RIGA - German business in the Baltics looks set for rapid expansion. At least, that's how Dr. Ralph-Georg Tischer, CEO of the German-Baltic Chamber of Commerce in Estonia, Latvia and Lithuania (AHK-Baltic) see it.
"EU accession at last created awareness of the Baltics right down to the Swiss border: people realized there's life beyond Poland," he says.
On the face of it, this is surprising: Germany already holds a strong position across the Baltics. It is Estonia's third-largest trade partner, Lithuania's second-largest partner and third-largest investor, and in Latvia it is number one in both trade and investment. To talk of "creating awareness" at this stage seems incongruous.
And yet, compared with other Central and East European EU members, the Baltics do appear to be lagging. German trade with Slovakia in March 2005 totaled just over 1 billion euros, as much as German-Latvian trade for the whole of 2004. German trade with the Czech Republic in April 2005 comfortably exceeded German-Lithuanian trade for the whole of 2004. As for investment, Germany is the single largest investor in the Czech Republic, Hungary and Slovakia, with a combined capital of well over 25 billion euro. Seen in this context, the Baltics are unusual in not showing German dominance.
First things first
One reason for the lag is structural. As Heiki Sirkel, representative of AHK-Baltic in Estonia explains, "The Estonian market is pretty small, so most of the German companies that come here are SMEs."
Lithuania shows a similar pattern. German companies there are the largest national grouping, according to the Lithuanian Statistics Bureau, but their investment per company is among the smallest. Tischer, who coordinates AHK-Baltic's work across the region, sums the situation up, "The German pattern of investment here is a large number of smaller companies."
Another reason is, of course, size. Even combined, the Baltics are smaller than the Czech Republic or Hungary, let alone Poland. Yet this is not enough to explain the discrepancy: Germany's trade with Slovenia (pop. 2 million) topped 5 billion euros in 2004, more than double the total for any of the Baltics.
Nor is geographical distance a factor. Berlin is almost equidistant between Vilnius and Ljubljana, the Slovenian capital, and what the Baltics lose in logistical convenience 's i.e., road quality 's they make up for in the convenience and closeness of their ports.
The reason that Germany's position in the Baltics is less dominant than might be expected is, quite simply, awareness. As Tischer explains, "Germany had a lot of homework to do in East Germany in the 1990s, and then it concentrated very strongly on its neighbors 's Poland, the Czech Republic, Slovakia and Hungary. Awareness of the Baltics, beyond the fact that they were small and peripheral, used to be inexact."
AHK-Baltic's representative in Lithuania, Oliver Baake, agrees. "Germany was busy with reunification, then its immediate interest moved to the neighbors," he says.
Sirkel still sees this pattern in Estonia. "It's hard to attract German companies here. They don't think of it as the first call, but only after Poland or Hungary. Poland is to Germany what Estonia is to Finland." This pattern reflects Europe's Cold War history: Poland, the former Czechoslovakia and Hungary all maintained their independence, and Germans were aware of them as separate countries. The Baltics, subsumed into the U.S.S.R., suffered a different perception.
But change is on the way. One factor has been the interest generated by EU enlargement. Says Baake, "Our Vilnius office had a lot of calls and requests for information last year. Germans have realized that there's something between Poland and Helsinki."
Tischer adds, "Since May 2004 there's been an unbelievable growth in interest in the Baltics, almost a stampede. On average, we're getting calls from 10 to 15 new contacts a day." German investment in Lithuania and Latvia soared in 2004. In Estonia, it remained steady, but imports from Germany rose by 34 percent. And as Tischer sums up, "EU membership means added security for foreign investors, especially the small and medium firms." EU enlargement has put the Baltics firmly on Germany's mental map.
Nor is this all. As enlargement generates increased interest, all the German investments in Central and Eastern Europe are being reviewed in the normal run of business, explains Tischer. "Some of those businesses are now thinking of extending their presence into other countries. Those two factors combined make the Baltics very interesting," he says.
If Germany's eastern neighbors caught the first wave of German expansion, the Baltics seem ideally placed to catch the second.
Looking for a niche
At present, the figures indicate that Latvia is the most popular choice. "The majority of current investment projects here are focusing on Latvia," says Tischer. "Riga has the advantage of being familiar to Germans for historical reasons. You could say that if Tallinn had its old name, Reval, it would be better-known too. At the same time, a good number of people here speak German. This is especially important for small companies: Never underestimate the impact of being able to do business in your own language."
But the neighbors are not forgotten. As Baake points out, "It's very easy to attract German companies to Lithuania at the moment. The country is still very attractive for incomers, so it would be fair to expect an increase in German business here. [The Baltics'] eastern connections are also a bonus, though this shouldn't be the main reason for coming here."
Estonia, the smallest and furthest of the Baltics, seems less likely to receive such high levels of interest, but even there, increasing trade volumes show that Germany's importance is growing.
But certain factors within the Baltics themselves are liable to limit the amount of German business here. One, inevitably, is size. As Sirkel says, "Estonian wooden houses are very popular, especially in Bavaria, but the eternal problem is size: Estonian companies can't provide enough products for the giant German chain stores."
Another is the limited supply of qualified manpower: "There is a lack of vocational training and of skilled blue-collar workers across the region," says Tischer.
Baake agrees. "One feature here is a lack of highly skilled people, especially with language knowledge," he says. "The country's aware of it, but people are still leaving."
And the sheer volume of foreign activity in the Baltics is another factor. "There is massive interest in doing business here, but there is a finite number of unexploited niches." Says Tischer. But for all that, the Baltics are no longer a small, ill-defined space on the periphery of German consciousness. They have moved into the focus of business interest. Given the scale of the Scandinavian business presence here, it seems unlikely that German trade will ever dominate the Baltics to the extent it does further south. But between EU enlargement and business expansion, Germany's presence across the Baltics looks set for rapid growth.