This past May 1 was remarkable for what didn't happen. There was no massive upheaval in manufacturing that day as the 15-nation European Union (EU) added 10 more countries and created an economic alliance with US$11.45 trillion in collective GDP and 450 million consumers. Factories didn't shut down. Markets didn't go without goods. "None of our clients were taken by surprise," states Ken Taormina, a senior vice president at McLean, Va.-based consultants BearingPoint Inc. These multinational companies "have had transition plans in place for some time to make sure this is as seamless as possible," he explains. About the only visible sign of change is that there are "no queues of lorries [trucks] at the borders with Western Europe anymore," notes Peter Davies, Deloitte Consulting's director of management consulting for Slovenia, Albania and Kosovo. Unlike Germany, where joblessness and labor productivity remain major problems nearly 14 years after the shock of reunification, a process of calmer evolutionary change will take place in the larger EU as manufacturing supply chains continue to shift from Western Europe to the relatively lower-cost countries of Central and Eastern Europe. Suppliers of relatively low-value auto components as well as metal fabricators and electric motor manufacturers will be among the companies first affected, suggests Kevin Gromley, a New York-based partner at Deloitte Consulting and global leader of its manufacturing industry practice. A "second wave" may impact producers of drive trains and other higher-value auto components as well as electronics and semiconductor makers, he says. However, it will probably be more difficult to quickly shift manufacturing in biotechnology and life sciences eastward "because there's still quite a research [and] scholarly environment in places like Germany, Switzerland and Finland," believes Toronto-based Rob Renaud, chair of the industrial practice group at GVA Worldwide, a global real estate services firm. "There's good news and bad news," quips Tom Murphy, a former metals industry CFO and now executive vice president of manufacturing and wholesale distribution for RSM McGladrey Inc., a Bloomington, Minn.-based consulting firm. "The good news is [the 10-nation EU expansion] opens more markets to us. The bad news is [that] in the long run . . . those countries will become more efficient." In short, they'll be tougher competitors. Glen Tellock, president of the crane division at the Manitowoc Co. Inc. in Manitowoc, Wis., expects higher demand for his company's non-residential construction cranes as the European economies pick up, perhaps beginning in mid-2005, and as the 10 new EU countries seek to improve their infrastructures. Doing business will be easier, because with EU membership, there comes "an established set of rules," he says. However, there'll be business challenges as well. These "are very small countries" with marked differences "and things don't change just over night," he observes. "I think there are opportunities there, but you always have to [think], 'What is my exit strategy if things don't work out?' " For Manitowoc and other U.S.-based manufacturers, "there" is the Mediterranean island countries of Malta and Cyprus and the eight nations of Central Europe and Eastern Europe: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. "As these countries prosper, they offer additional sales opportunities," confirms Deepak Agrawal, managing director of Gotham Consulting Partners, New York. However, "if these countries change the cost picture in the EU, then U.S. companies have to respond to it by moving production to these countries or acquiring local companies -- similar to GE Lighting's purchase of Tungsram in Hungary a few years ago. [And] that would negatively impact U.S. manufactured goods exports," he says. But whether U.S. companies are exporting to the new EU nations, are already manufacturing there, or both, Agrawal and other experts urge their executives to recognize that the 10 nations that have just joined the EU differ among themselves -- sometimes dramatically -- in economics, demographics and culture. "They are not one country," emphasizes Gotham's Agrawal. "They are really 10 different economies, 10 different unemployment levels, 10 different [levels of] R&D spending, and 10 different cost structures," he stresses. For example, joblessness is 18.9% in Poland, 8.5% in the Czech Republic and 5.9% in Hungary, relates Agrawal. Labor cost, he says, is about $430 per month in the Czech Republic and $562 in Poland. "When you go and work in these different countries, it's not only the language that is different," stresses Deloitte's Davies. "I only found out the day before yesterday that every invoice we issue in Slovenia has to be personally signed by a responsible person -- and that is going to be either the CFO or the CEO," confesses Davies, who has been in Central Europe for 10 years. "I am still trying to come to terms with this because it's beyond anything you could expect in a West European or North American environment," says Davies. "Each one of these states has different laws and different traditions behind the laws. . . . Before manufacturers come here, they need to get as much local background as they can to understand what differences that is going to make. Clearly, one of the advantages of being positioned in a lower-cost area in Central Europe is to export into Western Europe. But if you're going to be exporting into Central Europe itself, then there would be a lot of local knowledge that you would need to have," Davies stresses. He advises U.S. manufacturers, especially those entering Central Europe for the first time, to take note of requirements they may not have had to deal with before. For example, "there is a whole raft of legislation relating to environmental issues, particularly [the] tracking and tracing of chemicals." A case in point: a cosmetics firm, which Davies doesn't name, that now has a "hole in their budget" from some environmental costs it must absorb. Currency Concern? The financial impact on companies as, presumably, the new EU nations join the European Monetary Union and embrace the euro as their common currency is not getting much attention right now. "Much more relevant are issues like prices and competition, particularly prices of basic factors of production, like labor and property costs," says Deloitte's Davies. Indeed, further investment in the 10 will depend on costs, asserts BearingPoint's Taormina. "If countries like the Czech Republic or Hungary . . . start having workers' councils and everybody who gets sick can be sick forever, like you can in Germany, or it costs two years of salary to get rid of anybody, like it does in France . . . [companies] are going to invest less," he predicts. "My gut feeling is those countries want to grow and are not interested in being overly controlling like the French . . . or the Germans." Still, McGladrey's Murphy has some currency concern. "Obviously, it's easier over the long run . . . dealing with one currency instead of 11 currencies -- the euro and the currencies of the new 10," he acknowledges. However, in the meantime it's possible for one of the new EU countries to get the kind of investment from the rest of the EU to make it the world's leading maker of a product and, if the producing country's currency were "artificially manipulated" -- as some U.S. manufacturers allege is taking place in China -- "that could cause us problems," states Murphy. "Do I think that's going to happen? Well, I would think the U.S. and our foreign-trade people wouldn't allow that to happen. . . . There is an element of risk there, [but] I don't see it as a large risk."
Voice your opinion!
Sponsored