Romania and the Czech Republic: Trade Opportunities in 2006
Since the start of the EU transition process 15 years ago, countries in Central and Eastern Europe (CEE) have enjoyed robust economic growth thanks to reduced business constraints and increased foreign investment. Currently, Romania and the Czech Republic both have fertile opportunities for foreign investment. Germany, the US, Austria and the Netherlands are currently the largest investors in the Czech Republic, with direct investment from the UK amounting to 8 per cent.
Germany, Italy and France have long capitalised on significant commercial opportunities that exist in the CEE. However, despite the significantly improved picture for CEE countries, UK exports only account for a small proportion of European total imports. it would appear that many SMEs in the UK are still exercising caution because of fears over increased business risks. Certainly, entering new emerging markets carries a level of risk but, with the right risk management strategy, exporting can be a simple extension of domestic trading. The benefits of exporting are numerous and include:
While the rewards from exporting are potentially plentiful, the commercial, financial, economic and political risks must be considered. Before negotiating any export deal it is vital for an SME to develop a risk management strategy, taking some specific factors into account. For instance, before you start, undertake local research of your chosen export market to determine the need and want for a product, and identify the most appropriate distribution and marketing strategies. Working with a local agent or distributor who understands the market can be very useful.
The key commercial risk is ensuring payment once exporting is underway. Efficient domestic credit management practices can be applied but there are some additional considerations. Buyer risk can be complicated by differences in language and local culture, and credit periods are almost always longer for exports than is often the case for domestic trade. Make sure you know your client before you trade with them and obtain references where possible.
In many cases the credit period does not start until after the goods have arrived. If exporting to a distant market, delivery times will be increased, which in turn means you will be waiting longer for payment. This can have significant impact on working capital. Invoice finance can help optimise your cash flow because, compared with an overdraft, it offers greater flexibility as available credit will grow as sales grow.
Credit insurance, which will pay out if your creditor won’t or can’t, is also advisable and provides a safety net, but this should not be seen as a substitute for good credit management. By structuring finance to match a company’s transaction it may be easier for the bank to grant credit to a well-managed growing exporter. Certain types of finance may incorporate credit risk management.
And don’t forget the impact of foreign exchange fluctuations. There are various ways to manage this and you’re best advised to talk to your bank at an early stage to explore the possibilities and determine an effective exposure strategy.
The risks of overseas trade may come in many forms, the key is identifying them early, talking and working with the right bank and developing a clear strategy at the outset to navigate through the challenges. With a sound strategy and solid support, SMEs can confidently enter into the CEE market without exposing themselves to unnecessary risk. And for those who do, it is likely that doing business in the area will prove to be a lucrative venture.
The Czech Republic and Romania are two CEE countries in particular presenting sound commercial opportunities for UK business.
The Czech Republic is one of the most successful transition economies. With accession to the European Union in May 2004, the country enjoys a strategic location in the centre of Europe for both western and eastern markets. Its excellent skills base, low labour costs, good transport and well developed infrastructure, provide a number of attractive trade and investment opportunities for UK companies.
The Czech Republic has attracted significant direct foreign direct investment in absolute terms, running at twice per capita than that of any other country. The introduction of investment incentives in 1998 has attracted a massive inflow of foreign direct investment and these investments are the main drivers behind a surge in exports. The EU represents some 70 per cent of the total market for Czech exporters. The retail sector in particular has made significant acquisitions, with familiar UK high street names such as Tesco, Marks & Spencer, Mothercare and Next all appearing on the Czech high street.
Sectors in which UK companies can make their mark are automotive, leisure and lifestyle, food and processing, environment and IT/telecommunications. For example, the Volkswagen Group’s acquisition of a major stake in Skoda Auto, the largest car producer in Central Europe, has increased opportunities for component manufacturers.
Additionally the growing social influence from Western Europe has led to the emergence of a middle class that demands consumer choice for sophisticated and luxury goods. In turn, opportunities continue to arise in the leisure and lifestyle sector.
The Czech Republic is not always an easy market to enter. A slow and fairly complicated legal system and a high degree of bureaucracy are common challenges faced by businesses entering the market. While some of the most time consuming and costly procedures, like company registration or building permits, have finally attracted lawmakers’ attention, application of these new regulations in real life will take some time.
Careful and thoughtful planning and preparation are therefore needed. It is advised that UK businesses seek expert legal and financial advice before entering into any commitment.
Some 80 per cent of import business is done on open account with some companies offering up to 90 days credit. Cash in advance is also an accepted method of payment.
Language barriers in the Czech Republic are becoming less of a concern. English is increasingly popular among the younger generation and business community.
Despite a recent rise in the cost of labour, the Czech Republic is still cheaper than Western Europe. However, it is recommended that businesses think carefully about the location of their outlet in the Czech Republic. Some of the most developed regions have a large number of foreign investors already present; therefore new entrants to the market face the problem of finding staff locally. The inflexible housing market and the unwillingness of Czech people to commute to work or to relocate leads to the situation where many companies hire labour from Slovakia, Poland or Ukraine. The highest concentration of workers continues to be found in Prague, where the population is around 1.2 million.
Romania is the second largest consumer market in Central and Eastern Europe with substantial natural resources, a skilled but still relatively cheap workforce and a growing economy. Having acceded to NATO on 29 March 2004 and with an EU pre-accession programme in full swing (expected membership in 2007), Romania is welcoming foreign investment and EU funding is available in a number of areas. All things considered, Romania seems to present an attractive offering for UK businesses looking to expand in the international market place.
Romania’s offering is further strengthened by the relatively low risk associated with its export market and a recent intensification of investment activity. The country’s steady economic growth is being driven by both domestic and external demand.
Establishing a business in Romania or establishing trade relationships with Romanian business partners is not going to be without its challenges. The initial approach for any business will be establishing a local presence. There are several options for setting up business, from forming limited liability companies and joint stock companies to partnerships; as well as branches and representative offices.
Setting up a limited liability company is perhaps the most popular option, due to the greater flexibility and lower administrative and initial capital requirements involved. However, companies may wish to ease themselves into the market a little more slowly, starting with setting up a representative office. This should be relatively straightforward and it is the local staff and networks that will play a vital part in developing business as well as serving a front line function in minimising credit risks.
While Romania is thought of as a relatively low risk trade market there still remains a legacy from the communist era for a tendency towards bureaucracy and some consideration needs to be given to country and bank risk. Additionally, despite the progress being made by Romania as it moves towards EU membership, its legal framework remains inadequate in a number of areas making it imperative that sound professional legal, financial and taxation advice is sought. For companies trading with Romanian business partners, a sound risk and credit management strategy is needed.
Another important consideration is currency risk. The Romanian lei is not freely tradable. The easiest way for a UK company to overcome this is to agree with their Romanian business partner that they will either be paid or make payments in a tradable currency, most likely euros, to which the lei is linked, or US dollars. If this is not possible it will be necessary to establish an arrangement with a Romanian bank whereby leis are converted into either euros or US dollars. Either way, it is unlikely that sterling will be an option and businesses need to factor this into their pricing. To this end it will be necessary to establish a suitable foreign exchange facility and possibly a euro account.
With a growing and fully functioning market economy, coupled with the progress being made in preparation for EU accession in 2007, Romania is a highly viable growth area for UK businesses.