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Slovenia suffers from an unfortunate case of
mistaken identity. Even some who claim to
know Eastern Europe confuse it with Slovakia,
or assume it is embroiled in the Bosnian conflict.
For a growing body of investors and
entrepreneurs, however, this combination of
anonymity and ignominy is a potent recipe for
profits. Somewhat protected from competition
by this combination, investors, once there, have
positioned themselves in Southeastern Europe's
most dynamic, export-oriented market. An
adventurous American, Ned Einstein, is readily
aware of this phenomenon. His joint venture
with a Slovenian bus maker, TAM-Bus, sheds
some light on the "Slovenian Secret."
Slovenia is politically and culturally distinct
from the former republics of Yugoslavia. Unlike
Serbia, Croatia and Bosnia, Slovenia is
homogeneous and free of ethnic strife. Moreover,
as a former part of the Hapsburg Empire, Slovenia
retains its familial ties to Western Europe,
especially Austria and Italy.
The market in which the venture was struck
even surprises old hands in Eastern Europe.
Formerly considered the "Switzerland of
Yugoslavia," Slovenia has a tradition of economic
autonomy. Where as a large percentage of Eastern
bloc workers were involved in some form of
administration, 60% of the Slovenian workforce
was engaged in production. And although this
small patch of land was home to only 8% of
Yugoslavia's population, Slovenia produced 30%
of its total exports, a considerable portion of
which went to Western markets.
Current policies reflect this heritage. Backed
by a strong central bank, a stable local currency
and ample foreign reserves, the present
administration has been able to keep the economy
stable, at least by Eastern European standards.
Trade and investment support from its historical
allies, as well as a per capita GDP of $6,600, has
lead some to proclaim it as "the most developed
of the late Communist countries."
Within this environment, TAM-USA was
formed. This deal demonstrates the unique
qualities of the Slovenian economy. Evolving
out of a related countertrade agreement between
the Fortune 500 firm, Combustion Engineering,
and the then government of Yugoslavia, the
partnership was designed to guarantee the
American company a credit line and the chance
to bid on a hydroelectric project, in what was to
become Croatia, while supplying the Yugoslavs
with a source of hard currency. Rather than
contribute cash to the deal, Combustion
Engineering was persuaded to invest $2.5 million
in TAM-Bus, the bus making division of the
sprawling TAM group.
Saddled with an investment in a bus factory
about which they knew little, Combustion
Engineering thought that they would try to gain
something from the deal. So they brought in an
expert, Transportation Alternatives, a transit
consulting firm based in Van Nuys, California.
Transportation Alternatives' President, Ned
Einstein, a former adviser to the US Department
of Transportation and various municipal transit
services, recognized TAM-Bus's vast potential
market. "They had the most amazing product
line that I had ever seen," Einstein remarked,
"at least eight different truck and nine
different bus chassis." To Einstein,
TAM's use of unibody Monocoque chassis
represented a vast improvement over
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US bus engineering. Usually comprised
of little more than frames fastened to
truck chassis, American buses tended to
shear on impact, while TAM-Bus's
products offered maximum crash
resistance. In the over-litigated school,
tour and transit bus markets, Einstein
believed the Slovenian company had an
almost incomparable advantage.
To that end, Einstein assembled a
panel of safety experts who produced
specifications for TAM-USA's buses.
Such market sensitivity and ability to
"Americanise" their product, he believed,
would allow the partnership to quickly
outdistance its better established competitors.
Then the worst scenario that Combustion
Engineering and TAM-Bus could have imagined
actually happened: Yugoslavia disintegrated.
Yugoslav President Slobodan Milosevic began
an economic war to complement the struggle
already being waged for "Greater Serbia."
Almost overnight, the Yugoslav government
switched from the "soft" dinar to an exclusively
"hard" currency economy. Combustion
Engineering's credit line, the linchpin of its
countertrade arrangement, promptly evaporated.
TAM-USA was left without any operating capital.
Desperate to save its venture, TAM-Bus
scrambled to find other investors, who, cowed
by the fighting and fiscal chaos, were completely
unapproachable. Finally,the consultant Einstein
came in and offered himself as a knight in shining
armour.
Although brought in as an adviser, Einstein
transformed himself into an entrepreneur,
contributing $1 million of personal equity to
TAM-USA. His experience managing a successful
transit service for handicapped people hardly
prepared him for the demands of restructuring
the deal. "I'd never even been to Europe," he
admitted. Einstein undertook a crash course in
countertrade, currency hedging and the assorted
minutiae of international commerce. Though
still a novice, he was not naive. He hired an ace
adviser, Jim Hitch of Baker & McKenzie, the
largest law firm in the world and now also in
Eastern Europe. Hatch's participation cleared
up some remaining obstacles and the deal was struck.
Despite Einstein's personal contribution,
another $5 million was required to resuscitate
TAM-USA. Impressed by Einsteiri s confidence
in their company, TAM-Bus cast around trying
to find another source of capital. What followed
is one of the most remarkable stories in the short
history of the free market in Eastern Europe.
With potential investors now running scared,
TAM-Bus looked internally for all sources of potential liquidity.
Unlike some Yugoslav firms, it had a
substantial export operation. As its home market
evaporated, TAM-Bus management quickly built
up their export subsidiaries in Germany, Spain,
and the Middle East. This was fortunate for the
US joint venture. From each of these
now-profitable subsidiaries, TAM-Bus
was able to squeeze out a little hard
currency. Ironically, a 600-bus deal with
the Soviet Union generated still more
dollars and deutschmarks. Finally,
they raised the necessary money.
Including parts purchased abroad,
TAM-Bus's hard currency involvement
was close to $2 million. The remaining
$3 million was made up of labour and
services in kind. Of their effort, Rado
Lipicar, a Slovenian director of TAM-
USA remarked, "We took every
bloody dollar from this company."
TAM's flexibility was the key to the
deal. Imagine, an Eastern European company
actually investing in a Western company
when the Western money did not arrive. An
autonomous division of the much larger truck
manufacturer, TAM-Bus already effectively
competed in both European and overseas
markets. "We are a very export oriented company," TAM-USA board member Drago
Pohar commented. Indeed, by the time of
the deal, 60% of TAM-Bus's total market
was outside of what remained of Yugoslavia.
Its traditional market in ruins, TAM-Bus
expanded its strategy of challenging larger
competitors through savvy marketing. Aware of
their bus's reputation for quality, TAM-Bus used
licensing and technology transfer agreements to
penetrate new markets, tailoring their product to
each one's demands. Unlike their infamous
cousin, the Yugo, TAM-Bus stressed that its
products are made with a close eye for quality rather than profit margins. Indeed,
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this determination to avoid even the remotest
comparison to Yugoslavia's best-known export
permeates every aspect of production. "We
must," Mr. Lipicar said, "undo the damage done
by that car."
This determination to get onto the world's
stage played into the hands of Einstein, providing
him with the opportunity to step into the vacuum.
He came with little money, but with the right
attitude and at the right time.
The Slovenian government shows ingenuity
similar to that of TAM-Bus. With their country
untouched by the war, it has undertaken a bold
plan of modernization. Concerned with, but not
troubled by, "social costs," Slovenia is determined
to make itself attractive to the West. Following
the IMF's stringent guidelines, Slovenia's economic braintrust has reduced inflation,
devalued its currency, and thus provided a nimble
alternative to the usually bloated economies of
the East. After Milosevic's cancellation of the.
dinar, Slovene authorities issued their own
tender, the tolar. Pegged to the deutschmarks, the tolar lent the Slovenian
economy relative stability, especially
in contrast to Serbia's 20,000% inflation
last year. In such a setting as Slovenia,
Einstein assures, "I could turn $10
million into $50 million in five years."
He isn't there, yet. And it's not a project
for an investor with a short time frame.
Even Pahor advises that he expects
TAM-USA to mature fully in 20 years.
Einstein - in agreement that the
partnership will not see a profit for
some time - is convinced of his
product's place in the US market. Having faced
reversals in the school bus and mass transit
sectors, TAM-USA has again demonstrated its
mobility, shifting its focus to the small but
lucrative tour bus market. Despite the recession
and obvious loss of travel dollars, TAM has been
able to get its foot into the door of the US bus
market, already selling 12 of its luxurious Model
260 buses.
This deal was by no means easy to keep alive
and its success will take years to know, but the
ability of the partners to overcome financing set-
backs is extraordinary. The first investment was
made almost by accident - to get the former
Yugoslav government to award a hydroelectric
plant contract. The second investment was also
made by accident as an American entrepreneur
fell into the deal after first being brought in as a
consultant. And, ironically, the last investment
was made by the Eastern European company
itself. For those familiar with the heartbreak of
investing in the region, TAM-USA demonstrates
that it is possible to find an Eastern European
partner which is just as determined to make a
success of a venture as the Western side.
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