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How to do business with Eastern Europe

Eastern Europe: cheap available labour and low manufacturing costs should combine to make Eastern Europe a good business venue. But detailed knowledge of the markets is essential.

Eastern Europe is starting to see a bottoming out of its deepest recession since Communism, but any upturn is likely to be "fragile and patchy", says the European Bank for Reconstruction and Development in its annual economic report.

A World Bank report - 'Doing Business 2010' - actually saw a 20 per cent increase in pro-enterprise reforms in 2009, almost certainly the largest since the collapse of the Berlin Wall in l989. The economies of the Czech Republic, Hungary and Poland especially have opened up dramatically, and trade with the West has expanded rapidly. All three countries have de-monopolised trade regimes in which licensing and quotas now play very small roles.

The World Bank's report makes the point that most countries in eastern Europe and the former Soviet Union are benefiting from reintegration into the world's trading system, but to take full advantage of greater liberalisation they must push ahead more strongly on domestic reforms. Can this lead to further improvement in trade relations with Britain - or more specifically more markets for engineering products and parts, and energy?

The energy sector in central and south-eastern Europe is facing a period of change and development following the latest economic crisis and a fall in energy demand, coupled with the continuing drive towards a common energy market. The next phase of European gas market liberalisation may call for the restructuring of the region's gas industry to gather pace - issues that were discussed at the Energy Trading Central and South Eastern Europe 2009 conference held earlier this year in Budapest.

The point is that energy supply in eastern European countries has for years lagged behind growing demand. Figures from Russia's Ministry of Industry and Energy illustrate the level of under-investment in Russian power generation. More than 55 per cent of its plants pre-date 1980 and the supply deficit has risen due to higher electricity demand following stronger economic growth. The same is true elsewhere in eastern Europe.

Business opportunities

How can UK companies break into this region? The most successful are regional subsidiaries of giant global companies, some of which are clearly reluctant to reveal their tactics. Short of frequent exploratory and systematic visits, one way of learning more about trading possibilities is networking.

The Central & Eastern European Business Network, for example, organises high-level networking opportunities with ambassadors, ministers and VIP guest speakers, as well as arranging seminars and conferences and individual country briefings, trade missions and legal advice.

Links with businesses and business organisations in the region are bearing fruit; for example a 'Doing Business in Poland' event in Leeds last year attracted over 30 local businesses, while more than 50 delegates attended a similar address by the Czech Ambassador on current business opportunities in the Republic: an event held in advance of a trade mission to the MSV Engineering Fair in Brno, organised by the CEBN.

More British businesses are opening offices in Poland, ranging from Atkins, the consultants, to independent Manchester commercial auctioneer SHM Smith Hodgkinson, which opened an office in Kiev last year, in addition to its offices in Bucharest and Belgrade. The firm predicts 50 per cent growth over the next three years, but warns that the region is not for the unprepared. A good understanding of the market is essential.

"Our key advantage, is our local knowledge," says a spokesman for the company. "For businesses thinking of establishing themselves in the region there are plenty of pitfalls - we know all about them and how to avoid them. We like the region and thankfully the business community likes SHM Smith Hodgkinson."

Earlier this year, Olsen Engineering signed up a new official distributor and partner in the Ukraine. Olsen, established in 2004 as a professional engineering consultancy, helps UK manufacturing and engineering companies grow sales by developing their business in eastern European markets, primarily Ukraine and Russia. Its services include technical translations of sales brochures and technical catalogues, user guides, final contract negotiations, GOST certificates, logistics and customs paperwork. Olsen also supplies engineering products to eastern European markets and sources equipment in the UK on behalf of eastern European companies.

Another company stepping up its activities in eastern Europe, Bayer, is collaborating with Albis Group in Hamburg. Bayer has added Albis to its existing partners in Hungary, Poland, the Czech Republic, Slovakia and Romania for the distribution of high quality plastics, Makrolon, Apec, Bayblend and Makroblend from its polycarbonate portfolio.

"Eastern Europe is an attractive growth market for a wide variety of industries. We want to boost supply for our customers in this region by offering another alternative for high quality polycarbonate materials for innovative approaches," says Dr Dennis McCullough, head of the division for Europe, and Latin America at Bayer Material Science.

Another route to business development in the region is through project directors and consultants. Trade Partner Europe, established some 20 years, provides business development and tailor-made programmes for clients ranging from small and middle-sized companies to large enterprises and major corporations. In early 2009 the company supervised key environmental and wastewater treatment projects.

Company revenues

A new report by Deloittes, the accountants and business consultants, looked at 18 countries in the central and eastern European region, from the Baltic States to the Balkans and from Hungary to Ukraine.

Poland led the ranking of 500 companies with the highest revenues in 2008, in front of the Czech Republic with 14 per cent, and Hungary with 12 per cent. Some 38 per cent of top performing companies in central and eastern Europe were based in Poland, which managed to avoid the recession.

Polish oil company PKN Orien won the top spot, ahead of Hungary's MOL, thanks in part to the rise in oil prices. They were followed by two manufacturers - Ukraine's Metlinvest Holding and Czech carmaker Skoda Auto, a unit of Germany's Volkswagen - and Czech energy company CEZ. Energy companies were among the strongest in the region last year, making up 30 per cent of entries in Deloittes list but bringing in 40.3 per cent of total sales.

In 2008, 78 per cent of the 500 listed companies saw their revenues increase by an average of 20 per cent, but, following the global economic crisis, an almost equal number - 76 per cent - saw a 23 per cent drop in revenue in the first quarter of 2009 compared to the same period last year.

As in the UK, demand for new trailers and trailer production plunged. The UK-based consultancy CLEAR says that in the five years to 2007, compound growth in the eastern European trailer markets was 27 per cent per annum. In 2008 the market shrank by 11 per cent - a much bigger fall than in western Europe. The Baltic countries were the worst affected, while Turkey, Ukraine and Belarus posted modest growth. The situation worsened in 2009.

According to the consultancy: "Given the massive growth in demand for transport equipment in eastern Europe and the lack of exposure of these countries' banks to toxic assets, there was some hope in early 2009 that trailer demand would fall by a relatively minor 20 per cent compared to Western Europe's more dramatic 40 per cent.'

The trend for outsourcing manufacturing, financial services and IT, is also spreading to eastern Europe. The appeal of the Central European countries of the Czech Republic, Hungary and Poland is the low cost in terms of real estate and of the skilled labour force, coupled with membership of the European Union.

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