Low costs and production advances in recent years increase the attractiveness for investors
The Central and Eastern European Region (CEE) may attract new production capacity as the global economy undergoes major changes in the pandemic context, according to a Colliers International report on the regional industrial market. Romania is very competitive in terms of costs, and industrial production has increased significantly in recent years, qualities that can turn the country into a magnet for investments in the production area.
The global economy is undergoing a period of intense changes in the context of the pandemic, and the relationship between Europe and China is expected to shift significantly in the future. More and more specialists are talking about a relocation of important production capacities operated in Asia by European companies, eager to better control the supply chain. A major impediment, however, would have been, until recently, the significantly higher production costs in Central and Eastern Europe compared to China. As wages in China have advanced enormously in the last 10 years, this change is becoming more and more possible, especially in the context of a pandemic that has put huge pressure on the supply chain.
The Central and Eastern European area has seen one of the highest rates of economic growth in the last decade, and industrial production has kept the pace. Probably the biggest advantage that countries in this region have is the labor market, with wages several times lower than in Western Europe and, in recent years, surprisingly similar to those in China, according to Colliers International’s report.
“Bulgaria remains well below the level of labor costs in China for production operations, Romania is comparable to China, and Poland and Hungary are not much higher. There are major differences from a decade and a half ago, when Eastern European countries were either preparing to join the EU or had just become members. Between 2004 and 2018, average manufacturing costs increased 5.6 times in China, while in the CEE region the advance was much lower. And all these at a productivity which has clearly kept up the pace”, says Laurențiu Duică (photo), Partner & Head of Industrial Agency at Colliers International.
Specifically, the Czech Republic, Hungary, Poland, Slovakia saw an increase in labor costs of 1.6 to 2.6 times from 2004 to 2018, while Bulgaria and Romania recorded increases of just over 3 times in the same period. For comparison, labor costs in the German production sector are about 3 times higher than in the Czech Republic and Slovakia, about 4 times higher than in Hungary and Poland, almost 6 times higher than in Romania and almost 8 times higher than in Bulgaria.
“Moreover, the CEE region has overtaken Spain and the UK, as measured by the output of its factories, and is closing in on France. The CEE’s factories were initially focused on goods involving low-complexity manufacturing processes, but this has also changed gradually over time: goods with a higher added value and more technologically complex now make up a much higher share throughout the CEE than a decade ago”, says Silviu Pop, Head of Research at Colliers International.
The pace of productivity growth has remained above the pace of cost advances, and, in all Central and Eastern European countries, the gap between value added per employee and labor costs has widened significantly between 2004 and 2018. It is worth noting that in Romania, the gap between value added per employee and labor costs is slightly below that of China, with neighboring countries also following, with small differences. Innovation remains the region’s Achilles heel, with CEE scoring almost half in the World Economic Forum’s competitiveness indicators compared to Germany, which is nevertheless, one of the world’s top innovators. Still, the region’s countries managed to close the gap significantly compared to Germany and other developed nations, in the last couple of decades, with regards to infrastructure and institutional quality.