Testing the limits at home, Polish firms look abroad for growth

Trans Polonia SA

05/03/2018 07:00

* Polish foreign direct investment abroad leaps
    * Some mid-sized firms testing limits of Polish market
    * Nationalist government supports foreign expansion
    * Germany a favoured market for acquisitions
    * But German jobs won't necessarily move to Poland

    By Alan Charlish and Pawel Goraj
    GDYNIA, Poland, March 5 (Reuters) - Trans Polonia Group
faces a problem confronting many ambitious mid-sized Polish
companies: it is starting to outgrow its home market. 
    The group's trucks already supply a quarter of the fuel
delivered by road to filling stations across Poland, and Trans
Polonia (TPG)  TRNP.WA  has decided that to keep expanding it
must look West. That means not simply serving foreign clients
from a Polish base, but buying a presence abroad.
    Western companies, especially those in neighbouring Germany,
have been investing in Poland since soon after the fall of
communism. Now rapidly increasing amounts of investment capital
are flowing in the opposite direction as firms like TPG try to
get closer to customers in the biggest European economies.
    "If you want to expand then you need to buy a company or
companies which are located in the West," TPG chief executive
Dariusz Cegielski told Reuters. Based near the Baltic port of
Gdansk, his group is considering potential targets in Germany,
Belgium and the Netherlands with annual turnovers of more than
50 million euros ($60 million).
    Mid-sized companies in other central European countries have
already had to make international pushes due to their relatively
small domestic economies. By contrast, Polish firms have relied
for longer on a home market whose population of 38 million is
larger than that of the Czech Republic, Slovakia and Hungary
combined.
    Despite robust economic growth, Polish companies now appear
to be testing the limits of the local market. Direct investment
abroad more than doubled between 2014 and 2016 alone to $6.4
billion, according to the United Nations trade agency UNCTAD.
    TPG already bought Poland's biggest fuel trucking company
three years ago. Now it wants to expand beyond this domestic
business into a more international industry: intermodal
transportation of liquid chemicals, which uses tanks that can be
loaded between ships, trains and trucks with container cranes.
    Western European petrochemical companies are active in
eastern EU member states such as Poland, and further east in
Russia. But for transport companies like TPG to tap into this
business, they need to use established client relationships
which have often been built up at a local level over many years.
    "This you can achieve only via potential acquisitions. You
cannot realise this through organic growth," said Cegielski.
    
    TAKING THE LEAP
    While TPG is just getting started, some mid-sized Polish
firms have already taken the leap, encouraging others.
    "Successful acquisitions by Polish companies...have made
other Polish investors feel more confident to think about
themselves as potential foreign investors," Magdalena Komor,
Manager in Mergers & Acquisitions at PwC in Warsaw, told
Reuters.
    One example is household appliance maker Amica  AMCP.WA ,
which agreed to buy British kitchen appliance company CDA Group
in 2015 for 24.3 million pounds ($33 million).
    "Polish entrepreneurs who have found success in the domestic
market have reached certain barriers to further development in
Poland and need to think about foreign expansion," Amica's
deputy chief executive Piotr Skubel said.
    Some are moving beyond Europe. Drug maker Adamed Group took
a controlling stake in Vietnamese pharmaceutical company Dat Vi
Phu last year in one of the biggest investments by a Polish
company in southeast Asia. Before that Adamed Group bought four
companies in the Czech Republic and Slovakia.
    For many of companies Germany is the ideal destination due
to a shared border and the size of the country's market, said
Stepan Flieger, head of EY's Czech M&A team.  
    "Germany is a huge opportunity and Polish companies are
starting to realise if you want to do business in Germany you
cannot simply export. They will always prefer to buy from a
German."
    A temptation is to try to move some operations from a German
acquisition back to Poland, where average wages were 44 percent
lower in 2016, according to OECD data.
    "Usually when a manufacturing company invests abroad, let's
say in Germany, ultimately it plans to relocate manufacturing to
Poland where it can be done at lower cost, and to leave sales,
distribution and more value-added activities in the country of
the investment," said Tomasz Pasiewicz, managing partner at
Warsaw-based advisory firm Saski Partners. 
    This is a sensitive issue in the "Mittelstand", the
mid-sized German companies that pride themselves on creating
high quality jobs in the small towns where they are often based.
    But Langendorf, a German truck trailer maker which Polish
rival Wielton  WLTP.WA  bought last year, says its experience
has been positive. No jobs have been lost to Poland since
Wielton agreed to buy the firm based in the former mining town
of Waltrop for a maximum of 10 million euros.  urn:newsml:reuters.com:*:nFWN1IP0IY
    "On the contrary, the workforce in Germany has grown since
the takeover," Langendorf spokesman Robert Otto said, adding
that employees' "initial concerns were quickly dispelled".
    "Langendorf has already taken over central tasks from the
main group," Otto said. "Sales activities are being expanded
significantly, which of course also means an increase in staff."
    
    GOVERNMENT SUPPORT
    Poland's right-wing nationalist government is also playing a
role. Since coming to power in 2015, it has slowed
privatisations, moved to bring banks back under local control
and come into conflict with the European Commission over a
variety of issues including the independence of the judiciary.
    Amid the uncertainty, foreign direct investment into Poland
has fallen from $14.3 billion in 2014 to $11.4 billion in 2016.
But the ruling PiS party has made foreign expansion of Polish
firms one of the priorities for promoting economic growth under
its "Strategy for Responsible Development".
    The Polish Investment and Trade Agency, which began
operating in its current form in 2017, received 600 inquiries
last year about possible foreign acquisitions. 
    "We have set up an incomparably better support network for
Polish small businesses over the past 12 to 13 months of this
project than what was available to them in the past five or six
years," Executive Vice President Wojciech Fedko said.    
    Piotr Krupa, Founder and Chief Executive of Warsaw-listed
debt collection company Kruk  KRU.WA , said he has noticed a
change in government attitudes.
    Kruk, which is valued at $1.17 billion on the Warsaw stock
exchange, has recently made acquisitions in Spain and Italy to
take advantage of the high number of non-performing loans in
these countries following the global and euro zone crises.
    "It's a little bit different than a few years ago," Krupa
told Reuters. "Nobody wanted to help us and discuss Kruk, from
government, about our expansion abroad. But today this
government is more open for such activity and for
entrepreneurs."
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 (additional reporting by Michael Kahn in Prague, Michael
Nienaber in Berlin and Marcin Goettig in Warsaw; editing by
Michael Kahn and David Stamp)
 ((alan.charlish@thomsonreuters.com; +48 58 772 1582;))