Making Good Money Out Of Old Plants

U.S. companies are reviving Soviet-era factoriesand winning new markets

Alcoa Inc.'s AA mile-long rolling mill south of Budapest seems like a throwback to the Soviet era. The sun struggles to penetrate smudged skylights. Massive Russian-made machines from the 1960s grind away amid clouds of steam. Forklifts the size of flatbed trucks rumble by, stacking coils of aluminum sheeting like giant rolls of toilet paper.

Yet the 65-year-old factory in the city of Szekesfehervar isn't the dinosaur it appears to be. Those brutish Russian machines, long since retrofitted with computer controls and precision rollers, need just 15 minutes to reduce an ingot the size of a sofa to a roll of sheeting a few millimeters thick. In fact, Alcoa Inc. is so pleased with its Hungarian operations that it's spending $83 million to add more modern equipment to the plant and make more sophisticated products. "The investment projects show our long-term commitment," says Bela Forgo, Alcoa's country manager for Hungary.

Across Central Europe, U.S. companies are getting great mileage out of old factories they bought on the cheap. That these soot-stained giants are worth something may come as a surprise to anyone who has spent much time in the former Warsaw Pact region. The countryside is still littered with the carcasses of factories that didn't survive the transition to market economics. But some were always more competitive than they looked.

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Last year, electricity producer AES Corp. AES converted two 1950s-era coal-fired plants in Hungary to generate power from agricultural waste such as sawdust or sunflower seed shells. While AES added equipment to burn the new fuels, Communist-era steam turbines still turn the generators. "We've managed to breathe some new life into those businesses," says John McLaren, president of Arlington (Va.)-based AES's European and African operations. And Pittsburgh-based U.S. Steel Corp. X has become a major player in Europe with its purchase of a huge steel complex in Slovakia in 2000 and another in Serbia in 2003. In the second quarter, its European operations generated $188 million in profits--one-third of U.S. Steel's total operating income.

Central Europe's cast-offs have helped U.S. companies conquer a piece of the Continent that might otherwise have eluded them. General Electric Co.GE was an also-ran in European lighting before it purchased Hungarian bulb maker Tungsram in 1989. Now GE is No. 3, with 12% of the market. And workers there have proved more adaptable than they're sometimes given credit for. "Hungary is an attractive place not only because assets could be bought from the government, but also because it has a good workforce," says Istvan Szini, chairman of GE's Hungary unit. Now Hungary is home to one of GE's two main centers for lighting research and development.

Modernizing these plants hasn't been cheap, but it has turned out to be money well spent. Alcoa has laid out $900 million in Hungary on both acquisition costs and new gear. Today the original brick buildings are filled with Japanese robots and German equipment. U.S. Steel last year invested $249 million in Slovakia and Serbia, with much of that used to meet European Union pollution standards. But profits from the mill were twice that. "Prior to these acquisitions we had some shipments into Europe but not many," says David H. Lohr, president of U.S. Steel Kosice. "This has been a major step in learning about this market."

By Jack Ewing

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