Latvia as a new hub for Chinese investment

RIGA - What is there in common between the huge China and the little Baltic country of Latvia? It is development and growth, according to most of the guests participating at the 8th Horasis Global China Business Meeting that took place on Nov. 25-26 in Riga. An audience of 400 entrepreneurs and government officials got together to try and outline the future challenges of both countries for improving development, growth and cooperation. The meeting engaged participants to show the directions of Chinese investments in Europe, and how Latvia can become a hub for the Asian economic empire.

The 2012 Global China Business Meeting pointed to the challenges of both countries in the context of the global economic crisis and, more specifically, the current European difficulties in facing the sovereign debt problems and deflationary pressures. “Right now, the situation is as never before. There is a lack of responsibility, leadership and feelings of security in this fragile context of economic difficulties,” said Alan Hassenfeld, chairman of Hasbro in the United States. Europe and the United States are both dealing with unprecedented debt problems, which have its consequences in the financial markets and consumers’ fears. In this situation, China rises as one of the most important contributors to the world economic dynamism and recovery, beside Brazil, Russia, India and South Africa - the so-called BRICS countries.

Latvian opportunities in the Chinese market
China is one of the few countries sustaining world economic growth; it faces future challenges that depend on its capacity to manage the cooperation with other countries, and its internal pattern of economic development. The answers at the Global China Business Meeting were focused on sharing expertise and experiences, and finding cooperative solutions between countries.

In this sense, the event gave the opportunity for Chinese and Latvian business people to meet and discuss collaboration possibilities: potential collaboration partnerships between both countries for a new working plan for business.
According to Andris Ozols, director of the Investment and Development Agency of Latvia (LIAA), in recent years China has become an increasingly interesting destination for Latvian companies. Latvian entrepreneurs that decide to establish a presence in China have the opportunity not only to benefit from one of the biggest and fastest rising markets in the world, but to learn new ideas in the direction of innovation and technological progress.  

Among other benefits of taking China into account for outsiders include the current necessity of feeding the new, domestic consumer market there. “Domestic consumption needs now assume an even larger role in driving growth (…). And that needs to happen sooner rather than later or tensions in the current growth path will become increasingly evident,” says Anson Chan, chairman of Bonds Group of Companies in Hong Kong.

Latvia as a hub for Chinese investment
“Latvia is relatively young and less developed in the EU, so the potential for development is huge, therefore it is a good target market. More importantly, it is a hub to the EU that makes it more interesting than the local market itself,” says Vincent Zheng, a managing partner at Capital First Partners in China.
As host country of the Global China Business Meeting 2012 in November, Latvian entrepreneurs of all industrial and economic sectors, along with public officials took the opportunity to demonstrate why Latvia deserves to be one of the economic hubs for Chinese investments.

As a small economy, Latvia needs commitments for foreign investment to sustain the current economic development. Nowadays, the main foreign investors in Latvia are the strong alliance of Scandinavian countries, Britain and Germany. But China appears as the next phase.
According to the LIAA database, in 2011 about 5 percent of total foreign direct investment in Latvia came from China. More data shows that trading between both countries has been increasing since 1992, and has been strengthened and advanced through bilateral agreements pertaining to joint marketing and protection of investments. Nevertheless, the scope of China’s investments in Latvia is still limited.

“The timing is what we have to be good at right now. The investment has not been good, but not because of the Latvian reasons but because of the environment of the European Union,” says Jerry Wirth, chairman of the Foreign Investors’ Council in Latvia (FICIL).
In this sense, what Chinese speakers highlighted was the positive attitude of the Latvian government in the structural reforms and austerity policies that brought Latvia to become one of the strongest European countries in the current European Union crisis. “We may understand that the EU’s current situation is affecting us, but not at the same level as the countries in recession. We are worried about deterioration of the situation in Southern Europe,” said Latvia’s Prime Minister Valdis Dombrovskis.

The examples came mainly from Daniel Pavluts, Minister of Economy of Latvia: 6.8 percent GDP growth in the first quarter of 2012, the fastest rate in the EU, and the economic breakthrough plan based on higher valued-added and productivity, the driving role of manufacturing and modern products and services. The picture of stability was completed with references to the positive comments on the austerity program and stability of economic figures, such as the export and import balance.

Nevertheless, what was shared by the speakers is Latvia’s big challenge in improving research and innovation, and a more favorable financing cost, which means reducing the inflation threat.
“[For investing in Latvia] we have to understand the products and what kind of risks we are taking,” says Ho Punyu, managing partner at Wabash Investment in the U.S.

Why invest in Latvia?
“I assure [you] that Chinese investment is coming, because we have a lot of cash and savings. But it has to be carefully considered,” says Levin Zhu, chief executive officer of China International Capital Corporation (CICC).
What are these considerations? The main sector considered has been Latvian logistics.
Since Latvia is located in close proximity to the Baltic Sea, foreign investors see great benefit from the country as a gateway for transportation of goods, from east to west. Most of the Chinese logistics and manufacturing companies exhibited interest in establishing their branch offices for distribution facilities in Latvia.

“We are very much oriented in international traffic. If you don’t trust the Latvian economy, just trust in global market: the most important products, such as energy, pass through Latvian ports,” says Edgars Suna, director of the Freeport of Riga. According to Suna, Riga itself is the key city in the Baltic States, in the center of the region, which makes Latvia one of only three EU countries to have a direct-access border with Russia, making it ideal for east/west trade. In this sense, Latvia has three major ice-free international shipping ports linked to the country’s infrastructure of rail, road and pipeline. “It works in reality; Latvia is in the middle and is a good platform to transfer Chinese products to the world (…), [and what also has to be taken into account are] the tax incentives and customs services provided by the free ports of Latvia,” says Suna.

The current transcontinental rail route via Urumqi in China, Kazakhstan, Russia and Latvia - the so-called New Silk Road - provides opportunities for Chinese companies to gain access to Scandinavian and Central European markets in less than 15 days.

Related to transport, one of the possible projects talked about at the conference was shown by Zhang Xiadong, chairman of Winhopes Investment Co. in China, who asked the Latvian Minister of Economy, Pavluts, the possibility of creating a flight connection between Riga, Beijing and Shanghai. “I’d like to pursue that project. However, I see more benefits to airBaltic and Latvia than to the Chinese airlines. So I will do some research and have a better understanding on what it consists of before I talk with the chief executive officer of airBaltic. [It could] help for improving the tourism sector,” says Zheng.

Chinese tourism’s current demand was also an area considered by the guests. According to Zheng, the tourism business for Chinese travellers to visit Baltic areas can be a good start, the “low-hanging fruit.” In the future, it could also be manufacturing-related businesses that set up in Latvia.
“Bringing Chinese tourism in is one of the possibilities studied by many companies, especially in the sector of medical tourism, because it is well known the high-level medical facilities in Latvia,” said Punyu.

Tax advantages attract
Others of the main considerations for Chinese investors is the low taxes for companies working in Latvia. For Artis Kampars, chairman of the Latvia-China Business Council, it is easier to create a new company in Latvia than in other European countries. “It is possible to create a company in three days,” says Kampars.
But for most of the investors, the important issue is the relatively low-cost base with connections to Western EU countries. Several financial grants to foreign investors investing in the country, mainly in terms of tax exemptions and loans at very low interest rates, were the most commented on considerations.
According to a PricewaterhouseCoopers and World Bank 2012 study, Latvia has only seven company tax payments compared to Germany, which has a comparable 12 tax payments.

Globalization and Green economy models
The event also gave the opportunity to discuss the future challenges that China and Latvia have in reasserting the economic growth through new economic models which take into account the necessity of halting the most dangerous effects of globalization: the effects of economic exploitation on the environment.

“I am in favor of globalization, but in a determinate way. Liberalization but sustainability. It is necessary for equal development, and if not, it is not globalization,” said Anil Kurmar, chief executive officer of Ransat in the United Kingdom.
But at the same time, the discussion about globalization was related to the effect of global consumption. “There are an unaccountable number of products and customers in this competitive and innovative market. Here is the biggest challenge,” said Oki Matsumoto, chairman and chief executive officer of Monex Group in Japan.

In finding solutions to these challenges, the answer was unanimous: sharing experiences offers the richest value. “Today it is not just the technology, but the business experience used in developing other countries. It is very important to keep in mind other fields and the needs of the population, and it takes a commitment of all business sectors in sharing the best experiences in providing good services for these needs. In this way we get the global benefits from each other,” says Sandra Wu, chief executive officer at Japan Asia Group.   

In this sense, attendees could share new business viewpoints to improve what globalization nowadays demands: wider knowledge of the world and a refining of our understanding of global affairs, in the effort to provide better products and services.