Interview with Gary Whitlie of SABMiller

This interview appears in the 3 April 2009 edition of the Budapest Business Journal

Gary Whitlie took up the position of Managing Director of SABMiller’s Dreher Breweries on 1 October 2008, as a homecoming of sorts. He had first come to Hungary in 1999 to take up the position of Finance Director for SABMiller's European operation, but left Budapest at the beginning of 2001 to become Director of Finance & Control for the SABMiller group. Then, just over three years ago, he transferred to the operational role of Managing Director, setting up Miller Brands, SABMiller's operating company in the United Kingdom. His career with SAB began in South Africa in 1984, where he moved after being schooled and qualified as a chartered accountant in Zimbabwe. Now back in Hungary, he had mostly good things to say about the local beer trade and his adopted country he has come to love.

Doyle: The global economic crisis is having a pronounced effect on consumption behavior. How is the crisis affecting your business?

Whitlie: A report by AC Nielsen shows that the overall beer in Hungary is slightly down. Our key accounts are currently flat rather than declining. The austerity measures followed over the past several months helps to explain this. People have been spending less and are more likely to stay at home rather than go out. This has spurred improvements in discount sales. The UK has been facing a similar economic slowdown and there we see the economy brands performing better. In Hungary, the super premium brands, such as Pilsner Urquell, occupy a rather small portion of our market share, but their sales have continued to grow, despite the downturn.

Doyle: How is the beer sector in Hungary different from those in other countries?

Whitlie: The trade structure in Hungary is quite different from other markets. Hungary is characterized by a multitude of unconsolidated, independent operators. There are few chains of pubs and restaurants. On the supply side, the market hosts three similarly-sized international players; Dreher -SABMiller is one. Each of us has a similarly-sized portion of this share. Ours is slightly larger than the others. This situation has brought the unfortunate result of chasing volume at the expense of value to the producer.

Competition for market share among producers results in downward price pressure, as does an increasingly competitive retail trade. This is especially evident among the big box retailers who make high volume purchases. The end result is lower profits for producers.

Doyle: What are some of your practices that illustrate your relationship to consumers?

Whitlie: We pay a great deal of attention to the specific needs of each of our target consumers. It’s important to us to keep them relevant. You can see this attention expressed in our products, labels and packaging. Recent innovations have included putting Arany Ászok in 1 ½ liter plastic bottles with re-closeable tops. This way a consumer can pour a glass and put the bottle back in the fridge, something we found is important to Arany Ászok consumers. We’ve also launched a new alcohol-free beverage, Dreher 24, which has recently increased its share of the alcohol free segment. Traditionally, beer has sold in Hungary in half-liter returnable bottles. Our preference is for returnable bottles and kegs. They’re more cost-effective and more environmentally-friendly. The trend toward non-returnable bottles and cans tends to be convenience-driven from the consumer side. The trend was started by the import of cheap German cans. There is a fee levied on non-returnable containers, which was recently simplified to a flat fee from one based on the percentage of non-returnables that a producer sold. But consumers are willing to pay a premium for convenience.

Doyle: It’s clear from what you say that the Hungarian market is distinct. How do you market your products to the local consumer?

Whitlie: We take a 360 degree approach to marketing. This relies on what we know of the consumer of a particular brand. We pride ourselves on our deep insight of the target consumers of each brand. Some consumers spend a great deal of time watching TV, while others will spend more time online. We also reach them at the point of purchase, in the shop, at the pub, in the restaurant. We study their lifestyles and apply what we learn throughout each campaign in our efforts to reach and serve them. Our ads themselves are weighted to reflect the deep insights we have collected about our target consumers. On the Internet we strive to engage them through online contests. We sponsor events such as the EFOT student festival, which featured Kozel, a brand popular with students.

Doyle: What standards do you follow when it comes to the brewing of your beers?

Whitlie: Germany has its purity law, Hungary does not. We abide by our own international standards. We use all natural ingredients in line with HACCP standards of food purity. What distinguishes German beers is that they are generally all barley malt beers. American Budweiser, on the other hand, is made with rice and malt. Pure barley malt beers are heavier. A large percentage of the beers in CE Europe are barley malt beers.

Rumors that the modern beer making process is somehow speeded up are certainly not true at our brewery. The fermentation process is endeavored to be constantly and exactly the same. Both brewing and storage processes are monitored and the beer is tasted; this is done to ensure that all our beverage is produced within specification. Rushing simply doesn’t work. If alcohol is “just added” to beer, then it ceases to be beer. Consistency is important to us.

Doyle: What in particular distinguishes Hungarian beer?

Whitlie: What distinguishes Hungarian beer is that it tends to be less malty, less bitter and more “crisp,” than Czech or German beers. Hungarians beer tends to be more flavorful than American beer. As a rule, the further east you go, the more flavor you find in the beer. While the UK is still famous for its bitter, the majority of beer consumed today in the UK is lager.

Doyle: It is not uncommon to hear complaints from multinational companies doing business in Hungary. What has your experience been with the business environment here?

Whitlie: The bureaucratic burden is high in Hungary. The regulation and tax environment is difficult to follow. Taxes are burdensome and lack incentives for FDI. Nonetheless, we have invested at least HUF 13bn in total in the last 3 years, 10bn into our facility. I see great potential here. The population is well educated and enterprising. I recently sat on the jury of a business plan contest, part of the Young Entrepreneuer of the Future program I have participated in such events in other countries. I was literally blown away. I have never seen such quality and level of preparation.

We are committed to the community that serves us through sponsorship or culture, sport and education. I believe the benefit to the community of a long-term commitment is immeasurable.

Doyle: You have recently come back to Hungary after being away for several years. What do you like about it? What could be improved?

Whitlie: Budapest is a beautiful city. The list is long of what I love about Hungary: the river, the people, the pubs, the restaurants, the opera, the countryside, Lake Balaton, great beer. Some of the roads, on the other hand could use some work. The public transportation system is very good, but could stand some sprucing up. It’s sad about the graffiti. I do like living here. I belive it’s fitting that I met my South African wife here eight years ago.

Interview with Michael Tippin

An edited version of this interview appears in the 23 January 2009 Budapest Business Journal

Toronto native Michael Tippin went into real estate immediately after leaving university in 1988, working first as an appraiser, and later as an Investment Manager for several investment companies with portfolios across Canada and the US. In 1996 he formed the Tippin Corporation to buy and restore architectural landmarks in Toronto. These included the historic Flatiron Buildings in both Toronto and Atlanta. With an increasing interest on landmarks in Budapest, Tippin sold most of his Toronto portfolio in 2006, just as the real estate market was peaking. In January of that same year, his corporation acquired the former stock exchange building – recently rechristened “Exchange Palace” - on Szabadság square, currently the home of Hungarian Television, with plans for a thorough restoration to its former glory.

JACOB DOYLE: How did you come to Budapest?

MICHAEL TIPPIN: There’s always a connection somewhere. In my case, it was a close business partner in Toronto who lives in Tel Aviv, Israel. He had been investing in Budapest for many years and knew of my personal interest in landmark architectureo. He called me one day and said: “you need to come and meet me in Budapest; you need to see this city.” So I said sure, that sounds great. So we met in Budapest in October, 2004. I came as a tourist, first mistaking Budapest for Bucharest. There happened to be a direct flight on the Hungarian airline, Malev, from Toronto to Budapest in those days. In 2005, Malev awarded me a platinum card and informed me that I had the second highest mileage of anyone flying their airline that year, the first being their CEO. This resulted from my 22+ transcontinental and countless inter-continental trips, all flown on Malev. Boarding the plane and hearing Hungarian spoken got me in the spirit of being here. Now I realize that I was definitely in love with Hungary and not the airline, which is good because Malev has since cancelled its direct flight.

JACOB DOYLE: What are your plans for the Exchange Palace?

MICHAEL TIPPIN: We will do our best to return it to what it was, a house of commerce and a national landmark and – this may sound a little cliché to a country that has a socialist past – to restore it to being a house of the people.

The first time I saw the building I was told by my Israeli business associate that I could compete to buy this building. He walked me to Szabadság square and asked me, “would you like to own this?” I thought at first that the building must be a library or a university building or a museum. As I learned more about the history of the building, that it had housed a stock exchange, I realized that it needed to be something as grand as this again. It needed to be redeveloped and reused as it was originally intended as a house of commerce and a stock exchange, which in a was a house of the people; it’s a public building. So our intention is obviously to restore the building and to reuse it as a commercial building for premium office space and for such innovative retail as an organic food market and a Yoga studio. I really want to see the building join the park on Szabadság square that sits in front of it. I want there to be outdoor cafes and street life. I want to bring life to this square that in my opinion is one of the most beautiful squares in Europe. It’s a little enclave inside of a busy, noisy city. You can walk from Oktogon to Szabadság square in ten minutes and be in a whole different world. One of my favorite squares in Paris, where I lived for some time, is called Place des Vosges. There was an article last year in one of the travel magazines, which rated it as one of the ten best squares in Europe. I am sure that when this article comes out again in five years that Szabadság square will be added to that list.

JACOB DOYLE: In what ways do you see a freshly-restored Exchange Palace adding value to Szabadság square?

MICHAEL TIPPIN: It will add value because it’s well-known, it’s big, it’s important. I think that this project will be one of the largest privately financed historic rehabilitation projects in Budapest, maybe the largest. The building is about 50,000 square meters.

JACOB DOYLE: In addition to buying Exchange Palace, you also bought the neighboring Lipot underground parking garage, a so far expensive and underused facility. Were you criticized for buying it?!

MICHAEL TIPPIN: I guess you’ll have to ask me in five years to find out whether I got a good deal or not. You have to look at it long term. Lipot garage was a very expensive facility to build in a very difficult location. They had – for example – to dismantle the Soviet monument piece by piece and later reassemble it with the help of experts and with the permission and approval of Moscow to be exactly as it was. This delayed the project by six months. So Lipot Garage was expensive, but I think in the long run it will prove to be a wise investment because the value impact of having parking versus not having parking for Exchange Palace is, I think, almost immeasurable.

JACOB DOYLE: What plans do you have to limit the carbon footprint of Exchange Palace itself?

MICHAEL TIPPIN: We have hired an architectural firm in New York that is not only world renowned for its work with historical restorations, such as the Empire State Building and Grand Central Station, they also are experts as executing sustainable design on historic buildings. So it is our intention to make Exchange Palace as environmentally friendly as we can. We have the opportunity to do this because we’re undertaking a total gut and reconstruction. So there will be new systems. We have world-class engineers who are working on this already.

JACOB DOYLE: Despite this total gut and reconstruction, you plan to restore the building to its original design and structure?

MICHAEL TIPPIN: Absolutely. We’re building onto the original structure. And we will preserve as many of the original architectural features as we have found or will find. The sad part is that much of the architectural features of the ! building were damaged or destroyed. A firm we hired to do an inventory of the entire building discovered the extent of the damage. Their comment was that the damage done by the Germans and Soviets to Exchange Palace pales in comparison to the damage that Hungarian Television did to it during its years of occupancy since 1956. Fortunately, we have it all documented: what it was and what it will be.

JACOB DOYLE: Have you begun discussions with prospective tenants?

MICHAEL TIPPIN: No, it’s too early. I think we have to show them the concept, the product, before we can expect them to decide. I already know who many of our clients are going to be. Many of them are on the square already. Bank Centre may wind up empty. Who would rent space in Bank Centre if they can rent monumental modernized space – in a Hungarian Palace?

JACOB DOYLE: How might the Exchange Palace project be affected by the current global financial crisis?

MICHAEL TIPPIN: I think the project will take longer, but it will cost less. It could take longer because I think there will be a recession in 2009 in Hungary, if it’s not happening already. This could cause prospective tenants to hesitate in making decisions to lease new office space for five to ten years at a time. There will be fewer tenants, fewer multinational companies coming to Budapest in the near term. But we’re patient. I think we’re entering a period of deflation that will result in lower building construction costs, which is the most important factor to the economics of this project. Fortunately we’re in a unique position compared to most developers. Firstly, we sold most of our portfolio in 2006 so we are liquid. Secondly, we don’t have much debt because we didn’t need it. Thirdly, we aren’t reliant on the bank to fund our projects. It’s always nice to use a bank because their money is cheap. But if there’s not a bank, then that must mean that other things are cheap. Construction costs will go down because they’re not as many developers building. In the end, I think we will be positively affected by this economic crisis. The other opportunity that I think will open up is the chance to buy more buildings in Budapest over the next few years that will be brought to the market as a result of the crisis, both buildings that we may have been outbid on in the past and buildings that the government may wish to sell in order to raise cash.

JACOB DOYLE: The word is that you recently purchased the international airport in Tblisi, Georgia. If this is true, what was your motivation to do so?

MICHAEL TIPPIN: We bought the assets of the former Georgian Airlines and with that acquisition came a lot of land inside the international airport at Tbilisi, complete with hangars and aviation buildings. This deal came to me by the same partner who brought me Exchange Palace. The premise upon which I invested in Georgia is similar to the premise upon which I invested in Hungary. I felt that people in CEE were and are getting richer every day, little by little. People in North America, on the other hand, for the last ten years have been getting poorer every day as the result of debt. People here have been seeing their wages going up every year, from a very low base. What’s more, they haven’t been taking as much debt, because it hasn’t been available. I felt that Georgia was strategically important. Georgia has no natural resources to speak of. What little land it has, however, is very strategically located running between the Caspian Sea and the Black Sea. It’s the only way you can get from the Caspian Sea to Europe without going through Russia. That’s why a pair of pipelines have been laid across Georgia and down into Turkey, then up into Europe. A lot of people were skeptical of my Georgian acquisition in 2007. You can imagine what they thought on August 7, 2008 when the bombs dropped. But the results are in and the consequence of a fairly insignificant five-day conflict with Russia, which had minor costs to Georgia of around USD 100m to 200m, is that Georgia has received commitments of some USD 4.5bn worth of foreign aid. So my rationale that “Georgia matters,” was right by USD 4.5bn. Since August 7, there have been 45 high level diplomats that have landed at Tbilisi International Airport. We’re in the process of buying more land there. It just got cheaper, thanks to the war. I believe that one of the key objectives of the Obama administration will be to repair relations with Russia. This will force Georgia to repair relations with Russia. All Georgians speak Russian. Russians love Georgia and they will return to it. In 1991, 3m people travelled through Tbilisi International airport, the majority were Russian. In 2008, probably less than 800,000 air passengers will travel through Tbilisi, largely because of the Russian embargo. As soon as relations are repaired, however, Russians will start to return: to ski, to visit the sea and to invest. The Russians love Georgia just as much as Stalin did.

Q&A with Commerzbank President Andras Kozma

A slightly edited version of this Q&A appears in the 2009 edition of the Budapest Business Journal Book of Lists
Conducted by Jacob Doyle

Andras Kozma is the president and managing director of Commerzbank Zrt. He started his career at commercial credit insurance firm Euler Hermes Hungarian Credit Insurance Zrt. Previously, he had spent three years at HypoVereinsbank Hungária Rt, where he stayed for three years. He rejoined Euler Hermes in September 2001, as general manager and member of the board until joining Commerzbank in July 2007. He spoke with BBJ about the Hungarian banking sector and what adjustments it faces in the wake of the global finance sector crisis of 2008.

BBJ: The recent financial crisis has casued a severe blow to the global banking sector. What effect has it had on banks in Hungary?

Andras Kozma: Like the Hungarian business sector as a whole, Hungarian banking is fully integrated into the global banking sector with 80% to 90% of total banking assets owned by Hungarian subsidiaries of foreign banks. This means that every global change brings a change here, although not necessarily a parallel change of the same magnitude. Unlike many foreign banks that have been plagued by their ownership of “toxic” assets, Hungarian banks have largely avoided this. We have nothing like subprime assets. Asset backed securities are not characteristically found in Hungary. Our banks have worked more simply: deposits and credits. The local dynamic didn’t require such fancy instruments.

Andras Kozma: In so far that we have been affected by the recent financial crisis because of integration with the global sector, then yes. Initially, the big banks which failed - such as Lehman Brothers and Fortis – didn’t have much effect on the Hungarian market. Neither has a significant presence here.

There is a modest number of delinquent loans, which you could call bad assets. But our conservative business practice has prevented these from accumulating. The sector here has experienced sufficient dynamic growth to avoid the need for such “innovative” products as ABS.

BBJ: You say that Hungarian Banks are mostly subsidiaries of foreign banks, which you admit have suffered. Have relations suffered between local banks and their foreign parents also suffered?

Andras Kozma: While our assets are largely sound, we are influenced by the global sector. All banks have a need for liquidity. Deposits from households and companies are not sufficient to cover liquidity needs, so cash has to come from abroad from the parent banks. In a sense, we suffer even more than the parent banks because our liquidity needs are of lower priority than their own. As a result of the crisis, then, we have lost our foreign credit line. The Interbank market has dried up and we can no longer make loans in such foreign currencies as Euros or Swiss Francs. The parent banks simply did not have the liquidity to lend to us.

BBJ: What must Hungarian Banks do in the months ahead to cope with the aftermath of the crisis?

Andras Kozma: Deteriorating access to credit has been the impact of the crisis. Existing loans are still being prolonged if the borrowing entities prove creditworthy, but new credit lines have been difficult to establish. The challenge of the months to come is to find a way to adjust to this new reality. Banks are reasoning as to whether an offensive or a defensive approach is best. Which part of our business do we wish to scale back, they ask. Retail? Commercial? Which clients? How do we maintain liquidity? How brave do we want to be?

One approach we see now is to raise funds domestically by raising interest rates on deposits. But this doesn’t help those credits that are denominated in a foreign currency.

If the challenge can be summarized, it is to improve the liquidity management of the banks, to harmonise assets and liabilities on the maturity side and also to balance the currency side. If you have credits in a foreign currency, you need liabilities in the same currency.

Meanwhile, if interest goes to the sky on deposits, more expensive financing for banking customers cannot be avoided. Tight credit is most directly demonstrated in the lines of credit, investment credits, on loans with long-term maturity character such as real estate development projects, new investment in construction, retail expansion, mergers and acquisitions; in general, those business entities that do well in boom times will not be receiving much welcome.

The banking sector in this region has done well; we’ve gotten used to viewing ourselves as the favored sons of the European finance sector. But psychology plays an important role. It may be averting capital and financing from the region. We won’t likely be the favored sons of 2008.

BBJ: Will some areas of the banking business suffer more than others?

In my opinion, retail banking will be more stable than the corporate side and less affected by global setbacks. The brakes will be put on the corporate side, especially in the real estate sector. Instead of granting active credits, government paper will see more activity. In general, banks will be lending less and buying bonds in increasing number.

Money is like blood in the body. When there’s too much blood, you get high blood pressure, clots and loss of limbs. In much the same way, an overflow of liquidity causes bubbles in the economy. When more money is flowing, the assumption is that prices should be higher, which generates the impression that value is on the rise. But this is a psychological impact of high liquidity. The same home in the US could be valued at USD 200,000 or USD 2,000,000. But the value is derived from the expected sale price, not from an evaluation of the material value or the utility it provides. At the end of the current crisis, the assets in the US and Europe will see their values lowered. Asia’s, on the other hand, could see theirs rise.

BBJ: How do you view the relationship between the Hungarian banking sector and the government?

Andras Kozma: The banking sector is important to the broader economy, hence the government is concerned with it and has channels of communication such as the Commercial Banking Association, the National Bank, etc. I believe that the relationship is quiet good, as affirmed by recent statements from both sides.

We have seen recent instances of nationalization in the banking sector such as in the cases of the Royal Bank of Scotland or Hypo Realty in Germany. The CEE region has not yet seen the need for such government takeovers. As I said, we were not forced to be creative and had no need for AAA-rated subprime bonds.

BBJ: The energy sector was booming up until the recent crisis, particularly in the area of renewable energy. What do the months ahead hold for financing of projects, particularly in this sector?

Andras Kozma: It cannot be said that banks will refuse all new investment projects such as in energy or real estate. There will be new filters and the rules could change. If the government introduces new legislation that make energy projects more attractive, such as introducing new and higher subsidies and buy-in tariffs, then the business models of certain renewable energy projects could become much more attractive to banks. There are many things the government could do. But gas and oil should both be cheaper in times of recession, hence working against renewables. And just because gas may be expensive and coming almost exclusively from Russia isn’t enough to make renewable energy projects attractive borrowers to banks. These projects have returns that are years away, yet banks’ liquidity needs are months away. At the current moment and under current government policy, we wouldn’t be able to afford them, and wouldn’t likely be very enthusiastic to consider them as credit customers.

Q&A with Eric de Clercq

A slightly edited version of this Q&A appeared in the Budapest Business Journal
Conducted by Jacob Doyle

Eric De Clercq is the economic and commercial counselor of the Wallonia region of Belgium (Wallonia Export and Investment – AWEX), working through the Belgian Embassy to Hungary in Budapest. He recently came to Budapest from the same posting in Warsaw. Establishing and fostering ties between SMEs in Wallonia (Belgium) and Hungary, along with greater utilization of Belgian expats within Hungary’s business community top off his personal goals for his posting here.

Q: How would you describe Belgium’s role in international business?

A: Foreign trade has always been extremely important for Belgium since its very creation in 1830. Nowadays more than 70% of our economy relies on it. With this we are very open to the presence of foreign firms within our borders. Numerous large international companies have been long established in our country. American companies are for example extremely well represented. In fact, we just celebrated the 175th anniversary of Belgo-American relations. The most recent examples have been Google and Microsoft, which just decided to set up a major European hub in Mons, next to the French border. In my own region of Charleroi we have a large Caterpillar plant that assembles earth-moving equipment, providing employment for more than 3000 people. So the American presence in Belgium is substantial. Moreover, the presence of EU and NATO institutions gives the country a strong international aspect, particularly in its image abroad. And there is the fact that we have three official communities speaking three different languages (Dutch, French and German), as well as large numbers of ethnic minorities. Belgium’s cultural diversity is definitely considered as a plus by companies wishing to invest in our country. On the other hand, our national and regional presence abroad is rather far-reaching. Speaking just for Wallonia, we have the support of 105 economic representative offices in some 80 foreign markets, in place to serve the interests of our companies. And it is important to mention that we work closely with our colleagues from the other regions of Belgium and the federal authorities. As far as Hungary is concerned, Belgium is one of the top 10 investors in this country. Our companies have invested over €2 billion here.

Q: You recently came to Hungary from Poland as the Economic and Commercial Counselor representing the Wallonia region of Belgium. What have been your activities thus far and what plans do you have?

A: My main role is to help out companies - mainly SME’s - to develop their exports to the Hungarian market. I also promote foreign investment in my region. I’m new, so my first few months have been devoted to meeting Belgian firms already operating here. There are just a few large Belgian firms left in Hungary. Considering the process of globalization many Belgian investments have been bought over the years by multinationals. There are however many Belgians working in this country for non-Belgian firms. I would like to tap into this group and utilize its human resources. This is the first of two early goals I’ve set for myself, the second being to facilitate the involvement of Walloon SMEs in the Hungarian market.

Q: Could you be more specific about how do you hope to utilize these Belgian expatriates living and working in Hungary?

A: I think that the experience and expertise of all those Belgians working for non Belgian companies could be successfully used to help out our companies. One area where I hope to attract interest is to Pécs 2010, that is when Pécs becomes the European cultural capital. This was the rationale behind the business event my office helped to organize on April 23rd, along with the French-Hungarian Chamber of Commerce. Not only do events such as this build awareness on business opportunities, they also offer the possibility for the management and employees of Belgian and French firms to get acquainted, discuss and analyze opportunities and possible cooperation with the decision makers. With some 50 companies participating, our goal for this event was largely met. I don’t however wish to multiply the number of events on the Hungarian business calendar. There is more than double the number here than in Warsaw, my previous posting.

Q: What ways are you able to help these Walloon firms “get down to business?”

A: My office is able to foster business relations between Belgian and Hungarian businesses by organizing and even host meetings between them. What’s more, we have the capacity to play a limited matchmaking role at the request of a company – typically a Walloon firm interested in doing business here – by assessing their needs and then by researching the local market to help find partners, suppliers or even prospective clients on the companies behalf. We also work with ITD Hungary for FDI projects. I am not really a believer in big trade delegations. Instead I prefer to give as much individual attention to particular firms as possible. Unlike some other countries’ commercial services, we provide this service free of charge.

Q: What leads you to think you could have success in bringing Belgian SMEs to Hungary?

A: In addition to the services provided by this office, one factor attracting foreign companies to Central and Eastern Europe remains lower costs. But there is still sometimes a “mental Berlin wall” in the minds of many companies. Some people still view the region as being distant. Yet since the advent of low-cost air carriers, you can reach a market of 10m consumers and producers such as Hungary for less than the cost of a train ticket to Paris. Wizzair, a partly Hungarian owned airline, is the second largest client of the Brussels South Charleroi Airport. The effect could be similar to what happened in ’97 when Ryanair opened direct flights between Charleroi and Dublin and new markets were in effect created. Return fares of less than €100, coupled with agreements with hotels, enables low-cost visits with personalized meetings with local companies. So when it comes to bringing Belgian SMEs to Hungary, discount travel fills the missing link.

Q: What steps could be taken to secure investment on the part of Belgian SMEs?

A: All the big fish FDI have come already. The future belongs to SMEs. Their success depends a great deal on how they are received, both by local businesses and by local government. This will also help to determine the size and specificity of the SMEs that come. Previously, the lure had been made to big companies. Concerted efforts to attract foreign investors can and does pay off. As an example, the municipal government in Wroclaw, Poland launched just such an initiative and now lures numerous SMEs of foreign origin. Hungary could do the same. Municipalities could offer opportunities to Belgian SMEs. In Pécs we discussed redevelopment of the Zsolnay porcelain works. As you may know, in Belgium we also have a strong tradition of crystal and porcelain. When they described how part of the works would become a museum, I was reminded that this very thing has been done to a crystal works in Belgium, thereby illustrating an opportunity for just such cooperation.

MBA Program keeps Pace with Changing Times: An Interview with CEU Business School Dean Paul Garrison

A slightly edited version of this interview appears in the 2009 Budapest Business Journal Book of Lists

Paul Garrison is Dean and Managing Director of Central European University Business School and the former Managing Director of Coca-Cola Hungary and Marketing Director for East Central Europe and most recently founder and Chairman of The Garrison Group, a strategic marketing consulting company based in Budapest with Coca-Cola, IKEA, T-Com, UniCredit Banks, Bayer and Sony among their clients. He is author of three books, including one on marketing and a novel about Hungary’s 1956 revolution.

Jacob Doyle:

In light of the recent changes that have gripped the global economy, the practices and expertise of leading economists and business leaders have been challenged. Many are calling for reforms in the way business is done. In your view, how should business education be altered to better equip future business leaders to face this new and challenging business environment?

Paul Garrison:

Social and political thinking must be integrated in business education. If we look at what has happened in the past few weeks, this becomes clear. Public policy people typically don’t understand enough about how business works – about how to get things done - and, conversely, business people don’t understand how public policy works. In fact, these two threads of human activity are tightly intertwined, especially in this region. So business education must prepare students for this. If you’re running a bank, you need someone who understands politics and the public sector. The public sector, meanwhile, needs people who understand banking. Finding solutions to the current crisis is greatly hindered by a lack of such cross-sector understanding. Effective solutions require a different brand of thinking. The crisis isn’t merely economic; it’s a society wide crisis. In business education, therefore, it’s not enough for a professor to include an element of sociology in her human behavior class. I prefer to see an actual sociologist, a political scientist, a philosopher teaching business students to become politically astute, to get them thinking more deeply about society and the consequent impact of their actions…or lack of action.

Historically, business schools have taught students to go broad, to understand global trends, global standards, such as global ethical standards in their international business programs. Broadly speaking, they teach cross-cultural sensitivity. Yet while this crisis is having effects across cultures, it’s also penetrating deeply within particular cultures. Such depth of understanding is required to enable an effective solution, in much the same manner that a marketer selling bottled apple juice has to understand the depth of local tastes, habits and other consumer behavior to effectively position her product.

Doyle:

What have business schools been doing wrong and what must they do differently to be on the right track?

Garrison:

For years, students have entered and graduated from purportedly top business schools thinking they’re the leaders of the world. They were indoctrinated with this kind of thinking. They joined a club, a club with rules and role models. The typical role model set the rules by his own example: making as much money as possible while running through a string of divorces was perfectly OK, as was being a workaholic or a belief that money is the most important thing. These are not the rules I would advise my own children to follow, nor ask anyone else’s children to follow. They’re neither healthy for the individual, nor for society.

At CEU, we offer MBA and undergraduate bachelor of business degree programs and we also provide executive education, as many schools do. But we’re trying to do business education very differently. At public policy schools, such as Kennedy or Fletcher, they strive to teach future politicians and diplomats ‘to do the right things’. Business schools have historically taught how ‘to get things done’, but not so much about getting the right things done. It so happens that we’re building a public policy school at CEU, which is pretty big news. It promises to be one of the best public policy schools in the world because it will tackle that fundamental gap of getting the right things done for business and society.

Doyle:

Could you specify how your institution, the CEU Business School, is taking a different approach from other business schools?

Garrison:

Business students first of all need their core subjects, which include accounting, finance, critical thinking, strategic planning, among others. An MBA demands 60 credit hours. At CEU, we’ve reduced required credits to what’s absolutely critical, exactly 28.5 credits. That gives us 31.5 credits to do something more with, to instill a deeper understanding and awareness of responsibility. CEU students have gotten involved in such areas as regional studies or in our transnational leadership course where they do boardroom exercises where students must make real time decisions that have political, social and ethical and environmental consequences and ramifications. These could include a simulation where students – in the role of management - have to tackle a contamination problem; they have to decide how to notify consumers, how – if necessary - to lay off workers; all in a responsible way.

Doyle:

You mentioned rules learned by business students at other schools that you wouldn’t advise today. Is there a new set of business rules that you could recommend?

Garrison:

We have to reassess and write new rules for the next generation, the new club if you prefer, of business leaders. And the underlining and often unchecked premise of “greed is good” shouldn’t one of them. You can see the new rules taking shape among corporations. Take the example of the international brewer Inbev, whose slogan was formerly “the best beer in the world,” now changed to “the best beer in a better world.” What the new slogan reflects is a company policy not to produce beers and advertising that encourage binge drinking, but rather quality beer to be drunk responsibly, in moderation. While beer isn’t a product essential to human life, this change in policy does reflect a new understanding, a new club rule: you have to be responsible if you want to be a successful businessperson over the long term.

The old rules that economists and business leaders used to follow suddenly don’t apply. A severe drop in the Dow follows a five percent rise in US housing prices. Or a drop in the price of oil follows a cut in OPEC production. So it isn’t effective to teach students the old rules and economic models that try and predict some sort of rational behavior. The markets, like the people who work in them, are seldom rational. Instead students need to widen their focus, learn to be nimble and to more broadly assess situations as they arise with a deeper understanding of cause and effect – and once again, the cause is broader than just business, as is the effect.

Moreover, business itself needs new rules. I have never been a big proponent of unchecked capitalism. Unchecked greed is a problem and we have all seen how that has driven the irresponsible mortgage lending practices that precipitated this latest crisis. I think we need to have much more regulation. The Paulson team is busy trying to fix problems that – to many - did not come completely by surprise. A lot of people knew the bubble was there, but the lack of regulation allowed it to grow unchecked and eventually burst resulting in a credit crises, that became an economic crises, then a political crisis, and ultimately a social crisis that we are only beginning to see. It is this final step that most concerns me

Doyle:

Today we hear a lot about corporate social responsibility (CSR) being a positive trend in business. What is your view of CSR and is it something today’s business students should focus on?

Garrison:

Ultimately what businesses are about is providing consumer value. Customers care about useful, healthy products. They also care about such issues as carbon footprint. Good products and a lower carbon footprint are both expressions of customer value. When you create customer value, you create economic value and as a result, drive shareholder value. This should be the guiding light, the north star of business decision-making. If it becomes distorted with personal interest, then companies go off-track. When a business school alum is running a company and wishes to authorize a company contribution to his alma mater, I would advise him against that. If he wants to contribute his own money, that’s fine. He was educated there and received benefit and he’s free to give his own money. But I wouldn’t approve if he were to give shareholder money unless of course that gift was transparent and supported by the shareholders. Company money used for sponsorships, community relations and the like should be to benefit the reputation and goals of the company, not the personal goals, reputation and ego of the managing director.

An example of corporate social responsibility is when Coca-Cola used its clean water technology to clean up Lake Balaton or more recently the water in the national forests. Consumers care about clean water and it’s related to Coke’s mission. They source water and sell water. Naturaqua is one of their products. In other markets, in time of disaster, Coke has flown in and set up water treatment facilities. They’re the best in the world at water treatment and it’s a social responsibility role they can and should play. It’s an example of CSR, but it allows the company to stay true to its mission without getting distracted. Distractions can throw a company out of balance and make it very difficult to measure success.

Doyle:

After the Holocaust, German soldiers were taught to question the orders of their commanding officers; this to avoid carrying out any future misguided campaigns. Could a similar method be applied to business education today whereby students are taught to “self-regulate” their activities when they encounter what they regard to be questionable directions from their superiors?

Garrison:

We’ve got to have people coming out of business school with a greater understanding of business and social responsibility. We can teach 200 people in a class about social responsibility, about social interaction, the subtleties of politics, and about how to do what is right. But I doubt it will stick to all 200. Maybe just 175 and we hope these business leaders will exercise the good judgment required for self-regulation. It’s for the 25 to whom it didn’t stick that we need intervention and stronger regulations. We need to approach the problem from both ends. I don’t favor laissez faire capitalism, where businesses are expected to self-regulate. I don’t think we’re grown up enough for that. At the same time, I wouldn’t leave it to the government to do it all either. It’s clear to me we need both. That will take us to a better place.

Doyle:

Can responsibility in business really be taught? How do you teach it?

Garrison:

You try to put students in those situations where they have to take responsibility. At CEU, we’re using case studies, particularly case studies from this part of the world. Instead of just lecturing to students, our aim is to get them to walk in the shoes of decision-makers. In my marketing class, I present students with ten or eleven different sectors ranging from IT to entertainment to recreation to FMCG, etc. Then they pick a product, a new product, like a new type of mobile phone. Not always a real product, but, say, a new organic food product from Frito-Lay. They have to launch this product - develop goals and objectives, strategies, recognize and foster consumer understanding – and in the end, 50% of their grade is based on how that team presents that comprehensive business plan. And that’s just my marketing class. We apply the same case study and action learning approach across the curriculum.

We also put the students through a leadership camp at the opening of their MBA studies. One exercise is put them out in the woods where they’ve got four sets of three-man teams. The four groups of three are scattered throughout the woods, but only one group has a reliable map. In order to rendezvous, they have to overcome to real challenges using walkie-talkies and compasses to reach their destination. This exposes them to a host of leadership and teamwork stresses. The idea came from the Tenth Mountain Division that trained in WWII in how to survive Alpine combat conditions. While we’re not preparing our students for war, we can apply the same teamwork and leadership skills that led the Tenth Mountain Division alumni to such post-war achievements as creating the world famous Vail ski resort in Colorado or founding the Sierra Club, an environmental advocacy group. Ideas and ventures that have had a very positive effect on both business and society.

Doyle:

As a career business manager and a business educator, do you have any insights you would share with business students into the central problems facing business today and how these problems could be solved?

Garrison:

It’s clear that many businesses have lost their north star and have become disoriented on what is truly important. It has fallen off course in pursuit of short-term measurements and perceptions that often reward executives for making decisions that may in fact erode both customer and shareholder value over the long term. The perception demands placed on publicly-traded companies have a lot to do with this short-term versus long term focus that has led many of us astray. Family-owned or privately held companies don’t have this burden and can more readily plan for the long-term. As a result, their products and practices tend to reflect a more responsible approach. The Artois Brewery in Belgium, the genesis of today’s InBev, was a family-owned brewery for more than five centuries. Their emphasis was on quality rather than low costs and high sales. They recognized they were in the game for the long haul, so it would go against their interests to produce an inferior product they could sell cheaply. Just as public servants should serve the common good, so too should businesses – the common good is usually good for customers and that is usually good for business. But if the focus continues to be on short-term results as it is on Wall Street and other places in the financial trading world, this will continue to undermine long-term success planning and companies’ ability to produce quality products over the long term.