Japanese Follow a Cautious Path In E. Europe : Investment: There is much anticipation about what a yen infusion can do for the region’s needy economies. A venture in Hungary illustrates the high hopes and high hurdles.

SALGOTARJAN, Hungary — Surrounded by a crew of recent converts at this lonely industrial outpost near the Czechoslovak border, Shizuo Horio has adopted the role of a missionary--for the Japanese brand of capitalism.

Horio is in charge of looking after the interests of Nitto Boseki, a Tokyo spinning company that has a 21% stake in a $25-million joint-venture factory making fiberglass insulation material. The job entails trying to teach Hungarian partners the rudiments of proper bookkeeping and other tenets of the faith, such as cost containment, teamwork and quality control.

“It took half a year to make the Hungarian side understand what we wanted to accomplish with our accounting methods,” Horio said. “They weren’t necessarily resisting. They just had no basis for understanding.”

Other frustrations confront Horio. For starters, he has trouble communicating with the outside world because his factory of 115 workers, which started operations last October, has only one--very busy--telephone line. And his yellow, sponge-like product is stacking up on the plant floor, undersold because 30% inflation is chilling the domestic building industry.

Yet Salgotarjan Glass Wool Ltd. has become model for foreign investment in Hungary, as the former Socialist Bloc state muddles along the path toward a market economy. Not only does the joint venture appear relatively successful--if long-range goals are considered--it is one of the few examples of an up-and-running, major project at a time most serious foreign investors are hesitating at the Austrian border.

Japan’s big corporations are among the most cautious, despite much anticipation about what an infusion of yen might do for the backward economies of Eastern Europe. Nor do there appear to be immediate prospects for Japanese development aid gushing into the region, despite impressive numbers pledged by the Tokyo government or its lofty rhetoric about promoting democracy and free-market economics.

The hard reality is that there is not much money to be made around here, at least not in hard currency. And if the Japanese have anything to teach, it is their keen appreciation for the bottom line.

“I’ve lost count of all the delegations we’ve received from Japan--industrialists, politicians and trade ministry bureaucrats,” said Akira Amano, Budapest branch manager for Toyo Menka Kaisha Ltd., an Osaka-based trading firm that helped get the glass wool venture off the ground.

“They all stay a few days and ask exactly the same questions, then they go home and nothing happens,” Amano said. “This is a country of only 10 million people with a very shallow industry, and there aren’t many good projects. I’m not sure this market is going to be profitable, especially for Japanese.”

Still, Japan--the underdog country that became an economic superpower--has a magical allure for many Hungarians. Consider the signs plastered on buses in the capital earlier this year: “The Japanese Miracle Can Be Repeated.”

This slogan said more about the latent potential for conspicuous consumerism than about industrial development. A Hungarian trading firm that imports goods from Minolta Camera Co. put up the signs in a bold advertising campaign. Minolta opened its own office in Budapest in July, part of a wave of Japanese companies with antennas aimed at the awakening Hungarian consumer market.

Casio Computer Co. is another, delighted after discovering the honored Hungarian tradition of living beyond one’s means. Casio’s best-selling product here has not been a low-end calculator or a watch, but rather its sophisticated digital diary, which costs more than a month’s wages for the average Hungarian worker.

“Hungarian people really know very little about Japan,” lamented Laszlo Varga, managing director of Salgotarjan Glass Wool and Horio’s chief disciple. “They see the results, the products. But they know nothing about what’s behind the results or going into the products.”

Varga, 39, a chemical engineer and former executive with one of the Hungarian partners in the joint venture, has been studying the teachings and discipline of Japanese capitalism since he joined the project in late 1987. He admits disappointment that more Hungarian managers do not visit the operation to learn.

“If I were a manager at another plant, I’d be curious to know what’s happening here, but they don’t make any effort,” Varga said. “Maybe future generations will understand, but first we’ll need a brainwashing at all levels. Then maybe a second Japanese miracle can really happen.”

Horio, who had experience setting up factories for Nitto Boseki in China, said he had serious doubts about the Hungarian deal in the early stages. Negotiations began 10 years ago, and at first the feeling was “like we were tossing money by the side of the road.”

But the reformers in Budapest made things easier as they went along, streamlining the laws on currency exchange and machinery imports and last year offering tax breaks for foreign investment.

The plant opened on schedule, a point of pride for Horio and apparently a rarity for foreign ventures. Now he concentrates on instilling a Japanese-style sense of teamwork in the workers--about a third of whom are veterans drawn from one of the Hungarian partners, a neighboring sheet glass factory--and he is satisfied with progress.

“We could make some improvements in quality control,” Horio said, “but the people on the shop floor work very hard.”

A look at the statistics would suggest that Hungary has been swamped by foreign investment since the beginning of last year, when it was in the vanguard of the democratic reform movement that cracked the Iron Curtain. Taking advantage of the new tax incentives, foreigners invested in 687 Hungarian enterprises in 1989, or more than twice the total number of joint ventures that had been registered previously.

But nearly all of these were tiny in scale, and indeed many are believed to be family concerns or free-lance entrepreneurs seeking tax loopholes through their friends or relatives abroad. One supposedly common scam has been to bring in joint-venture “assets” in the form of cherished Western cars--imported one at a time from Austria or Germany.

Japanese interests have been tied to only four joint ventures in Hungary at the end of last year, but all were significant in scale--representing about 9% of the approximately $600 million in foreign direct investment.

“Japan’s sophisticated technology is badly needed in Hungarian industry,” said Tamas Palotas, assistant general manager of the capital market department of the National Bank of Hungary.

But Palotas said there is little point in differentiating between Japanese, American or German capital at this stage, when the economy is gripped by stagflation--inflation combined with negative industrial growth--and the task of wholesale privatization of state enterprises is causing wholesale confusion.

“In the coming years, the main issue is how to survive,” Palotas said. “Only then can we think about what kind of development model we should choose.”

Japan’s historic links and even its contemporary economic ties to Eastern Europe are, at first glance, tenuous. It transacts only about $1.5 billion in two-way trade--or 0.38% of its global total--with the six East European nations. Japan and Hungary traded about $270 million in goods last year, with imports and exports roughly in balance.

But Japanese commercial banks have been left holding as much as half of Hungary’s $21 billion in foreign debt, which is one of the highest among any developing nation on a per-capita basis.

“There’s no way to get that back without reforming the Hungarian economy,” said Eiji Seki, the Japanese ambassador in Budapest.

This economic bond was certainly a factor when the Japanese government singled out Hungary, along with Poland, for a special development assistance fund that was announced with much fanfare earlier this year. Prime Minister Toshiki Kaifu visited Budapest in January during a whirlwind tour, which included an obligatory stop at the Berlin Wall. He unveiled a pledge of close to $2 billion in funds for the two Eastern European countries.

The figure was an impressive one--until dissected into its working parts.

Half of it--$500 million each for Poland and Hungary--was in the form of Japan Export-Import Bank credits. These may be used either to finance the procurement of Japanese-made goods or to channel loans to Japanese companies wishing to take equity positions in Hungarian and Polish development projects.

Nearly all the rest represented new limits for a government trade insurance scheme that--not surprisingly--underwrites Japanese exports to the two countries.

In Hungary’s case, the $200 million that once theoretically could have been used to insure Japanese exports was raised to $400 million, resulting in an “assistance package” supposedly totaling $900 million. In fact, only about 30% of the earlier $200-million trade insurance limit had ever been used.

Kaifu’s East European trip coincided with an announcement by Suzuki Motor Co. that, after four years of negotiations, it had reached a basic agreement to build Hungary’s first automobile plant in a $140-million joint venture with a consortium of Hungarian banks and components manufacturers.

The understanding was that Kaifu’s new funds would be available to help finance the Japanese share of the project--a 30% stake by Suzuki and an additional 10% to be held by C. Itoh & Co., a major trading house. (International Finance Corp., a Washington-based World Bank affiliate, was also to take a 10% share.)

A final contract setting the exact terms of the deal was to be signed in June, but as of the end of July, none had been concluded. A Suzuki spokesman attributed the delay to “adjustments” in the terms, without elaborating. But, according to the central bank’s Palotas, some fundamental differences in viewpoint remained unresolved.

Suzuki’s proposal is to assemble its “Swift” model mini-car in Hungary using engines and transmissions made in Japan, and export half of the 50,000 autos produced each year to Western Europe to obtain enough hard currency to continue importing more engines and components from Japan.

The Hungarian side apparently wants more than a “screwdriver plant” that would drain hard currency from the economy.

“We hope to have a final contract by the end of this year,” Palotas said. “But we won’t welcome an unprofitable joint venture. We’ll tolerate a negative foreign exchange cash flow for the first few years, but in the medium term the joint venture has to earn hard currency to be viable.”

General Motors also announced plans in January to build engines and assemble its Opel Kadett model in Hungary. But the scale of GM’s production would be smaller, and it is the Suzuki plant that seems to symbolize Hungary’s hopes for industrial development.

Expectations are so high that one senior Hungarian financial journalist became visibly agitated when reminded of Daihatsu Motor Co.’s recent decision to back out of a joint venture project in Poland and asked whether there was a possibility that the Suzuki deal might similarly fall through.

“Even the kids on the street know about the Suzuki plant,” said Seki, the Japanese ambassador. “Having an auto industry is a point of pride for the Hungarians, a real emotional issue.”

In Salgotarjan, meanwhile, furnaces are spinning glass wool and the rolling machines are pressing out slabs and tubes of insulation.

“If you think about it, there’s something similar between the Japanese way and socialist ideals,” said plant manager Varga. “The difference is that the Japanese have actually realized these ideals, while we in the socialist countries, we only talked about it.”