Opportunity beckons in Eastern Europe - Hungary emerges as Modine choice because of lower costs, stability

Modine chose Hungary, where it already had operations, for a factory that is to begin making vehicle cooling systems next year. From its two factories in Hungary, Modine hopes to gain a stronger foothold in the European Union with vehicle-makers such as Caterpillar, Volvo and Nacco.

"Clearly, there's a second wave of opportunity going on in Eastern Europe in places like Ukraine and Romania," Thomas Burke, executive vice president and chief operating officer of the Racine company, said in an interview last week.

"We looked at those countries, but Hungary was the better choice for what we wanted."

About a dozen Wisconsin companies have operations in Hungary, according to Wisconsin Manufacturers & Commerce. They include Modine, Johnson Controls Inc., Miller Brewing Co., A.O. Smith Corp., Sensient Technologies Corp., Banta Corp. and The Trane Co.

They ride Harleys

Other companies, such as Harley-Davidson Inc., also have a strong brand presence in the small country that's big on American products.

"When you go to Hungary, it feels more like a rich country than a poor country. It's more advanced than some of its neighbors, such as Romania, Bulgaria or Poland," said Shale Horowitz, associate professor of political science at the University of Wisconsin-Milwaukee.

Although Hungary is prosperous, the cost of doing business there remains relatively low compared with North America. In Modine's case, for example, the average yearly wage for factory workers in Hungary is $3,000. Also, Hungary has promised the company generous tax breaks in return for building the second manufacturing plant.

"There was cash support up front and an ongoing tax incentive" for the plant, which is expected to employ 300 people, Burke said.

One of the country's strengths has been its fast and smooth transition to Western-style democracy, inspired by a nationalism that long encouraged Hungarians to control their own destinies. When communism fell, Hungary was already more modern than some of its neighbors in technology, work-force skills and business acumen.

"They were among the few countries that made the most aggressive reforms, and they quickly got into the European Union," Horowitz said. "That was important because it gave companies in Hungary access to selling throughout the EU, which is a huge market."Hungary has experienced some political turmoil lately, but it has not shaken the business climate. It's more of a political scandal than a disagreement over policy fundamentals, said Horowitz, who taught for a year at Central European University in Budapest.

Modine wanted a stable political environment, even if it cost the company more to operate a factory in Hungary compared with Romania, Bulgaria or Poland.

"That clearly was one of the advantages for going there," Burke said. "We have complicated products and processes, so having an established business environment was important. Hungary is our sole location in Eastern Europe now."

Cautionary notes

Although most countries in the region have enhanced their investment climates, serious constraints remain, according to an economic analysis from the World Bank.

"For example, operating a business in low-income countries of the former Soviet Union carries high risks because of insecure property rights, weak contract enforcement and unreliable infrastructure," the report notes. "In the middle-income countries . . . some of the constraints include too much red tape, inefficient regulations and the need for numerous permits."

Richard Farkas, a DePaul University political science professor and consultant to major corporations doing business in Eastern Europe, said the opportunities for U.S. companies in Hungary were plentiful, especially for components manufacturers.

General Electric Co. has its largest European operation in Hungary. But not every company has been successful in making products there. IBM Corp. closed its Hungarian factory and moved the production to a lower-cost country.

"The numbers were not right for IBM because wages were going up. So instead, the company opened a European service facility in Hungary," Farkas said.

The Hungarian work force is very adept mechanically and has a good work ethic, according to Farkas.

"The bad news, if there is any, is there's a squeaky labor situation," he said. "Under socialism, employed people expected an immense number of social services and a rather featherbedded kind of economic environment. So when a Western company came in, there was a need to shave costs and get down to an efficient labor force. There's been a sensitivity to new companies coming in and cutting back on workers."

Unemployment problem

Eastern Europe has had enormous economic improvements, but double-digit unemployment remains a persistent problem, according to the World Bank.

About 50% of the unemployed spend more than a year looking for a job, the World Bank noted.

"Unless there are more and better jobs created in the region, the poverty reduction we have seen in recent years could grind to a halt. And this in turn would really undermine the political support for reforms," said Arup Banerji, one of the supervisors of the report.

A bipolarity is emerging in the region, according to another World Bank study. "The prosperous countries are those that have begun to focus on trade more with Western Europe and the global economy. There's another set of countries which are still focusing on commodity-oriented trade and have begun to pull back into a Russia-centric sphere."

Hungary still has a few awkward transitions left, but it has been fully integrated into the EU.