Going East – CEE seen from a Western MNC perspective Arnold Schuh Competence Center for Central &...

Going East – CEE seen from a Western MNC perspectiveArnold SchuhCompetence Center for Central & Eastern Europe

Presentation at the Matej Bel University, Banska Bystrica – October 4, 2011

Let‘s go east – What motivates Western MNCs to expand to CEE?

SCHUH - GOING EASTPAGE 2

= Baltic states

= Central-Eastern Europe

= South-Eastern Europe

= European CIS

• 20 countries in close proximity

• 330 mio. inhabitants• Underdeveloped markets• Educated workforce at

lower costs• European culture

Before 2008: CEE as a highly dynamic but fragmented region

0 2 4 6 8 10 120

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Hungary

Czech Rep.

Poland

Estonia

RomaniaSerbia

Russia

Ukraine

Germany

Austria

Real GDP Growth 2007 (in %)

Per

Cap

ita G

DP

20

07

(in

€)

Pre-crisis economic growth model for CEEBruegel, 2010; EBRD Transition Report 2010

Intention to achieve a rapid political & economic integration into EU (single market, EU funds, EU norms)

High degree of liberalization in external economic relations

Opening of financial markets to foreign financial investors

Strong technology & know-how transfer and FDI from the West to CEE

Access to high-income countries Integration into transnational production networks


Significantly higher growth than in Western Europe

CEE even outperformed other emerging markets Bruegel, 2010

GDP at constant prices; Horizontal lines refer to group averages; blue line: unweighted averages; red line:GDP-weighted averages

Average GDP growth rates 2002-08

Economic growth varied due to starting positions and reform speed Roland Berger, 2009


Real GDP development (1989-2008, in %)

FDI as driver of change: Nearly €600 bn. since 1993Roland Berger, 2009

Total FDI inflow by year, 1993-2008, in € bn.

The business model for CEE before 2008

Above average returns

Huge market

potential & growth

Skilled labor at lower

costs

Favorable resource situation High

business risk but „EU umbrella“

Fast entry & quick

expansion


Convergence drives market growth & development in banking industry

Convergence drives market growth & development in banking industry

CEE was a good investment story – at least until 2008

Erste Group Bank share price

Early 2009 - CEE in big trouble


CEE was the hardest hit region by the recent economic slowdownUniCredit, 2010

Eu-ro-

zone

AUT CZR SLK POL HUN EST LAT ROM RUS UA-20

-15

-10

-5

0

5

10

200820092010F

GDP growth/decline in % YoY (2008-10)

Was CEE to blame for the crisis?

Crisis was imported to a high degree Collapse of markets – dependence on Western markets

for growth (automotive, consumer electronics) Drying-up credit from abroad

Currency weakening in late 2008 Difficult liquidity situation of households & companies

„Home made“ problems Overheated economies & real estate markets Excessive external debt High proportion of loans in foreign currency

LAT 90%, EST 86%, HUN 60% vs. POL 32%, CZ 9% Fiscal irresponsibility (e.g., Hungary)


Impact of crisis on CEE economies variedSchuh, 2009

SCHUH - GOING EAST

Impact of crisis onCEE economies

External financing gap

Foreign exchange regime

Industry specialization

Dependence on exports

Stock of foreign investment

Size of domestic market

Fiscal deficit

Is the business model for CEE still valid after the crisis?

Still reason-

able returns

Still huge market

potential but slower growth

Lower input costs

Resource situation remains

favorable Higher risk premia & more caution in new investments

Selective approach & optimization of operations

After grim year 2009, region is back to growth pathUniCredit CEE Quarterly, 02/2011

Euro zone

CZR

SLK

POL

HUN

EST

ROM

SER

RUS

UA

-20 -15 -10 -5 0 5 10

GDP growth rates (2009-12)

2012f2011f2010e2009

Changes in real GDP (in %)

By 2020 many countries will still be significantly below Western levels of 2010Erste Bank, 2011; EIU

By 2030 the most developed part of CEE will be where Western Europe is todayErste Bank, 2011; EIU

Back to business as usual? EBRD‘s new growth agenda for CEEEBRD, Transition Report 2010

Strategy review for CEE – Major decision areas for MNCs

Role of CEE in the global strategy

Participation in CEE markets

Activity location in

CEE

Product & marketing strategies

Organizational model


CEE has lost its luster but remains attractive

CEE lost its former status as growth region – especially compared to BRIC and Turkey

However, CEE remains attractive for Western MNCs due to higher growth rates and market potential

CEE is not regarded as homogeneous region anymore MNCs pay more attention to soft factors such as quality

of institutions, political stability & competitiveness MNCs follow a more cautious and selective

investment approach


ROLE OF CEE

CEE lost its position as a global growth engineRoland Berger, 2010


GDP development (2000 = 100)

ROLE OF CEE

CEE countries are losing on competitiveness, only Poland, Russia & Czech Republic improvedRoland Berger, 2010; World Economic Forum, 2010

Global Competitiveness Report (2004-2010, ranks)

ROLE OF CEE

Mixed foreign investment pattern in CEEwiiw, 2011


FDI inflows, in mio. €

ROLE OF CEE

Regional players benefit from the withdrawals of weaker firms

The crisis triggered a round of portfolio restructuring among MNCs in CEE

Most direct investors stick to their presence in CEE Geographic expansion into new countries is on hold for

now Regional players are better positioned to take

advantage from the situation than newcomers


PARTICIPATION

Examples of country portfolio restructurings (2009-11)

ABInBev sold 11 breweries in CEE

Carrefour exits Russia Vattenfall withdraws from

Poland Allied Irish Banks sell Polish

subsidiary to Santander GE Money withdrew from

Romania

PepsiCo bought 66% of Russian Wimm-Bill-Dann

Groupe Danone merged its dairy unit with Russian Unimilk to become the largest dairy company in Russia and CIS

UniCredit plans to open 900 branches in CEE and Turkey


Withdrawals Expansion

PARTICIPATION

Manufacturing continues going East

Subsidiaries in CEE expand their production capacity at the expense of their West European sister companies: Modern technology, more flexible & cost efficient

„Re-industrialization“ of CEE is best reflected in automotive sector: + 27,000 new jobs in 2009 compared to +6,000 in Western Europe (Ernst & Young European Investment Monitor 2010)

CE & SEE countries also improved their position as service providers (IT, business processes)


ACTIVIT

Y LOCATION

Local foothold & diversified approach characterizes winners

Local producers have lower costs and benefit from depreciating local currencies

MNCs with multi-tier strategies are in a better position than focused premium-product marketers

Increased price-sensitivity favors business models centering on affordability

Geographic & segment-related diversification as a winning strategy to cope with fluctuations in demand and increased uncertainty


PRODUCT-MARKETING

Multi-tier brand strategy immunizes Henkel CEE against market swingsSchuh & Holzmüller, 2003

Price-Index

Persil

Palmex, Tomi

Rex

Detergent brands

100

80

60

Brand Positioning

Premium brands stand for quality, performance, image & innovation

Medium-market brands: good quality for traditional & brand-loyal customers

Economy-segment: „More value-for-money“ claim for price-sensitive segment

PRODUCT-MARKETING

Organization for CEE: Centralize > decentralize > centralize …?

Expansion to CEE has been guided by highly centralized control

Good performance and improved qualifications led to more autonomy for local management

Need to balance entrepreneurial spirit of local management and desire for control

During crisis pendulum swung towards centralization again: Lack of restructuring experience in most CEE countries Centralized management of investments, costs,

liquidity, capacity & key accounts Use of simplified structures


ORGANIZATION

Switching from survival to growth mode again

Wait for completion of strategy reviews to understand organizational rearrangements

Pendulum swings back to a more decentralized organizational model again

Slower market growth forces management to continue the search for cost savings: clustering of smaller markets, concentration of back-office functions in shared service centers

Challenge for management to find a good balance between strict cost discipline and encouragement of new growth initiatives


ORGANIZATION

Great challenge: How to manage complexity in CEE?


How to respond strategically and organizationally to these biased structures?

Country Product Segments Company

• EU vs. non-EU

Advanced vs. emerging Large vs. small

Low vs. high

price Global vs. local Essential

vs. „luxury“

Growing vs. mature Urban vs. rural Modern vs. traditional trade Young vs.

old

Markt leader

vs. follower Profitable

vs. loss-making

ORGANIZATION

Conclusions – “CEE reloaded”

For CEE the recent crisis was an interruption of the catching-up process

The image of CEE as a growth region is shattered, however, the business model for CEE is still valid

Improving the competitiveness of the economies should be on top of the national agenda – more attention is paid to quality of institutions and business climate

Crisis means the end of CEE as a homogeneous region, we see a more differentiated investment approach today

Challenge for MNC management is how to deal with this multifaceted hybrid market situations and how to integrate the operations into the corporate group

Dual focus on growth and cost efficiency will continue


References

Bruegel Study –Becker et al.: Whither growth in central and eastern Europe? Policy lessons for an integrated Europe, Bruegel Blueprint Series, 2010

EBRD: Transition Report, London 1999-2010

EIU: Corporate Structures in 2010, Economist Corporate Network, Geneva 2004

EIU: Rethinking CEE: Changing Corporate Structures in CEE, Economist Corporate Network, Geneva 2010

Erste Group: A Macro-Economic Picture of Central and Eastern Europe, Presentation to the MKO, May 19, 2011, Vienna.

Roland Berger Strategy Consultants: 20 years of the CEE economic region – Assumptions for sustainable development, CE Business Club, Zagreb/Vienna Nov. 25, 2009

Roland Berger Strategy Consultants: CEE in 2020 – Trends and perspectives for the next decade, November 2010

Schuh, A. & Holzmüller, H.: Marketing Strategies of Western Consumer Goods Firms in CEE, In: Stüting H.-J. et al. (Eds.): Change Management in Transition Economies, New York: Palgrave Macmillan, 2003

Schuh, A.: The Impact of the Current Economic Crisis on Strategies of Multinational Corporations in Central and Eastern Europe, Akademija MM, 9(14), 2009.

UniCredit Group: CEE Quarterly, UniCredit Research, http://www.bankaustria.at/de/open.html?opencf=/de/18513.html

World Economic Forum (2010): The Global Competitiveness Report 2010-11:

http://www.weforum.org/issues/global-competitiveness

wiiw: Publications of the Vienna Institute for International Economic Studies, Vienna: www.wiiw.ac.at/


http://www.bankaustria.at/de/open.html?opencf=/de/18513.html

http://www.weforum.org/issues/global-competitiveness

http://www.wiiw.ac.at/

Data sources for CEE

Go to the homepage of the Competence Center for

CEE at WU Vienna with more than 50 CEE-related

resources.

http://www.wu.ac.at/cee/en

CEE Resources

CEE Management/Business

SCHUH - GOING EAST35

COMPETENCE CENTER FOR CENTRAL AND EASTERN EUROPEAugasse 2-6, 1090 Vienna, Austria

ASS.PROF. DR. ARNOLD SCHUHDirector

T +43-1-313 36-4608F +43-1-313 36-90 [email protected]/cee

Contact

SCHUH - GOING EASTSEITE 36

Going East – CEE seen from a Western MNC perspective Arnold Schuh Competence Center for Central &...

Documents

Transcript of Going East – CEE seen from a Western MNC perspective Arnold Schuh Competence Center for Central &...