Recession forces local exporters to cast net wide

After Romanian exports posted an encouraging 22.5 percent growth in the first 11 months of last year on the same period of 2010, companies are now facing a rough ride as the looming recession in the European Union, Romania’s main export destination, threatens their foreign sales. Emerging markets outside the EU are luring local companies but to what extent are they a viable alternative?

Simona Bazavan

Their hand forced by a shrinking internal market, many Romanian companies had no choice but to turn to exports last year: 2011’s results were positive with the growth in exports surpassing that of imports and fueling economic growth.

After falling between November 2008 and October 2009, exports have been on a positive trend. In the first 11 months of last year they reached EUR 41.74 billion (FOB), growing by 22.5 percent on the same period of last year, while imports grew by 17.8 percent (CIF) to EUR 50.39 billion.

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Overall, it is estimated that exports’ share of Romania’s GDP exceeded 30 percent last year. “It is a welcome evolution but exports’ share in the GDP continues to be low compared to the situation in other states in Central and Eastern Europe like Hungary, Slovakia and the Czech Republic,” Bogdan Belciu, partner, advisory, PwC Romania, told BR.

Many of the Romanian companies that focused on exports last year managed to maintain their sales levels or even improve them. But the situation was not rosy for everyone. The eagerness or rather need to turn to exports can also be interpreted as a sign of the difficulties facing local small and medium sized companies in the past year. Many of them had no choice but to export at small yields, as many industry value chains were disrupted and companies that were suppliers for local companies that faced difficulties could no longer sell in Romania.

“Of course, it is a good thing to export a share of a company’s production to diversified external markets, but while there are no solid value chains in the local economy with value being created by each company in the production stage and finally exporting a sophisticated final product, then we will remain in this situation where small companies manufacture unsophisticated products which are then simply exported,” Florin Pogonaru, vice-president of Aspen Romania and president of the Romanian Businesspeople’s Association, told BR.

2012 did not get off to a promising start for the EU economy. For the whole of 2012, Eurostat’s forecast for growth in the EU is only 0.6 percent compared to 1.6 last year. With the word recession on everyone’s lips, analysts predict that Romania’s export growth rate will slow down this year, a trend which has been visible since the last months of 2011.

“In 2012 I see the growth rhythm of exports decreasing. I hope that the slowdown will be reflected only in the growth rhythm and not in the volumes too,” Pogonaru told BR. The slowdown will be caused by the recession in Europe, the most important market for local exporters. But exports will also be affected by the exchange rate policy, Pogonaru added. ”I think that exporters will partially pay the price for the fact that the central bank’s exchange rate policy is more stable than is normal, especially if one looks at the situation in other central European countries, and the fact that the central bank has taken on social protection responsibilities for those with loans in foreign currencies,” he said.

Belciu added that Romania’s agriculture will also have a say in the slowdown of exports as 2012 is expected to bring a far weaker performance than 2011. As for the breakdown of export, the cars and equipment category is projected to remain the most important in 2012.

Looking to do battle on emerging markets

Welcoming the export increase of 2011, at the end of last year President Traian Basescu recommended local exporters not “put all the eggs in the same basket”, meaning the EU market, and suggested they consider emerging economies like China or, more close to home, Turkey. The president also stressed the need for a new export strategy this year.

Over 70 percent of Romania’s exports last year were to EU member states, which makes the Romanian economy vulnerable and dependent not only on demand from European markets but also on European exports, as in some cases Romanian exported goods are integrated into more elaborate European products which are later dispatched beyond the EU, noted Belciu. While official data show that exports outside the EU gained momentum in the last months of 2011, with their growth rate surpassing that of exports to the EU, their volume continues to be net inferior.

He added that developing an export strategy that would encourage taking Romanian goods to markets where they had a background in the ‘70s and ‘80s, like the former Soviet countries and North Africa, as well as emerging markets, is desirable. However this requires the state’s support, local expertise, financial resources and, probably most importantly, time and patience.

“It is clear that the sustainable development of the Romanian economy depends on the success of Romanian companies and products in establishing themselves on emerging markets,” Belciu concluded.

While a decrease in demand from the EU market is expected to affect large multinational companies – Romania’s largest exporters – to a lesser extent as they have the means to adjust their export strategy, small and medium sized companies (SMEs) are more likely to feel the strains of a EU recession, thinks Pogonaru. The costs of expanding to a new market outside the EU are huge for such firms.

In his opinion the authorities should optimize their export promotion structures, focus on a specific number of markets and consider a closer collaboration with the private sector. “We should ask ourselves if for expansion on foreign markets the private sector is willing to invest money alongside the state. Take for example the Austrian export support model which is done through export promotion centers which are financed 10, 20 percent by the private sector,” he said, adding that private companies financially supporting such schemes would be a sign these companies see potential in those markets.

Pogonaru added that local firms would be interested in such partnerships with the authorities if they were convinced that they would have a say in how those centers are organized and their activity.

What do the producers say?

For local companies, selling outside the EU means facing fierce cost competition and having to meet different legal conditions. “To an extent it is more difficult to export outside the EU – it takes more time to register the products, customs procedures are thorough and all the related tariff and non-tariff barriers end up driving up the price of the products and making them less competitive,” Mircea Turdean, president of Farmec Cluj-Napoca, told BR. In his opinion the state could help by setting bilateral trade agreements and also by improving the way Romanian economic interests are represented abroad. “Embassies and consulates should be more than protocol institutions, they should really help businesspeople in their relations with partners from those countries (…), to develop common projects for both sides and to act as our spokespersons there,” said Turdean.

Farmec Cluj-Napoca has a long tradition when it comes to exports, its products reaching all continents. This year the cosmetics manufacturer intends to grow its exports by up to 15 percent and tackle new markets in Eastern Europe. Last year exports generated 10 percent of the company’s turnover, and a similar share is expected this year too.

Grigore Horoi, president of local meat producer Agricola Bacau, told BR that the authorities’ help is required in supporting the promotion of local producers abroad as well as financial support and a simplification of the exports restitution mechanism. He added that when it comes to meat producers, the National Sanitary Veterinary and Food Security Authority (ANSVSA) should help companies meet the conditions required to export to markets like Russia, the Arab countries and North Africa.

“Selling in the EU involves dealing with very demanding markets with high quality standards which means big and expensive efforts. On the other hand, going outside the EU is difficult to handle because of other reasons. Different markets mean different demands and personalized shipments, which generates difficulties in the operational activities.

In 2011 the local meat producer exported 21 percent of its poultry production, double the share reported the previous year, to countries like Germany, Holland, France, Greece and the UK. The company has plans to diversify its export portfolio and even sell in the US. For poultry Agricola Bacau has targeted a 12 percent growth of its exports in 2012. 

simona.bazavan@business-review.ro