According to both the National Bank of Romania and greenfield investment monitor fDi Markets, manufacturing made up about one-third of FDI net inflows into Romania in 2013. In the past year, global companies such as Bosch and Continental have invested significantly in the country, which saw industrial production rise 6.1% in 2014. Importantly for Romania, manufacturing also created the highest number of total jobs and the largest projects in terms of capital investment in this time.
No wonder the secretary of state for foreign investment and public-private partnerships, Alexandru Nastase, tells fDi Magazine he is positioning Romania as a regional hub for manufacturing, particularly in the automotive sector. “We have the drive, we have the tradition… we have what it takes,” he says.
This focus on manufacturing was nurtured after the Second World War under Communism, during which both heavy and light industry developed considerably. It then suffered a major setback after Romania’s revolution in 1989 when global competition exposed the country’s outdated and inefficient industrial machinery and processes (blamed on underinvestment during the rule of Nicolae Ceausescu). All of a sudden, Romania was struggling to compete in a global market.
It also became clear that although there was significant industrial expertise in the country, the management style and practices in industry often could not meet the standards demanded by newly arrived foreign investors.
Neal Brothers is a UK packing company that serves many of the largest manufacturers in Romania. The company first came to the city of Craiova in 2007, expanding its facilities in 2010, then opening up in Ploiesti and, most recently, Cluj. Geoff Pearson, Neal Brothers' chief executive in Romania, says: “The generation who were still managing under Ceausescu have a totally different attitude to bureaucracy and enterprise. They want to know what is in it for them; they are motivated by self-interest, not company interest.”
Once Romania took its place in the EU, the union’s laws began to make themselves felt. Together with foreign investment arriving in the country, EU membership has acted as a catalyst for reform and rejuvenation in many industries in the country such as automotives, machinery, textiles, electrical products and food processing.
Hochland, a German cheese producer, is a typical success story. It invested in a new cheese processing plant in Sighisoara in 1998 to serve the domestic market where local brands could not compete with foreign companies on quality. Hochland quickly bought up an existing production site in nearby Sovata. It now employs 300 people in Romania with a turnover of €50m.
A new breed of workers
Alongside this, a different type of worker has emerged in Romania, according to Mr Pearson. “There is a new generation of graduates who have been trained in a more Western style of doing business,” he says. For many investors, it is Romania’s workforce that is the country's main attraction. Richard Reese, chief executive of the British Romanian Chamber of Commerce, says: “Romania’s labour force is keen to work and to get things done – as well as being skilled, well-educated and [lower in cost to employ].”
The size of Romania's relatively underdeveloped domestic market is also an important factor, according to investors. Zentiva is a major pharmaceutical company that started as the Bucharest Medicine Factory in 1962. It was taken over by the Sanofi Group, a global healthcare company, in 2009. Between 2010 and 2014, Sanofi spent €14.5m upgrading the Zentiva business by building workshops, laboratories and production equipment. Another €4.5m is being invested over the next four years.
A spokesperson for Sanofi says: “Romania is a strategic market for the Sanofi Group. The country has big growth potential. It has twice the number of people that are in Hungary and yet the same level of overall drug consumption.”
As with most countries keen to attract outside interest, Romania has set up a number of government incentives and grants, as well as free zones and industrial parks. There are also tax breaks: one particular initiative that experts say should benefit manufacturing is a tax incentive for those investing in production equipment. Any profit reinvested in equipment is exempt from taxation. Though there is no data yet to show how successful this incentive is, Gabriel Sincu, executive director in tax at EY, says: “There is a lot of interest and it is very rare to have this facility… This is a tax credit of 16% and it can be used for everything which you might use for manufacturing processes.”
Yet problems do remain for potential investors in manufacturing, such as in obtaining permits and cutting through red tape. Mr Pearson gives an example of what happened when his business first operated in Romania. “We experienced a lack of understanding and communication by the local authorities of international standards,” he says.
The packing company needed timber; international standards require that timber is properly registered and heat-treated. However, Mr Pearson explains: “We were often refused a stamp for the timber as the authorities would misunderstand the regulations believing that we had to do the heat-treating ourselves. Without the stamp we had to import the timber, which was crazy as there was plenty of it locally.”
Eventually, Neal Brothers took up the issue with the British Embassy and even the EU. “Now we have won the right to buy our raw material locally,” says Mr Pearson.
There is also concern among investors about what the government might do next, and a lack of confidence in predictability about rules and taxes. This is a particular problem in manufacturing, where capital investment can be very high and which will only begin to pay dividends in the longer term.
The pharmaceutical sector reacted strongly when a so-called 'claw-back tax' was introduced in Romania a few years ago. The tax is paid on medicines sold into the state-run national health services and is imposed widely in the EU but created real uncertainty in Romania. As the spokesperson at Sanofi says: “Pharma players are facing a very unstable environment. The claw back tax is a pure financial mechanism of the authorities to control the cost, [and is] unjust and unpredictable. There is no long-term strategy ensured by the authorities and no stability.”
What Romania needs, according to the spokesperson at Sanofi, is “a more stable, transparent and predictable business environment”. This is no small ask – but Romania is heading in the right direction.