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Investors from the Nordic countries have been sharing their plans for the Baltic States at a business forum in Riga last week. According to them, more goods and services are going to reach their markets from Lithuanian, Latvian and Estonian companies that have been integrated into Nordic business groups.

Christer Aberg, Executive Director and Vice-President of Orkla Confectionary & Snacks, does not want to reveal where else the company might invest in the Baltic States. However, he is happy to draw attention to the fact that the Norwegian Orkla Group orients itself to companies holding first or second position in consumer product markets. The case of NP Foods, the Latvian company Orkla acquired this August, only serves to confirm this rule; it controls Latvia’s strongest brand of confectionery and chocolate products.

“We pay the most attention to, and make the biggest investments in, this region. The Baltic States are the ones producing for the Nordic markets. We either notice who is the leader in each market or we work with them to become the leader”, noted Mr Aberg, who was sharing his company’s experiences in the Baltic States at the business forum of the Nordic and Baltic countries that took place this week in Riga.

Investment bankers at the forum were deliberating that in Lithuania, for instance, AB Vilniaus Pergalė, a confectionary producer controlled by the shareholders of UAB Vilniaus Prekyba, could be in the same category as NP Foods. However, they noted that in order to attract the interest of such a selective partner as Orkla, it needs “a good massage”, which could take a few years. Notwithstanding this, there are no signs that the current shareholder is willing to say goodbye to this investment so readily.

Nearby, Lars Malte, shareholder of the Baltic Textile Company based in Marijampolė, shared his experiences. He recollected that when he came to Marijampolė more than ten years ago, after having worked in Belarus and Russia – and before that in Africa and South America – he felt “almost at home” here.

“We started cooperating with the Danish company Gabriel, which was willing to relocate its production to Marijampolė. This has already been completed. We established, as I call it, a virtual company, which merged the Danish and Lithuanian company into one organism”, recalls Mr Malte. According to him, the future of business in this region does not lie in a simple relocation of services or production to more cost-efficient territories. Rather, we will see very tight cooperation between the party giving orders and the party fulfilling them, and a much closer integration of the production chain.

Doubled sales volume

Orkla, which acquired NP Foods this summer, also took over UAB Margiris in Kaunas, a company engaged in the sale of foodstuffs and drinks. According to Mr Aberg, following this transaction, the volume of Orkla’s operations in the Baltic States doubled and profitability grew. This year, the company’s financial experts expect sales revenues in the Baltic States to exceed NOK 1 billion (LTL 418 million; EUR 121 million), compared to NOK 898 million (LTL 367 million; EUR 106 million) last year. The group’s EBITDA margin, a measure of a company’s profitability, will improve to 9.5% compared to 8.3% last year. In Lithuania, the company also owns UAB Vilniaus Margarino Gamykla, UAB Suslavičius-Felix and UAB Minordija.

Listed on the Oslo Stock Exchange, Orkla can look back on a history of more than 200 years acquiring a range of leading brands, including Kalev, Estonia’s oldest and largest confectionary firm. The Norwegian concern has an annual turnover of NOK 33 billion (LTL 13.5 billion; EUR 3.9 billion), 92 plants and 17,000 employees.

According to Mr Aberg, Orkla invests in the Baltic States first of all because consumer markets there are growing more rapidly than in Nordic countries. “Moreover, we see that it is simpler to invest here, there is less red tape, and transactions are assessed by the competition authorities faster than, for instance, in Norway”. He also adds that Orkla invests because of the opportunity to strengthen its position in local markets as well as to enter other markets; hence, it invests in both directions. “I do not refute the possibility that for some time the businesses we acquire will be run by foreigners. However, simultaneously we seek to attract the best local managers and thus to understand local markets better”.

Mr Malte agrees that local expertise is vital, and praises the intelligence of the Lithuanians working for the company. He cannot imagine his business taking off had their ideas not been implemented. “Put the creative and smart Lithuanians, Latvians and Estonians on the company boards. If we fail to do this, we will simply lose in the Nordic countries”.

Time to reorient

Anders Paalzow, Rector of Stockholm School of Economics in Riga, notes that there is a lot of discussion about Scandinavian investment in the Baltic States; however, we should also consider the larger export flow to the Nordic countries from the Baltic States.

“Having in mind the conflict between the Ukraine and Russia, and the embargo on goods imposed by Moscow, now is the right time to reorient our product flows”, stated Mr Paalzow.

Senior Economist at DNB, Knut Magnussen, indicates that a healthy balance between labour effectiveness and price is the key condition for maintaining the long-term growth of the Baltic States, and the preconditions for doing this are favourable. According to him, labour effectiveness in Lithuania and other Baltic States is approaching the level of Germany or Sweden, but there is still sufficient space to grow. Having grown more rapidly than salaries, labour effectiveness in the Baltic States is once again lagging behind, which could be detrimental to the competitiveness of companies in the export markets.

On the other hand, in the opinion of Mr Magnussen, potential long-term GDP growth in the Baltic States of 3.4-5% is a good sign, and will allow them to get closer to more established EU economies. “According to this indicator, the EU average is currently reduced to 2%”, stated Mr Magnussen, when speaking at the business forum on Tuesday.

According to data from market research company GatewayBaltic, based on the statistics of central banks, direct foreign investments (DFI) from Nordic countries in the Baltic States has increased by 158%, from EUR 6.7 billion in 2003 to EUR 17.3 billion in 2013. DFI from Nordic countries now constitutes 44% of total DFI in the Baltic States.

Danish business prevails in Lithuania

Inese Andersone, Executive Director of GatewayBaltic, counts more than 2,000 companies with Nordic capital operating in the Baltic States, employing more than 110,000 people. “Nordic-owned companies create about 3% of jobs in Lithuania and Latvia, while in Estonia the figure is almost 8%”, says Ms Andersone.

Swedish companies have invested the most substantially in the Baltic States in terms of money. The largest proportion of Swedish DFI has been in the finance sector, which received more than half of Sweden’s total EUR 9.5 billion (LTL 32.7 billion) worth of investments, made across the Baltic States. This is not surprising considering major Swedish banks such as SEB, Swedbank and Nordea have operations here. The second place is held by Swedish investments in production. In terms of total value, the largest share went to Estonia; but investments in the IT sector from Sweden are clearly most substantial in Lithuania. In Lithuania, compared to Latvia and Estonia, Danes invest the most in production; they are also active in the transport sector. Finns, whose projects are increasingly common in Lithuania, have always been the leader in Estonia in the production, real estate and sales sectors. Latvians attracted the most DFI from the Swedish and Norwegians in the finance sector, and from the Danes in the IT sector.

Source: Invest Lithuania