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Executive Report on Strategies in Romania
ICON Group International, June 2007, Pages: 392
How to Strategically Evaluate Romania
Perhaps the most efficient way of evaluating Romania is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in Romania
This report provides an extremely detailed overview of factors driving latent demand and accessibility in Romania. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Romania:
Openness to Trade in Romania
Openness to Direct Investment in Romania
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering Romania. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for Romania over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by Romania when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for Romania as an area of dominant influence in Europe and, potentially, the world.
The report concludes with trade indicators for Romania. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in Romania.
As a whole, this report presents a strategic assessment of Romania by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN ROMANIA
Economic Fundamentals and Dynamics
Romania has made a slow and painful transition towards a market economy since its revolution in 1989. This transition was made more difficult by the legacy of the communist regime: centralization, a high degree of bureaucracy, and lack of experience in partial reform measures undertaken in other Central European economies during the 1980s.
Lenient government attitudes toward the accumulation of arrears by state-owned enterprises, coupled with inefficient bankruptcy procedures, indirectly subsidized unprofitable behavior, while good corporate governance was undermined by vested interests. An unpredictable investment climate, together with lack of labor mobility, a weak tax base, and high inflation, inhibited private sector growth.
Government Intervention Risks
While nearly 70% of GDP is generated by the private sector, the government, through the Ministry of Privatization, Ministry of Industry, and others, still owns 65% of Romania’s industrial assets. These assets are primarily in the utilities and energy sectors but extend to areas such as movie theaters, chemical plants, transportation, and the metals industry.
Completing the transfer of ownership of assets from the GOR to private hands remains the GOR’s biggest and most pressing challenge. There has been little change in the pattern of state-owned enterprises accumulating excessive inter-company and budgetary arrears. Social considerations have often prevailed over economic reasoning, resulting in government granting debt rescheduling or forgiveness to highly indebted state companies. Large loss-makers have also enjoyed sovereign guarantees and piecemeal deals including custom duty and VAT exemptions for imported equipment.
A new EU-inspired law on state aid came into effect in January 2000, designed to regulate and control state aid in any form (as either direct state subsidies, debt rescheduling schemes, or discount prices). However, implementation has been slow and preferential debt rescheduling by the Ministry of Finance and the Ministry of Labor has resulted in major distortions in the market. Furthermore, state aid schemes continue to be non-transparent.
Political Risks
Economic Relationship with the United States
The United States and Romania have very close relations. Both the government and opposition advocate integration into Euro-Atlantic structures. At considerable economic and political cost, the government resolutely supported NATO actions in Kosovo.
Politics and the Business Environment
Romania has consolidated its democratic political system and has made steady if insufficient progress toward the establishment of a free market economy. There are no major political issues that affect the business climate.
The Political System
Romania is a constitutional republic with a multiparty parliamentary system. Parliament includes a 345-member Chamber of Deputies and a 140-member Senate, representing 41 counties plus Bucharest municipality. The president is elected by universal suffrage. The position is non-partisan under the terms of the constitution. The president has responsibility for foreign and security affairs.
The president designates a candidate for prime minister following consultations with the political parties represented in parliament. The designated prime minister, his cabinet, and their governing program must be approved by parliament before the new government takes office.
The president, deputies, and senators are elected to four-year terms, but early elections may be held under certain circumstances.
Marketing Strategies
Distribution Channel Options
An encouraging sign of transition in Romania has been the steady growth of the private sector. Although generally small and medium-sized, private companies represent a good nucleus for U.S. firms seeking distribution channels.
Private firms are typically limited liability companies with few partners and low capitalization. Shortage of capital and limited collateral channel entrepreneurs towards activities where initial investment is low, and returns can be made rapidly, like services and trade. Companies engaged in foreign trade tend to focus on consumer goods. Import has been in many cases the first and only activity of new private businesses. State-owned companies, too, are now free to make their own business decisions and engage in foreign trade directly, with no need for intermediaries.
Factors that have a restrictive influence on the functioning of distribution channels include:
Obtaining information on the market is difficult due to the lack of published information;
The wholesaling and retailing systems are still not completely structured;
The general policy for the leasing of state-owned assets (shops, hotels, and other facilities) is not well defined;
Little improvement in the availability of local credit is seen in the short term.
Agents and Distributors
Agents and distributors can contribute to a U.S. company’s success on the Romanian market. Well-qualified candidates for employment exist in Romania. Romanian specialists are educated, have a good understanding of technical matters, and, with minimal training, can rapidly master new marketing techniques.
Investigating a company’s bona fides is not always easy in Romania. There are no specialized institutions providing survey services on a regular basis. Currently, the only source of information about a company is the Trade Registry, which, for a moderate fee, can release data from its database. The Chamber of Commerce and Industry (CCIR) is the authorized distributor for Dun & Bradstreet in Romania. CCIR provides information on the reputation, reliability, and financial status of a company using the Dun & Bradstreet format and rating. Banks can benefit from the services provided by the National Bank of Romania regarding the indebtedness ratio and payment history of their potential clients.
Franchising Activities
Franchising developed slowly in Romania, mainly because it calls for large initial capital investment. In spite of this, McDonald’s, Pizza Hut, KFC, Shell, AGIP, Candy Bouquet, and the Romanian-American oil company Rompetrol have Romanian franchisees.
Direct Marketing Options
Under the current business environment in Romania, it is recommended that direct marketing be done only after a thorough study of local conditions. Potential problems that should be considered are:
Legislation changes frequently. Commercial and fiscal legislation is sometimes unclear, reflecting a certain legal confusion existing in Romania;
Relationships with local municipal administration and other authorities are not always easy. Much still depends on the personality of public officials;
International accounting standards and procedures are in an early stage of implementation;
The level of exposure to western business practices is generally low. For this reason, providing solid training for employees is important.
Joint Ventures and Licensing Options
Most foreign companies involved in local manufacturing are organized under joint-venture agreements, but greenfield investments are becoming increasingly popular. The main advantages offered by joint ventures include quick market access using existing facilities and knowledge of the local business environment. Disadvantages of joint-venturing include the acquisition of excess personnel and the potential for incomplete control of the business.
Creating a Sales Office
Foreign companies have numerous options available for organizing business operations in Romania:
Representative Offices
Foreign corporations are entitled to set up representative offices in Romania. Representative offices are not entitled to carry on economic activities on their own behalf or on behalf of the parent. Therefore, a representative office can carry on activities of advertising, provision of information, marketing research or similar operations of a ‘‘preparatory or auxiliary’’ character.
Branches and Subsidiaries of Foreign Companies
A foreign corporation can carry out business in Romania through a branch or a subsidiary (Romanian legal person). Branches may only operate in the same field of activity as their parent company. Branches are not specifically defined in the Romanian legislation and therefore Romanian authorities are not very familiar with branch operations.
In Romania, the branch of a foreign company is subject to the national law of the parent company and Romanian public order rules (i.e. tax law, currency regulations etc.). Legally, the branch has no separate status from the foreign company itself; it is merely carrying on business in Romania. The foreign company will be liable to the employees and creditors of the branch for the actions of, and debts contracted by, its managers and agents on behalf of the branch.
Branches must be registered with the Commercial Register of the Romanian Chamber of Commerce and with the local tax authorities.
The subsidiary of a foreign company in Romania is a Romanian legal entity and, consequently, it is subject to Romanian law. It is liable on its own behalf for the actions taken by its management.
Company Law No. 31/90 (subsequently revised in 1997, 1999) provides for the following main forms of business organization in Romania:
General partnership, which must have paid-in capital, and in which the partners have unlimited and joint liability;
Limited partnership, which must have paid capital, and in which the general partners have unlimited and joint liability. The limited partners are liable only up to the value of their equity;
Limited partnership by shares, whose capital is divided into shares and whose obligations are guaranteed by the capital and by the unlimited and joint liability of the general partners. The limited partners are liable only for the payment of their shares;
Limited liability company (“SRL”), whose obligations are guaranteed by its net assets (‘‘patrimoniu”). The shareholders are liable only for the payment of their contribution to the registered capital;
Joint stock company (“SA”), whose obligations are guaranteed by the capital. The responsibility of the shareholders is limited to their individual contributions to the capital.
All commercial enterprises must be registered with the Commercial Register of the Romanian Chamber of Commerce; they take on separate legal status beginning with the date of this registration. The Commercial Register is an organization mandated to maintain statistical information on business activity in Romania. It also ensures that trade names, for example, are not duplicated.
The forms of subsidiary most commonly used by foreign investors are the limited liability company (SRL) and the joint stock company (SA).
A limited liability company (SRL) can be set up by one or more shareholders (but not more than 50) and must have a minimum capital of ROL 2 million (about $60.00). At present, capital contributed by a foreign investor is converted to lei at the prevailing market exchange rate in effect at the time the capital is contributed for accounting purposes only. Companies may maintain bank accounts in foreign currency. The registered capital is divided into equal shares whose value cannot be less than ROL 100,000 (about $3.00) each.
A joint stock company (SA) requires a minimum of five shareholders (no maximum) and a minimum prescribed capital of ROL 25 million (about $750). A joint stock company may be set up privately or by public subscription. The registered capital is divided into equal shares whose value cannot be less than ROL 1,000 (about $0.03) each.
There is no limit on foreign ownership and participation in the share capital of a Romanian company. A foreign investor is allowed 100% ownership in a Romanian company.
Setting up a legal entity in Romania generally takes 3 to 6 weeks to complete. The registration procedure for a limited liability company or a joint stock company includes the following main steps:
The constitutive documents (company memorandum and/or articles of association) must be prepared, approved by the shareholders and notarized;
The subscribed capital must be paid upon registration of the company. In case of a joint stock company (SA) each shareholder must pay at least 30% of the subscribed capital. For an SRL-type company there is no term by which capital contributions (referred to as social capital) should be paid up;
The company must be registered with the Trade Register, which issues a Certificate of Registration. The company legally exists from the date of its registration with the Trade Register.
Once it is registered as a business entity, the company must register with the local tax authorities and be issued a fiscal code.
Since July 1, 2001, the procedure of setting up a legal entity in Romania has been simplified. There is a one-stop office operational within each territorial Chamber of Commerce, handling all permits and authorizations previously obtained from various administrative authorities. Within 20 days, a Certificate of Registration, including a single registration code, is issued. In practice, this may take longer. The appendix of the registration certificate contains the sanitation-veterinary and environmental permits as well as the approvals from the Labor Protection and Fire Fighting Divisions.
The branch registration procedure is technically quite similar to the above, but in practice it is often more cumbersome.
Selling Strategies
Quality, price and payment conditions are the most important factors in determining who will succeed in concluding business in Romania. The Romanian market, like all former East-European markets, is still cash poor. A company’s willingness to entertain long-term credit arrangements, possibly barter transactions, and concepts like processing contracts will put it in a better competitive situation vis-a-vis others interested in doing business in Romania.
Product distribution is another important factor. Local partners can help maximize market coverage. Understanding the type of distribution required by a product and adapting it to the Romanian market’s specifics is mandatory for any company. While distribution of industrial goods in Romania is quite similar to the one existing in most European countries, in the case of Fast Moving Consumer Goods (FMCG), the situation looks completely different. Retail trade is very fragmented, with many small independent outlets and few emerging retail chains. There are very few professional distributors and in most cases they lack the financial sources, the logistics and the know-how required by a profitable distribution activity. Moreover, Romanian distributors’ business ethic is substantially different as compared to their Western peers.
Special note should be made of the fact that U.S. companies face strong competition from EU countries on the Romanian market. Goods from the European Union enjoy generally lower duty rates compared to similar goods from the United States.
Advertising and Trade Promotion
Accompanying Romania’s change to a market economy has been a notable growth in the variety and quality of advertising.
Television, which attracts over 70 percent of total ad spending, is the predominant media, followed by press, outdoor, radio, and movie advertising. Television includes four state-owned national networks, a large number of state-owned local networks, and several privately-owned networks which tend to cover the whole country (Pro TV, Prima TV, Acasa, Antena 1, Tele 7 ABC, Atomic TV, HBO). About 60% of the population watches television daily.
Romanian press offers a wide variety of national and local daily and weekly newspapers, as well as a large number of magazines and specialty publications (i.e. sports, business, entertainment and family). Only 20 percent of the population is reported to read one or more newspapers a day.
Outdoor billboard advertising has grown rapidly and is becoming more sophisticated. Billboard locations are multiplying and simple painted billboards are being replaced by back-lit models. Advertising on public transportation vehicles is also common.
The radio accounts for about 5 percent of ad spending. There are four national state-owned AM radio networks which target audiences interested in, respectively, news, culture, music, and programs for young listeners. In addition, there is a national FM network (Europe FM) and a large number of FM stations in Bucharest and other major cities, which have a broad audience appeal. The most popular are: Contact, Pro FM, Radio 21, RadioTotal. About 50% of the population listens to the radio daily.
Movie advertising allows a high quality message to be delivered. However, its share in the general market for advertising is modest.
All major western advertising companies are represented in Romania. Major agencies with international affiliation include: Ogilvy & Mather, McCann-Erickson, Lowe Lintas GGK, Tempo Advertising, Graffiti/BBDO, Saatchi and Saatchi, and Young and Rubicam.
Specialized market testing and market research are available from independent suppliers (IRSOP - Romanian Institute for Public Opinion and IMAS - Institute for Marketing and Market Research) as well as established institutes (Institute of World Economy and Romanian Chamber of Commerce and Industry). However, companies with extensive experience in market studies are rare. The best-known English-language publications providing market insights are the following:
Quarterly Bulletin (economic, financing, monetary and credit trend information and statistics of the National Bank); Publisher: National Bank
Romanian Insights; Publisher: Romanian Chamber of Commerce and Industry
Bucharest Business Week; Publisher: Americelt Publishing SRL, Bucharest
In Review, Romania’s Magazine for Business (monthly), and The Business Review (weekly); Publisher: Business Media Group SRL, Bucharest
Romanian Economic Daily; Publisher: Nine O’clock Publications.
Other publications in English are:
Romanian Economic Newsletter (published quarterly in the USA to report on and analyze Romanian economic developments)
Business Central Europe (published monthly by the Economist Newspaper Group, London)
Balkan News (a weekly newspaper published by Balkan News in Athens)
Pricing Issues
All prices have been liberalized, with the exception of prices of electricity and gas supplied for domestic consumption, which continue to be controlled by the government. With the restructuring and privatization of the electricity and gas authorities in the near future, price liberalization will become complete.
The product pricing structure is similar to that used in developed countries: prices are increased by wholesale and retail markups as well as with government and, sometimes, local taxes.
Supplying Customer Service
The lack of good local service companies is a problem. However, with suitable training this problem can be satisfactorily solved. The past lack of exposure to Western practices has left a legacy of indifference to after-sales service. U.S. companies are advised to pay attention to ameliorating these attitudes in their operations.
Public Sector Marketing
In some segments of the Romanian market, state-owned firms continue to be the only possible business partner for foreign companies. Although bureaucracy and corruption can be quite a challenge for Western business executives, it is apparent that local authorities are, as a whole, anxious to work with foreign companies and that changes in the legal framework generally are headed in the right direction. In industries considered “strategic” by the Romanian government, such as natural resource exploitation and essential basic industries and infrastructure, major purchases are made by international tender, sole sources being generally avoided. Bidders find the public procurement process non-transparent, frustratingly slow and fraught with difficulty, with tenders frequently postponed or cancelled, seemingly to cater to outside interests.
An innovative response by the government to the problems with tenders is its “e-licitatie” or e-procurement program. E-licitatie, which was launched as a pilot program in March 2002, can be accessed at www.e-licitatie.ro. It conducts government procurement for certain items by electronic auction. E-licitatie is transparent, with both ongoing and closed auctions listed, including the names of the decision-makers and closing prices. The increasing number of companies registered (up six times in the first month) shows the increased confidence in the new system.
Government Decision no. 244/2001 provides private SMEs with preferential access to public procurement tenders below a certain threshold. SMEs may benefit from 50% reductions in the criteria regarding turnover and bid bonds required in public auctions organized for the acquisition of materials, works and services. The first round of any tender is open only for SMEs if public institutions, business corporations, or national and public services corporations in which the state holds a majority interest are organizing such an auction.
Hiring Local Counsel
Company incorporation, daily activity and payment of fiscal liabilities, as well as conflicts resulting from possible late payments, debt recovery and disputes with local partners may generate the need for local legal and business assistance.
Romania’s civil law for contracts is set out in the Civil Code, which follows closely the French civil code, and the Commercial Code, which is modeled on the Italian commercial code. Generally, the specialized body of law, the Commercial Code, has precedence over the general body of law, the Civil Code. The existing body of law covers the areas of title and pledging title, protective creditor remedies, and debt recovery.
Romanian law recognizes the existence of mortgages for immovable property and pledges for movable property. Thus, assets can be pledged as collateral for loans and as guarantees. Also, the law provides that the guarantee agreement has the value of a writ of execution.
To protect the interests of creditors, Romanian law provides for:
The right to request forced execution against debtors’ s assets
The right to request the cancellation of legal acts that breach the creditors’ rights (“action paulienne”)
The right to request the taking of various measures for the purpose of preserving the debtor’s patrimony (e.g. seizure by court order of assets to satisfy a due amount, the right to intervene in trials related to the debtor’s assets, etc.)
The right to start court actions in relation to certain rights of an inactive or negligent debtor (“action oblique”).
Romanian bankruptcy legislation provides creditors the possibility to force insolvent companies to go either into reorganization or liquidation. Therefore, if a company is able to overcome the incapability to pay its debts, by way of reorganization, it may not go into liquidation. Nevertheless, if the reorganization is not successful, the judge will order the start of the liquidation procedure. Unfortunately, the lack of specialization of judges and lawyers in the bankruptcy field makes it difficult to bring these kind of cases to court and to obtain consistent outcomes.
Romanian justice continues to be slow and bureaucratic. Therefore, avoiding conflicts of any type is the best policy. It is strongly recommended that sales be based on confirmed irrevocable letters of credit opened with banks that are correspondents of American banks or are confirmed by such banks. In the case of investors, extensive due diligence is advised. In case of conflicts, competent legal assistance is available.
Import and Export Regulation Risks
Trade Barrier Risks
The Romanian market is open, requiring no special conditions for access or operation. Romania is a signatory to the conventions on Preferential Trade among Developing Countries (“The 16”) and Generalized System of Trade Preferences among Developing Countries. It adopted an 8-digit customs tariff code in March 1993. This code is similar to the International Harmonised System of Combined Nomenclature.
A potential obstacle for U.S. exporters is the preferential tariff treatment for European competitors. The free trade arrangements with the EU, EFTA, and CEFTA result in customs duty discrimination against many U.S. products, sometimes by as much as 30%.
Tariffs are particularly high for such items as cigarettes, furs, carpets, vehicles, photographic equipment and supplies, bicycles, TV sets and sound and video registration equipment. Duties applied to industrial equipment are generally about 15 percent ad valorem.
Exemptions from customs duties apply to exported goods, transiting goods, merchandise in customs warehouses (during the storage period), and goods imported and exported in the draw-back system.
Imported goods can be replaced/repaired during the warranty period. Damaged goods can be exported and re-imported under import duty exemptions. To benefit from the exemption upon the re-import of the goods, the replacement/repairs should be performed within the warranty period and the re-imported goods should have the same tariff classification and same technical characteristics as the exported ones.
In case the intention is to replace/repair the goods and the warranty clause has expired, then the re-importation is only partially exempted (i.e. the customs value is represented by the value of repairs).
Valuations on Imports
An important objective during the transition to a market economy was the protection of Romanian companies from goods being dumped or subsidized. Accordingly, in 1992 Romania introduced anti-dumping duties for goods imported at very low or dumping prices and countervailing duties for goods which have received subsidies. Safeguard measures can also be implemented to assist domestic producers adversely affected by imports. Safeguard measures may consist of additional customs duties or quantitative restrictions (quotas).
In Romania, customs duties are ad valorem duties. The customs value of imported goods is based on: a) the external price of the transaction, converted into lei at the market exchange rate; and b) charges not included in the price of goods, such as freight, handling and insurance on external routes.
If documentation concerning the value of imported goods is not available, the specific World Trade Organization (WTO) provisions will apply; import prices usually charged for such goods or similar items could be then used as the basis for valuation. Romania values goods on the basis of the WTO Valuation Code (i.e. Article VII of GATT). As stated above, for most items customs valuation is based on the contract value (i.e. transaction value). Customs duties must be paid at the time the goods are imported into Romania.
Exporters complain that customs valuation tends to be inconsistent and arbitrary.
Licenses Required for Imports
Import licenses are required for such products as pharmaceuticals, chemicals, and toiletries. Also, sanitary and safety standards as well as special approvals for wastes and residues, toxic substances, explosives and firearms are in force.
Controls on Exports
Exports of goods and services are not subject to customs duties or VAT. For the majority of goods, no export license is required. Authorizations are, however, required for exports of fuels, unfinished wood products, metallurgical products, ferrous and non-ferrous waste. The Department of Foreign Trade issues non-automatic export licenses on a case-by-case basis.
The National Agency for the Control of Strategic Exports and Prohibition of Chemical Weapons (ANCESIAC) is the authority responsible for the implementation of the procedures for exports of conventional arms and related technology. Exports of strategic goods can only be authorized by ANCESIAC. The license may be individual or general. A general license may be issued based on the goods’ level of sensitivity and the ultimate consignee of the goo
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