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Ten commandments for investing in the Eastern Bloc.

In November 1989, businessman Ronald S. Lauder met with a group of investors to form what became the Central European Development Corporation (CEDC). "We realized over and over again that Eastern investment is a five- to 10-year investment, and not a gold rush,' the outspoken businessman asserts. Lauder's previous ties to Central Europe include the ambassadorship to Austria during the Reaga administration. Meanwhile, Estee Lauder, the family business, has been introducing Budapest women to the art of Western cosmetics.

The following, based on Lauder's business experiences in Hungary, are his |Ten Commandments' for doing business in the Eastern Bloc:

1. Thou shalt not believe any numbers except tose of Western auditors. THey've never had to do a real balance sheet. If there was a shortfall at the end of the year, they just made it appear as an export to the Soviet Union.

2. Thou shalt suffer the problems of overstaffing, for they are the children of communism. We looked at one small company that had 2,000 workers. It should have had 200. But you can't expect to fire 1,800 people. Some suggestions: We make a purchase conditional on fewer employees. Or we require a plan for doubling capacity to keep the workers productive.

3. Thou shalt seeketh and findeth no trained personnel. One solution is to look for Hungarians from the "Class of |56" who fled the Soviet invasion, have been trained in the West, and now are eager to return to Hungary. The problem is that these people tend to be making more money than the combined staff of the enterprise.

4. Thou shalt seek out usury and bank debt. Bank debt doesn't appear on the books. You really have to pull it out.

5. Thou shalt inherit the machines and systems of our forefathers. Most of the machines belong in museums. The West prohibited technology transfer for 40 years, and what got through the blockade usually ended up in the Soviet Union.

6. Thou shalt not inherit trade with the Soviet Union. Any budget numbers based on Soviet trade are meaningless. You will find that that trade does not exist.

7. Thous shalt never acquire more than half a loaf. The government prefers to retain a 50% stake so that the people will not feel they are being sold out to a new master. CEDC just bought 100% of two companies, but the governement asked that we not talk about it - they feared there would be rioting in the street.

8. Thou shalt suffer inferior products. Quality control in Eastern Europe remains a tremendous problem. We give the management what they want during negotiations, but we retain the right to hire and fire. This saves five months of negotiations and, in turn, helps control product quality.

9. Thou shalt not be able to convert. There are now different ways to convert funds, but convertibility remains difficult.

10. Thou shalt walk in the valley of nationalism. Some think that the government is selling out to the West. This has led to a strong feeling of nationalism. I've seen a case where a company that [won a bid] had it taken away because it appeared as if they were taking everything.
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Publication:Directors & Boards
Date:Jan 1, 1993
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