Baltic success story - come and see for yourself

  • 2004-11-25
The May accession to the European Union of the three Baltic states, whose markets once again are among the most dynamic in Europe, has considerably increased their attractiveness for German economic players. Particularly in regard to mid-sized companies, the significance of these markets has been consistently growing from a strategic point of view. Until now, the Baltic states were relatively unknown since such "take-with" ("drive-through") markets have increasingly lost their importance.

One region - three markets

Despite an ever-increasing awareness in Germany of the region, the Baltic states are still widely regarded as a homogeneous market. This is not least due to the area's many similarities, even if linguistic, cultural and mentality differences will force mid-sized enterprises to specify and adapt their market-conquest strategies for each individual state. Relations among the Baltic states themselves are also individually tailored and often seem more mutually distanced than the generic term "Baltics" initially suggests.

The proven method for gaining a foothold in these countries is to first start doing business in one of the markets and then expand to the other two. Enterprises often seek business ideas that would produce regional synergies, as well as allow for a common market approach or product marketing on a regional level.

EU accession increases the importance of the Baltic economic zone, which has Riga as its regional center. Moreover, the Baltics' favorable geographic situation essentially constitutes an axis between East and West and offers a departure point for business development beyond purely Pan-Baltic transactions.

Rate of growth

Driven by increasing private consumption, a huge appetite for investment, an efficient financial sector and the strong growth of exports, Estonia, Latvia and Lithuania have attained growth rates of 6.4 percent, 8.2 percent and 7.2 percent respectively during the first half of 2004. In Lithuania alone industrial production grew by 13 percent during the first six months of 2004. These growth rates are far superior to the average European rate and are expected to remain at the same level during the next 12 months.

Problems arise first and foremost in regard to the balance of trade, which is characterized by a continuous, relatively high trade deficit caused mostly by a strong demand for imports. About 60 percent of this deficit is comprised of an influx of foreign direct investments. The Baltic states have pledged to keep their foreign debts under control and to reduce them during the long term. The Estonian kroon and Lithuanian lita are pegged to the euro within the mechanism of ERM II that makes the whole trade circulation much easier. The Latvian lat, however, is still attached to the SDR basket, but is due to be pegged to the euro in 2005. Euro-zone participation is set for 2007.

Germany - a leading trade partner

Germany's external trade with the Baltic states can be considered to be very well developed, having exceeded 5 billion euros in 2004 - a double-digit growth rate. (Lithuania claims the bulk of this amount, or almost half.) This makes Germany the most important long-term trading partner for each of the three states. Other than automotive vehicles, there are many other German products that sell well in the Baltics: industrial production equipment, machines, chemical products, as well as food and sweet products. Exports to Germany include textiles, clothing and wood-based products, as well as steel and steel-related products.

Chances for German enterprises

The abundance of cranes in Baltic cities is testimony to an unrelenting construction boom, and despite a very strong Scandinavian presence, many German businesses are also actively taking part. German enterprises are well positioned in the field of capital investment - high-value capital in consumption and production - in the Baltics. Continual growth of purchase power among the population and a permanently high "catch-up demand" in terms of modernizing facilities have contributed to the increasing demand for such products.

Thanks to low labor costs, a highly qualified labor force, good logistical ties and a moderate tax regime, the Baltic states are also suitable for the manufacturing of labor-intensive products. The focus at the moment is on the textile and furniture industry, metal processing and electrical devices. Nevertheless, German automotive suppliers also manufacture in the Baltic states, especially in Latvia and Lithuania, which, compared with Estonia, have a higher density of industry.

IT Leaders

One must add that all three of the Baltic states occupy leading positions in the field of information technology and telecommunications and can, in many respects, measure up to West European standards. Given the general and high level of society's openness toward new media and devices, there are several reasons for the positive development of the immensely promising IT sector. No doubt the proximity of leading Nordic telecommunication companies is a decisive factor here. Furthermore, the positive development of future businesses in high-tech sectors, such as Lithuania's laser technology or biotechnologies in Estonia (key word - gene pool project), has been observed.

Nordic investment dominates

Nordic businesses long ago identified the suitability of the Baltic countries as "natural partners" for outsourcing needs and defined the markets of these countries as "strategically important." By comparison, German businesses - especially in Estonia - have been sensibly shy in terms of investment. For instance, in Estonia, only some 100 enterprises with German capital, predominantly medium sized, are operating on the market. There are 300 German enterprises active in Latvia, mostly in Riga, though at the same time Germany has taken over the roll of the biggest investor.

Lithuania, because of its geographic situation and the relatively large size of its market, has 400 registered companies and can boast the greatest concentration of German capital in the Baltics. Industry and service projects are the main branches in equal proportions representing German business interests. This tendency, following EU accession, has grown even stronger.

The latest poll among German direct investors has shown the positive effects of EU enlargement: the expected increase in economical activity, facilitated customs export and import procedures, the opening of new (eastern) markets and a new EU-regulated business landscape (environment, safety at working places, hygiene). The risks lie with an eventual over-regulation of formerly liberal markets (for instance, deviation from a simple tax system), a loss of market share caused by an invasion of multinational companies, higher living standards and an increase in production costs, as well as the brain drain.

The quality of the business environment was also assessed in the survey. Ninety percent of the companies inquired said that they would repeat their investment provided that conditions stay the same.

Currently there are five direct airline connections to German destinations that invite any and all to come see the dynamism of the Baltic markets for themselves.