Chapter 2 Outline

Closing Case General Electric in Hungary

In the heady days of late 1989 when Communist regimes were disintegrating across Eastern Europe, the General Electric Company (GE) launched a major expansion in Hungary with the $150 million acquisition of a 51 percent interest in Tungsram. A manufacturer of lighting products, Tungsram was widely regarded as one of Hungary's industrial gems. GE was attracted to Tungsram by Hungary's low wage rates and by the possibility of using the company to export lighting products to Western Europe. Like many other Western companies, GE believed that Hungary's shift from a totalitarian Communist country with a state-owned and planned economic system to a politically democratic country with a largely free market economic system would create enormous long-run business opportunities.

At the time, many observers believed that General Electric would show other Western companies how to turn enterprises once run by Communist party hacks into capitalist money makers. GE promptly transferred some of its best management talent to Tungsram and waited for the miracle to happen. The miracle was slow in coming. As losses mounted, General Electric faced the reality of what happens when grand expectations collide with the grim realities of an embedded culture of waste, inefficiency, and indifference about customers and quality.

The American managers complained that the Hungarians were lackadaisical; the Hungarians thought the Americans pushy. The company's aggressive management system depended on communication between workers and managers; the old Communist system had forbidden this, and changing attitudes at Tungsram proved difficult. The Americans wanted strong sales and marketing functions that would pamper customers; used to life in a centrally planned economy, the Hungarians believed that these things took care of themselves. The Hungarians expected GE to deliver Western-style wages, but GE came to Hungary to take advantage of the country's low wage structure.

In retrospect, GE managers admit they underestimated how long it would take to turn Tungsram around-and how much it would cost. As Charles Pipper, Tungsram's American general manager, says, "Human engineering was much more difficult than product engineering." GE now believes it has turned the corner. However, getting to this point has meant laying off half of Tungsram's 20,000 employees, including two out of every three managers. It has also meant an additional $440 million investment in new plant and equipment and in retraining the employees and managers that remained. By 1997 the investment finally seemed to be paying off. Despite a 50 percent cut in the work force, production volume is now double the 1989 level. Although some large Eastern European customers are no longer on Tungsram's books, many of those were themselves poorly run state-owned enterprises.^*

J. Perlez, "GE Finds Tough Going in Hungary," New York Times, July 25, 1994, pp. C1, C3; C. R. Whitney, "East Europe's Hard Path to New Day," New York Times, September 30, 1994, pp. A1, A4; and T. Agassi, "Hungary for Capitalism," The Jerusalem Post, June 18, 1997, p. 8.

http://www.ge.com

Case Discussion Questions

1. What does GE's experience in Hungary tell you about the relationship among economic systems, political systems, and national culture?

2. Given the problems GE experienced with Tungsram, in retrospect might it have chosen a better strategy to attack the Western European lighting products market?

3. How important to the economic development of Hungary are investments such as GE's?
   What are the benefits that GE brings to Hungary?

4. If Tungsram had continued under local ownership, what do you think would have been its fate?