Biomet CEO Talks Bulgaria from Improvements Needed to Opportunities

 

How did you find your clients when first starting off back in the very early nineties?

Back in 1991 we started off by purchasing two new trucks, a major deal at the time because everyone else was operating with unreliable aging fleets. In fact, everyone thought we would fail; however, we made an agreement with a company that manufactured refrigerators and through this arrangement we were able to reliably get their product to market in Western Europe. And what this allowed me to do was invest in new trucks which I think shows us as a trustworthy company capable of transporting your goods efficiently; really, from here to England is about 3,000 kilometers and if you are moving in an old truck and break down along the way it hurts the client’s bottom line. So, through that we offer a better service than our competitors.

….come invest in Bulgaria. The country still has well-educated people who are willing to give everything for a good opportunity. Western companies are especially welcome and we expect more investments from them. We have hope that many obstacles will be eliminated for them in the future, like the judiciary reforms happening right now. This must be changed because I have met with potential investors who say ‘how can we enter when we are not defended’. The strange dichotomy though is that when more foreigners come to invest the pressure on the government to reform will be greater as foreigners and their respective embassies have a stronger presence here. Our low flat corporate tax rate at 10% is always a draw as well.

Most successful companies eventually hit a tilting point where they begin to expand rapidly for a period of time. When was that point with Biomet?

The period in which we started to grow coincided with the expansion of western investments in Bulgaria. So when they entered the market they were actively seeking solid companies to transport their goods rather than us marketing directly towards them. Our first big client was Shell, they contacted us early on to move their fuel to their petrol stations and they remain a client to this day. We are regularly contacted by all the large companies in the country; in fact, one of our largest clients is Ideal Standard, whose production is 95% for export. Initially this partnership consisted of just transportation but quickly we expanded into handling all their logistics when we built a center which became one of the largest logistic centers in Bulgaria (23,000 m₂).

Ideal Standard (American Standard) bathroom fixture producer is famous in the US. Why do you think they choose to set up a manufacturing facility in Bulgaria?

Ideal Standard is one of the most profitable companies in the country and they operate out of central Bulgaria where they service almost the entire demand for Europe, hence the 95% export figure. Their choice behind this is probably because of the low cost of labor and skilled workers.

We noticed the company has a presence in other parts of Europe. What do these entail and do they differ from you Bulgarian operations?

So we offer general cargo transportation from East Europe to West Europe as well as partnerships with firms in Spain and France for distribution within that part of Europe; from Spain to Italy, France to England, etc. And of course, because Bulgaria is a part of the EU we have the ability to expand and operate with total freedom in these markets. Beyond that, as mentioned, we provide transportation of fuels, foods with our large client Kaufland Supermarkets and Lidl, within Bulgaria. Beyond that we provide passenger transportation buses throughout the region.

Biomet CEO: Mr. Vanyo Alexiev

I also see that you are involved with renewable energy, solar farms specifically. Of course, an EU member must meet a standard by which about 16-18% of their energy must come from renewable sources. In order to reach that, Bulgaria, who has met that mark, must subsidize the excess cost and act as a guaranteed buyer for all the producers output. Is this still the case since the goal has been met?

When the government announced these plans under a 20 year contract many companies and individuals invested. However, the previous government signed a contract with the Russians for a completely new nuclear power station, which frankly is not needed. This project is very expensive and at this point there exists an enormous hole collecting water. Ultimately, this contract was rescinded, even a referendum was put in place to stop this from reoccurring; however, it really put the National Electric Company in dire straits financially after spending €1billion. Because of several complications in the energy sector there is an apprehension towards payment for the renewable energy source providers (RES). When the government announced its subsidies for RES we purchased very expensive solar panels and we expect the government to continue payment.

So do you think they will continue to honor that?

Fortunately, we are not paid from a state-owned company. We are paid through the private distribution company, CEZ.

When you look towards the future, what do your growth plans look like? Are they here in Bulgaria or more internationally?

Before 2007 there was a boom in investments, not just here, but worldwide as you know. Unfortunately, many of these companies grew through bank lending and when the crisis hit they went under. We were very conservative which shielded us greatly from the crisis. We have almost zero debt and even though the interest rates are really good at about 2.9% we are still looking to be conservative. I am looking at the potential of purchasing a supermarket; but again, only considering it. Beyond that I am always looking at things as they present themselves but mostly in Bulgaria where we know the market very well.

Ultimately, we want to maintain our current status and retain the high level of service our customers have grown accustomed to. At the moment there just doesn’t appear to be any tremendous prospects which is in addition to the demographics of the country. Many young and smart people are leaving Bulgaria for other parts of Europe and the States to find opportunity.

Do you have a board of directors that help guide this strategy or is it only you?

I am alone, so you can imagine I have to be extra prudent.

How long have you had this particular outlook on the potential in Bulgaria?

We are in the transport sector, which means we service the economy. So when the macro economy is stagnant with slowing FDI we by default are limited in our growth potential. I can say that the first quarter of this year (2015) and last year things were not so good from an FDI perspective. Bulgarian firms have limited amounts of capital for investment and so when FDI decreases our business declines as well. Many companies are leaving Bulgaria for Romania where the climate and growth is more stable, not to mention a much larger domestic market. Romania is strong politically and economically right now.

You speak of Romania in a positive light. But what are some of the issues in doing business here in Bulgaria?

The largest issue is corruption. Twenty-five years have passed since the fall of communism and still, we cannot escape this issue. The government has a large part in the economic life of the country, especially after 2007 when the crisis began and we joined the EU. The funds from the EC were allocated to the Bulgarian government who ultimately decided where those funds were destined. They instigate a highway project, for example, and release a so-called tender, and effectively choose who wins and many times it isn’t the company with the best quality service. When you operate things this way you are killing competition which has negative implications for the whole economy. This is my opinion as to why we are persistently the poorest country in the EU.

Why does this persist in Bulgaria when so many other former communist nations are ahead economically?

It has to do with the mindset, people perpetuating their own stereotype. One day they are talking about how bad corruption is but when presented with an opportunity to gain through it, they do. Another is that there are powerful entities at play that have a vested interest in maintaining the status-quo. But even still, there are some positive things happening.

Please elaborate…

The new government is looking to change the constitution as it relates to the judiciary function through reforms. This is of huge importance to businesses and investors and a large step forward to gain further confidence in investors and therefore stability. But there are some of those entities that do not want this to happen and are creating resistance. There are definitely those that want to make the changes but it can be difficult to realize it.

What instigated this reform consideration?

There were many scandals coming from the judiciary system and many ambassadors here in Sofia spoke out vocally about it. This put a lot of pressure on the Bulgarian government to make some changes.

Do you have faith that the new government will engage further with these judiciary reforms, and indeed, well beyond that, into other reforms important to the economy and the people of Bulgaria?

Yes and no. We always hope of course. We are moving in a positive direction but it is at such a slow pace that the people cannot see it. If the Bulgarian government is to solely enact all changes necessary then change will take a very long time. The only thing to help push this along is continued pressure for reforms from the States and the EU, we hope that happens. However, the present government is very open to the West, which is very positive.

Let’s get into the competitive landscape as it pertains to your busines. How strong is it and is it more acute in one part of your business than another?

Competition is very strong because we have to compete with a lot of international, western, companies. Because cost of operating here is so cheap many names from Western Europe are coming here and when a company tries to penetrate a new market the first thing they do is drop the rates below average which suppresses the market. So, it is severe. There are also some fly-by-night informal companies that buy a single truck, have no fixed expenses and contribute minimally in taxes. What they do is undercut the market, make some money and after 2-3 years you never see them again but their continued ability to do this hurts the serious players who are here for the long game like Biomet. It is this informal economy that has a large impact too.

In terms of passengers there is again the informal sector, where unlicensed taxis and buses operate at minimal cost and take our passengers. As for international travel we are under pressure from the low-cost airlines. But all this is typical not only in Bulgaria but in many other transitional countries.

I would bet that your long presence in the market and strong brand name has allowed you to offset some of these negatives.

Certainly, when a foreign investor comes they are looking for the real players, quality, not the ones just mentioned. The reputation is huge in that manner.

You spoke earlier about some business opportunities that you were batting around. What are some of those so our readers can be aware?

Despite the less then great environment currently for renewable energy we plan on investing more in solar panel. This is not to say that wind or hydro isn’t great too but we know what to expect in the solar side of the business. To us, regardless of current circumstance, RES is the future. As the climates changes governments will be forced more and more to invest in RES.

We’ve heard a lot about Bulgaria’s political and economic situation today. Please offer our readers a concise and final perspective on your country – good, bad or in-between. 

Even with everything said, come invest in Bulgaria. The country still has well-educated people who are willing to give everything for a good opportunity. Western companies are especially welcome and we expect more investments from them. We have hope that many obstacles will be eliminated for them in the future, like the judiciary reforms happening right now. This must be changed because I have met with potential investors who say ‘how can we enter when we are not defended’. The strange dichotomy though is that when more foreigners come to invest the pressure on the government to reform will be greater as foreigners and their respective embassies have a stronger presence here. Our low flat corporate tax rate at 10% is always a draw as well.

 

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