From hungary-report-owner Sun Apr 16 04:01:19 1995 Received: from localhost (daemon@localhost) (fnord) by nando.yak.net (8.6.5/8.6.5) id EAA18558; Sun, 16 Apr 1995 04:01:19 -0700 Received: from localhost (daemon@localhost) (fnord) by nando.yak.net (8.6.5/8.6.5) id EAA18547; Sun, 16 Apr 1995 04:01:02 -0700 Received: from bruner@ind.eunet.hu () via =-=-=-=-=-= for hungary-report@hungary.yak.net (18545) Received: from ind.eunet.hu (root@ind.eunet.hu [192.84.225.42]) (fnord) by nando (8.6.5/8.6.5) with SMTP id EAA18542 for ; Sun, 16 Apr 1995 04:00:11 -0700 Received: from [192.84.226.92] (bruner.dial.eunet.hu) by ind.eunet.hu with SMTP id AA24215 (5.67a8/SZTAKI-4.01 for ); Sun, 16 Apr 1995 13:04:01 +0200 X-Sender: pop029@ind.eunet.hu (Unverified) Message-Id: Mime-Version: 1.0 Content-Type: text/plain; charset="us-ascii" Date: Sun, 16 Apr 1995 12:55:49 +0100 To: hungary-report@hungary.yak.net From: bruner@ind.eunet.hu (Rick Bruner) Subject: The Hungary Report No. 1.03 X-Charset: US X-Char-Esc: 0 Sender: owner-hungary-report@hungary.yak.net Precedence: bulk Reply-To: hungary-report@hungary.yak.net ======================== The Hungary Report Direct from Budapest, every week No. 1.03, April 16, 1995 ======================== ====== BRIEFS Copyright (c) 1995, John Nadler ------------ GENERAL NEWS Rail strike very likely If going to Budapest this week, don't take the train. Following weeks of arduous negotiations, 60,000 plus railway workers will probably walk off the job this Wednesday. Talks between Hungarian Railways (MAV) and union leaders have yet to avert the threat of a national rail strike -- an action that would badly impair the nation's transport infrastructure. Unless a compromise is reached over key labour demands, this threat will become reality. Sticking points in negotiations are reported to be union rights to reject new restructuring proposals within the corporation, and cutbacks that would deprive workers of overtime pay and bonuses. Labour leaders accuse MAV of attempting to emasculate the unions, and push through restructuring plans that could lead to mass layoffs and diminished job security for surviving employees. MAV management has stressed the need to revamp the corporation in a bid to mitigate its staggering losses, estimated by the Budapest Business Journal to be Ft 25.3 bn ($250 m) this year. If a strike occurs, more is at stake than train travel. MAV's fate is considered a litmus test of the government's ability to exert control over the unions. Also, a clear victory by rail workers is expected to embolden Hungary's other disenchanted unions and lead to more head- to-head clashes between labour and the Gyula Horn administration. To wit, the Democratic Health Care Workers' Union is said to be toying with the idea of a strike in response to government budgetary cuts that could put as many as 5,000 physicians out of work. Black market is big business in Budapest The Hungarian black market is responsible for Ft. 1.6 bn of the nation's gross national product, says independent parliamentary deputy Peter Zwack, owner of the Zwack Unicum distillery. In calling for the creation of a government investigating body to take on black marketeers, Zwack has focussed attention on an invisible aspect of the Hungarian economy creating very visible trouble. The Budapest Sun reported last week that the illegal cigarette trade was the catalyst behind the decision of the RJ Reynolds production in the Hungarian town of Satoraljaujhely to layoff half of its workforce -- 187 workers in total. According to the Sun, Hungary's cigarette market is valued at about $220 m. The black cigaratte market is estimated to be worth about $25 m. Illegal trade is not limited to smoke. Budapest Week reports that gasoline is another contraband commodity traded in mass quantities in Hungary. According to the Week, custom officials suspect the Kordax petrol trading company of peddling 400,000 tons of fuel 'under the table', and cheating the government out of billions of forints in withheld taxes. Kordax allegedly had 400,000 tons of imported crude oil refined in Slovakia, re-shipped to Hungary, and sold at low prices on the local market. This scam allegedly allowed Kordax to pocket $30 m. Both scandals suggest that the breadth of the black market is as diverse as smoke and gas. But according to parliamentarian and businessman Peter Zwack, the black economy is controlled by an evil coterie of only two to three hundred. He has called for law enforcement to concentrate efforts on prosecuting this leadership. -------------------- BUSINESS & ECONOMICS European Bank is bullish on Hungary Hungary's $3.5 bn budget deficit and $28.1 bn debt may still be giving the IMF the jitters. But the EBRD (European Bank of Reconstruction and Development) loves Hungary. A recent meeting between EBRD managing director Jacques de Larosiere, Finance Minister Lajos Bokros and central bank President Gyorgy Suranyi solidified the sometime rocky relationship between Hungary and the European Bank. De Larosiere has pledged EBRD support in Hungary's plans to privatize its energy sector. EBRD loans to Hungary dwindled last year. But the bank wants to step up its involvement in this economy in 1995. The Budapest Sun reported (in a fine article by Theresa Agovino) that the bank now intends to back "riskier" ventures. According to the Sun, this attitude shift may have been inspired by biting criticism that the bank has heretofore been inclined only to fund safe projects in the developing former-Eastern Bloc. Hungary reportedly received $178 m in loans from the bank last year. This accounted for 16% of the EBRD's loans in 1994. The only country to get more money out of the bank was Poland. But Hungary's take that year was 28% less than in 1993. The EBRD's dwindling confidence in this country was reportedly inspired by a slowdown in privatization, and nervousness over the outcome of last May's national elections. The EBRD is now prepared to take risks. "This is what this country needs now," EBRD official Peter Reiniger was quoted as saying in the Sun. Privatization bill to go to parliament The Horn government's long-promised privatization bill is almost complete, and should be ready for debate in the next six weeks. Privatization minister Tamas Suchman the latest draft includes 467 amendments which, for the most part, detail the operation of a proposed new privatization agency which will be created when Hungary's two existing privatization bodies (the State Property Agency and the State Holding Company) are merged. Nepszabadsag and Postabank go after German publishing giant Hungary's enfluential daily newspaper Nepszabadsag has joined forces with the commercial bank Postabank in a $1 m initiative aimed at unseating Hungary's top publishing house Germany's Axel Springer. According to a piece in The Budapest Business Journal, the two companies hope to unseat Springer as the premier publisher in this market by boosting the readership of three regional daily newspapers owned by Nepszabadsag. All three papers -- Jasz-Nagykun-Szonok Kronika (circ. 20,000), Bekes Megyei Nap (16,000), and the Heves Megyei Nap (19,000) -- trail Springer publications in their respective markets, and are rated second. Laszlo Lengyel, CEO of Nepszabadsag told reporter Renee Cordes that he wants to seize a number one position in each market in a matter of weeks. Lengyel: "There is no law in Hungary which can guarantee ... anti-trust or anti-monopoly means. Everything is possible in Hungary. If you want to control 100% of the market in your industry, you can do it." ----------- SHORT TAKES THE SUZUKI MOTOR CO. will no longer be exporting car models from Japan to Europe that its Hungarian subsidiary can manufacture on the continent. All Suzuki Swift and Sedan models available in Europe will soon be produced by Magyar Suzuki Rt. This policy change was reportedly prompted by high European import duties which inflate prices of Suzuki models by 10%. Japanese auto makers Toyota, Nissan, and Honda have followed suit, and plan to expand their manufacturing activities in Europe. (Reuter) IBM HAS OPENED AN OFFICE IN GYOR, western Hungary, the first in a series of representative offices it plans around the country. It will open two more offices, in Pecs and Miskolc, later in the year. PANNON GSM has stepped up Hungary's portable telephone war by forming a consortium of 13 companies which includes the Dutch ING Bank in a bid to acquire a $115 m loan to develop its cellular telecommunications network in Hungary. (Budapest Sun) NOT EVEN SCORPIONS are safe from the insidious long arm of the Hungarian black marketeer. A week ago customs officials discovered 30 scorpions, 10 chameleons, 12 vipers, and 12 turtles among as many as 100 rare and protected animals in the luggage of two Hungarian citizens who arrived in Budapest on a flight from Egypt. Were these animals hapless stowaways which had crept into the linen of these two tourists, and found themselves on a plane to the Carpathian Basin? Officials report that the creatures were being smuggled into Hungary for sale to an exotic pet store. (Budapest Week) ---------------- NUMBERS CRUNCHED * Hungary exported $5.5 m in products to the EU in 1994. Imports from western Europe was valued at $6.6 m. (Budapest Business Journal) * 235 US-Hungarian joint ventures were established in 1994 with capital of Ft 3.9 bn. In 1993, 256 joint-enterprises were created with capital investments totalling Ft 2.2 bn. * State Privatization Agency' income in the first three months of 1995: HUF 9 bn ($75 m). * Privatization revenue target for year-end 1995: HUF 150 bn ($1.25 bn) ------------- EXCHANGE RATE: April 13, 1995 (National Bank of Hungary): US dollar - 119.97 (buying), 122.11 (selling) Deutschemark - 85.78 (buying), 87.20 (selling) ---- OOPS We regret a typo in last week's issue that could have caused confusion. * The figure in "Numbers Crunched" that was called the "targeted 1994 year-end budget deficit" was in fact a *1995* figure. Oops. In fact, the government is still debating the final figure anyway, so just nevermind. We'll update it when it's settled. ============= FEATURE STORY (longish) East of Silicon Valley By Rick E. Bruner Copyright (c) 1995 Speaking about the potential for programming brain power in Eastern Europe, some optimists have spoken about the "new Silicon Valley." A qualitative difference, however, between the US birth-place of the modern PC industry and the former communist East Bloc is that 286 technology doesn't sell anymore in California. While Western brand dealers would like you to think otherwise, old-tech, from dot matrix to 4MB RAM mainframes, still plays a significant role in the markets from Poland to Bulgaria where every penny counts for governments and students alike. To be fair, consignments of 286-based PCs are rare, though not unknown, but 386s continued to dominate every market in the region in 1993. A few western dealers, fighting tooth and nail for shares in the small, low-turnover markets, have given into the temptation of off-loading dead stock from the West into the highly price-sensitive markets of the East. Most brand dealers, however, have tried to stick to strategies of moving only the latest technology, playing to the Eastern buyers' advanced technical sophistication compared to shoppers in the West, despite the sharp contrast to their budgets. Not surprisingly, no-name brands and local assemblers still dominate most regional markets. "Price is the only thing that matters in this market. Nothing else," says Janos Minarovits, general manager of Albacomp, a local assembler and the market leader in Hungary. In 1993, relying on motherboards imported from the Far East, 70% of Albacomp's turnover was 386-based processors, and its 486s sold at 60% the price of its brand competitors', Minarovits said. "Intel had a very bad market strategy here," he said, referring to that company's decision to distribute only 486 and Pentium processors in Eastern Europe. Albacomp, for its part, doesn't use Intel processors at all, relying rather on AMD and Cyrix processors imported by wily small local traders who's prices are so low, "if this goes on, it might be worth exporting processors from Hungary," Minarovits said with a grin. Hungary was the first market the multinational brands entered when it opened its doors to free competition in 1989, and the first place where many of them "burned their fingers," according to Dataquest analyst Jim Tully. Seeing Hungary as a gateway to the other markets in the region, virtually all the brands "flocked" to Hungary, only to realize the market -- 10 million people, a mostly agricultural economy and average salaries a tenth of Western European countries -- was hardly a gold mine. Dealers confirm price competition here is cut-throat, with "the lowest prices in the region," said an IBM marketing representative. "For most of the companies, I don't believe [Hungary] is a profitable operation," said Tully. "It really is only because of the long-term opportunities in Hungary and the surrounding area that the vendors are still there." IDC's Eastern Europe director, Steven Frantzen, agrees. "Hungary's a little different animal because it's a very competitive market. A lot of companies are having problems there," he said. "In Poland, I think companies are making money, at least in the PC industry. Hungary might be an exception because of [limited] local industry. Even several brand-name vendors have seen a decrease in shipments. The market is still growing, there are just more companies involved fighting for shares. But in other countries, Poland, the Czech Republic, companies are making money." Taking a "once burned, twice shy" lesson from Hungary, brand dealers were more cautious entering the Czech and Polish markets. Frantzen says one response has been to maximize market visibility while minimizing their investments. "Western companies are trying to get a foothold in these markets, but they're not investing much," he says. "And for good reason, they simply don't have the volume to justify significant investment." While the brand names are certainly gaining ground, their low-impact presence allows "local dealers [to be] more flexible to the needs of the market," according to Istvan Pesti, an IBM marketing representative in Hungary. That has certainly been one of the points responsible for the success of Optimus in Poland, a local assembler and reseller whose own PCs have more than 25% of the market there. Using Intel processors, Optimus is more than just a cheap box factory. A representative partner of numerous brand-name hardwares and softwares and with an extensive service and distribution network around the country, the company was called the 10th largest PC firm in Europe by the UK's PC Europe magazine last year. Local assemblers in Poland had a strong head start on the brand competitors, it being the last of the three big Central European countries penetrated by the Western firms. Nonetheless, with four-times the population of Hungary and the Czech Republic, Poland is seen as the most promising market in the region, aside from the more dubious market of Russia. Last year, Poland sold 240,000 PCs, compared to around 100,000 in Hungary. 1994 was a turning point for brand names in the region. While Hungary is the smallest-volume market, it is also the most brand-penetrated and therefore the most responsive to technical distinctions. Last year was the first year when brand-names overtook no-names and 486 processors overtook 386s here, albeit both by a narrow margin, according to IDC. The ground gained by brands has sent several local distributors and assemblers into liquidation or reorganization, such as Controll, Kontrax and Microsystem. IDC's Frantzen says the same trend is likely for the Czech Republic, "though it has higher volume [than Hungary], so more companies are able to survive." In spite of their improving market position, Western vendors occasionally find it difficult to stick to their strategy of supplying only state-of-the-art equipment in countries that can ill afford the luxury. As often as not, evidence proves wrong the rhetoric of the Western sales managers that buyers in Central Europe demand top quality or nothing. "Any working computer can be sold here if the price is right," says Albacomp's Minarovits. Escom demonstrated that point in 1993, off-loading a consignment of 4,000 286 Olivetti PCs in Hungary. Priced at under $600, they sold like hotcakes, earning Olivetti the 1993 rank of the sixth best selling brand in the country. Frantzen says IBM and others have also indulged in dumping, mostly in the far less sophisticated markets of Romania, Bulgaria and Russia, though he says the practice is not common by manufacturers. Western resellers, on the other hand, contact Minarovits "two to three times a week" seeking help to unload slow stock. Albacomp accepts the offers only once or twice a year, he says. The mistake is to believe there's a market here at all for home computers. Frantzen estimates the SOHO market is less than 5% of total turnover. That, he says, will be the second boom for PC sales in the region, which he doesn't expect to happen for another five years. Presently, the biggest PC buyers are banks, followed by government administrations, utility companies and privatized state firms, much of which modernization is financed with help from international lenders such as the EBRD and the IMF. By no means, however, does the government have more to spend than the average consumer. IBM rep Pesti says it's hard for the brand companies to compete against the no-names for government projects because of the price sensitivity. "Government tenders are only about price. Sixty to 70% of the valuation method is price related. You can't gain much on technical advantage. The technical criteria don't concern themselves with performance, just configuration. It's like judging a car by the number of wheels and whether or not it has a four-stroke engine. If you meet the price, you'll win, if not, you'll lose." Another difficulty with government tenders, Pesti says, is the pace of its bureaucracy. "For almost every large government project, the technical specifications are already out of date by the time the bid is announced. For example, a recent tender specified machines with two megabytes RAM running Windows. We don't deliver machines anymore running on less than four RAM." While, according to Frantzen, the future for the region lies primarily in PCs, there remains for the present a sizable business in servicing existing mainframe systems with second-hand supplies. Gabor Abraham, of the Hungarian-German joint venture Intercomputer, claims that as much as 40% of the service market for Hungary's approximately 50 IBM mainframe data centers is met by second-hand dealers like his firm. Buying equipment on average three-months to two-years-old from brokers in The Netherlands and Germany, Intercomputer is able to provide systems solutions for cash-strapped companies at savings of "at least 30-40%" the price of new stock from the local IBM dealer. While Abraham said his company's revenues grew last year, he admits there's an inherent danger in building a client base on out-moded state firms struggling for survival. "On one hand, they need more services from their computer centers to improve their business positions, and on the other hand, they don't have money to do that." In addition to matching IBM's terms for warranty and extended maintenance on the products it sells, Intercomputer often upgrades very old machinery as part of a standard service agreement for particularly troubled clients, Abraham said. One such firm is the floundering Hungarian Ball Bearing Company, whose production depends on an IBM 4361, running 280MB magnetic disks with 4MB RAM. The technology was already obsolete when the firm purchased the computer seven years ago, but it was the best the company could do under Western COCOM restrictions on the export of technology during the Cold War. "For this company, to have a three-year-old configuration would be a big step forward," said Abraham. "We've invested a little in this company because we hope that if they survive we will have a long-term customer. So, I think second-hand equipment has a future here, for a while, anyway." * * * A version of this story appeared in European Computer Sources. ================ PARLIAMENT WATCH Privatization bill may pass yet By Tibor Vidos Copyright (c) 1995 In its program, the Socialist/Free Democrat coalition promised: "At the beginning of the parliamentary cycle, the government will present a unified privatization bill to the House. In this bill it will, among other things, regulate the legal status of the new privatization agency that is to be formed by merging the State Property Agency and the State Holding Company." This was in July 1994. In November, two months after the parliamentary cycle had begun, the government presented the privatization bill to the House. And then forgot about it. The bill went underground, just to be torn up in internal debates between various interest groups represented in the parliamentary faction of the governing Socialists. Last week the bill surfaced again. And chances are good that in the first week of May, the heavily amended privatization bill will finally be enacted. According to the amendments sponsored by Socialist MPs and supported by the government -- the only ones that have a chance to be passed -- most of the rights of the finance minister stipulated in the original bill will be transferred to the "minister without portfolio responsible for privatization" (can anyone say that in one breath?). Trade union representatives will be purged from the board of the new privatization agency, and state ownership will be maintained in a few more companies and abandoned in some others. Whether these changes justify the five-month delay in passing the overdue bill is highly questionable. Hopefully the privatization of the big utilities will gain momentum once the bill is passed. In another major attempt to swamp members of Parliament with drafts, the government has presented -- this time without delay or hesitation -- the legislative consequences of its March 12 austerity plan. The government intends to amend 20 acts, including the Personal Income Tax Code, the Corporate Tax Law, the Family Act and the Civil Service Act. The general rule is pay more - get less. It is also obvious that Finance Minister Lajos Bokros seems to have a problem with cars. Not only does he plan to increase the recently introduced tax on company cars -- presumed to be used for private purposes -- but also hopes to exclude everyone from receiving child benefits who own cars valued over Ft 2 million. If the car is owned by a grandmother, the exclusion does not apply. In no time, all decent cars in Hungary will be owned by grandparents and childless relatives. The cost to transfer ownership is relatively low; that is, until the austerity package is passed by Parliament. Then it will increase by 30%. * * * Tibor Vidos is a lobbyist and political consultant in charge of the Budapest office of GJW Government Relations. A version of this article appeared in the Budapest Business Journal. ============ SPECIAL NOTE For the next two issues, John Nadler and Rick E. Bruner will be travelling on a wild Balkan tour. Fear not, however, as their charming and capable associates, Adrienne Haspel and Sarah Roe, will produce the next two issues of The Hungary Report in their absence. Mses Roe and Haspel can be contacted c/o . =========== FINAL BLURB The Hungary Report is free to readers. To subscribe, send an email message to the following Internet address: hungary-report-Request@hungary.yak.net containing (in the body of the message, not in the headers) the single word subscribe Conversely, to stop receiving Hungary Report, simply send to the same address (in the body of the message) the single word unsubscribe The entire contents of The Hungary Report is copyrighted by the authors. Permission is granted for not-for-profit, electronic redistribution and storage of the material. If readers redistribute any part of The Hungary Report by itself, PLEASE RESPECT AUTHORS' BY-LINES and copyright notices. Reprinting and resale of the material is strictly prohibited without explicit prior consent by the authors. Please contact the authors directy by email to enquire about resale rights. For information on becoming a corporate sponsor of The Hungary Report, contact Rick E. Bruner or John Nadler by email. Feedback is welcome. Rick E. Bruner John Nadler Tibor Vidos For its briefs, The Hungary Report regularly consults the news sources listed below -- for information about subsriptions, contact them by email: The Budapest Business Journal <100263.213@compuserve.com>; Budapest Sun <100275.456@compuserve.com>; Budapest Week and Hungary Around the Clock (same email address) <100324.141@compuserve.com>, and Central Europe Today (free online) . ================ END TRANSMISSION