By  on May 24, 1994

NEW YORK -- While many textile and apparel firms are looking to Mexico as the next great manufacturing and sourcing opportunity, Danube Knitwear Ltd. -- a new firm started by two Americans -- has opted to go across the Atlantic, landing at Baja, Hungary.

"Hungary's reasonable labor rates, its highly skilled labor and management force, and advantageous duty and quota access to Europe and North America played a major role in our decision to go there," said Michael Smolens, chairman and chief executive officer of the vertically integrated mill and apparel producer, which began running at full capacity in Baja last month.

"That," said Smolens, during an interview here last week, "and the fact that Mexico doesn't yet have the expertise in better knits that the Europeans do. Also, we are hoping by 1998 or 1999, Hungary will be a member of the European Common market."

The creation of Danube, which is headquartered here, has also helped give a lift to Hungary's post-Communist recession. According to offices of the Hungarian General Consulate here, from 1990 to 1993, employment in textiles and apparel fell to 100,000 from 150,000 while fabric and yarn production dropped more than 50 percent. "Danube is giving to Hungary something we desperately need, and that's a mill and apparel producer all at one site," said Robert Sczigel, a representative here of the textile and apparel department of Hungary's Ministry of Industry. "They've been able to take a state-owned factory, which was in disarray, and get it up and running in a quick manner."

Situated on the banks of the Danube River, the company occupies a two-story, 100,000-square-foot textile plant -- which, within two years, will have the capacity to produce more than 500 tons of knit fabric per month -- and a 43,000-square-foot apparel making facility, employing nearly 600.

The firm's investments so far at the plant include about 175 new sewing machines, as well as state-of-the-art dyeing and finishing equipment, although Smolens said, "The workers still must be trained. We don't want to get too highly technical too quickly."

Danube is selling goods to both the U.S. and European markets. Danube shipped its first T-shirts in October 1993, and Smolens said its output for 1994 should be about 4.5 million units.Smolens said all the firm's cotton yarn comes from Europe, Asia and the U.S.

Danube was formed in 1992 by Smolens, then president of the Phoenix Group, a private label manufacturer with offices here and in San Francisco, and Philip Lighty, who was previously vice president of sourcing and manufacturing at Esprit de Corp. Lighty is now a principal working full-time with Danube and is its president.

Smolens said he and Lighty looked at about 15 state-owned factories -- most of them bankrupt -- before purchasing the Baja site.

Smolens said the most critical piece of the puzzle to get the firm up and running was securing a strong equity financial partner "to navigate the treacherous waters of the rapidly developing Hungarian private sector."

The two executives were able to secure a $7 million investment from First Hungary Fund, the first private equity fund established in Central Europe. The management team, lead by Smolens and Lighty, also kicked in about $450,000 to get going.

"Once we got the financing in place we knew we could make this venture work," Smolens said. "We look to become profitable this year, and in about three years, could be in the $40 million to $50 million sales range."

Still, operating in Hungary isn't without its problems, Smolens said. Danube, in an effort to stem a high level of absenteeism, gives a bonus to workers with a perfect monthly attendance. In addition, when sewing operators accomplish efficiency standards of U.S. standards, the workers receive an incentive pay bonus.

"We realize also that we may have to look beyond Hungary," Smolens said, noting that Hungary's labor rates, which are rising, could force Danube to supplement its production.

"We are currently investigating several opportunities within the Western Hemisphere, and Central and Eastern Europe," said Smolens. "However, right now our main emphasis is making the Baja facility as efficient as possible."

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