ESIS Oct 2000

Following Report published by U. S. Department of Commerce - June 22, 2000

SUMMARY

The Romanian personal computer market is expected to grow at a compound annual rate exceeding 17% over the next five years, and is expected to reach $130 million by the year 2000. Given the virtual lack of computerization before 1989, the greatest demand has been from governmental bodies, public corporations, banks, and some state-owned companies benefiting mostly from sponsorship of the international financial corporation (World Bank, EBRD, Phare).

The Romanian market is supplied by system integrators with brand local names that have covered almost 53% of the computer sales registered in 1996 and by imports of computer parts and brand name units (estimated at 40% of the market). The most promising subsectors within the sector are Internet equipment and software -- the Internet market registered an explosion, users increasing by about 200% a year, computer parts and peripherals, local area networks, and wide area networks.

U.S. exports in this sector decreased in the past two years because of the unfavorable customs duties applied to U.S. products following Romania's association with the EU and the CEFTA countries.

Starting March 1, 1997, Romania became part of the Accord on Information Technology signed by 36 countries at the World Trade Organization meeting in Singapore, December, 1996, which refers to the liberalization of the trade on five categories of IT products: computers peripherals and parts, telecommunication products, semiconductors and equipment for semiconductors manufacturing, data storage products and software, and scientific equipments. The custom taxes on these products will be gradually eliminated by January 1, 2000.

Since Romania is not actually a producer of these type of products, and because E.U. products are already exempt from custom taxes, it is expected that the Romanian government will consider the elimination of the custom taxes on these products prior to the year 2000.

American products are highly regarded and Romania is a fast growing and knowledgeable market with highly skilled personnel. The privatization and restructuring program drafted by the Romanian government is directed towards retechnologization of the industry which is a perfect market for industrial automatization industry.

A. MARKET HIGHLIGHTS & BEST PROSPECTS -- Market Profile

Since 1989, the computer market has developed at an extremely fast pace in Romania as a result of the development of a market economy, the increasing numbers of private and foreign companies, as well as the highly skilled work force in Romania. These factors and the large size of the Romanian market, 23 million, have determined the attractiveness of the market to local and foreign investors. The private sector now represents 50% of total GDP and is a large reason for the growth of the computer market in Romania.

In spite of these positive factors for investment, registered foreign investment in Romania has not kept pace with expectations. Since 1989, there has been only $2.4 billion of foreign investment. The cautious attitude on the part of foreign investors reflected uncertainties over the political stability of the region, concern over copyrights and intellectual property rights which, despite the fact that Romania is a signatory of international conventions on property rights and copyright, legislation was not in place until mid-1996, and the investors fear of inadequate return on investment determined by relatively high inflation and severe currency devaluation.

Most of the foreign capital was directed towards local importers of equipment, components and parts which received exclusivity rights to distribute brand names on the market (S&T - Hewlett-Packard, Total Technologies - Packard-Bell, RBS - IBM, RomSys - Sun Microsystems, and MBL, a 10-year franchisor of Computerland). Some companies like Digital Equipment and Intergraph opened representative offices subordinated to their EU headquarters. In 1996, Oracle and IBM opened offices in Romania. IBM decided to purchase their distributor, RBS, and officially open their office in 1996. In 1997, Hewlett Packard opened a representative office in Romania.

Several other companies used foreign capital to increase the quality and quantity of their computer components for local assembling production lines, and for the development of computer networking systems.

The well-known market research company, IDC, prepared a study on the Romanian PC market and reported an increase in the Romanian-installed base of PCS by approximately 11% in 1995, and estimates a projected growth of the market at a compound annual growth rate exceeding 17% over the next five years. At the end of 1996, in Romania had been installed 168.518 PCS (one computer at 130 inhabitants), of which 50.960 were installed in 1996. The cost for the PCS installed in 1996 were about US$78 mil, that is about $3,5 per inhabitant. Omnilogic-BGS, the major distributor company in the area, estimates the 1996 Romanian market for personal computers and related hardware and software to have reached approximately US$60-70 million. The value of the Romanian market for computers, the IDC report says, is expected to reach $130 million by the year 2000.

75% of the foreign software industry in Romania is controlled by U.S. companies. Romania has been a haven for software pirates for years. The Business Software Alliance (BSA), an association of the most important companies producers of software in the world (Microsoft, Novell, etc.), estimates that roughly 93% of software used in Romania is pirated. Until the enactment of Romania's 1996 Copyright Law, Romanian law offered little in the way of protection for software developers. Furthermore, penalties for counterfeiting were relatively small and foreigners trying to take action against software piracy had to do so under local laws. Under such legal indifference, pirating prospered as Microsoft and other foreign and software manufacturers stayed out of the Romanian market. A BSA study found that software manufacturers suffered over $20 million in lost retail revenue from the Romanian market due to piracy in 1995.

The present Copyright Law attempts to modernize the current protective regime and bring it closer to current European Union and World Trade Organization standards. Most copyrighted works, normally protected under the laws of EU countries, are covered under the law. The law provides for tough criminal sanctions for violators of copyright protections, such as prison terms of up to 3 years plus fines of up to 7 million lei. The Courts are also given the right to order the confiscation and destruction of illegal copies of protected software, and the equipment used to make such copies. The Law also foresees the establishment of a Romanian Copyright Office whose function will be analogous to the State Office for the Patents and Trademarks.

As result of the BSA campaign against piracy, the software piracy was reduced significantly in 1997. Over 74% of the systems sold in 1996 had license. The best sales were Microsoft products and Novell for the network market.

Romania's software export was $10 million in 1996. It is predicted that in 2000, Romania's software export market will be $30 million.

Best Sales Prospects

From a total of 40,545 units sold by the end of 1995-- IDC report, only three companies -- of which two were Sprint and IBM distributors -- declared more than 3000 units sold. At the end of 1996, seven of the above-mentioned companies reported to have sold more than 3000, and the other seven more than 1000 units. Regarding the quality of the units, the top four microprocessors sold in 1996 are: PC 486/DX5/133MHz, with 4-8 MB RAM, and HDD 540-850; PC5x86(Cyrix/AMD)/133MHz, 8 MB RAM, HDD of minimum 850 MB; PC Pentium/100-133MHz, 8-16 MB RAM and with more than 1.2 GB HDD.

It is expected that the market for office-use equipment to decrease slowly in the following years with a percentage that will not be covered by the SOHO (Small Office Home Office) market, which will determine a decrease of the local producer market revenue for the first half of 1997. Local companies are interested in finding new markets for its products.

Long - term estimations indicate that the PC sales will continue to increase at an average rate of 11% per year, being expected to reach 80,000 PC desktop units in 2001, 2820 portables and 3304 servers. Printer sales will continue to increase at an average rate of 7,6%, being expected to reach 340,000 installed units in 2001.

B. COMPETITIVE ANALYSIS

Domestic Production

The Romanian market is supplied by both imports and by system integrators, several of them with the status of original equipment manufacturers (OEMs), most of them combining the computer assembling with distribution of computer parts activity, wholesalers of brand names, sales and distribution channels by the vendor, direct sales by the distributor and indirect sales by the dealer/reseller and value-added-resellers (VARs).

A recent study published by ComputerWorld Romania (a Romanian publication of International Data Group) on Romanian producers of PCS anticipates that the prognosticated IDC annual growth rate of 17%, has been exceeded by the local assemblers and producers. The IDC survey estimated for 1996 that 53% of the sales will be covered by local brand names, 40% by brand names, and approximately 7% by no names.

The vendor market share of shipments of PC's in Romania, 1996 was:

Flamingo's Executive Manager underlined that the Romanian computer market is in its emerging state, computer firms have no history and a good management or marketing could change relatively easily the existing classification.

Because of the standardized technologies and the availability of components from system integrators and/or distributors, entry into business has been relatively easy, and small system integrators accounting for around 7% of the market (IDC study), constantly enter and leave the business.

3rd Country Imports

The Romanian market presented a high interest to the Asiatic companies interested in expanding their export markets towards the Central and Eastern European countries. Considering the relatively cheap and highly skilled labor force, and the geostrategic position of Romania, several Taiwanese and Singapore companies established joint ventures starting in 1991, beneficiating from the exemption on profit taxes and custom taxes the Romanian legislation offered to foreign investments.

U.S. Market Position

American investments were directed towards joint ventures with local distributors mostly as financial support to increase their presence on the market. Logic Telecom and MBL, both American-Romanian joint venture companies, became franchisors for Sprint and respectively Computerland. Romanian Business Services initiated promotion of IBM products and registered 7.4% of the market in 1995. In order to enlarge the range of IBM products offered to the Romanian market -- hardware and software, IBM decided to turn RBS into their representative office in Romania. Compaq, Sun Microsystems, Salient, continue to use the distribution channels to sell their equipment to Romanian market. Oracle also opened an office in 1996 as did Microsoft for its software products. Hewlett Packard recently opened an office in Bucharest.

The interest of representative offices of well-known American manufacturers such as Digital Equipment, IBM, Intergraph, as well as authorized dealers for American equipment S&T for Hewlett-Packard, Salient for Salient International, Scop for Compaq, Romsys and Datasys for Sun Microsystems, and Total Technologies for Packard-Bell was directed towards international financed restructuring and rehabilitation projects on transportation, energy, health, and banking industries.

U.S. exports of computer equipment and parts dropped by 10.82% in 1996. Romanian manufacturers and distributors, after the Romanian-EU trade agreement was signed in 1995, directed their imports towards the EU countries in order to be able to compete with the equipment assembled in Romania by the Asian investors.

In order to develop their activity and assure the quality of their equipment, the local assembling companies, are importers of Intel, Cyrix, AMD Seagate, Western Digital, and Quantum components directly from the producer or indirectly from wholesalers of computer parts. Despite the high custom taxes imposed on American products, 10-15%, as against 0% for European products, which are exempt from custom taxes, local assemblers are interested in importing from the United States because of the high quality of the products. Of benefit for the local production was the logistic support offered by the American OEMs which is absolutely necessary in developing professional systems.

On the other hand, Romanian companies with exclusivity rights, continue to import equipment and parts from US or from their production facilities in Europe. Several of them complain of the custom taxes barrier which increased the price of the equipment and determined unfair competition with those with production facilities in Europe.

C. END-USER ANALYSIS

Most of the rehabilitation and restructuring projects on transportation, energy, health, banking, custom, financed by international financial organizations undergoing in Romania have an IT component. It is expected that the local production companies will look into this market controlled by the representative offices of brand name hardware companies. Their advantage is usually the price, the knowledge of the market and the maintenance and consulting services they could offer. The IDC study remarked that up to 54% of PC sales went through indirect channels (dealer/resellers and value added resellers), 27% from the vendor, while only 12% were sold to end-users by distributors. In 1996, 25.70% of PC were sold to governmental organizations, 22.70% to finance/banks, 15% to offices with less than 10 employees, 14.80% to small and medium companies (11-499 employees), 13.30% to private persons, 7.50% to big companies (more than 500 employees) and 1% to education.

Some of the end users in Romania are: Romanian Government, Romanian Presidency, Romanian Parliament - Chamber of Deputies, Ministry of Defense, Ministry of Finances, Ministry of Research and Technologies, National Commission of Statistics, National Bank of Romania, National Authority for Railroads, National Authority for Electricity, etc.

D. MARKET ACCESS

Import Climate

The Government approved Romania's List of Tariff Concessions for information technology products, agreed upon under the aegis of the World Trade Organization during the negotiations on the trade in information technology products.

Accordingly, as of 31 December 1997, Romania will gradually reduce import duties and eliminate the commissions charged for customs operations for information technology products.

The following products fall under the above-mentioned provision: computers, printers, scanners, monitors, etc., products for telecommunications, including telephones, fax machines, modem, electronic components, equipment and scientific devices for the manufacture of electronic components.

In order to achieve an information society in Romania and to prepare the joining to the European Union and NATO, the Romanian Government has adopted a Government Decision no. 308/23 of June 1997, concerning the National Strategy of Informatization, which stipulates that the most important strategic target of the social and economic development is the speeding up the creation of the national information infrastructure and nominates National Commission for Informatics (CNI), the ministries, other central organizations involved and the Romanian National Bank to accomplish the national strategy for informatization and fast implementation of the information society and the Program for actions concerning the utilization on a large scale and the Romanian area for IT.

The elaborated strategy suggests the following global objectives:

Short term evolution (until 2000):

Creating a national information infrastructure as a support for the central and local public administration's informatization. Creating a positive context for using in the industry, trade agriculture, tourism, health, environment's protection, education, research and culture on a large scale the information and communication's technologies and the adapting to the European Union's measures.

Medium and long term evolution (until 2005):

The Information infrastructure's extension. Reaching an informatization level which should allow the integration in the European information society.

From an estimated number of 40 local producers, approximately 56% have registered their products with the State Office of Inventions and Trademarks (OSIM), and from these fourteen have 86% of the local production and have received Safety Certificates. The Romanian Center for Consumer Protection has authorized state-owned laboratories to conduct the tests for different types of products. The safety regulations apply to computers (both desktop and notebook), monitors, printers, electronic consumer equipment and electronic parts. The first stage of the certification process tests for electric safety and radio electric interferences.

CNI considers that an important role should be played by the software production and export, which has to be supported by a series of fiscal measures, the conclusion of strategic partnerships and the attraction of strategic partners to the cofunding of some projects of national importance. CNI has also elaborated a draft law on the development and utilization of the information technology which stipulates the free access to information, the protection of persons against the processing of the data with a personal character, as well as the legislative framework necessary to the development of the electronical trade. The draft law also stipulates the setting up of the Department for the Information Society and of the Romanian Informatics Authority, as well as the budget allotted to support the national projects in this domain.

Distribution/Business Practices

In entering the Romanian market, a US company should be aware that local companies usually lack capital to become only distributors of US products. Joint ventures and or other forms of cooperation can be recommended.

The IDC study remarked that up to 54% of PC sales went through indirect channels (dealer/resellers and value added resellers), 27% from the vendor, while only 12% were sold to end-users by distributors.

Financing

The safest method to receive payment for a U.S. export is through an irrevocable letter of credit (L/C). Banks in Romania require the importer to deposit funds prior to issuance of an L/C. Typically, L/C's are opened for a period to cover the production and shipping, and are normally paid within seven working days of the receipt of the goods. Cash payment or down-payments provide an extra measure of security for sales to new customers.

Key Contacts

Computer Publications in Romania

Major Local Distributors:

Most of the Romanian computer assembling companies have divided their activity between system integrating and distribution of computer parts.

Local PC Assemblers

American representative offices and dealers on the Romanian market

International Players.

Few international players have invested much to develop the Romanian market, most international manufacturers have appointed distributors.

Software representative companies and distributors:

Printers:

Demographics & Economic Situation

Source: Factbook.net

Source: U. S. Department of Commerce - National Trade Data Bank, June 22, 2000