EAST-WEST COOPERATIVE VENTURES (ER IR 69-97)

Created: 7/1/1979

OCR scan of the original document, errors are possible

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RECTOR ATE OF INTELLIGENCE

Intelligence Memorandum

East-West Cooperative Ventures

HISTORICAL REVIEW PROGRAM RELEASE AS8

9

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence9

INTELLIGENCE MEMORANDUM

East-West Cooperative Ventures

Summary

The USSR and the East European3 have increasingly entered into cooperative business ventures with firms in the industrial West- The chief Communist motives for participation in these ventures are the acquisition of advanced Western technology, equipment, and know-how and the expansion of exports, primarily to the West. Western participants generally regard these ventures as, among othereans ofoothold in what they anticipate will be future markets.

Production sharing and joint marketinghave been the principal types of ventures in the East-West cooperation- Production sharing is an arrangement which involves manufacturing or assembly as an integral part of the venture and oftenehicle for the acquisition of Western technology. Most production sharing and joint marketing agreements also are designed to expand exports to the West. An increasingly popular type of East-West cooperation is the venture intended to attract Western tourists and to increase the sale of services to them.

. Wellundred of these venture agreements have been concluded in the past five years. New agreements have been signed in greater numbers each year and continue to be signed with no apparent letup after the Czechoslovak events Hungary leads the other Communist countries in the number ofventure agreements concluded with Western countries.

Note: This memorandum vae produced solely by CIA. It Das prepared by the Office of Economic Research.

Foreword

The purpose of this memorandum is to provide information on the nature and scope of East-West cooperative business ventures, especially those arranged between the USSR and East Europeanon the one hand and the industrial Western countries on the other. Yugoslavia is excluded rom the discussion.

The ventures reported in this memorandum range in complexity from simple component supplyto jointly owned corporate entities. The common feature of these cooperative ventures is the element of continuing cooperation. Ostensibly cooperative ventures which lack thisor example, turnkey projects of long duration like the Soviet-Fiat agreementare not included.

Information on East-West cooperative ventures is incomplete in two respects: the actual number of these ventures is unknown because of incomplete or inconclusive reporting, and detailed information on tho terms of the agreements is lacking in most cases for the same reason.

111

General

1- Cooperative international business ventures,eature of international economic relations in the West, were rare in East-West Earlier cooperation was largely confined to licensing agreementsstill the most common form of East-West economic agreement aside' from commodity trade. The vast majority of these licensing agreements involve the acquisition of Western technology by Communist countries, although the flow is occasionally in the other direction,

in recent years the USSR and Eastern Europe have evinced considerable interest in formingarrangements of various kinds with Western firms. ellooperativeagreements have been concluded.* ozen were concluded in4nd since then the numbers per year have increased, reaching about Interest in East-West cooperativeapparently has not diminished since theevents The number of known agreements signed9 continues at roughly the same pace as

Agreements known to have been concluded are listed in the table below, which indicates that Hungary, the most innovative of the East European countries in economic reforms, is also in thewith respect to cooperative venture agreements with Western countries. West Germany, historically the chief Western trading partner of the Eastcountries, has been the most active of the Western countries in negotiation of cooperative agreements with the Communist countries. France, Italy, the United Kingdom, and Austria also haveumber of such agreements.

The recent interest in production sharing and joint marketing iseflection of theCommunist quest for Western technology and markets. Other sought-after benefits include the use of unemployed or underemployed labor, the training

* Selected groupz of cooperative venture agreements are listed in Appendixes A^ B, and C.

Soviet and East European Cooperative Ventures with Industrial Western9

Germany

of skilled labor, and the developmentucleus of experienced managerial talent. Western motives for participation in East-West cooperative venturesesire tooothold in tho East in anticipation of growing future markets there. Also, production sharing involving Western technology and equipment and East European labor has offered Western firms the opportunity to expand production and markets without incurring the high marginal costs of domestic production.

S. Although the results from these ventures in terms of sought-after Western technology and markets have not been large in absolute terms, their overall success is reflected in the increasing numbers and greater sophistication of those agreements in recent years. Thushe more complex production sharing agreements have increased greatly in relation to the previously more common joint trading eriod when trade between Eastern Europe and the west has been leveling off, cooperative ventures may become increasingly important to East-West traderowing source of needed hardfor East European countries. Hungary has been particularly successfulumber of production sharing arrangements which achieve all the objectives of the East European countries and are also attractive to the Western partners.

Production Sharing

6. The most common of the cooperative ventures undertaken in the last five years is that ofsharing. The more complex and comprehensive of these arrangements are known as coproduction agreements, which effectively provide for abetween Communist and Western participants. ypical coproduction venture, the Western partner provides the capital and entrepreneurship and the East European partner supplies the plant, labor, and raw materials. The host Communist country thus acquires the desired access to modern Western industrial and management techniques and often secures Western markets for the joint product as well. An example of coproduction is themade by the West German firms Krupp and Grundig with Poland to manufacture tape recorders. Poland supplies the land, labor, raw materials, and factory building, and the West German partners provide the know-how, machinery, and trademark rights. Poland retains nominal ownership of the venture, and the Krupp and Grundig firmshare of the Some of the recorders are sold by Poland in Eastern Europe, and the others are sold by Grundig throughout the Free World. In some coproduction ventures the output may be marketed only in the East or only in the West.

7. Less comprehensive agreements require one of the partners to provide component partsroduct or to perform preliminary operationsroduct which is then shipped to the other partner for finishing and sale. An example of the former is an agreement between Czechoslovakia and Italy whereby Czechoslovakia supplies motors builtfor Italian motorcycles which are sold only in the West. An example of the second typewedish-Polish agreement for Poland to manufacture furniture which is then sent to Sweden for finishing and sale in the West. Each of these agreements provides the Communist country with Western markets, but not with any technological gain or capital imports. In another example, however, the West Germanig er sends components of medicalto Hungary, where complete units are produced by the Hungarian enterprise Medicor under Wast German quality control supervision. The final product is shipped to West Germany. In this case the Communist country acquires Western know-how as wellestern market.

NI1A1

Joint Marketing

The Communist countries make use of joint marketing to gain entry into markets which might otherwise be closed to them. Joint marketing arrangements thatestern trademark to Eastern goods or provide for their distributionestern sales network enable thecountries to benefit from the commercial reputation of the Western company or brand name. Such market sharing may also cloak the Communist origin, which in some Western countries might repel would-be buyers. These benefits are automatically secured in supply agreements that involve Eastern export of'components instead of finished products.

The joint marketing firms are generally domiciled in the West and mayariety of organizational forms. oint-stock company is used to market East European exports. An example is the joint French-Bulgarian company sofbim formed to promote sales of Bulgarian machine tools in France. Ownership of the firm is divided among six Bulgarian andrench firms, each side holdingercent. Similarly, the joint Soviet-Belgian company Nafta was established in Belgium to import and sell Soviet petroleum products, although in this company the USSR retained majority ownership.

joint marketing venture often doesjoint investment but instead utilizesestablished Western sales network orto market Communist goods,ommunistsales network to sell Western goods. 6 Austrian-Czechoslovakfor Czechoslovak-made ski equipment toAustrian firm's trademark and to be marketedcountries. The Czechoslovaks receive parthard currency proceeds of Austrian sales. arrangement involves the sale ofArgus computers by Inorga of Czechoslovakialatter country. Inorga does the actual selling

of the computers and provides software and maintenance service.

Other Types of East-West Ventures

ventures, which are not in theinclude joint shipping companies and a

series of tourist-related activities* Thosealso provide the Communist partner withexports or export potential in the form of services as well as Western expertise and capital. In these ventures, the host Communist country often permits the Western partner toarge measure of control over the entire operation. Business practices are similar to those in Western countries, and the name of the Western product often is maintained. ajor Western oil company, is setting up inhain of its automobile service stations supplying its brand of products. The Hungarians obtain hard currency from foreign users of the stations and obtain practical access to Western business methods.

12. The tourist industryarticularlyexample. In the past few years. Westernhave concluded agreements with Communist countries for the construction of several hotels in Eastern Europe. TowerS-owned corporation, is involved in several of these projects. Itortion of the necessary capital, supervises planning and construction, arranges for Western management, and handles sales andservice in the West. In return Tower, or any other Western participant, mayhare of the profits in hard currency or make other financial arrangements.

COr<TTDENTIAL "

APPENDIX A

East-wost Production Sharing

Country

Bulgaria

Western Country Netherlands

Description

Jointly owned company NV Pastem assembles Bulgarian lift trucks in the Netherlands and markets andthem throughout the EEC.

partner Gaetano Zocca incorporates Bulgarian components into its machine tools produced in Italy and markets them in the West through its Swiss office.

enterprise Balkancar assembles Fiat autos for sale in Bulgaria.

French firm Petrochimiezechoslovak firm jointly produce industrial equipment for less developed countries.

production of turbines, to beto third.

production of small motorcycles. Czechoslovak Pov.izske

Date the agreement was concluded, unless otherwise indicated, b. First noted.

L

Communist

Date Western Country

Worksmotors; the Italian firm Itolem-mezeta mounts and sells them.

/ Czechoslovakia United Kingdom . Callaghan of the

UK collaborates with Kdynske Strojirny of Czechoslovakia in production oftextile machinery. Both partners supply components, and profits are.

Germany United Kingdom British Perkins engines

installed in Eastforklift trucks; marketed in the West through Perkins.

firm Fuehrungs-

technik and theenterprise Nikex jointly own andime works in Italy.

/ Alfa-Romeo

engines are fitted into Hungarian buses and marketed in the West by an Italian firm.

German firm

Spillings-Werke's steam engines andgenerators are combined and marketed in Hungary, Westand third.

a.Date the agreement was concluded, unless otherwise indicated. b. First noted.

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Date 2/

Communist Country

/ Hungary

Hungary

/ Hungary

Western Country West Germany

Austria

France

West German firm Siemens-Reiniger sends components of medical equipment to Hungary, where the Hungarian firm Medicor assembles them under West German quality control Completed units are shipped to West Germany.

Austrian firms Steyr-Daimler-Puch and the Hungarian Red Star Tractor Factoryin production of heavy duty tractors. Cooperation also extends to marketing and

French firm Weyprick-Alsthom cooperates with Hungary in theof hydraulic turbines.

in toy rench toy manufacturer provides Hungarian firm with equipment and know-how and receives part of the production. Goods are jointly marketed and profits are shared.

Joint supply of textile machinery to Each partner providesercent of the component parts,

the agreement wae concluded, un l<

noted.

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GGNFfBENTiAL '

Communist

DateCountry

which are then assembled in

firm Berllet

and the Hungarian enterprise Ikarus cooperate in bus chassis production and marketing.

German firms

Krupp and Grundig jointly manufacture tape recorders with Poland. Polandland, labor, rav/ materials, and the factory building, while the West German partners provide know-how, machinery, and trademark rights. Poland retainsof the venture; Krupp and Grundighare cf the output for royalties and The recorders are sold by Poland in Eastern Europe and by Grundig in the rest of the world.

emifinished

furniture to theof Swedish partner, Ikca. Ikea supplLeg machinery, technical supervision, and quality control.

a. Date the agreement woe concluded, unless otherwise indicated.

-

Western Country

is sent to Sweden for finishing and marketing.

United Kingdom British firm Power-Gas

nd Polish enterprise Polimexin the building of industrial plants and installations for third markets.

Poland

France

Joint production of nu!tispindle automatic lathes. French partner Amtec-France receives unfinished lathes from Polish firm and finishes them. They are marketed under joint trademark "Amtec-Fat" in France and other mutually agreed-upon markets.

Rumania

Italy

Joint manufacture of elec trie generating sets. Rumanian partner Mas in-export supplies the generators, and the Italian firm Isotta Fraschini provides thermic diesel engines, transmissions, andpanels foroperation.

Rumania

West Gemany

Cooperation in truck West German partner Man supplies technology and name-Rumania constructs tho vehicles, whichoint trademark. Part of the production is exported.

a. Date the agreement wae concluded, unleee otherwise indicated.

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-CONFIDENTIAL

Date4

USSR

USSR

/ USSR

Western Country Belgium

Japan

France

Description

Joint company Scaldia-Volga, located in Belgium; USSR owns two-thirds interest. Imports, assembles, and sells locally Soviet autos and trucks, the latter including Perkins engines from Britain.

Joint manufacture of coal mining combines. Japanese firm Mitsui supplies component parts and distributes the finished product in parts of East Asia.

Joint manufacture of electronic digital equipment. Agreement calls for constructionointly funded manufacturing facility in France and aexchange of technical assistance and personnel.

ate the agreement was concluded, unless othsrw'ise indicated o. First noted.

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APPENDIX B

East-West Joint Trading Companies and Marketing Arrangements

Communist

Country

trade company

Chemie-Commerz GmbHfor promotion of trade in chemicals between the two countries; located in west

trade company,

heldercent by Machinoexport ofandercent by the Dutch firm Maringson Mij NV. Except for sale of Dutch machinery in Bulgaria, the firm's activities are restricted to Western Europe. Profits are divided equally.

company Sofbim to

promote sales ofequipment in France. Shares of the Paris-based firm areetween Bulgarian and French interests.

trade company Bumac

Internationaltd. based in Australia and shares.

the agreement wae concluded, unless otherwise indicated.

noted.

15

/

Date

Communist Country

/ Bulgaria

Western Country West Germany

Description

Joint trade company. forof Bulgarian-West German trade; ownership. Bulgarian partner is Bulet.

Iron and Steel Export Corp. bought an interest in the Japanese firm Nichibu. Under Joint Bulgarian-Japanese management, the firm will trade in iron and steel and in machinery for the iron and steel industry, primarily betweenand Japan.

US firm Simmons receives metalworking machinery from Czech partner Skoda. After slight modification the machines are marketed under Simmons trademark and through Simmons

Czech-made ski bindings, bearing the Austrian firm Wiener Ketallwarenfabrik Sinolka's trademark, are jointly marketed in both countries. Thereceive part Of the hard currencyof Austrian sales.

the agreement

noted.

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^ONFIDENXIAX

Western Country

owned company Stira-France to sell Czech machine tools in France; based in France.

agreoment under which Ferranti of the UK and Xnorga of Czechoslovakiain selling Ferranti's Argusin Xnorgasoftware, sells the systems, andmaintenance service.

trading company Tjeco-Svea AB, based in Sweden, to market Czech machine tools in Sweden and Swedishproducts in Czechoslovakia. is equally divided between Strojimport of Prague and Jeijerinvest of Stockholm.

trading company .Mezarkets Czech products, mainly electric motors, in Italy. Tha Milan-based company isy Czech interests andercent by Italian interests.

Date the agreement was concluded, unless othervice indieated.

-

Communist

DaleCountry

Germany trading company

Defraco, located in Paris, designedto expand East German exports to France.

trading company

Technotrans, based in France, to promote sales of Hungarian goods in France, mainly machine tools andmotors. The partners will alsoin looking for products needed by Hungarian industry. Ownership isercent French andercent Hungarian.

marketing of Hun-

garian bathtubs by Okusa of Canada and Enamel Industry Works of Hungary.

trading company

Dcploma, based in West Germany, to promote trade in heavy machinery between Poland and West Germany. Ownership isercent Polishercent Wost German.

trading company

Metalex-France toPolish exports, mainly equipment. of the French-based firm isercent Polish andercent French.

Date the agreement wae concluded, un laae otherwise indicated. b. Firet noted.

-

At -

eONHBENTIAl:

Date

Communist Country

/ Poland

/ Poland

Rumania

/ USSR

/ R

Western Country Prance

Netherlands

West Germany

Italy

Finland

Description

French firm Ateliers et Chantiers de Bretagne and the Metaloxport Machine Tool Bureau of Poland market Hungarian-produced hydraulic equipmentoint trademark.

Joint trading company InternationalIlandelsmaatschappij Calanda, based in Amsterdam, imports and exports agricultural and industrial products. Emphasis is on Polish exports.

Joint trading company to promote trade in chemical and pharmaceuticalbetween the two countries. Partners in tho West German-based company are tho West German firm Chemie Handelskontor and Rumania's Chimomport.

Joint company Societa Ormas sells in Italy machinery supplied by Soviet foreign trade enterprises Mashino-oksport, Traktor-eksport, and Tcchno-promimport. .

Joint company Oykoneisto Ab imports and sells Soviet machinery in

the agreement was concluded, unles

noted.

-

company Actif-Avto to sell Soviet tractors in Franpe.

Joint firm Nafta sells Soviet petroleumin Western Europe. Ownership of the Belgium-based company isercent Soviet andercent Belgian.

Joint firm Konela Norge Bill, based in Oslo, to market Moskvich cars in Norway. The Soviet enterprise Avtoeksportontrolling share in the firm.

firm Sogo andto sell Soviet chemicals in France.

the agreement vac concluded, unli

noted.

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-eONFIDENTTAX

ther East-West Ventures

Country

Bulgaria

Western Country United States

Df.scri pt: on

Agreement between Diner's Club and Balkantouristfor the main hotels and tourist stores in Bulgaria to honor Diner's Club cards.

United States Agreement providing

for Towerof the United States to provide capital and know-how in constructionourist hotel in Czechoslovakia.

with Tower International onotel in Hungary. Hungary is to provide the site and some capital; Tower is to provide advisers and capital and toa percentage of gross receiptseriod of years.

States and

Oil Co. will help construct Shellstationsnitially) and will supplyadvice, and

Date the agreement was concluded, unless otherwise indicated. b. First noted.

I

Communist

Country

Western goods and parts. Hungarian agencies will own the stations.

States Cooperation with Inter-

continental Hotels of the United States in constructionourist hotel in Rumania.

States Agreement between Hertz

Corp. and Intourist toar rental service in the USSR. Intourist owns the cars and pays the employees; Hertzits name,reservationand expertise. Intourist pays Hertz for the franchise and Hertz gets thefor car rentals needed by Russians traveling abroad.

States Agreement between

Diener's Club and Intourist providing for acceptance of the Diner's Club card by Intourist facilities.

Date the agreement was concluded, unless otherwise indicated. b. First noted.

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-GON PI DEN'Ft

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