Friday, August 24, 2007

Romania: Logistically Speaking

Oxford Business Group Latest Briefing

Last week a Romanian trade delegation led by Ovidiu Silaghi, minister of small and medium enterprises, commerce, tourism and liberal professions, visited Dubai to discuss ways of enhancing co-operation between the two countries. Among the delegation's top priorities was attracting further investment in Romania's transportation and logistics industry.

While the logistics sector does not attract the kind of media attention that manufacturing, IT or financial services do, many analysts are touting it as the next big thing for Romanian investment. Recently, European logistics players have been announcing, on a regular basis, plans to invest in massive logistics centres throughout Romania.

This influx of attention has several origins. First and foremost on many logistics companies' minds is the fact that the Romanian economy is booming. Steady increases in wages have fuelled higher personal spending and have caused strong growth in the retail industry. This has translated into significant increases in shipping, trucking and other forms of transportation.

The entry of major corporate retailers has also had a marked effect. While small local stores can rely on local distributors, big players like Carrefour, Auchan and Ikea - which have all moved into Romania in the last few years - require national distribution chains that can deliver everything from razors to mangoes on a day's notice.

Retail's effect on logistics is fairly straightforward. Consumers are aware that the mango they buy at their local grocery store was probably not grown next door, and that ships, trucks or planes were probably involved in delivering that mango to the store.

What is less clear to many is the vast and often complex networks that enable the making of their automobiles, mobile phones or other manufactured goods. The globalised economy has made manufacturing in many countries more assembly oriented than pure manufacturing. Goods produced in Romania often have parts that were made in China, Western Europe and other far flung corners of the world. While this practice lowers costs, it also increases the importance of logistics operations.

Fortunately, Romania is well situated between Asia, the Middle East and Western Europe, as well as on important waterways that facilitate such operations. This is one reason why manufacturers such as Renault, Nokia and Ford have flocked to Romania and why many logistics companies are eager to enter the country.

While internal demand for logistics and transport is soaring, the country is also a prime target for regional distribution centres. Logistics companies see Romania's location, strong ports and strong manufacturing base as an opportunity to service not only the country itself but also the broader region. Companies such as DHL, Belgium's WDP and other major international players have already invested millions in trucks, warehouses and land.

The promise of future EU funds only increases Romania's potential. The country's transportation infrastructure is notorious for underdevelopment. Unlike major roads in Western Europe, few in Romania have more than one lane in either direction. Romanian railways are in equally poor condition, with speeds often averaging below half of what is common in Germany or France.

With over $10bn in EU structural funds expected to go towards infrastructure upgrades, logistics companies are seeing Romania's infrastructure problems in a new light. Many have said they believe that if they make investments now, they will have a greater say in where and how the government spends the EU funds.

This week's negotiations in Dubai speak to what foreign investment and infrastructure upgrades can accomplish. In April 2004 - after similar high-level meetings - Dubai's DP World took over management of the port at Constanta, which was infamous for underperformance and dilapidated infrastructure. A year later, volume had increased by more than 450%. Now the port, which DP World intends to further improve, is one of the premier ports on the Black Sea and a key connection for Eastern Europe to the wider world.

At a meeting held last week, Salma Hareb, CEO of the Jebel Ali Free Zone, which is owned by Dubai World, told the Romanian delegation, "Dubai World [has] already demonstrated our commitment towards Romania through the key investment and ongoing developments in Constanta Port [..] and we are very keen on working with Romanian government on developing an integrated logistics infrastructure platform to establish Romania as a major hub for the Eastern and Central Europe."

This is exactly the sort of investment Silaghi and other delegation officials would like to attract to Romania. Big foreign players such as DP World offer more than deep pockets. The experience they can offer is what Romania needs to become a thriving regional logistics hub.

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