People & Skills  

Manufacturing Eastern Europe's 'perfect storm'

A number of factors have impacted global sourcing from the Far East in recent months which Mark Morley suggests could lead to Eastern Europe becoming a major manufacturing hub for the high tech industry
 Many high tech companies have a presence in Europe  East. Europe has a substantial auto-manufacturing hub

Written by Mark Morley, Director of Industry Marketing for Manufacturing, GXS

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For the past twenty years most consumer electronics goods have been manufactured in the Far East, the traditional ‘manufacturing hub’ of the global high tech industry. However, disruptions are quickly changing the dynamics and structure of high tech supply chains. Low cost will continue to have a high focus for many companies, however protecting production capacity and ensuring quick delivery of goods to end markets has now become the strategic focus for many associated companies.

Although many high tech companies will continue to have head offices located in the Far East, production locations are going to have to change in order to protect both the supply chain and the high tech industry in general. We’ve already started to see the shift from East to West with Foxconn establishing numerous plants in Brazil, recently announcing that they would be building a fifth plant there in order to serve the exponential growth in the mobile device market in North America.

In a similar manner, Mexico is also seeing significant inward investment as companies look to take advantage of lower labour costs and more importantly its close proximity to the lucrative North American market.

So, we have a significant manufacturing hub in the Far East, we have a growing presence in Mexico and South America, but what about the other major region in the world, Europe?

Many high tech companies have established a presence in Europe, both in terms of regional sales offices and production plants. However, the relative high costs of producing goods in the main European countries of Germany, France and the UK have kept inward manufacturing-related investment to a minimum. Though Sony thought it was financially viable to build a TV manufacturing plant in the UK, it’s now starting to outsource the production of flat-screen TVs, putting the plants future in jeopardy.

In a surprise turnaround it was recently announced that the low cost PC, the Raspberry Piwould now be made at Sony’s plant in the UK, rather than in China. Increasing wage costs and other macro-economic factors are starting to impact high tech investment in China and the Raspberry Pi is an excellent example of near-shore manufacturing - a trend that is likely to continue.

So this begs a question if it’s possible to manufacture the world’s cheapest PC in the UK, a PC that is not much bigger than a business card; why doesn’t the high tech industry consider further investments in the European-region, especially in Eastern Europe where labour costs are still relatively low and the countries border onto Western Europe?

The Eastern European picture

Recently, I conducted a research study looking at the B2B adoption levels and key industries of the countries making up Eastern Europe. The Czech Republic, Slovakia and Slovenia came out fairly well in my analysis, with Slovenia being highlighted as a key investment hub for the manufacturing sector. There were various reasons why these countries were favoured as strategic manufacturing locations:

  • They all border Western Europe, which means that goods could be manufactured and shipped across the borders by train or lorry-based 3PL providers
  • They have a low cost base and a very skilled workforce that have been able to adapt their skills very quickly to the companies and industries that have invested in the region so far
  • As well as transport, they have good communications and utility-related infrastructures
  • The port of Koper in Slovenia provides the gateway, via the Adriatic Sea, into Eastern Europe for many companies, especially ASPAC companies looking to get their products or supplies into the European market. Slovenia has become a strategic location for not only distributing parts, components or products to end destinations, but also to service the many high tech manufacturers, such as Dell who have plants in the country.
  • The local governments offer significant tax incentives and heavily subsidised land prices to encourage companies to setup in the region.

In addition, countries such as Hungary and Poland have also seen significant investment from the manufacturing sector. A 2010 reportestimated that up to 30 percent of consumer electronics devices manufactured in the Eastern European region came out of Hungary. Many of the high tech suppliers who have established a plant in Hungary are supporting their automotive customers across the border in Slovakia, which is the main automotive manufacturing hub in Eastern Europe.

The Perfect Storm

Over the past 18 months there have been a number of factors that have impacted global sourcing from the Far East, developing into the ‘perfect storm’ when it comes to deciding future sourcing strategies. Natural disasters, high wage demands and strikes in China, rare earth export restrictions from China, not to mention the high value of the Japanese Yen are all contributing. This combination of factors could lead to many manufacturers changing the structure and dynamics of their global supply chains and ultimately benefit the countries that make up the Eastern European region.

North American and European companies are also starting to near-shore production back to their home markets. In Asia, Japanese companies are looking for new manufacturing locations to minimise future supply chain disruptions and due to on-going wage strikes, Chinese-based companies are also now looking for growth opportunities outside their domestic market, a trend currently being seen in Brazil.

Many governments in Europe have identified economic growth as a key way to reduce European debt levels and to help countries emerge from recession. The EU needs to classify key Eastern European countries as regional development locations which will get further significant tax breaks and other incentivized options for companies looking to build plants or expand existing operations in these locations.

Will Eastern Europe become a major high tech manufacturing hub?

The European Commission needs to develop a more all encompassing business and investment plan for the region - one of Europe’s biggest assets. With more and more companies deciding to source parts and products from the Far East over the past decade, this has partly reduced the investment in Eastern European countries. However the Japanese earthquake has changed sourcing dynamics forever, meaning that Eastern Europe could start to see further significant inward manufacturing investment once again.

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