The deal was scheduled to close in early January. After the signing, we would send a manager over, and they would start work on the building with the idea that we would be in production by March 1. My engineers told me we'd be lucky to start by September.
The night before I was scheduled to fly over to sign the closing agreement in January, I got a phone call from Leo saying the Hungarians didn't know how they could go through with this. They didn't see how they could ever get their money back out. It was very frustrating. They didn't understand how businesses generate cash flow and money by selling things.
I knew they wanted us as partners. How could we get these guys over the hump? I thought about it and realized the only way they could get any confidence was if I made a gesture that showed how positive I felt about the joint venture. I decided to give them an advance against one-half of the first month's estimated profit, which was $8,000. Suddenly they were seeing hard currency. That $8,000 made all the difference. They signed, and our manager moved to Budapest.
In February we chose four Hungarian employees to send to our plant in West Germany for training. This was their first trip ever out of Hungary. They walked into the plant, and their immediate comment was, "This is slave labor. Never seen anybody work so hard in our lives." Our manager over there called and said, "Frank, I don't think this is going to work."
I said, "Gunter, give them a chance." Within a week we had a complete turn-around. I think the Hungarian workers realized they were there to prove a point -- they could work as hard as the Germans. They actually seemed excited by the opportunity.
Meanwhile, back in Budapest we were looking at a building with cracks in the walls and blown-out windows. Concrete was falling from the ceiling. We had some fairly sophisticated needs. We use oil-free and waterless compressors. We use special water to wash the glass. How could we possibly get this place in shape?
Our partners from MOM kept saying, "No problem."
Our engineers kept saying, "No way!"
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In March I went back to Budapest to get the keys to the front door and cut the ribbon. I got over there, walked in, and couldn't believe it. The job had been done to a T, a first-class renovation, with the machines in place and people ready to work. This was nothing short of a miracle.
The joint venture between MOM and us now has 35 Hungarian employees. The typical Hungarian, I've found out, works at a regular government job for eight hours and does nothing. He rests. Then he goes to work for several hours in some kind of underground entrepreneurial activity. We made it clear that the joint venture was to be the workers' primary source of employment, not a place of rest.
Paying double the going wage has helped there. Our workers take home around $60 a week. Then we put in an incentive over their base rate based on productivity. We've since boosted that. The tax rate in Hungary is incredibly regressive. So we're adding additional incentives in the form of food coupons and family vacations that the workers couldn't normally afford.
The joint venture has three managers. Number one is Guy Cosby, an engineering manager we sent over from our plant in Portsmouth, N.H. Numbers two and three are Hungarians; they came from the partner. The Hungarians get paid -- as executives -- $250 a month. I knew we had to increase their salaries dramatically because after we adjusted the hourly wage rate, they were making about the same as the hourly workers. But MOM didn't want to see their wages go up at the expense of profit distribution to the joint venture. So I gave them consulting agreements with Erie Scientific, and we doubled their salaries.
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The concept of privatization is still so new, there was a great deal of mistrust when we started as to why we were there. Basically, the thinking at MOM was we'll get these Americans in here as joint-venture partners. Then we can sell accounting to the joint venture; we can sell import/ export services; we can sell payroll services. We can make a fortune off this and keep our enormous bureaucracy intact.
Guess what? We ain't interested. For a while MOM kept forcing people on us, but we went out and got our own accountant, our own import/export department. We got our own banking. We pay our bills directly from hard-currency accounts. The joint venture is finally a stand-alone business as we had told them it had to be at the beginning. We had to be free from the bureaucracy. We took a stand, and I think our point of view is sinking in. MOM has become much more cost conscious as to what it's willing to lay off on the joint venture.
The most valuable outside contractor we've found so far is our cabdriver. This guy has gotten us trucks, helped us out with the bank, given us input on what employee benefits to offer. He says he'll find us distributors in Czechoslovakia and Yugoslavia. There are hundreds of people like him. These are the people you need to find to do business, because the basic relationships we take for granted just don't apply.
Customs officials, for instance, show up and have to examine every shipment. They expect a "gift." We've made it clear we are not in the gift business, and they don't come around anymore.
Our partner, MOM, could also go bankrupt. It's struggling right now, but it's also hustling. It's seeking other joint ventures. Hungary needs to keep creating joint ventures like ours that will pay people more money and generate some sort of positive cash flow for the country, because it is a huge foreign debtor. They say it will be a two-year process to turn the economy around. I hope they're right.
The joint venture is doing better than we expected. Labor productivity is ahead of budget. The quality is excellent. We even made a profit in the first quarter, and MOM has returned its $8,000 advance.
A country like Hungary right now is like the Wild West, and if you're willing to go over there and get your hands dirty, you can't lose. Go in, find a building with a phone in it, find a cabdriver, and tell him, "I want to be in business in 90 days."
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Frank H. Jellinek Jr. is the president of Portsmouth, N.H.-based Erie Scientific Co. The company, founded by his grandfather during the Depression, has revenues of more than $50 million.
