5 Trends in Manufacturing in Central Eastern Europe
written by Lukas Reinhardt
Central Eastern Europe (CEE) has been amongst the few economic success stories in the EU since the global financial crisis in 2008. One driving force has been the continued expansion of manufacturing, fuelled by foreign direct investments. But strong growth has also introduced a number of challenges for these countries, such as severe labour shortages.
Last year, as part of the Institute for Manufacturing from the University of Cambridge, I visited more than 30 companies in the CEE region. These companies spanned the whole spectrum of manufacturing, from large dairy farms, to manufacturers of carbon fibres, even to makers of flying cars. My goal was to understand the biggest risks and opportunities they face. After interviewing the managers of these companies, I started to get a grasp of the biggest trends in the region. I have summarised my findings below.
1. Labour Shortages
As previously mentioned, one of the biggest issues in the region is a shortage of labour. Record levels of low unemployment has left companies scrambling for employees. One term that was frequently mentioned was brain drain. Brain drain is when skilled and educated individuals leave their home country in search for countries where wages and opportunities are higher. However, the issue isn't limited to the most skilled and educated anymore. Upon our visit to a Foxconn factory, we learnt that they had begun importing workers from abroad, as far as Vietnam and Mongolia, in order to fill factory positions.
2. Increased Automation
Not only is the availability of labour decreasing, the cost is also going up. Despite minimum wages still being a fraction of those found in western Europe, the sharp rise in income over the last years coupled with the shortage in available workers has caused companies to heavily invest in automation. According to the International Federation of Robotics the number of robot installations in the Czech Republic grew by over 40% between 2010 and 2015. The factory managers I spoke to explained that many of the manufacturing tasks within the region are easily replaceable with robotics. Many experts predict that automation will improve the productivity and competitiveness of the region.
3. Low-Value Manufacturing Heads East
As well as investing in automation, companies have begun to expand their reach further east to Romania and slowly also to Bulgaria where wages, although also rising, remain the lowest within the EU. This trend was especially clear for the big multinationals we visited such as Continental, Bosch, and Ford. At Continental we learnt that R&D and other high-value added activities were increasingly being conducted in countries such as Hungary and Poland, whereas the lower value areas of the supply chain were now occurring in Romania. The biggest challenges they said in heading east was the insufficient infrastructure, as well as the corruption and legal uncertainty. Despite these risks, the number of foreign companies flocking to the area continues to rise.
4. High-Value-Added Manufacturing & IT on the Rise
With low-value manufacturing heading east, countries such as Hungary, Poland, Czech Republic and Slovakia have begun reshaping their strategy towards high-value-added manufacturing. The head of General Electric's CEE operations recently said that the region's industrial success was "hinged on moving into higher-margin businesses". This strategic shift was also welcomed by politicians who hope that introducing more high value jobs will re-attract many workers who emigrated in search of a higher standard of living. In Budapest we visited TyssenKrupps software development centre, which now employs 500 top engineers, mostly Hungarian, working on steering systems for autonomous driving technology. This trend is only set to increase, with Blackrock, the world’s largest asset manager, looking to further invest in a tech hub Hungary.
5. Increase in Foreign Companies
Although some CEE countries have seen a dip in FDI over the last months, the average still remains higher than in neighbouring countries of western Europe. Romania, for example, has seen an 18% year on year rise in FDI in 2018. Despite this dip, the number of foreign companies opening facilities in CEE continues to increase. Jaguar Land Rover have opened their new production plant in Slovakia this year. An increase in foreign investment and foreign companies will hopefully lead to improved infrastructure within the region and an increase in GDP growth, however, it will also increase the competition for an already tight labour market.
The Future for CEE
In the future Central Eastern Europe will no longer be a place where manufacturing plants are set up due to cheap labour. The area is already becoming an R&D and innovation hub for many international companies. Going forward the region will need to continue to focus on attracting a skilled workforce. This can be done by investing in high-value added manufacturing and IT opportunities, such as is being done in Budapest. Although the region faces a number of challenges, such as severe labour shortages and lacking infrastructure, the future for CEE seems optimistic.