* Polish foreign direct investment abroad leaps
* Some mid-sized firms testing limits of Polish market
* Nationalist government supports foreign expansion
* Germany a favoured market for acquisitions
* But German jobs won’t necessarily move to Poland
By Alan Charlish and Pawel Goraj
GDYNIA, Poland, March 5 (Reuters) - Trans Polonia Group faces a problem confronting many ambitious mid-sized Polish companies: it is starting to outgrow its home market.
The group’s trucks already supply a quarter of the fuel delivered by road to filling stations across Poland, and Trans Polonia (TPG) has decided that to keep expanding it must look West. That means not simply serving foreign clients from a Polish base, but buying a presence abroad.
Western companies, especially those in neighbouring Germany, have been investing in Poland since soon after the fall of communism. Now rapidly increasing amounts of investment capital are flowing in the opposite direction as firms like TPG try to get closer to customers in the biggest European economies.
“If you want to expand then you need to buy a company or companies which are located in the West,” TPG chief executive Dariusz Cegielski told Reuters. Based near the Baltic port of Gdansk, his group is considering potential targets in Germany, Belgium and the Netherlands with annual turnovers of more than 50 million euros ($60 million).
Mid-sized companies in other central European countries have already had to make international pushes due to their relatively small domestic economies. By contrast, Polish firms have relied for longer on a home market whose population of 38 million is larger than that of the Czech Republic, Slovakia and Hungary combined.
Despite robust economic growth, Polish companies now appear to be testing the limits of the local market. Direct investment abroad more than doubled between 2014 and 2016 alone to $6.4 billion, according to the United Nations trade agency UNCTAD.
TPG already bought Poland’s biggest fuel trucking company three years ago. Now it wants to expand beyond this domestic business into a more international industry: intermodal transportation of liquid chemicals, which uses tanks that can be loaded between ships, trains and trucks with container cranes.
Western European petrochemical companies are active in eastern EU member states such as Poland, and further east in Russia. But for transport companies like TPG to tap into this business, they need to use established client relationships which have often been built up at a local level over many years.
“This you can achieve only via potential acquisitions. You cannot realise this through organic growth,” said Cegielski.
While TPG is just getting started, some mid-sized Polish firms have already taken the leap, encouraging others.
“Successful acquisitions by Polish companies...have made other Polish investors feel more confident to think about themselves as potential foreign investors,” Magdalena Komor, Manager in Mergers & Acquisitions at PwC in Warsaw, told Reuters.
One example is household appliance maker Amica, which agreed to buy British kitchen appliance company CDA Group in 2015 for 24.3 million pounds ($33 million).
“Polish entrepreneurs who have found success in the domestic market have reached certain barriers to further development in Poland and need to think about foreign expansion,” Amica’s deputy chief executive Piotr Skubel said.
Some are moving beyond Europe. Drug maker Adamed Group took a controlling stake in Vietnamese pharmaceutical company Dat Vi Phu last year in one of the biggest investments by a Polish company in southeast Asia. Before that Adamed Group bought four companies in the Czech Republic and Slovakia.
For many of companies Germany is the ideal destination due to a shared border and the size of the country’s market, said Stepan Flieger, head of EY’s Czech M&A team.
“Germany is a huge opportunity and Polish companies are starting to realise if you want to do business in Germany you cannot simply export. They will always prefer to buy from a German.”
A temptation is to try to move some operations from a German acquisition back to Poland, where average wages were 44 percent lower in 2016, according to OECD data.
“Usually when a manufacturing company invests abroad, let’s say in Germany, ultimately it plans to relocate manufacturing to Poland where it can be done at lower cost, and to leave sales, distribution and more value-added activities in the country of the investment,” said Tomasz Pasiewicz, managing partner at Warsaw-based advisory firm Saski Partners.
This is a sensitive issue in the “Mittelstand”, the mid-sized German companies that pride themselves on creating high quality jobs in the small towns where they are often based.
But Langendorf, a German truck trailer maker which Polish rival Wielton bought last year, says its experience has been positive. No jobs have been lost to Poland since Wielton agreed to buy the firm based in the former mining town of Waltrop for a maximum of 10 million euros.
“On the contrary, the workforce in Germany has grown since the takeover,” Langendorf spokesman Robert Otto said, adding that employees’ “initial concerns were quickly dispelled”.
“Langendorf has already taken over central tasks from the main group,” Otto said. “Sales activities are being expanded significantly, which of course also means an increase in staff.”
Poland’s right-wing nationalist government is also playing a role. Since coming to power in 2015, it has slowed privatisations, moved to bring banks back under local control and come into conflict with the European Commission over a variety of issues including the independence of the judiciary.
Amid the uncertainty, foreign direct investment into Poland has fallen from $14.3 billion in 2014 to $11.4 billion in 2016. But the ruling PiS party has made foreign expansion of Polish firms one of the priorities for promoting economic growth under its “Strategy for Responsible Development”.
The Polish Investment and Trade Agency, which began operating in its current form in 2017, received 600 inquiries last year about possible foreign acquisitions.
“We have set up an incomparably better support network for Polish small businesses over the past 12 to 13 months of this project than what was available to them in the past five or six years,” Executive Vice President Wojciech Fedko said.
Piotr Krupa, Founder and Chief Executive of Warsaw-listed debt collection company Kruk, said he has noticed a change in government attitudes.
Kruk, which is valued at $1.17 billion on the Warsaw stock exchange, has recently made acquisitions in Spain and Italy to take advantage of the high number of non-performing loans in these countries following the global and euro zone crises.
“It’s a little bit different than a few years ago,” Krupa told Reuters. “Nobody wanted to help us and discuss Kruk, from government, about our expansion abroad. But today this government is more open for such activity and for entrepreneurs.” ($1 = 0.8179 euros) ($1 = 0.7281 pounds) (additional reporting by Michael Kahn in Prague, Michael Nienaber in Berlin and Marcin Goettig in Warsaw; editing by Michael Kahn and David Stamp)