How do you make the transition from Marxism to a market economy in a country where the currency is virtually worthless, commercial technology is sparse, distribution systems are almost nonexistent and management talent is far from world class? That is the question I face as CEO of Kharkov, Ukraine-based Effect, the third largest manufacturer of perfumes and cosmetic products in the Commonwealth of Independent States.
In seeking to capitalize on a market of 290 million people with a pent-up demand for almost everything, we’ve begun the process of privatization, introduced our employees to Western-style marketing and accounting, streamlined our workforce and product lines and contracted with key suppliers of raw materials outside the CIS. But perhaps most important, we’ve launched joint ventures with Swedish and American partners to sell cosmetics and facilitate other deals.
Following below is an account of Effect and its fledgling Western ventures. I hope it will prove instructive to other Western entrepreneurs hoping to do business in the CIS over the next several years.
Of course, newcomers to the business environment in the former
One thing is for sure: Even in the midst of chaos and confusion, deals are being done. In the absence of an established business law, hordes of Western lawyers have descended on the CIS and are drawing up contracts ranging from short-form agreements for the sale of commodities to more complex contracts for joint ventures. Those favoring a rapid transition to a free-market economy obviously are not waiting for the legal system to catch up. Russian entrepreneurs are being forced to go ahead of the law.
A NEW GOLD RUSH?
The pioneers in this new environment-which originated under the glasnost policies of Mikhail Gorbachev, the former Soviet president-were Western multinationals looking for big deals. Some, like AT&T, continue to buy stakes in emerging commonwealth enterprises. In fact, the giant telecommunications company just took a 39 percent position in a new company that will build, own and run the
But many larger companies got cold feet, watched their early deals go awry, or were caught in the turmoil that last year swept away even Gorbachev himself. Typical deals now are smaller, simpler and easier to finance. Some shell-shocked veteran observers liken the business climate in the CIS to the
When Gosplan dissolved some time ago, I latched on with Effect. I began as an engineer, but later worked my way up to foreman, superintendent, managing director-and eventually “CEO.” Effect has annual sales of around 250 million rubles (roughly $3.3 million). On average, it produces 800,000 items a day at a price of three rubles apiece.
Effect was part of the initial American-Soviet Trade Consortium. And with Johnson & Johnson, a member of the American Trade Consortium, it was one of the first joint ventures in the
On the lookout for new partners, I attended a meeting early in 1990 sponsored by Unilever N.V., the diversified Dutch multinational with more than $30 billion in annual sales. While at the meeting, I established a relationship with Emile Wolters, president of Parfusale ab in
Having established a vehicle to transact business outside of the
Ultimately, we agreed to market Hazel Bishop cosmetics in the CIS through the Effect distribution system.
Initially, Continental Health cracked the Russian market in 1991. The company had established a partnership with Sana Medical, a French-Soviet joint venture, through which it markets health products in
Hazel Bishop, a maker of mass-market brands in the cosmetics industry, markets its products in some 20,000 retail outlets. In
Hazel Bishop’s “Commonwealth” line is shipped to our
Meanwhile, to introduce the cosmetics, we kicked off a Russian beauty contest supported by advertising on Soviet television and posters in retail outlets. To begin the competition, we invited Russian women to send us their photos and tell us why they would like to become a model and spokesperson for “Russian Red Lipsticks.” We’ll announce the contest’s winner later this year.
It’s too early to get an accurate gauge on the size of the market here for Hazel Bishop products. But early returns have been encouraging: Some 25 percent of the initial shipment was sold in
The financial arrangements in the cosmetics venture work this way: Rosen’s contribution comprises inventory and promotional dollars-from which he garners a profit in rubles. He leaves those rubles in the CIS to reinvest in additional promotional materials, packaging and inventory. The idea is to boost sales prospects in the CIS and prepare for the eventual export of Effect-manufactured cosmetics to the
Parfusale’s Wolters, who owns a 25 percent stake in Peremena, supplies raw materials for products made by Continental Health/Effect. Wolters, of course, derives a share of the joint venture’s profits.
In the wake of the disintegration of the
Privatizing the company.
Our next step was to establish a joint stock company in which all employees would be eligible to become shareholders. If a privatization law is passed this year, as expected, Effect will lease the plant back from the City Council. When the company turns enough profit, the joint stock company will buy the plant.
The first phase is now complete, and the new company is leasing the plant. We hope to purchase the assets from the City Council in two years.
Streamlining and retraining our workforce.
Effect is moving to reduce the number of workers from 1,000 to 800 and to reorganize its workforce into more efficient units.
It is also attempting to train workers in the ways of a market economy. Many people accustomed to working in a command-style economy are not motivated. Until recently, the average Russian worker toiled in antiquated facilities and tried more to avoid work than to do it.
As a result, the first task of any manager in the new market economy is to sort out who can be motivated and who cannot.
In fact, we may be able to take our cues from several large American firms that have successfully trained and motivated Russian workers. Of course, it is a great advantage if you have clean facilities and modern equipment, as do McDonald’s, which employs 1,100 people in its
But Russian entrepreneurs are also watching closely a Polaroid factory in
Targeting valuable assets.
As part of the lease-back agreement, our management team has the option to select only the most “modern” assets. The rest of the assets will be held by the City Council as part of the new administration’s policy to promote capitalism.
Trading company products to procure housing, clothing, food and pharmaceuticals for employees.
To be sure, this is a concession to the old way of doing things. We are aware that barter removes valuable goods from the marketplace and slows the process of transformation. But for now, our ability to provide our workers with hard-to-get goods is a valuable motivational tool. In a sense, it is among the few “benefits” we are in a position to offer.
Aggressively seeking foreign partners willing to invest valuable hard currency or raw materials and negotiating to try to sell some of our products through partners into Western markets.
Moreover, there are other ways we are restructuring Effect. We are contracting with fewer companies and seeking new sources of raw materials outside the Commonwealth. On the marketing side, we are reducing the number of our product lines from 60 to 40. We have also drawn up a financial plan based on Western-style accounting.
LEARNING THE ROPES
I believe that joint ventures are perhaps the best way for a Western concern to test the waters in the new Commonwealth. The Hazel Bishop experience is a case in point. A local joint venture partner knows the lay of the land and provides an entree into the internal network of contacts in
In plotting joint ventures in the CIS, both Russian and American partners have to listen and learn. Further, we must be aware that just as with other global markets, the Commonwealth has a variety of cultures, each of which may require tailored marketing strategies. We must put into action the Western expression “think global, act local.”
The risk may seem great, but for those with a long-term mentality, the rewards can be even greater. The CIS is the largest untapped market in the world. Robert S. Strauss, last year appointed U.S. Ambassador to
Effect, and thousands of other CIS companies in industries across the board, hope that the West hears and heeds the ambassador’s advice.
Sergei Glushko is managing director and chief executive officer of Effect, the third largestmanufacturer of cosmetic products in the Commonwealth of Independent States. Robert M. Donnelly is honorary chairman and managing partner of New York-based consulting firm Alpha International Management Group. He is also a partner in Peremena Russo-America.