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Business opportunities in Eastern Europe sail with warm winds of historic change.

Business Opportunities in Eastern Europe Sail With Warm Winds of Historic Change

Trade barriers between East and West have crumbled along with the Berlin Wall in recent months, but many questions need to be answered about how many hurdles remain. While commercial interests have been increasingly viewing the Soviet Union with immense interest - due in no small part to its potentially great consumer market - the revolutionary unraveling of the East bloc that began last fall is providing many new opportunities. Planners from many companies are presently in conference rooms, working on programs for these new markets and sources of supply.

Indeed, the term Eastern Europe seems to be losing its old political meaning. With Hungary and Poland in the forefront of actively working for radical economic reforms and courting Western capital and expertise, the momentous grassroots movement that toppled the hard-line Communist Party leadership in East Germany has shifted the spotlight for the moment.

West Germany has offered massive financial aid to East Germany in the wake of dramatic changes that have brought with them a call in some quarters for reunification of the two states. In response to this notion Soviet President Mikhail S. Gorbachev has cautioned that "exporting capitalism" could hurt the climate of cooperation in Europe.

Some observers in the West, including members of the influential Council on Foreign Relations, have opined that impending economic integration of the two Germanys will divert attention from the broader economic and political goals of Europe 1992. There are fears that the rough economic balance of Western Europe will be upset, resulting in a slowing down of real EEC integration.

Perhaps the first tangible sign that events in Eastern Europe may complicate the Common Market's integration program was seen in mid-December when West Germany postponed signing an agreement to establish border-free regions with four of its western neighbors. Officials in the Federal Republic said they needed more time to study effects of the so-called Schengen Agreement would have on the rights of East Germans to travel within the EEC.

$1.1-Trillion Economy

A combined German economy could be Goliath in proportions. With a population of 77.8 million people, its gross national product would be worth some US$ 1.1 trillion, according to estimates.

"It would be a leading exporter and the most powerful economic force in Europe," wrote Ferdinand Protzman of The New York Times. "The ease of doing business in their own language and culture provides a strong incentive, but the main attraction is the old-fashioned capitalist notion that huge sums of money are waiting to be made."

Meanwhile, as the Berlin Wall comes tumbling down, waves of East Germans have been rushing to the Federal Republic in search of freedom and opportunity - not to mention food and consumer goods that are not available at home. Most are simply seeking a better standard of living, something promised but not delivered during more than 40 years of the old regime's rule.

Things are changing so fast that the new leader of the troubled East German Communist Party (which prefers to go by the name of Socialist Unity Party of Democratic Socialism) has appealed to the United States for help to keep his country from being absorbed by the rich Federal Republic. All the while, the West German flag is being raised by protesters rallying for reform in the streets of Leipzig, Dresden and elsewhere.

So, to say that much of Europe is very concerned about the emergence of a Greater Germany would be an understatement. The United Kingdom and France are just as apprehensive about seeing a quick reunification as are Poland and Russia.

"Whatever follows in rebuilding East Germany, West Germany must cement itself into an integrated Europe, including East Germany," said Erich Klinkmuller, director of the economics section of the East European Institute at West Berlin's Free University. "We cannot rebuild it alone; we do not have enough resources. We must seek the participation of the other European nations, the United States and Japan... If there is to be a united Germany, it will be within a United Europe."

Back in the USSR, food shortages and a disorganized consumer market are very much on the minds of Politburo members. Soviet citizens, for the most part, don't have the option of walking across their borders in search of a higher standard of living in the West. And the powers that be are all to aware that they must improve living conditions soon or run the risk of seeing the already thin patience of the masses wear out.

So the established leaders of East and West shuttle back and forth, hold summit meetings and talk about the restructuring that will be necessary to drive the engine of a new world order. Billions of dollars worth of grants, loans, credits and outright gifts are sought and delivered. But while governments attempt to establish the framework, in the end it will have to be private enterprise that fleshes out a successful new system of production and distribution. The question remains whether success can be achieved without first replacing the underpinnings of central planning.

Garrill K. Popov, the leader of the Soviet Congress of Deputies, addressed this point during a recent debate: "You cannot create a market bit by bit," he said in criticizing Moscow's idea to spread such issues of property ownerships and currency changes across the next five-year plan. "You cannot have a carburetor working if the starter does not first work."

Western Sparkplugs

While the Americans and Japanese contemplate their response to new opportunities among Warsaw Pact countries, the EEC is making concrete moves. In late November it signed a trade agreement with the USSR, laid out an economic aid program for Hungary and Poland, and began negotiating a plan for East Germany. Developing countries that were involved in the Lome Convention complained about the attention - and money - that is going eastward. EEC ministers assured the third world nations that the Lome fund would be expanded and they would not be abandoned.

Nonetheless, the East bloc countries have semi-industrial economies with growing consumer requirements. And, what is probably most important, they are European. Proximity to West European nations makes Eastern Europe especially attractive to investors.

Danish Foreign Minister Uffe Ellemann-Jensen said to the press: "We must get into Eastern Europe before the economic superpowers do." However, he and his EEC counterparts claim they will not try to exploit the situation.

Eastern Europe does not contain new markets, for many frozen food machinery manufacturers have been doing business there for years. Peter Bisgaard-Frantzen of the Federation of Danish Industries had this to say: "There are great possibilities, but in the long term. First, production methods have to be built up, so the countries have products to sell. This demands money."

The inconvertibility of soft East bloc currencies has been a dogging problem, as many Western companies are not keen on countertrade. Some Danish finance institutions were reluctant to participate in a November export-promotion trip to Poland, simply because that country owes Danish interests millions of dollars. Companies like Br0drene Gram, which has been successively exporting freezing equipment to Eastern Europe for years, has practiced third-country financing through West Germany, Finland or Austria. EEC ministers plan to negotiate a European bank supported by funding from member nations, but non-member countries may be allowed to participate. Such an institution could prove instrumental in building up Eastern Europe, and in the development of trade with those countries.

"Danish food producers and technical institutions would be able to establish in Eastern Europe, but right now the problem is money," said Frantzen. "Another factor to consider is that the competition has exactly the same advantages we have.

"Some European companies have established divisions in countries like Spain or Portugal. Eastern Europe may become the new site of this type of expansion: communication is easier, transportation would be cheaper and prices are competitive. Some textile plants have already been set up in Poland. Machinery for food production has great potential: they need food-stuffs and the basics to provide these."

Danish industrial giant Danfoss is no newcomer to trading with the East bloc. The company's refrigeration-automation equipment is said to enjoy a 50% market share in Western Europe, and a 25% global market share.

"We've been doing business with Eastern Europe for a long time," said CEO Henry Petersen. "Recent changes will help, but it's too soon to make any estimates. We saw openings where we could go directly to customers, and we've done so. We have also been working through agents. Reforms mean, naturally, that it will be easier to work there."

The Danish foreign minister recently led a large trade delegation to Poland, and Danfoss was represented. "We presently have negotiations going on with Polish companies," advised Petersen. "We've just been in Russia, and for many years we've been dealing with Yugoslavia. We've been fairly active in these areas, and are currently working to expand activities there."

About East Germany, Petersen said Danfoss had no special projects under way there. He added that the company had had problems securing hard currency. "It's not for lack of demand in East European markets, but it's difficult to receive payment in money that's usable. But East Germany will play a larger role in the future. Technological developments will be occuring in East European markets, within the refrigeration equipment industry. They are several years behind the West, so we believe there are demands that need to be filled, generally, across the eastern market."

Petersen feels that Eastern Europe could become a place where Western industries invest in ventures because of cheap labor, although he said it would take some time.

Reforms have made, or will make, it possible for firms to deal directly with end-customers, as opposed to state purchasing bodies. However, as one export manager pointed out, Western companies could make a single trip, probably to a major city, and complete a series of deals. It may become necessary to travel for a longer period of time, or repeatedly, to distant provinces such as those in the Soviet Union.

Equipment manufacturer Br0drene Gram has a sound business going in a number of East European countries. Its practice has been slightly "indirect" trade, and also trade in services as well as merchandise.

"We have an export manager who travels to these areas, we're members of an export group and we have other people posted abroad who are responsible for certain locations," said Hans J. Knudsen. "If we take Russia, for instance, we've not only got contacts at the Russian Embassy in Copenhagen, but we've also got a lot of trade going through Finland, where there's quite a bit of countertrade and where we have a subsidiary. Our membership in the export association and connections to the seafood sector also help."

In the case of Poland, Gram has a 30-year-old tradition of doing business with public procurement bureaus. The company also has important contacts with Polish service and installation firms. "There are almost always Poles here at our headquarters for training in service or installation," Knudsen said.

The Danish company likes to receive payments from East bloc transactions in kroners or other hard currencies. Knudsen said that management has no immediate plans for expansion in Eastern Europe, but that it remains vigilent.

Bonduelle Eyes Changes

In France, Groupe Bonduelle has been watching developments in Eastern Europe carefully. "We are very eager to see what will happen in Hungary, Czechoslovakia and Poland," said Bruno Bunduelle, president of the European frozen and canned vegetable giant.

He told QFFI that he was not interested in sourcing raw materials from the East bloc, commenting: "It is very difficult to export food when you are starving. Instead, when the time is right we expect to assist those countries in producing vegetables for their domestic market. Our intention is `to sell know-how.'"

Bonduelle is already starting a project in the Soviet Union - a joint venture with a factory in the province of Georgia. Together they will build a plant to produce canned vegetables for the Moscow market. Frozens, for now, are not feasible due to distribution problems in the cold chain. The USSR does not have adequate equipment to store frozen food in warehouses and homes, let alone transport it.

"Maybe it will change in 10 or 20 years," said Bonduelle. "If you look at a department store in Moscow you will say that we would be crazy not to try to sell there. The Soviets have plenty of rubles, but there isn't much to buy. And to get what is available, shoppers spend an average of three hours a day seeking it out and queueing."

Slowly, it seems, the thawing cold war is providing warm opportunities for those in the frozen food business.
COPYRIGHT 1990 E.W. Williams Publications, Inc.
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Title Annotation:forecast for 1992 EEC integration and frozen food industry marketing
Author:Ferro, Charles; Saulnier, John M.; Davis, Mary
Publication:Quick Frozen Foods International
Date:Jan 1, 1990
Words:2127
Previous Article:The issue that just won't swim away, fresh vs. frozen seafood merchandising.
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