I. COMMERCIAL OVERVIEW (EXECUTIVE SUMMARY) Import Market The recovery of export industries that started in 1992 boosted the imports of raw materials, intermediate products and services. On the other hand, slackening domestic demand and the weakening purchasing power of the Finnish markka reduced the imports of finished products; imports of capital goods amounted to only half of the volume in 1989 and even imports of consumer goods were one-quarter less. The import shares of industries primarily serving the domestic market have considerably declined during the recession. In 1993 the great differences between the production outlooks of various industries were reflected in their import demand: the most successful export industries, such as the electrotechnical industry, increased their raw-material and component imports, whereas the automobile industry, for example, experienced a fall in its imports of production goods. The declining trend prevailing in industry's raw-material and production-goods imports ceased in 1993, as the growth of export industries continues. But the continuously slackening domestic demand is reflected especially in consumer goods imports; during the first half of 1993 the imports of passenger cars and other consumer durables fell by one fifth from the previous year, and the imports of convenience goods have started to decline. The imports of investment goods remained stable because of the ship and aircraft deliveries that materialized. In services imports, households' travel abroad dropped considerably, whereas the service purchases related to companies' exports increased. In 1993, imports increased by 9 percent, exports by 25 percent. The predicted growth of import demand in 1994 is largely due to the accelerating growth of industrial output. Also investment goods imports will rise as machinery and equipment investment gradually recovers. Consumer goods imports are still likely to fall somewhat. As a whole, imports of goods and services are projected to grow by 4.5 percent in 1994 and 9 percent by volume. U.S. imports were up 29 percent in 1993 in local currency value after declines of 18 percent in both 1991 and 1992. Total volume was 7.4 million markka or about $1.3 million. The increase was due to sales of civil aircraft, microchips, semiconductors, other electronic components, computers and peripherals, chemicals, drugs and pharmaceuticals, telecommunications equipment and services, and medical equipment. This trend will certainly continue through 1994 and into 1995. Finnish trade with the EU/EFTA countries is roughly 65 per cent of total Finnish trade. Germany is Finland's most significant trading partner, followed by Sweden, the United Kingdom, and the United States. The United States, which is Finland's leading source of computers, peripherals, and software, is Finland's largest trading partner outside Europe, with a market share of about seven per cent. Germany absorbs 17 percent of Finland's exports and supplies 16 percent of Finnish imports. AGRICULTURE/FISHERY/FORESTRY - Membership in the EU might come as early as January 1, 1995. This will require that Finland conform to trading and production rules of the EU's Common Agricultural Policy (CAP). Finnish membership in the EU is not expected to have major bilateral trade implications for the United States. Under the April 15, 1994 Uruguay Round (GATT) Agreement, Finland obtained production quotas and subsidies for milk, sugar, grains, oilseeds and certain kinds of livestock. This will allow continued production of agricultural products which might not otherwise have been produced. In addition, Finland will receive export subsidies like the rest of the EU member countries so surplus farm production will find its way onto the world market in competition with the United States and other exporters. It is also important to note that the Finnish market will be fully open to U.S. competitors within the EU while U.S. exporters will face EU import restrictions. Current opportunities for U.S. agricultural exports to these markets lie with those items not produced in these far northern latitudes such as cotton, tobacco, rice and numerous items more suited to tropical or temperate areas such as horticultural products and a broad range of consumer ready convenience foods, snacks and drinks. However, EU and other country competition for these markets is growing and EU membership will bring an additional price advantage to other EU members which will not have to face the EU's external duty/tariff structure. It should be noted that duty free quotas and tariff concessions for certain products had already been established in 1992 between both Sweden and Finland as European Free Trade Association (EFTA) members and the then European Community. These bilateral agreements covered a range of high value products including fresh and frozen fruits and vegetables, margarine, jellies and marmalades, and wine. Effective April 15, 1993, a bilateral agreement incorporating duty eliminations and reductions between Sweden and Finland covering trade of limited (quota) amounts of high value products between those two countries came into force. These bilateral agreements covered meats, sausages, cheeses and margarine. Bilateral Free Trade Agreements (FTA) between Finland and the three Baltic countries were signed in 1993 but the agreements had not been extended to agricultural/fishery products with Latvia and Lithuania as of May, 1994. It is also important to note that the EU has begun preliminary FTA discussions with the three Baltic countries. When complete, the Baltic/EU FTA's will replace the Finnish FTA's with the Baltic countries. Commercial Environment Finland is a country with an open market economy. A quarter of Finnish GNP comes from exports. Besides holding a leading position in the wood-based industry, Finland is an advanced manufacturing country. Finland is a world leader in the construction of paper machinery, mobile phones and instruments for environmental measurements. The Finnish chemical industry is also technologically advanced and competitive. Most Finnish enterprises are privately owned, and state- controlled companies operate for the most part according to the principles of a free-market economy. Finland currently spends approximately two percent of GNP on Research and Development, and is increasing its Research and Development investments. The rate of growth has been one of the fastest among the OECD countries in recent years. Two of the most important challenges to overcome in order to take advantage of the Finnish import market is the current state of the economy and the cartel-like behavior of local companies, primarily oil, chemicals and services. But as Finland moves towards EU membership, local players will have to relinquish their privileged position and power. July 1991 marked the end of Neste's import monopoly of oil products. The government is slowly implementing a plan to privatize most state-controlled companies. Full privatization is not expected until late in the decade at the earliest. Legislation liberalizing the telecommunications sector has already been passed. Restrictions on foreign investment in Finnish banks and other financial institutions have been removed and major reorganizations in wholesaling and retailing cartels are making them weaker and weaker. Mandatory social insurance such as worker's compensation and pension insurance is still limited to Finnish insurance companies. Automobile, medical, pharmaceutical and nuclear accident liability insurances can be sold freely in Finland providing the company has a local representative and a subsidiary somewhere in the EEA. Other forms of insurance can be sold under the same restrictions. The domestic sector, particularly service industries such as banking, retail sales, and construction, continues to contract and shed jobs. This situation will probably turn around only slowly, given a continued decline in average purchasing power. Industries still struggling are clothing and footwear, where production is shifting to areas with lower labor costs such as neighboring Estonia. Building materials production is also weak, reflecting a severely depressed construction market. Industrial production is up for electronics and basic metal manufacturers. Shipbuilding has also done well as a lower-valued Finnmark has increased Finnish competitiveness as a niche builder. Chemical exports have also been strong. With the continued improvement of the Finnish economy, industrial leaders are showing a high degree of optimism. Capacity utilization has steadily increased. Production is increasing in all sectors of manufacturing, particularly forestry-related, metals/engineering, and chemicals. Profitability is still expected to increase, but at a slower rate than last year's big gains. Investment, while still lower than a year ago, is increasing and will show a net gain for 1994. Prospective membership in the EU is expected to accelerate the increase in investment. Consumer confidence is also up. Consumers are expected to begin spending more but saving less as interest rates stay low. The gap between savers and debtors is increasing. The number of Finns with debt problems is decreasing but many of those in debt are getting in deeper. Another important market variable to consider in doing business here (one that can considerably improve export potential) is to link up with or piggy back on Finnish firms developing business in Russia and the Baltics, primarily St. Petersburg and Tallinn, Estonia. In the past, trade with Russia accounted for up to 25 percent of Finnish exports. Finns know how to do business in Russia and there are strong historical and cultural ties with Estonia--even the languages are similar. The excellent infrastructure in Finland and its geographical proximity to Russia and Estonia give it another advantage as a gateway to the East. The host-country's business attitude toward the United States is very positive. Finns like doing business with Americans and especially admire U.S. products and services that are on the cutting edge of technology. Major Business Opportunities It is apparent that the recent recession has not affected all market sectors evenly and that there is an increasing dichotomy between weak domestically-oriented industries and fast-growing export industries. U.S. exporters can benefit by targeting the healthy sectors and the businesses that serve them. A niche marketing strategy is strongly advised. U.S. exporters should target computer hardware primarily for the consumer market and multi-media, application software in all markets, telecommunications, semiconductors and electronic components, industrial chemicals and process controls and drugs/pharmaceuticals. U.S. exports of aircraft (civil and military) are particularly strong. Franchising, environmental technology and travel services are also important sectors to explore. Fast-food and restaurant chains are growing throughout Finland (McDonald's has in place an aggressive growth strategy here). Finland is a forerunner in developing governmental policies to ensure a better environment and is involved in cleaning up nearby problem areas in Russia and Estonia. The U.S. is the favorite long-haul destination for vacationing Finns, and business travel to the United States is up. Major roadblocks to doing business From the Finnish food consumers' point of view, quality, price and assurance that the food products are free of harmful additives, pesticides, etc. are critical. Because of the high proportion of working mothers, convenience foods are increasingly attractive to consumers. Currently, microwave ovens are found in 60 percent of Finnish households, a very important factor in determining the types of convenience foods that will be sold. It is difficult to introduce and properly advertise a new food product due to the cost, the limited numbers of purchasing/distribution firms (in Finland, three vertically integrated import/wholesale/retail groups account for over 90 percent of the market), and the fact that there are many similar products competing for very limited shelf space. This situation will remain true after membership in the EU begins in 1995. However, firms that have attractive products who are willing to make the investment in terms of time and money may find very attractive marketing opportunities. It should be pointed out that with the exceptions noted elsewhere in this report, Finland will be basically in conformity with EU food safety import regulations via veterinary and other provisions of the EEA agreement effective July 1, 1994. Other significant trade opportunity related to changes resulting from EU membership negotiations that will be implemented beginning in 1995 include the abolishment of the import, production and wholesale alcohol monopoly in Finland. Nature of Local and Third-Country Competition The only homegrown industries where competition is strong are forestry, paper and related equipment, cellular telephones, and the dairy industry. Some areas within Finland's service sector are still protected, such as insurance and air transport. The banking sector has liberalized and foreign banks can do business in Finland and make loans on the retail level. Telecommunications is open to foreign competition. Across the board, U.S. firms will have to compete primarily with European suppliers, especially German, Swedish and British competitors. The Japanese do not have a major presence here except in the automobile industry. See the best-prospect section for detailed description of competitor market shares by industry sector. Finland is by location and increasingly by treaty a part of western Europe. It looks to Western Europe for a large proportion of its two way trade. Eastern Europe, Russia in particular, is also both a significant market as well as a source of raw materials, particularly in the forestry sector. Historically, since the beginning of the 1950's, Finland has protected its internal markets and its farmers through import licensing schemes. This had the effect of limiting imports to those commodities that either weren't produced in Finland or were in short supply for one reason or another. With the European Free Trade Agreement (EFTA) and now the European Economic Area (EEA) in 1994 to be followed by membership in the European Union (EU) in 1995, the Finnish market will be more open to trade. However, it is likely that EU membership and associated FTA agreements that the EU is or will be negotiating with former members of the former Soviet Bloc will result in a larger share of Finland's trade coming from those partners in the future. It is important to emphasize, however, that Finland will be a more open market than it has been in the past and it is possible that a more competitive internal trading environment will develop as well. With continued progress in terms of lower duties and production subsidy reductions promised under the Uruguay Round agreement, Finland will continue to be a market for U.S. agricultural exports. It is also likely to increase in importance as a trade gateway to Russia, Estonia and other former Soviet Union states.