NOVEMBER/DECEMBER 1987 - VOLUME 8 - NUMBERS 11 & 12

Interview with Henry Sweat

Multinational Monitor What were Honeywell's objectives in setting up the joint venture? Henry Sweatt: We wanted access to the Yugoslav market, and that was what our partners were offering. For Honeywell, it would have been much cheaper to manufacture the computers in the United States and export them to Yugoslavia. If you take the total amount of labor that goes into it, plus the total amount of parts and materials, economically it is not as efficient as if it were made all in the United States and sold in Yugoslavia. We wanted market access and we wanted profit. Production is for the domestic market primarily, but there are some 50 or so countries listed in the agreement that the joint venture has a right to export to, including other East European countries, Asia and Africa. Monitor: In the long run was it more profitable for Honeywell to set up a venture in Yugoslavia? Sweatt: Sure, we not only sold just the components of the computers that are manufactured there, we also sold the rest of our line in Yugoslavia under a preferred position. Monitor: Aside from the government threat to shut off imports of your product, what did your company consider in deciding to form a joint venture? Sweatt: Basically we sat down and tried to evaluate if there was enough business in Yugoslavia so that the joint venture could break even. We did that by looking at our past sales records and talking to the government about the total use of computers in Yugoslavia. Our agent was very knowledgeable about what companies in Yugoslavia had computers. The government in Yugoslavia is all-pervasive. By talking with the government, we knew the total use of computers. We had entre into the army and into the police force, which were already customers of ours, and they told us what their future plans were. We were trying to decide if it was economically feasible to set up this joint venture, from the market access standpoint. When we had established that, we had our cue to go ahead. Monitor:Were there any problems with export controls on technology and equipment used in the venture? Sweatt: Yugoslavia is in the same country group as France. Still, for the size of computers that we were selling, we had to get individual export licenses, but we didn't have a great deal of problems with that. Export controls are a trade barrier and from a purely trading standpoint, I don't like trade barriers. On the other hand, I understand export controls. I am also a citizen, and I have a kid who is army bait. I am not anxious for a war. We had tremendous help from the U.S. embassy. At that time Larry Eagleburger was the U.S. ambassador and he was the first ambassador really interested in helping American commerce. The embassy support to us was really critical. They got entre for us to talk with a lot of officials that we probably wouldn't have been able to talk to ourselves. They lobbied for us with the government to expedite the approval of the agreement. They went far beyond what is required. Monitor: How do you rank Yugoslavia's motives or objectives for establishing the joint venture? Sweatt: I think, number one they wanted the technology. Second would probably be import substitution. Number three, from their point of view, they have always wanted to export. But they haven't really wanted to export themselves, they wanted us to buy back the product and call that an export. When you say export, you really have to define what you mean by export. As far as going out and pounding the bricks or hustling to sell their products, they are really not terribly into marketing. They're interested in making a deal for somebody to take it off their hands. When I looked at their cost of setting up a joint venture, that is, the resource allocation of the Yugoslav economy to do this, it did not make any economic sense whatsoever for them to do this. They wanted the prestige of building a Western, world class computer so that they could show their neighbors and their trading partners that advanced technology was available in Yugoslavia. They wanted to be able to take the Chinese, and the Africans, and the other Eastern Europeans on factory tours to show that they were manufacturing state-of-theart stuff. Monitor: ByYugoslav law, decisions are made "from the bottom up," but in practice often this is not the case. What was the case in the Honeywell joint venture? Sweatt: Well, supposedly the worker's council elects management. You have to realize that management is in there with the approval of the Party. For instance, the head of the Electronska Industrija now is also vice president of Serbia and a ranking member of the Communist Party. When he says, "I think it would be a good idea for you guys to vote for Bobby to be general manager," they all get the message. The worker's council does have power in that they decide on salaries, they have to approve the operating plan for the next year and if management wants to travel they have to vote them the hard currency to travel. When they get upset, they drag their feet on the things that they have to give approval for. They may not say no, but they don't say yes. If you have to have a positive yes before you can do something, that is a very effective way of bringing someone around to see their point of view. It is not as much authority, per se, as it is political. This was a group that wasn't going to win any election, but could keep you from winning one. Monitor: Did the enterprise have problems with low labor productivity? Sweatt: The Yugoslav labor is simply not as productive as the U.S. or the Italian labor. It's basically the problem of a communist regime. A guy who does an exceptional job and a guy who does an average job get paid the same. There is no way to really recognize merit, and so everybody does what is necessary with certain individuals doing a little bit more than what is necessary. That's a fact of life. We tried using an incentive system [offering bonuses for high productivity], but such a system is just not terribly acceptable in that social climate. Monitor: How do wages in the joint venture enterprise compare to domestic enterprises? Sweatt: We do pay on the average higher salaries than the rest of the Electronska Industrija. Plus our organization is profitable, so the perks and the vacation benefits are better, and it is the preferred place to work. That is because we are successful. When the joint venture became successful, then salaries were raised. Monitor: How are Westerners working for the joint venture compensated? Sweatt: We couldn't have gotten any Westerner to work at the joint venture in Yugoslavia without keeping them on our payroll on the outside. They were paid $700 a month by the joint venture. This is a guy who makes $40,000 a year, and so we picked up the rest of it on the outside. Usually they are paid in Yugoslav dinars and that covered his living expenses. The outside payments were made in dollars. Monitor: Does the system of worker self-management in Yugoslavia lead to greater likelihood of labor unrest there? Sweatt: If you are going to compare it with Taiwan or Hong Kong and ask if Hong Kong is a better labor client than Yugoslavia, that might have some validity, but if you compare labor unrest in Yugoslavia to France, Germany, the U.K. or the U.S., then there's really not any validity to the question. You have labor rights in all of those countries and labor exercises them. I would say that in Yugoslavia labor does not exercise the same militancy that you would see in the Teamsters, teachers or the UAW. Monitor: Hasn't there been some labor unrest recently in Yugoslavia? Sweatt: Yes, the strikes and work stoppages over the past year have come from the Yugoslav government's effort to control inflation and to pay off their foreign debt. With inflation running at 120 percent a year, they froze wages. It doesn't take very long for families to get pretty damn upset about that. You call that labor unrest, yes, sure, it is labor unrest. It is probably reasonable labor unrest, but it would be nothing that we would want to take a position on. Monitor: Do Yugoslav enterprises maximize income per worker by keeping the workforce small? Sweatt: Just the exact opposite. The drive is always for more employees. Employment is important, because your political base comes from how many people you employ. That has probably been the major contention between the two managements. It is very hard to fire somebody in Yugoslavia. You hire somebody and you are really stuck with them for life. They have been much more interested in expanding the labor force than in expanding revenue. We keep saying you have got to keep these two things in lock step. You have to increase revenue by 20 percent to hire 10 percent more labor, but they have never seen it this way. If business is going down they say we need more people. If business is going up they say we need more people. There the prestige of the company is the number of people they employ. If you ask an American businessman about his company, he will say, " we have got $500 million dollars in revenue and 8 percent of the furniture market." If you ask a Yugoslav about his company, the number one thing that he will say is, "We employ 20,000 people," or "we employ 5,000 people." That is the first thing that comes to his mind, because that is his political base. That is how you pass out political favors, that is how you get people indebted to you. From the lowest supervisor to the highest manager, there is this constant unstoppable drive to hire people. Monitor: Is it true that joint ventures tend to be capital intensive and therefore do not contribute a great deal to the employment situation? Sweatt: We employ 500 people. For what we produce that is a lot. It would depend on the joint venture. Sears doesn't have a joint venture, but they very easily could have one. A tremendous amount of Sears & Roebuck furniture is built in Yugoslavia, and that is very labor intensive. The maintenance of computers is labor intensive, but to manufacture them isn't. Sales, maintenance and systems analysis are all quite labor intensive. We have many more employees per dollar in revenue in Yugoslavia than anywhere else in the world. Monitor: What percentage of the product's components is imported? Sweatt:In the very beginning it was 99 percent imported, but I think now it is probably down to 60 or 70 percent. The metal frames and cabinetry are made in Yugoslavia. Some cabling. Now there are some components that are available in the Yugoslav market. But they still don't have a large microelectronic infrastructure. They're now making multilayered boards on which Western-made chips can be mounted. We used to supply the boards also, but now the boards themselves come from Yugoslavia. Monitor: Did the government generate much public revenue in the form of taxes on the joint venture? Sweatt: We pay a lot of taxes. There are taxes every time you turn around. The import duties are horrendous; they are 40 percent. Not only that, one of the problems we had was that some of our shipments were short. There was some fun and games going on in our own shipping department that caused it. They would clear a box of 100 memories through customs and get it back to the factory and open it up and there would be 15 missing. Under our agreement with the Yugoslavs we would replace those memories free of charge, but the venture still had to pay duty on those 15 pieces of memory. So for 100 pieces of memory, they paid duties on 115 at 40 percent, which is really horrendous. That part of it was really tough. Monitor: How much did Honeywell invest? Was there outside support? Sweatt: We invested $2 million and we received zero support from anybody. The investment was made with cash, capital equipment, computer parts, training and management. When we set up the capital of the company, 30 percent from Honeywell and 70 percent from the Yugoslavs, cash was the rounding thing, if you were off half a million dollars in your investment. In other words, if the capital equipment cost less than what you thought it was going to, then cash was used to make up the difference. Monitor: Are the Soviets moving toward a joint venture policy comparable to the Yugoslavs? Sweatt: The Soviets already have moved that way. That's what "glasnost" and the January Plenum speech by Gorbachev was all about. There is tremendous joint venture activity in the Soviet Union at this time, and I think they did look at the Yugoslav model. They also looked at the Bulgarian model and they looked at the Chinese model. The Soviets said, "What is going on here, why have they been able to increase their industrialization, modernization and standard of living so much more than we have?" Those socialistic examples of improvement have really been, in my mind, the major spur to Gorbachev to try to do something. Monitor:Was your joint venture profitable? Sweatt: From the first quarter it was profitable, and it has been profitable ever since. I don't think I need to say how profitable, but it was a much better return than we have on most of our businesses, including here in the U.S. Monitor: What are the prospects for joint ventures in Yugoslavia? Sweatt: Yugoslavia is a country of 22 million people. It is a good market. It is not as large a market as Los Angeles, but if one wants to participate in the Yugoslav market, a joint venture is a very good way to do that. In other words, you have to go in and become a citizen-player in that economy. What the future of joint ventures is depends on the future of Yugoslavia. If the Yugoslavian economy does better than it has in the past, then you are going to find more joint ventures there. Monitor: Honeywell has had a successful joint venture experience in Yugoslavia and elsewhere in Eastern Europe. What are the most important ingredients of success? Sweatt: Well, the most important thing in making any of these joint ventures work is the quality of the partner and the quality of the relationship that you establish. You can't look at it by asking, "Is this investment good?" It takes people to make the thing work, and probably any of them can be successful if management puts in the right people and gives it the right commitment. If it goes sour, they probably made a "people" mistake and not an investment mistake. East-West Technology Transfer Licenses for Technology Sold to US Companiesby East Bloc Countries Technology Buyer Seller Air column separator Air Products and Chemicals USSR Electromagnetic casting (alluminum) ALCOA USSR Psychotropic drugs American Home Products USSR Heller-Forgo dry cooling process Babcock & Wilcox Hungary Hydrocyclone "Triclean" Bird Manufacturing Czech Anti-cancer drugs Bristol-Myers USSR Chemical curing of polyester Dow Chemical GDR Cardiovascular drugs Dupont GDR Roller dies Harrisburg Steel Hungary Flash butt welding J.R. McDermott USSR Rock hammer Joy Manufacturing USSR Magnetic impact bonding Maxwell Laboratories USSR Titanium nitriding of steel tools Multiarc Vacuum Systems USSR Soft contact lens National Patent Development Czech De-watering screen for coal National Standard Poland Electromagnetic casting (Copper) Olin USSR Cardiovascular drug Squibb GDR In situ coal glassification Texas Utilities Servics USSR SOURCE: Kiser Research, Inc.