Vol. 2 No.5  

This other Eden

     Cautious investor Great Britain is taking a more keen interest in Romania

     Though British retailers and banks are staying at home, outsourcing of manufacture and the opening of new markets, such as small loan provision and takeaway coffee, are more attractive for the UK investor.
     “We have seen an increase in number of small or medium sized firms (SMEs) who cannot afford to continue manufacturing in the UK because of the costs of labour and are moving production into Romania,” says Ray Breden, chairman of the British-Romanian Chamber of Commerce (BRCC) Branch Advisory Board.
     These tend to be SMEs with an annual turnover of between one to ten million Euro, especially in the automobile sector, such as the manufacture of spare parts, from electrical components to safety belts.
     The chairman has “no doubts” there will be an increasing trend in British manufacturing companies coming here.
     As Romania’s infrastructure begins to build up, engineering consultancies could also have clear opportunities, in road surveying, advice on how to construct motorways or financing.
     “If the administration of publicly available money is improved, that would double the amount available for major construction and would inevitably increase the interest from British investors,” says Breden.
     He believes labour costs will remain low in Romania. “In ten years’ time the differentiation between Romania and the 2004 accession states will be very little,” he says. This means Romania is likely to be competitive, within its geographical region, for at least a further decade.


Estimated 2,000 UK companies in Romania
Estimated 5,000 British residents in Romania
2005 UK exports to Romania: approx. 975 million Euro: up six per cent on 2004
2005 Romania exports to UK: approx 1.14 billion Euro: down two per cent on 2004
UK investment: Over 3.5 billion Euro
Key firms: Vodafone, Fonebak, Aviva, Halewood, GSK, Alison Hayes, Linklaters, Rigips, Coats

Source: UK Trade and Investment

     UK trade and investment, the British Embassy’s commercial branch, sees local opportunities in finance and legal, construction, agriculture, healthcare, oil and gas, food and drink, environment, creative industries, film and cultural heritage, power, airports, education and training and security.
     UK manufacture is here. But retail is not. Marks and Spencer has two stores, Mothercare one and Debenhams will be opening in Unirea Shopping Center. But none of these come with British capital. All are franchises. The only UK retail chain in Romania is betting firm Stanleybet.
     Tesco allegedly looked at opening a hypermarket in Bucharest two years ago, but now seems to have backed away from the prospect of Romania, according to one businessman. Other international successes, electronics firm Dixon’s Store Group, DIY retailer B&Q and general store BHS are also absent.
     Romanians are also not yet turned on to the opportunities in the UK, but there is one locally-made product Breden believes could sell in Britain – it is the most sold item in its sector in Romania – and has people queuing on the streets of Paris – the Dacia Logan.
     “Fill it with all the toys, such as air conditioning and a CD player and it could obtain a significant market share,” says Breden.

Red alert

     Vodafone is now the co-leader in the Romanian mobile operating market, having bought out Connex owners MobiFon in what Vodafone Romania CEO Liliana Solomon calls “the largest transaction” in Romania in the last 15 years.
     Connex launched its GSM network in 1997 and 3G in April last year, but last month the company dropped the Connex brand for Vodafone Romania.
     The company has, according to Solomon, reached a brand awareness for Vodafone of 95 per cent of Romanians. Its red signature colour is now emblazoned across the retailers and partner stores.


Cost of transaction: 2.9 billion Euro (including purchase of Czech-based Oskar Mobile) from Canadian Telesystem International Wireless. Vodafone owned an existing 20 per cent of Connex.
Customers: 6.13 million (December 2005)
3G: available in 22 cities with over 135,000 customers
Shops in Romania: 39

     “Building on strong foundations, Vodafone is here to deliver innovative services, scale, scope and long term benefits for the people of Romania,” says Solomon.
     New products the company is preparing to launch include Vodafone Live! and Vodafone Mobile Connect over High-Speed Downlink Packet Access, after it launched Vodafone Europe for international calls to European countries.


Full treatment

GlaxoSmithKline Romania

Investment in Romania:
approx. 63 million Euro
2005 turnover:
approx. 127 million Euro
Employees: 1,000
Sells 140 brands in Romania, 56 are produced locally

     World number two pharmaceutical producer GlaxoSmithKline (GSK) now boasts a total market share of 9.34 per cent in Romania, of which 2.3 is in generics and seven per cent in brands.
     This makes it the overall local market leader, says general manager GSK Romania Roberto Musneci.
     The pharma giant bought 65 per cent in Brasov-based plant Europharm in 1998 and the remaining stake in 2003. The company also opened a greenfield facility for solid pharma products in 2002.
     The Europharm sale came with a chain of 33 pharmacies, which GSK sold to local chain Sensiblu last year.
     “I love the pharmacy business and I learned a lot,” said Musneci of his temporary tenure as a shopkeeper, “but having just 33 pharmacies does not make any sense. You either have a chain of 300 or you do not make any business in the field. Retail is counter-cultural for GSK from this point of view. We were not prepared to expand in the pharmacy business, so we decided to sell.”
     Are further acquisitions on GSK’s agenda for this year? Especially with state-owned and profit-making generics producer Antibiotice Iasi being top of the Privatisation Authority’s ‘to do’ list this Autumn.
     “We are looking at regional rather than local acquisitions,” says Musneci. “My personal view is that Antibiotice Iasi is a very interesting story, but in a globalised environment, all decisions are taken at a global level. Therefore Antibiotice Iasi is not in the immediate attention of the group.”

Ready cash


Home-collect loan provider
Launched in Romania:
May 2006
Investment for 2006:
No more than 4.4 million Euro

     Small loan firm Provident Financial has expanded in the British Isles and found a new home for its business model in the emerging markets of eastern Europe and Mexico.
     In Romania, the loan company is opening three offices in Bucharest, in Berceni, Militari and near Lacul Tei and may test one or two more cities.
     Many families with a household income of between 150 to 200 Euro find it hard to gain small loans from banks, or may not have a bank account. If they need a one-off payment to pay for, say, children’s clothes, holiday spending money or medical expenses there may be few options.
     Provident Financial aims to fill this gap with a loan product of around 170 Euro.
     Customers can call the provider and one of their agents drops in at the house and can hand over the money within 48 hours. The agent then returns over six months for repayments.
     Now the company is offering a 600 RON [170 Euro] loan repayable over 26 weeks, with a 50 per cent interest. Therefore 900 RON [254 Euro] has to be paid back.
     Compared to an average bank loan, this may seem high, but the company argues that there are no additional fees and customer can have a grace period.
     “We pride ourselves in transparency,” says Steve Rice, general manager Provident Financial, “what the customer signs up for at the beginning of the loan is what they pay.”
     From its research, Provident Financial has found that the ‘home service’ of an agent calling at the door is a big advantage. Rice says that many Romanians dislike paying bills in banks – party due to the queues and the difficulty of getting to the bank, particularly when Bucharest traffic reaches gridlock.

Play safe


Insurance company
Gross written premiums 2005: 13.5 million Euro
Total cashed premiums 2005: 11.3 million Euro
Employees: under 100, works with almost 1,000 agents

     Insurance provider Aviva Romania now has two partnerships in bancassurance products, where it sells insurance through a bank’s distribution channels, with BRD – Groupe Societe Generale and ABN Amro and one in healthcare through private clinic Medicover.
     “We have seen increased maturity on the local insurance market, which still has a long way to go,” says Adrian Allott, deputy CEO Aviva Romania.
     Professionalism has increased because the industry needs to work under the EU’s acquis communataire.
     “A most dramatic change will be reporting under International Financial Reporting Standards (IFRS),” says Allott, “which will mean a reshaping for the entire industry’s balance sheet.”
     But the sector lacks some services.
     “We miss consultancy firms that can provide accurate information on the whole sector,” says Allott. “It is important to have valid information when you decide to develop a new product, set prices or find out which are the growth areas.”
     There is also a lack of professionally trained staff. EU accession will see “a scramble” in the labour market for qualified staff, argues Allott.

Dress code


Investment since 1993: 15 million Euro
Profit 2005 (estimated): 730,000 Euro
Employees: 2,000 (plus 2,000 in subcontracted factories)

     Ladieswear manufacturer Alison Hayes will build a new distribution centre near Bucharest and is likely to expand its production in moves that see the firm stick with Romania, despite tough competition in the high intensity industry from Ukraine, the Republic of Moldova and China.
     Alison Hayes designs and produces ladies soft-wear such as dresses, blouses and trousers for some UK high street fashion stores.
     Now one of the largest textile companies in Romania, it has factories in Urziceni and Buzau, producing together 250,000 garments a month. 200,000 further garments a month are produced in sub-contracted factories.
     “We buy everything except the fabrics from Romania,” says Andreas Santis, general manager of Alison Hayes Romania.
     The company is building a new four million Euro distribution and logistics centre in Urziceni, over 7,500 sqm.
     But the rising wages of Romanians could be a threat to competitive industries, such as textiles.
     “Salaries are an issue but this does not scare us,” he adds. “This is only a threat to companies if they are pirates and they do not plan properly for the future. This isn’t a threat for a firm that has invested 15 million Euro and keeps investing, like us. Even though a lot of textile companies are moving out of Romania, larger professional companies will stay, while smaller textile firms who do not plan, will go to the wall.”
     Santis also concedes that it would be hard for a new clothing firm to set up shop in Romania in a greenfield development.
     “Romania could be the major workshop of Europe due to its geographical position, but has to work on building up the infrastructure from the rural areas to the big cities,” he argues, adding there are 150,000 people in rural areas around Buzau who could find employment in the city if decent roads and subsidised public transport is in place.
     Maternity is becoming an issue to manufacturers who employ almost 2,000 people as the salary for maternity absence is almost double what a person will earn at work, says Santis. Now Alison Hayes has 12 per cent of its workforce on maternity leave.
     "As far as any future plans for expansion, we may consider to build a new factory in Urziceni which could add another 300 jobs, but this depends how the legislation moves forward,” says the textile boss.


Manufacturer of industrial sewing thread and consumer needlecraft products
Turnover 2005: 7.8 million Euro
Forecast turnover for 2006: 8.95 million Euro

     Meanwhile, British manufacturing firm Coats has two factories in Odorheiu Secuiesc, Covasna county, one producing industrial sewing thread and the second making consumer needlecraft products.
     “The factory in Odorheiu is one of Coats’ biggest sewing thread production units in Europe,” says Anamaria Grecu, general manager of Coats Romania. The investment in the factory was 15 million Euro. Coats started its activity in the 1924 in the town of Talmaciu, near Sibiu, but lost the factory in 1948, when the Communist Government nationalised the industry.
     Re-starting activities in 1995, Coats Romania offers more than 10,000 products in industry and crafts to more than 1,900 customers in Portugal, France, Great Britain and, in Romania, Sara Lee, Secuiana and Jolidon.

Flight plan

     British Airways now flies twice a day from Bucharest to Heathrow, but the airline is examining opportunities further afield as other cities’ airports open up.
     Timisoara, Cluj-Napoca, Iasi and Constanta are the most obvious locations, though nothing is definite yet.
     “It is not impossible that by this Autumn or next Spring a decision will be taken,” says Corina Enciu, British Airways country commercial manager Romania & Moldova. “I see bigger potential in Timisoara, and Cluj-Napoca is more strategically located. If there were two possibilities, Iasi might also be an option. With Constanta that is not the case right now.”
     Recently the company introduced a 95 Euro one-way ticket price to London, without airport tax. “We wanted to stimulate the market,” adds Enciu. “We were the first to introduce the one-way ticket, but other airlines followed.”


Two daily flights: London Heathrow - Bucharest Henri Coanda
Average occupancy rate 2005: 78 per cent
Total load factor increase by 30 per cent in 2005 over 2004
This should rise by a further 30 per cent in 2006

     Business tourism is at present the main bulk of the flights between London and Bucharest, but BA last year organised an event in London, ‘Eastern Treasure’, presenting eastern Europe as a tourist destination.      “We want to repeat that experience this year,” she adds. “Romania is not viewed as a tourist destination, but a development towards this direction is now being felt and enhancing this is among our objectives for this year.”

Could it be magic

Linklaters, Miculiti, Mihai & Asociatii

Lawyer to partner ratio: 34/2
Some projects:
CSFB/MEC on the privatisations of Distrigaz Sud, Distrigaz Nord and Petrom
Vodafone on the acquisition of MobiFon Romania and Oskar Mobile
CEZ on the acquisition via privatisation of Electrica Oltenia

     Active here for seven years now, British law firm Linklaters, Miculiti, Mihai & Asociatii does not fear its fellow British law giants from the ‘Magic Circle’, some of which have started to look closer at Romania.
     “More entrants are an indication that the Romanian legal market is maturing and growing - both welcome news to our firm,” says partner Michael Schilling.
     As a firm with a track record in privatisation deals, Schilling believes the biggest opportunities for UK-based legal and financial services could be in real estate developments, manufacturing facilities, infrastructure related project finance and private equity investments.
     The British lawyer says privatisations to watch in next two years include gas producer Romgaz and telecom operator Societatea Nationala de Radiocomunicatii.
     But with the privatisation era nearing its end, he adds: “Our privatisation practice is a small part of our overall practice. We are proud to have consistently advised on the largest privatisations undertaken in Romania and the region of south-east Europe, but the remainder of our corporate, banking, private equity, real estate and commercial law practices are all performing very strongly.”

Train of thought

     Training company BPP Professional Education has a permanent office two minutes walk from Piata Romana, inside a former patisserie. “People still come into the office asking to buy cakes,” says Steve Crossman, its local managing director.
     But they will be disappointed as the building, with its own large school-rooms, now trains people to qualify to become chartered accountants, using UK-accredited exams. When taking the exams to become a professional chartered accountant, Romanians have a pass rate around 40 to 50 per cent higher than the worldwide average.
     “The quality of the young professionals here is excellent,” Crossman says. “In the early days a lot of foreign companies sent expats over here, because they knew how to carry out the business, but then they thought: let’s get bright locals and train them to international standards.”


Professional training company

Offers: Chartered accountancy (ACCA) qualification

Tailored finance training

Management development, such as teaching leadership and team building skills

20 full-time staff

     When BPP started it was mainly the elite and those from multinationals taking exams. Now Crossman sees Romanian companies looking for smarter ways to develop their finances.
     “There are a few Romanian companies who are expanding overseas and need to take with them an accountant they can trust,” says Crossman. “In the early days, Romanian firms were entrepreneurial, now they need to catch up with western firms and need solid budgetary programmes.”
     There is an expanding demand and in three to five years there should be BPP satellite offices in major cities in Romania.

Breaking in

     Coffee shops should be a high margin business model, where the only big bucks need to be invested in, is bricks and mortar.
     British-owned, but east European-based chain Coffeeheaven has now secured a number of sites for 2007, with its mixture of sit-down and take-away coffee products.
     “We have agreed sites but the paperwork is underway and not completed,” says general manager Richard Worthington.
     As to whether to open a branch in a bank, with another brand or in department stores such as Debenhams or offices, Worthington says he is still looking at these options.
     “We would prefer our first stores to be in high profile shopping streets or shopping malls,” he says. “We will consider acquisitions also from one to many units.”

Report by Michael Bird, Corina Mica and Ana-Maria Smadeanu