Hungary’s New Reality

SARVAR, Hungary —  Istvanne Adam used to spend her days gutting chickens in a frigid Communist-era poultry processor until she was offered a job in a modern plant assembling Microsoft Corp.’s state-of-the-art Xbox video game console.

The ebbs and flows of the global free market were far from her mind, although her Xbox job was a result of forces far beyond her hometown. To Adam, it was simply a good job.

This week, though, the 50-year-old mother of three got a blunt lesson in global economics when Microsoft announced it is transferring Xbox manufacturing to southern China, where its costs will be substantially lower.

In the grand scheme of international trade, it is a minor shift. But for Adam and her neighbors in the town of Sarvar, it is a reminder that, in capitalism, the perils of change come with the promise of wealth.

Adam and her two sons, who also work at the plant, were offered jobs making printers instead of consoles. Some of their colleagues were not. Unnerved by the Microsoft decision, Adam and her family expressed nostalgia for the simpler, more predictable era of communism.

“There was not so much uncertainty then,” said Adam’s husband, Istvan.

“Before you can work your eight-hour shift and have a second job farming. We used to raise pigs and rabbits, buying inexpensive animal feed from the state cooperative and selling our animals back to the cooperative. The market was assured. Now, the demand is for much higher volumes, and it’s no longer feasible for us to operate our small farm. So we just raise pigs for ourselves, and we are just happy to have jobs,” he said.

From pigs to consoles to printers, the economic journey of the Adam family mirrors the larger ups and downs of a country the size of Indiana as it grapples with its transformation from a communist command economy to a manufacturing force.

Nowhere is the change more apparent than the Varkerulet traffic circle in the heart of Sarvar, where trucks packed with live turkeys share the same road as semis bearing newly assembled cars bound for Western Europe.

The trucks are visible reminders that Hungary sits at a crossroads. Lying just east of Austria, Hungary has shaped itself into a desirable location for companies wanting to manufacture goods for Europe. But most of Hungary’s 10million inhabitants, whose average monthly after-tax income is $288, are scarcely able to afford the products their factories produce.

In short, Hungary is the European equivalent of Mexico with its abundance of relatively cheap labor, good roads, low tariffs and proximity to wealthy markets.

Sarvar, however, lacks the crowding, pollution and squalor that has marked Mexico’s border region. Instead, this quiet town seems suspended in time. Its 16,000 inhabitants bicycle around a leafy, well-kept town center, shop at Sarvar’s only supermarket and quietly chat at one of the town’s two bars.

Step into the factory on the eastern edge of town, and a different world emerges. Spotless, efficient and modern, the plant employs 4,000 permanent workers and hundreds of contract workers who march in and out depending on what’s being produced.

Owned by Flextronics International Ltd., the plant is a shiny example of cutting-edge manufacturing. Dozens of machine molds apply hundreds of tons of pressure to stamp out plastic casings. Workers in white gloves and smocks assemble electronic gear, scanning bar-coded components so every part can be traced to the employees who worked on it.

The rhythms of Sarvar are governed by the eight-hour shifts of its factories. Roads teem with cyclists starting at 2 p.m. as people leave work and head to the town center anchored by a medieval castle, parts of which have been turned into a community center.

Closer to Vienna than to Budapest, Sarvar is just 44 miles from the Austrian border.

This was important to Microsoft, which wanted to rapidly make 1.5million Xboxes within six months for the console’s European debut.

“Microsoft wanted to simplify logistics and produce the right amount of products and deliver them at the right time. And this was the best place to do that,” said Gyula Knizs, the factory’s program manager for Flextronics.

No longer. Now that Microsoft has plenty of boxes on store shelves in Europe, it is shutting down production in Sarvar.

Instead, the boxes will be made in Doumen, China, where the cost of buying and shipping parts for the console will be far less. Once the console was launched, consumer demand became more predictable, and having production nearby to quickly feed surges in demand becomes secondary to cutting costs.

For workers such as Adam and her two sons, Tamas, 22, and Peter, 24, that means coping with jobs that come and go.

By Western European standards, the Adams are not wealthy. Each makes little more than 70,000 Hungarian forints a month, or roughly $260, at the Flextronics plant. That’s not even enough to purchase an Xbox, which retails for around $269 in Europe. Adam lives with her husband and Tamas in a two-room house in Kenyeri, a village of 1,000 residents 15 miles west of Sarvar. Peter lives in Sarvar in a 150-square-foot apartment his family bought for him.

But the Adams aren’t complaining. Instead, Istvanne Adam talks about how life is so much better than when she worked in the poultry plant, where she had to fork over nearly one-sixth of her earnings for the bus fare to get to work. Now, a Flextronics-sponsored bus picks her up at exactly 1:02 p.m. and brings her home by 11 p.m.

As unsettling as the changes have been, Hungarians know there’s no going back to communism.

“In the 1980s, trade meant selling two dead dogs for one dead cat,” said Vilmos Skuleti, head of the government’s ministry of International Trade and Development, which recently opened an office in Los Angeles to help attract more U.S. investments.

When the Soviets left, Hungarians rejoiced at their independence. Once the euphoria wore off, the country realized how much work lay ahead in stitching together a true economy without benefit of Soviet subsidies. From 1990 to 1993, much of the country was thrown into economic chaos. Unemployment and inflation soared.

Within five years, Hungary leveraged its ties with former allies Germany and Austria to lure capital. Later came other Western European investments, followed by U.S. and Asian capital. Today, Hungary is host to factories that that turn out products ranging from engines for the Audi TT sports car to the Xbox. Unemployment is less than 6%, inflation declined to 7%. Before 1990, 90% of Hungary’s exports went to Russia. Today, 80% of Hungary’s exports are bound for Western Europe, the United States and Asia.

“Among the Central European countries, Hungary has been among the most successful, along with Poland” in adjusting to a free market, said Romain Wacziarg, associate professor of economics at Stanford University’s Graduate School of Business.

In Sarvar, unemployment has fallen from more than 10% in 1994 to less than 3% today, primarily due to the Flextronics plant, which opened in 1995. Since then, numerous contract jobs have floated through the plant.

Despite the fluctuations, annual local tax receipts from Flextronics and other, smaller industrial companies in the district soared fourteenfold since 1994 to more than $3.6 million last year. The revenue increase helped the city to finance a new spa to attract Austrian tourists who come in droves to Hungary each year for the country’s thermal springs.

“Sarvar is strong financially,” said Tibor Denes, the city’s mayor. “But this is recent. In the last 40 years, all of Hungary was left behind by the West. Now we have to work hard to catch up.”