By Xavier Hubert
The European Union (EU) celebrated its 50th anniversary this year. What began as a free trade agreement for coal and steel between six Western European nations with the 1950 Paris Treaty has now become an elaborate — not to say complex — political and economical union of 27 countries. With a gross domestic product equivalent to that of the United States ($13 trillion) and one-and-a-half times as many people (460 million) in a much more concentrated area, the EU is a very attractive marketplace for businesses trading goods on a global scale.
However, the disparity and overall complexity of this market (not to mention the 15 different currencies, 24 official languages, 27 value-added tax, or VAT, regimes and other rather original pieces of legislation) create a unique business environment. As with most economic zones — such as the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN) or South America's Mercosur — it is also a place where it is somewhat easier to trade from within. Nevertheless, as reaffirmed by its leaders on April 30 at the EU/US Summit in Washington, the European Union remains committed to free trade and simplifying exchanges with its world partners.
In this context, the last few decades have brought rapid changes to the European economic system as a large number of well-established industries delocalized part or all of their production to lower-cost economies. Most Western European carmakers set up production lines in some of the freshly independent former Soviet satellite countries, such as Poland, the Czech Republic, Slovakia or Hungary, while textile manufacturers chose to move to Northern African countries like Algeria and Morocco, or Asian countries such as India, China, Thailand or the Philippines.
Following this path to some extent, many other industries either supporting these industries or independent of them (e.g. electronics, IT, business/customer services) also displaced or developed their manufacturing base outside of the European region. In some cases, these transitions left behind only niche-market players and rare exceptions, not to mention social and political disarray.
The direct impact of this migration was an increase in the distance between the producers and their market, adding to the process a number of intermediaries, thus increasing transit time and inflating inventory levels in the supply chain. As a result, the logistics and inventory carrying costs grew significantly, amplifying or adding new risks to the equation: oil and currency fluctuations, supply shortage or inventory excess and obsolescence, as well as intellectual property (IP) issues.
After years of searching for lower production costs, manufacturing companies began to focus on "total landed cost." The overall management of the supply chain and costs associated with it took center stage, leading a large number of companies to transfer, or consider the transfer of, "in-region" assembly, configuration and distribution activities to Central and Eastern European countries. Countries such as Poland, the Czech Republic, Hungary or new EU members Bulgaria and Romania are proving very successful in attracting such business.
An Attractive Proposition
This trend is significant. Rare are the companies in the top five of their respective industries that do not have a footprint in, and/or their products destined for, the Europe, Middle East, Africa (EMEA) market flowing through one of the locations mentioned above. Providers of supply chain outsourcing services have seen recent growth in volume and expect to see more growth potential as most executive surveys highlight companies' intentions to hop on the bandwagon. And why shouldn't they? Eastern Europe has a lot to offer, including: