GE IN HUNGARY: LET THERE BE LIGHT General Electric is bringing plenty of capitalist enlightenment to its new acquisition in Budapest, where ''profit'' is not so much a bad word as an unknown one.
By Shawn Tully REPORTER ASSOCIATE Mark D. Fefer

(FORTUNE Magazine) – AT A turn-of-the-century light bulb factory near Budapest, a team of executives from General Electric is tackling one of the landmark management experiments of the 1990s -- turning a sluggish state-owned factory into a profit-making capitalist enterprise. As GE is learning -- and hundreds of companies scouting Eastern Europe will find out -- installing Western management methods is about as easy as teaching a World Cup soccer team to play baseball. Even the most basic business terms are mysterious. Soon after taking over Tungsram's information systems department in May, GE's David Gadra, 42, lectured his staff on the importance of keeping close track of inventory and receivables in order to measure their effect on profits. ''What means profit?'' asked one of his Hungarian engineers. No sooner had Gadra explained than he found himself back at the blackboard scribbling out graphs and flow charts to answer the next question: ''Why profit?'' In addition to patience, managing in Eastern Europe requires mastery of a . business equation unknown in Cleveland or Frankfurt. At Tungsram, labor accounts for one-quarter of the cost of making a light bulb, compared with one-half in the U.S. Raw materials make up most of the rest. As a result, the managers GE sent to Hungary have had to depart radically from the GE religion: achieving maximum production with the fewest possible workers. Instead of focusing on the work force, GE's managers in Hungary are trying to cut costs in other ways, including reducing the amount of materials needed. But GE's $150 million controlling stake in Tungsram is more than a management experiment. It is the latest phase of the company's European strategy. Up to a few years ago, Europe was a weak point for GE. In just three years of buying companies and forging alliances, Chairman Jack Welch has established a strong European base for half a dozen GE businesses, from medical systems to mobile phones. GE's presence was particularly dim in lighting. The world's second-largest producer (behind Philips), with 1989 sales of $2.3 billion, GE was just sixth in Europe, with 3% of the market for light bulbs. Says GE veteran William Woodburn, Tungsram's managing director in charge of Western Europe: ''We had a fortress U.S. mentality.'' Then came a highly successful raid on the fortress by Philips, which captured a substantial share of the U.S. market. GE is now fighting back by storming Europe. AT FIRST the grand strategy got nowhere. GE considered a joint venture with Siemens's lighting subsidiary Osram and British electronics producer Thorn EMI, but the negotiations bogged down because the potential partners didn't want to give Welch more than a minority share in any joint company. Nor did GE want to go it alone. Building its own plants would have cost at least $300 million, not to mention several precious years. A more promising opportunity cropped up in the meantime. Even before the Eastern bloc's sudden swerve toward capitalism last year, Tungsram had begun looking for Western help. The enterprise was in desperate need of investment capital, new technology, and management expertise. At first Welch was reluctant to invest in a Communist country, fearing everything from economic collapse to government meddling in management. But he also saw some advantages. A robust exporter, Tungsram got 70% of its $300 million in revenues from the West, chiefly Europe. Thus it offered a tempting mix of Western European market share and Eastern European wages. Any dealmaker hopes for a little luck during negotiations; Welch got a revolution. Hungary's Communist government, which was facing an election it ultimately lost to a coalition, offered concessions to GE -- including freedom to choose investments, repatriate profits, and lay off workers. The opening of the Berlin wall last November spurred GE to clinch the deal. To get a quick grip on Tungsram, GE replaced half the top managers with U.S. executives. And to cushion the culture shock for the natives, the company chose as chief executive Hungarian-born George Varga, 54. A college student at the time of the 1956 uprising, he fled to the U.S., becoming an All-American soccer player at Western Maryland College. He once scored 11 goals in a game. Varga has spent 28 years with GE, most recently in the Netherlands as head of a branch of its European plastics business. VARGA surrounded himself with seasoned executives, deliberately passing up the kind of aggressive young managers who have given GE a reputation for cockiness and arrogance. His managers average 18 years' service. Manufacturing chief Kevin Gallimore, 58, an affable, silver-haired 6-footer with a viselike handshake, has been sprucing up GE lighting plants for 33 years. Says Varga: ''We didn't want the young tigers. We need people with the sensitivity to perform a cultural marriage. We have the ideal team to sell our ideas to the Hungarians.'' Most of those ideas aim at a single goal -- profit. After absorbing GE's European lighting business, Tungsram should have 10% of the European market, with anticipated 1990 sales of $370 million. Varga wants to raise that share modestly to 11% or 12% in the next several years. This year Tungsram will earn only a few million dollars. For Varga, that's cause for optimism: ''I don't see how we can miss. We haven't even started tapping the huge potential for cutting costs.'' He thinks earnings can reach more than $30 million, or 7% of sales, by 1995. That margin would be extremely high for the industry. Product development is crucial. Tungsram derives more than 50% of sales from the classic tungsten filament light bulb. The company began mass-producing such bulbs in 1906. Though chronically starved for capital, Tungsram spent most of what it did have on the best Western European equipment. As a result, Tungsram's incandescent bulbs are high quality. They are also cheap. Trouble is, incandescent bulbs are the slow-growth, low-margin end of the lighting business. They are rapidly losing ground to a whole family of costlier, high-tech, energy-efficient products: compact fluorescent bulbs for homes and offices, high-pressure sodium lamps used in street lighting, and miniature spotlights that lend sparkle to shop windows displaying jewelry or antiques. Though Tungsram makes these new kinds of lights, production is small. With the government pocketing most of Tungsram's profits, there was barely enough money for the incandescent business. Says Varga: ''They were battling the giants without the means to match their competitors' new products.'' That weakness has been particularly glaring because Europe is the fastest-growing market for these sophisticated lighting products. To make Tungsram a strong competitor in all of the major high-tech, high-margin products, GE plans to invest at least $15 million a year, three times Tungsram's yearly investment in the 1980s. TUNGSRAM is an amazingly labor-intensive operation. At the time of the acquisition it had 18,000 workers. That's about how many GE has in the rest of its lighting division, which has sales seven times bigger. A melange of featherbedding, antediluvian office equipment, and nightmarish rules keeps the bureaucracy lumbering along. Clerks with pencils enter billing and inventory information into giant ledgers. In the West the solution would be huge layoffs. But the Hungarians' deep fear of joblessness prompts GE to take a more modest approach. Some of the laborious procedures can't be helped -- at least for now. Since checking accounts barely exist in Hungary, a staff of 150 is needed to stuff 17,000 pay envelopes with cash every month. In both plants and offices, wages are so low that it often doesn't make sense to replace workers with machines. On average, Tungsram pays workers $3,000 a year, compared with more than $30,000 for its competitors in the U.S. and Western Europe. Even so, Tungsram is judiciously cutting. It plans to save $10 million a year by the end of 1991 by gradually reducing the work force. This year 2,000 workers are expected to depart through attrition and early retirement. To help lower costs without cutting people, production boss Gallimore is bringing in more than 30 GE manufacturing experts from the U.S. Each will spend about two months this year at one or more of Tungsram's seven plants working on one of 82 cost-paring projects. Most involve fine-tuning. One production line, for example, turns out three million outdoor spotlights a year for yards and driveways. But the line also manages to break another half a million or so, causing a large loss in glass, tungsten wire, and other raw materials. The floor is covered with glass shards, and tall trash cans overflow with discarded bulbs. To solve the problem, Gallimore is summoning a production engineer from a GE plant in Cleveland who in the 1970s ran the same machine Tungsram is using now. Gallimore thinks by reducing breakage and breakdowns, he can save $500,000 a year. GE is also buying new machinery. Tungsram does a thriving business in automobile headlights, one of its few high-tech successes. But it is struggling to meet the ever-tighter quality standards imposed by automakers. GE will spend up to $10 million on a computerized line that should expand the company's share of the original equipment market. Tungsram is tightening its management of inventories and receivables. In the past it didn't consolidate results of its 17 foreign sales companies with those of the parent. That resulted in management practices that look outrageous to Western eyes. Since the parent could book a profit every time it transferred goods abroad, it kept sending out large quantities of products that the sales companies didn't need right away -- or couldn't sell at all. The incentive to keep shipping was strong: Tungsram executives received bonuses of up to 200% of their pay based on the parent company's revenues. Says David Harrison, the chief financial officer: ''The company was run like a production-and-employment machine.'' ONCE GE ELIMINATED unsalable inventories and uncollectable accounts, more than two-thirds of Tungsram's official earnings of $20 million disappeared. GE got a rude shock when it checked warehouses in France and Germany and discovered $3 million of six-watt car headlights, which haven't been used since the 1970s. No one is more thrilled with life on GE's new frontier than George Varga. ''Sometimes I'm amazed,'' he says. ''I left here as a kid. Now I'm whisked around town by a chauffeur and call the ministers by their first names. This isn't a job, it's a crusade.'' One person who remains unimpressed is Varga's 73-year-old mother, who still lives in the modest Budapest apartment building where Varga was born. When he goes there for dinner, Mama warns him that he is naive, that he'll never be able to change the system. But for the man who left his homeland dodging bullets, serving as ambassador for the new order is the ultimate accolade.