U.S. Investments 04



“American dream goes local”

According to the US Census Bureau, America exported $367 million of goods and services to Romania and imported $730 million. January-April 2004 saw $175 million exported by the US to Romania and $219 million go the other way. US exports here have more than doubled since the same time period for 2003. Trade in consumer goods, furniture, textiles and services is expanding.
By Nicu Pana

There are many ways to measure foreign investment – inflows, subscribed capital, etc. In addition, sometimes FDI is measured from the location of the holding company which is making the investment rather than the parent company. So it’s hard to get an accurate number. An unofficial survey of American businesses in Romania tabulated by US Foreign Commercial Service staff estimates the value of the investments made in Romania by US-headquartered companies at approximately $2.5 billion.

General Electric, Citigroup, AIG, IBM, Procter & Gamble, Shell and Coca-Cola have deemed Romania a market worth investing in. However, IBM has only invested $1.5 million in Romania so far. Last week it signed a strategic partnership with the government of Romania to promote Linux over IBM. The partnership is geared towards education in technical universities. Microsoft got an even better deal with the government a few months ago as the Romanian state agreed to purchase software licenses from the Redmond software giant. Microsoft’s success story in Romania promoted Silviu Hotaran, the former country manager, to coordinate the entire Balkan region.

General Electric has invested a little over $15 million (GE’s investments in Hungary amount to several hundred million dollars). Citibank, the world’s largest bank, has maintained a low profile in the Romanian banking system so far, only participating in large transactions and loan agreements. Furthermore, out of the world’s top 20 companies, only three have invested several hundred million dollars in Romania: Shell (more than $230 million), and Coca-Cola (with investments in excess of $300 million).

Romania is also a reliable partner for US investors in civil sectors. America is the third largest foreign investor in Romania. US direct investment in Romania exceeded $720 million, with more than 3,400 joint ventures or branches of US companies. Romania exports mainly electronic equipment (31.4 percent), textiles (22.3 percent) and raw metals (20.8 percent) to the US, while its imports from the United States include mostly electronic devices (47.8 percent), optical, photo and cinema equipment (14.3 percent), and chemicals.

Last year, the US Trade and Development Agency (USTDA) named Romania as its Country of the Year 2003, an honor based on the agency’s strong and diverse Romania country program, which has produced a significant positive impact on both Romanian economic development and American exports to Romania. For the second consecutive year, Romania was the leading USTDA grant recipient in Europe, with 19 activities totaling $3.1 million. USTDA maintains a diverse portfolio in Romania in the information technology, telecommunication, electricity, petrochemical, oil and gas, and transportation sectors. A fiscal year (FY) 2003 highlight of this country program was a USTDA-sponsored orientation visit for a delegation of Romanian energy officials, including Romanian Minister of Economy and Commerce Dan Ioan Popescu.

Recent success stories also include Johnson Controls, the American auto parts manufacturer which is in the process of opening its fourth location in Romania. Oracle, the world’s second largest software company, is now developing a significant support services center in Romania. TechTeam, an American IT services provider, is moving some of its Europe Direct (EU Hotline) operations from Brussels to Romania to take advantage of a cost-effective highly skilled workforce.

Honeywell, the engineering and manufacturing firm whose merger with GE was blocked by regulators, has expanded several projects here recently and is doing process controls engineering, producing engine components, and will begin assembling cabinets with electronic circuitry.

There are three major trends regarding American investment in Romania. First, American companies are beginning to discover Romania’s capabilities and cost-efficiencies in the IT sector. In addition to the presence of all the major global hardware and software vendors like Microsoft, Oracle and HP, the diversity and depth of the Romanian market is finally being tapped. For example, vendors with dynamic business models like Dell have begun selling PCs in Romania; startups like Blazent are outsourcing here and high-end consultants such as Gartner have announced their intention to come.

Secondly, the auto parts sector is becoming popular. Johnson Controls, Solectron, and Delphi Packard are here. The Romanian Ministry of Economy and Commerce recently led a trade mission to Detroit, Chicago, and New York to bring more auto parts suppliers over. Last but not least, American brands dominate the high quality business hotel sector. Howard Johnson opened its first location in Romania this year; the Marriott Grand became the first JW Marriott Hotel in all of Continental Europe; and Hilton is a major player.

However the magic of growing numbers and the recent boost of incoming American money should not serve as a substitute for long-term sustainable strategies to buttress the current upward trend. Even though Romania has sorted out most of its messy economic and political past, it still needs to be business predictable. In the words of Berry Kolodkin, special counselor to the Prime Minister & US adviser, Foreign Investments: “Ensuring predictable outcomes in the application of those rules is the next step for Romania. Not being able to predict whether the government will cancel a contract with one party and award it to a different party, or whether a control audit will be meted out arbitrarily increases risk to investors. In an increasingly competitive environment for foreign direct investment, Romania needs to optimize its risk-to-return ratio by increasing predictability.”

Long-term stability would guard against the sort of business volatility that comes with labor-intensive investments. “Basic macroeconomic stability is not enough to make Romania competitive and productive, particularly after the ‘first wave’ of investors interested primarily in low wages and low taxes passes. The challenge to Romania to build prosperity and a modern economy that can compete with EU nations is not only to improve and refine the implementation and management of the current reforms but also to increase the speed and sophistication of those reforms,” says Kolodkin.

Corporate investment

American companies have become large players in a series of strategic industries including telecommunications, infrastructure, heavy gear manufacturing, finance and even agriculture.

Coopers & Lybrand and Price Waterhouse established their Romanian operations in, respectively, 1991 and 1993, and by the time of their global merger in 1998 had developed substantial practices. Having continued to expand its services and knowledge of Romania’s business environment, today PricewaterhouseCoopers provides the highest level of professional services to international and Romanian enterprises. Overseen by seven Partners and employing 350 specialists and support staff, PricewaterhouseCoopers operates in Romania and Republic of Moldova from a network of four offices in Bucharest, Timisoara, Cluj-Napoca and Kishinev.

After 13 years leading the PricewaterhouseCoopers practice in Romania, Jean-Pierre Vigroux has accepted to become the first Senior Partner of PricewaterhouseCoopers South East Europe, a cluster made up of Bulgaria, Serbia & Montenegro, Macedonia, Kosovo, Albania and Bosnia, including Republika Srbska, effective July 1st 2004. His head-office will be in Sofia.

Effective the same date, Vasile Iuga was appointed Territorial Senior Partner of PricewaterhouseCoopers Romania. Prior to that, he has been Partner, head of the Assurance and Business Advisory Services and has joined the firm in 1991.

David Trow who is a lead assurance partner in Romania was appointed Territorial Senior Partner of Serbia as well as continue his oversight of the Timisoara practice and the Romanian practice technical function. David Fuller, Partner at our office in Warsaw, will be, effective July 1st, Partner in Assurance and Business Advisory Services Department, PricewaterhouseCoopers Romania.

Mihaela Mitroi was admitted Partner of the Tax Department and Alexandru Lupea was admitted Partner of the Assurance and Business Advisory Services, both effective July 1st.

The combination of local experience and a one-firm culture enables PricewaterhouseCoopers to provide advice that is consistent with its standards globally and responsive to local conditions and requirements. Engagements are generally staffed by a combination of Romanian specialists, with knowledge of local conditions and regulations, and international consultants, with expertise in tackling issues faced by international enterprises and practise in dealing in the Romanian environment. The key element of PricewaterhouseCoopers’ success in Romania is the quality of its staff, to whom partners are committed to providing the most current management training throughout their careers.

California-based telecom company Qualcomm picked Romania for its first CDMA venture in Europe. Zapp is a $350 million investment in the first ever 450MHZ CDMA network. On the basis of the Romanian success, Qualcomm and its partners decided to launch similar networks in Portugal, India and China. US Deputy Trade Secretary Samuel Boldman tested the network in summer last year when Washington DC still did not have a network to match Zapp’s technical capabilities.

Zapp is currently rolling out the third phase of network deployment and getting ready to launch 1x EV-DO apparently ahead of the first Romanian UMTS network. In Q2 of 2004, Qualcomm posted revenues of $1.2 billion, up 20 percent compared with the same period last year, and had a net income of some $488 million.

UPC Romania is also in the hot market of communications. The company has been on an acquisition spree since it entered the local market in an attempt to build up muscle and market share. It currently holds a 10 percent share of the market. UPC is stronger in cities outside Bucharest such as Timisoara and Ploiesti. Even though it is the only large cable company that did not jump on the bandwagon of voice and data services over its CaTV infrastructure, UPC executives argue their company is here for the long term and will sink more cash into network upgrades and creating new services. Quite recently UPC announced it would increase offerings on its TV program for its customers in Bacau and Cluj Napoca.

General Electric, the largest company worldwide in terms of market value at one point when Jack “Neutron” Welch was in charge, has a long track record on the local market. Dan Ionescu, GE’s country manager, also serves as one of AmCham’s vice-presidents. Back in 2002, GE Aircraft Engines (GEAE) and Turbomecanica SA of Bucharest formed a joint venture company to manufacture jet engine components, primarily for CF34 and CFM56 jet engines.

Another American industrial heavyweight, Honeywell, is doing well in this country. It clinched a $20 million deal with the SNP Petrom oil company for the supply of process control equipment for the latter’s Arpechim Pitesti refinery. “The contract has already come into force, and deliveries should begin this autumn. The contract duration is of about two years,” the quoted sources said. Petrom’s equipment purchase is part of an investment program currently being implemented at Arpechim Pitesti, with credit supplied by the European Bank for Reconstruction and Development. Honeywell, one of the world’s largest industrial companies, has been operating on the Romanian market since 1997, when it bought a production facility from Turbomecanica. Investments have turned Honeywell’s small Bucharest-based factory, producing parts and components for the automotive industry, into one of Romania’s top exporters. Honeywell has a $220 million business in Romania, about 1 percent of the group’s turnover worldwide.

Cargill, the US provider of food and agriculture products which logs $60 billion in annual revenues, does not regard its recent acquisition of Comcereal Alexandria (which has secured the company 10 percent of the local grain storages) as its last operation on the Romanian market. Cargill bought $26 million-worth of Romanian silos following the takeover of Comcereal Alexandria last year.

“This will not remain our only acquisition. We are always keeping an eye out for possible acquisitions. If you do not make a move, someone will always get ahead of you,” says Dave Rogers, president and CEO of Cargill International. In fact, Cargill now owns, following successive acquisitions, grain storages located in the harbors of Galati, Braila, Alexandria and Giurgiu. After the acquisition of Comcereal Alexandria, a transaction that has recently been concluded, Cargill became the largest owner of grain storages, with a storing capacity of 960,000 tons per year, accounting for about 10 percent of Romania’s capacity. Cargill’s operates on two segments in Romania: grain trade and storage, which are joined by occasional market opportunities, such as the development of a sunflower program.

One of the largest and very successful American investments in Romania is the US-based bearings producer Timken. Its subsidiary, Timken Romania, is the most modern bearing manufacturers in Central and Eastern Europe. The plant, established in 1979, previously known as Rulmenti Grei Ploiesti, was set up to support the domestic demand for heavy bearings. Traditional sectors requiring such products include mining, oil, construction and power generation. Timken Romania now manufactures a range of anti-friction bearings ranging in sizes from 200 millimeters to 2.2 meters. “Timken has invested over $20 million in the first five years after the sell-off, and will continue to invest in areas of our business where we see growth, areas such as primary metal business and the energy sector,” said Rory Lubic, general manager of Timken Romania. The firm is one of the mother company’s primary manufacturing sources of large cylindrical and tapered roller bearings solutions for the Western, Central and Eastern European markets.

The Timken Romania Engineering Resource Center will become the primary center of expertise in the design, manufacture and application of large ball bearing solutions in the company’s chosen focused markets. Another American company present in Romania, Precision Castparts Corporation (PCC), a 100 percent US-owned company, acquired the Sterom Campina plant in 1999 for $8.3 million, which is now one of the most important oil equipment producers in Romania. PCC Sterom was involved in an open conflict with Russian-owned COS Targoviste, its sole local provider of raw material.

USA’s Trinity took over rolling stock company Astra Arad in 1999. Rolling stock producer Astra Vagoane Arad SA will increase its share capital by some EUR 13.81 million. Most of the funds will be contributed by the Americans at Trinity Industries who now hold 97.9 percent of Astra. This amount actually represents Astra Vagoane’s debts to Trinity, namely a loan of around $12.5 million and a leasing contract worth $1.3 million. Astra Vagoane Arad’s investment program is worth $25 million, with more than half of it covered by the capital increase. The investments are focused on the purchase of equipment and machinery.

The Romanian state controls only 1.37 percent, while the remaining 2.1 percent is held by other shareholders. Majority shareholder Trinity Industries ran a tender offer in October 2003 in order to have Astra delisted from the Bucharest Stock Exchange. Astra Vagoane Arad last year finalized the take-over of the entire production, and assumed all the orders of the Czech Thrall Vagonka Studenka factory, part of the Trinity Rail Group.

Business issues

AmCham, the American Chamber of Commerce, has identified 10 outstanding issues that are holding back further development for American companies on the local market.

The labor market needs to become more flexible. The existing Labor Code reduces labor market flexibility and productivity, and as a result, inhibits investment and job creation. Changes to the labor code legislation are needed.

VAT refunds are long overdue. The new VAT refund process for eligible foreign companies has been implemented but management of the process has been challenging. Many companies are waiting months for VAT refunds for which they are eligible under the law. This causes financial hardship on these companies and is exacerbated by inflation.

Bureaucracy pushes up costs. Businesses are subject to frequent time-consuming and expensive tax audits by the fiscal authorities that reduce productivity and often result in arbitrary and unfair assessment of penalties levied against the subject company.

Foreign and domestic investors should have a level playing field with equal application and enforcement of laws. Though foreign investors have full rights and guarantees under Romanian laws, legislation is often not applied or enforced equally. The area of tax debt accumulation and restructuring is an example of where state-owned and domestic have an unfair advantage. In order to attract FDI, Romania must assure foreign investors that they will have a fair opportunity to compete.

Significant progress has been achieved in improving the legal framework for attracting FDI to Romania. Examples are the Fiscal Code, the Sunshine Law, the Silent Approval Law, etc. To achieve the intended results, full implementation, execution, and enforcement of the legislation are needed.

Reductions in tariffs for products from EU countries results in a differential that is harmful to US exporters. MFN tariff rates are comparatively high. Romania must also ensure that OECD transfer pricing principles continue to be refined and embodied in Romanian law and that tax inspectors are properly informed and trained as to how such principles should be applied in practice.

Intellectual property law enforcement is still a thorny issue on the list that will have to be fixed soon. Romania has taken significant steps to improve the legal framework governing protection of intellectual property rights. Copyright and trademark protection is uneven and counterfeit industrial brands are a problem. Piracy of intellectual property such as software, music, movies, and television programming remains very high as Romania is still on the US Trade Representative’s “301 Watch List” for countries not protecting intellectual property rights.

While company registration has improved significantly, obtaining all the authorizations to enable operational capability is still quite time consuming and expensive, particularly for SMEs. In addition, after making their investment companies often must wait long periods of time for access to utilities, water, etc. A new Justice Minister has been named and a reform program has begun. The perception that the Romanian judiciary is inadequately prepared to enforce contracts and rule on complex commercial matters must be overcome. Furthermore, fears of corruption remain high, particularly among smaller companies.