Ganz Electric Works was founded in 1844 by Abraham Ganz, a Swiss. The main factory, built in 1897, is located in central Budapest. It was a private company until the Communist takeover after World War II, at which time it became a state-owned enterprise. In 1991, Ganz and Ansaldo (of Italy) formed a joint venture; Ansaldo, at the time, held 51% of the company.
By 1995, Ansaldo controlled 82% of the company. Ansaldo belongs to the Italian state-owned Finmeccanica conglomerate, which, in turn, is owned by Instituto per la Ricostruzione Industriale (IRI), Italy’s biggest state-holding company.
For Ganz, the 1991 joint venture was essential. Ganz’s plant, equipment, and technology were obsolete, and the government owner had no capital to invest. Ganz was also operating at a loss and the government, burdened as it was with a sizable budget deficit, was eager to be rid of this loss-making enterprises.
Ganz-Ansaldo is a major manufacturer of power station equipment used by electric utilities and transport industries. Among other products, it pro-duces power generators, transformers, electric motors, and switch gears.
About 30% of sales in 1994 were from generators, about 25% from trans-formers, with the rest divided between switch gears and electric motors.
Ansaldo is the head of 20 companies of the IRI-Finmeccanica Group.
Ansaldo designs and supplies systems, plants, machines, and electrical and electronic equipment to the energy, transport, and manufacturing industries.
It is headquartered in Genoa, Italy, with 1994 annual sales of $1.4 billion and 20,000 employees. Ansaldo – at times in collaboration with Ganz and at times on its own – has sizable contracts in Taiwan, Indonesia, Malaysia, Egypt, Korea, Costa Rica, China, Belgium, Hungary and Italy. No profit data are available for Ansaldo; however, its parent company, Finmeccanica, was profitable in 1991 and 1992, the last years for which these data were available. Ansaldo “was expected to pass ‘positive results’ at the parent level for the year to 31-12-95 that will be better than 1994’s” (Financial Times, 1995).
According to a Ganz manager, “There was no company strategy in the old days” (Personal interview, 1995, Budapest). It was a state-owned com-pany, and it depended on orders from domestic sources, the Soviet Union, and other East European company sources.
The joint-venture company decided to move from its central Budapest location to Tapioszel, some 90 kilometers (55 miles) from the present site.
This case was written from public sources with some cooperation with Ganz-Ansaldo executives who wish to remain anonymous. It does not have the official approval of the company.
(Because of the poor road conditions the distance of 90 kilometers takes much longer to travel in Hungary than it does in Western Europe or the United States.) This move would, ostensibly, cut costs as the pre-1995 facilities were antiquated. A more serious issue in 1995 was to generate orders for Ganz-Ansaldo. Between 1991 and 1995, output dropped by about 50%, the number of employees decreased from 2,600 to 1,600, and, in 1995, capacity utilization stood at about 50%. The large decline in output is attributed to both the collapse of the ex-Soviet bloc market, including the domestic market in Hungary, and the lack of commercial orientation and lack of familiarity with the East European markets by the Italian-Ansaldo management.
Before 1989, Ganz had a monopoly position in Hungary and a favored position in the ex-Soviet bloc. After 1989, these advantages disappeared as markets became increasingly more open. Noting the plight of many of its state-owned companies, in 1994 the Hungarian parliament passed a law re-quiring state companies to purchase at least 30% of their large investments from domestic sources – provided that quality requirements were met and that the price did not exceed more than 15% of the price quoted by a compa-rable bid. Since December 1994, Ganz-Ansaldo has adhered to ISO-9001, the West European quality standard. The difficulty is that given the very poor budgetary situation of the Hungarian government virtually no investments have been made to improve utilities, railroads, and street cars, which are all state owned. These conditions are expected to improve and it is hoped that orders will begin to come in, though it is not certain that Ganz-Ansaldo will receive these orders. Exports as a percentage of total sales increased between 1989 and 1995 (from 40% to 67%) not because exports increased significantly but because the domestic demand collapsed.
Exports were (and are) done indirectly through Ansaldo, and it is unclear whether the joint venture is benefiting from this arrangement. As Ansaldo owns 82% of the joint venture – the management is almost completely in Ital-ian hands – a reasonable assumption is that management will keep Ansaldo’s interests in mind. Ansaldo did pass some low value-added subcontracting work to its joint-venture partner. The fact is that Ganz’s higher value-added product lines were de-emphasized. Moreover, Ansaldo’s management’s lack of interest in the Hungarian and ex-Soviet bloc markets exacerbated this joint-venture situation over and above what might have been expected in these countries due to the poor macroeconomic situations (Csermely, 1996).
Ganz-Ansaldo Exhibit 1 provides highlights of the company in 1989, 1994, and 1995.
The joint venture has posted losses every year since its formation in 1991. The losses were made up by Ansaldo by acquiring more equity in the company thus raising Ansaldo’s stake from the original 51% to 82% by mid-1995. A profit was predicted for 1997 in a strategic plan formulated in 1992,
Ganz-Ansaldo Exhibit 1. Financial highlights (in billion Hungarian forints).
1989 1994 1995
Sales/Turnover 3.0 4.7 10.0
Loss 0.6 0.7 minimal profit
(1.6 in 1993) (the first since 1991)
but this is unlikely to occur (Personal interview, 1995, Budapest). Running a deficit is in Ansaldo’s interest as it is a smooth way to acquire full owner-ship and eliminate the minority Hungarian partner. Furthermore, Ansaldo itself is state owned and, therefore, its profit motive is not as strong as it would be for a private company. Finally, the joint venture’s true profitability is difficult to establish because of transfer pricing between Ansaldo and the joint venture. At the parent level Ansaldo was, as indicated earlier, prof-itable. The joint venture’s total assets were about Ft2 billion. Outstanding debt was between Ft2 and Ft3 billion. About 50% of the debt was made up of loans from Hungarian banks and the other 50% was from Italian banks with Ansaldo’s guarantees.
By mid-1995, all the top executives were from Ansaldo: the General Manager, the commercial, financial, and production managers. This would facilitate a transfer-pricing system that would indeed benefit Ansaldo. The president was Hungarian but the position was a part-time and representa-tional one. In an interview he said: “While president sounds very nice, this is not my main job. I kept my own enterprises – trade in Russia, Ukraine, Moldova, and the Baltic States. At Ganz-Ansaldo the management is Ital-ian, I am ‘the Hungarian’ ” (Heti Vilaggazdasag, 1995).
On the one hand, the joint venture had some positive results:
The joint venture saved jobs. . .. All these [Ganz-Ansaldo] people would be out of a job if it were not for the joint venture. . .. Some foreign investors [Siemens] shut down their Hungarian manufacturing operations after they acquired a domestic company [and Ansaldo did not]. . .. Workers are being paid higher than average salaries.” In the last four years managers salaries doubled in real terms. [Personal Interview, 1995]
On the other hand, a 150-year-old Hungarian flagship company was, by 1995, virtually an Italian-owned company.
In forming the joint venture, Ganz expected to increase sales and to re-turn to profitability. At the time of the joint-venture agreement, Ganz had no other alternative than to find a joint-venture partner but, obviously, its expectations were not met. Ganz, or rather the government owner, did not shop around for the most suitable partner. The joint-venture agreement was part of a government-to-government deal concluded during the Hungarian
prime minister’s visit to Italy in 1990. For Ansaldo, Ganz was a strategic partner, a reputable (and broke) firm in the same industry. While wage rates were lower in Hungary than in Italy, this was not a major considera-tion as the company is very capital intensive. Ansaldo received in the joint venture Ganz’s underutilized plant and equipment, i.e., inexpensive spare ca-pacity. Ansaldo’s share of the joint venture was capital infusion, though it is not clear how much investment was committed by Ansaldo over and above making up losses in exchange for increasing its share of ownership. The main attraction of Ganz to Ansaldo was the former’s contacts in Hungary, other East European countries, and the ex-Soviet Union states. While these economies have, to varying extents, been recovering since 1993–1994, this joint venture has not benefited from greater volume of orders. Yet it is the continued low level of orders, together with the corresponding low capacity utilization, which is at the crux of Ganz-Ansaldo’s financial problems.