AmCham Bulgaria Director Valentin Georgiev: Bulgaria Can Attract US Outsourcing with Highly Educated LaborBusiness |Author: Ivan Dikov | December 10, 2010, Friday // 12:33| views
Exclusive Interview with Valentin Georgiev, Executive Director of the American Chamber of Commerce in Bulgaria (AmCham Bulgaria) for the Bulgaria-US Survey of Novinite.com (Sofia News Agency)
How would you characterize the general structure of investments by US companies in Bulgaria (i.e. by sectors, size, social impact, etc)? - by sectors, volumes? In terms of economic sectors, which sectors in Bulgaria harbor the greatest potential for attracting new large-scale investments from American companies? Where can the next large US investment in Bulgaria be expected?
I would like to point out three "hit sectors" with substantial US investments in Bulgaria which also harbor an even greater potential.
Let's start with energy. Of course, the AES corporation is the first to come to mind with its largest greenfield investment in Bulgaria and perhaps in Central and Eastern Europe - the Galabovo Thermal Power Plant in the Maritsa East Complex.
AES is not just developing the "classical" energy with Galabovo, it has gone further by investing into renewable energy with its wind power park St. Nikola. Its investment in a photovoltaic, or solar power park near Silistra is now on standby but when it is realized, it will add another EUR 300-350 M to AES's total investments in Bulgaria already amounting to about EUR 1.3 B.
As far as American companies are concerned, the energy sector has a number of other interesting aspects, which, one can say, are connected with the new policies for fighting climate change through green technologies proclaimed to be a priority by US President Obama.
So renewable energy and energy efficiency in Bulgaria harbor a great potential for American investors. The next step from here is green construction and green buildings.
The first two green buildings ever built in Bulgaria – which are the first of their kind in the country in terms of their concept – have been American investments.
The first one is the new US Embassy building complex, which is the first US Embassy in the world with a green building, and which features LEED certification. Then, there comes the Sofia Airport Center by Tishman International which features the first office building in Bulgaria with a LEED certificate. .
The Americans have a lot to offer in terms of green construction, and their investments in infrastructure will focus in that direction because they will be incorporating innovative green technologies. So here we can see this connection – from energy to renewable energy and energy efficiency to green energy – as a major field of American investments in Bulgaria.
The third economic sector which has been a leading sector for US investors in Bulgaria is IT. It has developed in the past few years, and has brought to the forefront one of Bulgaria's competitive advantages – its potential in terms of outsourcing and off-shoring.
The conference on Bulgaira's outsourcing potential that AmCham Bulgaria organized in November 2010 – that your readers read about – attracted 300 delegates from many foreign companies, including companies whose representatives came to Bulgaria for the very first time to study the outsourcing opportunities here.
Of course, the emblematic examples of American investments in IT and services outsourcing in Bulgaria are Hewlett-Packard, IBM, Microsoft, Cisco. But there are also a number of other companies that are smaller in scope but are also very important.
I should add immediately that there is one very important American company in Bulgaria which is also in the manufacturing sector. For some reason – I am not sure why – its investment in Bulgaria has not attracted much media attention.
This is Johnson Controls. Johnson Controls produces all kinds of dashboards and electronic systems for cars. They employ 500 people, engineers in Bulgaria. You can imagine what this means.
If more companies like Johnson Controls come to Bulgaria, this will be a key indicator that it is indeed a rather attractive outsourcing destination.
Usually, when we talk about outsourcing by HP or IBM, we are thinking about how many software engineers they will employ. But in the case of Johnson Controls it is also about hardware engineers.
Of course, the IT includes telecoms as well – or ICT, information and communication technologies.
What other major sectors in Bulgaria have attracted the attention of US companies?
I would like to stop here with these three sectors – energy, green building and infrastructure, and IT – with respect to the most important US investments in Bulgaria.
This is not to say that we don't have American investments in the other sectors such as real estate or tourism, for example, but those are not of such a large scale. We are focusing on these three sectors for one very simple reason.
About a year ago when the new Bulgarian government came to power, we at AmCham Bulgaria presented to them our activities, and our analysis of the framework of foreign direct investment in Bulgaria. One of our recommendations was that the government determine several priority sectors.
Of course, we are not underestimating the fact that the market forces will determined where Bulgaria is economically strong, and we are not saying that by declaring some sectors to be of high priority, the government should be neglecting other sectors, such as agriculture, for example.
But Bulgaria needs to outline a few priority sectors so that when foreign investors look at it, they would know how to place the country on their investment map.
The scale of the Bulgarian economy is small enough for us to claim that we can do it all.
Even if there is enough potential in all sectors – which is probably true – in any case, we do need to provide some kind of benchmarks for foreign investors. That is why we think it is important to focus on the sectors I just mentioned.
What is needed on part of the Bulgarian government to boost the country's chances for attracting more US investments in the sectors you mentioned – energy, IT, etc?
I should point out that when we presented out views and analysis to the new government, we went into further detail about each of these three sector, and we also place additional focus on attracting outsourcing.
In the energy field, we have a working group of some 30 companies, including firms that are not members of AmCham Bulgaria, which has been working rather vigorously on the new Renewable Energy Act.
We have had a very profound, ongoing conversation with the Bulgarian government on this topic, and our interaction about the law on renewables has been like a sinusoid. At first it started very well, then things dragged on as differing views appeared. But I think that we are now on the right track.
I think we have managed to achieve a good consensus between what the government wants to achieve in terms of its own goals in the field of renewable energy, and what we would like to see happen in order to make the sector more friendly for investment. We expect the Bulgarian Parliament to vote and adopt this very important law shortly.
What does this consensus with the government on renewable energy regulation entail?
It is about the fixed price rates for electricity once a new power production facility is connected with the grid. I am really not a specialist on these issues but I will stress we have seen the positions of AmCham and the government converge.
One question that is raised constantly is whether the power grid of the Bulgarian National Electric Company NEK can sustain the new electricity production capacities from renewable energy sources.
It seems pretty certain that the NEK grid won't be able to handle the electricity produced from all new renewable energy facilities.
This is where we ask what the EU funds are there for – because they should be used to fund the modernization and expansion of the Bulgarian power grid.
When it comes to infrastructure and the EU institutions in Brussels view that conservatively, we can attempt to modify this framework by demonstrating that the power grid should also be seen as part of Bulgaria's infrastructure, and that it should therefore be entitled to receiving EU funds.
First, this will help it handle and sustain the electricity production and transit, and second, it will allow Bulgaria to export and trade with electricity.
However, this has been a stumbling block, and there are still talks going on about how to channel funds into the modernization of the power grid owned and managed by NEK.
How would characterize Bulgaria's potential to attract large-scale outsourcing – from the USA, for example?
As far as Bulgaria's outsourcing potential is concerned, it is very important that we have managed to get that issue on the government's agenda since encouraging the efforts to attract outsourcing was not even part of the program of the new government at first.
We at AmCham have succeeded in providing strong arguments in our talks with the Cabinet about how and why this sector can generate a high added value and can have a substantial impact on the Bulgarian economy.
This is much better and much more important to Bulgaria's traditional attempts to attract foreign direct investment by putting forth its cheap labor. The fact of the matter is that there will always be countries in the world with cheaper and more abundant labor - China, India, Pakistan, Bangladesh – with whom we cannot compete on that criteria.
But we at AmCham seek to emphasize something else here – outsourcing in Bulgaria provides services of high quality and professionalism, which are relatively inexpensive at the same time.
Our proposals were welcomed by the Economy Ministry. We had the first meeting with the government about Bulgaria's potential strategy to attract outsourcing in May 2010, and only six months later we managed to organize this conference on outsourcing and offshoring.
With it AmCham Bulgaria has managed to demonstrate that Bulgaria has a great potential precisely with respect to opportunities for foreign companies which hadn't even considered it as an investment destination. Numerous US and EU companies attended the conference demonstrating increased interest.
We had crucial brands such as McKinsey, a high-profile international consultancy, declare that Bulgaria should be viewed as a major destination for IT and services outsourcing. Such statements will clearly see a snowball effect.
The American Chamber of Commerce in Bulgaria is not standing idly by, we go to the government and tell it what we think the parameters of policies to attract outsourcing should be.
The amendments to the Investment Encouragement Act adopted earlier this year, including the introduction of new incentives for outsourcing investments were introduced after our conversations with the Cabinet.
You are mostly talking about attracting outsourcing in IT and services. Should Bulgaria also try to attract outsourcing from American industrial manufacturers, or should it stay focused on IT and services?
Bulgaria can try to attract outsourcing in manufacturing but we seem to be stronger in IT at the moment. It is clear that the Bulgarian government wants investments in manufacturing. But for that to happen we need to demonstrate what capacities we can offer for the production of a certain product.
I think the government will have to invest a lot more efforts in order to convince major American investments in manufacturing outsourcing to come here.
Do you think US companies will be interested in the developing Bulgarian industrial zones – such as the Bozhurishte Industrial Zone near Sofia for which the Bulgarian government appears to have preliminary agreement for a joint venture with China?
We think that incentives can take various forms. We usually talk about Bulgaria having the lowest taxes in Europe. That is an indisputable fact but it is not enough. What is the critically important factor for us in terms of attracting FDI in both services and manufacturing? It is the human factor, the human resources.
If Bulgaria can demonstrate that its human resources are highly educated, professional, and relatively inexpensive, this will go a long way.
There is no point in deluding ourselves that we can maintain the same low labor costs as they do in India and Pakistan. The labor costs in Bulgaria have started to go up little by little. But if we prove to have high-quality education and high professionalism, this will attract outsourcing in all sectors – in services, IT, industrial manufacturing.
AmCham can also render assistance here but we can't really do that much here, the bulk has to be done by the government – such as reforms in education, introducing new majors in universities to produce specialists that can fuel all these sectors. This will help all these young people know they can find employment.
Once this happens, it will be much more attractive for a qualified person to remain in Bulgaria rather than emigrate because they will have the chance to have a career without leaving their family, friends, and their way of life. All those remain key factors in weighing the advantages of emigrating. Yet, if these conditions don't exist, it is understandable that many skilled Bulgarians will be looking for opportunities abroad.
The human resources are the major factor for economic success. Again, these might be clich?s about the importance of education and qualification. But this is what really matters.
Then there are all the other incentives. For one thing, a foreign investor must be getting a plot in an industrial zone immediately, for a price of USD 1 or BGN 1. And the industrial zone needs to have proper infrastructure.
There are again the clich?s and the vicious cycle. There are EU funds available that can be used to build much of this infrastructure for industrial zones or for individual large-scale investments. This money must be spent on these things, and must be absorbed very quickly.
The major arguments for using the money from the EU programs for industrial development infrastructure is that this will generate economic growth, and will help lift Bulgaria from the last spot in all EU rankings.
But, in general, all of Bulgaria's infrastructure must be fixed. A number of American companies are interested in Bulgarian infrastructure projects but they usually go elsewhere, to put it in the simplest way possible, because such projects have a very long period of implementation and absorption of these EU funds in Bulgaria, and they don't see the dynamic development they look for.
With all that said, does AmCham Bulgaria go out to promote Bulgaria as an investment destination through direct contacts with US companies that have not considered the country?
We have a rather exciting project coming up in 2011, which will be in a sense a repetition of something we did in 2007, right after Bulgaria's accession to the EU. Back then, with the ambassadors - then US Ambassador to Bulgaria John Beyrle, and Bulgaria's Ambassador to the USA, Elena Poptodorova (Poptodorova is now serving her second term in DC – editor's note), we organized our "AmCham-Ambassadors' Business Road Show" presenting Bulgaria to companies in the US.
We visited the Pacific Coast, the Midwest, and the East Coast, and there was enormous interest on part of the American business sector.
I was really surprised to see that because we have these myths here that the American companies are focused primarily on their internal market and on China and Asia, neglecting Europe. There is no such thing. They are interested in all opportunities. They are interested in the EU as much as in any other destination. Of course, we should not forget that the Asian countries are emerging markets.
But 2007 was 2007. Bulgaria has changed a lot since then, it has now been an EU member for four years, and we would like to stage a second, more large-scale "business road show" to talk to potential American investors on all topics, and to present the investment opportunities in Bulgaria. We will have once again the two current ambassadors – US Ambassador in Sofia James Warlick and Bulgarian Ambassador in Washington Elena Poptodorova.
There are a lot of new things. Bulgaria now has the lowest taxes in Europe, and we have an agreement with the US for avoiding double taxation, which has entered into force. This is extremely important because in that way we can present to the US investors Bulgaria's advantages in fiscal terms right away.
But we also already have major success stories that we can present. Because even though at present we occasionally see some new major American investor arrive to Bulgaria, the economic ties between Bulgaria and the USA are not nearly as developed as the political and defense relations.
Even though American investments have proven important for Bulgaria, the US is ranked eighth among the top foreign investors in the country. There is the widespread view that despite the great expectations for massive American investments in Bulgaria, especially after Bulgaria joined NATO in 2004, those generally failed to materialize. Do you think this view is fair?
This is why we need to present those American companies whose investments are success stories in Bulgaria. Because these stories show that American investors continue, in spite of the crisis, to increase their investments in Bulgaria.
For example, take AES Corp that I already mentioned. Or take Kraft Foods if you wish. Last year Kraft invested massively in expanding their production facilities in Bulgaria; they did not expand in Romania but in Bulgaria.
They now have huge operations here, no doubt about it. Or take Honeywell who made a large investment in Bulgaria this year creating probably 100 new jobs for skilled laborers working on the assembling of automatic control systems. Johnson Controls is also a success story in Bulgaria.
In our "AmCham-Ambassadors' Business Road Show" we are going to present these success stories because they are indicative of the trends of US investments in Bulgaria in the past two years.
From what I have seen from my colleagues in the other AmChams in Europe and around the world, their membership is generally on the decline or is stagnant. We in AmCham Bulgaria are lucky because we have seen no decrease in the number of our members.
We have kept all of the American investors who came here – AES, Kraft, Honeywell – none of them has left, and they have actually been expanding their operations. We don't have new American companies coming in but we will probably have some shortly.
HP is also an indicator – they did not keep their employees at 3000 but are hiring new ones.
This is actually "smashing" the labor market for software engineers in Bulgaria since it means that HP will provide attractive opportunities and many software specialists will leave their jobs in other firms to join HP in Sofia. So the big dilemma in the IT sector in Bulgaria right now is whether there will be enough software developers for all companies, now with this massive new investment of HP kicking in.
But the important thing is that we have not seen any American company leave, and those that are already here are expanding. It is true that in the past 1-2 years we saw few American newcomers – Starbucks has been one, for example - but we can present those that are already here in order to attract new ones.
As far as the volume of American investments in Bulgaria is concerned, AmCham does not collect statistical data. But apparently the statistical methods used by the Bulgarian National Bank are internationally recognized, and it cannot renounce them.
Thus, American investments coming to Bulgaria via Austria are considered Austrian, and American investments coming through the Netherlands are counted as Dutch. America is said to be the 8th largest foreign investor in Bulgaria.
We think that we are at least two spots higher because of the "indirect" investments coming via other countries. But the investment is counted as coming from the country that the bank transfer came from.
While the American investments in Bulgaria are substantial, the Bulgarian-US trade is relatively small. Why do you think that is? Do you have observations as to what Bulgarian products could be competitive on the US market?
This could be due to the distance but also the fact that Bulgaria is unknown. Both the Netherlands and Bulgaria are in the EU, with the same duties but we are not well-known.
I've heard incredible stories about certain very specific products that one would wonder who would buy them. But America is an stunning market.
We recently had the annual meeting of the AmChams from Europe in DC. During our meetings with the American Chamber of Commerce and the Department of Commerce we got data showing that some 95% of the American output is for domestic consumption, only 5% of the companies are looking at exports - which only demonstrates that the USA has an enormous domestic market.
Their companies barely manage to meet the domestic demand. Many American companies don't even consider exporting simply because they can sell their products on the domestic market. Since the entire world is trying to export to the American market, you have to be extremely competitive to manage to get ahead over there.
At present, with the effects of the crisis, it has become harder to sell on the American market, and some US companies have started to consider other destinations.
This is a chance to increase the bilateral trade but also to attract outsourcing. Because they could concentrate they major operations in America and outsource the secondary operations to a cheaper location.
This does not mean the loss of jobs in America because by moving away and saving from their secondary operations, they will be able to expand their main business at home, to put it this way. They can outsource the secondary operations abroad, and this could be a niche for countries such as Bulgaria.
So it is one thing to try to export to America, which is an enormous consumer market, and another thing to realize that everybody is trying to do the same, and that you have to be very competitive. Let firms interpret what this means. The same goes for importing American products.
I think the key to trading with American firms is for Bulgarian companies to be able to develop a distribution network that is not just in Bulgaria but in the entire region because Bulgaria is a small market.
The main formula that AmCham Bulgaria has used to promote Bulgaria has never urged investors to look at Bulgaria only. Our main message is that by coming to Bulgaria investors can have operations and develop their business in neighboring countries.
We now have emerging markets in the Balkans such as Serbia, Kosovo, Macedonia, Albania, Bosnia and Herzegovina, not to mention the more developed markets Greece and Romania, and Turkey, which is a huge market. But even though Turkey, for example, is on the map of every American investor, there are also opportunities to go there via Bulgaria. Then we have Bulgaria's traditional connections with countries such as Ukraine and Russia.
I can point to AbCRO as an example, a Bulgarian clinical research firm started by two women entrepreneurs that got bought by an American company after developing a network in Eastern Europe – they had opened offices in Serbia, Romania, Turkey, Ukraine, Poland. Because that way foreign investors see a much larger potential for added value, instead of Bulgaria's market of 7.5 million, they would be able to reach 50 or 100 million people.
This is our advice to everybody in Bulgaria who wants to do business with the US. They should tell the Americans that they can earn positions on a larger regional market by using Bulgaria as a regional hub.
Going back to the AmCham-Ambassadors' Business Road Show that you plan in 2011, what exactly is that going to entail?
It will take place in mid May 2010. We will probably go to 4 US cities. We are going to talk about the sectors that I mentioned, and about our success stories of American investments in Bulgaria.
We will certainly talk about HP because our idea is to visit San Francisco and the Silicon Valley.
During our outsourcing forum in November we talked about the potential "Bulgarian Silicon Valley" for the Black Sea region, and if it can happen in Varna.
But here we are getting to a more ambitious task. Some critics tells to be more modest in these times of crisis but it is good to have dreams.
We would like to see if it is possible to get some of the top American universities interested in a Bulgarian project. For example, could an university such as Stanford make an agreement with a Bulgarian university, and perhaps even open a branch here?
How do you imagine this kind of cooperation – an exchange program, a US campus in Bulgaria?
Something along these lines. The great thing about AmCham Bulgaria is that have very enthusiastic membership, especially the working group on outsourcing and offshoring, which includes 20 people full with ideas, and drafting papers.
They are creating business plans, and based on these documents we can have very specific discussions with the Economy Minister. Once we present clear and detailed business plans, our meetings with the Cabinet have much substance, and it is no longer just empty talk and "demonstration of good government-business dialogue."
I talked earlier about our working group on renewable energy but the working group on outsourcing is no less enthusiastic. It intends to draft an action plan for the development of outsourcing in Bulgaria, including with respect to government-provided incentives and education.
Part of our Business Road Show will be trying to present our ideas to some of the top American universities. It is not just about having exchange programs but about providing outlets for professional development in Bulgaria based on the American model which is already here through investors such as HP. American companies will find that they can duplicate the American model of education and business in Bulgaria.
We would like to try it out with something small, and perhaps something could work out. After that it can develop into something bigger. HP is a success story, a company that can show they have 5000 people working for them in Bulgaria, IBM probably have 1000, and others do, too. So US companies can help us enhance the education sector because they are already in Bulgaria.
It will be something very interesting. This road show will try to do it; to show not only the American investments but also to try to look at the potential connections with the academia, and to attract them to the cause for more business and investments in Bulgaria.
The third thing we will do during our Business Road Show will be to meet with the Bulgarian diaspora in the US.
This is what government officials do when they go there, but with us the Bulgarian immigrants will meet actual businessmen, and will see that they can also find work and have careers in Bulgaria.
They will be able to learn first-hand that there are such companies operating in Bulgaria, and that if they decide to come back, these options are there. They need these examples from the business sector to learn about their chances to find decent jobs in Bulgaria.
Earlier this year AmCham Bulgaria turned 15. What are some specific ways in which your organization has contributed to the development of the business environment in Bulgaria?
I do think that as a NGO that does not have any political agenda – because this is very important since we don't seek to realize the goals of any government but we focus on the interests of the business sector – I think we have achieved a lot of things because we have managed to help the American business to establish itself in Bulgaria.
Anybody who comes to us gets support, good advice, ideas, networking, and all that is needed for investors to find their way in a new environment. We have a lot of professional experience, and we have a lot of companies ready to share their experience. Our networking is very helpful.
On the other hand, we also have opportunities to hold talks with the government on specific investor issues which are important for a certain sector or for the entire economy.
We guarantee that we have channels for transparent dialogue with the Bulgarian government. All of our concept papers are on our website - on renewable energy or something else.
This way of communication with the government is very important for convincing a foreign investor that they can get help if they come to us. AmCham Bulgaria has helped many investors with its capacities because we have this authority with the Bulgarian government.
A third thing is that we achieved success on the adoption of a bilateral agreement for avoiding double taxation between Bulgaria and the USA. If it had not been for us nobody knows for how long the negotiations would have dragged.
We managed to do that because we had very straightforward arguments about why it is necessary to make such an agreement as soon as possible.
The two governments were not being pro-active, and this was not a priority in their programs. This specific example really stands out because of the decisive role of AmCham Bulgaria.
Last but not least, I think we have been a great example about corporate social responsibility. For a 4th year in a row our volunteer days got out hundreds of people to do volunteer work. This is noticeable because all of us do it at the same time, and other companies that are not members have started to join us.
We also hold traditional charities and the money we raise go for orphans' scholarships and to support children with disabilities.