Is the relocation of production facilities in the post-epidemic era an opportunity for Central and Eastern Europe?

  The new crown pneumonia epidemic (hereinafter referred to as the “epidemic”) has triggered a global discussion on strengthening its own supply chain and resisting external supply shocks. In order to avoid the risk of supply chain disruption, European supply chain managers may seek diversification of supply sources. Although China is not expected to lose its status as a “global supplier”, the aftermath of the epidemic may bring opportunities to Central and Eastern European countries, allowing them to occupy a higher share of the global supply chain.
  Central and Eastern Europe has become very attractive
  More than 30 years ago, Central and Eastern European countries changed from a planned economy to a market economy. This process was initiated by Poland. In the early 1990s, the Central and Eastern European countries faced high economic transition costs and soaring inflation. The shift to market-oriented and competitive emerging economies became the overall strategy of the region. There is no doubt that this process is supported by EU members in Central and Eastern European countries, most of which joined the EU in 2004, including the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. Later, Bulgaria, Romania (2007) and Croatia (2013) also joined the European Union. Today, only some Balkan countries have not yet joined the EU, but maintain close ties with the EU through trade agreements. The soaring of foreign investment inflows and exports in Central and Eastern Europe has benefited from its increased competitiveness. As a cross-border flow channel for goods, investment, services, knowledge and people related to international production networks, supply chains have changed the world. Regarding Central and Eastern Europe, some factors have prompted the decision to include specific countries and companies in the global value chain system.
  Attractive labor costs, educated labor, geographical proximity to Western Europe (most of the supply chains in Central and Eastern Europe belong to Western Europe), the application of the EU legal framework and various incentives are the key reasons for this type of investment accumulation. The increase in labor demand in Central and Eastern Europe has reduced the unemployment rate (most of which are lower than the EU average), but put pressure on wage growth. This process started in 2013 and has been accelerating in recent years. Nevertheless, the cost advantage of Central and Eastern Europe is still attractive, and its average labor cost is about 1/3 of the average level of Western European countries. However, the 2020 epidemic has reversed the situation in the labor market. Although some Central and Eastern European countries have adopted large-scale fiscal and monetary stimulus measures, the unemployment rate has begun to rise, while wage growth and labor shortages have eased. Similar trends can be observed worldwide.
  However, it may still be difficult to fill job vacancies in specific fields such as manufacturing. The latest “Global Competitiveness Report” (hereinafter referred to as the “Report”) released by the World Economic Forum (WEF) ranks countries based on non-price competitiveness, but does not list Central and Eastern European countries as global leaders. In fact, most of these countries are in the top 50 (141 countries in total). The international status of the Central and Eastern Europe region has improved in recent years, but the report shows that there has been a divergence among countries in the region. For example, Croatia has increased its ranking by 5, while the Czech Republic and Albania have dropped by 3 and 5 places respectively. The report shows that Estonia, Czech Republic, Slovenia and Poland are the most competitive countries in Central and Eastern Europe. In addition, the scores obtained in the pillar of innovation capability confirm that the region has shifted from the role of an “assembly line” to being more widely integrated into the global value chain system, and more research and development activities are being carried out.
  Robotics and automation: key factors that attract relocation
  Manufacturing occupies a considerable share of the economy of Central and Eastern Europe, thanks to the region’s extensive integration of supply chains and investment. In Poland and Slovakia, this proportion is close to 25%, which is equivalent to Germany; and the Czech Republic is even closer to 28%. In the manufacturing industry, the automotive industry plays an important role. As they have been deeply integrated into the global automotive supply chain, Central and Eastern European countries are quickly affected by the decline in automotive demand and the closure of factories. The European Automobile Manufacturers Association (ACEA) predicts that in 2020, global passenger car registrations will decrease by approximately 25%. Central and Eastern European companies will be strongly affected by changes in demand for automobiles from different countries. The example of the automotive industry shows that the flow of intermediate consumption is very closely linked.
  Facing the risk of supply chain disruption, supply chain management teams in many countries around the world have begun to seek flexible solutions to external supply shocks, such as by repositioning production in the domestic market or implementing a strong supplier diversification global strategy. achieve. The latter brings more opportunities for Central and Eastern European companies in terms of exports and wider integration into global value chains.
  In the past few years, labor shortages in Central and Eastern Europe have intensified, prompting companies to focus on the automation of processes and production and the wider use of robots. In Slovakia, 10% of auto companies use robots, which is much higher than Germany (4%). According to a report by Czech companies in the computer and electronics industries, the proportion of service robots in the country is comparable to that of German and French companies. The number of service robots used in the transportation and warehousing industry in Poland far exceeds that of other European countries in the industry. In the entire Central and Eastern Europe region, the food, textile, wood and paper and chemical products industries have a relatively high proportion of companies using robots. Bulgaria leads other Central and Eastern European countries in the field of metal manufacturing, Slovakia leads in the field of machinery manufacturing, and Poland leads in the field of construction. Among all EU companies (excluding the financial sector) with an average of more than 10 employees, only 8% of companies use industrial robots and service robots. The pressure of rising wages and labor shortages will force Central and Eastern European companies to further invest in automation.
  The International Federation of Robotics predicts that in the next three years, the number of industrial robots used in Central and Eastern European countries will grow at an annual rate of 22%, while the growth rate in Germany is only 5%. Increases in productivity and competitiveness are likely to encourage further foreign investment to flow into the Central and Eastern Europe region and help multinational companies to transfer production facilities to the region. Central and Eastern European countries that are more attractive to global supply chain management teams and investments are mainly the Czech Republic, Hungary, Poland, Slovakia and Romania. These countries have a large labor force and a stable business environment. Nevertheless, other Central and Eastern European countries are also attractive, such as the Balkan countries. The core countries of Central and Eastern Europe are more willing to attract investment that enables them to create higher added value, while the countries of the Balkans can choose lower value-added sectors, including agriculture, food, textiles and other sectors, or sectors engaged in import assembly. . The Central and Eastern Europe region is open to attracting more investment. The possibility of each department benefiting from the relocation of production facilities depends largely on the intention of the supply chain management team to diversify its supply chain.
  Reposition manufacturing, digital services to bring more business opportunities in
  digital not only improve the efficiency of the production process, but also improve the productivity of the service sector. The breadth of the global value chain includes various services, such as information and communication technology services, transportation services, etc. Due to the relatively high proportion of information and communication technology jobs and the large number of graduates in science, technology, engineering and mathematics, Central and Eastern European countries have great potential for further digitization. Coupled with high-quality digital infrastructure and broadband coverage, Central and Eastern European countries may be favorable locations for service outsourcing relocation, especially the Baltic countries. In fact, the information and communication technology talent pool of the Baltic countries and their network preparation capabilities rank high in the World Economic Forum Index. The further transfer of service outsourcing to Central and Eastern European countries will have a positive spillover effect on the commercial sector and economy of the region, and make them a higher position in the value chain.
  However, R&D expenditures in Central and Eastern European countries are still relatively weak. According to the latest “Global Competitiveness Report” released by the World Economic Forum, the R&D expenditure in Central and Eastern Europe has reached 1% of GDP, but it is still far below Israel (4.3%), Switzerland (3.4%), and Sweden. (3.3%), Japan (3.1%) and other countries. Among them, Slovenia’s R&D expenditure accounts for 2% of its GDP, the Czech Republic is 1.7%, Estonia is 1.3%, and Hungary is 1.2%.
  In addition to the above issues, Central and Eastern Europe should also prepare its labor force to meet the needs of digital work, that is, through retraining workers to enable them to acquire technical skills. Despite the increasing labor shortage in the region in the past few years, a part of the inactive population in the labor market can at least regain labor qualifications and engage in simple jobs. Under the epidemic situation, many companies have switched to home office plans. Global survey results show that the jobs that can be done at home mainly include information technology, education and training, law, management, business and financial services. As far as the sector is concerned, education services, scientific and technical services, business management, finance, and insurance can all be easily transferred to home for completion. On the contrary, transportation and storage, construction, retail, agriculture, accommodation, and food service are the most difficult to do at home. As far as the country is concerned, the higher the income level, the greater the proportion of jobs that adapt to home office. In Mexico and Turkey, less than 25% of work can be done at home, while in Switzerland, the United Kingdom and the United States, the proportion exceeds 40%. In most Central and Eastern European countries, this proportion exceeds 30%. In the process of expected relocation and further cost reduction, the service outsourcing business of developed economies may flow into Central and Eastern Europe. As long as the labor force has the necessary skills and language proficiency, the work done at home in developed countries can be transferred to Central and Eastern Europe, because it does not matter where the “home” is.
  The more developed Central and Eastern European countries, such as the Czech Republic, Hungary, Poland, Slovakia, Slovenia, Estonia, Latvia and Lithuania, are more likely to attract foreign capital inflows due to the rapid development of digitalization. The higher utilization rate of robots and automation has brought growth potential to the automotive, electronics, machinery, chemical, transportation and storage sectors. At the same time, the cost of the Western Balkans is even lower than other regions in Central and Eastern Europe. It can attract more investment in low-value-added industries, similar to the past practices of the core countries of Central and Eastern Europe.