The rise in labour costs in Asia has forced investors to look for business opportunities in other parts of the world. From 2010 to 2011, wages in Shenzen, one of China’s most important manufacturing cities, doubled, and in Shanghai they increased by 60%. Between 2002 and 2010, the hourly rate of remuneration of Chinese workers increased by 231%.
There has also been a significant growth in the level of social welfare levies in rapidly developing Asian countries, making this region less attractive to investors in terms of labour costs. Central and Eastern Europe (“CEE”) is a low-cost and developing part of the European Union (the “EU”) where manufacturing is a preferred economic focus. In recent years, CEE has become a place for the focus of manufacturing activity.
CEE countries offer many advantages for foreign manufacturing investors. Today, the average labour costs in countries such as Poland, Hungary, Slovakia and the Czech Republic are similar to those in Shenzen. Corporate taxes in these countries are generally low, compared with other European countries, and the legal and regulatory environment has also become increasingly investor-friendly. All CEE countries are constantly striving to reduce administrative burdens on investors and they have also improved their physical infrastructure, leading to more efficient logistics and supply chains.
Moreover, governments in CEE countries offer various grants and incentives to foreign investors establishing manufacturing facilities in the region. They offer grants for the acquisition of assets, job creation and tax incentives. Finance is usually provided to companies planning investments in priority sectors such as automotive, electronics and household appliances, aviation, biotechnology and food processing.
According to Michael Kern, CEO of the Polish-German Chamber of Industry and Commerce, “German investors in Poland value it most because of its EU membership, its employees’ skills, qualifications, commitment and productivity, and for the quality of its academic education.”
Recent trends show the automotive industry in particular sees advantages in setting up manufacturing plants in CEE. The region has become a leading automotive manufacturing centre – with 60% of Germany’s automotive production there in 2014. Poland is the number one bus manufacturer in the EU, Hungary has a strong vehicle component manufacturing sector, the Czech Republic specializes in the manufacture of small cars and Slovakia is the world’s number one producer of cars per capita.
British carmaker Jaguar Land Rover, owned by Indian Tata Motors, has recently decided to build a new vehicle manufacturing plant in Slovakia, worth £1 billion and with a production capacity of 300,000 cars per year. The awareness of the importance of CEE markets is also clearly visible in General Motors’ recent decision to locate its Global Business Services centre in Poland, an operation that will coordinate and support over 20 facilities in Europe.
GM Manufacturing already employs a total of 3,900 people in Poland.
Companies from other sectors have also started locating their manufacturing plants in CEE. ABB, the leading power and automation technology group, is planning to invest $50 million to strengthen its manufacturing facilities in the Czech Republic and $30 million to build a new plant in Poland. BASF recently opened its largest European production plant for mobile emissions catalysts in Poland.
Leading pharmaceutical companies have also begun locating their manufacturing plants in CEE. Servier Group has invested around zł150 million in Poland. In the words of Colm Murphy, Production Site Director of Servier Group, “in Poland we are delighted to have a highly qualified workforce with relevant experience in the pharmaceutical sector. The availability of the required skillset in designers and contractors and the support from local authorities has contributed enormously to our success.”. Xavier Douellou, Managing Director of 3M Poland, also sees potential in Poland and in the Polish workforce: “Over the last 20 years, 3 million has invested over $350 million in Poland. Poland’s highly-qualified people and stable economic situation attracts companies like 3 million which want to grow here in order to expand internationally”.
China still seems to be the workshop of the world. However, low labour costs, a highly-skilled workforce, a good location, a friendly legal and business environment and many other factors are making CEE one of the most attractive regions for investment – something that is unlikely to change in the near future.