V. MARKETING U.S. PRODUCTS AND SERVICES Distribution and Sales Channels An encouraging development of the transition process in Romania has been the rapid growth of the new private sector. This growth has largely occurred in trade and services and, as yet, is mainly centered on small and medium-sized companies. Nevertheless, these firms represent a respectable nucleus for U.S. firms seeking distribution channels. In 1993, hotels and restaurants accounted for 70 percent of the gross value added in the private sector of the Romanian economy, and employed 529,000 persons. This represents 57 percent of the total private sector employment. Data on private sector development in Romania, as in other transition economies, is poor and the bias, if anything, is towards understatement -- which means that private sector activity is probably higher than reported. The explosive growth in private business increased registries to almost 525,000 at end-1993. About 60 percent of these are registered as commercial companies with the remainder being individual or family businesses. An important impetus for private sector expansion has been provided by the leasing and sale of state enterprise assets which was initiated in 1991. During 1991-92, over 25,000 leasing contracts for shops, restaurants, hotels and office premises were concluded. In some cases, the former state commercial enterprises became empty shells, receiving only the income from leased assets. Some 6,100 shops, restaurants, and industrial facilities were offered for sale at the beginning of 1992, and about 1,700 more at the beginning of 1994; about 2,900 transactions have been completed, of which over 80 percent have been tourism assets. Through both the leasing arrangements as well as the sales program, the private sector has come to dominate activity in trade and tourism; in Bucharest alone some 66 percent of retail sales are now achieved through private firms. Private firms have also expanded into foreign trade. The monopoly of the former foreign trade organizations was abolished in February 1990, and private enterprises are permitted to participate freely in import/export activities. The number of economic agents carrying out foreign trade activities has increased to over 30,000 commercial companies. The new companies tend to focus on consumer goods. Private sector trading now accounts for 32 percent of imports and 26 percent of exports. Foreign goods are increasingly being imported into Romania. Importing has been in many cases the first and only activity of new private businesses. One very interesting aspect of current foreign trade activity is that the intermediary role played by both state and private trading companies is coming under pressure as state-owned manufacturing companies are becoming more interested and capable of undertaking international transactions by themselves. Indeed, private, but also autonomous state-owned companies, are now free to make their own business decisions and to import or export directly, without the help of middlemen. Moreover, these companies are entitled to retain 100 percent of their after- tax foreign earnings for their own use. These positive developments are accompanied, however, by some aspects that have a restrictive influence: -- The wholesaling and retailing systems are not yet completely structured; -- Obtaining information on the market is difficult due to the lack of published information; -- The typical private company set up during this early period is a limited liability company, devoted primarily to conducting domestic trade or import-export activities. These companies, again typically, have few partners and low capitalization. Shortage of capital, limited collateral, and lack of experience channels entrepreneurs towards activities where initial investments are low, and returns can be made rapidly - like trade and services; -- No improvement in the availability of local credit is seen in the short term. Moreover, the financial means of locals are most often extremely limited and cannot be relied upon in terms of business financing. Access to capital encompasses not only venture capital for private entrepreneurs, but also expansion of capital required to modernize existing installations, an issue particularly important in Romania; -- The leasing program for shops and hotels was reconsidered after 1992, partly owing to what were considered to be disappointing results. Leasing contracts were of short duration, with a maximum of three years. As a result, lessees extracted maximum profits and skimped on maintenance expenditures, with the result that leased assets are deteriorating. The sale-of-assets program provided state companies with the opportunity to divest themselves of assets not central to their core business and which may not survive without the built in business of their former owners; -- Sometimes "free market" appears to be confused with "no- rules market," where doubtful business practices may prevail; -- The extent of personnel training, although good, is not comparable to what is found in other Eastern European countries. All these drawbacks do not offset the profitability of entering the Romanian market, but highlight that the search for a local partner remains risky given the current situation of the Romanian economy. Use of Agents/Distributors; Finding a Partner The choice of a local partner is a critical step, and American managers must have access to local knowledge as a central foundation in making their decision. Progressing through the early and unstable stages of the process toward a free market economy, the Romanian situation is complex and difficult for foreigners. While the Commercial Section of the American Embassy can give some guidance, it is recommended that U.S. companies invest sufficient time on their own to satisfy themselves that the selected Romanian firm is fully capable and reliable. Fortunately, well qualified expertise and capability exists in Romania. Romanian specialists are very skilled, very good at technical matters, although they have been isolated for nearly two decades from the main stream of technical knowledge. What they need is a minimal updating and more experience in marketing techniques. One very interesting point is that during the last two decades local specialists erected many industrial facilities in neighboring countries. Indeed, a significant number of outside turn-key projects have been performed by Romanian firms. The experience acquired through carrying out large works could be very useful to American firms who form associations with Romanian partners both locally and in third markets. Franchising is at its beginning in Romania. Because of the limited purchasing power of the typical consumer, we believe it is too early for most types of franchises. However, we estimate that during the next few years the situation will dramatically change. Direct Marketing Under the current business environment in Romania, it is recommended that direct marketing be done only after a thorough study of local conditions. Potential problems that have to be considered are: -- Relationship with the local municipal administration and other authorities is not always easy. Much still depends on the personality of the public officer; -- Commercial and fiscal legislation is sometimes unclear, reflecting a certain legal confusion existing in Romania; -- Western accounting standards and procedures are difficult to implement; -- The level of exposure to Western practices has been generally very low. Romanians are often convinced of their own skills despite the fact that they lack experience and knowledge of Western business practices. For this reason, providing a solid training foundation for employees is important. It is also recommended that the foreign manager be highly visible and involved in day-to-day activities. Joint Ventures/Licensing Romanian production costs are among the lowest of the former Comecon countries and constitute a major attraction for foreign investors. Most foreign companies involved in local manufacturing and practically all associations with large companies are organized under joint-venture agreements. This is due to the fact that the joint venture often results from a negotiation process with large state entities and is often the only possible way to access the Romanian market. Also, potential Romanian partners do not represent a continuum of size and types, but are rather polarized between large state complexes and small private entrepreneurs, reflecting the lack of medium-sized local companies, either private or public, and usually the previous lack of any competition. The short-term advantages of joint ventures (quick market access by taking over existing installations) could theoretically be outweighed by long-term drawbacks in terms of management efficiency and freedom. However, joint ventures provide some unquestionable advantages. The knowledge of the local business culture, whether on the market or administrative sides is critical. Having the right partner may considerably speed up and ease the process of creating and developing optimal local business. Tax advantages for joint ventures are another frequent expectation of Western managers. These tax advantages are linked to bringing foreign capital into Romania, as tax laws provide tax relief for both joint ventures and wholly-owned foreign subsidiaries. Steps to Establishing an Office - Procedure for Company Incorporation Foreign companies have numerous options available for organizing business operations in Romania. Representative offices: Foreign corporations are entitled to set up representative offices in Romania. While representatives cannot enter into commercial contracts on their own, they are entitled to enter into contracts on behalf of their parent organizations. Establishing a representative office with the Ministry of Commerce, Department of Foreign Trade, is a straightforward matter. A nominal fee is levied and general information must be provided on the name of the office, its intended activities, and the name and address of the individual trade representative(s). Applications for representative status should be accompanied by the following: -- Documentation from a Chamber of Commerce or other official body of the country where the company opening the representative office has its headquarters, indicating its legal existence, activities, and registered capital; -- Confirmation of financial stability from the representative's principal banker; -- Statutory or other documentation indicating the nature of the company's activities, its organizational form and its operations; -- A notarized mandate for the individual or individuals appointed to act as trade representative(s). Branches and subsidiaries of foreign companies: A foreign corporation can carry out business in Romania through a subsidiary or a branch. Law No. 105/92 on International Private Relations adopts the accepted international practice by which a corporation is governed by the law of the jurisdiction of its incorporation. In Romania, the branch of a foreign company is subject to the national law of the parent company. Legally, the branch has no separate status from the foreign company itself, it is merely carrying on business in Romania. The foreign company will be liable to the employees and creditors of the branch for the actions of, and debts contracted by, its managers and agents on behalf of the branch. In contrast, the subsidiary of a foreign company in Romania is a Romanian legal entity and, consequently, it is subject to Romanian law. It is liable on its own behalf for the actions taken by its management. Subsidiaries and branches can carry on only the activities for which the parent company is chartered. The registration procedures for subsidiaries and branches are not expressly regulated by the legislation on commercial companies. In practice, subsidiaries are established following the steps of registering the commercial companies. The establishment of a branch follows the same steps as that of a subsidiary, but no Court decision authorizing the functioning of the branch is necessary. In order to establish a branch, a foreign investor should submit an application to the Romanian Development Agency. This application must be accompanied by: -- A notarized copy of the articles of incorporation of the parent organization; -- Evidence of registration of the parent company in its country of origin; -- Documentation indicating the firm's financial stability; -- The decision of the parent company's administration board or similar authorized body for establishment of a branch abroad. This decision should indicate the type of activity of the branch, the individuals appointed by the parent company to act on its behalf and the confirmation of the parent company that the acts of its representatives are legally binding on it. Assuming the branch is accepted, it must then be registered with the local office of the Commercial Register. The establishment of a subsidiary must comply with the minimum capital requirements in the company law, while the branch will need to have a minimum 100,000 lei, deposited in hard currency. Commercial companies: As in other industrialized countries, commercial enterprises may be formed in Romania as separate legal entities. This means they operate in their own right and are distinct from their shareholders and managers. Organizations have their own names, management, head office, and places of business. Corporations established in Romania are legal entities subject to Romanian law. Company Law No. 31/90 authorizes and defines five forms of commercial enterprises: general partnership; limited partnership; limited liability companies; joint stock companies; and limited joint stock companies. The most commonly used forms of business organizations are limited liability companies and joint stock companies. All commercial enterprises must be registered with the Commercial Register of the Romanian Chamber of Commerce; they take on separate legal status beginning with the date of this registration. The Commercial Register is an organization mandated to maintain statistical information on business activity in Romania. It also ensures that trade names, for example, are not duplicated. All forms of commercial enterprises, whether partnership, limited liability, or joint stock companies, must publish their financial statements annually in the Official Gazette. This requirement is currently under review. Currently, the majority of corporations registered to do business in Romania, whether domestic or foreign-owned, are limited liability companies. A limited liability company is known as an S.R.L. (Societate cu raspundere limitata). A limited liability company is a corporation that issues share capital to a limited number of shareholders. Shareholders can be as few as one but cannot exceed 50. The registered capital of a limited liability company cannot be less than 100,000 lei, of which no more than 60 percent can be contributed through assets in kind and the balance in cash. At present, capital contributed by a foreign investor is converted to lei at the prevailing market exchange rate in effect at the time the capital is contributed for accounting purposes only. Companies may maintain bank accounts in foreign currency. The registered share capital of a limited liability company is normally divided into shares with a registered or par value of not less than 5,000 lei. Shares cannot be freely traded, making limited liability companies similar to what are known as private companies in other jurisdictions. Shares of these companies cannot be pledged as collateral for loans. A joint stock company is a limited liability corporation with registered capital of a minimum of 1 million lei and with at least five shareholders. Share certificates may be issued in bearer form or may carry the name of a particular shareholder. The nominal or par value of the individual shares should not be less than 1,000 lei. A joint stock company may be set up privately or by public subscription. Joint ventures: Joint ventures in Romania are not separately regulated by Romanian law. The term "joint venture" is a common-used term to describe any of a number of forms of economic activity with international investment, including: -- a joint stock limited liability company with shareholders by both Romanian and international investors; -- a partnership of two or more companies or individuals, including international investors; -- a contract for production using imports with some type of production sharing (also known as a cooperation agreement). Company Incorporation Procedure The procedure for company incorporation includes the following main steps: -- Confirmation with Romanian Development Agency for investment registration, as well as with Private Ownership Fund and State Ownership Fund in case state owned companies are involved; -- Notarization of the contract and statute of the company with the local public notary; -- Opening bank account in the name of the company and depositing the statutory capital; -- Local Court's decision authorizing company's establishment; -- Publication of the Court decision authorizing company establishment; -- Registration of the company with the Commercial Register; -- Registration of the accounting books at the local taxation office; -- Obtaining the Investor Certificate from Romanian Development Agency. In practice this process can be very tedious and takes an average of six weeks. Selling Factors/Techniques Quality, price and payment conditions are the most important factors in determining who will succeed in concluding business in Romania. The Romanian market, like all former East- European markets, is cash poor - although Romania's low foreign debt situation may stand it in better stead than its neighbors. A company's willingness to entertain long-term credit arrangements, barter transactions and such concepts as processing contracts will put it in a better competitive situation vis-a-vis others interested in doing business in Romania. Most germane to the Romanian industry, a considerable part of the equipment and technologies now in place is European in origin, purchased in the sixties and seventies. U.S. companies will recognize that if competition's products are already in place, no matter how old, that competition may have the advantage when it comes to rehabilitation or replacement. Again, price, payment conditions, and service can offset such effects. Advertising and Trade Promotion Accompanying Romania's change to a market economy has been notable growth in the advertising field. Key aspects of this growth include: increased quantity and quality of media; and the development of professional advertising agencies and related services, some of them American. Television is the predominant media followed by radio, press, outdoor advertising and movie advertising. Television includes: TVR, the state-owned national network with 100 percent reach; Canal 2, the second network (40 percent reach); Canal 31, a Cable News Network (CNN) Bucharest-based rebroadcasting facility which accepts local advertising; and several small independent television stations in major cities. Radio is also important. There are three national state-owned AM radio networks which can be characterized by their target audience segment (popular, cultural and youth). In addition, there are a number of FM stations in Bucharest and other major cities which have a broad audience appeal. The press includes both newspapers (daily and weekly) and magazines. Over 60 percent of the population is reported to read one or more newspapers a day. There are about 10 national dailies, several of them have established their readership based on political philosophy (such as Romania Libera, the opposition newspaper); others are mass-market newspapers (such as Evenimentul Zilei, the most read periodical), or sport-oriented newspapers. There are also daily and weekly newspapers published in the major cities. Specialty publications (i.e. sports, business, entertainment and family) are a major aspect of the weekly newspaper and magazine segment. Movie advertising is a rapidly growing form of advertising as it allows a high quality message to be delivered. Additionally, outdoor billboard advertising is growing rapidly and becoming more sophisticated. Billboard locations are multiplying and simple painted billboards are being replaced by backlit models. Advertising on public transportation vehicles is also common. The advertising agency industry is experiencing rapid growth of both branches/local representatives and domestic agencies. Notable agencies with international affiliation include: BBDO/Graffiti; DMB&B/OFC; Grey; Ogilvy & Mather/Premiera; Saatchi and Saatchi/BBB Centrade; and Young and Rubicam. Notable Romanian agencies include Plus Advertising and Rom KU. Specialized services, such as market research and market testing are available from independent suppliers (IRSOP and IMAS) as well as established institutes (Institute of World Economy and Romanian Chamber of Commerce and Industry). However, experienced companies and people in marketing studies are very rare. For production, there are some independent facilities (Domino and Magnum) as well as the in-house operations of the major agencies. The best known business newspapers and journals in English are the following: -- Romanian Investment Review (bi-monthly, summary of trade and investment information). Publisher: Romanian Development Agency (RDA); -- Investment Guides. Publisher: RDA; -- Romanian Law Digest (translated legislation). Publisher: RDA; -- Quarterly Bulletin (economic, financing, monetary and credit trend information together with statistics of the National Bank). Publisher: National Bank; -- Romanian Insights. Publisher: Romanian Chamber of Commerce and Industry. -- Romanian Business News (11 issues per year). Publisher: Cosmos Development SRL, Bucharest. Other publications in English are: Romanian Economic Newsletter (published quarterly in the USA to report on and analyze Romanian economic developments); Nine O'Clock (Bucharest daily); Business Central Europe (published monthly by the Economist Newspaper Group, London); Balkan News (a weekly newspaper published by Balkan News in Athens). Pricing Product Motivated by desires to control the pace of price inflation, to limit immoderate markups by monopolies and to ease the costs of adjustment to new price levels, the policy of gradual price liberalization promoted by the government proved difficult to implement. There have been six episodes of price liberalization since October 1990 involving different areas of goods and services, distinct price rules, and often accompanied by changes in exchange rate levels. During the first stage, after the revolution, the prices of raw materials and intermediate goods remained subject to control, while some consumer prices were progressively freed. Different rates were thus enforced in different sectors and activities. Each "liberalization" episode was soon overtaken, however, by changes in pricing rules creating an uncertain environment for enterprises, redistributing income in arbitrary ways, and masking the profitability of state enterprises. In the presence of inconsistent macro-economic policies, these "liberalization" episodes both contributed to, as well as were affected by, very high inflation. In May 1993, the number of goods for which subsidies were being provided was dramatically reduced. This action was accompanied by the elimination of government control on sales margins, and the elimination of advanced price increase notification. Further, by March 1994, price controls on meat were eliminated, and only the prices of goods and services provided by public utilities (i.e. energy, railways), state procurement prices on some agricultural products, housing rents, and the prices of bread and milk remained administered. Therefore, currently, price controls apply exclusively to a limited number of products manufactured by state-owned companies. These limits do not apply to the sales of other companies and, consequently, freedom in pricing products is secured. Sales Service/Customer Support As already mentioned, finding good local partners is a matter of careful effort. The lack of good local service companies is also a problem. However, with suitable training this problem can be satisfactorily solved. The lack of exposure to Western practices in the past has left a legacy of indifference to after sales service. U.S. companies should pay attention to ameliorating these attitudes in their operations. Selling to the Government During the first years after the revolution many foreign companies avoided dealing with local state-owned firms. However, they may be the only possible partner or customer in some branches. Although the Western manager should know that bureaucracy and corruption still exist, it is apparent that local authorities are as a whole anxious to collaborate with foreign companies and that the current changes in the legal framework generally are going in the right direction. In those industries considered as "strategic" by the Romanian government, such as natural resource exploitation and essential basic industries and infrastructure, the American Embassy can be helpful in providing contacts and making introductions. Protecting Your Product from IPR Infringement (See Protection of Property Rights under Investment Climate below) Need for Local Legal Assistance Company incorporation, as well as conflicts resulting from possible late payments, debt recovery and bankruptcy might generate the need for local legal assistance. The situation of legislation passed in this respect is of interest. -- Late payments and debt recovery: The transformation of the state-run economy into a market economy has seen a tendency for some enterprises not to pay their debts on a timely basis. As a result, a regulation has been introduced specifying that invoices and other agreed-on amounts unpaid within 10 days of presentation or at the specified due date will incur interest at the rate of 0.15 percent per day (54.75 percent per year). Romania's civil law for contracts is set out in the Civil Code, which follows closely the French civil code, and the Commercial Code, which is modelled on the Italian commercial code. Generally, the specialized body of law, the Commercial Code, would have precedence over the general body of law, the Civil Code. The existing body of law covers the areas of title and pledging title, protective creditor remedies, and debt recovery. Romanian law recognizes the existence of mortgages for immovable property and pledges for movable property. Thus, assets can be pledged as collateral for loans and as guarantees. To assist creditors, Romanian law provides for various remedies to protect their interests, including: the right to revoke sales agreements (Action Paulienne), summary actions to limit irreparable damage, and possessory liens (permitting vendor to withhold delivery of goods for which satisfactory payment terms have not been negotiated). Debt recovery alternatives include property attachment (attachment of movable property for sale to satisfy an acknowledged debt), "action oblique," (the right for a creditor to recover funds on the receivables of an inactive or negligent debtor), juridical debt recovery (seizure by court order of assets to satisfy a due amount), and forced execution (seizure of collateral to satisfy debts). -- Financial discipline and bankruptcy: As part of the restructuring process, certain large enterprises with financial and other problems are now under a regime of financial discipline. The regime, under coordination of the National Commission for Restructuring, involves limits on their abilities to incur debts as well as a requirement for development of a plan for restructuring or dissolution through bankruptcy. New bankruptcy legislation, as part of restructuring and for operation of a market-based economy, is expected to be finalized by the end of 1994. The draft law provides for creditors to be able to petition insolvent companies into either a process of economic reorganization or liquidation. In the interim, a governmental decision provides for a form of bankruptcy; this decision has been used for several government initiated bankruptcies. Legal assistance has improved considerably during these last two years. Law firms, including some well-known American ones, are available in Romania.