Eastern Europe loses its luster as companies reverse investment strategies

Migration of manufacturing from Western Europe to Central and Eastern Europe (CEE) has been considered by many to be an irreversible trend. However, a recent survey has found that many companies are pulling back from the region, troubled by rising costs, lack of quality and production issues. This could have major implications for express and logistics companies which have invested in the region.

Since the first wave of countries from CEE became candidates to join the European Union in 2004 it has become generally accepted that there would be a wave of investment in the region, resulting in the migration of production from Western Europe.

There were some very good reasons for that assumption. German manufacturers in particular were attracted by the much lower labour costs and the lack of regulation and bureaucracy compared to their home market. Improving transport infrastructure would mean that they could – in theory – serve their customers just as efficiently from new facilities in countries such as Poland, Czech Republic and Slovakia.

At one stage, a study by consultancy Roland Berger established that around 80 pct of German companies were moving eastwards, with Poland and the Czech Republic being the most favoured locations. By 2004, it was estimated that German subsidiaries employed around 750,000 staff in CEE.

However, the reality of manufacturing in that region seems not to have lived up to expectations. Wage costs have risen significantly and many producers have complained of quality issues, missed delivery deadlines and lack of flexibility. According to the German Fraunhofer Institute, of 6,500 firms which relocated to Eastern Europe, 1,200 have reduced their investment or pulled out completely.

The lack of confidence in the CEE region has been mirrored by a growing resurgence in Germany itself, especially in the former East Germany. Labour costs have fallen and economic development pushed ahead strongly. This has proved an attractive relocation proposition for German manufacturers struggling to make their Eastern European subsidiaries work.

There are major implications for logistics providers if this trend continues. Many companies, not least of all the integrators, have invested heavily in the region hoping to cash in on the growing need for higher value-add logistics and distribution services. There have also been high levels of investment in warehousing in order to renew ageing stock and to locate facilities in more accessible transport nodes. Although no one is expecting the growth in logistics in CEE to be reversed, the westwards counter-trend of production migration strikes a cautionary note for investors in this sector.