Eastern promise

Frederick Metz Shepperd is managing director of the Quadral Group, a consulting firm with offices in Europe and North America. www.quadralgroup.com

Any business that sets its sights on expansion could do worse than look east. The burgeoning markets in Slovakia, the Czech Republic and Turkey are fast catching up with the established zones in the west and Asia, writes Frederick Metz Shepperd

Morning at the Vienna West train station. The loudspeaker announces departures to Prague, Bratislava, Bucharest and Budapest. Trains pull into the station like clockwork. Although many family businesses in western European countries still believe that little, if anything can develop in the expanded EU countries, they are experienceing an unprecedented economic boom. It is solid growth that will make these countries the most modern and efficient production centres of the world.

While many companies are investing millions trying to find a foothold in Asia to offset their flat European sales, auto ­companies are investing more than 1230 billion into a region that is less than an hour's flight and even in the same time zone. In a short period of time, the most efficient production plant for Toyota will not be in Japan, China, or the USA. It will be in the Czech Republic. There is enormous resistance, particularly in Germany, to think about expanded EU countries and even the Eastern part of Germany in other than condescending terms. However, they do so at their peril.

If you are an auto supplier, you will already know about the big move east. Slovakia will soon have the highest output per capita of motor vehicles in the world. New plants coming online in Slovakia will produce 1.1 million cars a year. In Romania 200,000, in the Czech Republic, 800,000, Hungary 200,000 Poland 640,000, in Turkey, almost 500,000 cars a year. There is a new class of executives and engineers with significant expendable income growing around the auto plants and their significant supply base. The companies are taking advantage of an hourly cost of 16 on the assembly line in Slovakia, compared with 140 an hour in Germany. They are finding well-educated engineers and managers to drive that production. They are also benefitting from one thing more. The workforce is ready, even hungry to work, develop and do whatever it takes for the company to succeed. Flexibility in the workforce is unlike any recent experience in the more developed regions of Europe.

Business Week refers to the region as Detroit East. However, the development goes far beyond the huge auto plants. Many other industries are transferring their operations East, setting the stage for significant and sustained growth and it is just as large in growth per capita as in China. The major difference is EU law, western cultural traditions and similar customs to their western neighbours that cannot be found in Asia. The investment of the large automakers marks the end of the pioneering years since 1990. It is time for settlement and this period is being followed up with economic growth fueled by smaller privately held company investments in the region.
 
This growth brings new trends and growth patterns. The nice part is that we have a good idea what can happen. What is old is new. Europe is returning to its normal width and breadth after a difficult period in the 20th century. What most of us thought of as Europe was only half of the real size. Companies moved their operations to West Germany from every part of Eastern Europe. Now they are using their former ties to return and other companies from the West follow.

With this the old cities of traditional Europe are returning to the top. Cities like Vienna, Prague, and Dresden are now the centre of growth. Dresden will add more than 1,000 jobs in the microelectronics industry in the next three years. Leipzig landed a deal last year as the central hub of DHL that will bring approximately 10,000 jobs to the region over a period of several years. Vienna is particularly well situated as Austria is next to four of the expanded EU countries and serves the region, similar to how Atlanta has benefited from the location of BMW in Spartanburg and Daimler Chrysler with their M Class operation in Vance, Alabama.

Family businesses must realise the new economic reality in Europe. They have to be flexible to realise the Eastern countries of Europe have entered their next phase of economic growth. What's more, it is a unique chance to use this location to beat competition from Asia. If not, they will supply from these countries to the western countries of Europe themselves. Just ask Toyota, Nissan, Suzuki, Kia, Hyundai and many of their suppliers. The move East does not stop in Europe.
 
Turkey has become a major manufacturing centre for trucks, buses and automobiles. Do not think that the opportunities are only for the big multi-national publicly-held companies. You have to follow your customer. If that means going to Turkey, that is where you go. Family-owned businesses can do quite well in Turkey and other markets. As your sales staff spreads to Asia, or takes on the Americas, companies based in, or going to the East of Europe are capturing market share and will soon affect what was once considered the home market of Germany, France and the original EU countries.

The plan for entry into the new EU varies from industry to industry, ­however, the problems are the same. European companies are dumping millions of dollars on trips to Asia and scurrying to figure out what they can do there. The same focus should apply to development in the East. Many businesses have ignored eastern Germany, Poland and other regions.

Second, personnel. Who goes to the East? It should be planned like any other major initiative in the company. It may be that the sales department is the first to head East. It may be the production, or operations side in response to customer demands. Whatever it is, create the team to support expansion, as you would for North America, or another major location. If senior management has shown the way, then do so as well. It also necessary for the ownership to show support for the effort to avoid half-hearted attempts and eventual failure of the project. Many senior managers and owners are afraid to stress this market, as it can mean that the company may pick up stakes and move East.

There are many examples where mid-sized companies have saved the jobs at home because of their move East. You may have to convince a lot of the staff, including yourself on this topic, but you must overcome the reluctance.
 
Regardless of the marketing and ­production changes due to the expansion, the logistics structure is now radically different than before the expansion last year. There are new continental patterns for logistics flowing East to the West that could never exist before the change. Your central warehouse is no longer central. It moved to the west by almost 800km last year. Those bastions of central distribution in Belgium and the Netherlands are far away and out of position to cover the new markets in the East.
 
Look at the traditional routes in the 1800s and the major centres of Europe at that time and you see the nodes of commerce and trends for the future. Vienna, for example is a key centre of growth. It has always been a bridge to the East and is quickly becoming the centre of the expanded Europe. Berlin to the north has the potential as well, but local politics and the problems from unification have stymied growth in this region. Dresden, unlike other German cities is more tied to growth in the east than other large cities in Germany. As a result, it is often overlooked. Yet it is in a good position to spring into Poland, the Czech Republic and locations beyond. If you are concerned about a move to one of the expanded EU countries, Saxony would be an interesting alternative.

Having made a strategic decision to look eastward, do not get lost in the low hourly cost and the large incentives offered by local and regional governments. The operation must be profitable without incentives. Consider the incentives a plus, not an essential ingredient. The countries in the East are not as significant a problem as in China. A good workforce can be found. Managers and engineers are well educated. If you come without proper planning, you may quickly go home. The problem is the same in the USA, Mexico, China and elsewhere. Another factor to consider is that the biggest incentives are given to the big fish, like auto plants. They are given with the idea that smaller companies will follow. You are the company that follows and cannot get the big breaks that the auto plants received. You may get significant incentives, just not a windfall as you may think you should receive.

Finally, the east is growing on a per capita basis just as fast as in China and is only in the starting phase. The big move east is in many ways a return home east. If you do not follow up with a serious plan for this market, or to check out production opportunities, you can be assured, your competition from here, or abroad certainly will.