China Business Law Journal is pleased to present a country-by-country guide to investment in central and eastern Europe for Chinese companies.

Bulgaria

Accession to EU: 2007

Population: 7.4 million

Currency: Lev

Together with Romania, Bulgaria is the easternmost of the CEE countries and its position near the Black Sea also makes it useful logistical point. There is a sense that Chinese investment is in its early stages but, as in other CEE countries, the Bulgarian government recognizes the potential of greater cooperation and partnership with China.

Georgi Spasov, managing partner of Spasov & Bratanov in Sofia, cites low cost as one of Bulgaria’s key competitive advantages. “It’s a cheap place to start investment in the EU,” he says. Tania Bouzeva, senior partner at Aliena Consulting in Sofia, agrees, explaining that Bulgaria offers the most competitive cost of labour in CEE and the lowest corporate income tax in the region, and that office rents in Bulgaria are also among the lowest in Europe. Bouzeva adds that the government also offer investment incentives in a number of areas, including R&D, manufacturing, warehousing and logistics, and high-tech services.

Diana Valkova, a partner at Dinova Rusev & Partners, describes how the Chinese car manufacturer Great Wall Motors is taking advantage of this and constructing a car manufacturing facility on a greenfield site. The project is being implemented in conjunction with the Bulgarian company Litex Motors. The value of the investment in the long term is reported to be around US$400 million.

Valkova believes this is indicative of a wider trend of Chinese investment in the country and cites rumours of a “planned treaty between Bulgaria and China aimed at the facilitation of employment of Chinese employees in Bulgaria” as an example of the political will that exists to support that investment.

Beyond car manufacturers, natural resources and energy projects are also attracting Chinese investors. The Bulgarian government has identified IP, biotechnology, and its agricultural and water resources as key areas for development.

The Chinese company Polar Photovoltaics is developing a 2MW solar park near Sofia. Alexandra Doytchinova, managing partner of Schoenherr’s Sofia office, sees this as indicative of the “serious interest” among Chinese investors in developing an “energy portfolio in the region,” including further solar investments in Bulgaria and tendering to construct two hydropower stations in the neighbouring Republic of Macedonia.

(See Bulgaria: a promising environment for Chinese investments.)

Czech Republic

Accession to EU: 2004

Population: 10.5 million

Currency: Koruna

Having once promoted “any project that brought in jobs”, which led to a focus on manufacturing (and particularly the automobile industry), the government “realized there was too much reliance on manufacturing that was export-driven” and switched to “develop incentives to attract more R&D type facilities,” says Vladimira Papirnik, managing partner of the Prague office of Squire Sanders & Dempsey.

Add to this a skilled labour force, competitive labour costs and what Radim Kotlaba, an associate at CMS Cameron McKenna in Prague, calls “a long and well-established industrial tradition” and the Czech Republic appears to stand out as an attractive destination for high technology investments in the CEE.

Pav Younis, a partner at Weinhold Legal, describes how technical education in the Czech Republic enjoys a strong reputation around the world. Jakub Lichnovsky, a partner at PRK Partners, believes Chinese investors already recognize this potential and are looking to acquire technology and know-how in the engineering industry.

The Czech Republic was ranked 36th (out of 139) in the World Economic Forum’s Global Competitiveness Report 2010-2011. The report considered 12 different factors, including institutions, infrastructure, macroeconomic environment, higher education and training, financial market development, technological readiness, market size, business sophistication and innovation.

The nation also offers “excellent investment support” and, perhaps most importantly for any investor staying around for the long term, the Czech Republic “is a good destination to live in,” says Kamil Blažek, a partner at Kinstellar.

Lenka Hrebícková, director of China and Southeast Asia operations at CzechInvest, the Czech government’s investment and business development agency, has seen notable investments focused in the manufacturing and sales and business support sectors by ZTE, Sichuan Changhong Electronics and canned meat producer Shanghai Maling. Blažek has seen growing interest by Chinese clients in sectors relating to R&D and startups in areas like biotechnology and nanotechnology. Hrebícková says these sectors are priority areas for the Czech government.

Aerospace is viewed as a growth area. Unusually for a small country, the Czech Republic produces entire aircraft. “There are a number of foreign investors in the aircraft industry in the Czech Republic – the best known producers of aircraft parts include Honeywell, GE Aviation, Piper and Groupe Latecoere. Honeywell has a number of production plants and also a research and development centre in the Czech Republic,” says Blažek. He also sees the energy sector as an area for expansion, particularly in terms of the production of industrial machinery to be used in, for example, the construction of power plants.

Ondrej Peterka, managing partner at Peterka & Partners, has also seen growing interest by Chinese clients in the areas of banking and construction.

But the Czech Republic is not without its challenges. Younis cites bureaucratic tendencies inherited from the country’s communist past as difficult and Papirnik says that “effective enforcement of law in Czech courts can present difficulties,” although “this can be mitigated by careful drafting and the use of appropriate alternative dispute resolution mechanism.”

Estonia

Accession to EU: 2004

Population: 1.3 million

Currency: Euro

GDP growth in Estonia in 2010 was 3.1% and for 2011 is estimated to be 4.9% says Karin Madisson, a partner at Sorainen in Tallinn.

Estonia likes to be known as the “e-country” says Sven Papp, a partner at Riadla Lejins & Norcous. He says the country’s well-developed e-government system facilitates fast and efficient administration and communication with authorities. The Commercial Register and Tax and Customs Board have online interfaces, as do all the major banks.

“One can establish a company, submit annual accounts, file tax returns, transfer money and sign all correspondence electronically from a personal computer,” says Madisson. It also offers a favourable tax regime, which “essentially allows for indefinite deferral of corporate income taxes”.

Mariana Hagström, a partner at Baltic Legal Solutions, also cites good infrastructure, including sea connections to Finland, Sweden and the rest of Europe, as a key competitive advantage. In July 2010 a new container terminal was opened in the Port of Tallinn, which aims to become a key import terminal for Chinese goods into the EU and Russia. “In April 2011 the Port of Tallinn and Estonian Railways signed a long-term cooperation agreement with Sinotrans,” explains Vadim Filimonov, a senior associate at Varul in Tallinn.

Hagström and Filimonov have both seen an increase in work relating to sales contracts between Estonian and Chinese parties. Filmov sees one of the main practical challenges for Chinese investors as non performance of those contracts by their Estonian counterparts, particularly following recently difficult economic times.

Hungary

Accession to EU: 2004

Population: 10 million

Currency: Forint

Hungary introduced elements of free market economics prior to the fall of the Berlin Wall – a policy that came to be known as “goulash Communism”. David Dederick, managing partner of Weil’s Budapest office, explains that this head start helped Hungary to emerge as the darling of foreign investors in the CEE in the 1990s. Accession to the EU in 2004 brought further rewards.

However, Hungary was one of the countries in the region hardest hit by the financial crisis and it turned to the IMF for a bailout in 2008. The new right wing FIDESZ (Fiatal Demokraták Szövetsége, or Alliance of Young Democrats) government that came into office in April last year after many years of Socialist Party rule has levied “crisis taxes” on sectors dominated by foreign investment such as telecommunications and energy, Dederick explains. While this is not generally interpreted as a deliberate attack on foreign investors, it reflects how changes in government may lead to changes in the foreign investment environment.

While overall investment has slowed, Dederick says Hungary remains in a strong position to attract Chinese investment. “For decades Hungary has been a favoured destination in Europe for the Chinese,” he says.

Zoltan Martonyi, managing partner of Martonyi Law Firm in Budapest, also detects a “closeness” between the two countries, including “a shared entrepreneurial spirit”. Richard Lock, head of corporate at Lakatos Köves and Partners in Budapest, describes how this appears to overcome the practical difficulties of what he fondly calls their “two impossible languages”, Hungarian and Mandarin.

Hungary is home to one of the largest Mandarin speaking communities in Europe, and although its roots remain something of a mystery, there has been a Chinese community in Hungary for several decades or more.

A Hungarian-Chinese bilingual primary school has recently opened in Budapest, and is believed to be the first of its kind in the region. Budapest is the only city in the region where the Bank of China has a branch office, and there are direct flights from Budapest to Beijing with Hainan Airlines.

Establishing a company in Hungary is “straightforward,” says Gabriella Ormai, managing partner of CMS Cameron McKenna’s Budapest office, and there is a well-trodden path for investors to follow. “Each project becomes easier and easier. There is a momentum,” says Dederick.

The AsiaCenter in Budapest is a hub for a number of small Chinese import/export businesses and it is widely believed that the Hungarian government is looking to China for investors for its national airline Malév and to develop a high speed rail link to Budapest airport.

Gabor Molnár, partner and head of corporate at Horváth and Partners DLA Piper in Budapest, describes how “Chinese investments have already created about 10,000 jobs in Hungary”.

When Lenovo acquired IBM’s PC business in 2005, it acquired a sales and distribution network in Hungary, and some assembly capacity. ZTE has established facilities in the country which include manufacturing and assembly and some R&D. Huawei made Hungary its European supply centre in 2009, and there are reports that it may expand this facility in 2012 to make it its European logistics centre.

Hungary has also been host to one of the most groundbreaking Chinese investments in the CEE: the restructuring and subsequent acquisition of Hungarian chemicals company BorsodChem, by Wanhua Industrial Group.

Ines Radmilovic, a partner at Kajtár Takács Hegymegi-Barakonyi Baker & McKenzie, whose banking and finance team advised the Bank of China on the 1 billion (US$1.3 billion) financing of the acquisition, explains: “This deal was the first of its kind in Hungary and the first time that such a significant amount of Chinese capital had been invested into a central and eastern European country.”

Zoltan Lengyel, managing partner at Allen & Overy in Budapest, who assisted Wanhua with the transaction, says the deal involved “an innovative acquisition strategy”, which included the acquisition of the target’s mezzanine and senior debts.

Weil advised the board of directors at BorsodChem, and Dederick says “Wanhua’s combination with BorsodChem created the third largest isocyanate producer in the world and transformed two regional players into a single emerging multinational.” It also gave Wanhua a much needed base in Europe. (Isocyanate is a polyurethane raw material used in construction and the automobile industry as well as in the production of household appliances and footwear.)

Weil also advised Beijing Sevenstar, an electronics company, in the purchase of Energo Solar, a Hungarian solar energy equipment manufacturer. “Both BorsodChem and Energo Solar acquisitions represent major investments by Chinese companies in foreign targets having unique technology,” says Dederick.

When Lenovo acquired IBM’s PC business in 2005, it acquired a sales and distribution network in Hungary, and some assembly capacity. ZTE has established facilities in the country which include manufacturing and assembly and some R&D. Huawei made Hungary its European supply centre in 2009, and there are reports that it may expand this facility in 2012 to make it its European logistics centre.

Hungary has also been host to one of the most groundbreaking Chinese investments in the CEE: the restructuring and subsequent acquisition of Hungarian chemicals company BorsodChem, by Wanhua Industrial Group.

Ines Radmilovic, a partner at Kajtár Takács Hegymegi-Barakonyi Baker & McKenzie, whose banking and finance team advised the Bank of China on the 1 billion (US$1.3 billion) financing of the acquisition, explains: “This deal was the first of its kind in Hungary and the first time that such a significant amount of Chinese capital had been invested into a central and eastern European country.”

Zoltan Lengyel, managing partner at Allen & Overy in Budapest, who assisted Wanhua with the transaction, says the deal involved “an innovative acquisition strategy”, which included the acquisition of the target’s mezzanine and senior debts.

Weil advised the board of directors at BorsodChem, and Dederick says “Wanhua’s combination with BorsodChem created the third largest isocyanate producer in the world and transformed two regional players into a single emerging multinational.” It also gave Wanhua a much needed base in Europe. (Isocyanate is a polyurethane raw material used in construction and the automobile industry as well as in the production of household appliances and footwear.)

Weil also advised Beijing Sevenstar, an electronics company, in the purchase of Energo Solar, a Hungarian solar energy equipment manufacturer. “Both BorsodChem and Energo Solar acquisitions represent major investments by Chinese companies in foreign targets having unique technology,” says Dederick.

“Poland survived the financial crisis with a positive growth rate and its strong internal demand continues to help weather the storm,” says Grzegorz Namiotkiewicz, a partner in Clifford Chance’s Warsaw office.

China is “a priority country” for the Polish Information and Foreign Investment Agency (PAlilZ). According to PAlilZ there were 12 Chinese investment projects in the country in 2010, worth 539 million and creating 3,828 jobs. In 2011 there are 16 projects, worth 674.5 million and creating 5,429 jobs. These include investments by Nuctech, a security inspection product manufacturer, and chemical company Duran China.

Tomasz Wardynski, a partner at Wardynski & Partners, points to Poland’s special economic zones where “investors engaged in research or implementation of new technologies may qualify for a deduction of up to 50% of associated expenditures from taxable profits”.

But inside and outside the economic zones, Poland’s infrastructure needs an upgrade, and Chinese investors seem increasingly to be the preferred bidders for projects. “Relatively big projects are being assigned to construction companies in road and rail transportation, energy, sport arenas and similar facilities. In certain areas (such as civil engineering) demand has exceeded the capacity of companies traditionally present in the Polish market,” says Andrzej Tokaj, a partner at Magnusson in Warsaw. Referring to the Beijing Olympics in 2008 he adds: “Chinese companies have both a good record and experience in delivering big construction projects,” and are becoming an “attractive alternative” to Polish and European bidders.

However such investments are not always straightforward.

The Chinese engineering group COVEC attracted a lot of media attention in 2009 when it was awarded the contract to build sections of the A2 motorway that will run west to east through central Poland, from the Polish-German border in Frankfurt through to Lódz and Warsaw. It is believed to be the first time that Chinese investors have won such a large public works contract in the EU, and COVEC appeared committed to further involvement in similar projects. But in recent months it has seemed as if COVEC’s A2 project has started to unravel.

COVEC’s bid for the work was significantly lower than other bids, and Bartek Swietlik, head of the China desk at Gessel in Warsaw, describes how “about a year ago, a formal complaint was brought before the arbitrators competent to consider disputes concerning public tender proceedings, alleging that COVEC’s price for two sections of the A2 motorway were unreasonably and unviably low and that they essentially amounted to dumping.” However, Swietlik continues, “the ruling was that COVEC’s price was in perfectly good order and that COVEC should be able to build a road for that amount of money.”

Work on the motorway slowed in May following reports that COVEC was unable to pay its subcontractors and was looking to withdraw from the project. This has led to accusations that COVEC miscalculated the price and that the government agencies which hired COVEC are guilty of mismanagement. However, COVEC has a strong track record of providing projects on time, and the full story is yet to emerge.

Piotr Trebicki, a partner at Czublun Trebicki, explains that public bids can be a minefield. “In the early days of what has developed into today’s public procurement system in Poland, there were cases of substantively legitimate bids being rejected on purely formalistic grounds,” he says. The current legislation contains provisions to allow content to trump form and this approach is increasingly put into practice. However, the problem today, as Trebicki describes, is that “in any issue turning on how to interpret a specific provision of the Public Procurement Act in practice, you are very likely to encounter not only conflicting opinions of the counsel to the parties involved, but also mutually contradictory rulings of the competent bodies”.

A large amount of bid documentation will need to be translated into Chinese for the client but then submitted in Polish. Even small discrepancies in documentation can lead to a bid failing to get through the initial rounds. “Sometimes, an emailed or photocopied document certified for compliance with the original has been found to be quite sufficient; at other times, nothing short of the signed and sealed originals were called for,” says Trebicki.

Romania

Accession to EU: 2007

Population: 21.5 million

Currency: Leu

Romanian infrastructure is among the poorest in central and eastern Europe. Like Poland, this presents an opportunity and challenge for potential investors. “Getting your product to market is going to be more difficult with a lack of infrastructure”, says Bryan Jardine, a partner at Wolf Theiss in Bucharest. “In the past investors have got burned because of this.”

On the flip side, as in other CEE countries, “Chinese construction companies and banks could be well placed to win tenders for large strategic projects,” says Perry Zizzi, a partner at Clifford Chance’s office in Bucharest.

But investment in Romania is about more than just road building. “There is more variety than that,” says Laurentiu Pachiu, managing partner of Pachiu Associates.

Romania has a highly skilled and educated workforce, particularly when it comes to high technology. Jardine provides the revealing anecdote that, “The second most often heard language on the Microsoft campus in Seattle is Romanian” and Chinese investors are well placed to “take advantage of the skilled local talent”.

Zizzi agrees. He has been working with clients in the infrastructure, real estate and manufacturing sectors. In the coming years he sees “numerous investment opportunities” in healthcare, infrastructure/PPPs, real estate, energy, agriculture and IT/technology.

Investors may also be able to leapfrog infrastructure concerns by offering to construct transport links to their facilities and it would seem likely that such a strategy would be looked on favourably by local authorities.

Slovakia

Accession to EU: 2004

Population: 5.5 million

Currency: Euro (adopted 2009)

Andrej Leontiev, managing partner of enwc’s Bratislava office, believes that having adopted the euro, Slovakia “provides excellent opportunities to enter the European market”. It is also “a gateway to the Balkans,” says Michaela Stressl, country managing partner for DLA Piper in Slovakia.

Slovakia has one of the highest growth rates in the European Union and offers investment opportunities which are able to bring returns “in a relatively short time period,” says Sona Hanková, counsel at Salans’ Bratislava office. Labour costs are “one of the lowest in the CEE”, says Leontiev.

Patrik Bolf, a partner at Kinstellar’s office in Bratislava, says the government has made good progress in reducing bureaucracy and simplifying the procedures involved in setting up a company. Hanková agrees and explains how the trade licensing office now acts as a “one-stop shop” for tax registration, registration on the commercial register and so on.

Managing the expectations of investors can be an issue, though, says Martin Magal, a partner at Allen & Overy’s Bratislava office. “Compared to China, Slovakia is a very small country and so are its companies,” he says. “Chinese investors often have too high expectations when considering their targets’ capacities and available manpower.”

Hanková says that corruption has also been an issue in the past, but the government is taking steps to improve transparency and clean up the country’s act.

Slovakia’s infrastructure is one area that is of interest to Chinese investors. Ondrej Peterka, managing partner at Peterka & Partners, has advised Chinese investors on tenders for the construction of major motorways in the country and there are reports of Chinese interest in the construction of a high speed railway and involvement in the car industry.

Leontiev says Slovakia has already acquired a strong position as a base for car manufacturing in central Europe. Slovakia is home to production facilities for Volkswagen, PSA Peugeot Citroen and Kia, and has been an attractive destination for Asian automotive suppliers. He believes Chinese investors are likely to follow. Hanková also sees opportunities in brown coal and gold mines and renewable energy sources.