Navigating Historical Opportunities In Eastern Europe

August 6, 2000
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Since the political and economic makeover in the countries referred to as "The Satellites" of the Soviet Union, Eastern European countries have embraced the changes with differing degrees of enthusiasm and success.



Sanitaryware casting in Romania using the modern Britech capillary system. Photo courtesy of Britech Industries Ltd., Stoke on Trent, U.K.
Believe it or not, 10 years have passed since the political and economic makeover in the countries referred to as "The Satellites" of the Soviet Union. And how have they managed? Bulgaria, Romania, Hungary, Poland, the German Democratic Republic and Czechoslovakia have embraced the changes with differing degrees of enthusiasm and success.

Czechoslovakia-with its "velvet revolution"-evolved into the Czech Republic and the Slovak Republic. Of the entire group, the Czech Republic had the most successful transition from state to market economy. Of course the German Democratic Republic merged with West Germany, creating an instant westernized market. The remaining countries-Hungary, Poland, Slovakia, Romania and Bulgaria-require closer looks.

Drawing the Iron Curtain

Following the Second World War, the Communist system forbade open private enterprise. With regard to the light industry sector and the ceramic industry in particular, state factories were encouraged to produce mainly for export, creating much-needed hard currency for their governments. Tableware in particular was exported in large quantities, mainly to the West European markets. The quality of the product-at least up until the mid-'90s-was geared to the lower end of the marketplace. The factories were huge and complex, and their goal was to create large throughputs with thousands of workers. Salaries were low, but so was the general cost of living. Factories were grossly overstaffed, and the philosophy of "You pretend to pay us, we pretend to work" was rife among the manufacturing industries.

The commercial association of all the communist bloc countries was known as Comecon. The organization's aim was to integrate the development of the countries and standardize production. The Soviet Union was responsible for supplying much of the energy required and, in return, took a percentage of The Satellites' output-ranging from agricultural produce to heavy machine tools and metals. In theory, the principle operated successfully through the '50s, '60s and '70s. However, the capitalist system of the West was very enticing. As the Western economies grew richer, the newly introduced satellite television beamed in images of how "the other half" lived, fueling the appeal.

After the Walls Tumbled

The momentous episodes in 1989 and 1990 brought irreversible changes to the Soviet Union and its European allies. Every aspect of life-particularly the commercial and economic facets-was changed forever.

Democracy and freedom would mean different things to different people. Some would benefit; others would lose tremendously.

The ceramic industry was fortunate. Its history of exports through the State Foreign Trade Enterprises had created close relationships with Western buyers. Those relationships served the industry well, even post-Communism. However, each factory was no longer supported by the state and instead became responsible for its own profits and losses. Some factories-the jewels in the crown of each country-were quite well off. These facilities had good production specialists and attracted Western investors, or companies interested in availing themselves of cheap, reasonable-quality products.

The immediate goal of all producers was to modify their firing processes. No longer was cheap gas available from the Soviet Union, and the old kilns were very inefficient. (Although they did have one advantage: They acted as space heaters for nearby workers!)

An expenditure of between $1-2 million per factory on new equipment made tremendous changes to ceramic production. By comparison, a similar investment in the glass sector or metallurgy sector would have yielded much lower results. Ceramic factories, therefore, modernized sufficiently to meet the quality requirements of Western buyers-and did so with a limited budget.

Supplier credit was available from West European kiln builders and a spectacular number of shuttle and tunnel kilns were put into service during the mid '90s. Without a doubt, this was the most significant step in the development of the East and Central European ceramic industry post-communism.

A Decade Later

So how have the ceramic factories fared over the 10-year period since 1990? The tableware industry has been infused with new techniques and processes, which, together with the modern ware design and colors, now produce products that meet the needs of the Western buyers. Sanitaryware and tile have also had good export potential, while the local construction initiatives have provided a market place for the lower-quality goods to be sold for soft currency.

Tableware

Some of the East and Central European producers had developed a strong reputation for manufacturing distinct, high-demand products-for example, Herendi Porcelain in Hungary and Meissen in the German Democratic Republic. The larger state-owned companies saw this and realized they needed to modernize in order to produce a more saleable/exportable product. Once they had completed the firing upgrades, their next priorities were to 1) create new body recipes incorporating superior imported raw materials, and 2) improve decoration and finishing.

Because of the German influence on tableware production, the major output is hard (continental) porcelain, while Poland has a production of a soft porcelain called porcelit. Factories producing earthenware and stoneware are common in the region, but Romania is the only producer of classic bone china.

After 1990, the number of small private producers mushroomed. In some instances these producers remained small, employing mainly family members, while in other cases companies developed their production to employ up to 200 workers. For example, in the town of Alba Iulia, the site of the largest Romanian tableware plant, approximately 60 small private producers manufacture mainly souvenirs and figurines for the West European and home markets. Some of the larger plants specialize in coffee sets, pizza plates and similar products.

For the larger ex-state factories, the introduction of isostatic pressing in the '90s aided the quest to produce quality flatware. The ceramic body used in the presses was either produced locally or imported from European producers of prepared bodies.

In the early '90s it was the State Property Fund's goal to find buyers for the factories, and ownership interest came from every type of entity. Managers and employees who had previously worked for the state bought shares in the factories where they worked. Companies that were previously state-owned acquired neighboring factories. Many Western companies-particularly those requiring large quantities of simple, non-expensive articles-had their ware produced in these plants, taking advantage of low overheads and a relatively hassle-free production unit.

The exported output from these factories can be found today throughout the Westernized world and as far afield as the U.S., Canada, Japan and Australia.

Sanitaryware and Tiles

Unlike the tableware industry, the sanitaryware and tile industry had a big helping hand from the state. The private housing development program in East and Central Europe after 1990 required large quantities of building materials, including bricks, sanitaryware, ceramic tiles and roofing tiles. Most of the East and Central Europe sanitaryware manufacturers also produce floor and wall tiles in the same factory complex.

Besides having a healthy local market, sanitaryware manufacturers were also presented with opportunities to export. Like the tableware manufacturers, they focused on quality improvements by upgrading raw materials and equipment. Although this added to the cost of the finished item, higher quality and fewer production losses were achieved, resulting in a very competitively priced finished article.

Of course the Western sanitaryware manufacturers were not absent throughout these developments. In the early and mid-'90s, major Western producers began investing in these and other plants. American Standard (Ideal Standard), Roca, Sanitec, Laufen, and Villeroy and Boch all purchased existing plants or built on greenfield sites in one or more of the countries in the region. The companies brought marketing expertise to Eastern Europe and insisted on importing high quality ball clays and kaolins to attain the best results.

In some instances, Western venture capitalists purchased sanitaryware/tile plants, modernized the production, lowered staffing levels and turned the plant into a successful unit before selling it at a handsome profit.

The influence was contagious. All sanitaryware/tile plants, with or without the involvement of Western partners, modified their production by replacing or adding to the traditional bench casting methods with pressure, capillary (spaghetti) or beam casting technology. As in the case of tableware, the firing and drying equipment was upgraded to accommodate larger throughputs. Mostly Italian technology was used to increase the range and output of wall and floor tiles.

Today, while the volume demands of domestic markets are high, most local producers still manage to export at least 50% of their production. The quality of both the sanitaryware and tiles nowadays is vastly superior to that produced prior to 1990, without much change in the labor overheads. However, to this day the remaining state and worker-owned East and Central European factories remain overstaffed with workers who earn low wages. For example, a Romanian ceramic factory worker will average a gross salary of approximately US$100 per month.

The Future

Although many legacy-pitfalls exist from doing business in the old-communist bloc countries, the opportunity for further development and investment in both tableware and sanitaryware/tile plants remains. Much of the capacity is still untapped, and labor costs are projected to remain relatively low for many years. Investment in the local telecommunication and transportation infrastructures continues to make it physically easier for companies to take advantage of the opportunities. And as the countries move toward convergence with the European Community, an operating base in the region will become even more attractive for Western manufacturers-an unthinkable concept just a decade ago.

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