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Manufacturing strategies in Central EuropeThe challenge of maturity
A white paper from
the Economist Intelligence Unit
sponsored by Oracle
© The Economist Intelligence Unit 2004 1
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Manufacturing strategies in Central Europe: The
challenge of maturity is an Economist Intelligence Unit
white paper, sponsored by Oracle.
The Economist Intelligence Unit bears sole
responsibility for the content of this report. The
Economist Intelligence Unit’s editorial team
conducted the interviews, executed the survey and
wrote the report. The findings and views expressed in
this report do not necessarily reflect the views of the
sponsor.
Our research drew on two main initiatives:
● We conducted a series of in-depth interviews with
senior manufacturing executives at multinational
companies operating in Central Europe.
● We conducted an online survey in July/August 2004
of 98 manufacturing industry executives located
throughout the EU accession and candidate
countries.
The author of the report was Paul Lewis and the editor
was Denis McCauley. Mike Kenny was responsible for
design and layout.
Our sincere thanks go to the interviewees and survey
participants for sharing their insights on this topic.
October 2004
Preface
2 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Most manufacturing sectors in the new
European Union member states have been
transformed over the past 15 years by
foreign direct investment. Foreign-owned
companies now account for the vast majority of the
region’s exports and have underpinned these
countries’ economic growth.
EU accession is unlikely to herald a fresh wave of
investment into the region, however. Quite the
reverse, in fact. Central Europe’s structural allure as a
low-cost location is still impressive compared with
expensive West European markets but is under threat
from other, even cheaper locations.
Slovakia is currently the location of choice for many
manufacturers, for instance, but many firms are now
looking outside the current EU, particularly at
Romania. Although Ukraine and Russia are deemed by
many to offer too much operational risk, the latter in
particular is set to attract significantly more FDI over
the coming five years. China is another alternative for
many firms, though transport costs to the EU can
eliminate the wage cost savings.
Not all manufacturers are focused on the region’s cost
benefits, of course. Some are in the region mainly to access
the local market. Many more seek the double blessing of
both a low-cost base for export and penetration of the
domestic market (although this can be a difficult tightrope
to walk—rising wages may push up manufacturing costs,
but also increase consumer demand).
But as Central Europe becomes less able to compete
on wages alone, manufacturers’ strategies are maturing
in tandem. A survey of 98 senior manufacturing
executives in the region, conducted for this white
paper, shows that wage costs are a major issue but that
other preoccupations are coming to the fore:
● Consolidation. Manufacturers in our survey are
concerned primarily with consolidating their position
in the home markets rather than looking further
afield. 70% of respondents say that the former is
important, and a third say critically so. Similarly, the
need to build closer relations with existing customers
is critically important to 39% of respondents,
compared with only 19% who are critically concerned
with penetrating new customer markets.
● Cost efficiency. This is regarded as manufacturers’
greatest point of vulnerability. Local sourcing of
components is a good way to cut costs, but this
requires very close management of the local supplier
in question in order to get it up to the required quality
standard. Expansion of the automotive supply network
over the next few years may provide new sourcing
opportunities for other sectors.
● Customer relationships. Although cost efficiency
is the principal area of vulnerability for manufacturers
in the region, it is not the only source of competitive
advantage. Respondents also point to brand strength,
local knowledge, flexibility and innovation. Customer
servicing, sales and marketing and product
innovation are the main investment priorities for
survey respondents.
Manufacturing in Central Europe is entering a new
era. But these differences are narrowing, and as a result,
the preoccupations of manufacturers there are changing
and maturing—from a focus on cheap labour to one on
cost efficiency, from expansion to consolidation, and
from growth by acquisition to growth through careful
cultivation of customers and products.
Executive summary
© The Economist Intelligence Unit 2004 3
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
The development of manufacturing over the
past 15 years in the Central European countries
that joined the European Union on May 1st
20041 has been startling and has largely been
driven by foreign direct investment (FDI). Entire
sectors have been transformed by the influx of foreign
capital and expertise from states of bankruptcy or
obsolescence into efficient export-driven industries.
Both investors and their hosts have reaped
rewards. Local enterprises have accessed modern
business skills, new technology, foreign markets and
money for investment. For their part, the investors got
a skilled and educated labour force, eager to learn
modern skills and at a fraction of the cost of their
western counterparts, as well as a market of 100
million consumers bordering the EU. Some 80-90% of
Hungary’s manufacturing exports is now produced by
foreign owned subsidiaries, and similarly high figures
apply to the Czech Republic, Slovakia, Estonia and
almost every other country in the region (with the
possible exception of tiny Slovenia).
Favoured manufacturing locations have shifted
between countries over time and will continue to do
so. Hungary was the preferred manufacturing site in
the early 1990s owing largely to its political stability,
but wage levels have since soared. Poland with its
significant domestic market took over during the mid-
1990s, attracting companies that wanted a piece of
the country’s roaring growth rates, until the economy
slowed in 1999. The Czech Republic became a brief
favourite around 2000, after it had ended its political
paralysis and began privatising key sectors. Today
Slovakia, an erstwhile political pariah with a small
domestic market, has become the new magnet for
export-oriented manufacturers, largely on account of
its reform-oriented government and the lowest wages
in Central Europe.
The most dramatic change in the region’s
manufacturing base, and a development that will
continue to shape the business environment and the
economies of the region for many years, has occurred
in the automotive sector. It has attracted the most
foreign investment of any manufacturing branch. The
key player has been Germany’s Volkswagen (VW) which
acquired Czechoslovakia’s Skoda works in 1991 and set
up a major greenfield plant near Bratislava as well as
an Audi engine plant in Hungary which supplies VW
world-wide. Fiat (Italy) and Daewoo (South Korea)
also acquired substantial plants in Poland, but both
ran into severe difficulties by the end of the 1990s. In
the last couple of years a joint venture of Toyota-
Peugeot (Japan-France) has set up in the Czech
Republic, while Peugeot and Hyundai (South Korea)
are both building major plants in western and central
Slovakia, respectively.
Although the automotive sector has in many ways
become the pre-eminent industry of the region,
foreign manufacturers have also transformed a wide
variety of other sectors. These include food and other
fast-moving consumer goods (FMCG) producers, such
as Nestle (Switzerland), Kraft Foods (US), Henkel
(Germany), Procter & Gamble (US) and Unilever
(Netherlands), which have bought or built scores of
manufacturing plants in Central Europe.
The steel industry, which is battling with over-
capacity and EU quotas, is currently being transformed
by foreign investors. Indian-run LNM Group—the
world’s number two steel company—recently took over
huge but underused steel capacity in Poland, the
Czech Republic and Romania; and Pittsburgh-based US
The end of transformation?
1 The Czech Republic,Estonia, Hungary, Latvia,Lithuania, Poland,Slovakia and Sloveniajoined the EU in 2004.Bulgaria and Romania arecandidate countries andare scheduled to join in2007.
4 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Steel has turned around the Kosice steel plant in
Slovakia, which is now the US firm’s most profitable
unit and the country’s number two exporter behind
VW. Hungary, in particular, has enjoyed substantial
investment from electronics producers such as Philips
(Netherlands), Flextronics (US), Sony (Japan) and
many others, while Thomson (France) has transformed
the Polkolor TV-making operation in Poland. The
stories are endless.
A few local companies have survived the foreign
competition, though many do so as secondary or
tertiary suppliers to the foreign multinationals.
However, some local firms, notably in the
pharmaceuticals sector, have held their own. Zentiva,
a merger of Czech Leciva and Slovakofarma (with
investment and management brought in by US private
equity fund Warburg Pincus), is strong in its home
markets; Gedeon Richter remains a major player in
Hungary; and Slovenia’s Lek held off foreign
competition until 2001 when it was bought by Novartis
(Switzerland) for a hefty $1bn, to name some of the
few examples.
As far-reaching as the transformation of Central
Europe’s industrial environment has been, differences
between the newer EU members and the older ones
remain profound. Wage differentials, for example,
remain startling. As one engineering firm points out, a
German engineer may cost some $85,000 a year to
hire; a Slovak, given a few weeks training, will work
almost as effectively for $15,000.
Political stability can also not be taken for granted
in the region. The new and prospective EU member
states still struggle to form stable and effective
governments, as political parties continue to be built
around personalities rather than policies and the
persistence of extremist groups in parliament force
moderate parties to form ideologically incoherent
coalitions. Fortunately today, the consequence of
political immaturity and paralysis are not as
significant as they were in the mid-1990s when
policies on such weighty matters as privatisation, for
example, had still to be instituted. But in less
developed countries, such as Ukraine or the western
Balkans and more importantly Romania, the new
target location for several firms, such shortcomings
are as important as ever.
Day-to-day operational hassles are also ubiquitous.
These include: availability, flexibility, mobility and
cost of skilled labour; the state of roads, rail and
waterways; the quality of the local supplier base; the
fragmented nature of distribution systems; weak
brand loyalty; low, albeit rising, purchasing power;
overly-cautious banks; and national markets that are
too small to justify sizeable investments in advertising
or marketing. Added into the old mix of problems is
new competition from other EU players that is leaving
firms, particularly food and confectionery producers,
with wafer-thin profit margins. And while chronic
delays at customs—a consequence of low wages,
bribes, poor certification procedures and poor
training—have diminished with EU entry, such
problems persist in the Balkan states.
© The Economist Intelligence Unit 2004 5
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Contrary to widespread expectations, the EU's
enlargement will not lead to a fresh surge in
FDI into the eight new Central European
members. These countries have already largely
achieved the main benefits of integration for
investment. According to a survey of 98 senior
executives in the region conducted especially for this
paper, manufacturing strategies after enlargement
focus more on consolidation in existing markets rather
than expansion into other markets.
According to research conducted by the Economist
Intelligence Unit in its annual World Investment
Prospects report, Central Europe’s FDI boom has
peaked. A sharp decline in FDI inflows to the new EU
member countries in 2003 can be seen as a harbinger
of a trend that will lead to a lasting shift in the
geographic distribution of FDI in Central Europe.
Average annual FDI inflows into the new EU
member states in 2004-08 are forecast at some $20bn.
FDI is expected to peak in 2005-06 with the
completion of some major outstanding privatisations.
After that, investment will be dominated by re-
invested earnings and follow-on investment by
existing FDI ventures. The share of the new EU
members in the Central and East European regional
total is expected to decline to below 50%, compared
with a share of almost two-thirds in the pre-2003
period. Economies in the Balkans and the
Commonwealth of Independent States (CIS), such as
Ukraine and, especially, Russia, will increase their
share of regional FDI.
Over the medium term, FDI inflows to the new EU
member states are expected to recover from 2003,
However, the danger of diversion of cost-sensitive
Now the hard work starts
What approaches will your company take to drive growth over the next three years? Please rate the importance of the followingapproaches to your company's strategic goals on a scale of 1 to 5, where 1 is critically important and 5 is relatively unimportant.
(% respondents)
1 2 3 4 5
Critically Important Relatively
important unimportant
1. Achieving growth through mergers and acquisitions 6 24 15 27 28
2. Building closer relations with existing customers 39 33 17 9 2
3. Developing new products and services 38 40 15 5 2
4. Entering new alliance relationships 14 36 22 21 7
5. Entering new geographical markets 13 25 25 28 9
6. Focusing on/leveraging core products and services 20 47 26 5 2
7. Improving distribution channels 25 23 31 14 7
8. Increasing advertising and marketing spend 11 23 31 31 5
9. Penetrating new customers markets 19 29 30 21 1
10. Spinning off and/or starting up new companies 5 14 16 33 32
11. Improving use of IT to drive better overall business planning 16 28 29 19 7
6 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
forms of FDI to even cheaper destinations looms larger
than any promise of more relocation to these countries
of investment from the West.
For labour-intensive, export-led manufacturers, the
focus is now ruthlessly directed towards controlling
wage and salary costs. Over three-quarters of the EIU
survey respondents expect modest rises in labour costs
in the region over the next three years. Of course,
wages are not expected to catch up with average EU
levels anytime soon.
The constant worry, though, is pressure from yet
lower wage locations. As wages in Slovakia eventually
rise, and the business environment improves in poorer
countries such as Romania, with a market of 23 million
consumers and all-in hourly wage costs per worker of
under $1, the latter markets start to hit many
corporate radar screens. And unlike in yet cheaper
Ukraine, political risks in Romania appear to have
diminished appreciably—with EU accession set for
2007.
Of course, the importance of costs varies according
to the nature of the manufacturing operation. Low
wages are often a drawback for companies looking to
sell into the domestic market, because they imply low
purchasing power. Plenty of manufacturers—
particularly in the food, drink and other FMCG sectors,
which do not export their output—are not overly
concerned by wage and other costs. As one
pharmaceutical company puts it: “Wages costs are
small—we never measure the ratio of wages to cost of
FDI flows, 2002-08
2002 2003 2004 2005 2006 2007 2008
Central Europe
Inflows (US$ bn) 22.2 10.1 15.1 18.8 21.6 16.3 17.3
% of regional total 60.4 38.4 39.9 43.5 45.8 37.4 36.9
Rate of growth (%) 34 -54.7 50.3 24.7 14.7 -24.4 5.9
% of GDP 6 2.3 2.8 3.2 3.5 2.5 2.5
Balkans
Inflows (US$ bn) 4.2 6.6 5.7 6.2 6.5 7 7.4
% of regional total 11.4 25.2 15.1 14.2 13.8 16 15.8
Rate of growth (%) -6.5 58 -13.5 8.1 5 7.7 6
% of GDP 3.7 4.6 3.2 3.2 3.1 3.1 3
Baltics
Inflows (US$ bn) 1.4 1.4 1.6 1.7 1.9 2.1 2.2
% of regional total 3.8 5.3 4.2 3.9 4.1 4.7 4.6
Rate of growth (%) 21.4 -1.7 16.4 4.7 14.7 7 5.9
% of GDP 4.9 3.7 3.6 3.3 3.4 3.2 3
CIS
Inflows (US$ bn) 9 8.1 15.4 16.6 17.1 18.4 19.9
% of regional total 24.5 31.1 40.8 38.4 36.3 42 42.6
Rate of growth (%) 24.1 -9.4 89.6 7.9 2.8 7.3 8.6
% of GDP 2.1 1.5 2.3 2.3 2.2 2.2 2.2Source: World Investment Prospects
© The Economist Intelligence Unit 2004 7
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
sales, only headcount to cost of sales”. Some FMCG
producers note that they sell more goods in wealthy
Slovenia than in the Ukraine, which is 25 times larger.
For firms focused on the domestic market,
distribution looms largest on their agenda. According
to Petr Sulc, CFO of Czech pharmaceutical firm Zentiva,
finding distribution partners who can get the drugs to
the pharmacies quickly and consistently is the big test
of business. Even small countries do not always have
the benefit of well-developed national distribution
networks, and local distributors still play a
disproportionate role in getting goods into shops in a
relatively limited geographic area. The only significant
development in this respect has come with the arrival
For Brau Union, which recently merged with
the Central European business of Heineken,
the much-heralded advantages of locating
in the region—EU accession and low
wages—come rather low down the list of
priorities. EU accession has brought
improvement in some areas, notably by
reducing corruption and improving the
legal environment, says Josef Nagl, head of
business development for Brau. But in con-
trast with manufacturers looking for a
cheap export base to western markets, Brau
is primarily seeking countries with strong
growth potential in themselves, not only in
which to sell its international beers, but
also to acquire and develop popular domes-
tic names.
The company is the market leader in
almost every country it enters, selling both
local and international brands in all of
Central Europe, as well as Romania,
Bulgaria, Croatia and Macedonia. In
Poland—its largest market—it has sales of
some €800m, accounting for 38.5% of the
beer market. In Macedonia it has a 73%
market share. The company’s strongest
competitive advantage is its brands.
International names such as Heineken and
Amstel represent some 10-15% of volume
sold in these markets, with local brands that
are equally famous in their domestic
markets, such as Zywiec in Poland, Zlaty
Bazant in Slovakia and the century-old
Steffl in Hungary, accounting for the rest.
Brau’s operating concerns therefore are
not directed at keeping labour costs down,
but at promoting its brands, finding and
developing a strong local management with
a good understanding of the consumer, and
getting beer to the shops and bars quickly
and cheaply.
Roughly three-quarters of Brau’s volume
goes to hypermarkets and small outlets,
with the rest going to bars and restaurants.
The biggest obstacles are the region’s
distribution systems, which almost
everywhere (with the possible exception of
Poland) are still poorly developed. Typically,
the manufacturer must deal with many small
distribution companies that each serve a
limited geographic area, and numerous
small, poorly-organised wholesalers. In
Romania, for example, a large part of a
distributor’s client base are kiosks. Building
up one’s own distribution system would
therefore give Brau, or any fast-moving
consumer goods company, a strong
competitive advantage, especially for a
product like beer which cannot travel too
far, says Mr Nagl. Hypermarkets are
admittedly now changing the distribution
environment, but these bring new problems
for the manufacturer, namely tougher
conditions and thinner margins.
As for expansion plans, market size is the
key factor to consider. Although Brau is
present in small markets, this is often the
result of having acquired an existing
brewery in a single deal. Its market
dominance in Macedonia, for example,
comes from having acquired Pivara Skopje
in the privatisation process in 1995, rather
than through long-term organic growth.
The fragmented Balkan markets would
normally hold little interest for the
company, not least because it is difficult to
sell a local brand across borders. It would be
impossible to sell its Croatian Karlovacko
brand, for example, in Serbia. Nationalism
can still play a big part in the choice of beer
drinkers, says Mr Nagl. And there are also
transportation problems in Southeast
Europe to consider. Such shortcomings are
only worth dealing with if the market
potential is big enough. Thus Heineken
Group is active in Ukraine and Russia, for
instance, where it recently acquired the
Shikhan and Volga breweries, making the
company the third largest beer producer in
the country.
Brau unbeaten
8 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
of major hypermarket chains, which often prefer to
sign international contracts with suppliers—and tend
to push very hard bargains.
But for some, costs are everything. “We count
pennies and minutes of production time”, says George
Varmuza, managing director for Central and Eastern
Europe at Emerson, an electrical goods manufacturer.
To take one example, Emerson might sign a lucrative
$500m, five-year deal to supply motors to Whirlpool
(US), but the agreed price will decline by a couple of
percentage points every year, irrespective of the fact
that input costs of copper or steel, to say nothing of
wages, may rise.
Emerson represents one extreme of the
risk/market/cost equation. The firm exports almost all
of its output from its factories in the Czech Republic,
Poland, Hungary and Slovakia. Although Emerson set
up a plant in Slovakia in the mid-1990s to supply the
Whirlpool washing machine factory in the eastern
town of Poprad, the decision to move in-country was
largely aimed at dodging the difficult customs regime
at the time. But Whirlpool Slovakia only accounts for
10% of Emerson’s sales of washing machine
components, while 100% of output from other
divisions is exported to Western Europe.
In its next step down the labour cost ladder,
Labour costs per hour (US$)
Country 1998 1999 2000 2001 2002 2003 2004 2005
Bulgaria 0.61 0.61 0.59 0.61 0.73 0.91 1.03 1.18
Czech Republic 2.05 2.09 1.99 2.19 2.73 3.41 3.88 4.63
Estonia 1.64 1.74 1.66 1.82 2.12 2.79 3.33 3.81
Hungary 2.03 2 1.91 2.27 2.95 3.8 4.37 4.94
Poland 1.96 2.38 2.42 2.77 2.86 3.14 3.36 3.78
Romania 0.65 0.55 0.56 0.58 0.64 0.8 0.95 1.08
Slovakia 1.58 1.44 1.41 1.42 1.66 2.19 2.6 2.91
Slovenia 5.29 5.29 4.78 4.91 5.44 6.79 7.71 8.53
Source: EIU CountryData
What does your company see as its greatest vulnerabilities? (Choose up to three) (% respondents)
Cost efficiency
Access to new markets
Efficiency in regulatory compliance
Sales/marketing strength
Innovation
Quality of customer service
Trading partner collaboration
Lean manufacturing and supply chain
Access to finance
Brand strength
Quality of workforce
Flexibility
Knowledge of local markets
Quality of product/service offering
Other
31
25
20
22
16
16
16
15
14
14
13
12
10
10
6
© The Economist Intelligence Unit 2004 9
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Romania therefore is now looking very enticing. But
“we won’t touch Ukraine now”, says Mr Varmuza. “We
are a conservative, Midwestern company.” For such
manufacturers, the cost-stability line appears to be
drawn west of the CIS and east of the former
Yugoslavia. Beyond Romania (or Bulgaria), a cost-
conscious, risk-averse company like Emerson is more
likely to look to China, where it is already one of the
biggest US investors with an $800m operation
employing 20,000 workers. But although wages there
are lower, transportation costs to Western Europe tip
the scales back in favour of staying in Central Europe
for the time being.
That balance is less decisive for Sony, which makes
TVs in Trnava, Slovakia and audio-visual equipment in
Hungary. Sony’s electronic goods are relatively light
and easily packaged, so China is a credible alternative
to Central Europe, even for supplying West European
markets. Werner Student, head of manufacturing in
the region for Sony, reckons that Romania, Bulgaria
and even Ukraine will inevitably become interesting
simply for reasons of lower wage costs.
Many manufacturers are increasingly focused as a
result on cost efficiency, the point of greatest
vulnerability in the minds of the survey respondents.
The automotive sector in particular has blazed a trail in
rationalising supply chain costs, bringing in hundreds
of its foreign suppliers to relocate in the region, while
attempting to boost the performance of locally-based
secondary or tertiary suppliers. Most manufacturers
have increased their local sourcing volumes, some to
almost three-quarters of their total inputs.
But even after 15 years of transition, firms still
report difficulties finding local enterprises that can
match global quality standards for the more
sophisticated components. Even low-grade
equipment, such as lathes, which are made locally,
often lack durability, while in some instances, key
pieces of machinery do not even exist in parts of the
region. The struggle to find cheap suppliers that can
deliver on time and to the required standard will
continue for many years, even within the new EU-10.
10 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
As competition from other locations heats up,
and as the region’s cost-based advantages
gradually erode, manufacturers in our survey
are concerned primarily with consolidating
their position in the home markets rather than looking
further afield. 70% of respondents say that this is
important, and a third say critically so. Expansion into
new markets is certainly on everyone’s radar screens—
with 63% saying that it is important to them—but it is
not critical. If they do expand it will most likely be into
one of the new EU member states, while a notable 22%
of respondents believe that Russia and the CIS hold
the brightest prospects.
The need to build closer relations with existing
customers is critically important to 39% of
respondents, compared with only 19% who are
critically concerned with penetrating new customer
markets. Asked to identify their competitive
advantages, survey respondents pointed to brand
strength (cited by 39% of respondents as their key
competitive advantage); cost efficiency (35%);
flexibility (33%); innovation (33%) and product
quality (33%).
Companies are prepared to put their money where
their mouths are. Asked to list their investment
priorities, they rated developing customer service as
the most important, followed by sales and marketing,
and product development. Interestingly, the benefits
of technology investments are expected mainly in
product quality and customer relationship
The changing agenda
What are your company’s investment priorities over the next three years? (Choose all that apply) (% respondents)
Customer servicing
Sales and marketing
Product development
Human resources/training
Information technology
Supply chain/logistics
Manufacturing
Regulatory management
General management
Finance and accounting
Other
58
57
49
51
44
32
26
21
15
11
5
© The Economist Intelligence Unit 2004 11
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
management, ahead of lower costs.
The importance of finding and hiring strong local
management with a good understanding of the
mentality of the local consumer is central,
particularly where brands are involved. Central
European consumers still tend to look at where a
particular product has been produced rather than
simply relying on the quality of the brand name. This
may be a throwback to communist days when the
quality of a product could be determined by the
specific plant that made it. But it may also reflect a
more recent nationalist phenomenon, whereby
consumers seek western quality but only in locally
produced goods. Such nationalist sentiments have
diminished with EU accession but cannot be
dismissed, and they remain particularly potent in
Southeastern Europe.
Giving local units decision-making autonomy is
therefore important. One drinks firm executive neatly
sums up the division of responsibilities: “Local
managers can take 100% of the decisions on local
brands. These account for some 60-80% of our total
brand portfolio. But decisions on international brands
are centralised.”
Cutting costs and servicing the cus-
tomer are occupying more manage-
ment time in the expanded Europe
than implementing new EU rules and
regulations. The EIU survey shows
that no compliance issue stands out
as being particularly troublesome,
although the usual suspects—envi-
ronmental, competition, corporate
governance, product certification
and intellectual property issues—are
listed as the more challenging.
These issues are of less concern to
most big foreign manufacturers,
which have global resources to draw
upon and have made the necessary
capital investments from the outset.
Most manufacturers are relatively
sanguine, with 56% saying that that
they are already fully compliant with
EU legislation and most of the rest
reporting that they will be ready by
2006. But a few admit to struggling:
While half of respondents expect the
cost of compliance to rise slightly
over the next three years, a notable
17% fear a dramatic increase.
Local, small and medium sized
enterprises in particular worry not
only about the financial costs but
also the time spent sifting through
hundreds of regulations and trying to
implement those that apply. In
companies without specialised
departments dealing with
compliance, managers report
spending an average of 5-10% of
their time just on environmental
issues. One Hungarian chemical
company reports: “We are extremely
busy implementing the
environmental directives and are
trying to meet compliance targets.”
Without in-house departments to rely
on, firms consult a broad variety of
sources, including the EU, industry
associations, the business press and
consultancies, usually online.
Calm about compliance
12 © The Economist Intelligence Unit 2004
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
If corporate structures are any guide, EU
enlargement has not closed the gaps between
Europe’s western and eastern halves. The new
member states are not yet seamlessly integrated
with the EU-15 in most manufacturing companies, and
probably rightly so. The disparity in wages and other
costs and the still different operating conditions
between east and west within the EU remain the
defining feature of this region and as a result the
corporate approach must be different, say managers.
But Central Europe cannot rest on its laurels as a
low-cost manufacturing location. FDI flows are already
down; competition from inside and outside the EU is
intensifying; and the bulk of survey respondents see a
trend of modestly increasing labour costs and
regulatory requirements.
There are still untapped markets for manufacturers,
of course. Pharmaceutical companies, for example, see
plenty of scope in the region to sell generic drugs. “We
are extending primary care [and] creating new
markets”, says Petr Sulc, the CFO of Czech drugs firm
Zentiva, who points out that western markets are just
as fragmented and far more competitive than those to
the east. But the region is maturing and
manufacturers must mature with it.
In the short term, that means a focus on core
markets and existing customers. Over the longer term,
it entails introducing higher value added activities
into the manufacturing mix. The wave of automotive
investments into the region is helping in this regard—
it has been accompanied by the arrival of hundreds of
international components suppliers, and also boosted
performance of local engineering firms. The ripple
effects may soon reach other manufacturing
industries. Sony (Japan), which makes TVs and video
recorders in the region, for example, has suggested
that it may reconsider its global sourcing strategy for
some electrical components as a result of the arrival of
new auto components suppliers. And companies such
as Emerson envisage the region’s new automotive hub
as a potential market in itself.
Look up
How do you expect labour costs in your industry to change over the next three years?
(% respondents)
They will fall dramatically 0
They will fall modestly 8
They will stay the same 10
They will rise modestly 76
They will rise dramatically 6
How do you expect the regulatory burden in your industry to change over the next threeyears?
(% respondents)
It will decrease dramatically 1
It will decrease modestly 11
It will stay the same 29
It will increase modestly 40
It will increase dramatically 17
Don't know 2
© The Economist Intelligence Unit 2004 13
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Appendix: Survey results
In July/August 2004, the Economist Intelligence Unit conducted an online survey of 98 manufacturing industry
executives located throughout the EU accession and candidate countries. Our sincere thanks go to everyone who
took part in the survey.
Please note that not all answers add up to 100%, because of rounding or because respondents were able to
provide multiple answers to one question.
Demographics
What branch of the manufacturing industry does your company represent? (% respondents)
Pharmaceuticals and biotechnology
Consumer goods
Automotive and transport
Chemicals
Electronics
Electrical engineering
Food and beverages
Machinery and equipment
Metals
Paper and packaging
Plastics
Textiles
Other
19
9
8
6
5
4
3
3
1
0
0
0
41
14 © The Economist Intelligence Unit 2004
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
How many employees does your company have across all locations?
(% respondents)
Under 100 29
100-1,000 23
1,000-5,000 19
5,000-10,000 2
10,000-20,000 10
20,000-50,000 4
More than 50,000 12
In which country are you located? (% respondents)
Hungary
Czech Republic
Poland
Croatia
Lithuania
Romania
Slovakia
Slovenia
Bulgaria
Estonia
Latvia
Other
21
20
13
5
4
4
2
2
0
0
0
29
© The Economist Intelligence Unit 2004 15
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Which of the following titles best describes your job?
(% respondents)
CEO/COO/Chief executive/Managing director 31
Other manager 10
Director/VP of marketing 8
Other director/VP 7
CFO/Treasurer/Comptroller 6
Director/VP of sales 5
Supply-chain manager 4
Chairman/President 3
CKO/CIO/Technology director 3
Director of planning/manufacturing 3
IT manager 2
Director of research and development 2
Other 15
Where else in Central and Eastern Europe does your company have operations? (Choose all that apply) (% respondents)
Poland
Russia
Slovakia
Czech Republic
Romania
Hungary
Croatia
Ukraine
Bulgaria
Slovenia
Latvia
Turkey
Estonia
Lithuania
Other
56
55
53
55
44
43
41
39
36
35
34
34
33
33
21
16 © The Economist Intelligence Unit 2004
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Competitive challenges and corporate priorities
What does your company see as its main competitive advantages? (Choose up to three)
(% respondents)
Brand strength 39
Knowledge of local markets 37
Cost efficiency 35
Flexibility 33
Innovation 33
Quality of product/service offering 33
Quality of workforce 26
Sales/marketing strength 26
Quality of customer service 22
Access to new markets 16
Efficiency in regulatory compliance 12
Access to finance 7
Lean manufacturing and supply chain 6
Trading partner collaboration 3
Other 1
What percentage of your company’s turnover comes from your domestic market? (% respondents)
Less than 5% 18
5%-10% 4
10%-25% 11
25%-50% 9
50%-75% 16
Over 90% 25
75%-90% 17
Will EU enlargement benefit your company?(% respondents)
Yes 84
No16
© The Economist Intelligence Unit 2004 17
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
What are your company’s strategic priorities after EU enlargement? Please rate the importance of each of the following on a scale of 1to 5, where 1 is critically important and 5 is relatively unimportant.
(% respondents)
1 2 3 4 5
Critically Improtant Relatively
important unimportant
1. We will seek to consolidate our position in our home market 29 13 28 14 6
2. We will seek to expand into other Central European EU member states 13 26 24 16 13
3. We will seek to expand into West European EU member states 7 20 22 23 15
4. We will seek to expand beyond the EU 15 18 18 12 25
What does your company see as its greatest vulnerabilities? (Choose up to three) (% respondents)
Cost efficiency
Access to new markets
Efficiency in regulatory compliance
Sales/marketing strength
Innovation
Quality of customer service
Trading partner collaboration
Lean manufacturing and supply chain
Access to finance
Brand strength
Quality of workforce
Flexibility
Knowledge of local markets
Quality of product/service offering
Other
31
25
20
22
16
16
16
15
14
14
13
12
10
10
6
18 © The Economist Intelligence Unit 2004
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
What approaches will your company take to drive growth over the next three years? Please rate the importance of the followingapproaches to your company's strategic goals on a scale of 1 to 5, where 1 is critically important and 5 is relatively unimportant.
(% respondents)
1 2 3 4 5
Critically Important Relatively
important unimportant
1. Achieving growth through mergers and acquisitions 6 24 15 27 28
2. Building closer relations with existing customers 39 33 17 9 2
3. Developing new products and services 38 40 15 5 2
4. Entering new alliance relationships 14 36 22 21 7
5. Entering new geographical markets 13 25 25 28 9
6. Focusing on/leveraging core products and services 20 47 26 5 2
7. Improving distribution channels 25 23 31 14 7
8. Increasing advertising and marketing spend 11 23 31 31 5
9. Penetrating new customers markets 19 29 30 21 1
10. Spinning off and/or starting up new companies 5 14 16 33 32
11. Improving use of IT to drive better overall business planning 16 28 29 19 7
Which market offers the brightest prospects for your company over the next three years? (Choose one response)(% respondents)
The EU 45
Other 7
Other AsianMarkets 1
North America 6
China 19 Russia and the CIS22
Companies from which market pose the biggest competitive threat to your company over the next three years? (Choose one response)(% respondents)
The EU 52
Other 4
Latin America 1
Other Asianmarkets 5
Russia andthe CIS 9
China 9 NorthAmerica 12
India 7
How do you expect labour costs in your industry to change over the next three years?
(% respondents)
They will fall dramatically 0
They will fall modestly 8
They will stay the same 10
They will rise modestly 76
They will rise dramatically 6
© The Economist Intelligence Unit 2004 19
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
How do you expect the regulatory burden in your industry to change over the next three years?
(% respondents)
It will decrease dramatically 1
It will decrease modestly 11
It will stay the same 29
It will increase modestly 40
It will increase dramatically 17
Don't know 2
What are your company’s investment priorities over the next three years? (Choose all that apply) (% respondents)
Customer servicing
Sales and marketing
Product development
Human resources/training
Information technology
Supply chain/logistics
Manufacturing
Regulatory management
General management
Finance and accounting
Other
58
57
49
51
44
32
26
21
15
11
5
20 © The Economist Intelligence Unit 2004
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
Challenges of compliance
11. When will your firm be in compliance with the relevant areas of EU legislation - the acquis communautaire (excluding areas wheretransition periods apply)?
(% respondents)
We are already fully compliant 56
We will be in compliance this year 7
We will be in compliance next year 10
We will be in compliance in 2006 6
We will be in compliance later than 2006, but within five years 7
We will not be in compliance within five years 1
Don’t know 12
In which areas of your business do you expect to see the greatest benefits from your investment in technology? (Choose up to three) (% respondents)
Better quality of products and services
More successful customer relationship management
Lower costs
Improved sales and marketing
Improved knowledge management
Easier collaboration with partners and suppliers
Increased innovation
More efficient supply-chain management
Better financial management
Enhanced back-office systems and networks
Better control of regulatory issues
Increased productivity from mobile and remote workers
Other
47
41
30
39
29
28
27
26
23
19
13
7
0
© The Economist Intelligence Unit 2004 21
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
13. What costs has compliance with the acquis entailed for your company?
(% respondents)
Insignificant 14
Modest 47
Substantial 19
Don’t know 20
14. How will your company’s compliance costs change over the next three years? (Choose one response)
(% respondents)
Compliance costs will fall sharply 2
Compliance costs will fall slightly 13
Compliance costs will remain the same 18
Compliance costs will rise slightly 49
Compliance costs will rise sharply 4
Don't know 14
What areas of the acquis have posed the biggest challenges for your company? (Choose up to three) (% respondents)
Environmental protection
Competition rules
Corporate governance/reporting
Product certification
Intellectual property
Consumer protection
Don't know
Taxation
Workforce representation
Workplace health and safety
Product liability
Product labelling and packaging
Customs and excise, import and export
Other
27
26
18
24
17
17
17
13
12
12
11
9
8
0
22 © The Economist Intelligence Unit 2004
APPENDIX: SURVEY RESULTS
MANUFACTURING STRATEGIES IN CENTRAL EUROPE
THE CHALLENGE OF MATURITY
What are your company’s main sources of information on EU compliance issues? (Choose up to two) (% respondents)
EU
Consultancies
General business press
Local industry associations
Government
Country-based EU delegations
Trade press
Other
21
20
15
19
11
7
6
1
How do you access information on EU compliance issues? (% respondents)
Mainly throughprint media 9
A combination of all these37
Throughthird parties(i.e. legal firms)12
An even mixof print andonline sources20
Mainlyonline22
Whilst every effort has been taken to verify the
accuracy of this information, neither The Economist
Intelligence Unit Ltd., Oracle nor their affiliates can
accept any responsibility or liability for reliance by any
person on this white paper or any of the information,
opinions or conclusions set out in the white paper.
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