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February - 2005


Opening a new vista for business

Trade ties have always been close between Turkey and Romania, but the Government still needs to prove the nation is a free trade zone

Following the Revolution, Turkey saw a market opportunity in Romania and then the holding companies dived in. Since then the Anatolian nation established itself as a firm partner in business, often due to the entrepreneurial zeal of Turkish traders and a shared style of business practise.But a climate that still fails to consistently punish firms in debt to the state and restrictive legislation has meant that Romania's trading environment is far from fair, free and competitive enough for a developing country that wishes to attract and retain high-performing companies.
Trade relations at the end of 2004 showed 2.5 billion USD total bilateral trade and, for the last two years, this has been 20 or 30 million USD in Romania's favour, making Turkey the fourth largest business partner.
“This is a satisfactory point of view,” says Guven Gungor, general manager of The Turkish Business Association (TIAD). “Especially as Romania has oriented itself to the existing European Union and we face big competition from Western Europe.”
This will continue, promises Gungor, who believes trade can easily reach a level of five billionUSDper year. Operations in packaging, wood processing, garment manufacture, fertilising and white goods production in Romania have seen success for Turkey, where the country has also great leverage inSMEsand in retail, travel and banking. “Now is a peak point in construction and many companies are already settled,” says Gungor. Some businesses are at project and development stage so are still silent in the market, but many major projects are either built by Turkish companies, or have Turkish subcontractors. In construction, firms such as EMCO Engineering & Contracting Romania, Ozer, Samko and Synergy have a solid foothold on the local market. Ozer Construction established in 1997 (with 100 per cent ownership by Ozer-Turkey) worked on numerous high-profile construction projects such as: Europe House, Mecano Business Center,America House and Bucuresti Mall.
In the banking sector Finansbank entered the market in 2000 through the aquisition of a local bank and aims for a market share of two per cent at the beginning of this year. Meanwhile electronic payment system provider Servus now owns 75 per cent of the POS installed base in retail, 14 per cent of the ATM sales and 30 per cent of theATMservice.
But, due to financial reasons, many of the Turkish firms and brands enter the market through the Netherlands (such as Garanti Bank) and the DutchAntilles.About 300 to 400 millions worth of investment has come through this channel, rather than through FDI fromTurkey.
There are also many obstacles to achieving a strong business bond. “Changes in legislation are problematic,” says Gungor, who adds that when a firm is looking for an incentive to invest, it is often attracted to an area or plot of land which is given a development zone status by the Government for a ten year period.However successive Governments or ministers have, in the past, taken away such a status before this time has elapsed, upsetting the business strategy of the firm and incurring further costs. Gungor adds that the Government needs to stick to its contracts, like in any other business arrangement.

A door to further investment facility.

Door and timber product manufacturer Prolemn is one of the largest direct investors from Turkey, with 50 million Euro so far invested in its Reghin factory. In 1998, Turkish company Kastamonu Entegre, part of wood firm Hayat Holding, bought 98 per cent of the shares and redeveloped the factory, which now has about 750 employees on a surface of approximate 35 hectares. But the Turkish owners are preparing for a massive expansion project worth over 100 million Euro.
Prolemn's general manager Dogan Gures says his firm will invest 15 million Euro in its own timber manufacture, while its parent company will invest in two other wood processing factories in Romania. For this the total investment
will be around 50 million Euro for each Developments at Reghin have so far included the replacement of the timber factory's saw system with a modern multi-blade system and a replacement of the chipboard factory with a new plywood plant.
Total sales in 2004 doubled on the previous year to 36 million USD and Gures expects sales to rise to 44 million USDfor 2005.“I chose Romania for its geographic position,” says Gures. “For exports Romania is close to almost all the ex- Soviets countries, Turkey and has an opening to Europe, as well as proximity to the Balkan states where our parent company makes other investments. Another argument is the superior qualifications of the employers and the presence of the raw materials, in our case, wood.”
In industry, bearings manufacturer Rulmenti Barlad was privatized in 2000, when it was picked up by Turkish firm Kombassan, who have since then made an investment of 25 million USD. Halil Kaymal, general manager Rulmenti Barlad, says: “When we came to Romania to expand our investments, we tried to purchase bearings manufacturer Rulmenti Suceava,
Rulmentul Brasov and cellulose and paper producers Palace Constanta. These privatizations were not fulfilled, but Kombassan didn't give up.” In four years the firm claims it has managed to double the turnover from 25 to 50 million USD and, as we went to press, Kombassan was intending to enter in a competition to buy abrasive wheels producer Abrom Barlad in a late January tender.

The competition myth

But business is not always this fragrant. Due to rising gas costs, bad laws and an unfair and uncompetitive business environment that punishes clean and transparent firms, will chemical fertiliser producerAzomures stay or go? The value of its investments so far in Romania, including reinvested profits, is close to 90 million USD, says the firm.
According to temporary results for the end of year, Azomures total revenue in 2004 fiscal year is 251 million USD, with a gross profit of around eight million USD.
“We chose to invest and develop our business in Romania simply because all members of our Holding Company [Transworld Fertilisers] have been doing business with Romania since the mid 1970s,” says President Azomures M. Fuat Kalgay. “Romania was like a home territory for the investors.”
But recently Fuat Kalgay has stopped investing and expanding to take stock of how the Romanian business climate develops, until something positive happens.Whyrein in the finance?
“A 260 per cent increase in the cost of natural gas,” says Fuat Kalgay, “which makes it impossible for us to compete with our competitors on international markets any more. Regretfully, this year, if the cost hike continues at same rate, we may be forced to shut-down.” He says the Work Code at present is “totally unrealistic, making it impossible for us to cope up with irrational demands of the work force.”
A failure by the Government to monitor businesses which do and do not abide by regulations regarding the treatment of the environment has also tipped the playing field against Azomures, argues Fuat Kalgay. “We have invested over 30 million USD in projects for environmental protection,” he says, “and we know for a fact that our competitors in Romania don't care about the environment and have no investment in this regard, however, the State permits them to operate without limitations".
Another factor that has led to an unfair trade environment is the fact that many firms are in debt to the tune of millions to the State, which they have used as a kind of bank to take out a loan they have no hope of honouring, for their lack of initiative in paying back such penalties remains unpunished.
“There are competitors of our Company who owed close to 50 million USD to the State in un-paid gas bills,” says Fuat Kalgay. “We had similar debts at this stage of privatisation and paid all of them with no single day of delay. Despite that, there is a law which makes it compulsory that all gas debts be cleared before the State permits new gas supplies. Some of our competitors continue operating with no debts settlements.”

Cool customer

Home Appliances giant Arcelik decided to make its entry into Romania through an acquisition of existing production expertise. “We found a very powerful brand in Romania, Arctic, with a huge potential to sustain our business growth in the Romanian market,” says Oguzhan Ozturk, General Manager Arctic Romania. The firm now intends to extend the business throughout central and eastern Europe, with an ambition to become the leading refrigerator producer in the region.
Since 2003 the firm has invested around 17 million Euro and has seen a turnover of 90 million Euro in 2004. Ozturk estimates that this will increase to 105 million Euro for 2005. Adds Ozturk: “To get, or even keep the leading position in this industry we need to invest consistenly in production capacity extension, product development and cost reduction projects.”

Retail frenzy

“Shopping centres did not have a great presence in Romania when we first came,” says Ali Ergun Ergen, general manager of the Anchor Group, who established the first large-scale shopping mall in Romania, Bucuresti Mall on Calea Vitan. “There was a great demand for such a concept coming from the retailers and from the Romanian people,” he says. The mall has become a destination for the new rich, who have, in their thousands, used its open plan environment and temperate climate as a place to hang out and be seen.
Since then Anchor Group has opened Plaza Romania on Bulevardul Timisoara, Bucharest, which claims to be the largest shopping centre in southeast Europe. A series of giant pure-white masses set around by anonymous grey tower blocks, the Plaza is arranged over five levels and 100,000 sqm, with space for 2,400 parking places and 150 outlets, that now includes a Gima Supermarket, Zara, Franco Benussi, Mango and Marks and Spencer. A fitness centre, entertainment complex and multi-screen cinema were yet to open their doors (as we went to press).
The latest incentives to shoppers include giving away one Volkswagen Polo every two weeks for a three monthperiod. At the beginning, the initial investment was Turkish, and in order to complete the building of the new mall, the Group needed a loan fromHVBBank to the tune of 45 million Euro. So far Anchor has invested more than 100 million Euro, which is set to rise.
The next step, says Ergen, is for the Anchor Group to continue developing its core business of shopping centres, but
also to expand into the real-estate business and office buildings.

Tourism opportunities

Turkey has built up a strong business expertise in the tourist industry over the last twenty years and has become a destination for Romanians looking for a cheap seaside holiday.
While in Romania, Majestic Tourism, which was founded in 1993 with a 7.4 million USD investment from Turkish firm Ener Holding, has transformed the two-star Majestic Hotel near Calea Victoriei into upmarket, four-star accommodation.
Mihail Corneliu Acatrinei, General Director of Majestic Tourism adds that as the business was going well, the share holders decided to reinvest in the development of the hotel and the new 5.2 million investment, finalised by 2003, expanded the hotel from 66 to 111 rooms.
Ener Holding's next plan is to acquire two plots of land at Snagov and Mogosoaia, on which the firm will build a country village, sometime during the next two to three years. But the firm also has bigger ambitions. Part of the Ener-Yuksel consortium, Ener Holding has also built a 30 km segment of the Bucharest Constanta motorway, between Fundulea and Lehliu, in a construction worth over 80 million USD.
“One of the reasons the business works so well here is because the distance between Romania andTurkey is not big,” adds Acatrinei, “it's no more than between Bucharest and Cluj.” And maybe, come Turkey's EU joinup sometime in the next ten years, it will be just as easy to get to.

Holding out for a stable future

Economic consistency and a fair level of customs duties in line with Europe would help stimulate Japanese investment
in Romania

Although diplomatic ties between the two nations have always been tight, the bilateral trade that Japan and Romania have enjoyed has not yet reached a satisfying level.
On the one hand there is a land of a high-technology industry and a demanding consumer base and, on the other, a developing nation with a shaky political system that does not always strike confidence in the cautious Japanese investor.
The average total of imports and exports for the last five years has been between 70 and 80 million USD annually, while foreign investment has remained low in comparison with the USA and EU.
In automobiles the average market share for Japanese brands in the European Union is between 12 and 13 per cent, but for Romania this is only six per cent. Bulgaria is much higher. Bucharest has not been seen as a viable place to start a business because it lacks a major motorway connection, according to second secretary at the Embassy of Japan Kenichiro Tanaka. “Many Japanese companies are exporting products to EU countries, but not near Bucharest, because they cannot be sure they can deliver on time,” he says.
Transylvania and the Banat have instead been the best regions to set up a business. Timisoara is especially attractive, argues Tanaka, because of its Technology University and competent labour force. This year Sumitomo Electric Wiring Systems Romania finished the construction of a production unit in Alba Iulia, to add to its two plants in Deva and Orastie. Wire harness manufacturer Yazaki has opened a production plant in Ploiesti and is constructing another in Arad for car parts. Meanwhile car component producer Takata-Petri has been producing seat-belts and wheels in Arad and will build a new plant in Sibiu, according to the Embassy.
Tanaka says that, on the whole, Japanese companies are satisfied with the method and quality of the workers, but they have preferred to build up factories on greenfield sites, rather than through the privatisation process, so have not had to deal with an existing and organised labour force.
Privatisation opportunities, however, have not in the past offered much interest to Japanese firms, argues Hitoyuki Nara, general director of trade body Jetro (Japanese Export and Trade Romania). “They are particularly concerned with the opportunity for introducing Japanese equipment in the factory after its privatisation,” he adds.
One example of a large greenfield investment is clothes fastening manufacturer YKK, which turned up in Romania in 1998 and has since invested 8.5 million Euro. In 2003 production started in a factory in Buftea, for zippers mainly targeted at the large domestic clothing market. “Romania is a good market for clothing accessories,” says Katsuya Kawanishi, General Manager YKK Romania, which has a turnover of three million Euro per year. “We have competition from China,” he adds, “which finds it easy to approach the EU. But Romania is fast-moving. When I saw the statistics I was certain. The Czech Republic, Hungary and Poland are going down, but Romania is increasing.” Kawanishi admits there are problems in the speed of the administration process and that it is hard to keep up with the changing laws. His firm is not planning any big investments at present, “but if the things will get better in two years time, we will build an extension to our Buftea site,” he says.
Wire harness firm Sumitomo Wiring Systems (SEWS) has so far invested around 25 million GBP in the country since starting up in 2000. With his firm boasting an annual turnover of 30 million GBP, Ionut Florin, administrative and Economic Manager says the volume of production and turnover is increasing and “we will probably invest in future production technology and equipment.” Florin calls for a more stable business environment as he has seen a decrease of the leu between 2000 and 2003 before a leap last year. “The stability of the national currency would help us a lot,” he adds.
But some Japanese firms have preferred to buy into Romania through acquisition. Bearings producer Koyo Seiko, bought out "Rulmenti" in Alexandria for a reported 57 million USD. In 1999 Japan Tobacco purchased RJ Reynolds and RJ Reynolds Romania to become JTI Romania in 2000. Over its period as two firms, JTI says it has invested more than 100 million USD in Romania. The firm has a manufacturing facility in Bucharest, transforming tobacco into cigarettes such as Winston, Camel, Monte Carlo, Winchester and More.
“Romania is a highly challenging market, with very demanding customers, who are seeking for good quality products at low prices. It is a market dominated by prices, not by brands,” says Gilda Lazar, Corporate Affairs Director, JTI Romania.
But she calls the legislative system “volatile” and says the business environment is “unstable and unpredictable”, making it impossible to make long-term business plans. Nevertheless JTI predicts it will continue to invest in Romania in promoting, distributing and launching new products.
Some EU legislation on the tobacco industry already faces Romania, argues Lazar, but the accession could bring the necessary level of stability. “A positive aspect is the increased predictability, which gives the producers the possibility to make realistic business plans, by estimating the taxation changes,” she says. “A negative aspect is this excessive tendency of regulating the tobacco industry. From 2007, there will be restrictions regarding the cigarette packaging, the sale of cigarette packs with less than 20 cigarettes and on advertising.”
The major reason for Japanese products' lack of market penetration is the high import duties. Tanaka says the country has “problems” with the customs authorities.
The import of electronic products has been difficult owing to high duties of 20- 25 per cent. While on Japanese cars this is as high as 30 per cent.
Adds Nara: “In order to sell Japanese products on the Romanian market and make a profit, since the custom duties in case of direct export from Japan are very high, Japanese companies focus their strategy on selling Japanese branded goods, manufactured in the European Union area, as European products”.
This has been the global strategy of major Japanese brands such as Mitsubishi, Toyota and Sony, which are firmly established in Romania, but mostly enter the country through the European Union.
Sony, one of the world leaders in consumer electronics technology and involved in hardware, software and entertainment development, opened its Romanian office in 1996. The Bucharest branch of Sony Overseas SA started running a substantial business operation in Romania from 1997 onwards. Every year the sales were increased rapidly, nowadays Sony is a major player on the audio-video market and handles the full European line-up, except VAIO computers. The high quality and the outstanding performance, together with the right price positioning of the products, secured Sony's competitiveness on the Romanian market versus the direct competitors Sony is the sole brand providing the whole entertainment package to the consumer from the full line-up of electronics, from WEGA television sets, Handycam and Cyber-shot digital cameras or Home Theatre Hi-Fi systems to the unique PlayStation, Walkman or Sony Mobile, as well as games, music or movies through the official distributors.
Romania's growing demand for electronics has been to the advantage of leading Japanese brands. In 1991 Panasonic made an initial entry in the market with a 100,000 USD investment, but Catalin Savulescu, manager Panasonic Romania, says it is the last two years when the Romanian market of home suppliers has speeded up. “One of the factors that promoted a development of this field is the access to credits,” he argues. Panasonic Romania is a 100 per cent Japanese capital company, set up in 1996, and is also a representative of Matsushita Electric Industrial Co Ltd in Romania, he adds.
In the financial year between 1 April 2003 and 31 March 2004, Panasonic Romania posted a 30 million Euro turnover, 54 per cent more then with a year ago. For the financial year 2004 Panasonic Romania is expecting to increase its turnover by ten per cent. “The keys products that help increase our turnover are: plasma screens, televisions, digital and D- Snap cameras, DVD players and recorders and projectors,” says Savulescu.
Toyota Romania importsYaris, Corolla and Avensis from various European countries and therefore enjoys nought per cent customs duties. “Bulgaria applies ten per cent customs duties and the rest of EU countries average ten per cent,” says Stratos Vakkas General Manager Toyota Romania. “We would expect the Romanian state to also come to this level within the next year or two. Currently there is a significant and I would say unfair disadvantage for all non-European producers in Romania.”
Neverthless he witnessed a steady increase in sales, from 100 in 2000, to 1,453 in 2003 and finally 2,300 in 2004, totaling 5,000 cars. This situation does not affect competition too much, because of the option of leasing, saysVakkas. “The legal framework of leasing keeps the competition fair.
“Under these conditions if a customer accepts to lease his non-European car he is able to defer the customs duties until the end of the lease and to pay a somewhat lower rate at the end.” However this is still higher than for European vehicles but, says Vakkas “it is not significantly unfair.”
Ambassador to Romania for Japan Naotoshi Sugiuchi agrees with some kind of harmonisation of customs duties. “I think it's highly important to have an equal treatment applicable to products coming both from EU and non-EU producers,” he says, “which will boost bilateral trade and cooperation and which I am sure will bring more Japanese
investment here… one possible area for future cooperation seems to me IT and communication.”
In this sector, fibre-optic cable manufacturer Fujikura has been on the market since 1993. Cristian Malisevschi, general manager, claims it is the tenth largest Japanese firm in Romania, but has yet to make any large investments. “Fujikura is only participating in auctions to win projects,” he says. “We will win business this year in the Internet field, cable television, and phones through the Internet.” So far the firm has worked for Romtelecom, Orange and the NationalAdministration of the Roads.
After visiting countries in eastern Europe looking for business opportunities, including Romania last year, Japan' sleading mobile communications provider NTT DoCoMo, and the largest mobile phone operator in Russia, Mobile TeleSystems (MTS), announced a strategic partnership under which MTS will launch Internet and email service 'imode' in Russia and other CIS countries, such as Ukraine, Uzbekistan and Belarus, with DoCoMo providing its brand and technology.
But, when contacted by The Diplomat on whether the firm would be interested in launching i-mode or its third generation service in Romania, a spokesman for DoCoMo said that “nothing had been decided yet”.
In the future Nara believes that a more attractive market will come from “The elimination of corruption and the drawing up of a clear legislation”. He welcomes an “active marketing policy” adapted to attracting Japanese Investors, which has been the case in the Czech Republic.
But, car part producers and some scattered industries aside, Romania has yet to make itself as attractive as it could
to the lucrative interests of the Japanese business market.

A yen to succeed: the Embassy view on Japan's potential

A combination of meeting EU standards and maintaining a low wage workforce should help more Japanese companies enter Romania, argues Ambassador Naotoshi Sugiuchi, because there is much room for development and trade is only at a modest level.“Recently we have seen several Japanese companies such as Sumitomo (SEWS), Takata-Petri, Yazaki and YKK manufacturing products for automobiles and garments in Romania,” he says of the bilateral record so far. “In infrastructure and energy we see more Japanese companies involved in modernising facilities and equipment.
“However, present economic and commercial exchanges seem to me yet at a modest level if we take into account the size, population and economy of our two countries.”
Japanese consumers have high expectations of the quality of imported products. “Successful trade with Japan requires some efforts to meet the specific demands of the Japanese market,” he adds, “and I think Romania, with qualified expertise in a number of products, has good potential to succeed.”
One recent example of an export success is bow instrument manufacturer Hora in Reghin, Mures county, which sells its string instruments to Japan. “I was very impressed to see that they were making several different sizes of violins, the smallest of which was really tiny and cute,” he says. “In Japan many children start learning violin from the age of two or three under the socalled 'Suzuki method'. As they grow and advance in the study, they need to use larger sized violins. This manufacturer has been making its best effort to respond to the varied demands of Japanese consumers.”
Sugiuchi argues that a sound business environment reflects the political and legal stability of a country. “This is one of the sine qua non conditions of attracting foreign investment,” he adds. “Romania's hard work aiming atachieving economic reform and EU accession are welcome and we also appreciate the progress concerning the improvement of the business climate. Still, stronger efforts are needed towards this direction.”
This year Japan will host the World Exhibition in Aichi between March and September, where Romania will have its own pavilion. “It is expected that a high level delegation will be dispatched from Romania to participate in a Romania Day event, scheduled for 1 June,” says Sugiuchi.