U.S. Firms Foresee Low Return from Eastern Europe Investments

By Uchitelle, Louis | THE JOURNAL RECORD, February 16, 1990 | Go to article overview

U.S. Firms Foresee Low Return from Eastern Europe Investments


Uchitelle, Louis, THE JOURNAL RECORD


Sifting through Eastern Europe's startling developments, U.S. corporations are slowly developing a strategy for investing in that part of the world - one that treats Eastern Europe as a source of low-cost labor and a platform for exporting products to rich Western Europe.

Making consumer products for the hard-pressed Eastern Europeans is not, for American executives, an appetizing goal.

The emerging strategy is understandable enough. Eastern European currencies are not easily convertible into dollars or yen or marks. So why invest heavily in a factory that would make toothpaste or washing machines to sell to Hungarians or Czechoslovaks when the profits from such operations cannot easily be sent back to the United States or spent outside Eastern Europe?

``Until you get the currency problem solved, American businessmen will consider their opportunities limited,'' said Richard Rahn, chief economist at the U.S. Chamber of Commerce.

And besides, there are not that many customers: only 43 million people in Hungary, East Germany and Czechoslovakia, potentially the richest markets.

It is far better, U.S. executives say, to make light bulbs in Hungary, as General Electric is doing, and export them to France or Germany for sale in francs or marks, which can be converted quickly into dollars and sent home.

Peter Rona, chief executive of IBJ Schroder Bank and Trust Company, who is helping United States companies get started in Eastern Europe, sums up the thinking this way:

``The big leverage is the low labor cost in the proximity of very high Western European labor costs. Without that, there would not be much American interest in foreign investment in Eastern Europe.''

Wages in Eastern Europe are generally below $3 an hour, versus $10 an hour in most of Western Europe.

So far Hungary, the easiest Eastern European country in which to set up shop, has drawn most of the meager American investment in the area - the total outlay still being below $300 million.

Among the export-oriented companies setting up shop in Hungary are Samsonite (manufacturing luggage), Guardian Industries (planning to make plate glass) and General Electric, whose outlay of $150 million to purchase control of Tungsram, Hungary's only light-bulb maker, is easily the biggest American investment in Eastern Europe - and certainly an adventurous one.

The plusses are impressive, and so are the risks.

On the plus side, GE sells high-tech lighting in Europe, but not screw-in bulbs and fluorescent lights. Tungsram had been exporting just these items to Western Europe, and controlled 4 percent of the market, a stake that G.E. inherited by virtue of its purchase.

``That 4 percent market share, with its hard-currency revenue, is worth more than the $10 million GE paid for the whole company,'' Rona said. …

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