- Labor rates for basic skills at approximately one-quarter of Western country rates.
- Highly educated work forces that are by no means lagging behind Western standards (as is often wrongly assumed).
- Dedicated, multilingual and readily available young populations (e.g., Poland still runs an unemployment rate of 15 percent, approximately twice the EU average).
- Governments open to the market system and ready to offer incentives.
- A central position within the extended EU and overall continent.
In light of these convincing reasons to set up operations in Eastern Europe, one might wonder if there are any reasons left to maintain any part of the supply chain in Western Europe.
A Logistics Challenge
Although the arguments in favor of Eastern Europe are compelling, the news is not all bad for Western Europe. First of all, a victim of its recent success, Eastern Europe is facing serious capacity issues, with road infrastructure that is inadequate to cope with the extra traffic generated as a result of recent development. The best logistics locations (around capital cities or in industrial regions such as Prague or Budapest) — already occupied by the first movers — are showing signs of overheated economies, with skills shortages, earnings and property prices growing much faster than the EU average.
With the notable exception of Poland, these countries also either are landlocked (e.g., the Czech Republic or Hungary) or have limited maritime access for container ships (e.g., Bulgaria or Romania, through the Black Sea). This is much to these countries' disadvantage when more than 90 percent of goods imported into Europe travel by sea and currently arrive through Rotterdam (Holland), Hamburg (Germany) or Antwerp (Belgium) for at least half their total volumes. Thus shipping a container to Czech Republic or Hungary can prove up to 30 percent more expensive than going through the Netherlands, Germany, Belgium, Spain, the United Kingdom or France.
For faster moving goods being shipped via air, the balance would again be much more in favor of Western countries, as more than half the volume of European air cargo flows through Frankfurt, Paris or Schiphol. Even though airports in areas such as Vienna and Prague are competing to become the next European cargo hub for Central Europe and are growing apace, it will be years before they can rival their Western European counterparts in terms of throughput, lanes and management of future larger cargo aircrafts.
Most Eastern European democracies are no more than 15 years old, and importers share a common concern about security. Even though this controversial argument is often abused by Western competition, it is valid in certain cases as, for example, when trading highly valuable products. While significant progress has been made in this area, theft and corruption are still a reality. Where the majority of Western nations would score around seven or eight on the Corruption Perception Index published by Transparency International, the vast majority of Eastern countries are still below the average of five points.
Qualified workers remain another concern. If the potential labor cost differentials are certainly attractive eastwards, it should also be said that these tend to decline as qualification and responsibility levels increase. As elsewhere, skills come at a price, and in fast growing economies, demand tends to be greater than the amount of skills available. Managers are also mobile and well aware of the earnings of their Western counterparts. Therefore, average salary differences between East and West managers tend to be much smaller than those of unqualified workers (if not much superior compared to the West in terms of purchase power parity).
An Uneven Distribution of Purchase Power
More importantly, from a market standpoint, even though Eastern European consumption is starting to show some interesting potential, purchase power is still unevenly distributed in favor of the West. To take the hi-tech/consumer electronic industry as an example, it is very common to observe a multi-tier distribution profile as follows: