accumulated; the MIS was very inadequate; and salaries were so low that skilled workers could be lured away by the new competitors.

OPPORTUNITY FOR RESCUE

In order to fund the necessary improvements in technology, marketing and sales, and the general modernization of the firm, large amounts of investment were required. Local management's preferred option was a sale to a foreign partner. The company already had some limited experience of working with a multi-national company as it had established (with a 49 per cent share) Jacobs Suchard (Budapest), mainly producing the 'Milka' brand of chocolate, and branded coffees.

Com

mer

cial

D

epar

tmen

t

Pro

duct

ion

Pla

nnin

g an

d O

pera

tion

s

Tec

hnic

al

Dep

artm

ent

Ene

rgy

Qua

lity

C

ontr

ol

Hea

lth

Pla

nt M

anag

er

Per

sonn

el

Sec

reta

rial

S

ervi

ces

Acc

ount

ing

Fig

ure

8.2

Org

aniz

atio

nal c

hart

of a

Qui

ntie

pla

nt

Sec

urit

y

Wel

fare

Leg

al

Aud

itin

g D

epar

tmen

t Inve

stm

ents

......

0 ~

104 Case Studies

The State Property Agency decided to privatize the firm by international tender. It was also decided that there were five main questions for which any new owner had to provide acceptable answers.

1 Could the new owner supply the firm with real brands? 2 Would the new owner supply fresh capital? 3 How would the new owner deal with the existing large debts of the

firm? 4 How would the new owner deal with the lack of a 'real' sales

force? 5 What would the new owner do about the lack of computing facilities?

A 'jury' of five people judged the bids. These included the managing director of Quintie; a representative from the Ministry of Agriculture and three members of the State Property Agency. On all five questions the undoubted winner was Stollwerck AG, part of the Imhoff Industrie Holding GmbH, based in Cologne. Stollwerck is one of the world's leading confectionery manufacturers, whose turnover has exceeded 1 billion DM per annum since 1991, and amounted to 1.4 billion DM in 1995.

The firm was originally established in Cologne in 1839 and became a public company in 1902. Recent growth had been achieved both organically and by acquisition: for example, of established firms such as Sprengel (founded in Hamburg in 1851 and acquired by Stollwerck in 1979) and Waldbaur (founded in 1848 and acquired in 1976).

Stollwerck is vertically integrated from the purchase of cocoa to the production of chocolates and biscuits, distribution and retailing. It owns over 200 retail outlets in Germany and also distributed the products of other companies such as Candelia (Sweden), Delacre (Belgium) and Manner (Austria).

Stollwerck also has a strong presence in Western Europe with subsidiaries in France, Italy, the UK, Belgium and Switzerland. It sells its products under a range of brand names including Stollwerck, Sprengel, Waldbaur, Jacques and Alprose.

The collapse of the communist regimes in Central and Eastern Europe had given Stollwerck an opportunity to seek new markets. With the domestic market stagnating and possibly declining, the changes in Central and Eastern Europe were viewed as an opportunity for the company to gain numerous new customers.

Stollwerck's entry (in reality, its re-entry) in the region took a number of forms. It acquired the Thiiringer chocolate factory in Saalfeld, Thuringia (East Germany); it constructed a new chocolate factory in

Quintie 105

Poznan (Poland), which began production in 1995; it build a new chocolate factory in Russia; in 1996 and it acquired Quintie.

Stollwerck acquired 98 per cent of Quintie's shares with the remaining 2 per cent going to the local community which owned the land on which the factories were located. (There was some initial protest about this relatively small share but it soon faded.)

The agreement was signed in 1992 and within two years all the objectives had been met.

BRANDS

Stollwerck brands had been sold in Hungary before the Second World War so its name had a familiar ring, especially to older people. In fact, most Hungarians today regard Stollwerck as a Hungarian company.

The firm immediately introduced two of its main brands, for a chocolate tablet and for chocolate dragees. Stollwerck also understood that each country has its own taste in chocolate: some countries prefer sweeter and some more bitter chocolate. Therefore the new owners realized that it was preferable to develop special lines for Hungary rather than try to impose Western tastes. This insight has enabled Stollwerck to remain the market leader, despite its multi-national competitors, whose products are both more expensive and not necessarily produced to meet local tastes.

Many product lines were cleared out. Since around 20 per cent of the product range had been providing 80 per cent of the volume, this posed no production problems. The number of products was reduced to 90 (1 0 per cent of the original quantity) but consumers appeared not to notice. Moreover, retail outlets had rarely stocked at any one time more than 50 lines and some outlets only 20. Furthermore, specialists were flown in from Germany to develop new products. The packaging was changed and designs were simplified.

INVESTMENT

In 1993-5 Stollwerck invested 35 million DM, mostly in Budapest. Money was spent on developing new product lines, quality improvements and packaging technology. For example, two new robot machines were installed to pack chocolate bars, which replaced a work unit of 80 people. Naturally, the corollary of the new technology was a substantial amount of

106 Case Studies

redundancy. Building on this investment a further 35 million DM were invested in 1994-95 in a completely new factory (see below).

The number of employees fell to 750 in three years. Large numbers of white-collar workers lost their jobs as well as manual workers. However, for those who remained, wages increased by almost 50 per cent and Stollwerck salaries become very competitive.

All the debts of the company were cleared, which gave it independence from the banks. The head office in Budapest was also refurbished with modern furniture and equipment.

COMPUTING AND MIS

The four old Russian mainframe computers were scrapped and new equipment installed. Each person who needs it now has a PC or workstation, on a network. This transformed the company. Because of the fast new information system the two Managing Director now really understand how the company works and can spot problems as soon as they arise. This has also created more work for them, of course, and along with other executives, are working longer hours, which is another way in which the company has become more 'Westernized'. In order to support the implementation of the new computer system, computer training is given as required.

MARKETING AND SALES

The main problem for Quintie was the lack of marketing. Companies in Hungary are having to learn new techniques quickly but learning them is 'not the same as growing up with them'. While the firm is technically good, it is felt that marketing still needs to be improved.

By the end of 1993 Stollwerck had developed a sales force of 25, with five district managers and six sales administrators. The salespeople travel much further distances than in the past, often 500 kilometres per day, even though Hungarians are not used to this way of working. The increased stresses of the work mean that this part of the workforce experiences a somewhat higher labour turnover than other departments, although turnover is generally low.

In order to improve the effectiveness of the sales force, salesmen spend at least one day per month on training.

Quintie 107

Further developments included the establishment of a system of account management and a small group was set up to develop packaging and products. There are also 40 warehousemen. Today sales and marketing are overall the largest unit within the firm.

ORGANIZATION AND STRUCTURE

Two of the four main factories were sold immediately. One of them was the small Zamat coffee-roasting plant, since an early decision was made to withdraw from the production of coffee, which was sold to Nestle. The other plant sold was the plant which had housed the joint venture with Jacobs Suchard, producing the 'Milka' brand. When Jacobs Suchard realized that a competitor now partly owned one of their prime brands they quickly made an offer to buy the whole plant.

Quintie's total production in 1995 was 26 000 tons, including 7000 tons of biscuits and wafers. The main chocolate producing plant is a large factory in the outskirts of Budapest. The company invested 35 million DM in a new wafer and biscuit factory on a green field site in Szekesfehervar to the south-west of Budapest. This started production in August 1995, with an annual production capacity of 15 000 tons. It was to be the 'biggest and most beautiful biscuit plant in Eastern Europe'. The old wafer plant was closed and Stollwerck then had two good, large, modern factories, which in 1995 produced 26 000 tons of product.

The company structure was reorganized along simple functional lines, with departments for purchasing, production, financial management and sales.

The Stollwerck companies throughout Europe are largely autonomous but there is central purchasing of cocoa beans in order to obtain the best prices. Sugar, flour and packaging are still sourced in Hungary, as are most other raw materials.

Control procedures and internal monitoring were much improved, and lines of communication were shortened. All management personnel were relocated into one building and the new MIS made communication more effective. The main problem seems to be the increased workload, because all problems are recognized both more quickly and more effectively. However, wage levels are good and staff appear generally satisfied.

Communication with the parent company tends to be fairly informal. There is daily communication between Budapest and the parent company. The Managing Directors can call Cologne directly, discuss an idea and get approval almost immediately. This contrasts with the more bureaucratic

108 Case Studies

systems operated by the large multi-nationals and facilitates much quicker responses to the market.

Furthermore, because Stollwerck is a German company all internal communication has to be conducted in German, and this has resulted in a need for staff to be able to communicate effectively in German. By the end of I 994 around 70 staff were on German language courses.

STOLLWERCK AND THE CONFECTIONERY INDUSTRY IN HUNGARY

The Association of Hungarian Sweets Manufacturers1 records that in 1993 there were 34 companies in the confectionery industry, with 2889 employees and a total share capital of 5. 7 billion Fts. Only 12.3 per cent of this share capital was in Hungarian private ownership, with the remaining 87.7 per cent in foreign hands, including Stollwerck.

The gross turnover of all firms was recorded as 20.9 billion Fts, with net sales of I 1.4 billion Fts. Since Stollwerck Budapest Kft recorded sales of nearly 8 billion Fts, for 1995, this confirms the company's dominant position in the industry. Exports accounted for one-quarter of net sales revenues.

The exports of all confectionery were worth $43.5 million, slightly greater than the imports, at $42.5 million. However, the share of confectionery in all food exports was 3 per cent, compared with 6.9 per cent of all food imports.

Chocolate products, including the famous cherry liquor pralines, accounted for 37 per cent of all confectionery exports, with the other main categories being candies (20 per cent) and chocolate (16 per cent).

Stollwerck's exports represented a total of 20 per cent of sales in 1993 and 25 per cent in 1995, destined mainly for Eastern Europe, but exports to Belgium, Switzerland and Germany are increasing.

In 1995 Stollwerck Budapest Kft re-entered, at number 93, the list of the top 100 firms compiled annually by Dun & Bradstreet Hungaria Kft. Its net sales for 1994, recorded as 6.89 billion Fts, represented an increase of 8.75 per cent over 1993. Sales for 1995 were projected at 8.5 billion Fts.

In early 1996 Stollwerck maintained its pre-eminent position in the Hungary confectionery market, with a market share of close to 33 per cent. Compared to five years before Stollwerck was a leaner company with fewer product lines, low stocks of raw materials and a radically reduced workforce of 750 core employees, and up to 500 seasonal workers. A

Quintie 109

quarter of production was now being exported, with 70 per cent of exports going to Eastern Europe. With signs of improvement in the macro economic situation and closer trading co-operation between the countries in the region, Stollwerck Hungary was looking forward to a continuing positive development of its position.

9 IDR: The Pharmaceutical Industry*

The case study exemplifies a range of issues. The erosion of longestablished relationships within the Hungarian pharmaceutical industry, coupled to a a substantial drop in state funding, has impelled the Institute for Drug Research (IDR) to rethink its traditional position and purpose. From being a predominantly research-oriented institute IDR has to become increasingly business-minded, seeking domestic and foreign customers willing to pay for its expertise.

This transformation involves the acquisition of new learning (for example, in techniques and processes) and a change in overall attitudes. This is accompanied by internal restructuring and a review of the institute's portfolio of activities. A key aspect of IDR's renewal strategy is to become an active member of an international contract research network.

As the prime purpose of IDR is pharmaceutical research and development, and since it now relies on the world as well as the domestic market for its contracts, it is important to understand the context of both the international and the Hungarian pharmaceutical markets before turning to the specific problems of the IDR.

BACKGROUND1

The International Scene

The global race to combat new viruses is overshadowed by many problems for producers: the search for new strategies for production; the escalating costs of research and development; marketing; and profits. Sales are becoming more concentrated: in 1993, there were 30 companies which achieved sales of $120 billion, but overall profits fell. US companies led the market, with 11 companies having a 25 per cent profit margin. Merck was the most profitable with a margin of 37 per cent.

For eight US market leaders the average sales growth registered in 1992-3 was 13 per cent and for non-US companies the rate was only

• This chapter is co-authored by Ildik6 Kiraly.

110

The Pharmaceutical Industry 111

slightly lower. The enormous costs of research and development, set against the costs of sales development, have compelled companies to reshape their expansion strategies in mergers and future alliances,2 and to concentrate their research only in certain areas.

In 1981 the pharmaceutical industry spent $5.4 billion on research and development and this peaked at $22.7 billion in 1993. Annual growth within the next ten years is forecast to be lower than the 13 per cent needed to justify the huge research and development expenditures. Estimates show that by the year 2003 a total market of $451 billion would have to exist to provide such a growth rate. Companies have reacted by reducing the number of therapeutic categories for research, but some commentators caution that decreasing research and development costs will lead to a self-destructive process since research and development is the lifeblood of the industry. Costs of development are now so large that it is no longer possible to achieve reasonable returns from simply a local European, Japanese or US market. Strengthened global co-ordination is increasingly desired, particularly in the field of regulation.

The need to satisfy ever more stringent regulations prolongs the time taken to bring a product to the market; but the need to bring the best possible product to market prevents the pure application of marketing and sales strategies.

Multi-nationals now also aim at the 8 per cent more consumers added to the market by the liberalization of the former command economies of Central and Eastern Europe. These markets now face the challenges of import liberalization and foreign competition. In 1991 Poland, Romania, Hungary, Bulgaria, and Czechoslovakia represented a total pharmaceutical market of $1.6 billion3 with Poland accounting for 38 per cent, Hungary 29 per cent, Romania 17 per cent, Czechoslovakia 12 per cent and Bulgaria 4 per cent. Poland is the largest pharmaceutical market in the region but Hungarian per capita consumption is greater, although still only one-third of per capita pharmaceutical consumption in Western Europe, which averages $130 per year. Overall sales for these five countries are forecast to reach $2.2 billion by 1996, reflecting an average annual compound growth rate of 6.7 per cent.

The scope and quality of health care services vary widely across the region but Hungary, along with Bulgaria, has the most favourable ratio of population per hospital bed, around 100 each, which compares with 120 in the West. However, this probably reflects a traditional overemphasis on inpatient care and unnecessarily long hospital stays compared with Western Europe.

112 Case Studies

Fast-changing lifestyles and import liberalization have led to an increase in self-medication, encouraged by privatized pharmacies. Multinational producers of self-medication products have begun to set up specialist operations with trained sales representatives. In the new private sector, wholesalers have entered the market. Cardiovascular drugs and antibiotics enjoy the largest market share of self-medication. Price controls on imports have been largely abolished although in some cases, as in Hungary, prices of domestic products are still regulated.

In all of Central and Eastern Europe there is great pressure on health budgets, forcing governments to seek ways of controlling costs, including their drug bills. Drug registration procedures have been streamlined but Eastern European governments would find it difficult to use registration as a means of limiting the number and types of drugs on the market. Although different countries have varying attitudes to the need for local clinical trials for imported products, they generally accept sensitive products if there is verification that clinical trials have been carried out in the country of origin.

The Hungarian Pharmaceutical Industry

The industry must be seen against the background of more general health care problems. Life expectancy is lower than in the West and poor diet, relatively high levels of pollution from old industries, high stress levels partly attributable to the strains of economic transition, and an ageing population are causing increased problems for health services, and for the state health insurance fund's drugs budget in particular.

The Hungarian pharmaceutical industry is considered to be one of the most stable and advanced industries in Hungary, despite growing international competition. Within Hungarian industry it directly employs 20 000 people, accounting for 3.1 per cent of employees; and it represented 5.5 per cent of gross production, 7.5 per cent of added value and 10 per cent of exports in 1993.

During the 1950s Hungary became the main supplier of drugs to the COMECON countries and therefore established huge capacities for the production of pharmaceuticals. It also established, in 1950, the IDR in Budapest as the research and development centre for the industry (see below).

However, COMECON and Hungary together did not deliver the profit level that would have allowed Hungary to keep pace with the dynamic developments in world pharmaceutical companies. In the 1970s, when the world was shaken by the thalidomide scandal and research and development costs shot up, a more sophisticated drug research model was developed in Hungary which did produce a few products but little market


success. In the 1970s and 1980s, when revolutionary changes were taking place in the European drug manufacturing industry, Hungarian pharmaceutical companies suffered a withdrawal of resources. The shortage of capital was particularly painful in the period 1986-90. The entire industry could spend only the equivalent of $50 million in five years on research and development and by that time the cost of developing an original product had already peaked at $150 million in the rest of the world. Despite this Hungary has developed 20 successful active ingredients for pharmaceutical products over the past 25 years. At present, more than 25 per cent of pharmaceutical sales comprise original drugs and the export of intellectual products.

The industry has a long tradition of research and development and annually exports $20 million of licences and intellectual property. Hungary's branded generic products are well known in Eastern Europe and in developing markets such as Algeria, Syria, Bangladesh, Egypt, Iran and Pakistan. In developed countries, generic products are merchandised as active agents. Even before 1990 most of the major Hungarian pharmaceutical enterprises supplied raw materials to Western producers, and several companies continue to operate on the basis of licensing: for example, Biogal has a marketing, distribution and research joint venture with Ciba-Geigy of Switzerland, and CHINOIN exports Jumex (for Parkinson's Disease) and Ipriflavon (an anti-osteoporotic) to the West.

In 1990 Hungary exported $440 million of products to CIS states. Since then, exports to the CIS have increased annually by 30 per cent. Exports to the rest of world, where 'newer' products are available, are more limited. Relatively small Hungarian companies must now compete against the USA, Japan and Europe. Miklos Gyorgy, the CEO ofCHINOIN, has stated that 'the total production of the entire Hungarian pharmaceutical industry is the same as that of a medium-sized Western pharmaceutical producer' .4

In 1990 the domestic share of Hungarian pharmaceuticals was 74 per cent, but by 1993 it had dropped to 53 per cent, although domestic sales had increased by 68 per cent over the same period. In 1990 no fewer than 1223 drugs were in circulation in Hungary and in 1993 there were 800 new products registered, of which only 90 were by Hungarian companies and 710 by foreigners.

Hungarian drugs taken out of registry amounted to 56.6 per cent of total drugs between 1 January 1988 and 30 June 1994. In 1993 drug sales in Hungary reached nearly 51 billion Fts, of which 53 per cent were Hungarian and 47 per cent foreign; but foreign companies achieved their share through only 15 per cent of total packages sold, because of their higher prices. In spite of rising prices the low profit levels that prevail inhibit the amounts spent by Hungarian firms on research and develop-

114 Case Studies

ment. In the retail sector Hungarian prices are still subject to official price control, although privatized pharmacies attempt to undercut state-owned outlets by price reductions. Despite the much higher prices, Hungarians prefer the imported products.

There are also political problems. It is believed that in order to meet the higher costs of research and development and marketing the Social Insurance's burden-bearing capacity must be increased, but this can only be achieved through economic growth. Hungary spent 5.5 per cent of gross domestic product on health care in 1993, compared with 13 per cent in the USA, 8.1 per cent in Germany and 6.7 per cent in the UK; these countries all have a much higher gross domestic product.

In 1992 Hungary spent $450 million on drug subsidies but at present almost everyone is unhappy about the drug-subsidy system. Foreign drugs, which cost six times more than Hungarian drugs, receive similar Social Insurance subsidies. Social Security is in deficit: the health insurance agency exceeded its 1993 budget of 38 billion Fts by 12 billion Fts. In early 1996 the social security deficit amounted to 20 billion Fts and the government was considering reducing the provision of hospital beds and raising pharmaceutical prices by a further 35 per cent.5 The need to reduce costs has led to reforms of the reimbursement system, under which the patient receives a proportion of the cost back, varying from zero to 100 per cent. A major problem has been that drugs qualifying for 90-100 per cent reimbursement accounted for 50-55 per cent of total sales, and over 50 per cent of these are foreign. Under the new system, implemented in February 1995, there are new percentage brackets of 100 per cent, 95 per cent, 90 per cent, 70 per cent, 40 per cent and zero; drugs qualifying for 100 per cent subsidy have been cut from 38 to 18; and drugs for the treatment of 24 illnesses will recieve 95 per cent. The 90 per cent reimbursement level applies to 150 active ingredients, of which 40 per cent are imported.

However, these reforms are unlikely to be enough. Certain categories of patients are exempt from payment, such as the old, the chronically sick and the unemployed. Their consumption is unresponsive to price changes and is also higher than average: 400 000 people with exemption certificates consumed three times the national average dosage per capita, while a survey conducted in March 1994 showed that almost 48 per cent of prescriptions were collected by pensioners.6

Despite the problems the industry intends to remain in original research and Hungarian research laboratories have a significant number of promising new compounds. Among Eastern European countries only Hungary meets modern production and research requirements, such as the UN's Good Manufacturing Practices code; but the total budget of Hungarian drug producers is less than the amount needed to develop one original


molecule. An increase in research and development is one of the aims of all the companies, but this would need help from central resources or from foreign partners.

Hungarian companies therefore are struggling with low and severely controlled prices, fiscal restraints on the state's drugs budget, international competition and a low level of exports to developed countries. The Hungarian government considers pharmaceuticals to be a priority industry and has encouraged foreign investment in this sector by granting tax exemptions to foreign joint ventures. Until now the Government has been reluctant to allow foreign majority ownership. CHINOIN, 75 per cent owned by SANOFI of France since the end of 1995, is the exception. However, the current law on privatization states that in the case of pharmaceutical companies 25 per cent plus 1 share will be retained, with three exceptions: 50 per cent plus one share of Richter Gedeon, the largest company, and of Humana, will remain in state hands. Reanal, the smallest, has been fully privatized. (For more details of major companies, see below.)

Among research and development companies the Human Vaccine and Research Institute will remain in 50 per cent plus 1 share ownership, and both the IDR and the Medicinal Herb Research Institute by 25 per cent plus one share.

There are approximately 100 drug manufacturers in Hungary, including a number of small workshops just producing or packaging items such as tablets, but the six largest account for 90 per cent of total production.

Table 9.1 gives details of the top five pharmaceutical manufacturing companies, who are also co-owners of IDR, and their rankings among the top 100 companies in Hungary in 1994; below there is a brief description of each of them.7

Table 9.1 The top five pharmaceutical companies

Company Ranking Net sales Pretax No. of 1994('93) 1994 profit employees

Richter Gedeon 23 (19) 21 854 000 4 294 000 4623 CHINOIN 34 (28) 16 231 000 3 658 000 2850 EGIS 41 (34) 15 302 338 2 545 868 3671 Biogal 61 (-) 10 458 000 852 080 1948 Alkaloida 80 (50) 8 139 500 1 025 600 1947

Revenue and pretax profit are shown in Forints. Source: Dun & Bradstreet Hungaria Kft, 'Top 100 Companies', Central European Economic Review, July-August 1995, p.19.

116 Case Studies

Richter Gedeon

Richter Gedeon was founded in 1901. It was the first pharmaceutical company in Hungary and one of the first in Europe. It continues to be the largest pharmaceutical company in Hungary. It produces about 120 drugs in 200 different forms. It is the largest Hungarian exporter of pharmaceutical products, accounting for about 40 per cent of exports, and is the largest supplier to Eastern Europe, managing to increase its sales to these markets from $34 million in 1992 to $62 mil ion in 1993. It has developed a strong medical sales team in Eastern Europe and 40 per cent of the company's exports go to the CIS, 40 per cent to the EU, Japan and the USA and 10 per cent to other former COMECON countries. Total sales in 1995 amounted to 27.4 billion Fts with a pretax profit of 7. 7 billion Fts.

The company has been streamlined in recent years, which involved cutting the labour force from 6000 to 4700. The loan portfolio was decreased from 7.3 billion to 4 billion Fts. Research and development activities were restructured, with a 10 per cent reduction in the workforce and the targeting of four strategic areas of basic research: central nervous system, liver protection, stomach and intestinal, and anti-coagulant drugs. The cosmetics division was sold to Colgate-Palmolive. Domestic sales increased by 50 per cent. After losses in 1992, Richter Gedeon made a profit of $18 million after tax in 1993. The firm also co-operates in research with Takeda of Japan.

In September 1994 the company raised $68 million through an international share offer and is now a major presence on the Budapest Stock Exchange. The company plans to reinvest 8 per cent of its revenues on research and development. The State Holding Agency still owns 62.5 per cent. Richter Gedeon remains the only large Hungarian pharmaceutical company not linked to a foreign investor.

EGIS

EGIS was founded in 1912.1t is now estimated to have a 14 per cent share of industry sales. It exports strongly to Eastern Europe. Its main product lines include cardiovascular drugs, antibiotics, nervous system drugs and anti-allergens. In the 1970s the company concluded many licence agreements and, although it still produces important generics and licenced products, the long-run emphasis is on producing self-developed original products. Chemical and pharmacological research will be subsidized by the company's own resources but development of new medicines will be realized on the basis of broad international co-operation agreements.


Research and development expenditure is intended to double between 1992 and 1995. Special priority is to be given to environmental issues and, in order to do this, EGIS is investing $12 million to meet environmental regulations.

EGIS also acts as a licensor itself: for example, Mochida of Japan bought production rights to a tranquillizer. In 1993 the European Bank for Reconstruction and Development acquired a 30 per cent ownership stake in the company which reduced the share of the State Holding Agency to under 30 per cent. During the public offer of shares in July 1994, shares with a nominal value of 2.6 billion Fts were sold at a rate of 202.5 per cent. The State Asset Management Company's stake was reduced to 28 per cent: not far above the legal minimum.

EGIS achieved sales of 19.8 billion Fts in 1995 with a pretax profit of nearly 4.9 billion Fts. Although sales to Eastern Europe fell by 7 per cent compared to the previous year, it succeeded in increasing its sales to Western Europe.

CHINO IN

In addition to human medicines CHINOIN produces veterinary products and plant protection agents, although the majority of sales are human drugs, including anti-osteoporotics and treatments for Parkinson's Disease. In 1991 Sanofi-Winthrop bought into CHINOIN and Sanofi eventually acquired 51 per cent of the shares. In 1993 its net sales increased to 14.2 billion Fts, of which human pharmaceuticals accounted for 11.8 billion. About 40 per cent of its production is sold domestically, with a further 24 per cent going to Eastern Europe and 37 per cent elsewhere. Sales of veterinary products have continued to drop following the decline in economic activity in the CIS, which was a major market for these products.

Biogal

Although ranked fourth in the industry, Biogal is the second largest domestic pharmaceutical manufacturer and total sales approached $100 million in 1993, of which 70 per cent were within Hungary. It is a market leader in the fields of antibiotics, and also produces a range of cardiovascular and anti-immune drugs. It has several product licences with Japanese and European multi-nationals and a joint venture with Pfizer of the USA. It has over 100 research and development staff and conducts original research into new products, based on methods meeting inter-

118 Case Studies

national quality standards. The company is financially sound and is currently looking for a partner who wishes to invest in the region and who will help to improve its international position. Biogal is expected to be partially privatized in 1995.

Alkaloida

Alkaloida was founded in 1927, initially to produce morphine from poppy seeds. It is now among the five largest producers of morphine in the world. Today it is a major producer of active ingredients of pharmaceuticals, pharmaceutical intermediates and pesticides, with pharmaceuticals accounting for approximately 60 per cent of production. Around 60 per cent of its products are exported to 80 countries. It expanded during the 1960s and 1970s and concluded many licence agreements. In 1990 Alkaloida built a new research and development base employing 200, the research emphasis being on cardiovascular and central nervous system treatments as well as herbicides, fungicides and insecticides. Alkaloida's main export is an anti-malarial drug containing the active agent chloroquine phosphate, of which Alkaloida is the world's largest producer. The company is also one of the largest producers of Phenobarbital and Phenobarbital Sodium. Priority is given to original research, and a successful co-operation agreement was concluded with Nichimen of Japan in 1992 for the development of a molecule into a new drug.

In 1991 the company began to employ medical sales representatives. The success of this channel of marketing prompted the company to use the same methods for agro-chemical product lines. Alkaloida was at the beginning of 1996 the only Hungarian pharmaceutical company still in state hands.

It is evident from these descriptions that the main owners of IDR have largely relied on their own in-house research and development departments, in keeping with traditional socialist industrial practice of selfsufficiency, rather than using the facilities of IDR. This in turn has contributed to the problems faced by IDR. The next section of the study outlines these problems and how the organization has dealt with them.

IDRLTD

IDR was founded in 1950 as the research and development centre for the pharmaceutical industry under the control of the respective Industrial


Ministry. In 1982 it was converted into a joint venture owned by six stateowned pharmaceutical enterprises: Alkaloida, Biogal, CHINOIN, EGIS, Richter Gedeon and Reanal.

Until 1988 IDR could work only for these six companies but then the ban on other work was lifted and IDR became a Contract Research Organization (CRO), willing to undertake contracts in any field of preclinical pharmaceutical research and development. The value of contracts from foreign sponsors rose quickly and today one-third of income is derived from work for foreign multi-nationals, one-third from the owner companies and one-third from miscellaneous sources, including the government. As well as accepting contracts from abroad, IDR has also licensed original drug candidates to other companies, which are carrying out the development of the molecules involved.

In 1994 IDR joined with five Western partners8 to form ECRON Services, a co-operative of CROs working in clinical drug research, based in Zurich. The partners specialize in various fields, IDR's speciality being toxicology and safety studies, but it is able to undertake most projects, from preclinical research to clinical trials on patients.

ROLE OF IDR IN THE HUNGARIAN PHARMACEUTICAL INDUSTRY

When first established IDR emphasized chemical work and developed production processes for the manufacture of major non-original drugs, supporting the revival of the Hungarian pharmaceutical industry. Later, the emphasis shifted to the research and development of new, original drugs. From the 1960s the majority of new drugs in Hungary were based on IDR's work: at least 10 new drugs reached the market because of IDR.

IDR emphasized its service activity rather than manufacturing. Its two fields of activity can be described as real service activity, where IDR carries out scientific work complementary to the development phase of a new drug; and semi-finished products, where there is a selected drug candidate with all the results of its research and development phase but needing further work to satisfy the requirements of a foreign regulatory body, such as the Food and Drug Administration in the USA. IDR was originally non profit-making, but is now expected to operate profitably.

In the past, non-profit-making research institutes calculated the price of new production processes or drug candidates on a cost-plus basis: that is, raw materials, experimental animals, researchers, technicians and over-

120 Case Studies

heads plus 10 per cent or 20 per cent. This covered neither the real research costs nor the real commercial value of the activity.

Until the late 1980s IDR did not use the concepts of marketing and selling. It tried to satisfy the needs of the owner pharmaceutical companies by attractive research and development, and the results of original research were offered for government sponsorship. Ten original compounds based on the work of IDR have been put on the market by the six owners. These six also had a budget for IDR which covered ad hoc complementary research or development work. Government funds covered original basic research and the owners covered the development of drug candidates into marketable drugs. The present research centre was built in Budapest in the early 1960s. At the end of 1995 IDR had 400 active employees, of whom 160 were employed as researchers.

IDR began to run into financial difficulties in the early 1990s as the level of government funds decreased (in Hungary the total spending on research and development went down from 2.5 per cent of gross domestic product to 1.1 per cent and has continued to fall); the problems of the Western multi-nationals have caused a decrease in global research and development spending; and the six owners have developed their own research and development departments.

To overcome its financial difficulties IDR commissioned several reports, both internal and external, to consider the problems and suggest possible ways in which to develop. IDR was aware that for its survival it would have to seek new financial resources and partners, and change many of its working practices. To find new foreign partners required fundamental change in the organization and in the levels of its pharmaceutical research and development activity: it needed a proper management system, feasible projects and highly qualified research staff in order to match the level of US and European companies.

IMPLEMENTATION OF FUNDAMENTAL CHANGES

IDR decided to develop a new framework in which its research and development could be more effective and productive than it currently was in the unstructured environment hitherto prevailing, where goals, objectives and long-range plans were vague. Two reports were produced in 1992: an internal report and one commissioned from A.D. Little.9

The first step was to introduce a new full innovation line of pharmaceutical research and development which emphasized the most important


decision making points accepted in international practice (see figure 9.1) This involved setting up a complete new documentation system using standardized criteria for both original and non-original research, and thereafter the documents were assigned to the responsible divisions, departments or specialized groups.

At the start of a new project a DO documentation is prepared, summarizing the therapeutic target, theoretical design of new chemical entities, biochemical and pharmacological screen-system, analysis of scientific marketing situation, etc. The preclinical research phase is concluded by a D 1 documentation. This compiles all the results to justify a decision on the further preclinical development of the selected compound(s). The D2 documentation summarizes all the results of the preclinical phase that will be submitted to the respective authorities for authorization of clinical Phase 1 and Phase 2 human studies.

A new in-house organization was set up, known as RCI (the Research Council of IDR). It has the important roles of discussing and approving research goals and new projects: the discussion of basic research goals and objectives; the acceptance/refusal of new research goals and objectives in both original and non-original research; and decision-making after analysis of the documentation.

The planning and control system was reorganized and an in-house online computer system was introduced. The essential task of top managers was identified as the exercise and maintenance of control, but this was inadequate. Control was markedly improved by developing the information system. An internal study of the information system of IDR was prepared which established a detailed system involving both new information forums (meetings, seminars and so on) and new materials (documents, reports and so on). Some of these new elements ~ere scientific and some managerial. This guaranteed the implementation of further conditions for entering foreign markets.

The introduction of international standards (GLP, GCP, GMP) was essential but it was a slow process and initial delays in achieving them resulted in the loss of some business. GLP stands for 'good laboratory

DO Dl

Preclinical Preclinical Research Development

Phase I

D2

Submission to OGYI*

* Hungarian Drug Regulatory Government Agency.

Figure 9.1 Line of innovation

Phase 2

D3

Clinical Pharmacology

122 Case Studies

practice' and a GLP quality assurance group was set up to ensure standards met international levels. Similar standards were sought for 'good clinical practice' (GCP) and 'good manufacturing practice' (GMP). The achievement of these three certificates was a prerequisite for the expansion of collaboration with international partners.

IDR had 19 drug candidates in 1988 and their scientific and economic value was reviewed. Reports were commissioned and six to eight original molecules were selected for further research. In 1989 the important strategic decision had been made to enter the foreign pharmaceutical market and the aim now was to obtain sponsors in three main fields: original molecules as drug candidates; new original research projects at the preclinical level; and service activity in research and development from the first chemical steps to the final verification of effectiveness. IDR reviewed all departments and made decisions about nine fields of preclinical pharmaceutical research and development that could be recommended to foreign partners. These were advertised in a brochure: /DR- your CRO Partner, published in 1992.

ANALYSIS OF MARKET POSITION

IDR had successfully developed its customer relations and set competitive prices. It covered a wide scale of research and had developed new systems and documentation to international standards. It had a new information system, including the RCI and new computers, which facilitated strong operational control. However, there was inadequacy in market research and in the professional marketing approach, and slowness in removing unprofitable activities (since foreign customers proved not to be interested in four of the nine fields advertised in the 1992 brochure).

On the financial side, there were several weaknesses. The financial management was inadequate: it dealt mainly with day-to-day work with no long-range planning or forecasting. Money transfer from abroad via MEDIMPEX10 was complex and slow; there was poor resource allocation and stocks were too high in some departments.

The scientists employed were, and are, highly skilled and experienced, but were badly motivated, because of low salaries compared to those in other pharmaceutical companies, and this caused a high turnover and a shortage of manpower. The heads of departments are good scientists but not necessarily good managers, and have experienced difficulties in adapting to market-oriented methods of working. Staff development is therefore critical and at least 10 per cent of the staff (including researchers) are undergoing external training, in many cases abroad. These study tours are often the result of personal contacts made on the international conference circuit.


The work of IDR is attractive to foreign partners but the owner companies have their own research and development departments and there are many new companies specializing in particular fields which overlap with IDR.

There are research funds at present but these are continuously decreasing. In 1992 IDR received one of the highest levels of government support in the form of a fund of 150 million Fts, at the rate of 50 million Fts per year, which represented a special government supplement to a US firm's sponsorship of original research, plus further funds for business development and promotion. But generally, government funds are decreasing; the owner companies are reducing their contracts, and might in theory even demand the return of their 'capital'. This was further confirmation that the best opportunities for the future would be found in the foreign markets, as business prospects declined domestically.

New marketing and managerial strategies had to be developed. In the past foreign partners came to IDR because of its reputation. Now IDR had to turn its 'passive customer strategy' into an 'active aggressive customer strategy'. The organization now actively focused on marketing and selling: selecting appropriate customers, whether large pharmaceutical companies, smaller specialized pharmaceutical laboratories, retailers or wholesalers, and then developing a suitable marketing mix.

All projects were reassessed and unwanted ones removed. New drug candidates and projects were selected and new sponsors found for some ongoing research. The introduction of international quality standards was completed.

A small marketing department (initially four people) was set up to handle foreign contracts, visits and advertising, and agents were appointed in various countries.

It is expected that the ECRON co-operative will prove to be very fruitful. IDR's advantage is that besides high level pharmaceutical drug development research work and a large research staff it will also conduct original research, which is much riskier, on a contract basis. It is unusual for CROs to undertake original research because of the long timescale involved (perhaps 10 to 15 years) so IDR is unique in this area.

Once contracts are established, IDR still uses MEDIMPEX to manage foreign currency transactions and imports of laboratory equipment. Despite its slowness, MEDIMPEX still has much more experience in these fields than IDR, and MEDIMPEX is also a partner in some contracts.

The management structure of the organisation was altered by the introduction of a project matrix system. This was encouraged by the A.D. Little Consultancy, whose services were paid for by the State Holding Agency and the Industrial Ministry. A.D. Little was experienced in training

124 Case Studies

research and development companies in how to operate CROs. The essential feature of the project matrix system is that each project has a particular manager who is responsible only to the Director of IDR. Project managers 'hire' their workforce from line management across departments as required. The Director receives weekly computer-generated breakdowns of time and costs spent on each project and can see very quickly whether projects are going over schedule or cost. Strict cost control is operated and profits carefully monitored. An internal contract system is operated. Employees write their own timesheets and work to flexitime, although there is a wide core time of 9 a.m. to 2 p.m.

There has been a large improvement in cash flow because of the strict cost control and better planning. Penalty payments for late delivery decreased by 50 per cent However, the outdated commercial practices still prevailing in Hungary are continuing to cause some cash flow problems. For example, on the 'outgoing' side it is usual to have to pay for advertising in advance; however, on the 'incoming' side, companies in Hungary do not have to pay a maintenance fee on a patent licence agreement until a new drug is on the market, and only then does it pay royalties to IDR. Thus the company is paying out money early on some items and receiving it late on others. Despite these difficulties IDR is making a profit, partly from royalties on past developments.

Currently IDR is focusing on two research areas where the organization has a worldwide reputation: an anti-thrombotic compound to replace Heparin, called Efegatran, which has already been licensed and is undergoing clinical trials in many parts of the world; and a compound for the central nervous system to slow down the process which leads to strokes, and which is also undergoing clinical trials.

The Director believes that the future of IDR is secure, perhaps more so than for some of the parent companies. Although salaries in these are higher than in IDR, IDR is attractive to scientists because of its emphasis on original research. Companies throughout the world are reducing their research and development budgets and are relying more on outsourcing. IDR is competitive on price and, according to a recent OECD review of Hungarian research and development, Hungarian research and development was considered to be of good quality and very good value for money.

10 The 'High-Tech' Industries*

The case study utilizes the experiences of two small high-tech companies to illustrate some of the issues facing similar companies in Hungary. These companies are the outcome of the gradual liberalization of the economy in the 1980s and are representative of changes in the economic system and the need for industry renewal.

The companies display many of the positive features of entrepreneurism based on identified competences which distinguish these companies from their competitors and on an ability to be responsive to change. A further characteristic of these companies is their focus on particular market segments whose needs they are able and committed to fulfil. The scope of these companies is constrained by substantial competition from similar domestic companies as well as from major foreign players. A further handicap has been the inherited and antiquated infrastructure in telecommunications which has until recently tended to hold back business opportunities in this and client sectors.

INTRODUCTION

The computer industry was one area which benefited in particular from the sanctioning and expansion of the second economy in the 1980s.

Until the 1982 reforms enterprises could order large, expensive computers through the state trading system but smaller computers could be obtained only from people returning from visits to the West. After 1982, the market for microcomputers grew extremely fast, with 17 000 in use by 1985, from a base of only 270 in 1980 (Swain, 1990:93). The new small economic enterprises soon dominated this market. As well as the rise in the number of computers, the level of technology also rapidly increased, with Hungarian users being as eager to take advantage of each phase of improvements as their counterparts in the West.

The market fairly quickly divided into specific segments, with firms specializing in hardware, software, peripherals and other services. By

' This chapter is co-authored by Tamas Szabo and Vilmos Szego.

125

126 Case Studies

1988 about 60 per cent of the professional PC market was covered by small co-operatives, which also accounted for 50 per cent of software exports (Swain, 1990). These software exports were mainly in the form of the skills of software writers, rather than packaged software. One of the few exceptions to this rule was Graphisoft, which sold products to Apple and Hewlett-Packard. By the second half of 1985, no fewer than 385 Hungarian software professionals were working outside the country, 232 through state sector foreign trade contracts and the rest as individuals, mainly in Austria and Germany.

In many respects the emerging computer· industry was similar to Western-style computer industries and was characterized by newly created firms and by small to medium-sized businesses. In many cases one small firm was able to dominate a particular segment (for example, Muszertechnika in the production of computer cards and Micro System in the PC market). However, firms in the industry tended to be small and suffered from a lack of investment capital. The industry therefore relied heavily on intellectual capital and many of the people working in the computer industry were highly qualified engineers from middle-class backgrounds.

BACKGROUND

As Hungary entered the free market and began to acquire modern technology, the competition to provide the means of implementing this technology intensified. Hungarian firms now face strong foreign competition, and local distributors struggle to keep a foothold in the market. This case study highlights the experience of one firm in the computer software segment and one in the data communications segment which have survived and grown by appreciating the need for reliable customer service, a factor which they see as their main 'competitive advantage' over other rivals in this highly fragmented industry.

COMPUTING

Before 1990 the Hungarian computer industry was protected from Western competition by the Eastern Bloc system, and five companies -Kontrax, Muszertechnika, Controll, Microsystem and Novotrade, dominated the market for hardware and software. Hardware companies often imported components from Asian countries, assembling and selling them

The 'High-Tech' Industries 127

in Hungary, while software companies copied Western programs or developed their own. After the changes in 1990, Western competition arrived and nearly all the major US and West European computer firms established themselves in Hungary. The Hungarian industry could not compete with the superior technology and market power of the West. The leading Hungarian companies rapidly fell into debt and some had to face bankruptcy. Between 1990 and 1992 the sales of domestic firms supplying computing services declined by just under 9 per cent. By 1992 the majority of sales of domestic firms came from data processing rather than the development of software, as Microsoft and other foreign firms began to take increasingly large shares of the market (~ee TablelO.l).

By late 1994 there were signs that the initial stage of expansion in the information technology industry was levelling off. Most of the banks, many government departments and large infrastructure companies had made significant investments, and demand from these appeared to be declining. It was expected that the next wave of growth would come from consumers, small businesses and manufacturing industry. Multi-national companies began to prepare for this by strongly promoting financial and leasing packages and working with consultants, local systems integrators and software houses. Although the Hungarian market for hardware is smaller in total than either the Czech and Slovak Republics or Poland,

Table I 0.1 Sales and activity of Hungarian computing companies excluding units without legal status and individual entrepreneurs

(in billions Fts)

of which:

Year Return from Sales Domestic Exports

1990 10 822 8 505 2 317 1991 11 275 9 213 2062 1992 9 869 8 645 1 224

Of which: Software 2 707 I 830 877 Data Product 133 133 n.a. Data Processing 6 955 6 608 347 Research and Development 74 74 n.a.

Source: Statistical Yearbook of Hungary, Central Statistical Office, 1994.

128 Case Studies

Hungary's per capita spending on hardware is higher than in all Central and Eastern European countries except Slovenia.

According to the Hungarian Central Statistical Office, there were 1880 firms in 1994 whose primary activity involved computer technology, with a net combined turnover of 53 billion Fts. The provision of computer services accounted for 42.8 per cent and 57.2 per cent came from sales. Approxinately 8.1 per cent of turnover came from exports, mainly from sales of application software. Central Statistical Office figures indicate that the field of information technology is dominated by businesses with 11-20 employees and that their combined revenue amounted to 5.5 billion Fts in 1994.

Thus, although the larger Hungarian firms could not compete on the same level as companies such as IBM, ICL, Hewlett-Packard and others, in the new entrepreneurial climate many small companies sprang up to distribute hardware and software and to fill niches in the market. Hungary has a very strong reputation for engineering and its scientists have always been considered innovative and resourceful. It is considered likely that, as the computerization of Hungarian business proceeds, there will be a growing need for the smaller, service-oriented firms which can provide ongoing assistance in the implementation of new technology.

People working in the computer industry tend to be younger than in other domestic industries, and well educated. To some extent the problems and competitive issues are the same as anywhere else in the world. Many small firms have come and gone since 1990, and the ones that have survived have worked hard to do so.

DATA COMMUNICATIONS

In the data communications market customers buy products which require telephone lines as a medium of transmission. The products in this segment range from simple modems, used to connect two PCs or a PC to a mainframe, to large area networks of computers and equipment which connects two or more networks. However, much of this technology depends upon the availability of telecommunications. The Hungarian telecommunications market is very underdeveloped: in 1994 there were only 17 lines per 100 head of population, well below Western standards. In 1993 Deutsche Bundespost Telekom and Ameritech International paid $875 million for 30.2 per cent ofMATAV, the Hungarian communications conglomerate. This was, prior to the MOL sale, the largest foreign investment in Hungary, 1 and in 1995-7 MAT A V intends to spend $2 billion on


installing 1 million phonelines. About 700 000 people were on the official waiting list at the end of 1995, and there was concern expressed in some quarters that telephones were more available to the urban and more prosperous areas, leaving rural and poorer communities less well served.

Hungary's teledensity is expected to triple before the end of the decade, bringing it up to a penetration level of 45 per cent. There is thus a potentially very large data communications market, which will expand as fast as conditions allow. One estimate suggested that the value of the total market had increased by nearly 200 per cent between 1992 and 1994, and growth would continue to be faster than the average for the economy until 1998. Furthermore, customers require a high level of support in this new field.

THE FIRMS

IQSoft

IQSoft is a medium-sized software development and trading company, although it is large for its segment. It started life in 1977 as a department of the state-owned Computer Research Centre (SZKI). In 1990 SZKI was broken up into individual satellite firms and a separate company, eventually named IQSoft, was created, with SZKI as the main owner. In 1993 there was a management/employee buy-out, with the management and employees acquiring just over half of the shares.

Between 1989 and 1993 IQSoft was the sole distributor of ORACLE products in Hungary. ORACLE is a database management system which operates on a wide variety of hardware, including IBM compatible PCs and networks. It is a high-performance system which supports on-line transaction processes and distributed databases. The ORACLE Corporation is the third largest software company in the world and supplies products and support services in 92 countries.

During the first two years of the contract sales of ORACLE rose to US$3.5 million. There were only seven staff employed- two salespersons and five technicians- although the firm subsequently expanded to 58 personnel. The success of this small team led to the winning of some very large contracts and in 1993 the Budapest Business Journal estimated that it was the fourth largest software company in Hungary, ranked by its 1993 revenue. Based on this success ORACLE Corporation decided to open its own branch office rather than buy the majority shares in IQSoft, as the staff had hoped. Although by 1993 IQSoft had diversified, ORACLE sales still represented 50 per cent of gross profit and occupied 30 per cent of the

130 Case Studies

staff. The loss of the ORACLE contract was a blow to the company and it was therefore necessary to reassess its strategy.

ORACLE Hungary (OH) itself had teething troubles. The parent company was experiencing problems and somewhat neglected OH. OH had taken technical staff from IQSoft but not their sales staff. OH initially had difficulty in finding good sales staff and staff turnover was relatively high. The pace of growth began to slow down and a new managing director was appointed. Elsewhere in Ceritral Europe Oracle was more successful. It has offices in Croatia, the Czech Republic, Poland, Russia, Slovakia and Slovenia. It has sold major systems in all these countries, with its biggest contract in 1994, worth $11 million, being to equip Slovnaft, Slovakia's largest petrochemicals company, with an integrated information system.2 The firm hoped this would enable it to win further business in Hungary, which it has since done.

Although IQSoft is no longer the sole distributor of ORACLE products, the sale of the system still contributes almost 25 per cent of annual revenue. However, it was eventually decided not to switch to distributing the products of yet another major international company, such as SYBASE or INFORMIX, but to concentrate on developing applications, design, maintenance and service for a diverse range of software. While retaining ORACLE in the portfolio, other important applications are AVALON-Applications, a comprehensive system for enterprise-wide processing of manufacturing, distribution and financial information; and PCS*Care, an extensive hospital management information system.

The firm had also acquired the rights to GUPTA, a database management system developed by a US private company, and consequently decided to expand its marketing for this. The US company has subsidiaries in Europe and IQSoft obtains its supplies from the German branch. Hungary is the third largest user of GUPTA, after the Czech Republic and Russia. GUPTA is a good system for small to medium-sized companies. Major sales of GUPTA have been to the State Holding Company, the Hungarian Police, the think-tank Kopint-Datorg, Matra Power Station and the Hungarian Parliament.

IQSoft has also been successful in the imaging and automation business. A joint development with another company has resulted in the development of the DOKTAR system which is now available commercially. Users of DOKTAR include the Prime Minister's office, Inter-Europa Bank and the national daily Nepszabadsag. Furthermore, the firm's knowlegde of Microsoft products has earned it the title of the first 'Microsoft Solution Provider' in Hungary.

Other important customers are banks, municipalities, newspapers, and airport and telecommunications firms. Many private firms do not yet have the


money to invest in expensive software. However, revenue from GUPTA rose from $20 000 in 1993 to $300 000 in 1994. Exports generate 30 per cent of gross profits: the Bank of Austria is a major client as well as a shareholder. The firm's turnover and number of employees have grown rapidly since 1990.

IQSoft is now considered to be one of the larger, more stable software companies. Its market position stems from the support it gives to clients in the form oftraining, consultancy, a 'hotline' and other services. Of its 58 employees, 37 are technical staff, 10 are commercial, seven are administrative and there are four managers. The large diversification effort means that the main business is now in developing applications, particularly 'high end' applications for automation.

The company's work is expensive for Hungarian firms but it believes it gives very good value for money. Relations with customers are also considered to be very good because of the level of service provided. Teams of experts work on each product and, as well as giving technical advice and assistance, they carry out system and support work for clients on demand. The firm also offers a comprehensive range of training relating to its software products.

There is strong marketing support for the work, in the form of advertising, roadshows and trade fairs. For example in 1994 IQSoft organized and/or attended 16 events.

As is normal throughout the industry, customers often come via partners: other computer companies selling hardware and related products. IQSoft has partnerships with HP, Bull and Sun, and an exclusive agreement with Sequent Computers. Customers often purchase their hardware first and then look around for the software to use on it, not realizing that the software is the most crucial element of the system. They are then recommended to firms like IQSoft. IQSoft has many partners in different areas of the market and a partner in one field might be a competitor in another.

Decisions still need to be made on the focus of future activities and, in order to assist in the formation of a strategy, IQSoft employed for one year from the autumn of 1994 an American MBA graduate supplied by the MBA Business Enterprise Corporation, a consortium of 25 business schools organized by the University of North Carolina.

The company has a flexible, matrix structure and an informal atmosphere, with an enthusiastic and relatively young staff who would not be out of place in a similar firm in the West. Of the 58 staff, 16 are under 30 years old, 14 are aged between 30 and 39 and 28 are over 40. Of these 58, 49 have a university degree and there are 36 men to 22 women. The test of them, and of IQSoft, is whether they can maintain their market position in the face of seemingly poor prospects for the economy and ever-increasing competition.

132 Case Studies

Sci-Modem

Sci-Modem was started in 1991 by two electrical engineers as a small private company distributing a range of data communications products. Identifying the emerging market for data communications in Hungary, their first product was a modem. Initially they offered lower-priced mediumspeed models from Taiwan but later concluded an agreement with a European market leader and began to supply 'high-end' modems. The firm started with a capital of 1 million Fts and three employees, and by early 1996 had 12 employees. Growth has been consistent (see Table 10.2).

The company is run by the two managing directors who now own a majority of the shares, although 60 per cent of the company's capital was initially owned by German shareholders.

Sales of modems grew rapidly from 600 in 1991 to 6000 by 1994, with turnover increasing from 16 million Fts in 1991 to 200 million Fts (from all sources) in 1994. Sci-Modem estimates that it now has 30 per cent of the modem market.

Following the success of the modems, the company extended its activities in mid-1992 to offer a complete range of products to its customers. Personal computers and software were now added to the range and eventually more sophisticated equipment, such as X.25 networking and LAN interconnectivity (which demand highly qualified staff and considerable investment in training). The company established a good reputation for itself because it focused on expertise and service and developed long-term relationships with customers. However, growing competition in the market and the fluid state of the economy forced the company to reappraise its products in 1993 and focus its activities more clearly.

Year

1991 1992 1993 1994 1995 1996

Table 10.2 Growth of Sci-Modem, 1991-96

Employees

3 4 6 8

11 12

Capital (million Fts)

1.0 1.5 1.5 3.5 3.5

Hungarian ownership (%)

40 63

100


Sci-Modem's market could be divided into private consumers, who are mostly interested in modems and fax modems, and industrial customers, who are more interested in the 'high-end ' modems, networks and network interconnectivity.

Private consumer demand for modems is relatively low but the potential market is very large. The conditions for use are the availability of computers and of telephone lines. While PCs are popular and relatively cheap the telephone system is very underdeveloped. Demand for modems, until recently saturated, is beginning to increase again as the telephone network is upgraded and expanded.

Small companies are targeted as private consumers for modems, while the main customers of the 'high-end' products are the large companies. Large companies are restructuring and, while many of them are keen to establish new technology, they do not a! ways have the resources to implement it.

There are many competitors in each market, particularly in computers, and 'low end' products are very price-sensitive. Many companies operate only as trading companies and consequently offer limited service.

Data communications products develop rapidly and new systems appear almost weekly. This can be confusing, particularly for Hungarian companies new to high-technology products. It is therefore necessary for companies like Sci-Modem to be able to differentiate themselves in terms of both product and service.

In 1993 Sci-Modem examined its product portfolio with a view to concentrating on the best possible mix. Their product portfolio contained eight product lines, each comprising a range of products, from modems to LANs and training/counselling, and from small 'stand-alone' items to large systems requiring planning, design and maintenance. It was clear that not all products were profitable or contributed greatly to turnover. The product range needed to be cut, and more attention paid to the training element of the firm's service.

The firm evaluated five strategic options, taking into consideration the products, prices and market conditions. The strategy eventually selected involved withdrawing from the PC and radiocommunications markets, in which they could not compete profitably (this would also free resources for other items); consolidation of the modems, for which Sci-Modem estimate they have around 30 per cent of the market; and further market penetration of X.25, Bridgers/Routers, LANs and training/counselling. There was also some suggestion of assembling an own-brand modem, but this was ruled out at this time as being too risky.

134 Case Studies

By 1994 Sci-Modem had completed its changes and was concentrating on core activities. Two modems were being supplied, a cheaper model popular with PC users, and a more expensive model for banks and other commercial customers. The other main products were datacommunications and switching networks.

Main suppliers include Datatronic (Taiwan), Telindus (Belgium), Philips-TRT, EICON (Canadian) and RAD Group (Israel). Customers include MOL, which is installing a data network worth 300 million Fts. Sci-Modem is also a sub-contractor with Philips (providing 40 per cent of the equipment), MATAV (the telecommunications giant) and six regional electricity companies. Sci-Modem believes that it wins contracts by building good relations with technical staff and supplying a high level of support. There are other, much larger, firms in the industry, such as Optotrans (a Hungarian firm) and foreign firms such as Siemens, but SciModem has invested much effort in demonstrating its commitment to its clients. Among the smaller companies, Sci-Modem believes that it has a significant market share.

This 'commitment to service' is seen as a potent marketing tool. The firm invests a lot in new product demonstrations, so that clients can see what they are buying. It has also invested a lot in measuring and testing equipment so that it can measure and test networks and telephone lines. This is expensive but, as few companies in Hungary do this, it provides another competitive edge. The engineers can measure and test the environment and give exact solutions: diagnosis is part of the service. Other marketing methods include advertisements in the national press (taking up 2-3 per cent of turnover) and taking a display stand to the spring and autumn international trade fairs.

New customers come from a variety of sources. Apart from those seeing advertisements, many are recommended by customers, or by other companies/partners.

Sci-Modem has established itself securely but it has grown in an unstructured way. Working from an apartment close to the centre of Budapest, the firm has recently expanded into the neighbouring apartment (there are very few office blocks in the city where small firms can rent accommodation).

Turnover and profit have increased consistently since 1991 and since 1994 the company has had no outstanding bank loans (see Table I 0.3).

Key recent developments have included being invited to take part in large projects (for MOL, for example) by large multi-national computer companies and the launch of Sci-Modem's own modem on the Hungarian market. The modem (called Dialcom) has become a cash cow for the

Year

1991 1992 1993 1994 1995

The 'High-Tech' Industries

Table 10.3 Sci-Modem's turnover, 1991-95

Million Fts

16.5 36

110 225 330

135

company and its success is attributed in part to the fact that it is the only modem on the market with packaging and instructions in Hungarian.

These two developments give the company confidence that it can face future challenges successfully, particularly as the instability of the Hungarian economy and the drive to enter the EU are maintaining the pace of change. Sci-Modem will need to be equipped to compete in an increasingly open market.

Part III

Patterns and Prognosis

11 Patterns

Following our general overview of the evolution of the context within which companies and their managements operate and our presentation of the situation of a cross-section of companies, this chapter seeks to identify common themes which underline the evolution of companies in Hungary we have studied. Compared to the present, the period of socialism, as we have explained in earlier chapters, was betokened by a general uniformity and relative stasis in the organization of the economy and of enterprises. In view of the nature of the overall political system this is hardly surprising. The economy (and its constituent enterprises) had to conform, even if only approximately, to an overriding model of economic organization. As a consequence uniformity was a general characteristic of the former system of economic management. Even considering the divergence of reality in Hungary from the model, particularly from the late 1960s with the New Economic Mechanism and the expansion of the legal (and illegal) second economy in the 1970s and 1980s, on balance the Hungarian system had much in common with the socialist model of the economy. Consequently Hungarian companies, up to the end of the 1980s, were more similar to companies in other member countries of COMECON than to comparable companies in Western Europe or North America.

In contrast to this uniformity, the brief period of the introduction of free market capitalism has been characterized by considerable diversity and dynamism, engendered to a large degree by the collapse of the rigidities and certainties of the former system. The overall hierarchical decisionmaking structure of central state direction ceased to prevail and had implications for industry and company structures. The break-up of monopolies and conglomerates has gone hand in hand with the establishment of new enterprises, acquisitions by foreign investors and a general quest for new identities and roles. Adding further spice to this recipe for dynamism and fundamental change is a background of global recession and manufacturing overcapacity (Thurow, 1992), which offers little relief to companies accustomed to decades of a different system and faced with the collapse of the major part of their traditional markets in other countries of Central and Eastern Europe and the former Soviet Union. Companies used to the secure markets of the 'East' now had to venture into the highly competitive markets of the 'West', while at the same time witnessing the invasion of their domestic market by powerful and aggressive organizations from

139

140 Patterns and Prognosis

Western Europe, the USA and Japan which were tried and tested in the rules of the game.

Under such circumstances it should not be surprising to find a move away from a general uniformity to a greater diversity as companies seek to come to terms with, and adapt to, the new realities. Whilst, in the past, the prescription would come from above (with on the whole one prescription for all), now each company has to find a way of operating to suit its own requirements in the context of its specific environment. The companies whose evolution we have portrayed in earlier chapters, as well as other companies in Hungary we have investigated, display a diversity of experiences, both for the company itself and individual managers: these experiences range from the disaggregation of monopolies and enterprise break-ups to the exploration and securing of viable niches for smaller new companies as well as acquisition by foreign companies. The creation of a privatized economy naturally encompasses a variety of processes and forms. However, out of this diversity of experiences we will seek to identify a number of common patterns and themes.

PRO ACTIVITY

One characteristic that has repeatedly struck us has been the proactivity displayed by managers in the organizations we have visited. Clearly, proactivity was not totally absent under the former regime but it was fundamentally constrained by the general framework within which enterprises and their managers had to operate. This proactivity is particularly evident in the new small enterprises seeking to establish themselves and prosper in the face of substantial competition. In other cases this proactivity may be no more than the desperate response to the new circumstances, driven by a need for survival. If the ship is sinking (and many organizations appeared to fit this description), you can either leave (and many managers have) or you can stay on board in order to try to keep the ship afloat. This proactivity was frequently allied to a critical analysis of the company's situation and its capacity to respond adequately to the often rapidly changing situation. Many managers, particularly middle managers, felt frustrated at what they considered to be top management's inability to change quickly enough, to identify key deficiencies and develop appropriate strategies which would engender the necessary tangible and intangible resources and give the organization a better chance of survival.

Clearly, many top managements were torn between the security of the past and the unknown nature of the future; they sought refuge in estab-

Patterns 141

lished forms of enterprise behaviour, such as political lobbying and the pious hope that the state would continue to bale them out, even though post-socialist governments continually professed their commitment to the establishment of a market economy and the privatization of state-owned enterprises. In such cases it was commonplace for the more talented middle managers, particularly those with some experience of working in the West or knowledge of Western management methods and with foreign language skills (especially English and German) to be lured away to another company (often a foreign company) or to set up on their own. This factor also helped to sustain the growth of small businesses, contributing in no small way to the transformation of the economy. At the same time it depleted the established enterprises of some of their more talented and goahead human resources.

A complementary picture is that of top managers who had assumed leading positions since the change of regime. Many had already been working for the company, in middle management or in leading technical positions, before assuming the mantle of managing director. Thrust into new positions these senior managers now had to identify and implement a new purpose for their organization. In conjunction with the issue of dayto-day survival the new managing directors had to devote themselves to considerations of strategy in order to secure the future of their companies. It was no easy task to devise a workable strategy, given the intellectual and physical inheritance of the past and the general economic environment of rapid and fluid change. Yet these managers were prepared to wrestle long and hard with the challenges and threats facing their companies.

AUTONOMY AND RESPONSIBILITY

Proactivity was often accompanied by the realization that the organization now needed to function autonomously and by a sense of responsibility for its continued existence. With the dismantling of the former system of economic management there was a clear intention, consistently expressed by the new democratic governments, to make companies autonomous within a specified framework of economic action in which companies themselves were conceived as the principal agents. Autonomy can be perceived as an opportunity to follow one's own goals and strategies, to develop without the constraints of the state and centralized planning. On the other hand autonomy can be a burden, a withdrawal of state support and the loss of a final refuge in the case of dire difficulties. While at least


in theory liquidation became feasible towards the end of the former regime, it was never the ultimate arbiter of the fate of an enterprise, as reasons of state could always be called upon to overrule the exigencies of the 'market'. This has now all changed, and companies really have to find their own way of survival.

This can be a demanding task, as shown in the cases of IDR and Metrimpex. Organizations created for specific purposes in a different system may find it difficult to find a new purpose and scope, especially if their primary function derived from the way the economic system was structured in the past. Research institutes and foreign trade organizations had a specific function which was, however, frequently undermined by their client organizations' desire for autarky. With market liberalization, organizations such as IDR and Metrimpex were already being challenged by their former clients' own in-house organizations, even though they might initially have been only embryonic.

There may be a number of driving forces behind such a quest for a new purpose and scope, including a desire for survival, ambition to prove oneself in the new conditions, and a belief in the validity and value of the company's activities. A further driving force is a sense of responsibility towards one's fellow employees and to the local community. IDR is keen to preserve a body of talented and experienced research scientists; BERV A is the largest employer in the town of Eger and employs a large number of skilled engineers. Possession of such resources is in itself not a sufficient condition for survival, but these specialist resources have to be substantially retained if the company is to have any kind of future.

The issue of autonomy is therefore bound up with a range of other considerations, such as privatization, strategic purpose and scope and a broader social responsibility to employees and the local community. Many top managers often appear to be trying to 'square the circle', ensuring short-term survival, developing longer-term strategies, seeking out new customers and markets, developing new products, pursuing potential investors, keeping current creditors happy, and maintaining as much employment as possible. They are in fact doing what senior managers in the West would be doing under similar conditions of crisis, and some of the Hungarian managers we interviewed have been coping like this since 1989-90. In the process many have experienced many more disillusions than successes, although the fact that their companies are still in existence can be counted as a success in itself.

Patterns 143

INVESTMENT AND RESTRUCTURING

Proactivity and autonomy have brought with them many tangible changes in the way companies are structured and managed. As mentioned in Chapter 3, redundancies were already manifest towards the end of the former regime (and the town of Ozd is only a short distance from Eger).

A first step in restructuring occurred with the removal of party-political involvement in the running of enterprises. This led directly to the disappearance from the workplace of the HWSP and to the diminished influence of the official trade union. Subsequently the ability of the trade unions to play a substantial role in the operation of companies has been much diluted, at least in part because of the general antipathy of many workers to trade union organization. Companies then tended to become predominantly economic organizations run by 'real' managers.

Two forces played a significant role in the restructuring: marketization and commercialization. Companies now needed to be responsive to market forces, and accordingly marketing began to gain in significance. Marketization's particular impact was felt in the demand for the company's products or services so that its impact rebounded to 'upstream' areas, such as product design and development. The level of orders was now being determined by the market and this was influenced by a range of factors such as product design, quality and the nature of competitive products. The shift from a seller's to a buyer's market was of enormous significance in raising the need for an appropriate level of marketing which could identify the needs of customers and meet them profitably. As the BERV A case indicates, these two aspects may have to be considered separately and they are not necessarily achievable simultaneously. In fact, the company may need to devise distinct strategies for each of the two dimensions: first, manufacturing the product to the customer's specification (at the beginning, possibly below cost); and second, moving towards profitability, by investing in new plant and machinery and upgrading the process of production.

Commercialization -and the establishment of functioning salesforces -was the 'downstream' dimension of the buyer's market. Even products suitable for the new conditions have to be brought to the attention of potential consumers. They no longer sell, so to. speak, on their own. Products are now faced with a range of existing and potential competitors. This is especially manifest in the case of consumer markets and the example of Stollwerck is illustrative of the need for and investment in distribution and sales.


Accordingly, substantial investment has gone into the training of human resources, in functional areas such as marketing, sales and finance and in general management skills. This has been seen as complementing existing technical skills in general and specialized areas of engineering (for example, chemical engineering). Training in expanding functional areas such as sales has often had to counter the influence of deeply engrained working patterns and behaviours, as reflected in people's attitudes to the nature of the sales representative's job with its substantial amounts of travelling, for instance.

This investment in people has been accompanied by investment in new technology and equipment. This has included investment in new information technology and in some new buildings and production equipment as well as the development of new processes. However, investment in capital assets (such as automated manufacturing plant) has been limited by the relative cheapness- by Western standards- of Hungarian labour which, up to now, because of its level of skills, has attracted substantial numbers of foreign investors. This supply of skilled, yet relatively cheap, labour has in general outweighed the need to invest intensively in labour-saving devices. This combination of high-skill/low-wage labour may, however, prove to be only a transient phenomenon in the transformation of the Hungarian economy.

One consequence of restructuring has been the substantial slimming down of labour forces. If nothing else, Hungarian companies are much leaner than they were five years ago. Even allowing for 'fat' from the old days, Hungarian companies have shed large numbers of employees. Some former employees exercised party-political and trade union functions, some represented organizational 'slack', on hand if ever it was needed; others were there to compensate for the 'technical difficulties' of the old system. Nevertheless, a substantial slimming down has taken place. Metrimpex had virtually halved the number of its personnel by 1994; Berva reduced the size of its workforce by two-thirds, although it has subsequently started to take on more workers; Stollwerck has reduced its workforce by 60 per cent, although this figure includes 500 seasonal workers. Its core workforce now represents only around one-quarter of the total workforce it employed under the former regime.

Such massive reductions in employment have had a major impact on those affected. In a general environment of downsizing, new job opportunities are likely to be limited and subject to intense competition. Furthermore, only a certain number of those affected by unemployment are likely to have the requisite skills and aptitudes to set up their own businesses. On the other hand, the members of the workforce who are retained

Patterns 145

tend to enjoy greater job security and higher wages, even though they have to work more intensely and for longer hours.

UNBUNDLING

This slimming down has been allied to a general process of reviewing the company's activities and products. Even the smaller companies we investigated devoted considerable attention to deciding on which products and services to offer and which market segments to concentrate on. The sponge-like nature of the old conglomerates, absorbing a range of disparate activities, was not conducive to succeeding in the market economy, with its stress on the core business and focused action. Companies tended to have fingers in too many pies. Take the example of Quintie: its core activity was the manufacture of confectionery. However, it was also involved in a range of 'upstream' and 'downstream' activities, some related to the core business, some not. Quintie owned shares in a raw materials supplier and a software house; it manufactured machinery; it manufactured competitors'(!) products under licence; it acted as an import-export agency for other companies as well as owning a number of retail outlets (for the full picture of Quintie' s activities see Figure 8.1 ). Berva, to give another example, is located on a vast site with its own power-generating plant.

The example of Quintie may be somewhat extreme but it is not untypical. Under the new economic circumstances companies have begun to review their product portfolios in order to identify those areas which might be successful in ensuring the company's development. In the case of established companies this generally involved pruning back and excising areas which were considered to be lacking in potential or to be too remote from the company's core business. The newly founded businesses we studied gave considerable thought to evaluating and selecting areas of activity and products before actually embarking upon new initiatives.

This process of unbundling has perhaps most of all affected the large conglomerate monopolies such as MOL, which was fully integrated from the prospecting of raw materials to supplying end consumers. The breaking-up of such monopolies has been a complex and involved process, taxing the energies of the company and the state, as well as potential investors. Clearly the larger the organization, the greater the implications for employment and what might be considered the national interest. However, the unbundling of the large monopolies must be considered essential, if the process of privatization is to progress, if efficiency is to


improve and the state is to raise sufficient finance to balance the national budget and implement its policies.

INTERNATIONAL LINKAGES

Over the last five years Hungary has experienced the highest influx of per capita foreign direct investment in the region and has substantially reoriented its trading links from its former COMECON partners to Western Europe in particular. Although a re-evaluation of the significance of the former communist markets in Eastern Europe and the former Soviet Union is now under way, it is true to say that Hungary has rapidly established strong linkages with the West. These linkages have taken a number of forms within the companies we investigated.

Possibly the most overt linkage has been acquisition by a 'Western' company as in the case of Quintie, which was acquired by the German confectionery manufacturer Stollwerck. The acquisition by Stollwerck gave Quintie access to the parent company's expertise and resources, including product lines and distribution networks. More generally, Quintie has been able to tap into the managerial expertise which is available within Stollwerck.

This, however, is not the only form of international linkage. Looser linkages, such as manufacturing under licence and sub-contracting, can also play an important role. Berva, for example, has built up considerable experience of working for international companies, initially for the Swedish company Mecman and subsequently for Electrolux and Suzuki. In many respects, however, this kind of looser linkage is just as demanding and possibly riskier than direct tie-ups through acquisition. Acting as a supplier, the company still has to meet the stringent requirements of the contracting company yet without necessarily obtaining the equivalent level of support and commitment. The gains in autonomy and independence may therefore be outweighed by a relative lack of access to necessary expertise. Nevertheless, working for an established 'Western' company does exert considerable pressure on the organization, forcing it to upgrade its products and processes in order to comply with the client's demands and international standards.

The relationship, moreover, may take the form of a co-operative venture, as in the case of IDR's participation in the ECRON contract research network; Involvement in ECRON and the general need to be competitive internationally has moved IDR to review its procedures so

Patterns 147

that they meet internationally recognized standards (for example, in GMP).

Even the small, more recently established businesses have drawn on international linkages to supply the needs of the market. SCI-Modem supplies and services products from a limited number of international suppliers as part of the overall package it offers its customers. Companies can also benefit from the association with large international players: for example, if they are denoted as recognized suppliers of internationally known products or are included by large international companies in the delivery of a part (even though it may be small) of a large project.

THE HUNGARIAN CONTEXT

And what of Hungary and Hungarianness? Under the old regime and within COMECON, Hungarian enterprises had managed to develop a distinctive mode of operation which in many ways set them apart from comparable companies in other East European socialist economies. To what extent has this distinctiveness been preserved or lost in the tumultuous changes which have occurred since 1989?

All the companies we investigated were being managed by Hungarians. They had clearly learned - and learned quickly -how to manage under the new circumstances. Their companies' international links are in some way a testimony to their success in ensuring the survival of their organizations and in carrying through the process of transformation. These managers also demonstrated traits of individualism and entrepreneurism. Such traits, necessary at a time when the prime need was to transform their companies to operate under free market conditions, were also allied to a more general concern for their fellow employees and the local community. Success for the company was important but so too was pride in being able to demonstrate that Hungarian workers were, at least potentially, the equal of their Western counterparts and not, as one interviewee described it, 'oriental peasants'. For many of the managers, their positions were buttressed on sound technical knowledge and competence, which were now allied to a bourgeoning knowledge and application of Western management.

A further dimension of Hungarianness has concerned the products which some of the companies manufacture. After the collapse of the former regime, shops in Hungary were deluged by products from the West. This was particularly evident in consumer markets where retailing outlets were dominated by Western chains such as Julius Meinl and Kaiser's.


In confectionery, Hungarian products yielded to Western brands produced and distributed by major multi-national concerns. More recently, however, former Hungarian products have been relaunched and have gained considerable consumer acceptance and market share. In fact, consumers have begun to react against purely international brands and companies without a Hungarian manufacturing base appear to have been particularly affected by this trend.

However, this national dimension also has broader implications. Even though Hungarians are open to Western ideas (and many Hungarians are fluent in English or German and a good proportion are capable of conversing in both), there is still considerable attachment to being Hungarian, to being a distinctive ethnic entity in the middle of Europe. This aspect can be illustrated by the case of SCI-Modem. When SCI-Modem decided finally to launch its own-brand modem, it distinguished it from the products of its competitors not so much in terms of specification and price but by packaging. SCI-Modem's Dialcom modem is as yet the only modem on the Hungarian market with packaging and instructions in Hungarian, and it has subsequently become a major success for the company.

Although the cases do not speak about this aspect explicitly, classic cross-national and cross-generation cultural conflicts may be lurking behind many managerial decisions, especially in international companies and those with extended foreign markets. The new values and behaviour patterns are easily acquired by the younger generations who can enjoy the opportunity of learning languages at school and university. However, older people may face serious problems. Behind the success stories there are also many personal tragedies: development - especially in turbulent times - always has its victims. Conflicts may result in high managerial fluctuations: the days when one could be the CEO of one large company for decades on end are over.

12 Scenarios for the Future

'Improving balance, declining financial situation': this was the title under which the Hungarian Central Statistical Office published its report on the year 1995 in the largest domestic daily (Nepszabadsdg, 29 February 1996, p.5). The first part of the title -improving balance- refers to the financial situation of the country, the second one- declining financial situation- to that of the citizens. In the first chapter of this book we have already mentioned that Hungary has become a place full of contradictions since the start of the transition: positive and negative processes are going on in parallel, there is development and decline, new values are coming up and old ones are disappearing; the world looks different when viewed from on top of the bridge and then from underneath.

Speculating about the future is just as contradictory: there is a wide variety of potential options, and the probability of any of them actually occurring is very hard to assess. In the following pages we will embark on drawing the sketches of two possible scripts, an optimistic one and a pessimistic one, by considering present-day facts and taking a closer look at some of them. At the same time we are well aware that they represent the two extremes and that reality will probably develop somewhere between the two.

THE OPTIMISTIC SCRIPT

The economic system of the socialist kind that had developed in post-war Hungary had obviously lost the game against the market economy by the end of the 1980s. This became so evident that a 'smooth change-over', a revolution without bloodshed, took place. The task is clear: the socialist planned economy has to be transformed into a market economy. Before constructing the new building, the old one must be dismantled, which is impossible without pain. This is evident to all rationally thinking people, but a better future is by all accounts worth the temporary sacrifice.

As it is a market economy, development will be determined by the growing private sector. Hungary has chosen the market approach to privatization which helps the development of private ownership and related modes of behaviour. In spite of certain setbacks privatization is proceeding steadily, and the economic figures for 1995 are utterly convincing.

149


The owners will behave like real proprietors, they will be thinking in the long term and, if their fortunes grow, the country will become richer too. Employees will earn more and they will pay more taxes. Foreign proprietors - the big multi-national corporations such as General Electric, ALCOA, Ford, Shell, UNILEVER and Ameritech - will bring technical and managerial know-how of unassessable value into the country and they will integrate Hungary's economy into world trade, making it ever more global.

In order to realize the restructuring inevitable for development, radical steps have been taken in the Hungarian economy which are accompanied by considerable sacrifices, but it will be much easier to make progress once the ground has been cleared. The restrictive financial measures brought about initial achievements. According to the government 1995 was the year when the situation turned: the gross domestic product has increased by 2 per cent; the budget deficit has become smaller than planned; the foreign-capital flow to Hungary has amounted to $4.5 billion; the net foreign debt has decreased by $1.5 billion; 70 per cent of the GDP comes from the private sector; in all branches of industry exports have grown; the gross savings of the population have increased by 25 per cent in the course of the year; and from January 1996 the Forint has, in practice, become convertible. According to these figures investors on the Budapest Stock Exchange are optimistic. International forecasts are positive: for instance, according to The Economist ('The World in 1996', p.40) the long-awaited and hoped for upswing could set in at last by the end of 1996. This will be due to the devaluation of the Forint and to the increasing demand for finished products in Germany. In the opinion of the magazine's experts the panic caused by debts will be lessened by revenue increases and this will ease the situation of companies. According to the new minister of finance, appointed at the beginning of 1996, inflation will recede significantly in 1997.

The population has taken the hardships in a well-disciplined way; largescale strikes and demonstrations have not taken place up till now and will not take place in the future. People's income is decreasing for the time being, but the economic upswing will soon ease the situation in this respect as well. The unemployment rate does not exceed that of the Western European countries and the inevitable reductions in the labour force are counterbalanced by the private sector quickly absorbing superfluous labour. Continually growing incomes will increasingly be used for capital investment by the population, the members of which will themselves become proprietors: that is, citizens who have a personal interest in the consolidation of the market economy and the new democratic

Scenarios for the Future 151

establishment. Due to its growing revenues, the state will be in a position to improve social security, which at present is no longer secure. The education system will increasingly produce experts, who speak foreign languages, have travelled in the world, are competitive and who will take over from the older generations. The position in politics will gradually settle down, and in a way similar to some Western countries the conservatives and social democrats in Parliament will take turns to promote legislation while the average citizen, as the population becomes more and more well-to-do, cultured and informed, will vote rationally. Sometime at the turn of the millennium Hungary will join the EU by having gone through a kind of development and getting into a position within the Union which is similar to Ireland's.

THE PESSIMISTIC SCRIPT

The population experienced the period of the socialist economic system between 1957 and 1989 as an epoch of gradual improvement. The consumption of the population was, albeit slowly, continually growing, civil rights and liberties were extended year by year. This is what the average citizen has grown accustomed to on the whole during the past 40 years. People expected from transition further achievements, or that their personal situation was going to get perceptibly better quickly as a result of the collapse of political walls and the transition to a market economy. These expectations, however, have had to face substantial disappointment.

Although gross salaries are rising, their value is decreasing because of increasing taxes and inflation. According to the figures of the Central Board of Statistics, after several years of decline, in 1995 in the national economy real income decreased overall by 12.2 per cent (in education by 17.3 per cent, in health and social welfare by 18.8 per cent). Compared to the preceding three years prices in 1995 were rising by a higher level than expected. According to a report of the World Bank on poverty and social subsidy published in 1996, in Hungary gross domestic product decreased by 20 per cent, the total income level declined and the balance of income distribution widened between 1989 and 1993, in the course of the four years of transition to a market economy. While in 1989 there were 1.6 per cent of the population living below the poverty line, receiving less than the minimum pension, in 1993 this had risen to 8.6 per cent. If, however, as the minimum pension is extremely low, one takes 150 per cent of the minimum pension as the poverty line, then the proportion of the poor went from 5 to 33-40 per cent in the course of four years. As


incomes are concentrated around the poverty line, even the slightest decrease in income can result in a massive growth in poverty. People who have become accustomed over the decades to one-Forint bus fares, free education and health care, low book prices and cinema tickets, cheap trade union holidays, peacefully boring newsreels and relaxing walks at night, now find themselves in an ever gloomier world.

There are winners in the transition, but there are quite a lot of losers too. People naturally judge the results of transition by the situation they were in at its beginning: according to a study by Zsuzsa Ferge ('The Subjective Balance of Restructuring', Nepszabadsag, 24 February 1996), 65 per cent of heads of households in the survey consider themselves to be losers and only 15 per cent winners. (The corresponding rates in the former German Democratic Republic are 34 and 40 per cent respectively.) Consequently Hungarians seem the most pessimistic in the region as far as future prospects are concerned. While in other countries, on average, one-quarter or one-fifth of the people asked are embarassed by questions about the future, in Hungary about half of them are.

Hopes connected with an economic upswing prove to be illusory: the economy is actually using up its reserves. Radical measures bring about short-term achievements indeed, but at the same time they undermine the basis of long-term growth. Privatization carried through with the massive assistance of foreign capital is akin to the indebted shoemaker who sells his tools: he can get a rich meal with the money, but the next day he may be no more than a journeyman in his own workshop. By the time national companies have been privatized, state revenues from privatization will have diminished. The population will observe the activities of the political and economic elite with growing distrust, while at the same time rediscovering many familiar faces from the past. Perceiving this insecurity and distrust the new proprietors will embark on ever more blurry actions in order to protect property: they will try to convert the company's property into their own private property, making it disappear via a complicated network of companies or maybe sneaking it out of the country. In some cases the police are beginning to investigate, but because of the tremendous gap between their financial capacities and those of the accused, they cannot achieve too much. The administration gets increasingly entangled in private capital, the country attains ever worse scores on the corruption 'billboard' even though in any case its scores are already not impressive (Newsweek, 25 December 1995, p.59).

Distrust and insecurity can be taken advantage of by extremist, demagogic and blurry political trends, as has happened before in this part of Europe. In political life it comes to a coup d'etat in the South American

Scenarios for the Future 153

style. Financial restrictions reach a crucial point, people go on strike more often, dissatisfaction becomes expressed more and more loudly. The risk of investment increases because of political insecurity, the flow of foreign capital into Hungary slows down, one tries to get one's own fortune out of the country. Aid projects are halted, the attention of the West will be drawn to the much larger and politically more dangerous countries of the former Soviet Union and to the incredible opportunities of the Far East region.

If choice were possible, all rationally thinking people would undoubtedly choose the optimistic version. For the time being the path winds its way somewhere between the two: citizens to a certain extent, corporations and companies more so, government and participants in political life and international organizations (possibly to the greatest degree), have a great responsibility in setting its direction.

Notes

2 The Old System

1. The common programme was agreed between the coalition of parties in the area of Hungary liberated by the Soviet Union. These parties were the Communists, Social Democrats, the Smallholders and the National Peasant Party.

5 MOL Ltd (Hungarian Oil and Gas)

1. 'Top 100 Hungarian Companies', 1995· 2. Ibid. 3. 0' Leary (1994) is the source of data on prices and price rises.

6 BERVA

1. Key source: Havas (1993).

7 Metrimpex

1 'Radical at last' (1995). 2 Karvalics (1994). 3 'Hungary's top 100 companies' (1993) and 'Top 100 Hungarian Companies'

(1995). 4 Karvalics (1994). 5 Krauss (1996).

8 Stollwerck

1. Hungarian Food Catalogue 1994-5, ITD-H (Federation of Hungarian Food Industries and Agromarketing Ltd), p.112.

9 IDR: The Pharmaceutical Industry

1. A key source for this section: 'Pharmaceutical Industry' (1994). 2. For example, in January 1995 Glaxo announced a takeover bid for Wellcome,

making it the world's largest drug company. 3. CIF prices for imports, ex-factory prices for local products. 4. 'Pharmaceutical Industry' (1994), p.30. 5. 'Krach urn Gesundheitsreform' (1996). 6. Whitfordetal. (1994).

154

Notes 155

7. Some suppplementary information is taken from a report on Hungary's Pharmaceutical Sector compiled by Kinga Svastics for the US Embassy, Budapest, 1995.

8. The members of ECRON are:

International Pharmaceutical Consultancy Wiedey Clinical Research Institute for Drug Research PFC Pharma Focus Consultants AG Pharmaserve National Medical Research Corporation

9. A. D. Little, 'Evaluation of IDR'.

France Germany Hungary Switzerland UK USA

10. MEDIMPEX had been the state import-export company for the pharmaceutical industry. It is now undergoing substantial change as a result of the liberalization of trading activities.

10 The 'High-Tech' Industries

l. Copeland (1995). 2. 'Seek Tools, Not Toys' (1994).

References

Althusser, L. (1970), 'ldeologie et appareils ideologiques d'etat (notes pour une recherche)', La Pensee, 151 (June).

Barratt Brown M. (1984), Models in Political Economy, Penguin. Burawoy, M. and Lukacs, J. (1992), The Radiant Past, Ideology and Reality in

Hungary's Road to Capitalism, The University of Chicago Press. Copeland, R. ( 1995), 'Calling Kisoroszi: New Phones Bring Change', Budapest

Business Journal, 7-13 April, p.23. Crampton, R. (1994), Eastern Europe in the Twentieth Century, Routledge. Csap6, L. (1975), 'The Hungarian Reform, Towards a Planned, Guided Market

Economy', in Kirschen, E. (ed.), Economic Policies Compared, West and East, North Holland/American Elsevier, Vol. 2, pp.6(}-142.

Edwards, V. and Lawrence, P. (1994), Management Change in East Germany, Routledge.

Ehrlich, E. and Revesz, G. (1995), Hungary and its Prospects I985-2005, Akademiai Kiad6.

Falus Szikra, K .(1995), The Position and Conditions of Intellectuals in Hungary, Akademiai Kiad6.

Haraszti, M. (1977), A Worker in a Worker's State, Penguin. Havas, A. (1993), 'CMEA and COCOM Abolished: Restructuring the Precision

Engineering Industry in Hungary', Hungarian Economic Review, December, pp.7-13.

Hickson, D. and Pugh, D. (1995), Management Worldwide, Penguin. Hisrich, R. and Fulop, G. (1995), 'Hungarian Entrepreneurs and their Enterprises',

Journal of Small Business, July, pp.88-94. Hungarian Food Catalogue I994-5, ITD-H (Federation of Hungarian Food

Industries and Agromarketing Ltd). 'Hungary's Top 100 Companies' (1993), Central European Economic Review,

Autumn, p.12. Karvalics, A. (1994), 'Paying the Price of Liberalization', Business and Economy

Invest in Hungary, 6, pp.26-31. Koll6', J. (1993), 'The Transformation of Shop Floor Bargaining in Hungarian

Industry', in Szekely, I. and Newbery, D. (eds), Hungary: An Economy in Transition, Cambridge University Press, pp.277-95 ·

Komai, J. (1990), The Socialist System, Princeton University Press. 'Krach urn Gesundheitsreform' (1996), Der Neue Pester Lloyd, 7-13 February, p.l. Krauss, A. (1996), 'MOL Set to Decide Trading Arm's Fate', Budapest Business

Journal, 12-18 February, pp.l and 15. Kiirti, L. (1990), 'Hierarchy and Workers' Power in a Csepel Factory', in Hann, C.

(ed.), Market Economy and Civil Society in Hungary, Frank Cass, pp.61-84. O'Leary, J. (1994), 'Natural Gas Company Sales Ignite Interest', Budapest

Business Journal, 30 Sept.-6 Oct. Pearce, J. (1993), 'From Socialism to Capitalism: The Effects of Hungarian

Human Resource Practices', in Maruyama, M. (ed.), Management Reform in Eastern and Central Europe, Dartmouth, pp.11l-3f.

156

References 157

Petkov, K. and Thirkell, J. (1991), Labour Relations in Eastern Europe, Routledge.

Peto, I. (1990), 'Distinctive Features of the Hungarian Economy. Changes in its Working from 1945 On words', in Kilenyi, G. and Lamm, V. (eds), New Tendencies in the Hungarian Economy, Akademiai Kiad6, pp.7-60.

'Pharmaceutical Industry' (1994), Business and Economy Invest in Hungary, 4, pp.25-48.

'Radical at Last' ( 1995), The Economist, 1-7 April, pp.51-2. Samli, A. and Jermakowicz, W. (1983), 'The Stages of Marketing Evolution in

East European Countries', European Journal of Marketing, 17, 2, pp.26-33. 'Seek Tools, Not Toys' (1994), Computer and Technology Survey, Business

Central Europe, September, p.48. Stollwerck (I 994 ), Geschiiftsbericht, Cologne. Swain, N. (1990), 'Small Cooperatives and Economic Work, Partnerships in the

Computing Industries: Exceptions that Prove the Rule', in Hann, C. (ed.), Market Economy and Civil Society in Hungary, Frank Cass, pp.85-109.

Swain, N. (1992), Hungary, The Rise and Fall of Feasible Socialism, Verso. Sziniczki, G. (1990), 'Redundancy and Regional Unemployment: A Case Study in

Ozd', in Hann, C. (ed.), Market Economy and Civil Society in Hungary, Frank Cass, pp.l25-39.

Thurow, L. (1992), Head to Head, William Morrow. 'Top 100 Hungarian Companies' (1995), Central European Economic Review,

July-August, p.19. Whitford, R. with P. Klopf, A. Kovac, and A. Motluk. (1994), 'Sick Men of

Europe', Business Central Europe, November. pp.37-43.

Index*

AB Mecman (Sweden) 82, 83, 84-5, 88, 146

accountancy 57, 101, 107 acquisition, foreign 99-109, 139,

140, 146 A.D. Little Consultancy 120, 123-4 advertising 100, 134 after-sales service 93, 95 agriculture

collectivization 5, 28, 31-2 under communism 5, 7-8, 27-8,

31-2,52-3 and imports 91 and management 45 and privatized companies 60-1

Agrimpex 89 Alkaloida 118, 119 alliances, strategic 58 Ameritech International 54, 128,

150 Antall, J6zsef 15, 17 Ard6, Zsuzsanna xii Association of Free Democrats 15,

17 Association of Hungarian Sweets

Manufacturers 108 Association of Young Democrats 15 Austria

opening of borders with xiii, 14, 24

projected gas link 71 autonomy

enterprise 9, 33-4, 37-8, 43, 46, 49,80,141-2,146

shopfloor 40,48 AVALON-Applications 130

balance of payments 7, 90 Balaton, Lake, development 6, 10, 21 banking

and privatization 78, 79, 80, 85-6 restructuring 13, 28, 52, 62

bargaining, worker -management 47

Barratt Brown, Michael 25 barter 28, 61, 79, 95, 96 Berlin Wall 6 BERVA 78-88

and direct foreign investment 84

history 81-3 and joint ventures 84-6,87, 146 and precision engineering industry

78-81 and privatization 78-81, 86, 142,

143, 144, 145 problems in early 1990s 83 profitability 86, 87-8, 143

Biogal 113,117-18,119 biotechnology, and Metrimpex 95 birth rate 1 7 black market 51, 61,73 Blue Star Corporation 75 bonuses 44,47 Boros, Peter 17 brand loyalty, in confectionery

industry 101 branding, in confectionery industry

101, 102 Brezhnev Doctrine 9 Bulgaria

management salaries 44 and Metrimpex 96 pharmaceutical market Ill

Burawoy, Michael 40 bureaucracy, in command economy

25-6,30,49,61 buyouts, management 54, 97, 129

capital, intellectual 59, 113, 126 capital assets 101, 144 capital market 13, 28, 50--1, 52 cars, private use 3, 7, 73, 91

*Page numbers in italics refer to tabular matter.

158

Central Europe collapse of communism x, xii,

104, 139 market opportunities in 111

change, resistance to xiv, 4, 96-7 CHINOIN 113,115,117,119 Christian Democratic People's Party

(CDPP) 15 churches

under communism 5, 14 under market economy 22

cinema under communism 5-6, 8, 38 under market economy 21

CIS see Commonwealth of Independent States (CIS)

clientelism 48 co-operation agreements, in

pharmaceutical industry 116, 118, 121, 146-7

co-operatives agricultural 8, 52-3, 60-1 and microcomputer industry 126

Coastal Oil and Gas Corporation 75

collectivization of agriculture 5, 28, 31-2

COMECON collapse 52 differences between countries

ix-x, 33, 139, 147 economic specialization ix, 30 and oil crisis 10 and pharmaceuticals 112 and precision engineering industry

79 trade with 30, 34, 89, 112, 146 and worker-management relations

47-8 see also Eastern Europe

command economies 24-34, 139 differences between ix-x incremental change xiv lack of theory of change xiii Soviet model 25-6

Commercial and Credit Bank Ltd 86

commercialization 143-4 Committee for Deregulation 52

Index 159

Commonwealth of Independent States (CIS)

and engineering exports 79 gas imports from 67-8, 69, 74

and pharmaceutical export 113, 116, 117

communication, organizational 107-8

communications see telecommunications

communism collapse x, xii, xiii, 24, 104 'goulash' xiii, 31

Communist Party, and control of economy 25-6

Communist Youth Association 8 Companies Law 14,51-2 companies, public 34, 51-2

in agriculture 60-1 background institutions 62 domestic 58-9 financial planning 56, 57 and future scenarios 149-53 high-tech 125-35 multi-national see multi-national

companies restructuring 56-7,73-4,78, 81,

92,94-6,143-5,150 small ventures 59-60, 141 see also privatization

companies, state 9, 27-8, 139 and centralized planning 31,

33-4,35-7,41,79 and corporate governance 50, 55 councils 39,40,50 division 51, 54 and economic reform 50 and economic units 12 efficiency 37 and financial management 35-6 forced specialization 29-30 in market economy 53-4 medium-sized 12 mixed Hungarian-Soviet 27 privatization 51-2, 80 and state system 29, 36 vertical structure 29, 36, 37, 41,

82 see also management; workers

160 Index

compensation Jaw competition

between workers and black market

15,53

39 61

29,51 under communism in computer industry

131, 132, 133 126, 127,

in confectionery industry in engineering industries

92 in foreign trade 92 in oil and gas industries

74

100 80, 85,

67, 72,

in pharmaceutical industry 115, 146-7

reactions to 140 competitive advantage 58, 126, 134 Computer Research Centre (SZKI)

129 computer technology

and high-tech companies 125-35, 147, 148

and Metrimpex 93-4, 95 see also data communications;

hardware; software computer-aided manufacture (CAM)

100, 106 confectionery industry 99, 108-9,

144, 146, 148 consultancy, business 55-6, 62, 127 consumer

and computer industry 133 local tastes 99, 105

consumer goods under communism 5, 9, 11, 14,30 imports 5, 79, 96, 147 and privatized economy 20-1,

143 contract research I 10, 119, 123,

146-7 contracts, internal 124 control, in pharmaceutical industry

121, 122 Contrail 126 core business 145 corporate governance 39-40, 50, 55,

86 corruption 22, 152 cost, disregard for 35-6

Council for Mutual Economic Aid see COMECON

countertrade 95 credit

under communism 28 and privatization 56, 59, 96

crime economic increase in

Csap6, L. 28 culture

61' !52 22-3

under communism 5, 8-9 under market economy 16, 21, 52 organizational 26, 50, 58, 92,

95-6 currency see Forint customer relations

in computer industry 126, 131, 132

in pharmaceutical industry 122, 123

Czech Republic and foreign investment 58 and privatization 53

Czechoslovakia collapse of communism 17 management salaries 44 pharmaceutical market Ill private sector ix and Soviet Union ix student movements 8

data communications 127, 128-9, 132-5

Ddgaz gas company 69, 77 death rate 20 debt, company 51

in computer industry 127 in confectionery industry 102,

106 in oil and gas industry 76 in precision engineering industry

84,85-6,88 debt, international

under communism ix, xiii, 11, II, 15,49,52

growth 11, 11 under market economy 23, 55 reduction 91, 150

Index 161

Degaz gas company 69, 77 Deutsche Telekom 54, 128 devaluation II, 16, 91, !50 distribution

under communism 26, 35 in confectionery industry 99-100 in foreign trade organizations 93,

94,95,96 of gas 69, 70, 77 ofoil 72 privatization 55

diversification 95,96-7, 101, 129, 131

diversity, under capitalist system 139-40

Do you know Sunday-Monday? 38 DOKT AR system 130 drug trade 22 drugs see pharmaceutical industry

East Germany investment opportunities in 104 management salaries 44 private sector ix worker-management relations

47-8 Eastern Europe

collapse of communism x, xii, 104

foreign investment in 58 loss of markets in 83, 139 marketing opportunities in 84,

104-5,108,109, Ill, 146 pharmaceutical market 111-12,

113,116-17 see also COMECON

economies of scale, under communist control 29-30

Economist, The !50 economy

black 51, 61,73 under communism 24-34, 139;

cns1s 10-13; directive model 27-30,33,35,99-IOO;growth xiii, 4-10; and guided market model 7-9, 27, 32-4, 37-8, 42, 43, 45, 49, 139; reforms 13-16,49-52,81,89-90, 149; transitional stage 26-8

grey 61 market: and corporate life 49-63;

transition to 15-16, 18-19, 20-2,38,100, i49-52;see also companies, public; privatization

'second' 9,31,46,47,48, 139 ofshortage 26,35,49,51-2,57,

58 Soviet model 24, 25-6

ECRON Services 119, 123, 146-7

education 16, 18, 28, 52, 58, !51 and computer industry 128 for management 42-3

efficiency under communism 37,40 in energy supply 71, 72, 73 in energy use 68, 70, 73-4 and privatization 55, 70

Egaz gas company 69, 77 EGIS 116-17,119 Ehrlich, E. 45 elections

1990 15,49,52 1994 17,54, 77

electricity, demand for 6, 70-1 Electrolux Magyar 84, 86-7, 146 Elektroimpex 89 employees

educational qualifications 75, 76, 85

shareholding 54, 77, 97, 129 employment

in agriculture 27, 32 in computer industry 131, 132 full 9, 26, 46, 49 in industry 31-2,36-7,46,67,

99, 142, 144 employment law, under communism

7-8 'energy saving' 46 energy supply

under communism 6, 7, 13, 16 see also MOL Ltd

engineering instrument see Metrimpex precision 78-81 see also BERV A

162

English, knowledge of 71, 92, 141, 148

enterprise see companies, state Enterprise Economic Work

Partnerships (EEWPs) 46-7 entrepreneurship xii, 19,51-2, 147

'forced' 59 and foreign trading companies 92 and high-tech industries 125, 128 and small ventures 59-60

environmentalism growth 13, 91 and Metrimpex 95 and oil business 67-8, 76-7 and pharmaceutical industry 117

Esterhazy, P. xii Production Novel 38

European Bank for Reconstruction and Development 117

European Union Hungarian membership 91, 135,

151 and import restriction 91 pharmaceutical exports to 116

exports ofconfectionery 101, 108, 109 engineering 81, 87, 91-2 growth 90, 91, 150 and Metrimpex 93, 94, 95 pharmaceutical 112, 113, 116,

118 software 126, 128, 131

Fejes, Endre, Rust Cemetery 38 Ferge, Zsuzsa !52 Ferrunion 89 FESTO 82 Five Year Plans 30, 32-3 food supply

under communism 6, 8, I 0, 32 under market economy 60-1, 91

foreign policy 22 foreign trade organizations (FfOs)

89-90,91-8,142 Forint convertibility 4, 19, 52, 150 devaluation II, 16, 91,150 franchising 58 fringe benefits 76, 10 I

Index

future scenarios optimistic 149-51 pessimistic 151-3

gas, natural pricing policy 69-70 privatization 77 sectoral analysis 70-1 see also MOL Ltd

General Electric 57, !50 German, knowledge of 108, 141,

148 glasnost 13 Gorbachev, Mikhail 13 'goulash communism' xiii, 31 Graphisoft 126 grey economy 61 gross domestic product 114, 150,

!51 Grosz, Karoly 13-14 guest workers 61 GUPTA 130-1 Gyorgy, Miklos 113 Gypsy community xii, 22

Haraszti, Miklos 38-9, 40 hardware, Hungarian market 13,

127-8 headhunting 92 health care 19-20, 111-12, 114 high-tech industries 125-35, 147,

148 companies 129-35 data communications 127, 128-9,

132-5 organizational structure 131 see also hardware; software

homelessness 3, 19 Horthy, Miklos Nagybanyai xii, 16 'house farms' 5, 8, 32, 60 housing

under communism 6, 10 post-communism xiii, 3, 20

HSWP see Hungarian Socialist Workers' Party (HSWP)

human resources 50,141,144 in oil and gas industries 67,

75-6 in trading companies 92

Index 163

Human Vaccine and Research Institute 115

Humana 115 Hungarhotels 56 Hungarian Democratic Forum (HDF)

15 Hungarian Revolution 14

economic effects 4-5, 27 European perceptions of xii political effects xiii, 8, 24, 30-1

Hungarian Socialist Party 14-15, 17 Hungarian Socialist Workers' Party

(HSWP) 6, 9, 11, 27-8, 143 and enterprise managers 42 and industrial workers 36-7 and reform socialism 12-14

Hungarian State Geological Institute 69

Hungarian Writers' Association 13 Hungarian-American Petroleum Ltd

(MAORT) 68 Hungarian-Russian Petroleum Ltd

(MASZOLAJ) 68 Hungary

attitudes to change 3-4 economic specialization ix, 30 national characteristics xii, 24,

147-8 pharmaceutical market 111

ideology, communist x, xii-xiii, 10-11,25-6,36

and workers 38-40, 43, 45-6 IDR (Institute for Drug Research)

110-24 and contract research 110, 119,

123, 146-7 establishment 112 financial problems 120, 122, 123,

142 and foreign share ownership 115 market position 122-4 and owner pharmaceutical

companies 115-18, 119, 120, 122-3

RCI (Research Council of IDR) 121, 122

restructuring service role

120-2, 123-4 119-20,122

imports agricultural 91 under communism 5, 7, 11, 29 and confectionery industry 101,

108 and consumer goods 5, 11, 79, 86,

147 liberalization 51, .90-1, 111-12 limitation 11,90-1 and Metrimpex 93-4, 96 of oil and gas 7, 67-8,69,70, 71,

72, 73,74-5,98 and pharmaceutical industry 91,

111-12,114 and precision engineering 79, 84

Independent Party of Small Farmers (IPSF) 15

individualism, Hungarian xii, 147 industrialization, under communism

28,32,37 inflation

effects 18, 19-20,72, 101, 151 reduction 15-16, 150

information, corporate 55-8 information technology, growth xiv,

13, 106, 127, 144 infrastructure

under communism 6-7, 52 in oil industry 75 technological 78, 125

Institute for Drug Research see IDR instrument engineering, exports see

Metrimpex insurance company, division 51, 62 integration

backward 95, 101 forward 95, 101 horizontal 37, 41, 101 vertical 29, 36-7, 68, 80, 10I, 104

intellectuals access to West 13 emigration 5

interest rates 11, 85 International Bank for Reconstruction

and Development (IBRD) I 1 International Monetary Fund (IMF)

I 1, 23 'intrapreneurship' 12 inventories, reduction 57

164 Index

investment under communism 7, II, 25 in computer industry 126-7 foreign 52, 57-8, 84, 85,99-109,

115, 128, 139, 144, 146-7, 153 and privatization 56, 143-5, !50

IQSoft 120-31

Jacobs Suchard 102, 107 Japan, pharmaceutical exports to

116 joint ventures 34, 52

in confectionery industry I 02, 107

and foreign trade 92 in pharmaceutical industry 113,

115,117,119 in precision engineering 84-6, 87,

146

Kadar, Janos 5,9,13-14,31,34 Karvalics, A. 97 Khruschev, Nikita 30 Kiezun, Witold 47 Kogaz gas company 69, 77 Kollo, Janos 47 Kontrax 126 Kornai, Janos 25-6, 41 Kiirti, Laszl6 39-40

labour costs 26, 85, 101, 144 shortages 12, 26, 47, 100-1,

122 turnover 106, 122, 130 see also overmanning

land reforms 27,31-2 languages see·English; German Lehel (Electro lux Magyar) 84, 86 Leigh Fermor, Patrick xii leisure, under communism 6, I 0, 25 licensing agreements 146

in engineering industries 79 in pharmaceutical industry 113,

116-18, 119, 124 life expectancy 112 literature, under communism 6,

38-9

living standards under communism 4, 5-7, 9-10,

30-1, 151 under market economy 4, 17-23

local government authority, shareholding 83, 86, 105

loyalty, employee 76 Lukacs, Janos 40

Mafia 22 Magyar Suzuki, and BERV A 57, 82,

84,86,87,146 management

and agriculture 45 autonomy 9 class origins 42-3 and communist ideology 35-8,

41-5 in confectionery industry 10 1,

107, 146 and economic reform xii, 50,

140-2 and effects of change 4 in engineering industry 81, 85 financial 35-6 and 'five Ks' 44 and foreign trade organizations

89,92,95-7 headhunting 92 in oil and gas industries 71, 76 party affiliation 29, 42-3, 45, 48,

50 and pay differentials 9, 18, 43-4,

76 and pharmaceutical industry 121,

122-4 and privatization 55, 58-9, 147-8 proactivity 140-1 professional competence 42-3,

45,48,50,147 project 123-4 style 47 training 42-3, 62, 144 and workers 9, 38-40, 45-8, 147

management information systems 59, 99, 100, 102, 107, 121

market segmentation 95, 125-6, 145 market share

of computer industry 127, 134

Index 165

of confectionery industry 101, 108-9, 148

of oil and gas industry 72, 73-4, 73

of pharmaceutical industry 113, 116

of precision engineering industry 79,82

market socialism 15-16, 27; 30-1, 49

marketing by multi-nationals 71, 74 under communism 26, 29, 35 and computer industry 131, 134 and confectionery industry 106-7 and foreign trade organizations

92,95 and pharmaceutical industry 118,

120, 122-3 and privatization 56-7,81, 101-2,

143 MAT A V (Hungarian

Telecommunications Company) 54, 128-9, 134

maternity benefits, under communism 7-8

Mecman Eger KFf 84-6 Medicinal Herb Research Institute

115 Medimpex 89, 97, 122, 123 mergers, in pharmaceutical industry

Ill Metrimpex 89-98

financial structure 94, 95, 142 future prospects 97-8 and liberalization of foreign trade

90-1 organizational structure 94 and privatization 91-4, 97, 144 product portfolio 93-4, 97 strategic renewal 94-6

micrbcomputers, market growth 13, 125-6, 133, 134

Microsoft 127, 130 Microsystem 126 middle class, development 9 Mineralimpex 69, 89, 98 Mining Law 71,75 minorities, national xii, 22

Mobil Erdgas-ErdO! GmbH 75 mobility, worker 47, 56, 75 Mochida pharmaceutical company

117 modems 128, 132-5, 148 MOL Ltd (Hungarian Oil and Gas)

67-77 and data communications 134 environmental standards 67-8,

76-7 financial resources 76 and foreign trade 98 gas business 68-71, 77 history 67-8, 145 human resources 75-6 oil business 71-5 privatization 67, 68, 77, 128

monopolies private 53 state 30, 89, 92, 139; break-up

40,51,54,67, 140,145-6 motivation

of management 41, 47,76 of workers 46, 81, 85, 122

multi-national companies 3, 57-8, 59, 150

and computing industry 127, 134

and confectionery industry 100, 102, 148

and energy supply 71, 72,74-5, 77

and pharmaceutical industry 111-12,117,119,120

and precision engineering industry 84

Muszertechnika 126 MVM (electricity company) 70-1

Nagy, Imre 14 nationalization 27-8, 53, 79 Nee, V. xiii Nemeth, Miklos 14 New Economic Mechanism 7-9, 27,

32-4,37-8,139 and enterprise management 42,

43,45,46 and foreign trade 89

niche markets 128, 140

166

Nichimen pharmaceutical company 118

Novotrade 126

Occidental Corporation 75 oil business

and foreign competition 67 imports 74-5 need for restructuring 73-4 privatization 67 product mix 72-3 see also MOL Ltd

oil crisis, effects l 0, 34 OKGT (National Oil and Gas Trust)

68,69 Optotrans 134 ORACLE Corporation 129-30 ORACLE Hungary (OH) 130 Oslo Treaty (1994) 76-7 overmanning 26, 36, 77, 96, 100-l,

144 6zd steelworks 46

packaging in confectionery industry l 00,

105, 107 in high-tech industries 148

Pannonplast 54 parties, political 14, 23

see also Hungarian Socialist Workers' Party

passports, availability 14, 21 patronage, and management 43,48 pay

and bonuses 44, 47 under communism 5, 7, 9-ll, 33 in confectionery industry 101,

I 02, 106, 107 differentials · 9, 18,43-4, 85 in oil and gas industries 76 in pharmaceutical industry 122,

124 in precision engineering industry

85 under privatization 18, 124, 150,

151 PCS*Care 130 peace, prospects for 23 pensions 20, 151

Index

perestroika 13 personal computers 13, 125-6, 133,

134 personnel management 57 Peto, I. 29 Pfizer pharmaceutical company · 117 pharmaceutical industry 30, 91,

110-24 capital ll3 drug registration 112, 113 foreign trade see Medimpex Hungarian 112-19 international 110-12 as priority industry 115 research and development

ll0-11, 113-15, 116-18, 120-4

sales llO-ll, 112, 113, 116-18, 120

top Hungarian companies 115-19,115

Philips 134 piece-rates 39 planning, centralized 29-31, 149

and confectionery industry 99 and consumer goods 5 effects on enterprises 35-7, 139 and enterprise management 41 and infrastructure needs 6 and plan bargaining 31, 47 and precision engineering industry

79,87 planning, strategic 50, 57, 96, 131 Poland

economic crisis 12 exports to 87 and foreign investment 58, 105 management salaries 44 and Metrimpex 96 pharmaceutical market Ill private sector ix and Soviet Union ix

police 8,13,22 politics

and business 23 democratization 12-13

pollution 3, 112 population, decrease 17, 100, 112 Post and Savings Bank 86

poverty, and market economy 19, 151-2

Prague Spring 8, 34 prices

under communism 10--13, 26, 28, 34

for consumer goods 9 control 28, 34, 112, 114 for food 100 in gas industry 69-70, 71 under market economy 16, 21 in oil business I 0, 68, 72, 73 in pharmaceutical industry 112,

113-15, 122, 124 in precision engineering industry

85 private property

under communism 5, 7, 9-10, 27-8

and market economy 15-16,19, 60

privatization 14-15, 19, 23,51-2, 53-7, 140

of confectionery industry 104-5 in engineering sector 78-81, 86,

142, 143, 144, 145 of financial sector 62 and foreign trade organizations

97 future prospects 149-53 and multi-national companies

57-8 of oil and gas industries 67, 68,

77 in pharmaceutical industry 115,

118 and property valuation 55-6 scandals 56, 152

proactivity 140--1 product loyalty

in confectionery industry 10 I in gasoline supply 72

product mix 145 in computer industry 133 in confectionery industry 99, 101,

105 in foreign trade organizations

93-4,97 in oil industry 72-3

Index

production labour-intensive 82-3, 85, 101 see also turnover

167

Production Novel (P. Esterhiizy) 38 profit

under communism 35-6, 37 in computer industry 134 in foreign trade organizations 94 in oil and gas industries 71 in pharmaceutical industry

112-14, 116, 117, 119-20, 124 in precision engineering industry

83,86,87-8,143 and privatization 55

project matrix system 123-4 property

intellectual 59, 113, 126 valuation 55-6

prostitution 22 publishing industry

under communism 5, 8 under market economy 16, 21,

59

quality assurance, in pharmaceutical industry 121

quality control in confectionery industry 101 in pharmaceutical industry 118 in precision engineering 83, 85

Quintie 99-104 activities 102, 145 capital assets 10 I financial structure 101-2 organizational structure 103 product portfolio 99, 101, 105 and Stollwerck AG 104-9, 146 transition to market economy

100--5

Radio Free Europe 8, 14 Rakosi, Matyas 5 raw materials

availability 28, 101, 107, 109 exports 113 imports 29, 90 inventory reduction 57 stockpiling 26, 36

Reanal 115, 119

168 Index

recession, effects 73, 83, 85, 100, 102, 139

redundancy under communism 46, 48 under privatization 86, 96, 106,

143 regulation, in pharmaceutical industry

Ill, 117 religion, freedom of 22 research and development

in automobile industry 73 in confectionery industry 102 in engineering industry 79, 81 pharmaceutical: in Hungary

112-15,116-18,120-4,142, 146; international 110-11; see also contract research; IDR (Institute for Drug Research)

responsibility 141-2 retail trade

and confectionery industry 100, 101, 105

and economic crisis 12, 147 and Metrimpex 96 and oil and gas industries 67, 71,

72 and pharmaceutical industry 114

retraining, and unemployment 18, 56

Revesz, G. 45 Richter Gedeon 115, 116, 119 rights, civil 7, 9, 14, 23, 151 Romania

and Metrimpex 96 pharmaceutical market Ill

Rust Cemetery (Endre Fejes) 38

sales under communism 29, 35 computer industry 127-8, 127,

130 and confectionery industry 106-7 and foreign trade organizations 92 and pharmaceutical industry

110-11' 112, 113, 116-18, 120 and precision engineering industry

87 and privatized companies 56,

143-4

SANOFI 115,117 savings 150 Sci-Modem 132-5, 147, 148 self-medication, growth 112 self-sufficiency 57, 80, 82, 118 'semi-ventures' 12 services

and economic crisis 12 and high-tech companies 93, 128,

131, 132-4 and pharmaceutical industry 119,

122 shareholding

by banks 78 employee 54, 77, 97, 129 local government authority 83,

86, 105 Shell 57,71, 74,150 shirking 48 shopping 20-1 shortages, economic effects 26, 35,

49,51-2,57,58 Siemens 134 Skala department stores 1 0 social democracy 12 Social Insurance, and pharmaceutical

costs 114 social market 15-16, 27, 30-1,49 social security 9,43,52, 101,114,

151 software

under communist economy 13 companies 129-31 engineering 58 exports 126, 128, 131

solidarity, worker 39, 40, 48 Soros Foundation 13 Soviet Union

collapse of communism xiii, 17, 139

and command economy 24, 25-31

crisis 12-13, 17 economic relations with Hungary

52 loss of markets in 78, 79, 92,

139 market opportunities in 30, 87,

91-2, 146

Index 169

troops in Hungary 15, 23 see also command economies

specialization, under communism ix, 29-30

Stalin, Josef 30 standards, international 91, 146

in oil industry 76-7 in pharmaceutical industry 121,

122, 123, 147 in precision engineering industry

87 Stark, D. xm state, and Communist Party control

25-6,29-30 State Asset Management Company

117 State Development Institute 83, 86 State Holding Agency 116, 117,

123, 130 State Property Agency 51-2, 83, 86,

104 Stock Exchange 13, 52, 53, 62, 77,

116, 150 stockpiling 26, 36, 76, 122 Stollwerck 99-109

acquisition of Quintie 104-5, 146 brands 105 industry status I 08-9 investment in Quintie 105-6 and marketing 106-7, 143 organizational structure 107-8 product portfolio 105 workforce 144 see also Quintie

strategic alliances 58 strategic business units (SBUs), in

foreign trade organizations 95 strategic planning 50, 57, 96, 131 stress levels 112 student movements 8 sub-contracting 57, 146 subsidiaries 50, 57

in oil and gas industries 68 subsidy

and central planning 26 for consumer goods 9 in energy supplies 69 for housing 6, I 0 and pharmaceutical industry 114

reduction 9, 17, 51, 91, 100 supply

under communism 6, 7, 9-11 under market economy 20-1

Supreme Economic Council (SEC) 27-8

Szikra, Falus K. 43, 48 Szin'iczki, Gyiirgy 46

Takeda pharmaceutical company 116

taxation and energy supply 73 on imports 90-1 increased 151 and pharmaceutical industry 115 reforms 13, 52

Technoimpex 87 technology

gap 52,81 high-tech industries 125-35 investment in 144 in precision engineering 81 transfer 57-8

telecommunications and data processing 128-9 infrastructure 7, 52, 93, 125,

133 television

under communism 5, 8,13-14 under market economy 16, 21

theatre under communism 5, 8 under market economy 21, 38

Tigaz gas company 69, 77 tourism

domestic 6 Western 7

trade, foreign under communism 26-7, 29-30,

89-90 liberalization 90-1, 92 see also exports; imports;

Metrimpex trade union

and company management 36, 46, 143

and market economy 48 and workers 7, 39-40, 46, 48

170

training 18, 28, 58 in computer industry 106, 131,

132, 133 in engineering industry 81 for management 62, 144 in oil and gas industries 76 in pharmaceutical industry 122 for sales staff 1 06, 112, 144

Transe1ektro 97-8 travel

and foreign trade 89 freedom of 14, 21 to West 8-9, 151

Trianon Treaty xii, 22 Tungsram 57 turnover

under communism 7, 39 in computer industry 128, 131,

132, 134,I35 in confectionery industry 107,

108 in foreign trade organizations 94,

96,97-8 in gas industry 69 in pharmaceutical industry 112,

113 in precision engineering 83, 83,

87-8

UN, Good Manufacturing Practices code 114

unbundling 145-6 unemployment

under communism 14-15, I5,46, 48

Index

and privatization 55, 56, 85, 144-5, 150

and retraining 18, 56 uniformity, under communist system

ix, 139-40 USA

pharmaceutical exports to 116 pharmaceutical industry 110-11

utilities, privatization 53

veterinary products 117

wages see pay wholesalers

in confectionery industry 99-100

in oil and gas industries 67, 74 in pharmaceutical industry 112

workers 'guest' 61 and management 9, 38-40, 45-8,

147 mobility 56, 75 and party ideology 36-7, 38-40,

48 working week, five-day 10 World Bank 62, 151

Youth League, and enterprise managers 42, 43

Yugoslavia collapse of communism 17, 23 and market forces 38 and oil pipeline 68, 74

Index compiled by Meg Davies (Society of Indexers)

Documents

Hungary since Communism: The Transformation of Business