Strategic Analysis Project - government.bg Analysis Project Final Report (For project related internal discussion only –not approved for any publication or sharing of information

Strategic Analysis Project

Final Report

(For project related internal discussion only – not approved for any publication or sharing of information outside defined project team)

Sofia, January 28th, 2011

A.T. Kearney 43, Invest Bulgaria Agency, FDI Strategic Analysis, January 2011, 18730p 2

This document is created with the financial support of the Operational Programme "Competitiveness of

the Bulgarian Economy 2007-2013", funded by the European Union through the European Regional

Development Fund. All responsibility for the content of the document lies with the Bulgarian Investment

Agency, and under any circumstances cannot be assumed that this document reflects the official

position of the European Union or the Ministry of Economy, Energy and Tourism.

Този документ е създаден с финансовата подкрепа на Оперативна програма „Развитие на

конкурентоспособността на българската икономика" 2007-2013, съфинансирана от

Европейския съюз чрез Европейския фонд за регионално развитие. Цялата отговорност за

съдържанието на документа се носи от Българска агенция за инвестиции и при никакви

обстоятелства не може да се приема, че този документ отразява официалното становище

на Европейския съюз или Министерство на икономиката, енергетиката и туризма.


Table of contents

Executive summary

Analysis of the current state of the Bulgarian economy

Changes and improvement initiatives to catch up with EU average levels (Vision 2020)

Appendix I: Global FDI trends

Appendix II: Criteria for selection of prioritized industries

Appendix III: Industry snapshots of prioritized industries

Appendix IV: Effect of the crisis on industries in Bulgaria


Executive summary – Bulgaria and selected sectors

Bulgaria needs to refocus its FDI attraction strategy to export-oriented sectors with relatively higher-value added and with long-term positive employment benefits. Given the current economic and educational structure, Bulgaria needs a comprehensive, segmented strategy focused on both traditional and emerging global industries

• Bulgaria’s overall FDI experience is positive in terms of absolute numbers and relative to GDP. But the growing end consumer market as the key driver for FDI in the last decade is facing already a high saturation level across key industries, while the market shrunk due to macro crisis and limited buying power. As other countries in the geographic neighborhood, Bulgaria is at the cross roads of a FDI strategy and needs to target investors in export oriented and higher-value added industries.

• However in these areas of today’s target investors, Bulgaria failed to attract major investments in production, R&D, or high-value added sectors

• While availability of high skilled people is confirmed as key criteria across different surveys to attract target investors,Bulgaria’s labor force is employed in relatively low-skilled sectors and the educational system currently does not provide enough graduates in global, emerging high-tech sectors.

• The possibilities for cluster-focused FDI-approach are also limited due to the lack/low availability of developed clusters in Bulgaria. As investors are moving towards a logic of geographic industry clusters – Bulgaria is at risk that attractive investors are not considering Bulgaria adequately.

Bulgaria’s FDI promotion strategy should focus on sectors that allow sustainable growth through attractive industry clusters.The marketing mix utilized within sectors will need to differ based on the structure of targeted sectors and their relative priority:

• Transport equipment and machine building, electronics and electrical, chemical & plastics, food & agriculture, logistics, IT, outsourcing – high priority sectors where Bulgaria has certain competitive advantages (traditions, geography, education, labor force, cost advantages) and which have significant export, employment, and regional development potential. No major institutional changes are needed to attract investment and significant marketing resources should be directed there to attract both global leaders as well as smaller players. Therefore, IBA should employ a full marketing mix for these industries (direct meetings at government level, direct mailing, industry conferences, specialized magazine publications and PR)

Source: A.T. Kearney analysis


Executive summary – selected sectors

• Healthcare and pharmaceuticals are high-value added, high-potential sectors, but require institutional efforts in order to attract large-scale investments. IBA should dedicate resources for marketing efforts to attract potential case-study investors, but there needs to be an overall government commitment and strategy for these sectors if they are to become major sectors of the economy. BIA and the government may take a role in providing quick feedback to drive needed institutional changes in order to attract larger-scale FDI

• Bulgaria should also start building capabilities in a select number of emerging global industries with a 5-10 year perspective. Industries with high potential and where Bulgaria may have certain traditions and endowments upon which to build and develop include cleantech, biotech

Overall, Bulgaria should focus on a number of broader clusters, where it should seek to establish itself as a an innovation leader in the next 10 years.

• IT & outsourcing – focus on attracting additional investments in IT/software and outsourcing and seek to drive spread of industry to the rest of the country. In parallel, attract R&D investment in latest IT technology

• CleanTech – cleantech is an emerging cluster industry, which incorporates a number of sub-industries (manufacturing of mechanical components, electronics, chemistry, biotech). Bulgaria’s attractive renewable energy legislation should be used as a marketing base for attracting manufacturing and R&D capabilities in the sector (and not only wind, photovoltaic parks)

• Food and agriculture-related biotechnology – Bulgaria should seek to attract basic FDI in the food and agri-sector as well as investments related to bio-foods, nutraceuticals, and others

• Healthcare and wellness related industries – Bulgaria can use its natural endowments to build an infrastructure in the healthcare, pharmaceuticals, and medical device industries



Executive summary – global trends

Global FDI flows are likely to recover starting 2011, which provides an opportunity and urgency for Bulgaria to position itself early on the post-crisis FDI flow map:

• FDI flows decreased almost twice in the 2007-2009 period as a result of the crisis. However, there is an expected rebound in FDI starting 2010/2011 and as TNCs are generally willing to continue internationalizing their operations

• Production, call centers and shared services are among the industries with highest probability for internationalization in 2011 and beyond

• Many business-cycle-sensitive industries such as automotives and other transport equipment metal and non-metal products, chemicals, and, more generally, the manufacturing sector as a whole, have been among the worst affected by the crisis, resulting in a direct negative impact on their FDI plans

• Some less cyclical activities that rely more on stable demand, such as agri-food and many services, or on supplying markets with quick growth prospects in the medium term, such as pharmaceuticals, have been less affected

There are a number of important global economic and FDI trends, which should be taken into account for Bulgaria‟s FDI and overall economic strategy

• China is the world’s second-largest economy and likely to become a major FDI exporter. EU is the largest economic block. Bulgaria should seek early on to position itself as a gateway to Chinese investment in the EU

• Population is growing, aging, and with longer life expectancy. Longer life expectancy is no longer a rich-world only phenomenon. Bulgaria can use its natural endowments to become a recognized healthcare destination

• Food demand is growing. Bulgaria significantly underutilizes its food production potential at the moment

Investment agencies in Europe try to have a focused approach of promoting several industries or clusters of industries. They also try to promote the new industries (biotechnology, clean-tech, life sciences)



Bulgaria – overview of positives and negatives

Bulgaria‟s macroeconomic stability, low tax rates and labor costs are clear advantages – but compared to other alternatives (competitive countries) not sufficient enough to attract target investors.

From human resource and industrial structure perspective there are a number of major challenges: • An industrial structure, which is heavily skewed towards low-value added employment. FDI is one of the major ways to try

to shift employment to higher productivity sectors• A heavy emphasis on business/finance studies by university graduates and relatively small number of technical graduates• Lack of strong established clusters that can serve the basis of attracting FDI at the next level of the value chain

Investors deem the lack of trained personnel, bureaucratic inefficiencies and lack of incentives as the basic obstacles for investing in Bulgaria. Major areas for improvement according to investors include:• Long term view of government, and macroeconomic and legal stability and predictability• Reduction of bureaucracy, easy and transparent for business environment• Investment agency should be empowered to help find a site, negotiate tax incentives, remove barriers and smooth the

process for investors• External promotion can be improved; Bulgaria has favorable investment environment but is still not known abroad • Improve efficiency of state institutions and law applicability• Increase ease of financing for the industries, requiring heavy investments



Table of contents

Executive summary








Bulgaria is a stable country with low tax rate and relative low costs of local business operations


Stability

• Bulgaria is an EU and NATO member

• The country has the lowest budget deficit in the EU and its credit rating was recently upgraded by Moody’s

• No currency fluctuations due to a currency board

Access to markets

Economic development

Cost of doing business

• Lowest cost location within the EU - zero tariff access to a €800 mm market

• At the center of South - East Europe - a 122 mn inhabitant high growth market

• Access to EU, Russian, Middle East and Africa markets

• Constant growth of above 6% in the period 2000-2008

• Consistent FDI inflows of more than €5 bn/year in the pre-crisis period

• Commitment to economic reforms and fiscal planning

• Flat tax of 10% on corporate and personal income – lowest in EU

• Tax exemptions and investment incentives for qualified investment

• Lowest salary costs in EU

Access to skilled labor

• Relatively large number of universities and specialized higher education centers

• A relatively high number of young Bulgarians studying in prestigious international universities

• Strong traditions in engineering and exact sciences


Within EU Bulgaria has the lowest GDP/capita while the GDP growth is too low to enable a short term solution

-20014

ROBGHUCZSKTK

7,4%

GDP Growth • GDP decline improved in Q1’10 to -4.0% compared to-5.9% in Q4’09, and -5.4% in Q3’09

• Analysts consensus for 2010 is growth close to 0%, following positive net exports, weak domestic demand and increasing unemployment

Peer Comparison 2010F Comments

Source: EIU, Eurostat, A.T. Kearney analysis

• Despite being one of the countries with highest GDP growth in recent years, Bulgaria remains the poorest member of the EU

• Even immediate peers like Romania have surpassed Bulgaria in terms of GDP per capita

• Compared to EU 15, Bulgaria has almost 6 times lower GDP/capita

European Comparison 2009 Comments

EU-15

13.1

FR

23.6

EU-27

BG DE RO

25.229.6

IT

34.6

NL

27.5 29.3

CZ

8.14.7

PL

9.3

HU

5.5

GDP/capita (EUR „000)

Summary of macroeconomic indicators


Earlier growth was fueled by significant inflow of foreign direct investment…

Overall FDI inflow levels in Bulgaria are relatively high with a peak year in 2007, when FDI were the highest since 1996

Source: BNB, A.T. Kearney analysis

2009

2,736

67%

2003

1,851

58%

2002

980

64%

2001

903

69%

2000

76%

1999

866

61%

1998

605

94%

1997

570

98%

1996

137

95%

3,213

22%

69%

2008

6,697

41%

62%

2007

9,052

30%

53%

17%

2006

6,222

33%

52%

15%

2005

3,152

30%

57%

2004

Reinvested profits Other EquityEquity Investments

FDI flows by type of FDI(EUR mil)


…but a sustainable growth was challenged by the investment in relatively lower productivity, non-export oriented sectorsSector Distribution of FDI(EUR mil)


2%

2002

980

27%

2001

906

37%

32%

2000

1,047

13%

25%

51%

2009

3,282

18%

8%

18%

22%

8%

28%

2008

6,686

15%

19%

9%

25%

28%

2007

9,052

17%

15%

12%

24%

30%

2006

6,222

19%

16%

17%

13%

29%

2005

3,152

7%

18%

28%

22%

15%

2004

2,736

25%

19%

24%

7%

2003

1,851

21%

24%

OtherTrade and RepairManufacturingFinancial ServicesEnergyConstruction & Real Estates


Beside closing the GDP gap more than 1 mn employees need to be moved to higher productivity sectors

(1) Assumed at 600K for conservatismSource: Eurostat. 2006 data, A.T. Kearney analysis

Unknown(1)

Wholesale and

retail

Textile and

apparel

Construction

Land transport

2007

1.580

600

612

138

140

90

206

80

475

612

Bulgaria Estonia Czech Hungary

2013

50

138

HungaryEstonia CzechBulgaria

Employees in select low-productivity sectors Number

• Structurally, Bulgaria may employ

much less people in the wholesale

and textile sectors and possibly in

the construction and transport

sectors

• Possibly, the following labor force

may be reallocated to other sectors

if there are available opportunities:

− 200K people from wholesale and

retail

− 50K from textile

− 20-50K from transport and

construction

− 500K from other

Comments

• Sectors such as textiles, wholesale and retail and repairs are unlikely to become much more productive with existing labor

force due to internal and external constraints

• Possibly around 1 mn employees must be “moved” to higher productivity sectors by attracting relevant FDI


As of today Bulgaria‟s manufacturing structure is similar to peers but oriented towards lower value added sectors

Manufacturing sector revenues(% of total manufacturing)

Source: Amadeus, A.T. Kearney analysis

4%

5%

7% 6%

7%

4%6%

4%

14%

8% 16%

8%

7%

14%4%

7%

4%7%

4%

4%

6%

7%6%16%15%

Chemicals and chemical products

Machinery and equipment n.e.c.

Fabricated metal products

Other non-metallic mineral products

Electrical equipment

Food products

Basic metals

Coke and refined petroleum products

Slovenia

100%

38%

1%

10%

12%

7%

0%

Hungary

100%

46%

2%4%

5%4%

3%

Estonia

100%

44%

4%2%

7%

11%

3%

1% 2%

Czech Rep.

100%

40%

All other manufacturing

2%6%

Rubber and plastic products

Beverages

10%

9%

1%

Bulgaria

100%

20%

5%5%

5%

• Coke, petroleum products, basic metals, and foods are the leading manufacturing sectors


Compared to Czech Republic and Hungary, Bulgaria lags behind in the high-tech sectors

Manufacturing sector revenues(% of manufacturing revenues)

Source: Eurostat. 2006 data, A.T. Kearney analysis

• Bulgaria has relatively small production of higher value-added sectors such as motor vehicles, computers and electronics, other fabricated metal products

7%

4%

4%

14%

8% 8%

7%8%

21%

5%

9%

4%

7%

10%

11%

5% 12%

6%

7%

6%

5%

5%13%

18%3%

36%

0%

14%

5%5%4%

6%

16%

7%

7%

3%

3%

Czech Rep.

100%

17%

Bulgaria

100%

Other non-metallic mineral products

All others

Basic metals

Electrical equipment

Chemicals and chemical products


Food products

Computer, electronic and optical products

Machinery and equipment n.e.c.

Fabricated metal products

Motor vehicles, trailers and semi-trailers

Slovenia

100%

24%

10%

6%

7%

3%

Hungary

100%

28%

3%4%

4%4%

4%

16%

Estonia

100%

40%

1%7%

6%4%


In Bulgaria, ~80% of employment is within wholesale and retail, manufacturing, construction, and transport sectors…

Employment and revenues% of total


18%

18%7%

7%

17% 16%

6%

1%0%

Revenues

All other

1%

18%

4%

1%

4%3%

4%4%

4%

Employment

33%

Manufacturing

Wholesale and retail

Construction

n/a

Transportation and storage

Professional, scientific

Human health and social work

Public administration and defence

Administrative and support services 1%

More than 80% of the employment in Bulgaria is within wholesale, manufacturing, construction, transportation, and professional and technical services


…which are generally low value-added sectors


Employment and revenues% of total

13%

9%11%

8%

17% 16%

8%

5%

7%

5%

2%2%

34%

10%

Employment

6%

Less knowledge-intensive market

services

Other knowledge-intensive

services

Low-technology

Knowledge-intensive market

services (excluding high-tech and

financial services)

n/a

Medium-low-technology

Less-knowledge-intensive

market services

All others

Revenues

48%

Bulgaria has only one sector where it has relatively higher productivity than CEE countries


There are only 500,000 people employed in relatively high-value added sectors

Source: Eurostat. 2006 data, A.T. Kearney analysis

57%

13%

5%

7%

4%

14%

n/a

Low

Medium

Medium-low

Medium-high

High

5%7%5%

9%11%

21%

Medium-high-technology

High-technology

Knowledge-intensive financialservices

High-tech knowledge-intensiveservices

Knowedge-intensive services

Knowledge-intensive marketservices (excluding high-tech)

Revenue

25%

20%

17%

Employment

21%

15%

43%

493,000 €10 bn

Total employment% of total

Less than 20% of total employed are in relatively high value added sectors


One reason is that Bulgarian higher education is heavily skewed towards business and finance, not engineering

Students enrolled by type of specialty(% of total)

Students prefer business administration/finance to technical studies, which

creates shortage of technical specialists in the country

Source: NSI; A.T. Kearney analysis

3%

5%

6%6%

6%

12%

3%

Construction & Architecture 4%

4%

IT

Mining3%

Art

Agriculture

2%Tourism

2%National security and Police

3%

1%

Social Services

Other

8%Environmental Studies

Public Services4%

Law

Pedagogy and Education

MedicinePhylology and History

Manufacturing

Business and Finance

30%

Total students (2009):254,160


There are no technical/engineering specialties among the top preferred study programs

Top university specialties(number of students)

The majority of students in Bulgaria are in non-technical specialties

Source: NSI; A.T. Kearney analysis

Business and Finance

Philology and History

Medicine

Pedagogy and Education

Law

Public Services

Agriculture

All others

254,160

76,515

15,389

14,639

14,17011,573

10,0449,908

101,922

• More than 75,000 students are involved

in business and finance-related studies

• Philology and history majors comprise

the second-largest student body

category

• Agriculture and public services are also

prominent student specialties

Comments


939

923799

53920

Manufacturing-related

IT

Mining

Communication

technology

Chemistry

Biology

Geography

Physics

Mathematics

Geology

Other technical 51,682

29,679

7,838

6,449

1,821

1,4071,268

Only 20% of all students are in technical/engineering specialties

Technical specialties(number of students)

Only 50,000 students are in technical/engineering specialties

Source: NSI, A.T. Kearney analysis

Macro analyses

• There are only 30,000 students in manufacturing related specialties

• There are ~8,000 students in IT-related specialties

• Students involved in sciences are in the range of 500-2,000 per discipline

Comments


Table of contents

Executive summary








The strategy “Vision 2020” outlines the path for Bulgariato catch up with EU economies through a targeted FDI strategy

Vision 2020

Increase share of priority industries

Provide incentives to

investors

Attract back students from

abroad

Change the skills set to

meet investor needs

• On the basis of a set of selection criteria, we have prioritized the following industries for targeted FDI marketing campaign:

− Electronics and electrical equipment

− Chemicals, rubber and plastics

− Agriculture and food production

− Transport equipment and machine building

− Transport and Logistics

− ICT

− Outsouring

− Healthcare and pharma

• Questionnaire, sent to investors in Bulgaria, shows that they believe the government can provide additional incentives to stimulate FDI growth

• These incentives could be not only in the form of subsidies, but also support for training employees, etc.

• Cooperation between the government and various universities and industry organizations could facilitate the FDI growth

• It is assumed that more than 30,000 Bulgarian students study abroad

• Most of them plan to stay working there as low salaries and corruption are preventing them from coming back

• Through a targeted strategy and increased information flow, these students and many young professionals could come back to Bulgaria and bring international know-how, which would boost the development of local companies

• One of the biggest problems for investors currently is the people skills set and the limited improvement of these skills in the past 5 years

• In order to meet the requirements of current and potential investors, Bulgaria needs to take some measures to improve the quality of the labor force

• This could be done, on the one side, with bringing back people from abroad. On the other, it could be achieved through better communication between the industry and the educational system

Source: A.T.Kearney analysis


The structure of the Bulgarian economy lags significantly to other CEE in terms of priority sectors‟ share

FDI priority sectors in Bulgaria and their share in the economy of some CEE countries(revenues)

Through a targeted FDI approach, Bulgaria could increase the share of these industries to catch up with peers

Source: Amadeus, A.T.Kearney analysis

Healthcare and Pharma

ICT

T&L

Transport eq.

and

Machine building

E&E

Chemicals, rubber and

plastics

Agri-food

Romania

25,2%

0,6%4,0%

5,3%

3,2%

1,7%

4,1%

6,2%

Hungary

40,4%

1,2%

3,8%

5,1%

7,1%

8,7%

8,7%

5,8%

Czech Rep.

32,6%

1,9%

3,4%

5,3%

8,3%

4,3%

4,5%

4,9%

Bulgaria

26,9%

1,2%3,4%

5,1%

2,0%2,0%

6,4%

6,9%


Our joint project analysis indicates that the investments in priority industry clusters could contribute to 33% of Bulgaria‟s output in 2020

207

33%

9%

Others

Outsourcing

182

ICT

Transport andLogistics

Transportequipment

E&E

Healthcare andpharma

Chemicals

Food andagriculture

2020Expected

1392

6

13

6

6

5

12

18

2020Baseline

139

14

9

24%

33

9

13

2010

89

68

2

2

4

111

4

6

0

Industry output, EUR bil.

Source: A.T. Kearney Analysis, Amadeus


This output will be generated by a cumulative investment effort for the next 10 years in these industries

188 13

Outsourcing100

ICT350

Transport and Logistics700

Transport equipment andmachine building

350

Electronics and electricalequipment

400

Healthcare and pharma500

Manufacture of chemicals, rubberand plastics

500

Food and agriculture500

Cumulative Investment(2011-2020, mill. EUR)

26

9

4

-20

6

6

-2

-2

22

9

17

9

8

3

9

78

86

10

15

7

35

18

12

6

5

13

2

6

Expected output within a range(2020, bill. EUR)

Bulgaria’s position

(1) Ranges have been determined by looking at the elasticities of these industries in peer countries. Ranges will vary when the amount of investment changes

Source: A.T. Kearney Analysis


With professionally planned investments, Bulgaria could achieve the 12,000 EUR GDP per capita target till 2020

2010 2020Expected

+112%

38.9

82.712.000

5.200

2010

+131%

2020Expected

4.4% per annum real growth of the economy

Nominal GDP growth(2010 – 2020, bill. EUR)

GDP per capita growth(2010 – 2020, EUR)

Source: A.T. Kearney аnalysis


Successful FDI strategy in the selected industries will lead to beneficial side effects in other industries…

Note: Local cluster is the one, which serves only the local marketSource: Centre for Economic Strategy and Competitiveness, EU Cluster Observatory, MOC, Amadeus, A.T.Kearney analysis

Other

Automotive

Plastics

TextilesPharmaceuticals

Oil and gas

Buildings related

Paper pr.

Chemical

Lighting & electrical eq.

Power

Metal manuf.

Electronics & Electrical

Natural resource

drivenTelecom

Construction

IT

Local

Instruments

OtherTelecom

Business services

IT & Outsourcing

Paper pr.

Maritime

Textiles

Other

Aerospace

Sport &

Recreation goods

Medical devices

Metal manuf.

Automotive

Processed

food

Buildings related

T&LHeavy Machinery

Production tech.

Transport Eq &

Machine building

Oil and gas

Other

Tourism &

hospitality

T&L

Local

Construction

Pharmaceuticals

Local

Healthcare

Maritime

Tobacco

Local

Natural resource driven

Farming & animal husbandry

Agricultural pr.

Processed food

Agri-food

Other

Chemical pr.

Transport & Logistics

The activities in every priority sector are inter-related with other industry clusters

Cluster name

Priority sectorPriority sectors and clusters in them (revenues)


…as formation of clusters in the priority sectors has already started

Local

Natural resource driven

Farming & animal husbandry

Agricultural pr.

Processed food

Agri-food

Tobacco

Local

Instruments

Medical devicesOther

Lighting & electrical eq.Natural resource driven

Power

Construction

Metal manuf.

AutomotiveITTextiles

Telecom

Pharmaceuticals

Electronics & Electrical

Oil and gas

Buildings related

Other Paper pr.Telecom

Plastics

Business services

Chemical pr.

IT & Outsourcing

Other

Paper pr.

Chemical

Maritime

Textiles Automotive

Other

Processed

food

Aerospace

Buildings related

Sport &

Recreation goods

T&LConstruction

Heavy Machinery

Metal manuf.

Production tech.

Transport Eq &

Machine building


Oil and gas

Pharmaceuticals

Other

Local

Tourism &

hospitality

Healthcare

T&LMaritime

Local

Cluster name

Note: Local cluster is the one, which serves only the local marketSource: Centre for Economic Strategy and Competitiveness, EU Cluster Observatory, MOC, Amadeus, A.T.Kearney analysis

Priority sectorPriority sectors and clusters in them (employees)

The activities in every priority sector are inter-related with other industry clusters


Investors indicate that the government plays a crucial role to facilitate the investment process and to boost FDI in the future

Over 90% of interviewed investors see some or major barriers to opening new business in Bulgaria. This is mostly due to complicated, expensive and complex procedures

Some of the issues investors face include:

• Lack of competent network in automation / tooling

• Not adequate infrastructure and rule of law

• Not enough production companies

• Lack of technical expertise and management experience

Major areas for improvement according to investors include:

• Long term view of government, and macroeconomic and legal stability and predictability

• Reduction of bureaucracy, easy and transparent for business environment

• Investment agency should be empowered to help find a site, negotiate tax incentives, remove barriers and smooth the process for investors

• External promotion can be improved; Bulgaria has favorable investment environment but is still not known abroad

• Improve efficiency of state institutions and law applicability

• Increase ease of financing for the industries, requiring heavy investments

Extract from investors‟ opinions and improvement suggestions (Survey 2010)

Source: Questionnaire among foreign investors in Bulgaria, A.T. Kearney analysis


1.1

1.3

1.3

0.9

1.2

1.2

2.1

2.5

2.6

3.1

Difficult access tofinancing

Legal barriers to foreign investors

Political influence

Lack of skilled labor

Inefficient bureaucracy

Factors creating difficulties Improvement over the years

Investors see some improvement in decreasing political influence and reducing legal barriers to foreign investors

From investor perspective bureaucracy as a major problem their company faced during the investment process

(1) Distribution is calculated on the actual responses, and exclude questionnaires with no response on the particular questionSource: Questionnaire among foreign investors in Bulgaria, A.T. Kearney analysis

3=improved1=worsened5=most important


Providing more incentives is one way of promoting Bulgaria to investors

Supplier network program – develop data base with information about the major companies in the country, the services and products they provide. This information should be accessible by foreign companies so they can properly evaluate the opportunities provided by the Bulgarian industry.

Revision of incentives law – the available incentives should be targeted, easily applicable and independent on the other long, bureaucratic processes.

• Development of HR subsidies:

– Publicly-supported training and education programs to alleviate the shortcoming of qualified labor.

– Temporary wage subsidies. The start-up phase can be further supported through the temporary coverage of part of the new corporate unit’s wage bill.

• R&D subsidies – no clear incentives mechanism for development of R&D activities in the country

– Cost participation under the form of direct subsidy

– Credit to investors

• Infrastructure should be a given, not an incentive – necessity for wider development of industrial zones meeting the investors needs

Increase administrative power of IBA

• Shift focus from „information center“ towards role in supporting the complete life cycle of targeted investments.

• Provide coordination in development of industrial zones any apply global best practices for industry zone management

• Ensure „one voice“ of Bulgarian investment initiative and streamline interfaces between public institutions. (Position IBA

as central project office)

• Authority to guarantee implementation of incentive plans

• Authorize (or support) IBA to impose penalty in case of non-execution of certain measures

List of practical initiatives to support IBA



For investors in Bulgaria, people‟s skills and qualifications are of highest importance for investment decisions

1.6

1.9

2.1

2.2

2.4

2.4

2.4

2.9

2.9

3.1

3.1

3.2

Access to raw materials

Access to suppliers

Access to other markets

Reliability and quality of infrastructure & utilities

Level of corruption

Ease of doing business

Access to local market

Labor cost

Stable regulatory environment

Stable macroeconomic &political environment

National tax regime

Labor force qualifications & skills

Foreign investors rank highest the quality of labor force, while labor cost ranks lower in terms of importance


5=most important


They see the lack of significant improvement in the skills sets as one of the biggest problems currently

1.3

1.0

1.5

1.0

1.0

1.3

1.33.1

2.4

2.7

2.7

2.9

3.1

3.1

Labor force mobiity

Other staff

Labor productivity

Restrictiveness of labor laws

Local managerial staff

Language skills

Technical staff

Skills and qualifications ranking Improvement over the years

Language skills and experienced, highly skilled labor force are of the highest importance to investors


3=improved1=worsened5=most important


Building a highly skilled and trained employees will be essential for Bulgaria to improve its attractiveness for investors


Specialists

Employees with specific skills that are not present or are scarce in the economy and

cannot be developed in the short-term or in a cost-effective way

Flexible Labor

Reflects alternatives the economy can use to meet periods of high demand for employee or

the need to lower costs

Critical Workforce Segments

Consists of highly skilled, highly trained individuals who drive revenue growth and value-

added

Core Workforce

Reflects the backbone of the economy – people who are well trained on general processes but whose knowledge and skills are more easily

replaced

Dif

fic

ult

y o

f re

pla

cin

g s

kil

ls

Impact on value chain


Therefore a targeted cooperation with universities and associations could close the gap to the FDI 2020 target

Program for attracting Bulgarian students and professionals from abroad

• IBA to coordinate development of data base with information about the Bulgarian students and professionals abroad

• Regular distribution of informational newsletter among the Bulgarians abroad in order to inform them about the business opportunities in the country

• Approach Bulgarians on key positions in international companies who can direct investments to the country

Co-marketing with established cluster and industrial associations – these organizations are close to the market, have direct contact with the companies and specific expertise so the joint marketing activities with IBA will improve their impact

University partnerships – education is a major factor for FDI attraction, so IBA should work closely with the educational institutions in order to structure the mechanism for development of programs tailored to the needs of specific big investors and investment flows.

Establishment of better direct marketing capabilities within the Agency – Structuring the whole process of direct marketing: database with potential investors, targeted and credible message, responsible people and consecutive actions.


List of practical initiatives to support IBA


Young professionals are opportunity driven, seeking new chances for career enhancement over greater salary

Young professionals are confident and motivated: more than 60% prefer opportunities for growth, while only 7.9% are looking for better job security

Factors influencing job selection process

Notes: The survey is conducted among individuals of different nationalities aged between 14 and 29 yearsSource: Deloitte survey, A.T.Kearney

7.9%

13.6%

27.8%

32.1%

34.5%

47.0%

49.8%

63.5%

Company culture/

reputation

Salary and

benefits package

Opportunities for growth

and development

Job responsibilities

Location

Company brand

Good recruiting experience

Better job security


Currently, corruption and lower salaries are the major impediments to their coming back to Bulgaria

Corruption, lower salaries and the lack of organization in the social system are the major impediment for the Bulgarian students to come back to Bulgaria

If you have any worry to work in Bulgaria, what are the reasons for that?(Times mentioned, total respondents 1425)

Notes: The survey is representative for the Bulgarian students in GermanySource: www.baiganyo.de, A.T.Kearney

Corruption in the

job selection process

Lower paymentties

Lack of enough security

Other

Personal reasons

Lack of interesting employers

0

Underdeveloped Public society

Lack of organization

in the Social system

Underdeveloped infrastructure

No idea

Corruption, incompetence,

bureaucracy in State institutions

Less opportunities for development

of the expert knowledge

100 200 300 400 500 600 700 800 900 1.050

http://www.baiganyo.de/


Bulgaria needs to develop a program for attracting back students and young professionals back to Bulgaria

Source: “Forum Career in Bulgaria – Why not?” A.T.Kearney

Creation of encouraging and favorable environment

Improve access to information

Social entrepreneursh

ip

Provide institutional support for the young, foreign educated Bulgarians with extravagant ideas. Support for business start-up of the young people Change in attitude of the institutions. The negative approach of the population /institutions is often

demotivating

Organize database and mailing list with the students abroad. Regularly send business data regarding the available opportunities like companies, job positions and requirements, funding programs, available projects and news

Inclusion of young people in the process of market economy and society development via various non-profit organizations, which attract young people willing to develop their personal skills

These organizations provide the basis for business entry of the young graduates

Expectation management

Improve access to quality services in support of career and personal development of young people Make it clear from the beginning that there are certain difference in Bulgaria. Still, the balance between the

risk to loose motivation from this fact and reality should be carefully kept

Security

Target experienced

people

Stimulate participation of young people in crime prevention and build trust between them and law enforcement institutions.

The students build their negative impression based on the information for the unsuccessful business ventures of relatives and the publicly available information about kidnapping and phone tapping

The experienced people above the entry level positions will not face the obstacles of the deficit of entry level positions and will bring important international know-how to the local economy

Moreover, these people have been living abroad for a longer period and homesickness might be stronger decision factor

Attract young people to state

institutions

Improve bureaucracy in the state structures in the process of recruitment and decision-making. Develop

“fast lane” for development of exceptional employees.

The project based approach, which involves external experts, will engage the young people who want to

contribute to the economic development , but do not want to work in the bureaucratic State structures


The level of information flow to these people needs to be improved

Source: “Forum Career in Bulgaria – Why not?” A.T.Kearney

Data Base

Collaboration

Mailing list

Gather information about the Bulgarian students abroad by specialty as well as the available experts by specialty

Direct contact with the universities from the countries with major presence of Bulgarian students

Collaboration with the private organizations sending Bulgarian students abroad (Integral, Darby, Work and Travel etc.)

Collaboration with the informal students organizations in Bulgaria (Back2BG, Tuk-tam etc.) as well as with the Bulgarian students organizations abroad in the different countries

Distribution of a periodical information (newsletter) by e-mail with the major job opportunities in Bulgaria, profile of the major employers, as well as news about different initiatives of the State (and private) institutions

Information campaigns

Direct marketing

Preparation of information materials about the labor market in Bulgaria, the various opportunities for funding and development, as well as the requirements for that

Information about the security, rule of law and protection of personal rights in Bulgaria

Direct contact with Bulgarian experts from abroad in order to be attracted for certain investment projects

Preparation of bonus programs for attraction of Bulgarian experts from abroad

Marketing Sending a message to the society with stressing on the importance of the family values, friends

and social circle. Adoption of the positive approach in order to improve the society attitude


The recent investor survey and a first comparison with other agencies indicates that IBA needs to be further empowered

2.2

1.0

1.4

1.8

1.9

2.1

2.1

Real estate brokerage firms

Other

Mgmt consultancy / investment boutiques

International accounting firm

Investment or commercial bank

Regional / industry business associations

InvestBulgaria Agency

Investment and commercial banks are the major sources of information for investors


5=most important

Sources of information used when entering Bulgaria


Appendices


Table of contents

Executive summary








• Historically, developed economies attracted higher share of FDI due to sophisticated business environment and infrastructure, stable economic and political systems and qualified labor force. With the EU integration of CEE countries, they started a convergence path, which in combination with lower labor costs and tax rates have increased their attractiveness to foreign investors.

• With the fast growth of Asian economies like China, India, Korea, Thailand, Singapore, FDI to these developing economies increased driven by booming economies and low labor costs.

• Due to the crisis, FDI on a world level contracted by 37% in 2009 compared to 2008.

Remarks and conclusions

Global FDI inflow slowed down to 3% in 2000-2009, after a period of 20% annual growth in the previous decade

222 285508

851601

441 362 410625

970

566236151143173

2011

10

7

8

8

106423200

10477534035

17630

825

215

630

2001

+20%

2009

2,100

1,444

91

565

2006

1,459

55

434

2005

986

2000

1,401

1,138

256

1999

1,088

228

1998

707

123

2007

70191

1997

486

191

1996

389

1,114

31

330

2004

732

+3%

292

2003

566

478

2008

1,771

1,018184

2002

628

147

1995

343116

1994

256

1993

223

1992

166

111

1991

154

114

1990

208

-37%

Transition economies Developed economiesDeveloping economies

FDI inflow of the world, 1990-2009(USD bil.)

(1) Classification of countries is provided in the back-upSource: UNCTAD, A.T. Kearney analysis


Sub-Saharan Africa experiences booming

development

Long life expectancy is no longer a rich-world-only

phenomenon

The EU is the world‟s largest economic bloc

International migration impacts world economic and

social patterns

World‟s health dynamics is changing

Freshwater is increasingly scarce

The world is urbanizing

Women become the primary breadwinners in developed

economies

Population is growing and quickly aging

The world‟s middle class is exploding

Global development trends are changing our societies and demand for products and services…

12 trends that will shape the global business environment by 2020

Source: A.T. Kearney’s Global Business Policy Council

Food demand is growing

China is the world‟s second-largest economy


...with some of them having higher impact on Bulgaria

Growing middle class and urbanization

• Although still having very low GDP per capita, Bulgaria is experiencing growing middle class and increasing urbanization, impacting consumer demand

• The most dramatic growth in spending of the new middle class globally will be seen in consumer spending and health care

Industries like food production and healthcare are likely to grow

Declining birthdates, aging population,

increasing life expectancy

China is the world‟s second largest

economy

• Declining birthrates, aging population and increasing life expectancy observed in Bulgaria are following Europe’ pattern

• Healthcare and services for aging population are expected to rise. This dynamics however puts pressure on retirement system and public spent

Healthcare will continue to have prominent importance

• China is currently the world’s second largest economy• China is increasingly becoming an exporter of FDI• With the EU as the world’s largest economic block, Chinese companies will be looking

for increased access to the EU marketsBulgaria should seek to establish close cooperation with China at all levelsearly on (FDI, R&D, tourism, university partnerships, cultural exchange, etc)

Access to EU‟s market

• Bulgaria is part of the world’s largest economic bloc representing around 30% of the global economy.

• EU membership notably eases investors in doing business, and gives access to the common market and EU subsidies and funds to support convergence

Bulgaria should seek to position itself as a gateway for Chinese and othernon-EU investments into the EU



Industry landscape is changing as sustainability is expected to endure as a major post-recession theme…

Consumption patterns (% of respondents)

8%

25%27%28%

38%

45%

52%

60%

"Go green" or

sustaina-bility

awareness increases

Private savings’ share of income higher than in the past

Internet shopping

gains market share

Product price more

important than

product quality

OtherThrift shopping increases

Fewer leisure

expenditures

Product quality more

important than

product price

(1) Companies participating in the index represent 44 countries and span 17 industry sectors across all 6 continents. Respondents include C-level executives, as well as regional and business heads

Source: A.T.Kearney FDI Confidence Index 2010

• The growing importance of “Go green” concept will drive industry sectors such as renewable energy, recycling, etc. More companies are expected to invest in sustainability creating growing demand for “green” products

• Internet shopping is expected to change the retail landscape as internet penetration across the world increases. Many retailers are expected to focus on developing internet portals along with shop expansion

• Fewer leisure expenditures, combined with higher share of private savings are expected to negatively affect tourism as less people will spend money on holidays. The recession has made consumers insecure, thus preferring to keep their money in savings. Banks would focus on expanding their deposit portfolios to meet the growing demand

Impact on industries


…and industries face different pressure to consolidate depending on their development cycle

1) CR3: Market share of the three largest companies of the total market based on Value-Building Growth database (34,000 companies)2) HHI: Hirschman-Herfindahl Index corresponds to the sum of the squared market shares of all companies, the axis is logarithmically plotted, CR3 and

HHI correlate with r2 = 0.78Source: Value-Building Growth database; A.T. Kearney analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

45%

- 10 - 5 0 5 10 15 20 25

CR3 1) HHI 2)

Years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

45%

- 10 - 5 0 5 10 15 20 25

CR3 1) HHI 2)

Years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

45%

- 10 - 5 0 5 10 15 20 25

CR3 1) HHI 2)

Years

OpeningOpening ScaleScale FocusFocusBalance/

Alliance

Balance/

Alliance

Paper

Drugs

Natural gas liquids

Semiconductors

Telecom

BrewersRailroad

Divers. Chemicals

Utilities

Automotive Supplier

Restaurants & Fast Food

Steel Producer integrated Automotive Mfrs.

Confectionary

Truck & Trailer Mfrs.

Shipbuilding

Distillers

Cigarette

Defense Electr.

Soft drinks

Aluminum Producers

Food Retail

Airlines

Integrated oil & gas

Banks

Consumer Electronics

Divers. FoodRubber & Tire Mfrs.

Paper

Telecom

Brewers

Defense Electr.

Soft drinks

Brewers

Insurance

Defense Electr.

Soft drinks

Ore Mining

Cosmetics


Expected internationalization is set to continue post the crisis

Level of expected internationalization2011 (in %)

Production, call centres and shared services are among the corporate functions with highest probability for internationalization in 2011

Source: UNCTAD, A.T. Kearney analysis

Level of expected internationalization Less than 10% 10% - 50%More

than 50%

Corporate functions

Production of goods and services 18 34 48

Sales offices 16 37 48

Logistics and distribution 27 37 37

Call centres and customer relations management 44 28 28

Administrative support and shared service cent 40 40 20

Research and development 41 43 15

Finance 45 45 10

Headquarters and decision-making centres 61 33 6

Common indicators

Sales 2 31 68

Investment expenditures 12 40 48

Employment 12 42 46

Capital stocks 26 49 25


Size and growth of regional markets are key decision factors for company location

The size and growth of local market are the major factors influencing locationdecisions


Leading factors influencing the location of companies2009 - 2011 (% of responses)

Most important location criteria by sector2009 - 2011

Primary sectorManufacturing

sectorServices sector

Access to natural resources

Size of local market


Stable and business-friendly environment

Growth of market Growth of market


Presence of suppliers and partners

Presence of suppliers and partners

Growth of marketAccess to international/regional markets

Access to international/regional market

17%

Access to

international/

regional

markets

Growth

of market

10%

Size of local

market

Presence of

suppliers

and partners

16%

Stable and

business-

friendly

environment

10%

8%


EU 12 are a medium priority region on a global scale

Regional prospects

Sub-Saharan

Africa

North Africa

38.3%36.4%31.8%35.1%

77.9%74.7%

44.2%

64.9%

37.0%

16.9%19.5%

SE Europe & CIS

Other developed countries

Other Europe

New EU-12EU-15US & Canada

Latin America & Caribbean

South, East and SE Asia

West Asia

5.65.35.25.75.45.45.86.45.65.15.0

2.92.62.33.0

3.93.93.1

3.92.8

1.71.9

Companies with FDI stocks in the relevant regions in 2009 (% of respondents)

Expected change in FDI by region, 2009–2011 (1=decrease of more than 50%; 5=unchanged; 9=increase of more than 50%)

Level of priority for each region as an FDI location 2009–2011 (1=marginal; 5=very important)

New EU-12 and SEE regions are medium priority for the major investors



Uncertainty is the major impediment to FDI in the post crisis period

Note: -4=large negative impact very probable; 0= negligible impact very probableSource: UNCTAD, A.T. Kearney analysis

Importance of risk factors for FDI decisions, 2009 – 2011(average value of respondents)

-0.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

0.0

Threats to

personal and

business safety

(e.g. terrorism,

Volatility of

prices in general

(inflation,

deflation etc

War and

political

instability

Exchange

rates

fluctuation

Volatility of

petroleum

and raw

material

prices

Rise of

protectionism

Changes

in investment

regimes

Increased

financial

instability

Worsening

of the global

economic

downturn

Uncertainty is the major impediment for FDI in the post-crisis periodBulgaria‟s top priority in terms of PR should be to convey a message of

macroeconomic and political stability


Internationalization is set to continue

Note: 1=not internationalized; 5=very internationalizedSource: UNCTAD, A.T. Kearney analysis

0.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.0

HQ & decision

making centres

FinanceR&DCall centres

and

CRM

Administrative

support &

shared-services

centres

Logistics

and

distribution

Production

of goods

and services

Sales offices

20112008

FDI is likely to rebound due to expected continuation of internationalization of corporate functions

Proportion of various corporate functions undertaken abroad2008 and 2011 (average value of responses)


SEE and EU12 are medium priority region for TNCs

Note: 1=not internationalized; 5=very internationalized; ODC = Other Developed Countries; LA = Latin AmericaSource: UNCTAD, A.T. Kearney analysis

TNCs‟ regional preferences2008 and 2011 (average value of responses)

5

4

3

2

1

0

20112008European TNCs‟

5

North

Africa

Other

Europe

West

Asia

SEE

and

CIS

LA and

the

Caribbean

New

EU-12

North

America

South,

East

& SE

Asia

EU-15

4

3

2

1

0

Sub-

Saharan

Africa

ODC

Japanese TNCs‟ Asian developing countries TNCs‟

Naturally, European TNCs view new EU 12 as highest priority relative to North America and Japanese TNCs

5

4

3

2

1

0

North American TNCs‟

5

North

Africa

Other

Europe

West

Asia

SEE

and

CIS

LA and

the

Caribbean

New

EU-12

North

America

South,

East

& SE

Asia

EU-15

4

3

2

1

0

Sub-

Saharan

Africa

ODC


The primary and service sectors were least affected by the crisis

Impact of the economic downturn on TNCs‟ investment plans 2009–2011, by sector/industry (average value of responses)

Note: 0=no effect; -2=very negative effectSource: UNCTAD, A.T. Kearney analysis

Other manufacturing

Transportation services

Electricity, gas and water

Electrical equipments

Electronic equipment

Wood and wood products

Chemicals and plastics

Business services

Metals and metal products

Precision instruments

Pharmaceuticals

-1-2 -0.6-0.8

Construction

-0.2 0-1.2

Manufacturing

-1.4 -0.4-1.6-1.8

Trade

Motor vehicle and trailers

Machinery and equipment

Telecommunications

Non-metalic mineral products

Other services


Primary

Textiles, clothing and leather

Services

Other transport equipment

Coke, petroleum products and nuclear fuel

Food, beverages and tobacco

Primary and Services sectors were least affected by the crisis. Pharmaceutical industry almost did not feel negative impact.


Transport equipment, electronics, and business services are the top job creating FDI sectors

Source: press search, A.T. Kearney analysis

50,000 150,000100,0000

Logistics

Electrical Equipment

Pharma, Medical

& Healthcare

Industrial Machinery

& Equipment

Food, Beverages

& Tobacco

ICT

Chemicals

Business Services

Electronics

Transport Equipment

Top ranking sectors by estimated jobs(2009)

There is an emergency of industry clusters (e.g. renewable energy), which span multiple traditional sectors

20092008

Comments

• Traditionally dominant sectors of investment, such as transport equipment, chemicals, and information & communications technology (ICT), all saw significant declines in numbers of jobs created from FDI

• Life sciences, energy and logistics sectors all saw varying degrees of recovery in investment levels

• Investment activity within some clusters has been more pronounced than what is discerned within individual sectors

• It is becoming increasingly important for locations to understand how they are positioned for investments within the new clusters rather than in the traditional sectors


Ireland, Hungary and Singapore topped the list of recipient countries FDI countries in terms of jobs created

0 20 40 60 80 100 120 140 160 180

Lithuania

UAE

Belgium

Nicaragua

Serbia

Bulgaria

Georgia

Malaysia

Estonia

Tunisia

Slovenia

Slovakia

Liberia

Canada

Uruguay

Czech Republic

Costa Rica

Singapore

Hungary

Ireland

Top ranking destination countries by estimated jobs – per 100,000 inhabitants (2009)

Top ranking destination countries by estimated jobs, created by FDI projects (2009)

It‟s not unrealistic for Bulgaria to be able to at least double number of jobs created by FDI projects in other countries

Source: press search, A.T. Kearney analysis

80,00060,00040,00020,0000

Morocco

Australia

Vietnam

Germany

Czech Republic

Thailand

Spain

Canada

Brazil

Russia

Hungary

France

Poland

Phillippines

Malaysia

UK

Mexico

China

India

USA


With the changes in global trends, new high-impact technologies will emerge from the convergence of scientific disciplines


Physics

ChemistryBiology

Robotics and Artificial

Intelligence

Biotechnology

(biochemistry, cloning,

Pharmacogenomics)

Energy Technology

Clean tech

(wind and

solar power,

biofuels, etc.)

Medical

Diagnostics

Medical

Devices

Nanotech

Stem Cell

Technologies

Smart

materials

Nutraceuticals

Nuclear Chemistry

Thermodynamics

Neurochemistry

Investors estimate biotechnology, clean-tech, nanotechnology as the ones of highest future investor interest


Some investment agencies in Europe have already started to promote these new industries

Focus of investment agencies in Europe

Belgium

• Clear focus and government

support on biopharmaceuticals

R&D and manufacturing

(1) Mechatronics – a fusion of machine construction, electronics, and information technology, deemed to be a high growth sector in AustriaSource: A.T.Kearney analysis

Czech Republic

• Focus on the high-tech

industries such as

nanotechnology, life sciences

and clean-tech

Austria

• Focus on high-tech industries

such as mechatronics, life

sciences and biotechnologies

Denmark

• Focus on technology-intensive

industries such as renewable

energy and life science

Finland

• Focus on clean-tech, ICT

and renewable energy

Ireland

• Focus on ICT, clean-

tech, life sciences

Portugal

• Focus on ICT, renewable

energy, biotechnology, cork

industry

Sweden

• Strong focus on

clean-tech

Croatia

• Focus on biotechnology

and pharmaceuticalsSlovenia

• Focus on chemicals and

pharmaceuticals

Estonia

• Since recently, clear

focus on biotechnology


ICT, Pharmaceuticals and Electronics are leading industries in focus by most European investment agencies

European agencies encourage investments in high value adding industries

3.6

1.0

1.1

1.3

2.3

2.7

2.8

3.1

3.2

3.4

3.7

3.7

3.7

4.0

Tourism&wellness

Retail&wholesale

Real estate

Logistics

Healthcare

Electronics

Chemicals

Automotive

Pharmaceuticals

ICT

Cleantech

Life sciences

Machinery&equipment

Oil&gas

(1) Distribution is calculated on the actual responses, and exclude questionnaires with no response on the particular questionSource: Questionnaire among European investment agencies, A.T. Kearney analysis

5=most importantIndustry focus of investment agencies


People skills and infrastructure are seen as equally important competitive advantages in the majority of European countries

Focus on developing people skills is key for the industries of the future

20%

5%

5%

15%

17%

18%

20%

Other

Natural endowments

Government support

Industry clusters

Education & research centers

Supporting infrastructure

People skills


Country competitive advantages

Comments

• Current trend is to promote R&D activities in steadily established industries: automotive, electronics, medical products, renewable, High-technologies, IT technologies” (interviewee comment)

• People skills and availability of supporting infrastructure are important factors for promoting development of new and high-value adding technologies


Qualified labor and access to larger (EU) markets are the most important country promotion arguments

Access to raw materials is the least used promotion argument

3.4

1.9

3.1

3.1

3.1

3.2

3.2

3.4

3.6

3.9

3.9

Ease of doing business

Availability of land plots

Labor costs

Favorable national tax regime

Access to local market

Access to raw materials

Access to suppliers

Stable macroeconomic &political environment

Access to other markets

Labor force qualifications & skills

Reliability and quality of infrastructure & utilities

5=most importantKey country promotion arguments



Investments in education and in infrastructure are key priorities in most European countries

Building upon people skills would be the differentiating factor for attracting investments

7%

12%

25%

28%

28%

Invest in infrastructure

Other

Improve institutionalefficiency

Invest in education

Introduce tax incentives


Comments

• Some of the other areas for improvement identified by European agencies include:

– Innovation environment

– More flexible labor legislature

– More attractive tax regime

– High-tech strategies on governmental level

– Targeted investment and operational incentives (rather than tax incentives), etc.

Key investments priority for the agencies


Manufacturing and R&D are historically the most important types of investments in Europe

Greenfield investments in R&D and manufacturing were preferred in Europe during the last 5 years


Preferred types of activityPreferred way of entry

11%

17%

72%

Privatization

Greenfield

M&A

2%

10%

16%

16%

17%

18%

21%

Other

Distribution / Warehousing

Call center / shared services

Sales operations

Manufacturing / Processing

R&D

Regional headquarters


Table of contents

Executive summary








Electronics and Electrical engineering

Global trends

• The 2nd largest industry in the world in terms of FDI job creation with 89 000 new

jobs in 2009

• Expected significant FDI rebound and specifically increase in investments in

Eastern Europe

• High-tech, export oriented sector

Endowments in Bulgaria

Potential impact

• Strong traditions in Bulgaria – more than 130,000 employed in the past

• Proximity to the key markets of Western Europe

• Presence of some international companies

• Relatively good educational resources

• High potential impact for productivity improvements and export.

• Possibility to attract medium-skill level electronics and electrical firms in regions

outside of Sofia with the potential to employ relatively less skilled labor (e.g.

product assembly)

• Potential to increase employment in the sector with up to 100% and reach 1980s

level.

Source: UNCTAD, “Global Location Trends”, A.T.Kearney analysis

Targets• Focus on attracting both OMS and EMS firms from major countries like

Germany, Italy, UK, China, South Korea, Japan, US, Taiwan


ICT

Global trends

• The 5th largest industry in the world in terms of FDI job creation with 53 000 new

jobs in 2009

• CEE market for IT services is growing and is expected to continue the growth in

the future with higher rates

• High value-added and Knowledge intensive sector, Export oriented services

sector


Potential impact

• Strong traditions in Bulgaria – IT leader in the CEE in the 80s


• Presence of major big international IT companies


• High-speed broadband network

• Possibility to upgrade to higher knowledge intensive sub-sector of IT industry

• IT is enabler for development of technologies and improve of productivity in

other sectors

• Driver for improvement of the educational structure

• Possibility for development outside of Sofia


Targets

• Focus on attracting of companies in the Software Development and Higher value

added IT services. Development of newer tendencies like cloud computing, and

software-as-a-service (SaaS).

• Targeted countries: Western European countries - Germany, France, UK,

Belgium, Netherlands , Sweden, Denmark, Finland; Other developed countries -

USA, Japan; EU representatives for the growing IT companies in China and India


Outsourcing

Global trends

• The 3rd largest industry in the world in terms of FDI job creation with 56 000 new

jobs in 2009

• Expected significant FDI rebound and specifically increase in investments in

Eastern Europe

• Export oriented services sector


Potential impact

• World competitive in terms of cost and availability of skilled labor - high ranking in

Global Services Location index

• Relatively good educational resources with multi-language skills

• Presence of major big international IT companies


• High-speed broadband network

• Possibility to upgrade to higher value-added activities or attract higher-skill

sectors like financial or mathematical analysis

• Know-how attraction , productivity and quality improvement of the whole industry

• Possibility to attract medium-skill level firms in regions outside of Sofia with the

potential to employ relatively less skilled labor with the only requirement of

language knowledge

Source: UNCTAD, A.T.Kearney’s “Global Services Location Index”, IBM’s “Global Location Trends”, A.T.Kearney analysis

Targets

• Focus on: Business process outsourcing (BPO), Service centers and some emerging outsourcing fields like R&D, Financial analysis and Mathematical analysis.

• Targeted companies: the major international corporations who can benefit from outsourcing.

• Targeted countries: USA, UK, Germany, France, Belgium, Netherlands , Sweden, Finland


Food & Agriculture

Global trends


jobs in 2009

• The impact of the crisis on the FDI plans has been more limited than average.

The growth in FDI is expected to continue

• The low growth in EU production can be resolved by exploiting markets in the

new EU member states.

• Recurrent trend of healthier food products


Potential impact

• Strong traditions in Bulgaria – main exporter for the USSR market in the past

• Fertile land in various areas of the country

• Presence of major international food companies



• Possibility to provide employment for less skilled labor in regions outside of

Sofia.

• Development of the Wine cluster


Targets

• Focus on: Organic farming and finished goods ; Convenience products - portable and convenience foods that do not compromise quality and taste

• Targeted companies: Companies and investors in farming and food & beverages producers.

• Targeted countries: with high expertise in agri-food like France, Germany, Italy, Netherlands, Israel and countries with strong food demand like China, the Arab world and Japan.


Transport Equipment and Machine building

Global trends

• The largest industry in the world in terms of FDI job creation with 160 000 new

jobs in 2009

• Expected growth of more than 30% in the next years in light vehicles

• Trend of relocation of some manufacturing activities from developed countries to

low-cost countries

• Chinese manufacturers are entering the European market


Potential impact


• Proximity to the automotive clusters of CEE

• Presence of international auto-parts manufacturers



• Possibility to attract medium-skill level transport equipment and machine building

firms in regions outside of Sofia with the potential to employ relatively less skilled

labor (e.g. product assembly)


Targets

• Focus on attraction of some of the main Chinese car manufacturers, as well as to target some of the international car manufacturers of electrical cars for the initiation of electric car components production

• Focus on other transport equipment production (agricultural machinery, buses, ship building, wagon and rolling stock, bicycle)

• Targeted countries: China, US, UK, South Korea, Germany, etc



Global trends


jobs in 2009

• The sector is expected to grow with more than 30% in the next 20 years.

• Expected significant increase in investments in Eastern Europe due to formation

of Regional Distribution Centers

• Service oriented sector with focus on export and value-added activities


Potential impact

• Extremely favorable location on the cross road of Europe and Asia with 5 Pan-

European Transport corridors crossing the country

• Availability of all modes of transport

• Infrastructure development is Government priority



• Possibility to attract other industries, highly reliable on fast and reliable Transport

& Logistics services

• Possibility to employ a combination of high skilled logistics experts and low

skilled labor in the transportation and processing activities


Targets

• Focus on attraction of: Logistics hub for regional distribution centers, shippers,

LSPs, logistics facilities developers

• Targeted countries and companies: China, international transport, logistics and

warehouse operators (Maersk, CMA CGM, DHL, etc)


Healthcare

Global trends


jobs in 2009

• The aging and relatively wealthy population is likely to demand more medical

services.

• Reduction of the in-hospital treatment time and promotion of treatment in

outpatient settings

• The pharmaceutical industry is non-cyclical and is among the least affected

industries by the crisis, with one of the most positive outlooks for FDIs in 2011.

• Generics producers niche development due to patent expiration


Potential impact

• Long traditions in wellness tourism and experienced Bulgarian staff. Traditions in Pharmaceuticals

• Excellent geographical, climate and natural conditions


• 80% of Bulgarian pharma production is in the sphere of generics

• High potential impact for pharmaceutical production and export.

• Possibility to employ more medium-skilled people in service related activities

through-out the whole country

• Year-round development of tourism

• Improvement of the whole healthcare structure


Targets

• Focus in Healthcare on medical tourism, spa and wellness, end-of-life care,

R&D, medical suppliers

• Targeted countries: Germany, Italy, UK, Nordic countries, France

• Focus in Pharmaceuticals on generics, production outsourcing, early stage R&D,

bio-similars

• Targeted countries: France, Germany, Italy, Spain, UK, US, Switzerland


Manufacture of Chemicals, Rubber and Plastics

Global trends


jobs in 2009

• Chemical companies undertake major capital investments in emerging markets for lowering structural costs and for capturing new market opportunities

• High value added, technology intensive, export oriented sector


Potential impact


• Extremely favorable location on the cross road of Europe and Asia

• Traditions in the sector – 113 000 employed in the 1980s

• Presence of few big international companies

• Access to some natural resources


• Possibility to employ a combination of high skilled chemistry experts and low

skilled labor in the production process, in factories outside of Sofia.

• Potential to increase employment in the sector with up to 100% and reach 1980s

level.


Targets

• Focus on fine and consumer chemicals, bio-based materials, nanotechnologies,

cleantech

• Targeted countries: Germany, France, UK, Italy, Belgium, Netherlands, US


New industries – Cleantech, Biotech, New Generation IT

Global trends

• New funding in clean-tech industry are expected to more than double by 2018

• The increasing need of drugs and growing number of clinical trials will drive the

biotechnology industry in the next several years

• Cloud Computing and Software-as-a-Service are gaining popularity worldwide. IT

decision are being integrated in almost every sector of economy


Potential impact

• Presence of some research facilities

• Relatively good development prospects of supporting industries like IT,

Chemicals, Renewable energy production

• High awareness of intellectual property and patenting and adequate legislation

in place


• Key enabling technologies for other sectors development

• New technologies open new perspectives for applications in the pharmaceutical,

food and environmental markets.


Targets

• Targeted countries:

• Cleantech: USA, Nordic Countries

• Biotech: USA, Germany, France, South Korea

• New Generation IT: Top international IT companies


Table of contents

Executive summary








Electronics and electrical equipment snapshot

0.2

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Q3 1009080706050403020100

FDI flows(EUR mm)

Industry size

Size % econ % manuf.

Revenues (€ „000) 1 504 749 1,9% 8,7%

Employees 44 679 1,6% 7,7%

Firms 2 249 0,6% 7,3%

Employees

• Strong traditions – more than 130,000 people in the industry ’80s

• Availability of qualified engineers

• Appropriate technologies conformable with the EU standards

• Modern equipment from EU, American and Japanese suppliers

• Good quality/price ratio

• Good overall educational level of the population

• Member of EU – access to the community market

Strengths

Weaknesses

• Ageing of the qualified engineers• Amortization of the equipment due to lack of investments• Lack of significant investments and supplier base• The higher education structure does not stimulate the development of

the industry in the whole country

• Electronics & Electrical = 9 000 students

• Other relevant = 21000 students

• (Communication technology; IT;

• Manufacturing: aviation; freezing technology; machine-building;

materials; metals; transport equipment and other technical specialties)

University students

Other resources

• 22 Professional schools with specialties in E&E

• Active research institute in Bulgarian Academy of Science (BAS)

• Active industry association

• EU funding

Source: Amadeus, BNB, A.T. Kearney analysis

Industry Size and FDI Flows Strengths and Weaknesses

Educational and Other Resources Geographic Concentration

Industry overviews – Electronics & Electrical equipment


Only a few sub-segments are sizeable

Sub-segments within the industry

Sector and Sub-segments Revenues Employees Companies

Electrical equipment 991 842 29 291 1017

Other electrical equipment 125 707 8 645 343

Electric motors, generators and transformers 198 817 5 268 158

Other electronic and electric wires and cables 188 903 4 368 54

Electricity distribution and control apparatus 75 701 3 817 270

Electric domestic appliances 225 332 2 940 18

Electric lighting equipment 67 810 2 016 140

Batteries and accumulators 108 946 1 904 31

Non-electric domestic appliances 627 333 3

Computer, electronic and optical products 512 907 15 388 1232

Electronic components 280 600 5 655 151

Communication equipment 62 509 3 249 223

Irradiation, electromedical and electrotherapeutic equipment 57 943 2 931 642

Computers and peripheral equipment 71 527 2 133 168

Optical instruments and photographic equipment 13 089 700 13

Instruments and appliances for measuring, testing and navigation 11 019 583 21

Magnetic and optical media 15 050 95 2

Watches and clocks 1 169 42 12


Certain sub-segments have very low revenues overall



Top players in the electronics industry (1/2)

The top players in the Electronics industry, according to its corresponding sub-segment

Company% of Industry

Revenues% of Industry Employees

Sub-segment % of Sub-Segment

Rev

EPIQ Electronic Assembly 22% 15% M-e of electronic components 40%

Sensor Nite Industrial 14% 0,4% M-e of electronic components 26%

Melexis Bulgaria 7% 1% M-e of electronic components 12%

DATECS 7% 2% M-e of computers and peripheral equipment 51%

Videoton Bulgarian Holdings 4% 0,1% M-e of electronic components 7%

Deltacom Electronics 3% 2% M-e of communication equipment 27%

BTL Industries 3% 0,3%M-e of irradiation, electromedical and

electrotherapeutic equipment26%

Kanon Bulgaria 2% 0,1%M-e of optical instruments and photographic

equipment 59%


The industry and sub-segments are defined by a few successful / sizeable, foreign and domestic companies



Top players in the electrical engineering industry (2/2)

The top players in the electrical engineering industry, according to its corresponding sub-segment




Rev

Liebherr Hausgerate Marica 16% 6% M-e of electric domestic appliances 72%

Yazaki Bulgaria7%

13% M-e of other electrical equipment 52%

Monbat 6% 2% M-e of batteries and accumulators 59%

SE Bordenetze Bulgaria 6% 6%M-e of other electronic and electric wires and

cables 31%

Filkab 5% 1%M-e of other electronic and electric wires and

cables 24%

Hyundai Heavy industries 5% 2%M-e of electric motors, generators and

transformers26%

Schneider Electric Bulgaria 5% 2%M-e of electric motors, generators and

transformers24%

AMK Motor Reduktori 4% 0,01%M-e of electric motors, generators and

transformers18%

Enersys 3% 2% M-e of batteries and accumulators 27%





Summary of global trends in E&E industry

The electronics industry is a cyclical industry, dependent on the economic cycle. The industry experienced a decline in FDI flows during the crisis and may expect recovery starting in 2011

It is an infrastructure industry and therefore underpins a lot of other sectors. This drives characteristic long-term cycles. Latest cycle will be driven by growth in medical devices, security, energy, cleantech, and other sectors

The industry is one of the top ranking sectors by estimated jobs by FDI

CEE countries saw significant investment in the industry in the past, but Bulgaria didn’t attract major players. Major OEMs and EMSs are present throughout CEE

The value of the electronics production for one year in CEE is $85bn with tendency to reach soon $100bn. Nearly 50% of the major manufacturers on the European market prefer CEE to Asia as location for their facilities.

Main advantages of CEE are low transportation and labor costs and qualified labor pool

The main growth opportunities within the sector are within the professional (vs. consumer) applications. These include segments such as automotive electronics, medical device, energy, industrial, telecoms related

The EU remains the largest market in terms of consumption and the second largest in terms of production of electronics. Main countries manufacturers are China, Japan, USA, South Korea, Germany, Italy, UK, Taiwan, Singapore

Within the EU, the sector employs 3,5 mn people and generates €500 bn in revenues. The sector has a two-tier system – a few large companies and many smaller players

Within this sector, Bulgaria should approach the following strategy and tactics:

• Focus on industrial electronics (automotive, medical device, energy, telecoms). Basis of competition there are engineering skills, labor costs, proximity to markets. These segments are characterized by smaller players and are dominated by EU firms

• Target also large OEMs and EMSs on an opportunistic basis. Contact both established global players as well rising Chinese electronics companies who wish to enter the EU market

BIA should have a segmented approach given the structure of the sector – direct contact at BIA/governmental level with the industry giants in EU, USA, China, Japan, South Korea (Panasonic, Flextronics, Samsung etc) and direct mailing to smaller EU players




Electronics and electrical equipment industry: EU snapshot

Source: Commission of the European Communities – “European industry in a changing world 2009”


Facts & Figures

• The sector employees around 3,6 mm people and with an output of €50 771 mm in 2007 represented 9,8% of the total EU manufacturing industry

• All sub-sectors showed modest to dynamic growth rates, except for transmission apparatus and telephones, which declined

• Between 2006 and 2007 the overall weight of this subsector decreased from 10,3% to 9,8% of total EU-27 manufacturing output

Competitiveness Assessment

• As a major supplier to other sectors, the E&E is very “cycle-sensitive” as a result of the overall slowdown of the EU economy, the growth rate of the E&E industry has fallen below the overall GDP growth rate

• Counterfeiting of EU E&E brands is a serious and growing problem for European manufacturers

• Access to third countries is also frequently hindered by local safety standards and certification/testing procedures which are not in line with international standards

R&D and Innovation

• E&E is closely involved in the Framework Program 7 and the European technology platforms research programs

• The creation of joint research initiatives between public and private sectors at EU level is seen as the right step forward to foster sustainable growth, competitiveness and durable job creation

Areas of Growth• Two sub-sectors have shown the highest growth over the long term: electric motors, generators &

transformers and other electrical equipment (27% and 22%, respectively, for the period 1999 – 2005)

• Currently, the focus is on energy efficiency and energy security, which is widening the scope of growth

Structure of Sector

• The structure of the E&E industry is characterized by a two-tier system: a few large corporations producing a large range of electrical and electronic equipment, and many small companies specialized in niche markets

• A characteristic of the industry is the relatively high level of employment relative to output


Opportunistic trends for Bulgaria in the E&E industry

Medical

Energy

Industrial

• 14% CAGR in Europe, from professional to mass market applications

• Innovation : well being, new services like patient monitoring, Heterogeneous integration (biology, SC, power, High Reliability)

• Opportunities: Imagery and Telecom leadership, European medical expenses 600 billion euros = 6% of the GDP and growing faster (major productivity gains required)

• Smaller international companies, mainly in Europe

• Countries: Germany, Italy, UK, US

• Outlook: Solar cells shortage, Investment in PV = investment in SC in 2010

• Innovation: Energy mix to increase requiring system approach (modal approach) and specific technologies (components, power management, storage)

• Opportunities: German leadership in PV, Spain and Denmark in Wind Energy, major operators and investments


• Countries: Germany, Italy, UK, US, China, Spain, Denmark

• Outlook: 5.0% CAGR in Europe, a strong European leadership in all the value chain

• Innovation: large scale smart infrastructures, increased global operations productivity (design, manufacturing, supply chain), energy efficient systems require new product & technology from component to software

• Opportunities: European regulations and consciousness ahead of the market


• Countries: Germany, Italy, UK, US, Japan, South Korea

Who to target for FDI?Opportunities for/in Bulgaria

Automotive

• Outlook: 4.5% CAGR in Europe, strong investment in emerging regions

• Innovation: Electronic content to experience a new boost following new car architectures (impact from 2010), mechatronics integration

• Opportunities: technological leadership and industrial infrastructure, new innovators like Michelin, Continental, Bolloré, Dassault


• Countries: Germany, Italy, UK, US, Japan




Opportunistic trends for Bulgaria in the E&E industry

OEMs

EMS

• High growth potential and value added

• Availability of engineer skills

• Low labor and production costs

• Proximity to EU markets, Middle East

• Traditions in sector

• Presence of international leading players

• International global companies leaders in the industry

• Countries: Germany, China, South Korea, Japan, US

• High growth potential and value added

• Availability of engineer skills


• Proximity to EU markets, Middle East

• Traditions in sector

• Presence of international leading players

• International global companies leaders in the industry

• Countries: Germany, China, South Korea, Japan, US, Taiwan





Chemicals, rubber and plastics industry snapshot

4,1

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FDI flows

(EUR mm)

Industry size


Revenues (€ „000) 1 669 603 2,1% 9,6%

Employees 47 687 1,7% 8,2%

Firms 2 720 0,7% 8,8%

Employees

• Availability of qualified and experienced engineers and employees

• Low production costs

• Existence of raw materials for some sub-sectors, especially the ones with future growth potential (energy and energy saving sectors, biotechnologies)

• Presence of big international companies on the Bulgarian market (Air Luiquide, Solvay Sodi, etc)

• Strong traditions in the industry

Strengths

Weaknesses

• Lack of modern and cost-effective technologies and equipment

• Interruption of the innovations process after liquidation of the supporting R&D structures

• Lack of or not developed cluster structures

• Lag of the higher and professional education to the actual needs of the chemical needs

• Chemistry and chemical manufacturing = 6,245 students

• Other relevant = 2,622 students

• (Biotechnology, cosmetics and manufacturing of materials)

University students

91

7

-9

36

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1

97

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Electronics Industry Size and FDI Flows Strengths and Weaknesses


Industry overviews – Chemicals, Rubber and Plastics


There is a diversified chemicals and plastics supplier base



The leading position of certain sub-segments is a result of the presence of large international companies


Chemicals 916 274 17 919 756

Other chemical products n.e.c. 356 623 4 363 180

Soap and detergents, cleaning and polishing preparations 104 579 3 533 214

Perfumes and toilet preparations 193 400 1 714 99

Man-made fibres 14 920 1 685 7

Fertilisers and nitrogen compounds 52 865 1 527 7

Paints, varnishes, printing ink and mastics 47 889 1 084 86

Explosives 23 399 773 5

Essential oils 11 462 554 36

Synthetic rubber in primary forms 11 604 538 17

Dyes and pigments 15 907 525 21

Plastics in primary forms 25 787 449 30

Pesticides and other agrochemical products 22 998 444 18

Industrial gases 24 554 387 9

Glues 10 285 343 27

Rubber and plastics 753 328 29 768 1 964

Other plastic products 169 761 9 002 617

Rubber tyres and tubes 169 800 8 830 1 045

Plastic packing goods 199 169 6 107 130

Plastic plates, sheets, tubes and profiles 118 466 3 207 118

Builders' ware of plastic 96 133 2 622 54



Top players in the chemicals industry (1/2)

The top players in the chemicals industry, according to its corresponding sub-segment




Rev

Solvay Sodi 7% 1,2% M-e of other inorganic basic chemicals 36%

Agropolychim 7% 1,5% M-e of other inorganic basic chemicals 35%

Orgachim 3% 1,4% M-e of other inorganic basic chemicals 17%

Neochim 3% 3% M-e of fertilizers and nitrogen 95%

Ficosota Syntez 2,6% 1%M-e of soaps, detergents and cleaning

products41%

Panchim 0,8% 0,2% M-e of other inorganic basic chemicals 4%

Air Liquide Bulgaria 0,8% 0,2% M-e of industrial gases 57%

Agri 0,8% 0,4% M-e of pesticides and agrochemicals 60%

Dunarit 0,8% 1,1% M-e of explosives 59%





Top players in the rubber and plastics industry (2/2)

The top players in the Rubber and plastics industry, according to its corresponding sub-segment




Rev

Gotmar 3% 2,1% M-e of plastic packing goods 16%

Natalia MM 0,2% 1,9% M-e of other plastic products 11%

Plastchim T 1% 1,5% M-e of plastic packing goods 12%

Vidahim 2% 1,3% M-e of rubber tires and tubes 7%

Assenova Krepost 1% 1,3% M-e of plastic packing goods 10%

Extrapack 1% 1% M-e of plastic packing goods 8%

Megaport 1% 0,9% M-e of plastic packing goods 7%

Danik n/a 0,8% M-e of other plastic products 4,6%


The rubber and plastics industry is dominated by small and medium firms



Summary of global trends in the chemical industry

Source: Mergent, Commission of the European Communities , Staff working paper, European industry in a changing world, 2009, A.T. Kearney analysis

Globalization / Structural changes

Cost Reduction

Product portfolios

• Industrialized nations have lost their traditional positions as largest exporters of chemicals to countries like China and India

• Responses to globalization include restructuring, joint ventures, M&A and shifting of production facilities

• Chemical companies undertake major capital investments in emerging markets for lowering structural costs and for capturing new market opportunities

• Volatile input costs are a major challenge for chemical producers. Sourcing from emerging markets reduces costs

• As customer industries are rapidly changing as a result of continuous innovation, the chemical industry will eventually restructure its product portfolio, stressing the importance of bio- and nanotechnologies

• In order to minimize cyclicality, companies need to expand into high growth specialty chemicals, such as fine chemicals and consumer chemicals

R&D and innovation

• Discovering, adopting and commercializing new chemical substances, preparations and technology is a key driver of future developed countries competitiveness in the chemical industry

• Clustering, collaboration and formation of strategic alliances are becoming increasingly important

Talent management

Environmental sustainability

• The manufacturing labor market shrinks; the average age of chemical industry employees in the U.S. is around 50 years

• Companies are also challenged by the changing expectations of the workforce due to growing demand for complex skill sets; the industry is also challenged to locate and retain skilled workforce in emerging markets

• The sub-sectors in the chemical industry that are active in the fields of energy and energy saving (solar panels, insulation, carbon capture) and water purification have enormous growth potential. Electronic chemicals have very good growth prospects too



Chemicals, rubber and plastics industry: EU snapshot

Facts & Figures


R&D and Innovation

Areas of Growth

Structure of Sector

• With a turnover of €537 bn, the EU is the leading chemicals producing area in the world (29% of world production)

• The industry employees about 1,2 mm, although employment has fallen by 2,1% per annum over the last 10 years

• The EU has a substantial trade surplus in chemicals (€35,3 bn), although its share in the global market falls constantly

• The key factors influencing competitiveness of the EU chemical industry are access to energy and feedstock, innovation, R&D and international trade

• The EU has recently increased its trade surplus in specialty chemicals, consumer chemicals and polymers

• The challenges facing the industry are slow demand growth in Asia, delocalization of customer industries, higher production costs and highly regulated environment

• In 2004, R&D spending accounted for 1,8% of the sales of the EU chemical industry, slightly higher than US (1,7%) but two times less than Japan

• The chemical industry is responsible for about 15% of all filings at each major Patent Office

• Clustering, collaboration and strategic alliance formation are becoming very important

• The sub-sectors that are active in the fields of energy or energy saving (solar panels, insulation, carbon capture) and water purification have enormous growth potential

• Electronic chemicals and pharmaceuticals have very good growth potential too

• The chemical industry consists of about 27 000 enterprises, 96% of which are SMEs generating 30% of sales and 37% of employment

• The EU rubber industry comprises some 4 200 companies and employees 360 000 people

• The plastics industry is comprised of approx. 50 000 enterprises employing some 1,6 mm people




Opportunistic trends for Bulgaria in the chemical industry

Source: AT Kearney Analysis

Production

outsourcing

Fine and

consumer

chemicals

Bio-based

materials

Nanotechnologie

s

Clean

technology

• Low production and labor costs in Bulgaria

• Long traditions and skilled staff

• Access to EU market, Middle East, Russia

• Successful FDI case studies

• International companies, especially ones whose strategies include outsourcing and M&A

• Countries: Germany, France, UK, Italy, Belgium, the Netherlands

• Sub-sectors with high growth potential

• Traditions in the sectors with export orientation

• Presence of big international companies

• Existing modern technologies and equipment in certain companies

• Big international producers

• Countries: Germany, France, UK, Italy, Belgium, the Netherlands

• Agriculture occupies an important place in the Bulgarian economy

• Bulgaria counts with necessary resources and at lower prices

• Availability of skilled labor force and relatively good supply of newly graduates from relative specialties

• Strategic alliances with major producers/research institutes, international chemical companies

• Countries: Germany, UK, France, US

• A few developed countries have positioned as leaders in nanotechnology

• Although Bulgaria lacks skilled personnel and experience, it can try to attract outsourcing of nanotechnology-based production

• Cooperation with international technology and R&D companies/centers which subsequently to assist in the production companies’ targeting

• Countries: Germany, France, UK, Netherlands

• Bulgaria counts with the necessary natural and environmental conditions and resources (solar, wind, geothermal, etc)

• Availability of experienced labor force, local developers and currently there is interest from foreign investors

• Foreign investment funds, as well as equipment producers (solar panels, wind generators)

• Countries: Germany, Italy, Spain, France, the Netherlands, US




Food products and agriculture industry snapshot

FDI flows(EUR mm)

Industry size


Revenues (€ „000) 4 058 942 5,1% 23,4%

Employees 114 222 4,1% 19,6%

Firms 7 170 1,9% 23,3%

Employees

• Low production costs and relatively good quality of final products• Continuous modernization of existing technology and equipment, as

well as technological standards• Availability of qualified and experienced engineers and employees• Presence of big international companies on the Bulgarian market• Member of EU – access to the community market• Strong traditions in the industry

Strengths

Weaknesses

• Scarcity and low quality of raw materials • Lack of cost-effective technologies and equipment• Limited investment in new technologies, innovations and R&D• Relatively big part of the industry is in the grey sector• Lack of qualified and experienced labor force• Lack of or not developed cluster structures

• Agriculture = 9 908• Manufacturing: biotechnology = 969• Manufacturing: food = 2 143

University students

Other resources

• 157 251 students in professional schools• Industry associations• EU funding

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24,00

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Industry overviews – Food & Agriculture


The food industry is one of the main manufacturing sectors



The leading position of certain sub-segments is a result of the presence of large international companies

Sector and sub-segments Revenue Employees Companies

Manufacture of food products 2 948 029 84 343 5 456

Processing and preserving 558 006 16 229 528

Cocoa, chocolate and sugar confectionery 343 223 7 690 116

Oils and fats 317 992 3 346 134

Operation of dairies and cheese making 312 748 7 951 383

Bread, fresh pastry goods and cakes 299 334 28 434 3 307

Other food products n.e.c. 198 559 4 277 215

Grain mill products 197 303 3 602 251

Sugar 189 688 1 671 13

Production of meat and poultry meat products 169 897 3 795 36

Condiments and seasonings 114 768 599 31

Prepared feeds for farm animals 101 992 1 753 113

Ice cream 50 436 1 276 91

Fruit and vegetable juice 44 912 916 42

Homogenised food preparations and dietetic food 20 663 572 21

Rusks and biscuits; preserved pastry goods and cakes 12 184 952 99

Macaroni, noodles, couscous and similar farinaceous products 7 822 585 61

Starches and starch products 4 140 49 3

Margarine and similar edible fats 3 586 99 6

Prepared pet foods 776 6 4

Prepared meals and dishes 541 2

Manufacture of beverages 852 002 24 677 1 688

Distilling, rectifying and blending of spirits 291 587 7 975 726

Beer 202 550 7 529 474

Cider and other fruit wines 196 133 2 453 20

Malt 154 927 6 494 450

Other non-distilled fermented beverages 4 417 122 4

Soft drinks; mineral waters and other bottled waters 1 209 35 7

Wine from grape 1 179 69 7



Top players in the food industry (1/3)

The top players in the food industry, according to its corresponding sub-segment




Rev

Nestle Bulgaria 3,2% 1,3%M-e of cocoa, chocolate and sugar

confectionery 38%

Bella Bulgaria 2,9% 1,1% M-e of other food products 60%

Kraft Foods Bulgria 2.6% 1,0%M-e of cocoa, chocolate and sugar

confectionery 30%

Amylum Bulgaria 2,4% 0,2% M-e of condiments and seasonings 86%

Papas Olio 1,8% 0,2% M-e of oil and fats 23%

Dil Tur Plovdiv 1,8% 1,2% Production of meat and poultry products 43%

Chipita Bulgarua 1,7% 0,7% M-e of bread, fresh pastry goods and cakes 23%

Litex Commerce 1,7% 0,1% M-e of sugar 36%

Danone Serdika 1,2% 0,4% Operation of dairies and cheese making 16%





Top players in the beverage industry (2/3)

The top players in the beverage industry, according to its corresponding sub-segment




Rev

Coca Cola Hellenic Bottling Company Bulgaria

4,1% 1,1%M-e of soft drinks, mineral water and

other bottled waters57%

Zagorka 1,9% 0,5% M-e of beer 39%

Carlsberg Bulgaria 1,4% 0,5% M-e of beer 30%

Kamenitza 1,4% 0,7% M-e of beer 29%

Devin 0,8% 0,4%M-e of soft drinks, mineral water and


Vinprom Peshtera 0,8% 0,9%Distilling, rectifying and blending of

spirits 15%

Domeyn Menada 0,4% 0,4%Distilling, rectifying and blending of

spirits 8%

Qadrant Beverages 0,4% 0.3%M-e of soft drinks, mineral water and



The beer sub-sector is dominated by three companies



Top players in the tobacco industry (3/3)

The top players in the tobacco industry, according to its corresponding sub-segment




Rev

Blagoevgrad BT 2% 0,9% M-e of tobacco products 31%

Sofia Bulgartabac 1,3% 0,4% M-e of tobacco products 20%

Alliance One Tobacco 1,2% 0,5% M-e of tobacco products 18%

Bulgartabac Holding 0,6% 0,2% M-e of tobacco products 9%

Cigarette Factory Plovdiv 0,3% 0,4% M-e of tobacco products 5%

Leaf Tobacco a Michailides 0,3% 0,2% M-e of tobacco products 4%

Missirian Bulgaria 0,2% 0,1% M-e of tobacco products 3%

Isperih BT 0,1% 0,1% M-e of tobacco products 2%


The tobacco sub-sector is still mainly state-owned



Summary of global trends in the F&B industry

Source: Mergent, Commission of the European Communities , Staff working paper, European industry in a changing world, 2009

Productivity

R&D / Innovation

Legislation

Consumers purchasing power

Health and wellness trends

• The European food industry is weaker in terms of economies of scale and its performance in terms of growth or labor productivity is poor

• The low growth in production can be resolved by exploiting markets outside the EU area

• Cultural differences and different food habits provide an opportunity for innovation and development of new products

• Consumers’ expectations for high quality and health products, as well as growing concern for GMOs will further drive innovation

• The complexity of the EU law and the administrative burdens that this imposes, access to finance, low investment in R&D and access to raw materials are the among the main problems that the industry has to confront in order to increase its competitiveness

• As a result of lower consumer purchasing power, most leading F&B companies throughout the EU are re-structuring their product ranges and developing new categories and packaging designs aimed at more budget-conscious consumers

• With the recurrent trend of healthier food products, food processors and manufacturers are expected to continue to emphasize the use of premium ingredients, advanced processing techniques and innovative packaging

Convenience products

• Consumers are increasingly looking for portable and convenience foods that do not compromise quality and taste

• The growing demand for convenience products is opening opportunities for the ready-to-drink beverages market in Europe



Food, beverages and tobacco industry: EU snapshot

Facts & Figures


R&D and Innovation

Areas of Growth

Structure of Sector

• The second largest sector in the manufacturing industry in value-added terms, with a market share of 12,2%; account for 14,5% of total manufacturing turnover (€917 bn) and 13,7% of employment (over 4,5 mm workers)

• Limited but stable growth in both production (1,8%) and value-added (1,1%) and negative employment growth rates

• The sector is extremely fragmented and dominated by SMEs

• The EU food industry is weak in terms of economies of scale, growth and labor productivity, as well as low growth in production that will have to be resolved by exploiting markets outside the EU area

• the EU food industry faces higher raw materials prices, as well as a large number of tariff and non-tariff barriers

• The food industry is not recognized as being particularly innovative compared to other industry branches. The share of R&D expenses in value-added in 2005 was between 0,8% and 1,1% for Germany, France, Spain an the UK

• The sector is dominated by SMEs which do not have sufficient resources to invest in research and innovation. EU food research centers and the industry are not closely related

• The EU beverage sector (wines, beers, spirits mineral waters/soft drinks) is the global market leader in all segments and represents the largest production in the world, as well as accounting for over 73% of world exports

• The fruit and vegetables processing sector is one of the most competitive sectors in the EU, with EU countries having an export share of about 48%

• The food industry is made up of 310 000 companies and provides jobs for more than 4 mm people

• Germany, France, Italy , Spain and the UK account for 70% of the EU-27 turnover, whereas the 12 new Member States account for 8,7%

• EU is the largest world exporter (20,8% of share in world exports) and the second largest importer (18% in world imports)




Opportunistic trends for Bulgaria in the F&B industry

Organic finished

goods

Organic farming

Production

outsourcing /

Logistics center

• The Bulgarian GMO law remains restrictive


• Availability of skilled and experienced labor force

• Existence of production base (more than 5 000 companies) that only need restructuring

• Access to EU funds

• Private fund investors and/or bigger companies with established brands on the market

• Companies: Earth’s Best, Amy’s Kitchen, Green & Black’s, 365 Everyday Value, Organic Valley

• The Bulgarian GMO law remains restrictive


• Existence of resources and traditions in the sector

• Access to EU funds

• Private fund investors and/or organic farmers

• Countries: US, Italy, Spain, Germany

• Wellness goes mainstream; prevention culture increases


• Long traditions and experienced Bulgarian staff

• Existing modern infrastructure in certain locations

• International companies with indication for production outsourcing rand M&A readiness

• Countries: Germany, Italy, Greece, Portugal, UK, Spain, Hungary, Poland, Czech Republic, US, Turkey





Transport and logistics industry snapshotIndustry Size and FDI Flows Strengths and Weaknesses


FDI flows(EUR mm)

Industry size


Revenues (€ „000) 3 735 810 4,7% n/a

Employees 143 336 5,2% n/a

Firms 18 385 4,9% n/a

Employees

• Traditions in the sector• Favorable geographic location on the crossroad of Europe, Asia and

Mediterranean• Favorable customs arrangements due to EU membership• Harmonization of Bulgarian and EU transport legislation• The development of transport infrastructure is government priority• Availability of all modes of transport – road, rail, water and air.

Strengths

Weaknesses

• Underdeveloped transport infrastructure – poor inter-connections with the neighbor countries and few intermodal terminals

• Black sea is dependent on the Mediterranean sea• Ageing transport equipment. The Rolling stock on the rail system is

antiquated and in poor repair• Bad Vocational training

• Transportation = 2603 students

University students

Other resources

• 157 251 students in professional schools• EU funding (OP Transport)• Developed Construction cluster• Presence of big international T&L companies• Industry associations

18,6

02

8,9

01

-15,6

00

14,1

Q3 10

3,8

09

5,2

08

84,0

07

47,7

06

54,8

05

-29,1

04

0,0

03

1,3

1,9

1,2

2,415,91,1

3,4

3,0

48,6

2,3

2,7

1,2

2,0

5,5 1,3

11,3

4,1

1,5

2,8

1,9

1,8

1,8

1,3

3,8

1,8

1,8

11,3

4,5


Industry overviews – Transport & Logistics


The industry employs a sizeable portion of the labor force



Land transport contributes for more than half of the revenues in the industry

Sector and Sub-segments Employees Revenues Companies

Land transport and transport via pipelines 90 172 2 072 137 14 331• Freight transport by road 45 032 1 153 993 7 501• Passenger rail transport, interurban transport 12 136 579 778 26• Other passenger land transport n.e.c. 22 010 297 562 1 994• Taxi operation 10 886 38 803 4 797• Freight rail transport 14 2 000 4• Other 94 n/a 9Warehousing and support activities for transportation 23 936 1 026 380 3 261• Other transportation support activities 5 108 411 210 613• Service activities incidental to air transportation 4 120 179 293 42• Service activities incidental to land transportation 2 057 178 341 201• Service activities incidental to water transportation 3 626 143 590 219• Warehousing and storage 2 812 59 539 85• Cargo handling 6 213 54 407 2 101Air transport 13 527 244 447 588• Passenger air transport 13 350 244 447 586• Freight air transport 177 n/a 2Postal and courier activities 11 230 187 646 108• Postal activities under universal service obligation 6 946 93 879 24• Other postal and courier activities 4 284 93 767 84Water transport 4 471 205 200 97• Sea and coastal passenger water transport 2 737 130 234 69• Inland freight water transport 1 734 74 966 28



Top players in the transport & logistics (1/2)

The top players in the Transport & Logistics, according to its corresponding sub-segment


The land transport is fragmented but has one strong player – the national railway company

Company % of Industry

Revenues % of Industry Employees


Rev

Bulgarian Railways 14,0% 8,2%Land transport and

transport via pipelines26,5%

Somat AD 1,5% 0,4%Land transport and


Stolichen Elektrotransport EAD 1,0% 1,2%Land transport and


Pimk OOD 0,7% 0,4%Land transport and


Union Ivkoni OOD 0,5% 0,4%Land transport and


NK Zhelezopatna Infrastruktura DF 3,8% 0,4%Warehousing and support activities for transportation

14,0%

DPRVD DF 2,1% 0,8%Warehousing and support activities for transportation

8,0%

Sofia Airport EAD 1,3% 1,3%Warehousing and support activities for transportation

5,0%

Gopet Trans EOOD 1,2% 0,1%Warehousing and support activities for transportation

5,0%


A.T. Kearney 43, Invest Bulgaria Agency, FDI Strategic Analysis, January 2011, 18730p 102Source: Amadeus, A.T. Kearney analysis

The Air and Water transport as well as the Postal services are dominated by a single player with the rest distributed among many companies.

The top players in the Transport & Logistics, according to its corresponding sub-segment

Top players in the transport & logistics (2/2)




Rev

Bulgaria Air AD 4,4% 0,6% Air transport 41,0%

Air Via OOD 1,3% 0,1% Air transport 12,0%

Bulgaria Air Charter OOD 1,1% 0,1% Air transport 10,0%

Hemus Air 1,0% 0,3% Air transport 9,0%

Bulgarian Posts 2,1% 0,3%Postal and courier

activities44,0%

Spidi AD 0,7% 0,8%Postal and courier

activities13,9%

DHL Express Bulgaria EOOD 0,6% 0,2%Postal and courier

activities13,0%

Econt Express OOD 0,4% 0,6%Postal and courier

activities8,3%

Navigation Maritime Bulgaria AD 1,9% 1,5% Water transport 54,0%

Bulgarian River Shipping AD 70,0% 40,0% Water transport 13,0%



Summary of global trends in the transport and logistics industry

The transport and logistics industry is an attractive FDI sector for Bulgaria:

• Traditions in the industry (huge export to the USSR market in the past)

• Favorable location

• Availability of all modes of transport

• Projections for consumption growth in the region

• Developing infrastructure

The industry plays an important role for the EU

• The sector employs more than 9% of the entire EU workforce and accounts for 20% of the EU GDP

• The sector is expected to grow with more than 30% in the next 20 years.

CEE is a top-priority region for logistics providers and Bulgaria should exploit the window of opportunity

• The emerging region of CEE is the main macro economic driver, impacting European supply chains

• Regional Distribution Centres are established in CEE region. After the Czech Republic, Hungary and Poland a second wave of expansion to Russia, Slovakia, Ukraine, Romania, Turkey and Bulgaria is starting.

• Increasing service requirement is recognized as the second most important macro trend

• Increasing demand for warehouse space in strategic locations, close to the market and with high transport availability due to shortening lead-times and tight delivery windows

Bulgaria should try to position itself as a logistics hub for the Balkans for the establishment of RDCs

• BIA should target shippers, LSPs, and logistics facilities developers




ICT industry snapshotIndustry Size and FDI Flows Strengths and Weaknesses


FDI flows(EUR mm)

Industry size


Revenues (€ „000) 2 139 063 2,7% n/a


Firms 2 855 0,8% n/a

Employees

• Good labor productivity/cost ratio

• Technical talent pool

• Legacy in electronics and ICT equipment

• Traditionally good educational system

• Small but growing domestic market

• Enthusiasm

• Relationships with MNCs

Strengths

Weaknesses

• Brain drain leading to shortage of IT specialists

• Limited market size

• Few international enterprises

• Low e-readiness rankings

• Well under EU27 average R&D spending

• Concentration of the industry in Sofia

• IT & Telecommunications = 9600 students• Related specialties = 93 600 students

(Business and Finance, Mathematics, Philology and History, Physics )

University students

Other resources

• Several industry associations (including IT cluster)• 4 VC funds concentrated in ICT• Developing electronics industry• High speed internet connection with growing penetration

Q3 10

-97,7

09

127,9

08

-377,2

07

67,4

06

178,3

05

-129,2

04

343,2

03

-15,7

02

12,6

01

12,3

00

9,0

0,3

0,2

0,1

1,0

0,1

0,1

0,1

0,1

0,1

0,1

0,0

0,3

0,4

0,1

0,1

0,1

0,40,90,1

0,3

0,1

24,4

0,1

0,1

0,1

0,1

0,5 0,1


Industry overviews - ICT


Telecommunications have the largest share in the industry revenues



The industry is equally separated between the three segments in terms of employment, but Telecommunications contribute for 73% of the revenues.


Telecommunications 1 446 569 11 662 104

Other telecommunications activities 245 940 4 600 98

Wired telecommunications activities 135 023 2 815 3

Wireless telecommunications activities 1 065 606 4 247 3

Computer programming, consultancy and related activities 316 087 10 186 1 286

Computer consultancy activities 93 316 4 378 502

Computer facilities management activities 1 368 44 2

Computer programming activities 127 13 2

Other information technology and computer service activities 221 277 5 751 780

Information service activities 124 817 8 460 1 299

Data processing, hosting and related activities 45 570 2 379 225

News agency activities 5 244 379 53

Other information service activities n.e.c. 74 003 5 702 1 021

Other software publishing 101 179 3 114 160

Publishing of computer games 2 847 297 4



Top players in ICT (1/2)

The top players in the ICT, according to its corresponding sub-segment

The Telecommunications companies are dominating the industry in terms of revenues




Sub-segment % of Sub-Segment Rev

Nef Telecom Bulgaria 2,77% 0,01% Other telecommunications activities 4,1%

Eurocom Cable Management 1,35% 2,23% Other telecommunications activities 2,0%

Ericsson Telecommunications 1,23% 0,20% Other telecommunications activities 1,8%

Nokia-Siemens Networks 0,93% 0,35% Other telecommunications activities 1,4%

Alcatel-Lucent 0,54% 0,00% Other telecommunications activities 0,8%

BTC 6,31% 8,05% Wired telecommunications activities 9,3%

Mobiltel 28,99% 8,03%Wireless telecommunications

activities 42,8%

Cosmo Bulgaria Mobile 20,88% 3,93%Wireless telecommunications

activities 30,8%

HP GDBC 2,14% 3,49% Information service activities 36,6%

Sofika 0,12% 0,39% Information service activities 2,1%

Fadata 0,46% 0,47% Computer consultancy activities 2,1%

Telerik 0,42% 0,49% Computer consultancy activities 1,9%

CSC Bulgaria 0,92% 1,30% Computer consultancy activities 4,21%

SAP Labs 0,89% 1,50% Computer consultancy activities 4,05%

Oracle 0,55% 0,08% Computer consultancy activities 2,52%



Most of the international software companies are present in Bulgaria

The top players in the ICT, according to its corresponding sub-segment

Top players in ICT (2/2)



Sub-segment % of Sub-Segment Rev

GB Services 0,40% 0,89% Computer consultancy activities 1,8%

SAP Bulgaria 0,26% 0,04% Computer consultancy activities 1,2%

Dir.bg 0,06% 0,10%Computer facilities management

activitiesn/a

CNSYS 1,22% 0,49%Other information technology and

computer service activities 5,5%

IBM Bulgaria 0,87% 0,63%Other information technology and

computer service activities 3,9%

AKT Soft 0,44% 0,03%Data processing, hosting and

related activities 7,5%

Megalan Networks 0,40% 1,18%Data processing, hosting and


Software AG 0,10% 0,16%Data processing, hosting and


Avto Engineering Holding 0,41% 0,03%Other information service

activities n.e.c. 7,1%

Markus Engineering 0,21% 0,00%Other information service


Axway Bulgaria 0,20% 0,43%Other information service




Summary of global trends in the ICT industry

The ICT is an attractive FDI sector for Bulgaria:

• Traditions in the industry (in the 1980s Bulgaria was an IT leader in CEE)

• The industry employs 35 000 people and generates revenues of €2,14bn

• 1/3 of the employment is in large companies, but there is a large number of small, innovative IT companies.

Global industry trends are favorable

• The global market for ICT is expected to grow by 1,9% to €2,3 trillion in 2010

• The emerging markets are the main driving force for future growth

• In Europe that Software and IT services are growing faster than the other segments

Bulgaria is already an attractive destination for IT services and outsourcing

• Bulgaria provides one of the lowest cost structures in CEE

• CEE market for IT outsourcing services is growing and is expected to continue the growth in the future with higher rates

• There is considerable consolidation into large companies in the CEE outsourcing market

BIA should target via direct mailing both larger and smaller players from the key ITC countries: EU countries (Germany, France, Scandinavian countries, UK, other), USA, Japan, China, India, others)




ICT industry: EU snapshot

Facts & Figures


R&D and Innovation

Areas of Growth

Structure of Sector

• The ICT sector employees 6,6 mm people across EU-27, of which 1,6 mm (24,5%) work in the ICT manufacturing sector, and 5 mm are employed in the ICT service sector

• Software has an 11% share, IT services 21% and carrier services 44% of the total ICT sector

• The EU ICT sector was worth €670 bn in 2007 and represents around 5,3% of total GDP

• A prime driver of growth in the ICT manufacturing sector has been the increasing demand for ICT services

• Average profit margins in 2006 are highest among software (23%), Internet (15%) and semiconductor (12%) firms, while telecommunication services and communications equipment firms achieved average margins of 8,9% and 8,2%, respectively

• R&D expenditure in the ICT sector and the number of patents exceeds those of other industries. The ICT industry undertakes a considerable amount of foreign R&D investments

• R&D expenditure related to ICT industries increased in the EU-15 from €26,7 bn in 2003 to €29,3 bn in 2005. Most of the R&D expenditure is in the ICT manufacturing sector, but semiconductor firms are thmost R&D intensive and software firms have the highest R&D expenditure growth

• Prospects for the ICT sector are much less favorable than in recent years. Impact from the global crisis are worse for employment in the ICT sector due to increasing competition from developing countries and global industrial restructuring of the ICT market

• Investments are expected in Europe-wide fiber access network and mobile broadband networks

• The ICT sector is heavily concentrated; large firms with more than 250 employees account for more than 60% of the employment and produce more than 70% of the value-added in the sector

• ICT manufacturing is the most concentrated sub-sector, with 80% of value-added being produced by large firms, who employed 75% of all those working in the industry; the ICT service industry is considerably less concentrated




Summary of global trends in the outsourcing industry

The outsourcing and business services industry is one of the least effected sectors by the current economic and financial crisis

The growth of the outsourcing industry has slowed down across almost all countries in Eastern Europe, with Russia and Romania coming almost to a standstill (only 11% growth in 2009)

Nevertheless, there is a global trend towards a growing share of outsourcing business services, with call center and customer service, IT and Internet generating the highest demand. The industry is expected to experience a 25% CAGR for the 2001 – 2020 period

Around 75 – 80% of this growth will be driven by currently untapped segments, like public sector, healthcare, media, utilities

Poland, Romania, Slovakia and the Czech Republic are the main regional competitors of Bulgaria in the attraction of outsourced services

Currently, the business service outsourcing in Bulgaria generates between 150 – 200 mm in revenues and employs around 15 000 people

Bulgaria can tap into the upcoming FDI flow in the outsourcing industry offering the following competitive advantages:

• The country adds around 2 000 engineers every year suitable for internationally oriented IT and engineering service s industry

• Bulgaria’s fully loaded cost of IT operations seems 25% lower than a traditional EE off-shoring country, like Poland

BIA should have a segmented approach given the structure of the sector – direct contact at BIA/governmental level with the industry cluster representatives, agencies, technological parks and direct approach to the big international companies from different industries prompt to outsourcing. Overall, countries to be targeted are US, Germany, UK, France, Spain, the Scandinavian countries, Netherlands, Belgium




Pharmaceuticals industry snapshot


FDI flows(EUR mm)

Industry size


Revenues (€ „000) 275 408 0,3% 1,6%

Employees 7 111 0,3% 1,2%

Firms 112 0,0% 0,4%

Employees

• Growth potential, with OTC market being the main driver• Generics account for more than 80% of the market by volume and are

mainly supplied by local producers• Low production costs• Presence of some of the biggest international companies, though

solely on the distributor’s market • Member of EU – access to the community market

Strengths

Weaknesses

• Low investments in R&D; focus on generics• Lack of or not developed cluster structures• Lag of the higher and professional education• Burdensome of registration processes for pharmaceuticals • Lack of clear pricing and reimbursement policy• Medicine labeling issues

• Biology = 1 268• Chemistry =14 07• Manufacturing: biotechnology = 969• Manufacturing: cosmetics = 9• Medicine = 14 639

University students

Other resources

• Industry associations• EU funding• Experienced workforce abroad

Q3 10

-1,5

09

-5,1

08

5,3

07

5,8

06

41,6

05

-0,6

04

0,2

03

0,1

02

0,1

01

0,0

00

0,5

0,01

0,19

0,030,23

0,02

0,00

2,87

0,00

0,01

0,02 0,35

0,09

0,01

0,19

1,71

0,38

0,81

0,00

0,01

0,18



Industry overviews – Healthcare and pharmaceuticals


Top players in the pharmaceutical industry

The top players in the pharmaceutical industry, according to its corresponding sub-segment


Revenues

% of Industry

EmployeesSub-segment

% of Sub-

Segment

Rev

Sopharma 37,8% 26,0% M-e of pharmaceutical preparations 39%

Biovet 21,6% 22,9% M-e of pharmaceutical preparations 23%

Balkanpharma na 9,8% M-e of pharmaceutical preparations na

Actavis na 5,3% M-e of pharmaceutical preparations na

Unifarm na 4,5% M-e of basic pharmaceutical products na

Farmatsevtichni zavodi 19,5% 4,4% M-e of pharmaceutical preparations 20%

Vetprom 3,5% 4,0% M-e of pharmaceutical preparations 84%

Salvamed 1,5% 2,7% M-e of pharmaceutical preparations 2%

Chaykafarma 1,4% 2,6% M-e of pharmaceutical preparations 1%


The companies with biggest presence in the industry are from the pharmaceutical preparations sub-sector



Summary of global trends in the pharmaceutical industry

The pharmaceutical industry is non-cyclical and is among the least affected industries by the crisis, with one of the most positive outlooks for FDIs in 2011

It is a high technology-intensive sector therefore requiring skilled and educated workforce; R&D plays a major role in the sector

The global pharmaceutical market amounts to $1 045 bn in 2009. Europe is the second largest pharmaceutical producer and consumer, after the US, with sales of around $300 bn in 2009 and production value of $280 bn. The European pharma sector employees more than 600 000 employees

Main advantages of CEE are low production and labor costs and qualified labor pool, as well as proximity to major markets (EU, Middle East, Africa, Russia, etc)

The traditional health products market will suffer from a downturn due to a patent expiration expected in the period 2009 –2014, which represents a good niche for generic producers

In this regard, generics account for more than 80% of the volume of the Bulgarian pharmaceutical market

Another global trend in the industry is company restructuring and cutting of costs. International pharmaceutical companies are exploring the possibility of cutting early stage R&D expenses through outsourcing

Within this sector, Bulgaria should approach the following strategy and tactics:

• Attract some of the main international players on the generics market and position itself as a generics production destination

• Position itself as an outsourcing destination for early R&D, mainly clinical trials

BIA should have a segmented approach given the structure of the sector – direct contact at BIA/governmental level with the industry giants in EU and USA and direct mailing to smaller EU players




Pharmaceuticals industry: EU snapshot

Facts & Figures


R&D and Innovation

Areas of Growth

Structure of Sector

• The pharmaceutical industry represents a workforce of over 600 000 employees in EU-27, with more than 100 000 in R&D alone

• The industry has experienced a steady growth

• Value-added per employee is very high

• Several factors are likely drive down returns and limit the industry’s ability to attract R&D investments: (i) declining R&D productivity; (ii) major blockbuster drugs whose patents run out by 2010; (iii) patents with shorter exclusivity periods; (iv) rising costs of commercializing a new drug; (v) mounting price pressures exerted by governments and private insurers

• Lack of competitive national markets and inadequate protection of intellectual property

• The EU lagging behind the US in R&D spending, drawing down the number of patents

• Declining productivity results in increased R&D costs (for every 13 compounds found, only one makes it to the market)

• Breakthrough in life sciences will lead to more individualized medicines and ultimately to tailor-made medicines

• The generic sector is expected to enjoy constant growth over the coming years

• Restructuring in the innovative sector based on biotechnologies and nanotechnologies

• The OTC segment is less likely to be affected by technology and economic changes

• The herbal medicines segment and traditional medicines are also likely to grow in response to social preferences

• The sector is currently dominated by 25 global big pharma companies, each with an annual turnover of more than €10 bn

• There is also a large number of relatively small global players with focus on one segment of the medicine market

• A multitude of generic producers and numerous start-ups




Opportunistic trends for Bulgaria in the pharmaceutical industry

Generics

Production

outsourcing

Early R&D

• 80% of Bulgarian pharma production is in the sphere of generics

• Strong local companies and foreign investments, presence of most international companies


• Long lasting traditions in the industry

• Access to EU market, Middle East, Russia and Africa

• International generic producers, companies looking for acquisitions

• Countries: Germany, UK, France, Spain, Italy

• Availability of skilled personnel

• Excellent geographical location – access to EU, Middle East and Russian markets


• Existing legal framework for health products licensing

• International pharmaceutical companies with outsourcing strategies

• Countries: Germany, France, Italy, Spain, UK, US

• Pharmaceutical companies are exploring the possibility of cutting early stage R&D expenses through outsourcing

• Bulgaria can position itself as a clinical trial destination

• Low R&D costs

• International pharmaceutical companies with large R&D pipelines

• Countries: Germany, France, Italy, Spain, UK, US


Biosimilars

• The biosimilar market remains embryonic at present

• The commercial value of the biosimilars market is potentially significant

• Only a small number of generic producers will be able to position themselves in the market

• Top 5 generic producers with biosimilar products development potential

• Companies: Roche Avastin, Abbot’s Humira, Teva, Sandoz, Novartis,




Healthcare industry snapshot


FDI flows(EUR mm)

Industry size


Revenues (€ „000) 816 097 1,0% n/a


Firms 10 868 2,9% n/a

Employees

• Long traditions in the healthcare sector in Bulgaria• Experienced physicians and scientists• Most of the medical personnel, given parallel private practice, have up-

to-date training and knowledge of existing new technologies• Low costs for medical procedures• Internationally recognized physicians in certain specialties, such as

heart diseases, orthopedics, cancer, dentistry, etc.

Strengths

Weaknesses

• Projected shortfall of physician, nursing personnel, home care workers• Diminishing number of hospital beds• The existing infrastructure is in urgent need of renovation• Cuts in the government expenditure on healthcare• Capital demands increasing / bad debt pressure continues• Lack of cluster, unified government policy and sector reforms

• Medicine students = 14,639 students• Social services = 4,915 students

University students

Other resources

• Availability of private health insurance funds• Mineral water springs in different cities• Health centers on the seaside and in the mountain

Q3 10

0,3

09

1,5

08

0,0

1,7

07

0,0

4,6

06

0,00,8

05

1,2

04

0,0

03

-0,1

02

0,2

01

-0,1

00

0,1

1,6

3,0

1,5

3,77,8

1,9

5,4

2,5

28,9

1,8

2,8

1,6

2,83,1

1,7

11,6

5,0

1,8

3,5

2,0

2,3

2,2

2,1

2,9

2,5

2,4

4,6

3,5





Future global trends for the industry

Health as an Entertainment Brand

Global Medical Tourism

Health Provider Migration

Demand for Quality

Personalized Assessments

Office health care

The convergence of health

and entertainment evolves

into a new market category

that creates opportunities for

consumer electronics, retail,

travel and the media

industries

The growth of health tourism

continues, as options expand

and more individuals decide

to obtain care in high-quality,

accredited facilities around

the world

Stakeholders, particularly

providers, face new cost and

efficiency pressures as the

health care system continues

to show signs of breaking

down

More health care consumers

will associate quality and

outcomes data with payments

and valuation, forcing

providers to guarantee the

efficacy of their medical

interventions

This development leads to

consumer-focused medical

models that favor retail

channels over clinicians

Employers emphasize health

maintenance, illness

prevention and productivity.

Health information is collected

and used to offer reinforcing

incentives




Summary of global trends in the healthcare industry

Aging and wealthy population

Tight hospital labor markets

New technologies

Healthcare reforms

Hospital consolidation

Treatment of patients

Europe’s aging, active and relatively wealthy population is likely to demand more medical services. Italy, Greece and Germany have the largest proportion of residents at the age of 60 and above

Hospital labor costs are and management is always looking for technologies and procedures that can reduce total expenses

Europe is lagging behind in R&D and new technologies, mainly due to government budget cuts, high manufacturing costs and conservative culture that is slow to commercialize scientific innovations

Governments across Europe are implementing reforms that contain or cut expenses by shifting more responsibility for financing healthcare to the private sector and encouraging price competition

Hospitals across Europe are suffering from decreasing revenues, resulting in various restructuring processes and reduced hospital beds base. As a result, competition to supply hospitals is increasing

The reduction of hospital beds is reducing the in-hospital treatment time and promoting treatment in outpatient settings




Opportunistic trends for Bulgaria in the healthcare industry

Medical Tourism

Spa and wellness

End-of-life care

R&D

Attracting

medical suppliers

• Aging and wealthy European population

• Lower medical costs in Bulgaria

• Long traditions and experienced Bulgarian medical staff

• Could offer specialized/alternative treatment (stem cells)

• Private hospitals with experience in international patients treatment / medical tourism operators

• Countries: Germany, Italy, Greece, Portugal, France, UK





• Investors for the construction and infrastructure management

• Countries: Germany, Italy, Greece, Portugal, UK, Hungary, Poland, Nordic countries





• Investors for the construction and infrastructure management

• Countries: Germany, Italy, Greece, Portugal, UK, Hungary, Poland, Nordic countries

• European companies will increase its R&D activities in order to increase competitiveness

• Although Bulgaria lacks experience, it counts with educated scientists

• Changes in legislation for clinical trials

• Big R&D companies/medical suppliers for infrastructure development and know-how

• Countries: Germany, Italy, UK, France, Sweden

• The global medical supplies and equipment industry is with excellent potential for growth based on new technologies and innovation

• Bulgaria needs to attract the production / research businesses of supply companies, not pure distribution

• Big medical suppliers for infrastructure development and know-how

• Countries: Germany, Italy, UK, France, Sweden, US





157 251 students in professional schools Industry associations

Industry overviews – Transport equipment and Machine building

Transport equipment and machine build. industry snapshot

FDI flows(EUR mm)

Industry size


Revenues (€ „000) 354 448 0,4% 2,0%

Employees 15 796 0,6% 2,7%

Firms 657 0,2% 2,1%

Employees

• Traditions in machine engineering and electronics

• Entry point to EU markets

• Presence of port infrastructure (useful for export sectors)

• Close to the CEE automobile clusters

• Component manufacturers are active in producing high precision and

endurance components for various European customers

• Qualified labor and Low labor cost

Strengths

Weaknesses

• Absence of car manufacturer and automotive cluster in the country

• Small capacity of production lines

• Weak internal demand

• Decrease in ship-building and concentration mostly on low value-

added repair works

• R&D infrastructure lags from the modern standards

• Manufacturing specialties = 20 060 students• 5 Technical universities

University students

Other resources

01

1,7

00

-0,1

Q3 10

5,0

09

0,6

08

-0,3

07

0,8

06

8,2

05

-1,4

04

-1,0

03

2,4

02

3,0

0.0

0.1

0.5

0.2

0.2

0.6

0.1

0.1

0.0

0.3

0.70.3

0.0

0.9

0.3

0.1

0.0

0.1

0.2

0.1

0.1

0,0

4,7

1,3

1,6

1,7

1,6





Building of ships and floating structures is the biggest segment in terms of revenues



Many of the companies from the electronics and electrical engineering can also be placed in this sector


Manufacture of other transport equipment 287 473 11 841 516

Building of ships and floating structures 167 477 6 801 372

Manufacture of bicycles and invalid carriages 42 445 947 14

Manufacture of railway locomotives and rolling stock 38 223 2 788 22

Manufacture of air and spacecraft and related

machinery 35 841 834 69

Building of pleasure and sporting boats 2 635 320 23

Manufacture of other transport equipment n.e.c. 853 151 16

Manufacture of motor vehicles, trailers and semi-

trailers66 975 3 955 141

Manufacture of motor vehicles 26 176 335 18

Manufacture of other parts and accessories for motor

vehicles23 801 2 892 108

Manufacture of electrical and electronic equipment for

motor vehicles12 648 494 1

Manufacture of bodies (coachwork) for motor vehicles;

manufacture of trailers and semi-trailers4 351 234 14



Top players in the transport equipment (1/2)

The top players in the Transport equipment, according to its corresponding sub-segment

The biggest companies are in ship-building and railway equipment



Revenues

% of Industry

Employees Sub-segment

% of Sub-

Segment Rev

ENERGIYNA FINANSOVA GRUPA AD 12,4% 0,04% Building of ships and floating structures 26%

BULYARD SHIPBUILDING INDUSTRY EAD 11,1% 5,7% Building of ships and floating structures 23%

ODESSOS SHIPREPAIR YARD AD 4,2% 5,1% Building of ships and floating structures 9%

TEREM KRZ FLOTSKI ARSENAL VARNA EOOD 4,2% 4,0% Building of ships and floating structures 9%

MAXCOM EOOD 4,8% 2,8% Manufacture of bicycles and invalid carriages 40%

CROSS OOD 4,2% 1,3% Manufacture of bicycles and invalid carriages 35%

LIDER 96 OOD 1,6% 0,7% Manufacture of bicycles and invalid carriages 13%

RAILWAY CARRIAGE REPAIR WORKS 99 AD 4,6% 5,0% Manufacture of railway locomotives and rolling stock 43%

TRAKTSIA AD 2,3% 2,4% Manufacture of railway locomotives and rolling stock 21%

VAGONO REMONTEN ZAVOD KARLOVO AD 1,6% 1,6% Manufacture of railway locomotives and rolling stock 15%

VAGONO REMONTEN ZAVOD LEVSKI AD 0,9% 1,1% Manufacture of railway locomotives and rolling stock 8%

EVN BULGARIA TOPLOFIKATSIA EAD 6,2% 1,0% Manufacture of air and spacecraft and related machinery 62%

TOPLOFIKATSIA VT AD 0,8% 0,4% Manufacture of air and spacecraft and related machinery 8%

MIKROENERGIA OOD 0,5% 0,2% Manufacture of air and spacecraft and related machinery 5%

AVIO DELTA OOD 0,4% 0,1% Manufacture of air and spacecraft and related machinery 4%



The auto parts manufacturers are smaller in size and larger in number

The top players in the Transport equipment, according to its corresponding sub-segment

Top players in the transport equipment (2/2)


Revenues

% of Industry

Employees Sub-segment

% of Sub-

Segment Rev

AREVA TID 0,5% 0,1% Building of pleasure and sporting boats 67,6%

VRANGOVI 2 OOD 0,1% 0,1% Building of pleasure and sporting boats 15,9%

LODKOSTROITEL K OOD 0,1% 0,1% Building of pleasure and sporting boats 8,7%

BALKANCAR PLEVEN AD 0,1% 0,2% Manufacture of other transport equipment n.e.c. 59,7%

KROS VIDIN OOD 0,1% 0,4% Manufacture of other transport equipment n.e.c. 38,1%

MADARA AD 6,9% 0,9% Manufacture of motor vehicles 93,0%

KENTA AD 0,3% 0,6% Manufacture of motor vehicles 3,9%

TIAT AD 0,1% 0,1% Manufacture of motor vehicles 1,0%

A L FILTER OOD 2,7% 2,2%Manufacture of other parts and accessories for motor

vehicles *39,5%

MTM OOD 0,7% 0,4%Manufacture of other parts and accessories for motor

vehicles *9,8%

DROUZHBA AD 0,6% 1,7%Manufacture of other parts and accessories for motor

vehicles *8,7%

JOHNSON CONTROLS ELECTRONICS 3,6% 3,1%Manufacture of electrical and electronic equipment for motor

vehicles *100,0%

PRK 2002 EOOD 0,6% 0,3%Manufacture of bodies (coachwork) for motor vehicles;

manufacture of trailers and semi-trailers45,3%

L M D OOD 0,4% 0,2%Manufacture of bodies (coachwork) for motor vehicles;

manufacture of trailers and semi-trailers30,8%



Summary of global trends in the transport equipment industry

The transport equipment sector was one of the most affected from the present crisis, confronted by a sharp drop in sales and profits, as well as significant decrease in FDI

Nevertheless, the light vehicle sector is expected to grow with more than 30% in the next years, lead mainly by Chinese car manufacturers entering foreign markets more aggressively

Most of the major car manufacturers are present in the CEE regions but Bulgaria failed to attract any key investments in the sector

Bulgaria has never been a major transport equipment producer and it’s unlikely that the country attracts any of the big Western car manufacturers at this stage given existing capacity in the sector

Nonetheless, Bulgaria has strong traditions in the ship building sector, as well as the auto components production

Currently, the industry employs almost 16 000 people and generates revenues of €355mm and is closely related with other industries like electronics and electrical engineering

Although almost 97% of the companies are in the SME segment, 1/2 of the employment is in large companies

Bulgaria should focus its efforts on:

• Attract some of the main Chinese car manufacturers, as well as to target some of the international car manufacturers of electrical cars for the initiation of electric car components production

• Focus on other transport equipment production (agricultural machinery, buses, wagon and rolling stock, bicycle), targeting countries like China, US, UK, South Korea, Germany, etc




Automotive industry: EU snapshot

Facts & Figures


R&D and Innovation

Areas of Growth

Structure of Sector

• The automotive sector has a turnover of over €780bn with €125bn in exports and €60bn in imports

• Value added amounts to around €140bn representing about 8% of European manufacturing VA

• Generates 12mm jobs across Europe which is about 5,5% of employment in the EU-27

• 19,7mm vehicles produced in 2007, equivalent to about 27% of total production worldwide

• Large home market, but flat growth in Western Europe. New Member states used to provide growth opportunities

• Utilization of capacity (dropped to 65% in 2009) remains an issue as there is overcapacity

• The sector in EU is world-leader in premium vehicles and has a strong supplier base

• Concern over access to raw materials in the future

• Global technology leader due to substantial investments and demanding home market

• € 24bn per annum investments in R&D, representing ~30% of European R&D investments

• 50% of R&D investments comes from automotive suppliers

• Investments in ground-breaking technologies (battery-powered hybrids, electric vehicles etc.)

• Joint research projects between the industry and the public authorities

• In the longer term, growth is expected in the external markets, as rising income levels improve access to individual mobility, especially in the emerging markets of China and India

• Stricter regulations on fuel efficiency are likely to lead to growth in related components and technologies

• The segmentation between city traffic vs. longer distance traffic will impact the relevant products

• Division between suppliers (split in tiers) and OEM, 75% of vehicle’s original equipment components and technology are sourced

• Supply chain management is a key strength of the European automotive industry

• The suppliers sector includes 3000 companies (2500 are SMEs employing over 3mm people). For each €1 of VA by the automotive itself, supporting industries generate ~ €2,7 of additional VA




Opportunistic trends for Bulgaria in the transport equipment industry

Chinese light

automobiles

Other transport

equipment

Electric car

components

Ship building

• China is expected to become the largest car manufacturer in the future, with light vehicle production reaching almost 16 mln units in 2015

• Given that Bulgaria failed to attract any major Western manufacturer, the country may target Chinese producers for the location of vehicle components production in the country

• All Chinese vehicle and automotive components producers

• Bulgaria may target producers of agricultural machinery, wagon and rolling stock, bicycle, buses, heavy truck machinery, etc.

• Bulgaria may offer low production and labor costs, skilled labor, access to key markets

• Smaller international companies

• Countries: US, Germany, Russia, UK, Italy, China, South Korea

• Electric vehicle production will significantly increase in the future

• Bulgaria may target major electric car producers to set up components production and/or assembly

• Major international electric car manufacturers

• Countries: Japan, US, Germany, South Korea, UK, Italy


• Strong traditions in the country, sea and river transport present

• A few major ship builders that need restructuring and may attract foreign investors’ interest

• Low production costs and access to major markets (EU, Middle East, Russia

• Major shipbuilders in Europe and Asia

• Countries: Japan, China, South Korea, Pakistan, Germany, the Netherlands, UK, Turkey




Table of contents

Executive summary








Some industries were very affected by the crisis and their output contracted significantly; others remained intact

The recovery of the economies in EU, among which the Bulgarian, depends on several external factors: fast world recovery, return of the confidence in the financial markets, low interest rates and better usage of EU funds.

The recovery was driven by a surge in inventory and exports, whereas consumption and gross fixed capital formation remained weak.

• Net exports lifted growth in the EU10.

• Overall, gross fixed capital formation remained below pre-crisis peaks in all EU10 countries, and consumption in all EU10 countries with the exception of Poland and the Czech Republic.

In EU 10, industry is leading the recovery, while finance and construction are lagging.

• Industry benefits most from the rebound in global demand for capital goods and durables, helped by its deep integration into European production chains.

• The revival of industry supported a return to growth of trade and transport, although at modest rates compared to before the crisis.

• Other service sectors remain constrained by weak domestic demand and sharp adjustments in finance and construction. However, partly helped by public projects, construction activity is slowly recovering, and returned to growth in Poland.

In Bulgaria, industries were affected differently by the crisis:

• Manufacture collapsed with almost no signs for recovery in 2010

• Electronics and electrical equipment were hit by the crisis but started to recover in 2010

• Food production was the one that was almost not affected

• Chemicals, plastics and rubber already started to recover

• Transport decreased substantially in 2009 but started to recover in 2010

Source: NSI, A.T.Kearney


Manufacture collapsed with little signs for recovery in the end of 2010

Crisis affected Manufacture production and FDI much more than mining; FDI in mining decreased as well but starting from a much lower base

0

10

20

30

40

50

60

70

80

90

100

110

120

130

20102009200820072006200520042003200220012000

Manufacture

Mining

Index of turnover in industry(2005 = 100)

Notes: The production index measures changes in the produced goods

The turnover index measures changes in value of sales and pricesSource: NSI, A.T.Kearney

FDI inflows(EUR mm)

555

289

95

532433

613 591

296

1.100

2008

1.073

2005

46

937

2007

892

1.140

45

1.049

2004

11

2001

2955

2000

5616

294

-2

2009 20102002

106

659608

2003

45118

26

18

91

2006

17550

ManufactureMining


The Electronics production was not affected heavily by the crisis

Index of production in industry(2005 = 100)

Electronics production was least affected by the crisis, although FDI in this sector collapsed



0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

20102009200820072006200520042003200220012000

Machinery

(production)

Electrical equip.

(production)

Electronics

(production)

FDI inflows(EUR mm)

35

34

30

18

68

6958

21

-3

543

3628

-1

11

2001

53

109

2008

95

34

83

213

2007

0

123

2006

24

41

64

138

43

2009

-4

12

6

2010

30

39

2005

98

69

9

2004

23

2 321

33

15

-12

20022000 2003

M-e of computer, electronic and optical products

M-e of machinery and equipment n.e.c.

M-e of electrical equipment


The production of non-light vehicles collapsed with 49%


The production of non-light vehicles collapsed with 49% with no signs of recovery. The limited production of automobiles in the country allowed the

fast recovery of the sector.



0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

20102009200820072006200520042003200220012000

Vehicles exc.

light vehicles

Automobiles &

trailers

FDI inflows(EUR mm)

-10

22

1

2007

1

2010

5

6

2009

1

00

2008

0

-3

-1

2006

8

8

0

2005

-1

-2

0

2004

-1

-10

2003

2

1

2002

3

3

0

2001

2

2

0

2000

M-e of motor vehicles, trailers and semi-trailers

M-e of other transport equipment


The Food production was the overall least affected industry in the country


The Food production was the least affected industry in the country



0

10

20

30

40

50

60

70

80

90

100

110

120

130

200220012000

Tobacco

Beverages

Food

20042003 201020092008200720062005

FDI inflows(EUR mm)

2020

12

35

35 61

45

35

50

27

22

0

85

1-36

13

2009

110

17

-11

2005

85

4

20

50

2006

52

2004

70

15

69

2008

72

25

-3

2007

85

0-1

36

2003 2010

-1

11

23

2002

49

2001

49

0

29

2000

43

0

23

M-e of tobacco products

M-e of beverages

M-e of food products


There are signs for recovery in chemicals, rubber and plastics and pharmaceuticals industry


The production and FDI in chemicals, rubber and plastics, pharmaceuticals collapsed, but there are signs for recovery in 2010



0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rubber & Plastics

Pharmaceuticals

Chemicals

FDI inflows(EUR mm)

-44

97

36

91

-2-5-9-9

1 3

-1

1 510

3 314

7

-8

2000 2001 2002

0

115

7

2003 2004 20072005 2006 20102009

0

2008

-38

42

6

103

6

10

-1

170

60

-5

203

5

92

25 2718

9 7

M-e of rubber and plastic products

M-e of chemicals and chemical products

M-e of basic pharmaceutical products and pharmaceutical p


The production of basic and fabricated metals, and non-metallic mineral products collapsed in 2008


Although mining was not affected severely by the crisis the production of basic and fabricated metals and non-metallic mineral products collapsed in

2008 with little signs of recovery



0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

20012000

Fabricated metals

Basic metals

Non-metallic

mineral products

20102009200820032002 2007200620052004

FDI inflows(EUR mm)

-93

-28-31

101

7

68

92

19

211

109

1

101

2003

135

68

-2

2002

-10

11

2001

123

31

2000

399

373

2005

69

93

4

2004 2010

73

2

63

9

2009

197

42

147

7

2008

82

152

24

2007

423

148

29

245

2006

444

122

21

301

M-e of other non-metallic mineral products

M-e of fabricated metal products, except machinery and eq

M-e of basic metals


The Transport industry collapsed in 2009, but stabilized in 2010

Index of turnover in industry(2005 = 100)

The Transport industry collapsed in 2009, but stabilized in 2010. Land and Water transport were affected most severely by the crisis

Notes: The index measures the turnover in Transport and Communications


0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

2000 2002 2004 2006 2008 2010

Air transport

Water transport

Land transport

Total

Postal and courier

activities

Waerhousing,

auxiliary transport

services

FDI inflows(EUR mm)

-20

178

12

3724

-1-1-2-10-30

0

-1

1000

1 0

10

5

03

2008

84

5

21

59

1

2007

48

455

2010

4

1 4

2009

5

2

2006

55

26

4

2005

-29

24

2

-37

2004

0

3-3

2003

19

1 1

4

2002

9

-1

2

2001

-16

1

0

3

2000

14

-4

3

Water transport

Warehousing and support activities

Postal and courier

Land transport and transport via pipelines

Air transport


The growth drivers of the last decade are not anymore valid and overruled budget contraction and low buying power


FDI • Relatively low inflows of FDI due to the crisis

Structural

reform• Delay in key structural reforms such as healthcare and education

• Delay in judiciary reform

Banking

System

• Relatively high level of non-performing loans across both retail and corporate clients

• Still relatively low levels of new credit growth

• High level of inter-company indebtedness

Economic

Growth

• Possible negative or low GDP growth in 2010 and 2011 due to weak internal demand

• Lack of government spending due to objective of keeping budget deficit under control

• Export growth may not be sufficient to help take the economy out of the recession due to low share of

export-oriented industries in the economy

Budget deficit

• Falling tax revenues and increasing pressure from unreformed sectors for budget transfers may put at

risk the projected budget deficit

• Policy of delay of VAT return payments to private sector is having negative repercussions throughout the

economy and increased inter-company indebtedness

Potential Risks

Documents

Strategic Analysis Project - government.bg Analysis Project Final Report (For project related internal discussion only –not approved for any publication or sharing of information