Doing business in the east will be easier as red tape removed

The hum of cranes and the chatter of hundreds of builders working through the night at the "Golden Terrace" development in the centre of Warsaw is a clear signal that business in Poland is picking up after a difficult three years.

Work on the flagship €400 million retail development takes place 24 hours a day making it difficult to sleep at the adjacent Holiday Inn hotel.

But well-heeled guests will have to get used to the noise as Polish consumers have made a habit of shopping late into the night at US-style malls.

Poles have rushed to embrace a consumer culture since the fall of communism, with most large cities now boasting a shopping centre. This desire to spend has got out of control on at least two occasions, with the lure of cut- price offers causing dangerous crushes at some of the big malls.

This almost fanatical zeal to shop may do little to create a healthy egalitarian post-communist society, but for Irish businesses it offers a real opportunity to boost trade and profits.

The accession states account for €1.3 billion worth of trade per year with Ireland, which enjoys a healthy trade surplus with the region.

And it is not simply Irish consumer goods or foods that line shop shelves in the accession states, increasingly it is software, plastics and equipment to supply a growing multinational sector.

"About 90 per cent of Enterprise Ireland's time is spent helping Irish firms tap into these markets," says Mr Jim Mongey, Enterprise Ireland's director in the Czech Republic. "There are also signs that the service sector is opening up for Irish firms."

More than 20 Irish firms took part in a trade mission to the Czech Republic recently, representing sectors as diverse as English schools, software firms and large manufacturing companies.

But there are already some big success stories in the region.

Openet Telecom, a Dublin-based firm that develops billing software for telecoms companies, has two big contracts in accession states and expects to sign a new deal next week.

"Almost 18 months ago we began looking at the region and ensured that we got some direct sales guys on the ground and, importantly, got a local partner," says Mr John Rainger, Openet's chief executive.

"We have deals with mobile firms Orange Slovakia and Eurotel in the Czech Republic... this year we will make almost €2 million from the area."

Unfortunately, there are signs that Irish firms have been slow to embrace trade with the accession states with only Poland, the Czech Republic, Slovakia and Hungary attracting a lot of interest.

Eurovision 2007, a report by Goodbody Stockbrokers, shows Ireland has the weakest trade links with the accession states, with just 1.3 per cent of 2002 merchandise exports destined for the 13 enlargement candidate states.

But Goodbody's says enlargement should be regarded as an opportunity rather than an event that threatens domestic exports with more price competition.

Openet Telecom deliberately targeted accession states because firms are making similar investment decisions to those taken by EU firms a few years ago.

The accession date is a minor factor for firms, although it will remove some barriers, says Mr Rainger.

One of the key changes will be the removal of withholding taxes in certain accession states. This tax, which stands at 10 per cent in Poland, penalises foreign firms that compete with indigenous companies in the region, he says.

Another change that will help Irish software firms operate in the region is an increased respect for intellectual property that should take hold.

In recent years there has been huge progress made in fighting software piracy, says Mr Jan Muehlfeit, Microsoft vice president eastern Europe.

Microsoft is aggressively targeting the region for sales and believes it can help governments and firms adapt to regulatory and financial changes brought about by EU entry, according to Mr Muehlfeit, who on Thursday addressed the Irish Software Association's conference addressing the theme of opportunities of enlargement.

Microsoft is also tapping into the region's pool of software engineers and has recruited 1,200 staff from eastern Europe to work at its Seattle headquarters. It also outsources a range of functions to firms in the region to cut costs.

Irish software firms, such as the e-learning company Riverdeep, are also cutting their cost base by outsourcing development work to accession states.

"We have cut costs by between 20 to 25 per cent by outsourcing certain software engineering and graphics work to firms in the Czech Republic," says Mr Tony Mulderry, Riverdeep director.

"We believe the trend of moving east will continue and we are already active in India and Russia."

Other Irish technology firms have gone a step further by setting up development operations in the accession states. Silicon and Software Systems, a Dublin-based firm that develops integrated circuits and processors, has Czech and Polish offices.

Mr Cathal Friel, chairman of the Irish Software Association, describes this as "near shoring" and believes it offers Irish firms a big opportunity to cut their costs.

But he also highlights that migration by software engineers from the accession states could also act to put a cap on wage inflation.

Irish manufacturers are also setting up operations in certain accession states to expand their business and enable them to supply the multinational sector, which is also moving eastwards.

Realtime Technologies, CNF Tooling and Mergon International have all followed their customers to the Czech Republic to expand their businesses further.

"The smart Irish firms are trying to become small multinationals with three or four manufacturing sites in Europe, Asia, the US and Ireland," says Enterprise Ireland's Mr Mongey.

"We need to see Irish firms become financially stronger by entering diverse markets and they won't do that by staying put in Ballina."

EU accession should reduce some of the red tape and bureaucracy that has made it more difficult to do business in former communist states. Some Irish firms, such as JFC (see below) have seen their products held up for days at the Polish border because of simple clerical errors.

There is also some low-level corruption which was built into the system in the communist era, says Mr Sean Melly, who set up the telecoms group eTel in the mid-1990s in Poland, Czech Republic, Slovakia and Hungary.

"A lot of this stuff was very petty and I wouldn't overstate it. But it would be fair to say it is a bit more difficult to build a business in these countries," he says.

Business is also a lot more formal than in Ireland or the US and there are always documents to be signed and stamped. Setting up in Poland took a long time, according to Mr Melly.

But the potential benefits of entering a relatively underdeveloped region with 74 million consumers has lured two of the biggest Irish firms into acquisitions.

CRH has made some big acquisitions related to cement manufacturing in Poland while AIB owns the fifth-largest bank in Poland, BZ WBK, which has 400 branches throughout the state.

AIB entered the Polish market in 1994 as part of a privatisation process initiated by the Polish government and despite a difficult economy has created a good strategic opportunity. Last week BZ WBK reported a better-than-expected performance in the first quarter prompting analysts to suggest it could be AIB's fastest-growing division during 2004.

"The rationale for our investment was a scale issue. Poland has a population of 40 million and offers significant potential for banking and other business," says Mr Maurice Tracey, senior divisional manager AIB Poland.

"You also have to factor in a rapid economic development of Poland as it enters the EU."

With accession now removing the last few remaining obstacles to free trade, other Irish firms are likely to follow in their footsteps.

This week Enterprise Ireland launched a handbook, Building Your Business in the EU Accession States. It can be accessed at www.enterprise-ireland.com.

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