HUNGARY: Hungary's appetite for growth.

HUNGARY: Hungary's appetite for growth. - Reconstruction of the gateway to the East offers computer markets for the West.

by Jane Bird.
Last Updated: 31 Aug 2010

Reconstruction of the gateway to the East offers computer markets for the West.

In Budapest the phones frequently don't work. If you want to arrange a business meeting with someone you call in person, even if their office is on the other side of the city. "You might have to wait for an hour until they are free, but it is still quicker than trying to get through on the phone," says William Szentagotay, consultant for central Europe at Oracle, the US software house.

Such basic communications problems are a fact of life in Hungary. "You just get used to it. There are only 10 phones per 100 people here," Szentagotay says. Outdated banking services are another obstacle to smooth business operation. Two years ago one of Szentagotay's first customers came to buy a PC - with two sacks full of money and a bodyguard. But such conditions do not put him off. In fact, he regards this most liberalised country of eastern Europe as one of the world's more exciting markets.

He isn't the only one. Budapest's hotels are bursting with western businessmen and management consultants. They have come not to bathe in the restorative thermal springs, nor to take boat trips up the Danube, but because they see Hungary as the gateway to the uncharted terrain of the East. Last year, total computer sales for eastern Europe and the former USSR were $802.7 million, according to the market research consultancy IDC. Although not huge by western standards, sales to the East are forecast to grow faster than anywhere else in the developed world.

Hungary's liberalisation began in the mid-1980s, long before the Berlin Wall came down. It is now undergoing a large-scale reconstruction and privatisation programme, from government administration and financial services to telecoms and transport. Computers are essential for this to be successfully accomplished.

One of the earliest on the scene was DEC, the US computer giant, which arrived in the late '80s and now has seven offices in eastern Europe, 300 staff, and annual sales of $30 million. DEC had hoped that by being in the vanguard it would be able to scoop much of the market. But it wasn't that simple, recalls Yves Sarazin, DEC's director for central and eastern Europe. "It is a different world. The competition here is much more open because nobody has a strong installed base to take advantage of."

His comments are echoed by George Balatoni, DEC's sales and marketing manager for Hungary. "Our bosses thought that by coming here first and establishing customer loyalty, we could create a buying pattern similar to that in the West. In fact, the very openness of the market has changed the rules."

Eastern Europe is fraught with hazards for the western computer invaders. For Oracle, the great worry was software piracy. When planning its attack on the former USSR, Oracle discovered that there were probably 10,000 copies of its database management system in use, hardly any of which had been paid for. How could the company begin trying to sell its products?

Deborah Lloyd, the company's business development manager for central Europe, explains: "We were warned that if we sold one licence it would get copied once, copied again, and before you knew where you were you would have put yourself out of business. Software is an astronomical price to them so they have tended to treat it like a library book." Oracle decided to view the illicit copies as a business opportunity and take no punitive or retributive action. The software copyists did exactly what they had to do to survive, reckons Lloyd. "It would be of no advantage to us to push them out at this stage."

On the contrary, they had accumulated a great deal of expertise in Oracle software because they did not have access to manuals and often had to unravel programs to find out what they did and how they worked. With lots of applications running under the Oracle software, they had a vested interest in continuing to use it. In the Spring of last year, Oracle appointed Moscow-based LVS Systems as its distributor. "We found that customers want legitimate licences because their goal is to find western partners and if they have grey technology they won't be able to do this," says Lloyd. Moreover, by going legal, they could preserve their existing investment in applications. "And once they buy a licence, they are not nearly so inclined to share it with people down the street who have paid nothing," Lloyd says.

Lack of indigenous business skills is another problem. Centralisation and long-term planning are endemic in eastern Europe. "They are masters of the five-year-plan that led to nothing," Szentagotay says. "Our task is to explain that such plans are still needed, but with clearly defined goals - improving service or achieving business compatibility with the West." Western companies spend a lot of time teaching basics such as marketing, budgetary forecasting, target-setting and decision-making. There is also an enormous confidence-building task. "People have a real fear that Westerners are going to blow in, turn the country upside down, and blow out again," says Lloyd.

Earning hard currency is perhaps the biggest challenge in eastern Europe. Those in the know keep a close watch on the activities of international development agencies - many computer sales are funded by loans tied to specific projects. You need to scale down your expectations, says Sarazin. "Western companies tend to have an inflated idea of the market size based on population, but annual GNP per capita, at $5,000 to $7,000, is less than one third of its level in western Europe."

It is not a dustbin for old technology. "Eastern Europe cannot be approached as a jungle where western companies can sell their outmoded equipment," says Balatoni. "We still get calls from salesmen who say they have a stock of 200 10Mbyte disk drives and can we shift them?"

One of the big bonuses is access to a highly skilled, relatively low-cost workforce. Until recently, denied access to advanced western technology, Hungary has developed sophisticated software to make the most of what it had. It is the world's fifth largest exporter of software, and its programmers are proficient in many computer languages.

British companies keen to do business in the East can look forward to a warm welcome, says Julia Sipka, marketing and sales director at Budapest-based IQ Soft. "At present, Hungary's links tend to be with Germany and Austria, but those countries are not particularly innovative in IT, and we prefer to work with the UK and US." Hungarians are looking for loyalty. They fear that they will be used as a conduit to the East, and then by-passed when direct sales are established. Csaba Viosz, of the Hungarian Chamber of Commerce, says: "It is risky for our companies to be appointed as representatives for overseas partners because if the local company is successful it will either be bought up or the foreign partner will launch a direct competitor. The problem is that Hungarian companies haven't the money to invest in expansion."

Hungary wants the West to invest in R and D, too. This, it hopes, will help reverse the brain drain - more than 10,000 of its software specialists currently live abroad. "They will stay away because the living standards overseas are much better and they can work at the forefront of technology," Viosz says. Business conditions are improving. Customers can now use bank drafts or electronic funds transfer to pay for their computers. But the country is in a state of flux. There are 70,000 companies, compared with 4,000 five years ago. Inflation is running at 23% and expected to be around 16% next year. "Hungary is trying to be the best in class in central Europe, and in lots of ways is achieving this. Yet this year's deficit will be more than twice IMF forecasts," says Sarazin. For the moment, however, western companies are undeterred. Beset by troubles at home, their sights are set on the East.

For reprints of this article, contact Anne Oakley (071) 413 4336.

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