Hungary / Czech Republic Blog

I am very sad right now as I sit here on our last night in Budapest writing my last blog for the entire study abroad program. Well, maybe not so much the blogging part! But I do want to say thank you so much to our great professors. You two have outdone yourselves and I appreciate every company visit and every meal, although I was not too keen on the meat selections all the time!
 By far Budapest has been my favorite of the two cities that we have visited. The people are friendly and the city is incredible. The company visits in Budapest were a little different than the ones in Prague though. I felt as if the information that we received from each one was not consistent. Their statistics and data never really matched up with one another. Yet, the one thing that I do remember being consistent is the fact that their government is corrupt!
 I really enjoyed the visit to Graphisoft. Specifically because I work for an architect and they use AutoCAD and Arch.CAD on a daily basis. I thought it was interesting to find that the program Arch.CAD is from a company here in Budapest, what a coincidence. Graphisoft, established in 1982, is one of the oldest companies that came to be after the communism era. Gabor Bojar, the creator, decided to make an application for Apple. Then in 1984 he created the application for architects, Arch.CAD. This is an application that allows you to draw in 3D. Now 99% of their business is done outside of Hungary. Worldwide Graphisoft has 300 employees in the US, UK, Germany, Spain, Japan and Finland. And the company earned a revenue of one million Euro last year.
 There has been a financial acquisition in the past few years of Graphisoft by Nemetschek Group, a German company. Nemetschek bought the European and US companies. Up until the year 2000 the original founders ran Graphisoft. Then the next year a new CEO was appointed and two years later another CEO was placed with Graphisoft. Nemetschek purchased Graphisoft for its brand importance. The company was publicly up for sale and was a financial benefit to the owners. 100 million Euro, in cash, is what it took to purchase Graphisoft! Our presenter said that he thought that was too much.
 Their major competitor is Autodesk. They have AutoCAD and Revit. Revit is the 3D software that Arch.CAD competes with the most. In order to stay above the rest, Arch.CAD continues to develop new and improved 3D software programs. Coming later this year is Arch.CAD 11 will have a BIM Experience Kit – Interactive Training Guide included. Graphisoft allows students and teachers from anywhere around the world to go online and download a small version of their software for no charge. This gets their name out there and will in turn place their name and product into the architectural firms when the students move on in their professions. So far 200,000 students have downloaded AC 10 and 30,957 consumers have registered. The presenter told us that there really is not a significant difference between the two software programs. But one thing that they have as an advantage is their marketing system. And by having the option to have the short version of their product available online for free has really helped their sales.
 One major problem that Graphisoft is having is that 90% of their software is being pirated. Russia is the main region that is doing this. The EU is trying to help with this problem but there is only so much the government can do to put a stop to this. It is not easy to find the piracy ring and bring them in. Especially when there are so many people doing so. Although this causes a loss in revenue for Graphisoft they say it is somewhat helpful. This gets people using the software at home. And since companies definitely cannot pirate the software the employees who have will ask their employer to purchase the Arch.CAD for their desktop at work. It is not the best way of doing business, but it works.
 After taking this course and seeing what the EU transition economies are going through really makes me think that we have it so easy in the US. I know that other foreign companies and the US have to comply with the EU policies when importing to these countries, but we do not have to deal with their petty laws on a day to day basis. If you are not an online-based company or one that has been privatized you are basically the EU’s puppets. There are so many rules and regulations to follow before you can even think of opening your doors. Although Graphisoft does not seem to have a problem with the EU, others are having problems with their products meeting EU CO2 regulations, shipping laws, etc. Just to touch on Radiant Systems one more time, the US based company does not have to deal with too many rules and regulations on an operating stand point. The EU places so many taxes on the companies and then the country taxes are added as well. The Radiant Systems in Europe has to deal with individual countries ever changing laws, the VAT, different languages and different currencies. And being that Radiant Systems is a US based company they have to change their products to suite the regulations of the EU. We have learned that being a business owner all the way down to the smallest employee in EU countries can be very tough. Especially in Hungary where the government cannot make up its mind how many taxes they would like to place on their inhabitants and how much! And when they have to include the taxes from the EU government, why work?
 Thanks again to Wade (Vade) and Ilgaz! You guys were awesome and very patient with us! We made it through the two weeks all in one piece, no missing passports and no one was placed in the drunk holding tank! The companies were all great in their own way and I have a better appreciation for our economy and the freedom that we have as American citizens!

You guys, I will miss you all so much. I cannot express just how much I enjoyed meeting you all! This is definitely be one of the best times of my life! And to top it all off I have 14 new friends!!! We have had a great time and great conversation every day and night (hence the Jewish weddings and gay porn conversation). I would never take one second back! I love y’all with all of my heart and wish you guys the best in your futures after school, moving and weddings!!!!!! I know we all agreed to have a reunion, but let’s actually do it!! Mabye another wine tasting 601?! Thanks for being such a great group of people.

Love - Sarah

PS. I know that we are all not in this pic, sorry. But I will have more to send!!

Budapest has been great and I’m especially pleased with the companies we had the opportunity to visit. The presenters were well prepared and very informative for the most part. My favorite four companies in the Hungary portion of this trip have been Trigranit, MOL, and Zwack Rt.

Trigranit has a mission of becoming the leading real estate developer in Central and Eastern Europe. It is a very reputable company and was established in 1997. Some of their projects include mixed-use city centers, retail and entertainment, class “A” office buildings, residential complexes, hotels and even have one PPP. Based on what they said, they are well on their way to accomplishing their goal by focusing on such landmark projects. Building and maintaining relationships are the most important parts of their business and this is how they acquire clients. Their network is huge and there is lots of trust within it. In four years they have managed to go from operations in 2 to 10 countries. Trigranit now operates in 11 countries and originally started in Hungary and Slovakia. They chose Hungary to begin the company because Hungary was making far greater post-communist economic progress than most other Eastern European countries at this time. Their biggest challenge to achieving their goal of becoming the leading developer in Easter and Central Europe is and has been human resources. Good employees are hard to find but they do it and this is part of why they are so successful. EU also helps them with this because it provides labor mobility and allows for a greater selection pool of suitable employees. Trigranit’s key strengths are its shareholders (who are some big-name people), long-term dominant investment, international experience, and high-quality projects. I thought it was strange that Trigranit was doing projects in countries outside of the EU and especially those that had no intentions of joining such as Russia. They said that the risks to doing projects outside the EU are far greater. They mentioned having large projects in Russia and I can’t help but wonder how much corruption they have to deal with there. This also makes me think that Trigranit is also involved in clandestine and corrupt activities in those places outside the EU where corruption is so prevalent. It seems that this would be part of getting business done with those governments. They even use ex-politicians to negotiate with the Russian government and this is probably why they are so successful in areas where other companies have failed. On a side note, I’m not sure about anyone else, but I got a really sketchy feeling about this company. As far as the effects of Hungary’s joining the EU, as the speaker put it, “they just got married, but have been engaged for a long time” so everything that happened as a result of this marriage was expected.

MOL was a great company to learn about. MOL is now 100% owned by private investors, is the biggest company in Hungary and is top 5 in the region. MOL is the first national oil and gas company to be privatized in Central and Eastern Europe. MOL was several different companies (exploration, transmission, refining and marketing, and petrochemical) and after the fall of communism the first step was to merge all of these companies. Then the trading and storage businesses were given up but they still have the pipeline business. The MOL speaker mentioned that a major problem for the EU is that 60% of gas supply comes from Russia. If Russia were to get angry with the EU and cut its gas supply (which Russia has been known to do), Europe would be traumatized. The EU plans to diversify where its gas comes from and look into places such as North Africa to obtain gas via pipeline. However, other member countries make this really hard to accomplish because they are making various bilateral CYA agreements with Russia to ensure that they continue receiving the gas. An example of this would be Germany’s plans to have a pipeline going directly to it under the Baltic Sea as opposed to the current pipeline which goes through Poland. I see this type of behavior as a communist hangover in the way that no country trusts the EU’s bureaucracy to do what needs to be done in order to ensure that the EU countries continue to have gas. I guess this is another characteristic of communism that will take a while longer for the courtiers to get over. A major impact the EU had on MOL is that is decided to commit to reducing CO2 emissions by 20% by the year 2020. In some of our class discussion in Atlanta we talked about how important a legal system is in a transition economy but also that this is the toughest process for the country to go through and the longest. MOL’s representative told us how there was a lack of legislation for a long time which enabled illegal oil trading by altering the specifications of use for this oil and therefore it was taxed at a much lower rate. For a long time the authorities were unable to follow this.

My favorite company visits tend to be those where I can drink alcohol, watch movies and go shopping. Zwack was able to provide all of these entertainments for me and therefore I really enjoyed it. Zwack has an interesting history and has been around since 1790. Its Unicum drink is made with a special secret formula that only two people in the world know. During communism the drink was altered and made with a different formula, but after Peter Zwack returned to Hungary and resumed production with the original formula. Now the children of Zwack have come up with a similar but less harsh drink called Unicum Next which is comparable to Germany’s Jagermeister. The company has distributors in the U.S. but cannot compete with the popularity of Jager amongst the younger people. I think if they spend a little more money on marketing Unicum Next by promoting parties and even coming up with a drink equivilent to the Jager Bomb, Unicum Next may have a greater chance for success in the U.S. market.

To conclude this final blog and the trip I have to say that the European Union has been very good for many countries; mostly the rich ones. However, it seems to me that there is far too much bureaucracy in the EU and the member countries give up too much control to Brussels. I don’t recall one company that was happy with the amount of bureaucracy and in some cases it even stifled the company’s progress (AIG). In the case of Hungary and Czech Republic, I see that the Czech Republic is farther along with its economic progress than Hungary. Hungary isn’t getting all of the benefits it’s supposed to from being a member of the EU. There is still a lot of corruption and too much government debt. The vision is there but executing seems to be taking much longer than it was anticipated. The European Union’s capital market is not what we are used to seeing back in the U.S. and if that’s what they are aiming for than they may have to let up on some of this control of the member countries, however, I don’t think that a market economy such as the one in the U.S. would flourish any better than their current market system. For Hungary to become a well developed economy, it would involve the government taking the first step. For example, some government officials could start paying taxes and set an example.

And now I am off to Russia to see how far behind and corrupt they are compared to the European Union.

Our visit with ITD Hungary was quite informative in what was and wasn’t said. They server the same purpose as Czech Invest does in the Czech Republic, luring FDI dollars into the country. Much of the presentation was a rosy forecast for Hungary’s future, an outlook that was not supported by our previous visits. Most glaring was that Hungary has issues with developing industries with competitive advantages that are sustainable in the long term.

The highlight of the last part of the trip was the final full work day in Budapest. We were able to visit the Suzuki plant in Eztergom, where the Swift is manufactured for the CEE market. The highly robotic process is indicative of Japanese techniques, as is the investment strategy. I thought that Suzuki wasn’t committed to a long-term presence in Hungary upon learning that there was no R&D development taking place here. I would later learn that it is simply their style, as they maintain all R&D in Japan, and that they have steadily increased their investment in the plant to grow factory output.

I did find it interesting that mention was made of Hungary’s growing biotechnology sector and wondered if that could somehow be leveraged to create a specialization that could be unique. When touring the city and surrounding areas, we were told about the mineral waters and thermal springs that were abundant in the region. Budapest contains many thermal baths that are visited for their therapeutic attributes. In addition, many doctors are present in Hungary relative to the population. It would be interesting to see if these strengths could somehow be leveraged to become the wellness center in Europe, particularly with the expansion of the EU, placing Hungary in a convenient central location.

As for the success of Hungary as a transition economy, I would have to give them a qualified yes. They have certainly taken the steps to move away from a centrally planned economy, but are at a stage in which they must overcome some of their current fiscal and political problems to stem the sliding progress, particularly as other EU entrants surpass it in economic growth. This is made even more difficult with its decline population and the mobility of labor and capital allowed within the region. On the horizon, both Hungary and the Czech Republic will have to stave off the challenges from other low cost EU locations as well imports from larger EU members, particularly as the FDI incentives and EU Structural Funds disappear.

The profile for Hungary is very similar to that of the Czech Republic in terms of factors for attracting foreign investment. Both are small countries that offer low cost production alternatives in the region and talented workforces skilled in the technical arena. As such, it is in direct competition with the Czech Republic and as we began our visit, I wanted to see how well the country stacked up. At first glance there don’t seem to be any serious distinguishing characteristics. I was pleasantly surprised at the level of commerce taking place in Budapest. I was initially expecting a city that was not as cosmopolitan as Prague but quickly changed my mind. The city is a large, vibrant collection of small and medium sized business and the presence of multinational corporations was obvious.

We started with an introduction to the country’s political and economic history by Dr. Paul Marer and Dr. Yusef Akbar at the CEU. This provided a backdrop against which we could look at the companies that we would be visiting during the week. Both of the presentations were informative and honest. It was the first time that we heard people speak of a transition in more balanced terms, giving us the good and the bad. The overreaching positive that came through in these talks was that despite a long history or political dominance by foreign powers, Hungary maintained a strong identity on which to build its future. The major question for the people was if Hungary could recover from a long period of subjugation. Dr. Marer stated that memories of the previous Hungarian period of freedom served as a reminder to the nation that it could successfully return to independence. It was also mentioned that Hungary started on the road to a market oriented economy before the end of the communist era, giving it a head start with free enterprise, though on a small scale. Dr. Akbar’s speech was insightful in the challenges that Hungary has considering it fiscal and economic policies as it transitions completely into the EU. It is ironic that a country that has only recently gained political and economic independence would so quickly place itself under the regulations of another external body. This was echoed in our visit to the National Bank, when the delays for qualifying for the Eurozone were highlighted. Hungary political tensions are definitely impacting the financial performance in the country but there may also be a desire on the part of many in Hungary’s political system that would prefer to maintain a level of economic autonomy that will not be present once they converge into the Euro system.

Trigranit was the first firm that we visited in Hungary and its has been quite successful in its strategic approach. Recognizing that it is a small player in fragmented industry, its competitive advantage is realized by leveraging its company structure, local knowledge and niche market focus, concentrating on large scale brownfield developments. With a few wealthy individuals as primary shareholders, they have a steam-lined decision making process that gives them maneuverability that their competitors lack. They were also helped by the entry into the CEE countries (1995) before Hungary joined the EU, while their competitors waited until 2004. I came away impressed with how they were working to deal with the small labor pool and how they used their property management arm to bolster their credibility and maintain strong relationships with their client base.

We concluded the day with a visit to Zwack, a liqueur manufacturer that has designs on expanding into the U.S. market in order to compete with Jagermeister. This was a firm that was privately owned, then appropriated by the communist regime and repurchased by the Zwack family after the regime ended. The changes brought about by EU membership have allowed the to grow their European distribution due to the abolition of import duties but has also brought about more competition.

Wednesday, May 30.  Today we made a visit to TriGranit, a development corporation.  TriGranit strives to be the dominant developer in the CEE community and looks more to the East for development projects.  This is due to the higher level of competition in the West which TriGranit has determined is not worth challenging.  In fact, Russia seems to be TriGranit’s biggest bed for development.  This focus does not come without its challenges however.  Land quality and political issues in the East pose elevated threat levels.  Nevertheless, TriGranit has found a niche in pursuing transition economy development.  TriGranit considers its core competency to be in negotiations.  People in Eastern European region like doing business with people they understand and like, and seeing that TriGranit emerged from the Hungary/Slovak area, its advantage comes naturally.  This is an interesting concept seeing that many of the CEE businesses look to the West as their host countries make the EU transition.  Interestingly, TriGranit does not prefer doing business with governments in the East as they consider them risky ventures.  Having the EU court available has helped escalate legal issues faced by TriGranit in some EU countries. 

For the rest of the trip we visited Unicum, Suzuki, MOL, and GraphiSoft, but I will save discussion of these companies in order to refocus on the question of whether Hungary and the Czech Republic have successfully completed their journeys from transition to developed market economies. 

As we learnt before coming out here, the economic levels lie on a spectrum.  One cannot simply jump to becoming a developed economy overnight.  For the Czech Republic, I would say that it is 90% of the way in becoming a developed economy.  Much of this has to do with the Foreign Direct Investment in the country and the mass privatization that has taken place.  Although the technical foundations of the country are good, I would like to see more of a balance with formal business-focused educational institutions.  Customer service is obviously still an issue but will come along slowly.  The Czech Republic’s level of inflation is more tame compared to other Visegrad countries and the Koruna seems to be showing natural strengthening.  There are still some voids that are of concern from (mentioned in an earlier blog) a lack of basic firefighters to more complex issues of formal risk management.  There are also still some cultural issues with the youngsters through parental influence, as explained by Paul at Radiant Systems.  I kind of expected this but not to the extent that a company like Radiant (in Prague) has to have special cultural programs in place to bring young local employees around the cultural bend (especially in 2007).  Lastly, I was not totally convinced that CZ has an efficient financial sector.  The need for more access to capital through private sources still seems to be there rather than through state-influenced agencies.

Turning out attention to Hungary, I would say that it is 80% of the way toward a developed economy.  A big chunk of this detriment compared to the Czech Republic is pinned to the issue that corruption seems to be a much bigger problem on the political level especially in regards to taxation which the public is having to pick up the slack for.  Inflation is higher and as we have been told, Hungary has gone from the forefront in transition to the back burner.  The need for political consensus appears to be stifling progression as is the level of government bureaucracy.  Budget deficits amongst other issues are also keeping Hungary from adopting the Euro which, if it were further along the development spectrum, would be less of a barrier.  Nevertheless I see much Foreign Direct Investment in the country and the history of the country in going through so much change has helped Hungary come far along.  Although the technical competencies of the country come as no surprise, tourism, agriculture, and service related sectors are on the rise.  Like the Czech Republic, low labor costs seems to be attracting FDI to the country.  I believe that in this sense, Hungary’s slip in transition will help as the wages of surrounding countries increase faster. 
 

When does the transition end?

The World Investment Report has classified Hungary as a developed nation, implying the transition is complete. Where is the “developed nation” border lie, though, and how do we know when we’ve crossed it?

I believe that a nation can be considered to have completed transition under a few important conditions:
• The political and legal systems are established and are functioning
• Most, if not all, of the nation’s means of production are privatized
• The future is optimistic to businesses and to citizens

Under these conditions, Hungary has completed its transition and is now a developed country. Voids in institutions from communism have been mostly filled and legacy behaviors are being altered gradually to cope with the new environment.

Although there is a serious problem with corruption in the way business is conducted, a legacy from the days of communism and occupation, companies are not paralyzed by it today. Companies have learned to cope with the current system and US companies are still able to find clients, suppliers, and partners that conduct legitimate business.

By 1998, the country was almost completely privatized. A few large scale institutions, such as the airport, were held by the state until recently but even those have now been sold to investors. There is also a stock market that is gaining popularity. Trigranite, a real estate development firm operating the CEE area, has plans to grow from 1.5 billion euros to 5 billion euros in the next five years. This ambitious goal demonstrates the type of optimism firms are facing in this new market economy. PPPs (public private partnerships) are a new model in which public projects are funded privately, held for a period of time, and then sold to the state later. Trigranite has performed several of these projects successfully and plans to continue rolling them out throughout the old soviet block.

The future is also looking bright for many companies we visited while in Hungary. Graphisoft has established a new distribution channel with Apple’s sales to educational institutions and 90% of their revenues are now coming from exports. Magyar Suzuki Corporation built 500,000 automobiles before Hungary even joined the EU. They produced their millionth car last year and are experiencing quick growth in exports. Domestic sales aren’t growing nearly as fast but they are certainly holding steady. They are receiving a 50 billion euro investment this year to increase output to increase volume to one per 57 seconds, which will increase overall plant output to 300,000 units per year. Zwack, an alcoholic beverage manufacturer and distributor, is doing well also. They have very good market share domestically and are now testing the waters of the US market, facing Jagermeister as their main competitor. Jagermeister currently has no direct competitor in the US for ‘herbal bitter liqueurs.’ During our meeting with Magyar Nemzeti Bank, the Hungarian equivalent of the Federal Reserve, we learned more about Hungary’s plan to adopt the Euro as its currency. Although the country has missed several deadlines on meeting the requirements and has pushed the project back each time, they are confident that they will adopt the Euro in the next several years. The deadlines were too aggressive before and at this time, there are no standing deadlines. This is a realistic approach and does not show discouragement from joining the monetary union.

I’m sure almost every economist has his or her own theory on how development can be measured. From my experience here meeting with companies and finding out their short and long term plans, I have to conclude that Hungary is doing pretty well for itself and has a solid future ahead. I agree that Hungary is, in fact, a developed country.

Our last company visits were to a Suzuki manufacturing plant and a Hungarian software firm. Despite the weak presentation at Suzuki, I was really taken aback at the scale of what Chris Mattox called ”organized chaos.” I couldn’t have imagined how those robots moved with such precision. I will discuss more about the company’s market position in the final, as I noticed today there was a question about it.

The software firm Graphisoft has been in Hungary long before the reformation because of Hungary’s earlier measures to allow private companies. I was also shocked to see how prevalent this company’s product was. Archicad is apparently the best most user friendly architectural software available. The most interesting part of the presentation to me was how Mr. Laszlo cited software piracy as a positive marketing tool for their company. The company started out as Hungarian-owned but is now owned by the German equity firm Nemetschek Group.

In comparing the Czech Republic and Hungary, I have very mixed feelings about which country is more developed. Prague is, in my opinion, a city with two extremes. On the one side, you have the beautiful city square located in the classic and serene Old Town. The streets are clean, the buildings are magnificent, the prices are high, and there is almost a majority presence of tourists. There are also a lot of prominent FDIs within the city in large modern comnmercial buildings. Business is thriving, but the people don’t seem to be terribly happy. Behavioral legacies were most notable in the areas of customer service (I could go on for a while about this aspect). On the other side of town there are communist blocs with deteriorating conditions, abandoned factories and shops, poorly maintained streets, and grafitti everywhere. Taking the train out of the country showed me even more signs of economic despair. The train stop of Kolin looked like it had not been in use since the 1950s. The surrounding buildings were in worse condition than in Prague and the rest of the cities we passed looked similar.

Crossing the border into Hungary, we passed some quaint little towns with several castles on the hillside. The train station in Budapest was admittedly dilapidated, but once on the city streets and on the bus to the hotel, my first impression was that we were in a Western European city, perhaps Vienna. Taking the tour of downtown and seeing the square, parliament, theater, business districts, and dining locations, I was even more convinced. Even the little towns we visited outside were clean, pretty, and full of culture. The service was noticeably better as well. The institutional voids seemed to be less than in the Czech Republic, with more prevalence of major FDIs. I found out later that Hungary had opened its borders to FDIs long before the iron curtain fell and had been ahead of the other CEEs in the transition stage.

The disparity came when we started our company visits. The first few slides in all of our presentations began with an overview of Hungarian history and current economic status. The general consensus was that Hungary was not in good economic health, the political situation is disastrous, and the people’s pessimistic attitudes about their government and future aren’t helping either. Apparently, since 2000 Hungary has been falling behind the other CEEs. They have a large deficit and appear to be one of the last CEEs to adopt the Euro. According to the National Bank, the main problem is lack of fiscal discipline due to a corrupt and divided government. Inflation is at 8.8%. All of this information just came as a shock to most of us.

I agree with the notion that both economies are no longer in transition because they are now operating under a free market system. But the level of success has varied with the Czech Republic and even Slovakia moving faster than Hungary. In looking back at the class slides, the first key difference between market and planned economies is the political ideology and system of government. This is probably Hungary’s biggest problem today. I will try to save some comments for the final, but I think it will be at least a decade before we can truly recognize these nations as developed economies.

So far we’ve had all company visits in Budapest and at times I’ve become more and more confused on the information that they’ve given to us. Come to think of it, ITD Hungary confused me a bit on their scew of information. Of course they are an agency that purely promotes foreign investment in Hungary while their presentation was more or less to sell us a positive and healthy image of the country. Makes sense. It was’t until we asked specific questions when more truth came out. Hungary’s foreign investment market was nearly saturated by 1998 with the growth rate decreasing since then and is now at 3%. The EU average is around 7 or 8%. Unemployment is at 7.5% with real wage growth at –6.4% which doesn’t indicate a promising economy to invest in. On the other hand, the promising views of this would be cheaper labor costs for skilled workers in terms of productivity. Hungary’s average salary is only $18,000. Hungary is proud of their education with most students studying IT, Biotechnology and Research and Development, which is what the country specilazes in. Big companies come to Hungary to establish a workfoce with this specialty knowledge and low wages. Also the proximity of the coutry’s location makes Hungary near the heart of Central Europe.

Magyar Suzuki Corporation was interesting company to visit. The presentation was poorly done by a top manager in the company who spoke little English and couldn’t provide basic information such as last year’s profits. Maybe that’s how the Japanese want to keep it. She kept mentioning that they are not able to keep up with the demand. Like we were talking about in the wrap-up session this morning, a business fights to keep up with demand in order to make a profit. SMC is just above breaking even with a thin profit margin. Something is wrong here with this picture. Hungary has great advantages for Suzuki: its proximity to the rest of Europe, a developed logistical infrastructre, long tern economic stability in that Hungary was the first country to experience all privatization in a transition to market economy, its qualified labor force in the auto industry with a favorable business environment. Suzuki needs to expand quicker than its projections for the end of this year. It also needs to evaluate the whole process of its efficiency. Every 63 seconds a car is produced. We said this morning that in America we can produce a car every 25 seconds or so. Apparently SMC needs to find areas to improve on to catch up with the demand. The opportunity is there, it’s just whether or not they want to take advantge of it.

The World Investment Report from 2006 claimed that Hungary is no longer in the transtion state but already developed. In some respects I can agree with this statement, but in others I do not. I see that the Czech Republic has surpassed Hungary being that Hungary chose the band aid meathod where they privatized the state owned firms as soon as they could and no longer can depend on foreign direct investment for new markets. Czech Republic chose to take the slower route and focus more on its infrastrcuture and wanted the privatization to take a slower path and it would all pay off in the end. Now I can see the difference between the two from a more personal approach. If I had a company choosing between Hungary and Czech Republic, I would choose Czech Republic for various reasons. It has more potential in GDP growth and nearly matching the EU average. Both countries have incentives for foreign direct investment, so I would have to look into this a little more. I’ll keep my reasoning short considering I’m positive that this will be addressed in the final paper.

Bye to Budapest!!! Oh and Ashish, my bank account isn’t liking Hungary too much either!!

I’ll miss you all!

After visiting the rest of the companies in Hungary I am now ready to provide a final discussion relating the company visits with some course material. I am not going to provide any more specifics about companies we have visited as they begin to exhibit many of the same qualities and issues.

We have spent time in both the Czech Republic and Hungary, each of which has pursued a different strategy for privatization of companies and transition to market economy. The Czech Republic privatized very rapidly, basically overnight, through a voucher privatization process; however this process did lead to the state owned bank buying a lot of the vouchers from the private community leading to some interesting cross-shareholding. Hungary has taken a much slower policy of privatization which is now almost complete. I would argue that the Czech Republic’s process has been more successful in helping to move more rapidly to the market economy. Evaluation of some of the market institutions that are necessary to be a market economy (Spotting Institutional Voids in Emerging Markets) are more lacking in Hungary than in the Czech Republic. The meeting with the Hungarian National Bank exposed some of the institutions that are missing or not fully developed, specifically transaction facilitators and some regulators and other public institutions. We learned that the Hungarian stock exchange is not that large and there is not a large amount of interest in it right now. While researching for a report in a spring class I learned that the Czech Republic stock market is one of the larger stock markets. I don’t recall the exact number but I do believe it was in the top 15.

Another interesting point during these 2 weeks was the discussion of the EU. We had readings on the creation and the enlargement of the EU which was discussed again while in Hungary. The progression of countries being added to the EU has been much more rapid in recent years. This has created a much larger market but also much more competition for these transition economies. The discussion with Dr Yusaf Akbar touched on this point and included the fact that it was now time for the EU to pause and take stock of what is happening. While the EU has added more than 10 new countries very rapidly there are still 12 that have not joined the Eurozone. What is it in these countries that are taking so long to meet the requirements of the Eurozone? I think that these countries realize that they are not quite ready for the complete competition of a single currency and the lack of control they will have over that currency. A last discussion during our closing meeting on Saturday discussed this exact point while focusing on Hungary. Hungary is artificially raising the value of its money to attempt to help pay down debt but this is in a time when inflation is rising which does not fit the economic equation. The structure is in place for these countries to meet the requirements and join the Eurozone; however the countries are not taking the initiative to put the regulations in place in their countries that will move the country in the direction to meet the criteria of the Eurozone.

The key point of all these blogs has been a discussion of this point:

“Decades of communist-party rule and central planning have resulted in institutional voids and behavioral legacies that have negatively impacted the business environments in Hungary and the Czech Republic. On the other hand, changes in the political, legal, social, and economic arenas since 1989 have lead to unprecedented systemic transformation, culminating in European Union membership for both countries in 2004. Therefore, one may argue that both countries have now successfully completed their journeys from transitional to developed market economies.”

After meeting with all the companies, and individuals in the countries I believe that the argument for both countries successfully completing their journeys is easy to make. While they still have some issues to deal with; most specifically their monetary policies to help stabilize the market and make the transition to the Eurozone, they both have functioning markets and strong entrepreneurial spirit that will help the country continue to grow and contribute to the market in the EU and the world.