Doing business in Eastern Europe

We discover there's rich pickings for UK companies in the new part of the EU


Twenty years ago it wasn’t even worth considering. Ten years later you still had to jump through countless hoops and were met at every turn by a new regulatory obstacle.

But for the last nine months and the foreseeable future, UK businesses have a real opportunity to partner with, sell to and work in the ‘new EU’ – 10 fast-growing countries drawn predominantly from the old Soviet states in Eastern Europe.

New kids on the bloc

The EU’s historic expansion from a 15 to a 25-member Bloc in May 2004 created a wealth of opportunities for clued-up entrepreneurs. With this single event came the sudden demolition of trade and travel barriers, the promise of closer political ties and potential for monetary union.

According to government estimates, the new set-up will add £1.75bn a year to Britain’s GDP and will boost growth in the new states by about 1.5%. What it means for individual businesses is uncertain, but many have already made substantial gains through introductions in the debutante states.

Economic growth statistics are a good indicator of the untapped potential on Europe’s fringes. On May 1 2004, when the latest 10 countries joined the bloc, annual growth in Poland was topping 6% – three times more than the old EU 15’s average at the time.

Since then, growth in the new states has been consistently higher than the old heads of Europe. The latest statistics from Germany, for example, show that the most powerful economy in Europe inched along at 1.7% in 2004.

The UN’s Economic Commission for Europe says the 10 new states will grow at about 4.5% this year, 2% higher than expected for the old EU 15. It says the Baltic States – Estonia, Lithuania and Latvia – will experience the quickest acceleration.

And while the newcomers could not be described as powerhouses in world trade – collectively they boast economic strength equivalent to the Netherlands – the potential for further growth in these countries is plain to see.

Research by the Centre of Economics and Business Research (CEBR) shows that the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia all feature in the EU’s top 10 most desirable places to invest.

Top of the pile – based on growth prospects, education levels, market size and eligibility for EU funding – was Lithuania, although Malta came bottom of the index.

Prague in the Czech Republic was calculated to be the area’s foremost ‘sunrise region’, with a score approaching double the EU average for investment potential.

“We are at a time of economic adjustment in the EU,” argues Jonathan Said, an economist at CEBR. “Regions in the East that have just entered offer a highly-skilled pool of labour at very competitive rates.”

Look before you leap

For owner-managers, the statistics translate to a mine of infrastructure and development contracts. Budding economies need new buildings, transport systems and telecommunications, which in turn breeds demand for e-commerce and leisure services.

Already, there are signs this transformation is taking place. At the end of 2003, just 1.9% of the new EU had access to broadband internet compared with 12% of the EU 15. But at the current rate of broadband roll-out, the former figure will catch up with the latter by 2008, according to US research consultancy the Yankee Group.

It cites, “a more affluent, urban, techno-literate middle class; strong competition in some countries between telcos and cable TV companies; and strong political support for internet usage”. It concludes: “We expect to see strong overall growth in the new countries during the next five years.”

Movement between the countries is another sign of economies hotting up. Immediately before expansion, air traffic organisation Eurocontrol said that the burgeoning wealth of the accession states would cause a spurt in low-cost air traffic.

The group said: “The largest growth in the air transport market will be in Eastern European and Mediterranean states, with an average of 4.5% growth a year in the EU accession countries.”

Throw into the mix a skilled low-cost workforce, boundless enthusiasm for collaboration, falling business taxes and fewer regulatory hurdles, and you have the ingredients for prosperous partnerships.

Exactly where, by what means and in what industry you decide to invest will of course be defined by what you produce, construct or serve in the UK. However, it is important that you take time to research opportunities thoroughly.

Prospects offered by the new EU countries are by no means uniform and you should be aware of the local demand for what you want to do. It sounds obvious, but you should not take advantage of lower labour costs if the quality of work will suffer as a result – after all, you are still spending money.

Remember, for instance, that CEBR’s study shows that new EU members occupy both the top and bottom places in terms of investment readiness.

Within the 10 new states, the Czech Republic is seen as having particular promise because of its rich academic and cultural history, rapidly growing economy and its geographical location at the heart of Europe.

The country attracted $6bn of foreign direct investment last year and $9bn the year before, of which UK firms contributed only a small fraction. However, the government wants more involvement from foreign businesses and offers a range of tax-incentives to entice them.

“Two years ago there were 200 British companies with branches in the Czech Republic, at the end of 2004 there were 600,” says Ales Cernik, head of the commercial section at the Czech embassy.

“That compares with around 7,000 German companies, but once UK business people realise it’s the same as branching to Holland or France, we expect it to pick up even more quickly.”

Lithuania is another one to watch, according to analysts. In a report published last year, the World Bank said it was the best place to do business in Eastern Europe, while its capital city, Vilnius, was named ‘Eastern European city of the future’ by London-based FDI magazine.

Like the Czech Republic, it offers tax breaks and EU structural funding, as well as low interest rates on loans, which the government offers to underwrite in some cases. Hot sectors in the country include IT services, engineering and design.

Olga Stravinskiene, Lithuanian commercial attaché, says UK-style entertainment is also a big draw. “There is a huge demand for the British club culture. DJs and music from the UK always gather crowds. Also Lithuanians enjoy British-style pubs,” she told GB.

Been there, done that?

Those of you who have already peered beyond the Iron Curtain since it was drawn 15 years ago will agree that the area exhibits huge potential.

Almost without exception, those who have set up a branch, hired sub-contractors or exported to the new member states say they would do so again, and many are already looking for their next opportunity.

Guy Whitehead, chief executive of Armourcoat Surface Finishes, has just taken on a group of subcontractors in Latvia. He says visiting the country’s capital, Riga, was an inspiration that has fuelled his desire to chase more prospects in the area.

“I plan to hit them all,” Whitehead says when asked whether he plans to move into other newcomer states. “We see the new EU as a fast growing market. From what I have seen of people from the Baltic states, they are skilled, efficient and hard working.”

Armourcoat has plenty of experience trading overseas – it currently sells its products in 52 countries across the world, including Cyprus, Poland and the Czech Republic – but Whitehead says Riga bowled him over.

The company originally got involved with Latvia four years ago, but it was not until the management team visited the capital that the scope for development became obvious.

“We were amazed by the buildings in Riga. There were a number of modern and well-built ones in among the old Soviet-era blocks. I was hugely impressed with the high standard of workmanship in the country, in some cases it was among the best quality I had ever seen.”

Chris Barling, chief executive of Actinic software group, has a similarly glowing view of opportunities in Hungary. Beginning in 1999, he put together a team of research staff drawn from some of the country’s highest skilled people.

Barling says the decision was taken with the EU’s future expansion in mind, and that since then progress toward tax harmonisation in Hungary and freer travel arrangements have made life much easier.

That’s in addition to the ongoing benefits of having an elite workforce that demands a salary of between one half and one third the going rate for someone with the equivalent skills in the UK.

“Many of our people have PhDs, but we were able to start them on the equivalent of £12,000. Now they are on about £20,000, which is a high salary for Hungary but only about half or a third of what you can expect to pay in the UK,” says Barling.

“We also allow them to work from home, which they see as a real bonus. It means the people turnover rate is practically zero – which is great because we want experienced people who know the company and the job.”

Asked whether the factors underpinning his decision to hire in Hungary were unique to Actinic or whether he would take the same action with another company, Barling said he would if it fitted the business model.

But it doesn’t mean that venturing into one of the new Member States will be plain sailing for everyone. Both Actinic and Armourcoat have had plenty of practise dealing outside the UK, and the experience may not be such an unreservedly good one for companies planning their first foray overseas.

Jeff Kirkham, senior partner at PKF accountants, has seen first-hand some of the drawbacks. He was approached last summer by the heads of a project management company who wanted to take advantage of new infrastructure contracts opening up in Poland.

“We found the legislation totally different and it took much longer to complete the project than if it had been in the UK,” admits Kirkham. “There were 10 times as many rules and they were very complicated.

“The language barrier was also a problem. Unfortunately there weren’t many English speakers on their side and no Polish speakers on ours. It meant accountants in Poland had to sort out the regulatory bit, then have someone translate it to English before we knew what had been done.”

As an example of the rigorous checks demanded by Polish institutions, Kirkham cites the process of setting up a bank account, for which all the directors were required to complete a sworn statement witnessed at the Polish Embassy.

Although the company overcame these barriers and the venture proved commercially successful, its example proves that for inexperienced businesses, at least, it might be a good idea to get some advice from an accountant and a lawyer.

For Whitehead, a thorough system of checks is a must: “We carry out a lot of research on the countries we sell to,” he says. “They include financial checks on companies, of course, but mainly it’s to do with getting to know the client and the country they operate in.”

Estonia

Language: Estonian (Finnish, Russian, English, German)

Currency: Kroon

GDP per head: ?4,950 (est)*

Hot sectors: Transport and logistics, food processing, biotechnology

Useful links: www.investinestonia.com, www.emta.ee, www.koda.ee

Latvia

Language: Latvian (English, Russian)

Currency: Lat

GDP per head: ?3,080 (est)*

Hot sectors: Construction, research and development, IT, automotive

Useful links: www.london.am.gov.lv/en

Poland

Language: Polish (English)

Currency: Zloty

GDP per head: ?3,880 (est)*

Hot sectors: Financial services, security, consumer goods, transport

Useful links: http://home.btclick.com/polishembassy, www.mg.gov.pl

Czech Republic

Language: Czech (English, German)

Currency: Czech Koruna

GDP per head: ?3,360 (est)*

Hot sectors: Automotive, food and food processing, IT, construction

Useful links: www.czechembassy.org.uk, www.doingbusiness.cz

Lithuania

Language: Lithuanian (English, Russian)

Population: 3.6m

Currency: Litas

GDP per head: ?3,780 (est)*

Hot sectors: Wood processing, furniture, textiles, food, agriculture, optical equipment, ship building

Useful links: http://amb.urm.lt/jk

Slovakia

Language: Slovak (English, Hungarian)

Currency: Slovak Koruna

GDP per head: ?4,750 (est)*

Hot sectors: Utilities, fashion, food and drink, transport

Useful links: www.slovakembassy.co.uk, www.slovakia.org

Malta

Language: Maltese (English, Italian)

Population: 397,000

Currency: Maltese Lira

GDP per head: ?9,400 (est)

Hot sectors: Manfacturing (especially electronics, ship building, textiles), food and beverages, tobacco, tourism

Useful links: http://www.gov.mt

Cyprus

Language: Greek, Turkish (English)

Currency: Cyprus Pounds

GDP per head: ?8,000 (est)*

Hot sectors: Airport supplies, consumer products, food, technology, tourism, waste management

Useful links: http://ted.publications.eu.int/official

Slovenia

Language: Slovene (German, Italian, English)

Currency: Tolar

GDP per head: ?9,410 (est)*

Hot sectors: ICT, automotive, pharmaceuticals, logistics, distribution

Useful links: www.gov.si/mzz/dkp/vlo/eng, www.gzs.si/eng

Hungary

Language: Hungarian (English, German)

Currency: Forint

GDP per head: ?5,960 (est)*

Hot sectors: Food and drink, automotive, electronic components, government tenders, research

Useful links: www.mfa.gov.hu/ Kulugyminiszterium

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