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Connected Europe; a business reality Companies in Western Europe and Central and Eastern Europe are more connected than ever. Many have supply chains that span multiple countries and sales and operations in both regions.

Connected Europe; a business reality

Connected Europe; a business reality

by ING

Companies in Western Europe and Central and Eastern Europe are more connected than ever. Many have supply chains that span multiple countries and sales and operations in both regions. As CEE companies move up the value chain and increasingly focus on services, connections between West and East will continue to evolve.

Twenty-five years ago, as Central and Eastern Europe (CEE) emerged from communism (and near economic collapse), an unprecedented opportunity emerged for companies in Western Europe and CEE to forge new connections. By setting up subsidiaries and joint ventures to produce and sell goods, and building relationships with new suppliers, companies have created a truly connected Europe.

For Western European firms, the opening up of CEE provided access to more than 100 million new consumers.

Today, the region’s shopping malls highlight the strength of the bond between Western Europe and CEE. Germany’s Metro Group and Schwarz Gruppe, which operates Lidl stores, are among the largest retailers while Germany’s T-Mobile and the UK’s Vodafone are leading players in mobile telecoms.

Western companies also spotted the potential benefits of relocating production to lower-cost countries, and exploiting cross-border supply chains. Now, Western Europe and CEE is connected through hundreds of intricate supply chains for multiple industries. The vast majority of CEE’s foreign direct investment is from Western Europe while one third or more of CEE countries’ top-15 trade partners in global value chains are from the euro area.

Benefits for both West and East

Integration between Western European and CEE has not just delivered benefits for Western Europe. Investment in CEE has dramatically increased: research and development as a percentage of CEE’s GDP has grown from almost nothing before 1990 to 0.43% from 2001-2012. More generally, Central and Eastern Europeans have benefited from improved skills, better employment prospects and higher incomes.

The establishment of supply chains has spurred the creation of new companies. Of the 700 automotive suppliers in Poland, half are domestically owned. These suppliers are part of an industry that is central to CEE’s prosperity. The auto sector has turnover of roughly €150 billion, and grew by 170% between 2009 and 2014: 44 manufacturers in CEE now produce over 3.5 million vehicles a year – and contribute an average of 10% to CEE countries’ GDP.

Access to foreign know-how to upgrade production facilities, as well as to international capital and global distribution channels, has enabled CEE companies to make new connections across Western Europe and worldwide. Ukrainian agribusiness Kernel, the world’s largest exporter of sunflower oil, now supplies an estimated 16% of the world’s traded sunflower oil, partly because of a series of innovative financings (involving ING) that have enabled it to grow rapidly. Polish cosmetics firm Inglot and Polish organisation KCR, which provides contract research services to pharmaceutical companies, are also expanding across Europe and the world.

CEE costs remain attractive

The strength of the connections between companies in Western Europe and CEE companies is clear. But what drives those connections? Historically, one of the most important drivers has been the cost differential between the two regions. While wages in CEE have risen significantly in recent decades, they remain significantly cheaper than Western Europe.

Hourly wages in Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia are on average 75% less than in EU15 countries (the pre-2004 members of the EU) and are as much as 90% lower in Bulgaria and Romania. Consequently, businesses in Western Europe continue to seek new supply relationships or set up their own low-cost production facilities. Flat, or falling, wages in the post-crisis period (as well as devaluation of some currencies) have helped to further improve competitiveness and spurred new investment.

In May, specialist contract electronics manufacturer AWS expanded its operations in Slovakia. “Many of our customers are under pressure to regularly review pricing structures in order to remain competitive,” says Paul Deehan, AWS Group CEO. “We have been able to alleviate some of this pressure through offering low-cost manufacturing in Slovakia,” notes Deehan. The company says that costs at its Slovakia facility are now comparable with countries such as China and Malaysia. As a result, some customers are re-shoring work from South-East Asia to CEE.

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