Printer Friendly

What does thaw in Eastern Europe mean for the frozen food industry?

What Does the Thaw in Eastern Europe Mean for the Frozen Food Industry?

Eastern Europe: is it a land of opportunity for capitalists from the West, including those who may be keen on making investments in badly-needed refrigeration and frozen food facilities? Or is it just an economic black hole?

With the apparent end of the Cold War and the devolution of socialism in former Soviet satellites and even in the Soviet Union itself, business news pages and the trade press are full of speculation - much of it contradictory - about what happens next.

One group trying to make something happen is the US-USSR Food Industries International Trade Council (FIITC), formed in March to promote deals between US equipment suppliers and the Soviet food industry. On the occasion of the Summit meeting between Presidents George Bush and Mikhail Gorbachev, it sponsored a conference in Washington that attracted 75 food and agricultural industry leaders from the Soviet Union and more than 150 business and government leaders from the United States.

A new inter-governmental agreement, entitled "On Cooperation in the Area of Food Processing and Packaging," was signed at the conference by Jack Parnell, US Secretary of Commerce, and Vladilen Nikitin, chairman of the State Commission of the USSR Council of Ministers on Food and Procurement. Better utilization of technical and scientific advances in food processing and packaging is the object of the agreement, while the conference focused on issues like joint ventures.

J. Mel Jolly, vice president of International Operations for APV Crepaco, Inc., was one of the conference participants. "While our company has been quite active in the Soviet and Eastern European markets, the meetings here in Washington and the caliber of the speakers and their presentations shed even more light on a complicated yet very profitable market," he commented afterwards. Following the conference, Soviet delegates fanned out around the country visiting plants and, presumably, talking turkey - frozen or otherwise.

So far, however, little or nothing concrete seems to have come of all this. Even Alfa-Laval, a Swedish group with long-standing involvement in the Soviet Union, inked its latest deal, not for refrigeration or FF equipment, but for a $15 million baby food plant to be built in Kiev by its US subsidiary. Another recent deal was by Indian Valley Meats of Alaska and others for technology to help the Soviets produce sausages from reindeer meat. Why sausages? Elisa Miller, consultant to Indian Valley, explained that "lack of cold storage facilities, and of packaging and processing technology" has made it impossible to get meat safely to market in any other form.

Soviet officials admit that much of their produce never makes it to market because of the lack of refrigerated storage and transport - one admitted to George Melnykovich, president of the Food Processing Machinery & Supplies Association (FPM&SA), that 25% of the milk ends up going to feed hogs because there isn't any way to get it to market before it sours. Mike Shaw, vice president of the International Association of Refrigerated Warehouses (IARW), said he understands the spoilage rate for produce is 80%. Preston Williams, president of Southern Frozen Foods, who visited Moscow two years ago, called the food distribution situation "pathetic."

Williams never got outside Moscow, and never talked to anyone but Soviet officials. But the general impression he got is that there is nothing resembling a cold chain in the Soviet Union. Although he visited a fairly advanced frozen potato products plant, said to turn out 220 million rubles worth of French fries and patties a year, that was probably atypical. If the refrigeration industry is archaic in East Germany (see story by Morrison Brown on page 62), it must be worse in the Soviet Union - East Germany has been reckoned the most industrially advanced nation in the former Soviet bloc.

What the Soviets need now isn't love, but a system of refrigerated transportation and storage. Transportation will probably mean refrigerated rail cars rather than long-haul trucks, because the USSR highway network is even more primitive than the Soviet rail system. At a time when railroads are losing out to trucks in both Europe and the United States, that could be the basis of a whole new industry. But refrigerated warehouses, refrigerated delivery trucks, and refrigerated retail cases (for produce, at least, if not for frozen food) are also sorely needed.

So why aren't people rushing in with investments or joint ventures to build up that vital infrastructure? It all has to do with the Soviet financial and economic system - starting with the ruble, which still isn't convertible (ditto Eastern European currencies, although Hungary promises convertibility by the end of this year). Sure, Western technology is needed by the Soviets, and available for export. "But the Soviets have nothing to pay for it with, and nothing to trade," observed Shaw. Moreover, it isn't even certain who or what Western investors will be dealing with.

The Soviet Union, in theory, has always been a federation of 15 republics representing various nationalities. In practice, it has always been a totally centralized state - until recently. Lithuania, Estonia, Latvia and Georgia have all voted to secede, while Uzbekistan is officially seeking autonomy and even Russia itself has declared that its laws override those of the USSR. According to Melnykovich, who speaks Russian himself, delegates to the June conference included representatives of Russia, the Ukraine, Turkmenia, Byelorussia and local and regional administrations as well as the Soviet Union itself.

Infrastructure Top Priority

Melnykovich agrees that, whether the deals end up being struck with the Soviet government or with constituent republics, the first priority is the infrastructure of storage and transportation. "We're easily five years down the road before there'll be any significant use of frozen food in the Soviet Union," he told Quick Frozen Foods International. Nevertheless, he added, "the long-term market is incredibly huge." Among other things, he said, the Soviets are interested in microwaveable products, and some of their representatives visited ConAgra to study the technology. For the time being, however, canned rather than frozen food is likely to be a Soviet priority.

Meanwhile, with their economies generally in transition from a command system to a market system, the former Soviet satellites are also looking for investment in basic food preservation and packaging technology. Hungary, which enjoyed the benefits of a "goulash economy" even before the social revolutions of 1989, has welcomed a USA Showcase '91, scheduled for Oct. 17-20, 1991, in Budapest. Held in cooperation with the Hungarian Ministry of Trade and the Hungarian Chamber of Commerce, it will bring together US-based companies that want to expand into Eastern Europe with those in the Eastern European business community who want to acquire American technology, equipment and services.

Hungary, which recently set up the first stock exchange in a former Communist country, is busy divesting state-owned industries - Tungsram, a light bulb manufacturer, has already gone to General Electric. In the food area (but not yet frozen food), Central Soya Co. has formed a joint venture with Agard, a Hungarian feed manufacturer, to produce and market complete feeds and milk replacers to more than 400 "partners" or business associates throughout Hungary. The new operation, Agrokomplex-Central Soya Feed Producer and Distributor Corp., will employ about 450 people. Central Soya has been supplying feed technology to Agrokomplex since 1969, and entered a joint venture with a Polish feed cooperative last year.

Showcase '91 will be the climax of an investment promotion campaign that will begin this September with matchmaking of potential US investors and Hungarian partners, followed by a trade mission to Budapest in March and April: the idea is to have potential partners ready to negotiate by that time. The trade show itself will occupy 50,000 square feet of exhibit and conference hall space and, it is to be hoped, draw 250 US companies. Although held in Hungary, the show is expected to attract businessmen from other East European countries, especially Czechoslovakia and Poland. Another trade mission to Budapest, Prague and Poznan is being sponsored by the US Department of Commerce Sept. 26-Oct. 6. The Polagra Fair, billed as Poland's largest agribusiness show, will be a prime attraction for this US Food Processing and Packaging Industries Trade Mission.

ConAgra Inks Deal

Further East, ConAgra has entered into an agreement - the precise terms of which have not been disclosed - to help manage poultry and hog operations in the Soviet Union. The goal is to increase productivity and improve feed conversion rates, thus getting more meat into Soviet shops (this seems to assume, of course, that transportation and storage will also be improved - or else that the pork and poultry will all be turned into sausages!). Nikitin, who inked the ConAgra deal, also announced a literal swords into plowshares project: converting 200 military plants and 135 military research laboratories into agricultural equipment factories and food technology research laboratories.

Will any of this actually work? In Poland, Solidarity founder Lech Walesa has compared transforming a command economy into a market economy to "making fish out of fish soup." As if that weren't bad enough, most East European countries are burdened by huge foreign debts. Since they don't have much capital to invest - convertible or otherwise - Western Europe has jumped in with a European Bank for Reconstruction and Development, capitalized at $12 billion and scheduled to begin operations out of London next April. The 12 European Community nations hold 53.7% of the bank's capital, while the United States has put up 10% and Japan 8.5%. Also involved are Australia, Canada, Egypt, Israel, Mexico and Morocco.

All East European nations except Albania are also members, as is the Soviet Union - which will have a six percent ($720 million) interest, but only have to put up 30% of that ($216 million) in cash. Other East European nations together have a 7.45% stake. For the first three years, at least, the Soviets won't be able to borrow any more than they put in; but other East European countries will not be so restricted. The big question, of course, is whether the new bank's loans to Eastern Europe will actually be productive, or whether the whole operation will turn into a bottomless pit, like World Bank loans to Third World countries. At least 60% of the funds have to go to the private sector, however; only 40% to public operations such as roads and communications.

The Market is Real

There is a market out there. Mraziarne, a Czech FF plant located in Bratislava, was very specific in its response to this magazine's latest equipment survey: It is looking for 20 refrigerated trucks, 10 conveyors, five doors, four harvesters, four items of construction equipment, three freezers, three refrigeration units, two rinse pumps, two knives or saw, two air sterilizers, a cold room, a frying/cooking unit and a packaging machine.

There are even new opportunities for food exports from Eastern Europe: Hungary is reportedly seeking a market for kosher meats, especially beef and mutton, in Israel, and also for Israeli partners in a joint venture to produce frozen fruit for the Israeli market.

In East Germany, the Central Institute of Nutrition, part of the Academy of Science, announced a joint venture in May with Thomas J. Payne Market Development of Burlingame, Calif., USA, to "establish a two-way exchange of information and ideas, including the licensing of patents, DDR market feasibility and access and development." Where the unification of Germany will leave this venture is unclear.

Meanwhile, a Committee in Support of Polish Individual Farmers has organized in New Britain, Conn., USA, to sponsor farmer-to-farmer exchange programs and offer training in managerial and marketing as well as agricultural skills.

Asian Assets

If Westerners prove shy of investing in East Europe, perhaps Asians will fill the gap. Japan, Taiwan, Hong Kong and Singapore may be attracted by the cheap labor - hourly wages are between $1 and $2, even lower than in Portugal ($2.50), and well below the spiraling rates in Asia itself. Lucky-Goldstar, a Korean conglomerate, has already gone into a consumer electronics joint venture in Hungary, and Japanese automaker Daihatsu is trying to link up with its Polish counterpart Fabryka Samochodow Osobowych to produce 100,000 passenger cars a year. Hungary wants to produce cars in another joint venture with Suzuki Motor Co.

Purchasing power may be a major problem in trying to reindustrialize Eastern Europe; the average Gross National Product is only $3,860 per capita, compared to $10,180 in the European Community. That ranges from a high of $6,673 in East Germany to a low of $1,665 in Poland - yes, Poland is even worse off than Romania. There are also fears that workers in Eastern Europe will have trouble adapting to the hectic pace and stress of productivity of capitalism, after having accustomed themselves to the somnolence of socialist enterprises for the last 45 years.

It's perhaps even worse in the Soviet Union itself, where the only tradition of "entrepreneurship" in the last 70 years has been that of black marketeers selling goods that fall of trucks. For a case study in utter ineptitude, check out a recent PBS documentary of the first Miss USSR contest: the folks running the affair were taken in by a Middle Eastern "investor" who delivered practically nothing, and the contestants had to scrounge around for swimsuits and mooch makeup from a theater troupe. Soviet industry, from all accounts, is hardly managed any better.

Monumental Waste

That certainly includes the food industry. A team from the Dairy and Food Industries Supply Association that visited the USSR last year estimated that up to 50% of Soviet food production is lost to spoilage and infestation before it reaches consumers, and processing facilities also fall far short of Western sanitary standards - even pasteurized milk has a shelf life of only 24 to 36 hours. Soviet economist Vladimir Tikhonov, meanwhile, has admitted that only 24 million tons of the 90 million tons of potatoes produced each year reach consumers.

Domestic budget debates in the United States have often revolved around whether "throwing money" at social problems will solve them. In the Soviet Union, and to a lesser extent in Eastern Europe, the problems are as much social as technological. Can technological investments pay off, in profits or improved production, if the traditional social structures that reward sloth and incompetence remain in place? It's a question Western refrigeration and frozen food equipment suppliers should consider carefully.
COPYRIGHT 1990 E.W. Williams Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Pierce, J.J.
Publication:Quick Frozen Foods International
Date:Jul 1, 1990
Words:2403
Previous Article:Paced by 8% advance in catering segment, another good year for Swedish business.
Next Article:Soviets, warming up to ice cream variety, welcome Baskin-Robbins production plant.
Topics:


Related Articles
Business opportunities in Eastern Europe sail with warm winds of historic change.
Time to take the industry's temperature.
Look to foodservice for innovation, not in the supermarket freezer!
Premium, Restaurant-Quality Desserts Increasingly on `Menu' in Freezers.
Garlic Bread on Rise at Retail Stores; Lender's, Sara Lee Roll New Bagels.
CFG's New Soya Burger and Canapes.
Want to Freeze Stuff Really, Really Fast? There Are Lots of New Alternatives Now!
Certificate for Frozen Herbs Ltd. (News & Installations).
To Russia with refrigeration equipment: Starfrost opens sales office in Moscow.
Starfrost opens sales office in Moscow.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters