Articles

Poland's Biggest Factory Struggles to Survive

by Kevin McDonald

This article was published in the Wall Street Journal Europe on May 8, 1990.

WARSAW - Henryk Poddany is anxiously gazing out his window at a parking lot full of tractors. Where, he wonders, can he sell 1,500 tractors quickly? Mr. Poddany (pronounced Poh-DAH-nee) is the Managing Director of the Foreign Trade Office for Ursus, the Polish tractor company based in Warsaw. He knows that understanding the market in the next few months will be critical to his company's future. Ursus is trying to stay afloat in new waters.

For 45 years, the company sold tractors mainly within the protected Polish market. On January 1 of this year, however, the Polish Government withdrew virtually all protection as it converted Poland into a free market country with the stroke of a pen. Thus although Ursus is still state-owned, it is suddenly operating on its own, without government planning, subsidies, or other assistance.

The challenge to Ursus goes beyond the overnight transition to capitalism: Poland is also suffering from a drastic recession, the consequence of the rapid shift to world market prices. The problems that Ursus's management faces are representative of those of every company in the country. Ursus is carrying $20 million in short-term debt. It had hoped to finance its debt through sales, but the recession has depressed revenue. Tractor exports are up 80% over 1989 levels but from a small base. Ursus cannot afford to refinance through Polish banks because interest rates are currently 8% per month (down from 35% in January). A bank loan with a grace period is not likely to be available. Nor is the Polish Government going to intervene.

Ursus is hoping to sell its accumulated inventory to a foreign buyer. The company's stockpile of finished goods and raw materials are believed to be worth over $20 million. "In the past, we carried large inventory because vendors were unreliable and interest rates were low," says Stanislaw Barczewski, Deputy Director of Technical Development. "Since January we've been able to buy most of our raw materials on short notice. But we were not prepared to cut the accumulated inventories so quickly."

Ursus could also sell equity, perhaps through a joint venture with foreigners - several Western companies have already approached Ursus. Alternatively, Ursus could sell shares domestically. Management and workers alike are interested in privatizing the company. Privatizing such a large company as Ursus, however, would require months, because of the need to recast the financial statements according to worldwide standards, to value the company, and to build a secondary market for the shares in Poland.

Once management finds cash to continue operating, it will have to focus immediately on other problems. The company has two main possibilities: to build complete tractors or to make components.

Mr. Poddany believes that in the domestic market, Ursus can continue to sell whole tractors. "Our products are well-suited for this market, and our prices are unbeatable. Also, we are the only company with any infrastructure in Poland." But in the near term, Ursus must sell outside Poland, where people have money to buy its products. And that may mean selling components instead of whole tractors: "Tractor dealers do not buy from many manufacturers and they rarely change suppliers," Mr. Poddany says. "Because we are new to the market, foreign dealers might consider us risky, despite a discount of about 25% relative to imports from Japan and Korea."

So Ursus has to sell itself before selling its parts. "Foreign companies need to know that we have good equipment, years of manufacturing experience including some exports, and average wages of 60 cents per hour including benefits and payroll taxes, says Aleksander Burnowicz, Ursus's Commercial Director. Ursus' exports of components are up 300% over last year's levels.

Low wages, however, are not enough to make Ursus competitive. "We don't know our costs by product," says Lech Kuczmowski, Senior Systems Analyst. "Our standard costs are obsolete. We've continued many operations over the years because we couldn't rely on outside vendors in the communist system. We are sure to be uneconomical in some areas."

Financial accounting is probably the weakest functional area at Ursus. Historical financial statements are almost irrelevant since they do not contain market prices and they incorporate large subsidies. Finance personnel have historically occupied themselves with the management of a steady and predictable flow of money.

Ursus might focus its cost-reduction efforts on materials. Materials comprise 70-80% of total cost in most Polish manufacturing companies. Labor and benefits typically represent less than 10%. Ursus believes it can reduce material costs through better purchasing, for example by importing some inputs. Unfortunately, the company does not have a worldwide supplier list. "How could we have one?" asks Mr. Kuczmowski. "Until three months ago we had almost no dollars with which to import."

Ursus may also be able to use materials more efficiently: "We inspect raw materials, explains Mr. Kuczmowski, "but generally we don't send rejects back to the vendors. This practice is a legacy of the communist era when the most difficult aspect of manufacturing was getting inputs."

The prospect of making all these changes quickly is a bit daunting. Not surprisingly, Ursus management is quite interested in collaborating with foreign partners very soon.

The Ursus parking lot continues to fill up with tractors intended for the domestic market. Management has decided it will temporarily halt production for the domestic market if local sales do not pick up soon. Only workers producing for export would stay on the payroll.

Similar problems confront all of Poland's 8,000 state-owned enterprises. There is an urgent and widespread need to make business connections outside the East bloc and to re-shape Polish enterprises accordingly. Finance Minister Lescek Balcerowicz, in Washington today for talks with the State Department, is acutely aware of the need for real restructuring at the factory level. He has made it a top priority to see that Polish companies learn Western managerial procedures and get information about prospective customers, suppliers, and partners outside Poland. The easy way out - for instance, providing subsidies and easy credit -- is not regarded as a solution.

Principals

Kevin McDonald
25 years of experience in investment banking, consulting, private equity, and international business
Michael Lehner
In the high technology field for 30 years, as an operating manager, consultant, venture capitalist, and investment banker
Copyright © 2010 McDonald-Lehner. All Rights Reserved.