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Based In New Jersey, Thriving In Bulgaria

Sevlievo, a city of 25,000 tucked into a valley beneath the Balkan range in central Bulgaria, is about the last place you would expect to find a bastion of American enterprise. Battered Russian-made Ladas bump along cratered streets, and soot-stained, concrete high-rise apartment blocks are the prevalent mode of housing. A few people still get around on horse-drawn carts.

Yet this is where American Standard, the Piscataway (N.J.) maker of bathroom fittings and toilet bowls, manufactures more of them than it does anywhere else in the world. Indeed, Sevlievo is very much an American Standard company town deep inside Eastern Europe, with three factory complexes and 3,700 people on the payroll. American Standard's investment, which began with the purchase of a state-owned fittings maker in 1992, has helped show other foreign investors the potential lurking in Bulgaria's rugged hills. It's a case study of how the right kind of foreign investment is helping Eastern Europe grow.

Nowadays, Bulgaria is hot. With European Union membership likely as soon as 2007, the country has been luring U.S. high-tech companies such as AMI Semiconductor (), which makes chips for auto makers and medical uses, and Tumbleweed Communications Corp. (), a maker of security software. Both companies have opened development centers in the Bulgarian capital of Sofia to take advantage of the nation's highly regarded technical-school graduates. Foreign direct investment in Bulgaria more than doubled in 2005, to $2.7 billion, from $1.2 billion, according to estimates by the European Bank for Reconstruction & Development.

Back when American Standard first ventured into Sevlievo 12 years ago -- in part to take advantage of Bulgarian manufacturing wages that even now average only $2 an hour -- it was a pioneer. Bulgaria's transition from communist dictatorship to free-market democracy had been rocky. Output plunged, and inflation reached nearly 2,000%, culminating in near economic collapse by 1997. The population fell by 10% as a million Bulgarians migrated abroad to find work. Today, Bulgaria operates under a strict fiscal regimen imposed by the International Monetary Fund in return for a bailout, and the economy is growing again. Gross domestic product is expected to grow 5.1% in 2006 on top of a 5.4% expansion this year.

One explanation for Bulgaria's woes was that so many privatization deals had gone wrong -- as the abandoned steel and textile factories that still dot the landscape around Sevlievo attest. Why did American Standard succeed? A key reason was that it trusted local expertise and left existing managers in charge. Those managers were short on international experience, but they knew the language and the environment and were better equipped to deal with chaotic conditions. "We found a good group of people who were talented and willing to learn and wanted to be better," says American Standard Chief Executive Frederic M. Poses.

The company used a simple method to train Bulgarian managers in the ways of free enterprise: Vassil Kanev, chief of the former state-run company, shadowed top executives at American Standard's German unit. Shop-floor supervisors also spent as long as two months working alongside their German counterparts -- returning to Bulgaria only when they could operate machines as fast as the Germans. "We knew there was a big difference in skills and technology," says Kanev, who has since gone on to become the Brussels-based business leader for American Standard's bath-and-kitchen division in Eastern Europe.

There have been challenges, of course. Sevlievo had no gas to fire up the kilns that bake clay forms into shiny white bidets and sinks. American Standard solved that problem by helping a Bulgarian utility finance a new pipeline. One fringe benefit: Sevlievo residents can now cook and heat with gas. Gone is the sour smell of coal soot that marks so many Eastern European cities.

And that's the least of what having American Standard in their city has meant to residents of Sevlievo. The municipality has near-full employment, compared with a national unemployment rate of 10%. Sevlievo, though still poor by Western European standards, is even beginning to show some signs of prosperity. Audis and Opels mingle with the Ladas, and there's a brand new appliance store on the edge of town.

The American Standard factory complexes are a mix of high and low technology. Fittings are still polished by rows of men with big biceps who lean into polishing wheels the size of dinner plates. At the same time, in an example of how Eastern Europeans are moving into more high-value work, engineers at a design center sit at computer terminals, working on the next generation of gold-plated faucets.

American Standard also manufactures in Asia, but Bulgaria remains attractive because of its proximity to fast-growing consumer markets such as Ukraine and Russia, where people are using their growing wealth to renovate household bathrooms. Sevlievo "is very competitive to what we do in Asia," says CEO Poses. Wages are still competitive, too: Skilled workers make about $500 a month. That's one reason why American Standard has built a new factory to produce bathroom ceramics in the farm country outside the city.

Still, investing in Bulgaria isn't for everyone. Economic sanctions against neighboring Serbia in the 1990s bred a smuggler class that has since turned to organized crime. Foreign diplomats tell of mob bosses and their bodyguards cruising the streets of Sofia in Mercedes sport-utility vehicles. At one fashionable restaurant a sign warns patrons not to bring in their handguns. Unresponsive bureaucrats and a dysfunctional judiciary are also big problems.

For many investors, though, such concerns are outweighed by the city's ample supply of talented scientists and technical-school graduates who work for a tenth of the salaries of their Western European counterparts. "This is a good environment for setting up a business. You can get anything you need," says Anelia Mladenova Pergoot, managing director for AMI Semiconductor in Bulgaria. A Balkan tiger? It looks like Bulgaria has the potential.

By Jack Ewing in Sevlievo

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