FIVE INDUSTRIES THAT COULD WIN IN ROMANIA’S NEW NORMALITY

Here are five industries that have been growing in Romania during the coronavirus crisis and have a lot of potential to continue their growth throughout the next economic cycle.

By Claudiu Vrinceanu

GOV-TECH Economic recovery after this difficult period will be possible through a joint effort by the public and private sectors and one of the main measures that the government can take in this regard is the digitalization of the public sector. Government officials say that we will see an explosive growth in the IT field in response to the challenges posed by the coronavirus crisis, which can generate great opportunities in the gov-tech sector, i.e. IT companies creating software products and IT platforms for the public administration.

CYBERSECURITY As the number of online services will increase, the demand for cybersecurity solutions will spike up at the corporate level, according to investment advisory firm Wavteq. This trend will become a constant as organisations across Romania will carry out much more remote work.

TELEMEDICINE In the context of the COVID-19 pandemic, telemedicine is considered to be one of the solutions that could limit the spread of the virus and also help the healthcare system manage the growing demand for minor consultations. This explains the emergence of online platforms developed both by major providers of private medical services as well as by state hospitals. “The coronavirus situation has rapidly changed the way patients react to vir

All courier companies have continued their activity at the national level

tual appointment with their doctor, and may eventually change the whole discussion about the cost of care,” said Ruxandra Tarlescu, Partner at PwC Romania.

COURIER SERVICES All courier companies have continued their activity at the national level without any restrictions or limitations, and the main players on the market have taken numerous preventive measures and implemented contactless delivery options. Most online stores have encouraged card payments, while couriers have been trained to deliver without contact. The entire delivery process has been adapted to the new security requirements for both couriers and customers. The postal and courier sector, a market valued at about EUR 1 billion in 2019, may grow by 20-30 percent in 2020, so that the more than 1,500 companies in the field could generate revenues of EUR 1.3 billion.

E-COMMERCE The e-commerce market in 2019 was estimated at over EUR 4.3 billion, according to ARMO (Association of Romanian Online Stores). In the case of online payment processors, all the products and services purchased online have led to serial increases in their revenues. For 2020, expectations are very high in e-commerce, and the current public health crisis has further changed shopping behavior. In the coming years, most corporations and large brands in traditional retail are expected to accelerate investments in the online area, encouraged by new consumer trends. At the same time, many other online stores will open among SMEs, including many that will target the European or even global market.

Digitalization at core of economic

recovery in age of social distancing

Romanian authorities ordered strict lockdown measures to prevent the spread of the coronavirus, and companies and employees are still reeling from the disruption caused by the medical crisis, which might have long term effects on the way we work, shop, and spend our free time. Investments in digital operations are helping companies stay afloat and might become the linchpin of the economic recovery over the next few years.

By Ovidiu Posirca

Gabriel Voicila, PwC Romania

Doina Vilceanu, ContentSpeed

There is significant room for improvement in Romania’s digital performance, as the country was ranked 27th out of all European Union countries in The Digital Economy and Society Index (DESI). Romania’s overall score has slightly improved in the past year in the index, which tracks five dimensions ranging from broadband penetration to the integration of digital technology by businesses and the tech skills of employees.

“COVID-19 is changing companies’ digital strategies, and not just in the short term. Developments that we’re currently seeing in different sectors will become permanent changes, and they are most welcome. All our reports have shown that automation and digitization increase companies’ productivity, innovation, resilience, and implicitly lead to revenue growth in any economic cycle,” Gabriel Voicila, technology partner at PwC Romania, told BR.

DIGITAL INVESTMENTS IN THE FACE OF DISRUPTION Less than half of Romanian companies had a website in 2019, while just 10 percent of enterprises were using cloud computing services in 2018, according to data from Eurostat, the EU’s statistics office.

Moreover, only 20 percent of small and medium-sized enterprises (SMEs) are highly digitized in Europe and the situation varies a lot across different countries: while 40 percent of companies in Denmark and the Netherlands are highly digitized, the same can be said for only 1 in 10 in Bulgaria and Romania.

“So, there is enormous digital potential in the Romanian private sector,” Alexandru Soare, sales director at Integrisoft, a Romanian integrator of software solutions, told BR.

Nonetheless, the current crisis might provide an impetus for more companies to invest in technology. Entrepreneurs have to adapt to a new economic reality in which social distancing becomes the new norm.

“For companies that had to suddenly develop remote working policies, it was time to ensure that people are both efficient and safe while working from home, with the right tools, robust and secure technology, and

cybersecurity,” Voicila adds. The situation in the private sector has “already changed dramatically” and at this point you either have an online store or you are looking to urgently build one, suggested Doina Vilceanu, CMO of ContentSpeed, the provider of an eCommerce platform.

“If any entrepreneur thinks that this too shall pass, and that consumer behaviour will just go back to the old patterns, they are making a huge mistake and wasting an enormous opportunity. The change is here to stay. In 2019, merely 23 percent of Romanians shopped online. We are currently witnessing a great influx of first-time buyers, placing their first online orders,” Vilceanu told BR. The company supported the launch of 15-20 new websites weekly in the past month. She says that a new online store can be up and running in about 2 weeks.

Meanwhile, the pace of digitalization differs depending on companies’ existing technological foundations. Those that were already tech-savvy will accelerate investments, while firms that have taken a more conservative approach will be using digital tools for immediate needs. For instance, restaurants are intensively using digital channels to stay in touch with their customers and handle meal deliveries.

“This seems like a long-awaited step towards transformation that should have been taken a while ago, but kept being postponed for future. Now, it’s on the table and being tested in real life. We should say that this crisis has also had a good part: it’s been a very good time to test digitalization,” says Cosmin Nastasa, founder of performance marketing company Data Revolt Agency.

In companies that need big customer support departments, including banks, online retailers, travel agencies, and utilities, chatbots (virtual assistants that use artificial intelligence) are being deployed in droves in order to deal with an increasing influx of queries. People in a difficult financial situation can postpone the payment of bank installments for up to nine months, and lenders have had to deal with a significant increase in traffic. Romanians who had booked holidays before the pandemic are getting in touch with travel agents to find alternative solutions.

Romanian startup Druid says that demand for its chatbot solutions jumped during the crisis and it is expecting a 20 percent increase in its annual turnover, on top of the earlier forecast that said its turnover would grow fivefold in 2020 versus 2019. The company recently signed a global deal with UiPath, the startup with Romanian roots that pioneered the robotic process automation (RPA) market, in a bid to provide each person with a chatbot. “We’re seeing increased demand from retail, financial services, healthcare, and utilities. Practically, these are the industries that must work in any conditions, the pillars that support the Romanian economy today,” Daniel Ionescu, marketing director at Druid, told BR.

TURNING DIGITALIZATION INTO FINANCIAL

GAINS Investments carried out by companies for digital transformation can lead to improved cost efficiency and higher revenues, through increases in volumes and transaction speeds, but also through a better overall customer experience. Tech insiders add that investments in digitalization can also open up new business opportunities in areas that are heavily affected by the coronavirus crisis such as tourism, education, and public services.

“Given these circumstances, companies that were once afraid to take a big step towards digital are now experiencing its potential: bigger exposure, reduced operational costs, and of course higher sales. The efforts we are now making to adapt our business will surely pay off later,” Madalina Stanescu, the founder of Optimized, a marketing agency working with eCommerce companies, told BR. Mihaela Moisa, co-founder of startup Future WorkForce, says that investments in digitalization can generate value in the long term through increased capacity to react quickly to changes on the market, better adherence to compliance rules or increased employee effectiveness in order to sustain business continuity through automation.

“Today companies are forced to speed up their digital transformation engines. In the current context, technology has become more important than ever as companies have experienced a forced entry into the digital field. While in past years they were just merely opening their doors towards technologies like RPA, now they will certainly consider them for their business continuity plans,” Moisa told BR. The current medical crisis has also highlighted European companies’ reliance on suppliers in China. Some commentators say that more firms could make investments in manufacturing operations closer to home to reduce the risk of supply chain disruptions.

Vilceanu of ContentSpeed urges local players to invest more in their digital operations in order to harness the potential of new business.

“As the China supply chain has been profoundly affected, many are looking for local or EU-based producers; how will they find a factory if it doesn’t even have a company presentation website? How can you sell your products?” Vilceanu remarked.

Romania was set to ease its lockdown measures starting May 15, two months after people were ordered to stay indoors as much as possible. More than 800 Romanians had been killed by the coronavirus so far, with more than 14,000 infected individuals.

SHARE OF ENTERPRISES IN ROMANIA USING CLOUD COMPUTING SERVICES

Romania

EU

Source: Eurostat

2014

5%

19%

2018

10%

26%

SHARE OF ENTERPRISES THAT HAD A WEBSITE IN 2019

Romania

EU

Source: Eurostat

47%

78%

DIGITAL ECONOMY AND SOCIETY INDEX (DESI) 2019 RANKING

Romania

rank score

DESI 2019 27 36.5

EU

score

52.5

Drops in startup valuations expected over coronavirus

The startup industry is entering a new age, marked by lower valuations and a tighter funding environment as a result of the coronavirus crisis disrupting the global economy. Local startups might struggle to raise funding in the early stages given the dim economic outlook, market players suggest.

By Ovidiu Posirca

Sergiu Gidei, CEE Attorneys/Boanta, Gidei si Asociatii

Bogdan Litescu, Plant an App

The global economy was slated to enter a recession in the second quarter of 2020, while estimates in Romania anticipate an economic contraction of up to 5 to percent of GDP, with the unemployment rate set to more than double in the coming months. The government’s forecast of just a 1.9 percent GDP drop this year has been disputed by many economists.

Raising funds might prove to be a daunting challenge for startups at the moment, as numerous entrepreneurs have taken a “wait-and-see” approach until lockdowns are removed and businesses start to reopen.

“Like in past outbreaks, some will win, some will survive, and some will lose, and it will be the time to see which startups are the most innovative and have the best products. I think the Romanian startups that have already obtained funding and have an international footprint are more likely to emerge well from this crisis, because they have money to invest in new and innovative products needed in this context,” Ionut Sas, partner at professional services firm PwC Romania, told BR.

FUNDRAISING DOWN IN THE FIRST QUAR

TER In the first quarter of 2020, funding for startups had already fallen by 10 percent in North America, Asia, and Europe, to USD 50 billion, according to a report by PwC and CB Insights. Part of the decline is likely attributable to the earlier phases of the pandemic. Moreover, the report shows that aggregate valuation is falling. Figures could go into further negative territory for the second quarter, when most large economies ordered the closure of nonessential businesses.

Valuations are used to show what a startup is worth after it gets through a funding round. The current gold standard for entrepreneurs is reaching unicorn status for their startup, meaning a valuation north of USD 1 billion.

“The general feedback that I hear from both entrepreneurs and investors is that

valuations are negatively impacted. I’ve heard about cases where investors cancelled existing term sheets and started new ones at a lower valuation. And these stories are still on the good side. Many investors have reduced new investments and put existing negotiations on hold in order to save that capital for companies in their portfolio,” Bogdan Litescu, CEO of Plant an App, a startup building a platform for the development of software apps, told BR.

Litescu says he is in talks with investors from the Bay Area, Central and Eastern Europe, and Japan, estimating that the scope of the crisis will be limited in Romania.

“Even right now, with the COVID-19 situation, we see that the effects are much more limited in Romania than in other countries in Western Europe or the US. Personally, I tie this phenomenon to a lower appetite for risk, which is strong in the local culture,” he adds.

In past recessions, the amount of funding for startups shrunk and fewer entrepreneurs attracted investors, while valuations also fell.

Sergiu Gidei, partner at law firm CEE Attorneys/Boanta, Gidei si Asociatii, suggested that startup valuations have dropped by 30 to 50 percent due to the coronavirus crisis.

“Romania is following the global trend of lower startup valuations in the current context. We have noticed a 30-40 percent decrease in valuation on the market, which directly results in less funding for startups, especially in pre-seed/seed phases. This fact also puts pressure on founders to ensure faster access to new financing rounds in order to obtain the cash required to develop and scale up their business,” Gidei told BR.

In this recession, startups serving affected industries such as tourism and restaurants or firms whose business models are based on direct sales might take a bigger hit, suggested Donald Butler, managing director of USD 500 million venture capital fund Thomvest Venture. He wrote in a blog post that commitments by limited partners to venture funds significantly fell in the previous two recessions - by 41 percent from 2000 to 2001 and by 58

Ionut Sas, PwC Romania

percent from 2008 to 2009. “So, if the past is prologue, it would not be surprising to see commitments to VCs cut in half this year,” Butler concludes.

INDUSTRIES WITH POST-CRISIS GROWTH POTENTIAL Gauging the potential of new companies that might come out stronger from this health crisis doubled by an economic downturn is difficult, but finding growth in these conditions might provide a valuable busi

ness lesson for the future.

“Some industries are becoming very hot. The last three customers we signed have use cases in the healthcare industry, which traditionally had been adopting digital transformation at a slow rate. I believe educationrelated technologies might also receive better valuations as people will have to obtain new skills in order to find jobs. And, who knows, perhaps this crisis will be the start of the GovTech industry,” says Litescu of Plant an App.

As more people are working from home, startups providing platforms for remote work and video conferences stand to benefit. Other industries with growth potential are in healthtech, biotech, fintech, takeaway food, entertainment, and gaming.

“As for the state of funding rounds in the coming months, opinions are mixed. VC will be cautious, but that doesn’t mean it won’t take advantage of a good investment opportunity.

Also, there are European states such as Germany, Finland, Austria or France that have announced special rescue plans for startups,” says Sas of PwC Romania.

Some tech startups might prove more resilient as large companies still need new solutions for document automation and customer management software, among others, suggested Jonathan Lehr, general partner at VC fund WorkBench, quoted by the Wall Street Journal. He added that many skilled individuals might be laid off from startups due to the bad economy, but they will be recruited by global players of the likes of Google, Netflix or Twitter.

Business opportunities during the pandemic

Even in the worst crisis, there are seeds that can be sown for future growth. In fact, some entrepreneurs see opportunities where others see only destruction. Some are working hard right now to adapt their businesses to the new coronavirus world.

By Sorin Melenciuc

Companies established during the last financial crisis were among the most successful during the recovery

SUPPLYING THE FRONTLINE The first obvious opportunity is supplying the “frontline” in this unusual war against a virus. Hospitals need ventilators, tests, drugs, and protective personal equipment (PPE) for their staff, and governments are ready to pay higher prices for those items than they would in normal times. Decades of underinvestment in Romania’s health infrastructure now translates to higher emergency spending for the country, and its needs are huge. Romania does not have a well-established tradition of producing protective equipment for medical staff or for other types of workers, and before the coronavirus pandemic it almost entirely relied on foreign suppliers – mainly China and other Asian countries.

Even if the government’s policies tend to favour direct negotiation of such contracts by public organisations – such as state-owned company Unifarm – with foreign suppliers, there was and still is enough room for private import-export firms to cover the demand. Other public and private organisations operating on the frontlines, such as the police, utilities or courier firms, also need some protection gear for their employees, and this is usually supplied by private companies.

NEXT STEP: MANUFACTURING But there is another major trend that is now developing in many countries that have an industrial tradition, including Romania, supported by governments: domestically manufacturing these goods and limiting their reliance on foreign suppliers. In Romania, the government has created a scheme financed through public funds to support the local production of masks, other PPE items, and ventilators. This new policy has been effective. Companies all over Romania have been trying to turn themselves into producers of medical devices and PPE in order to survive.

Gaze Industriale Mures, an oxygen tank manufacturer based in Targu Mures, has developed a mechanical ventilator that has already been successfully tested and approved by a military commission in charge with emergency reviews of such equipment. “It is a Romanian product, it opens the way for these types of devices in Romania, and it allows local teams to do research, to innovate, and to develop these products,” said Razvan Corneliu Popa, the manager of the company. “We can produce the device at a cost below the market price. We all know that prices have exploded because demand greatly exceeds supply, but we are well below the sale prices of imported devices,” he added.

In Cisnadie, Sibiu County, the company Coramed started manufacturing protective face masks in March, and a furniture producer based in Maramures County, Taparo,

completely changed its business model and bought equipment to make masks.

RISK FACTORS However, these business moves could prove riskier than previously thought. First, the lack of experience is a major risk factor when the business model changes: a face mask production facility in Romania has already been closed because most of its employees were infected with the coronavirus. But the most important risk factor for such manufacturing projects is science. Following the first wave of COVID-19 patients, when ventilators were seen as the best chance of survival for critically ill patients, doctors have gained experience and have started to advise against the use of ventilators for many patients because the survival rate for those who get intubated is too low. Some studies suggest that, in many hospitals, more than half of the intubated patients die.

Alternative devices such as oxygen masks or even CPAP machines and black boxes, normally used to treat patients with severe sleep apnea, are now being used in hospitals in Europe and the US to treat patients who would have been put on ventilators just a few weeks ago.

From this point of view, the risk lies in investing time and money into a product that is no longer needed after some time because fresh research finds better treatments and methods – and, in such emergency situations, research on disease has some delay. The local pharmaceutical industry is also being pushed to change its usual business. Local medicine producers like Zentiva Romania or Antibiotice Iasi have already changed their production structure in order to increase output or to start manufacturing certain drugs considered to have the highest potential in treating COVID-19 – like paracetamol and hydroxychloroquine.

But these decisions are facing the same major risk: science. There is currently no cure or vaccine for the SARS-CoV-2 virus, and doctors all around the globe are struggling to treat their patients with existing drugs. There is no study that proves that a particular drug can really cure COVID-19. But like in the case of ventilators, doctors and researchers are gaining experience, mostly through trial and error methods, but they are nevertheless improving their knowledge. Many drugs have already been tried on COVID-19 patients in many countries, from antimalarial drugs (hydroxychloroquine) to anti-HIV treatments (remdesivir and lopinavir/ritonavir) and rheumatoid polyarthritis drugs (tocilizumab).

Other treatments, like famotidine (a cheap drug for acute heartburn), are being tested in clinical trials. But all these medicines also have side effects and their use is controversial – they seem to have some “limited success” on certain categories of patients, but they don’t really seem to prevent or cure COVID-19 at a large scale. But with all of Big Pharma now massively investing in developing vaccines and finding existing or new cures for this viral infection, there is a high probability that they will soon discover which existent ated new markets in the country, as they have everywhere else. Forced to stay home, most people are rediscovering their skills as bakers and cooks and they need products they usually wouldn’t buy before the crisis. A new lucrative market for flour, yeast or cooking ingredients has exploded since the beginning of the outbreak, and this market may not disappear very soon as most recent research has suggested that the coronavirus would be with us for the next months or years.

drug works best and which new treatment has the best chance of being approved by health regulators. For those companies investing in producing drugs that will soon be considered irrelevant in treating COVID-19, the costs could prove excessive.

NEW RETAIL MARKETS At the same time, this pandemic has also generated new demand on the retail market for protective masks, gloves, and disinfectants, and the country’s stocks rapidly vanished even before the beginning of the outbreak in Romania. Following a rapid depletion of stocks and a rapid rise in prices, many companies have seized the opportunity and secured contracts with foreign suppliers.

Today, masks, gloves, and disinfectant can be bought online from retailers like eMAG or Altex at lower prices. But lockdown, social distancing measures, and isolation have cresolvent during the recession, and assets were undervalued,” financial analyst Iancu Guda noted a couple of years ago. These companies tend to be more competitive as their business model gets tested during tough times.

CREATIVE DESTRUCTION IN CRISIS Studies conducted in Romania and abroad suggest that companies created during the last financial crisis were among the most successful during the recovery. “These companies were founded at a time when, in general, trust had not yet been recovered. This is because there was an empty space left by companies that had gone bankrupt or in

However, these encouraging studies are counterbalanced by data showing that more than half of currently active Romanian firms have not experienced a severe shock on the market, as they were founded after the financial crisis. The lack of experience in navigating troubled waters may prove fatal to many local companies. But in the economy, seeds of new life lie in every bankruptcy – Joseph Schumpeter’s ”gale of creative destruction” seems to function in each and every major crisis. According to experts, the coronavirus crisis could accelerate current business trends, destroy old unsustainable models, and push for new, better suited business concepts.