As the 'boundaryless' General Electric pushes for domination of the global lighting business, its purchase of the Eastern-European manufacturer Tungsram has created economic and cultural complexities.
Jack Welch's turnround of General Electric in the 1980s was one of the decade's great management case studies. The techniques he used, developed within a year of his appointment as chairman in 1981, are now business-school gospel. If a business is not first or second in its market, close it, sell it or fix it. Emphasise ownership, teamwork and enterprise in everything you do. Draw and share good practice wherever you find it. Break down all internal barriers to action and communication. Become a 'boundaryless' organisation, shifting resources and expertise to wherever they are most needed.
On the back of this philosophy Welch transformed a company with a declining market share in every sector in which it competed into a $60 billion operation which, by 1991, ranked number one in the Forbes 500. Today, GE is one of the few truly global corporations, with a significant presence in 65 countries, including many in the former Eastern bloc. In establishing a hold in these markets, Welch has applied the same methods as those used on the parent - regardless of local difficulties. 'Change has no constituency,' he declared. On current evidence he seems to mean it.
Such a philosophy has profound implications for the countries in which GE operates, particularly those still coming to terms with the workings of capitalism. Of these, there are few better examples than the operations of GE Lighting in Hungary - at its simplest, the story of the takeover and turnround of an ailing, state-owned company in a former command economy.
In 1989 GE acquired a half share of Tungsram, the Hungarian light-bulb manufacturer, at that time the fifth-largest in Europe. It marked the first stage in what has become a worldwide push by GE to build a base in lighting outside of the US. Hungary, aided by an easy-going government, low wages and a stable economy, appeared the ideal location for investment - and Tungsram, a sound though run-down company, the ideal business on which to centre a European lighting operation. From this initial stake, GE went on to acquire the UK lamp-making operations of Thorn in 1991 and those of Sweden's Lumalampan in 1993.
After two years of heavy losses in 1991 and 1992, GE Lighting Europe made a small profit in 1993, doubling its net sales in less than five years. Last year, after a 6% increase in sales, it more than doubled net income, enabling the company to acquire Lindner Licht, a German lamp maker, and buy the remaining 49% of Sivi, its Italian subsidiary.
The turnround followed a by-now familiar GE formula: divestment, integration, cost-cutting and large-scale investment in infrastructure, training and research. Its architect, Charles Pieper, was appointed chief executive in 1991 with the express purpose of moulding GE Lighting's European acquisitions into an integrated operation.
As part of the process two of Thorn's factories were closed and Tungsram's interests in products other than lighting divested. At the same time GE invested nearly $600 million in the remaining Tungsram businesses. Some of it has gone on the basics. When GE took over, for example, roofs leaked and much of the equipment failed to meet environmental standards. Simple things like telephone lines and fax lines did not work - in 1990, for example, there were only two lines serving 1,730 extensions.
The bulk of the money has gone on new products - in particular, on developing a range of compact fluorescent lamps. A site for a dedicated plant was found at Nagykanizsa, close to the former Yugoslav border, where a vast manufacturing operation was built. At a cost of $300 million it is GE's largest single investment in the world.
Under the supervision of production director Don McKenna, time between order and delivery at Tungsram has been slashed - from 90 days in 1990 to 32 days in 1994. In the past calendar year alone manufacturing cycle time has been reduced by over 50%. And breakages on the production lines have been cut from a staggering one in two lamps in pre-GE days to its current level of near-world standards. The true acid test, however, has come in GE's ability to promote teamwork and Western-style project management in a culture previously reliant on rigid demarcation. 'People seem compelled to build walls between themselves and others,' Welch wrote in last year's annual report. 'These walls cramp people, inhibit creativity, restrict vision, smother dreams and, above all, slow things down. We must break them down if we want to release the flood of ideas that are so important to the future.'
'Our world has totally changed,' says project manager Tibor Fricsan, who has seen Tunsgram's layers of management cut from 11 to the current three. Tamas Palopia, senior leadership technology director, agrees: 'People who are used to a hierarchical structure where the boss gave the orders have had to adjust in a very short time to the idea that decisions are taken by teams and not individuals.'
The situation has not been helped by a deteriorating relationship with on-site unions. For much of the critical period when Pieper was merging GE's European subsidiaries, Tungsram faced a financial crisis partly caused by the collapse of its Eastern European markets. 'Around 30% of Tungsram's sales then came from Comecon countries,' says Pieper. 'Almost overnight they fell to near zero. At the same time, inflation in Hungary shot up to over 30%. With the sand shifting under out feet, we had to restructure quicker than we originally intended.'
As a result, the company lost a record $105 million in 1992 - 'the biggest blot of red ink in the history of Hungary,' according to Laszlo Mohr, the former deputy general manager at the Hungarian Credit Bank (then Tungsram's largest minority shareholder). The combination of GE's planned job cuts and the losses prompted by the unforeseen economic crisis resulted in half of Tungsram's workforce, slightly less than 9,000 people, being laid off.
Pieper is adamant that, given GE's stated aim of investing only in market leaders, cuts of this size were inevitable - a position made clear to the unions at the time of acquisition. He also points out that the workforce was reduced primarily through job relocation, early retirement and a hiring freeze. Nevertheless, the cuts shocked the unions. 'When GE acquired a majority share of Tungsram four years ago it was hailed as a shining example of how capitalist prosperity could be brought to post-Communist central Europe', says Gyorgy Selmeczy, president of the Independent Tungsram Trade Union. 'But at the time GE assumed full ownership of the company in 1993, much of the deal's lustre had faded in the wake of the job cuts. Tungsram workers feel increasingly betrayed by American management.'
Underlying this tension in labour relations is a set of starkly contrasting values. Unions at Tungsram were used to annually negotiated wage increases across the board, largely based on job title and seniority. The current view, reflected by GE, is that companies should only reward measurable improvements in quality, teamwork and level of skill. Tungsram's unions also expected productivity deals to be negotiated year by year. Pieper's view is that increases in quality and productivity should be continuous and not linked to specific wage deals.
Other problems stem directly from the legacy of the Communist era. Under the socialists, exhortations to greater productivity and efficiency were seen as political slogans to be ignored and bypassed. The result is that, while GE executives regard phrases such as 'empowerment' and 'a culture of winning' as articles of faith, to workers on the factory floor they bear a confusing similarity to the slogans of the old order. They are also often seen as another way of increasing responsibilities without greater reward.
American managers acknowledge the problem. 'Such an approach to pay is relatively new over here,' says Bob Lubecky, who joined Tungsram in 1992 as director of technology from GE's halogen engineering business in the US. 'At the moment it's proving difficult to implement in this part of the world.' Pieper's frustration with this slowness to adjust is often tangible. 'If we had not introduced cuts when we did, nobody would be in work now,' he stresses. 'Changing the culture of a number of loss-making companies into one profit-making organisation in such a short space of time was bound to be difficult.' He might also point to the fact that Hungary has benefited from GE's European restructuring to the tune of 1,400 additional jobs in the past year. Many local union leaders focus on different issues - on what is often seen as GE's over-autocratic style of management. That, in turn, feeds into the larger issue of the methods of multinationals in Eastern Europe and GE's relationship with the Hungarian government.
Both of the administrations that GE has dealt with - Jozsef Antall's reformist coalition, which was zealous in its support of privatisation, and the more cautious former socialist government re-elected last May under Gyula Horn - have been keen to encourage Tungsram's transformation. Direct assistance has come in the form of relaxed labour laws and an initial five-year tax break. Fiscal and legal measures are echoed by declarations of support. 'I'm convinced that GE's strategy is a successful one and is making Tungsram competitive in the world market,' comments Laszlo Pal, the Hungarian industry and trade minister. 'It's inevitable that the introduction of more advanced technology and business methods would result in job losses, but I'm sure that the company will expand.'
Largely on the back of this goodwill, GE was last year able to negotiate an extension of its tax holiday in return for a pledge to invest $78 million over the next five years. The agendas of the two parties, however, remain poles apart. The Hungarian government desperately seeks to restore its credibility after the IMF turned down a proposed three-year financing programme last autumn in the face of a spiralling domestic budget deficit. It also labours under foreign debt of $28 billion - equal to 67% of GDP - and inflation of over 20%. Equally damaging is the squabble within the coalition over privatisation. Earlier this year, Laszlo Bekesi, the internationally respected finance minister, resigned in frustration at the slow pace of reform.
Horn, meanwhile, is between a rock and a hard place. If confidence in his government wanes he fears that Western investment will migrate to the more stable economies of Poland and the Czech Republic. He also faces criticism at home, particularly from the Association of International Corporations in Hungary (AICH), for introducing banking, labour and tax measures which favour foreign companies. Reflecting a seemingly growing sentiment, Janos Rundnay, AICH's chairman, recently expressed support for harsher taxation measures for investors who do not plough profits acquired in Hungary back into the economy.
Pieper's concerns are very different. GE is currently battling with its main competitors, Osram, owned by Siemens, and Philips, for control of the markets of central and Eastern Europe. Osram is currently seeking to set up a plant in the region, while Philips continues to build a strong presence in Poland.
In the light of this onslaught, GE is increasingly targeting the countries of the former Soviet Union. Sales in Russia more than doubled last year, largely driven by GE's role in infrastructural projects. Though the current instability in Russia has made many investors wary of venturing beyond the Visegrad border, Pieper remains sanguine. 'The figures on the CIS reflect a great deal of uncertainty,' he says. 'Beneath them, however, is a growing entrepreneurial behaviour - and it is this that we look for.' In line with Welch's philosophy of shifting resources wherever most needed, Pieper does not envisage running this division out of Hungary. Rather, he sees the newly trained Hungarian managers being used to convert local staff to a new way of thinking. 'The Hungarian team will support the Russian operation in the way our US and UK managers supported changes at Tungsram - by transferring know-how,' he says. 'Our focus is on growth in any direction.'
In a zero-sum game in a regional battle between multinational competitors it seems a sound strategy. Inevitably, however, it has little to do with the needs of the Hungarian government. The latter's experience of dealing with global companies like GE - which typically have the upper hand - has warned it off forms of joint ownership. 'Taken to the extreme, each side has the possibility of abusing the relationship and interdependence turns to resentment,' says Pieper. 'Trust is critical.'
Whether the tentative trust that exists between GE Lighting and Horn's government survives the savagery of both GE's regional marketplace and Hungary's precarious political and economic situation remains to be seen. In the absence of legislation forcing multinationals to reinvest profits and share the social costs of employment, its presence in Hungary provides the government with a useful model of successful foreign investment. For GE, Tungsram plays a key role in its push to dominate the global lighting business. How long it will continue to do so depends on its success in matching the presence of Philips and Osram. In this light, few doubt Welch's resolve - if GE Lighting isn't truly first or second in its business then its future must be bleak. For Tungsram's employees that is the greatest spur of all.