Read the “Transition at Whirlpool Tatramat: From Joint Venture to Acquisiton” case study in your textbook, and submit answers to all the questions that follow the case study.
part three I N T E G R A T I N G C A S E 1
Transition at Whirlpool Tatramat: From Joint Venture to Acquisition
This case gives a description of the evolution of Whirlpool’s participationstrategy in Slovakia. Beginning first with a joint venture, Whirlpool eventu-ally takes control of the whole operation. The Joint Venture Partners Whirlpool Corporation Whirlpool Corporation is one of the world’s leading manufacturers and marketers of home appliances, such as washing machines, refrigerators, and kitchen ranges. Its growth, from a domestic manufacturer in the United States to a firm with worldwide presence, is the result of a strategic decision taken in the mid-1980s.
Unable to find adequate growth potential in the United States appliance mar- ket, the company began its global expansion. By 1998, the company manufactured products in 13 countries and marketed them in approximately 170 countries. It employed over 59,000 people worldwide, and its net sales reached $10.5 billion.1
Over ten years, the company had doubled the number of its brands, its employees, and its revenues, and had tripled the number of countries in which it had manufacturing sites (Table 1).
Whirlpool’s Western European operations started in 1989, when Whirlpool and N.V. Philips of the Netherlands formed a joint venture, Whirlpool Europe B.V. (WEBV). Its mission was to manufacture and market appliances in Europe. Origi- nally, Whirlpool held a 53 percent stake in the joint venture; in 1991, it became the sole owner through the acquisition of the remaining shares.
Whirlpool Europe B.V. soon became the third largest household appliance pro- ducer in Europe, behind the Swedish company AB Electrolux and the German joint venture Bosch-Siemens Hausgerate GmbH. After its acquisition of Philips’s shares, Whirlpool began production in several European countries (France, Italy, Germany, and Sweden). These sites achieved economies of scale by producing a minimum of 600,000 pieces per year per factory. However, the Western European market soon experienced a recession, which was reflected in disappointing sales and profits, unlike at that time those in the United States.
TABLE 1 A Decade of Whirlpool ’s Internationalization, 1988 and 1998
Item 1988 1998
Countries with manufacturing sites 4 13 Brands 14 25 Employees 29,100 59,000 Revenues (billions of dollars) 4.4 10.5
Source: Whirlpool Corporation. 1998. Vision, 1, 2 (March–April) and information provided by Whirlpool Slovakia.
After the fall of the Berlin wall and the revolutionary wave in Central and Eastern European (CEE) countries, WEBV started looking for opportunities in the transition economies of Eastern Europe. Given the competitive pressure in Western Europe, as well as pressures on manufacturing costs, WEBV capitalized on the idea of opening new markets as well as using the low-cost competitive advantage of CEE by investing in Poprad, Slovakia.
Whirlpool Europe not only ranked as the third largest producer and marketer in Western Europe, but it also was the leader in CEE, where it had one manufacturing center (in Poprad, Slovakia) and ten sales offices. Whirlpool’s strat- egy for Europe has evolved over time. During the 1990s, Whirlpool focused on closing the “value gap” between the costs of appliances relative to consumers’ dis- posable income in Western Europe as compared to other major world markets, such as North America. That strategy was by and large successful, although at that time the whole industry was under cost pressures, as economic growth in Europe stagnated and consumers turned to lower-cost, less-featured products.
Through new products, the company undertook a dramatic restructuring of its entire line during the second half of the 1990s. Using extensive consumer and trade customer research, new products were introduced in every appliance cate- gory. In 1997, an estimated 60 percent of revenues came from these new products. In February 1998, Whirlpool CEO David Whitman commented on the situation in Europe: “Europe proved to be a bright spot for us in 1997, following two years of turbulent times. Our performance in Europe has consistently improved, quarter after quarter, following cost-reduction and productivity improvement efforts begun in 1996. Additionally, we continued to expand our business in Central Europe and other emerging markets by drawing from our expertise throughout our other European operations. As a result, Whirlpool remains the leading brand across the whole region.”2
Tatramat Karol Scholz founded Tatramat in 1845 as a producer of nails and currycombs for grooming horses. After World War I, the company switched to producing domestic kitchen goods; after World War II, the company was nationalized. Under the 45 years of socialism, the company expanded to produce zinc-coated and painted barrels, water heaters, electric ovens, and automatic washing machines. It began production of automatic top-loading washing machines (under license with VIVA of France) in 1969, and front-loading washing machines in cooperation with Elektronska Industrija of Yugoslavia in 1972. In Czechoslovakia, it was the number one manufacturer of automatic washing machines (202,500 units in 1990) and domestic water heaters (146,900 units). At the beginning of the 1990s, Tatramat employed approximately 2,300 people. It controlled 88 percent of the automatic washing machine market in Czechoslovakia, a near monopoly. The company derived about 12 percent of its revenues from exports. In 1990, its sales reached $48 million. The operating profit was about $3.2 million, resulting in an operating margin of 6.8 percent. Tatramat’s washing machines were designed to meet the requirements of the Czechoslovak market.
In the late 1980s, Western brands were often too expensive, too complicated, or simply too large to appeal to the average Czechoslovak buyer. Tatramat also had an established distribution and servicing network in Czechoslovakia. This, along with a wide spread of the brand, meant cheaper distribution costs, cheaper servic- ing costs, and lower advertising costs relative to imported brands. In addition,
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there was an untapped market for washing machines in Czechoslovakia. At the beginning of the 1990s, the penetration level for washing machines was only 58 percent. It was expected to rise to the levels of Western Europe (approximately 90 percent) within a decade. The demand for major consumer appliances was expected to increase gradually in Czechoslovakia and in neighboring countries as the region reoriented itself toward a market economy.
After the Velvet Revolution in 1989 in Czechoslovakia, Tatramat, as well as other Czech and Slovak companies, went through major changes. The communist gov- ernment was overthrown and Czechoslovakia began to build a democratic society and a market economy. Although restructuring was difficult, and the year of 1990 was particularly hard, Czechoslovakia was considered to be among the leading and most successful countries in transition. Martin Ciran, the director of Tatramat and, subsequently, Whirlpool Slovakia, described the situation of Tatramat at that time as follows:
After 1988, State export subsidies that covered the difference between high domestic costs and low prices on foreign markets were gradually abolished in our country. It hit the sales of our main export article, frontloaded washing machines very strongly. At that time we realized that our products were not competitive on the open European mar- ket. We concentrated on top loaded washing machines because our main customers were all interested in top-loaders and we were able to increase the production of only one product at a time. Obviously, top-loaders and front-loaders were produced using different technology. In 1989–1990, we introduced abroad our new product, the MINI, fully designed by Tatramat. It was a failure because of its low quality and high price. It was simply an old concept; a new machine, but an old concept. Afterwards, we started to think about how to increase the competitiveness of our products. We considered the purchase of technology or licensed production. In 1989, prior to the revolution, I began looking for partners to supply technology for top-loading washing machines. We received bids from Philips, Thompson, and Zanussi. We intended to improve the techni- cal standards of our production as well as to increase production capacity. We realized that it was not enough to produce only 200,000 units per year, because studies showed us that we had to produce more than 300,000 per year to achieve scale economies.
Martin Ciran and other managers of the company visited the leading manufac- turers of white goods in Western Europe and saw that even 300,000 washing machines per year were probably not enough. The best companies produced 600,000 to 1 million units per year. They decided hence to change their products, to increase production, to share costs, and to cut unit costs for the company to survive. Martin Ciran went on:
In the meantime, the COMECON market collapsed. We totally lost our foreign markets for washing machines and boilers; domestic demand also went down as a result of the difficulties of the first years of transition. There were fewer apartments built, fewer weddings…. People had other troubles and preferences than the purchase of a wash- ing machine. We lost markets, we lost customers. In 1990, we fired about 100 people; in 1991, we fired 900, from an original of 2,300. We were lucky, because such a major lay-off did not lead to any special discontent. Employees got good compensation according to the law and some of them started to run their own small private busi- nesses, which had not been allowed under socialism. It was also a time of so-called small privatization—the privatization of small shops, services, etc. formerly owned by the State, which attracted some of our employees, too.
One of the primary challenges in the Czechoslovak transition and in the shift toward a market economy was privatization. On October 1, 1990, the Slovak Ministry of Economy transformed Tatramat from a state enterprise into a state joint stock
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company. At that time, ownership of assets, in the form of shares, was transferred to the National Assets Fund, under the administration of the Slovak Ministry of Privatization. As a joint stock company, the intention was to privatize Tatramat through vouchers. Companies owned by the National Assets Funds could establish joint ventures with foreign investors only after approval by the Slovak Ministry of Privatization.
Martin Ciran recalled:
We were transformed from a State-owned company into a State-owned joint stock com- pany, one of the first companies in Czechoslovakia. In the meantime, the separate Czech and Slovak Governments became much stronger and federal Czechoslovak Government lost most of its power. It meant that our superior authorities were no longer the federal authorities in Prague but the Slovak authorities in Bratislava. The change of the form of the company also resulted in more power in the hands of management. We started to have a real feeling for new responsibilities, and we could do a lot of things without the approval from the State or State authorities. Although short of ownership, we had more competence and power. We could, for example, negotiate with foreign companies. After we recognized that the price for a license or a new technology was very high, we started thinking about capital investment or about a partner for a joint venture. It took us half to three-quarters of a year to understand that it would not be enough to produce new machines without access to markets. Under the new conditions brought by the revolution, it was possible to think about other forms of cooperation or alliance with foreign compa- nies, not only about licensing. At that time, Volkswagen was preparing a deal with Skoda in the Czech Republic and with BAZ in the Slovak Republic, with the assistance of Credit Suisse First Boston. We also prepared a memorandum about us, followed by an offer for cooperation. This memorandum was sent in January 1991 to all prospective investors known worldwide, all leading companies in white goods. I cannot say that all the people in the company were eager for such cooperation with Western companies as I and my closest team were, but everybody felt it was necessary to do something.
After receiving the memorandum, Whirlpool, Electrolux, Bosch-Siemens, and Thompson all declared their interest in possible cooperation. It is to be recalled that, at the end of the 1980s and at the beginning of the 1990s, Tatramat produced about 200,000 washing machines per year: 100,000 top-loading washing machines (the so-called MINI, 95 percent sold in the Czechoslovak market) and 100,000 front-loading machines (25 percent for the Czechoslovak market, 75 percent for exports, primarily to the socialist countries of Poland, Bulgaria, Yugoslavia, and the German Democratic Republic; only 5,000 were sold in Western markets). At that time, various problems surfaced in the factory and its environment: high fixed costs, low productivity and quality, backward technology, products unsuitable for for- eign markets, the abolition of state export subsidies, the collapse of the COMECON market, and a drop in demand on the domestic market. Tatramat sales dropped from around 350,000 units in 1988 to around 220,000 units in 1991 (Table 2). Finally, the devaluation of the Czechoslovak crown in 1990 tripled production costs.
At that time, Tatramat’s management realized that a single purchase of technology would not solve all its problems. Market access was needed, as well as a partner who
TABLE 2 Tatramat Sales, 1988–1991 ( thousand units)
Item 1988 1989 1990 1991
Washing machines 200.0 199.1 210.6 144.1 Water heaters 151.8 143.7 133.3 76.2
Source: Information provided by Tatramat.
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would be able to guarantee it. Tatramat’s idea shifted from a purchase of technology or licensed production to capital investment or a joint venture. During the search for the right partner, it was realized that Whirlpool was the firm most interested in improving Tatramat’s management and including Tatramat in its global network.
Motivations for an Alliance Between Whirlpool Europe B.V. and Tatramat In 1990, the managers of WEBV realized that the changes in CEE brought about new opportunities and challenges for their company. They were attracted by the possibility of gaining new markets, as well as obtaining production facilities and a skilled labor force. Their facilities were not efficient, but they were low cost in comparison to Western Europe. The privatization of state-owned factories opened the way for potential ownership and control. However, WEBV was not driven only by external reasons. It was also forced to look at new opportunities because of its internal problems: more limited success in Western Europe than expected, disap- pointing operating margins, and the need to decrease costs.
Strategic Options for Whirlpool To solve some of these problems, WEBV could use various strategic options: exporting, joint venture, acquisition, or greenfield investment in CEE. Every option had some advantages and disadvantages:
Exporting l Advantages: Sales would increase, without assuming high risks. l Disadvantages: Production costs would not be reduced; tariff barriers would remain.
l Advantages: Access would be had to an existing facility, an existing brand, an exist- ing labor force, an establishedmarket share, existing distribution facilities, an estab- lished local supplier base; low production costs; contact with authorities through the local partner; the potential to increase ownership control at a later stage.
l Disadvantages: Control would be shared, relationships and trust need to be built, labor force training would need to change local attitudes, need to overcome negative attitude toward the local brand name.
l Advantages: Full control plus all advantages of a joint venture. l Disadvantages: More resistance from the target firm and local government. In
Czechoslovakia, takeovers had no precedence, resulting in more prejudice and in less motivation or cooperation by the local partner; the facility and the labor force would be more difficult to change.
l Advantages: New facility, full control, own trained labor force, low costs. l Disadvantages: No labor force at hand, more training needed, local competition,
more obstacles from the government and local authorities, more expatriate staff would be needed, no inherited market share, no previous brand name recognition.
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A takeover would have been the best choice for Whirlpool. However, the legal system of Czechoslovakia and the resistance of the local managers as well as the Government did not allow going for this form immediately. Therefore, the most realistic choice for Whirlpool from a strategic point of view was a joint venture, with the possibility of a gradual increase in investment until a final takeover.
Strategic Options for Tatramat Tatramat’s reasons for entering into the joint venture could be summarized as fol- lows: drop in domestic demand, collapse of export markets in CEE, high and grow- ing costs, obsolete technology, risk of massive layoffs, and a need to increase production to reach scale economies. To solve its problems, Tatramat had to choose between two strategic options: licensing or joint venture. Both options had some advantages and disadvantages:
l Advantages: New technology, no partner to be accommodated, full control, access to training in technology, continued production of both washing machines and water boilers under Tatramat’s control.
l Disadvantages: No market access, possibly high technology and license fees, no other know-how or skills inflow, no capital inflow.
l Advantages: Technology, capital, training capacity, know-how, and market access. l Disadvantages: Profits and control to be shared, eventually leading to a loss of
control over the enterprise.
A joint venture seemed to be a better choice in comparison to a licensing agree- ment. Because the potential partners wanted only the washing machine unit, Tatramat’s contribution could be only this part of production. The main question that remained was what to do with the water boiler segment. Other problems could be solved through gradually selling Tatramat’s ownership to Whirlpool or by becoming a supplier to the joint venture.
Form of the Deal As seen from this analysis, the most suitable form for both partners was a joint ven- ture. Tatramat was nevertheless concerned by the three conditions set by Whirlpool: the possibility of a gradual increase of Whirlpool’s share in the joint venture, Whirlpool’s unwillingness to include water boiler operations in the joint venture, and the call for an increase in the tariff protection of the local washing machine market. Tatramat was in a weak position vis-à-vis Whirlpool, and it decided to accept fully the first two conditions. It even managed to lobby for import tariffs.
Anatomy of the Deal: Main Problems and Outcomes After complex negotiations, the contractual basis for the joint venture was created at the end of 1991, and it began operations in May 1992. Whirlpool contributed know-how in technology, production, and marketing to the joint venture, and
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also bought 43.8 percent of the shares for $6 million (Figure 1). Tatramat’s non- financial contribution consisted of intellectual property rights in the area of washing machine production, goodwill, buildings, machinery, land, and contracts. It kept 56.2 percent of the shares of the joint venture. The original agreement was signed for ten years.
With Whirlpool’s investment, the original Tatramat company split into three separate entities: (1) the joint venture Whirlpool-Tatramat became the number one washing machine producer in both the Slovak and Czech Republics; (2) Tatramat itself continued to produce water heaters; and (3) Tatramat-Quasar, a small joint venture with an Italian partner, continued to produce vending machines.
Whirlpool-Tatramat became a separate organization with its own sales staff and after-sales service. Whirlpool-Tatramat produced two types of top-loading washing machines: the old Tatramat MINI (under Tatramat’s brand name), and the Whirlpool T-12 (under the Whirlpool-Philips brand name). The first T-12 rolled off the line in October 1992. Even though results improved over time, the number of units produced in 1993 (59,000 MINIs and 39,000 T-12s) was below expectations.
Not only quantity but also quality became a critical problem in Poprad. As WEBV envisaged broadening Poprad’s role to an international production plat- form for Western markets, the quality of Poprad’s products had to meet the strict demands of Whirlpool and its customers. Quality had improved at Poprad during the years 1992 and 1993 but not enough, forcing them to sell to mostly Czech and Slovak customers.
Employment levels significantly dropped after the establishment of the joint venture. Initially, 550 employees were transferred from Tatramat to the joint ven- ture, and the remaining 750 employees stayed on the payroll of the Slovak parent company. In the case of management staff, Tatramat did not want to lose its best employees to Whirlpool-Tatramat, and therefore any transfer of white-collar work- ers was subject to its approval.
FIGURE 1 Ownership Structure of Whirlpool-Tatramat, 1992–1996 (%)
Source: Information provided by Whirlpool-Tatramat.
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By 1993, employment at the joint venture was down to 219.3 However, pro- ductivity increased from 153 units per employee in 1992 to 199 units in 1993.
In July 1993 Whirlpool transferred $1.5 million to the joint venture, increasing its share in the joint venture to 49.9 percent (Figure 1). This amount was invested into a partial transfer of “hard” technology.
The external conditions of the joint venture also experienced a drastic change. In 1993, as a consequence of the division of Czechoslovakia, the local market for Whirlpool-Tatramat, with its location in Slovakia, diminished by two-thirds with the loss of the Czech Republic. However, Tatramat’s brand name still enjoyed high name recognition in the Czech Republic, and the company maintained distribu- tion facilities there. To catch up with the political changes, including new borders, and to avoid losses resulting from worsened operational conditions, Whirlpool- Tatramat established its own affiliate in the Czech Republic in May 1993.
Despite the loss of about $1.5 million in the first full year of operations, Whirlpool increased its share in the joint venture to 72 percent in February 1994 (Figure 1). Before Whirlpool’s stake reached two-thirds of the joint venture, Tatramat had the right to nominate the chairperson of the board of directors and two other board members, compared to two seats for Whirlpool. After having obtained the two-thirds majority, Whirlpool got the chairpersonship plus two additional seats. Moreover, as soon as Whirlpool reached two-thirds in the joint venture, the joint venture agree- ment allowed it to decide, without the approval of Tatramat, on most important issues, such as plans, major contracts, and financing. AsMartin Ciran, managing direc- tor of Whirlpool-Tatramat since the beginning of its operations, recalled: “We were aware of the necessity of performance improvement, but we did not want to have our hands tied up by Tatramat, which faced big economic troubles at that time.”
In 1994, production experienced moderate growth, with the production of T-12 more than doubling to 95,000 units (Table 3). The joint venture also produced the 11,000 MINIs that year, but it was the last year that the model was manufactured. The MINI was abandoned due to poor design, quality, declining sales, and thin margins. Initially, in 1992 and 1993, the Whirlpool-Tatramat assembled washing machines from kits imported from Amiens, France, where the T-12 was also made. The joint venture produced only the T-12 in 1995 and 1996.
In October 1996, Whirlpool bought out the remaining shares and became the sole owner of the company (Figure 1). The name was changed to Whirlpool Slovakia, and its headquarters and national sales office were moved from Poprad to the cap- ital city, Bratislava. The following year the company exceeded, for the first time, the production targets outlined in the original joint venture agreement. A new front-loading model, the Tatry, was introduced in 1997 and production reached over half a million washing machines in 1998 and nearly one million by the year
TABLE 3 Whirlpool-Tatramat ’s and Whirlpool Slovakia’s Production, 1992–2000 ( thousand units)
Type Brand 1992 1993 1994 1995 1996 1997 1998 1999 2000
MINI Tatramat 74 59 16 – – – – – – TL* Whirlpool Ignis 5 39 93 8,149 267 349 381 495 585 FL Whirlpool Ignis – – – – – 1 140 275 360 Total 79 98 111 219 267 350 521 770 945
* Note: TL: top-loaders, FL: front-loaders. The model T-12 has been produced since the beginning. In 1998, other top-loaders (Kireco and Alliance) were introduced.
Source: Information provided by Whirlpool Slovakia.
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2000. Although the capacity at Poprad made it the smallest of Whirlpool’s European manufacturing centers, it remains the lowest-cost production facility.
Operational Issues Since 1994, Poprad has begun to integrate vertically, producing more of its compo- nents in-house in an effort to reduce its reliance on the expensive Amiens compo- nents. Components account for 80 percent of a machine’s costs. This, together with transport distance, customs regulations, and problems with timely delivery from the Amiens site, led to a decision to source as much as possible locally. While local content was only 3 percent in the first year, it reached 12 percent in 1994, 37 percent by the end of 1995, and 60 percent by the middle of 1997. This share has been maintained since then. In the mid-1990s, the plant had only 14 local suppliers; by 2000, it had 35.
With the creation of a local supplier network, the company succeeded in increasing production flexibility, reducing costs, and avoiding import restrictions such as duty and import surcharges.
The total equity investment of Whirlpool, including the initial investment and the equity increases, reached about $11 million (including technology capitalized at $3 million) by 1996. The joint venture invested $14 million into production in 1992 to 1995. In the years 1996 through 1998, the company planned significant investments into new front-loading machines (the so-called Delta). This project was supposed to introduce a completely new front-loading machine for the European market. Later, Project Delta was changed to Project Tatry, with less investment and different technology, producing low-end front-loading washing machines. Investment into this model reached about $10 million by 1997. To prepare for the launching of this product, changes had to be made to production areas and technology, and a semirobotic line for assembling was installed.
The total amount of Whirlpool investment into the Poprad plant reached $36 million by the year 2000. In comparison to hard technology, soft technology trans- fer has been more pronounced. Whirlpool introduced its management and incentive structures in Poprad. The company stressed the importance of communication with workers. Face-to-face meetings with management took place, explaining human resources practices previously unknown to the employees. After the first shock from Western management style in 1992 and 1993, employment gradually grew.
The human resources department adopted new policies, such as performance evaluation, pay for performance, a “recognition policy” to reward hard work and innovation, and gain-sharing schemes in which additional wages were linked to company profits. It also emphasized the need for improving inter- and intradepart- mental communication and for training on specialized topics, such as teamwork, decision making, and individual thinking.
White-collar workers were trained in basic business skills, market economics, quality management, supplier quality, ISO 9000, English, computer skills, and Whirlpool philosophy and corporate culture. These training programs were intended to increase managers’ commitment to the firm and to spread the new corporate philosophy among workers. People were taught how to communicate, organize their workplace, and increase productivity and the quality of work.
Additionally, the human resources department provided introductory courses on the Whirlpool Excellence System (WES). These courses were popular among Whirlpool Slovakia employees. According to the managers, it became a valuable tool for improving the work of the company. The region of Poprad had an
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unemployment rate of about 17 percent, and for Whirlpool this meant the possi- bility to ensure flexible work practices.
The human resources department received 400–500 job applications annually. Seventy percent of the candidates completed high school education. Currently, workers’ wages consist of a fixed part (73 percent on average) and a collective bonus (27 percent), depending on productivity, flexibility, quality, and the level of absenteeism. A collective bonus was chosen as a way of encouraging cooperation among employees to work more efficiently at a lower level of absenteeism.
Since work there is considered to be intense, most employees at the Poprad plant are young, with an average age of 28 years. The average manager is 38 years old, which is also considered to be young. This may reflect the fact that only young people were willing to join a terra incognita—a joint venture—when the joint venture was established in 1992. They were trained by Whirlpool and were able to take their new positions quickly. In comparison to the Slovak average, they are well paid. During the first six years of Whirlpool’s operations in Slovakia, only one employee had left the company. Currently, there is only one expatriate in Slovakia, an Italian national who serves as plant director in Poprad.
The joint venture was established with the aim to reach the productivity levels that were typical of other Whirlpool plants in Europe. The productivity in Poprad’s plant increased significantly from 153 pieces per employee in 1992 to 199 in 1993 and to 323 in 1994. It reached 927 pieces per employee in 1997, which is far above the expectation and levels in similar plants (Table 3). Product quality has been a critical aspect of production at Poprad. As WEBV intended to expand Poprad’s role as an international production center to serve Western markets, Poprad’s prod- ucts had to meet Whirlpool’s global quality requirements. Quality improvements in Poprad have been attributed to the training of employees in quality concepts, in-process checks, and vertical integration, including greater internal control over the quality of components. During production, every machine is tested electronically, and 10 percent are taken off the assembly line and tested for 50 cycles. Additionally, 3 percent out of the 10 percent taken from the line are taken to the factory reliability lab where they are run through 250 cycles (corresponding to one year’s usage) or 2,500 cycles (ten year’s usage).
During the two first years (1992–1993), the company operated only in the Czech and Slovak markets because product quality at that time was too low to guar- antee exports. In 1994, the company started to sell in Poland, Hungary, and Argentina. In 1995, it entered into the Western European market. In 2000, about 90 percent of the output of Poprad was exported through the corporate distribu- tion network. On balance, Whirlpool-Tatramat proved to be successful. Its perfor- mance has gradually improved. Its WES score rose from 238 in 1993 to 702 in 1997. Even the best Whirlpool plant in Europe managed to score only slightly bet- ter in 1997 (850). According to Whirlpool managers, the performance of Poprad has remained at the same high level since then.
Reasons for the Takeover of the Joint Venture by Whirlpool The following reasons for the full takeover of the joint venture by Whirlpool could be identified:
l The global strategy of Whirlpool. Whirlpool and Tatramat were two unequal part- ners with two different goals. Since the beginning, the goal of Whirlpool was a
Integrating Case 1 Transition at Whirlpool Tatramat 437
gradual increase of its share in the joint venture with the aim of taking it over. It is consistent with its worldwide strategy of acquisitions and global control.
l The economic problems of Tatramat. Tatramat was not able to keep its share in the joint venture. In 1993, when it was time for the first significant investment to increase productivity, Tatramat was unable to contribute. This situation pro- pelled a gradual increase in the share of Whirlpool in the joint venture. Under the worsened conditions, the goals of Tatramat to continue washing machine production and to survive the transition could be reached only at the expense of losing control over the joint venture. The hopes of Tatramat’s management to obtain the dividends from a profitable joint venture and to improve its own difficult economic situation were not realized.
At the beginning of its operations, the joint venture was in the red, and the only way for Tatramat to get some cash was to sell its shares to the other partner. With this deal, each party nevertheless satisfied at least some of their needs: Whirlpool established production in a low-cost country, benefited from the local skilled labor force, reached a new market, and created a new export base for other countries. Tatramat avoided going into bankruptcy and received cash and knowledge in vari- ous areas, including marketing, management, and production.
Factors of Success at Whirlpool Slovakia
A Manager’s Point of View According to Martin Ciran:
The very comprehensive and detailed joint venture agreement consisting of 30 pages and four appendices worked out by English lawyers from the Scadden Arps Company was one of the reasons for the success of the company. In each case of a misunder- standing, we referred to this agreement, and it really showed us the way out. On the other hand, you have several cases in Slovakia where a joint venture broke up because of a non-qualified agreement. After the collapse of the centrally run economy, the establishment of joint ventures was marked by a lack of hands-on experience on the Slovak side. Due to a shortage of reputable and experienced law firms, we chose a for- eign company to draft the agreement and it was really worthwhile.
There is still more to that story. Martin Ciran described other success factors:
Based on the joint venture agreement and the follow-up development of the ownership structure, the parent company Whirlpool practically had full managing and decision- making power in the company. Its approach has been very transparent and we got all the necessary knowledge and skills through training and technology transfer. On the other hand, Whirlpool’s headquarters in Italy had agreed to the use and application of this knowledge. I would say mutual trust has been one of the basic points of our suc- cess. Furthermore, our people have been eager to learn and to apply new procedures. It was also essential that top management of the joint venture was young and not “afflicted by socialist working practices.” It identified very quickly with the Whirlpool philosophy and corporate culture. The managers have transferred these values to other employees. We have implemented a new management system known as the Whirlpool Excellence System, quickly and successfully. In my opinion, the greatest change since the Tatramat days has not been in technological innovation or investment but in employee attitudes. The new thinking of our employees and their accomplish- ments in improving the working conditions at the facility and in making the production
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lines more flexible set the company apart from most of the other firms in Slovakia today. On top of that, the next very important success factor has been “not over investing.” In other words, our company has a big cost advantage in comparison to Western European producers because of low debts. With high investment we would lose this advantage.
A Broader Approach to Success Factors Even though Martin Ciran mentioned many success factors, it is necessary to add that the story started with the investment of Whirlpool into a local monopoly pro- ducer. Hence, an immediate market share was guaranteed for the joint venture. This was important especially at the beginning of the operations when it was not possible to export products abroad due to their low quality. The monopoly position was also guaranteed in the joint venture agreement stipulating a noncompetition clause. It did not allow the Slovak parent company to produce washing machines and excluded competition between affiliates and parent companies. Whirlpool could also realize classical first mover advantages. The combination of a monopoly position, low-cost production, and first mover advantages has contributed to the suc- cess of Whirlpool Slovakia. It is interesting to note that Whirlpool insisted on market protection, but this was automatically abolished in the Czech Republic after the split of Czechoslovakia and did not play any special role in Slovakia. The firm maintained its market share simply because imported goods were too expensive for the average Slovak costumer at the beginning of the 1990s. There were no other classical incen- tives (such as tax holidays) provided to Whirlpool.
The Performance of the Slovak Parent Company The managers of Whirlpool were satisfied with the evolution of Whirlpool- Tatramat and later Whirlpool Slovakia. However, the situation in the Slovak parent company, Tatramat, has proved to be more complex. With the creation of the joint venture Whirlpool-Tatramat and the splitting of the old Tatramat into washing machines and boilers production, the parent company Tatramat entered into a period of difficulties. The parent company Tatramat tried to adjust to its joint ven- tures with foreign partners. At the beginning of the 1990s, in addition to Whirlpool-Tatramat, it established Tatramat-Quasar, which produced vending machines with an Italian partner. At a later stage, it also established Scame- Tatramat with an Italian partner to produce plastic parts. As activities moved out from the parent firm into the joint ventures, Tatramat experienced a large decline in its labor force, especially in the first half of the 1990s, and at one point even faced bankruptcy. As initially expected, the sense of rivalry, jealousy, and competi- tion between Whirlpool-Tatramat and its Slovak parent company evolved during the first year of operations: Tatramat, located in the neighborhood of Whirlpool, has become its main local supplier. According to the Slovak managers of Whirlpool, Whirlpool’s orders placed in Tatramat and its ventures created employ- ment for about 200 persons there. Besides that, they argued that Whirlpool contributed to the creation of 400 more jobs in other Slovak companies. This means that one workplace established in Whirlpool created another job in supplier, service, or distribution companies doing business with or for Whirlpool. In the end, Tatramat
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survived its period of transition. In 2000, it reported a turnover of about $11 million, of which 75 percent came from export sales. It recorded a pretax profit of $0.15 million (compared with a loss of $0.6 million in 1997) with 520 employees.
Conclusions The acquisition of Tatramat by Whirlpool is only one example out of many: Since the middle of the 1990s, the strategy of investors in Slovakia has changed, especially among large multinational corporations (MNCs). The new trend is characterized by incremental takeovers. In several instances in the late 1990s, MNCs (including the biggest investor in manufacturing, Volkswagen) steadily increased their equity shares in joint ventures in Slovakia. There are a number of reasons for this new trend:
l The global strategies of MNCs. l The weak, unequal position of the local partners in comparison to their foreign
partners. l The conflicts between the Slovak and foreign partners over the joint venture
strategy. l Conflicts over the control of key or common services such as energy, telecom-
munications, and security (joint ventures are usually situated in the former plants of Slovak parent companies).
l Conflicts over pricing and transferring profits abroad. l A lack of experience by local companies in how to deal with these issues (under
socialism, cooperation with Western companies was not permitted). l The inability or unwillingness of the Slovak partners to maintain their shares in
the joint ventures. l Financial difficulties of the Slovak partners, forcing them to sell their shares in
the joint ventures to their foreign partners. l The success of MNCs in establishing their own communication channels with the
authorities, in building positive public relations and in finding local managers for top positions, resulting in less reliance on local partners in these areas.
l The recognition by MNCs that the transition process is irreversible and thus risk sharing with local partners was no longer necessary.
Most multinational companies that first established a joint venture with local part- ners in Slovakia have, in the meantime, moved into the acquisition of shares (Whirlpool-Tatramat, Volkswagen-BAZ, Alcatel SELTesla, Henkel-Palma, Hoechst- Biotika, etc.). There are only a few exceptions, usually based on legal constraints, such as state participation in the telecommunication industry. Moreover, this situation is typical not only for Slovakia, but also for many other transition economies in CEE.
Like the best-known examples in Slovakia (Whirlpool and Volkswagen), similar developments occurred, for example, in Hungary with General Electric-Tungsram, in Poland with Gerber, and in the Czech Republic with Philip Morris. As soon as multinational companies became sole owners, they tended to invest more into technology (however, they usually tried not to “over invest,” i.e., not to lose the cost advantage and not to replace cheap labor by machinery). Most governments seem to have no policy to prevent an “incremental takeover.” Moreover, entry into the European Union and the acceptance of its legal framework may further limit the possibilities to block such acquisitions.
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Epilogue: Whirlpool Slovakia in the New Century At the turn of the century (years 1999, 2000, 2001), Whirlpool Slovakia produced around 1 million units yearly. In 2002 the production reached 1.2 million units, half of that top-loaders and another half front-loaders. In 2003 production reached 1.5 million pieces and the company employed more than 800 employees. Since 2004 Whirlpool Europe decided to shift all the production of washing machines in the group to Slovakia (e.g., 300,000 units from Amiens, 150,000 from Polar), and the capacity was removed from Neukirchen to Poprad.
From 2004 until 2008, Whirlpool Slovakia produced almost 2 million units each year (slightly more top-loaders than front-loaders every year); for example, in 2008 the total production was 1.97 million washing machines. In 1998 the company pro- duced the millionth piece in its history, and in 2008 the 15 millionth washing machine produced in Poprad ran off the production line.
In 2004–2008, the company employed about 1,200 people directly, and about 1,800 employees worked in the Poprad area for the suppliers of Whirlpool Slovakia (such as Tatramat, Pascal, Sagit, Cima, AZD). Three to four percent of the yearly production is sold on the domestic market; about 96–97 percent of the production is shipped to Africa, Asia, Latin America—to almost 30 countries.
Planned yearly capacity for Whirlpool Slovakia is 2.2 million units; some man- agers even talked about 4 million units in the future.
Plainly, the operation of Whirlpool has changed from a market-seeking to a fully low- cost-seeking operation.
The year 2008 meant a new landmark in the history of Whirlpool Slovakia. The company has opened a new central warehouse of 24,000 square meters in Lozorno in Western Slovakia, to which the Whirlpool products from nine European factories and China are shipped and from where about 1.5 million of Whirlpool white appliances for Czech, Slovak, Hungarian, and Austrian markets are distributed.
There is an interesting story related to the acquisition of Polar in Poland: Polar was on the radar screen of Whirlpool Europe early in the nineties, but at that time the top management decided not to engage the company because of the strong trade unions and low willingness of the then Polish management to work with a foreign investor. Later, Thomson Electric, a French company, acquired Polar, but the deal ended up in economic problems: When Whirlpool Europe was buying Polar, it had the value $28 million and was $14 million in debt; so the company put itself for sale for $42 million. At that time Whirlpool Europe was trying to find a company in Central and Eastern Europe where it could localize refrigerators production for all of Europe (based on a very good experience from Slovakia, where a major production site for washing machines was created).
There was a cheap refrigerator company for sale in Slovakia, the former Calex company whose value decreased after an unsuccessful joint venture with Samsung. The local Slovak management, led by Martin Ciran, was trying to persuade Whirl- pool Europe to buy it. Even though the success of Whirlpool in Slovakia was undeniable and the country at that time had a very progressive government introducing many market-oriented reforms and one of the best business environ- ments in Europe, Whirlpool Europe decided to buy a much more expensive
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Polish facility instead. The reasons may be seen in risk diversification and the rel- atively big size of the Polish market.
Plainly, Central and Eastern Europe has become more and more attractive for big MNCs as a location of production for the whole European market. The advantages of the CEE coun- tries, such as relatively cheap and skilled labor, even increased since 2004 when Poland and Slovakia (together with other CEE countries) entered the European Union.
Since that time many producers, especially from outside of the EU (the United States, Asia), established their major European production and distribution centers in CEE (e.g., Sony, Samsung, Hundayi, Kia, Panasonic).
C A S E D I S C U S S I O N Q U E S T I O N S
1. Would you have recommended a greenfield invest- ment strategy for Whirlpool Slovakia rather than a joint venture? Explain your answer.
2. Would you have recommended a direct acquisition of Tatramat for Whirlpool rather than a joint venture? Explain your answer.
3. How would you assess the control versus risk tradeoff by Whirlpool?
C A S E C R E D I T
Sonia Ferencikova. 2002. “Transition at Whirlpool- Tatramat: From joint venture to acquisition.” Transnational Corporations, 1, 1, pp. 69–98. Used with permission of the author.
C A S E N O T E S 1Whirlpool Corporation. 1996. Annual Report 1996. Benton Harbor, MI: Whirlpool Corporation.
2Whirlpool Corporation. 1998. Annual Report 1997. Benton Harbor, MI: Whirlpool Corporation, p. 4.
3William Davidson Institute. 1994. Whirlpool Tatramat, a.s. Mimeo. Ann Arbor, MI: William Davidson Institute, University of Michigan School of Business Administration.
4Maruca, Regina Fazio. 1994. “The right way to go global: Interview with the Whirlpool CEO David Whitman.” Harvard Business Review, 72, March–April, pp. 135–145.
5Steinmetz, Greg and Carl Quintanilla. 1998. “Tough target.” Wall Street Journal Europe, 16, 50, p. 1.
6Whirlpool Corporation. 1998. Vision, 1, 2 (March–April). 7Whirlpool Corporation. 1999. Annual Report 1998. Benton Harbor, MI: Whirlpool Corporation.
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