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Central Europe an option for plants, start-ups

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If you ask most any businessperson where the most exciting place for a startup or a new plant is, the answer probably would be China.

Media reports reinforce this point. ``It's China, China, China, China, China, China and maybe in the last 12 months India,'' said Roger Morgan of Roger Morgan Consulting Ltd. in Teddington, England.

But there's another hot area of the world that doesn't get as much attention, Mr. Morgan told attendees of the 47th Annual General Meeting of the International Institute of Synthetic Rubber Producers, held earlier this year in Barcelona.

``Nobody ever boasts about their new plant in Prague, or what they're doing in Russia, or what they're doing in Turkey,'' he said. ``It's all China, China, China. But what I'd like to suggest to you is that maybe, if you're planning a second plant, you may not necessarily want to build it in Shanghai. You might like to think about building it in Central Europe.''

Mr. Morgan, who retired last year from Kraton Polymers Inc. as vice president of Europe, Africa and the Middle East, said he got interested in the business opportunities of Central Europe after reading an article about Primasil Silicones L.L.C. The company, based in England, had chosen to move its organic rubber unit to the Czech Republic instead of Asia.

``I thought, `Why on earth did they do that?''' he said. ``And the more I looked at what they'd done and the decision they went through, I realized what a smart decision it was. Instead of following the herd, investing in China, they actually thought about it and realized for them and their business, the smart move was to actually invest much closer to home and to their markets and the Czech Republic.''

Mr. Morgan defines Central Europe as the former Warsaw Pact countries, an area bounded by Poland, Czech Republic and the former Yugoslavia on the west and on the east by Russia.

``Even if you just think of Central Europe as ending in Europe, it's still the size of China,'' he said.

It's more than geographic dimensions that make the two markets similar.

Mr. Morgan described three fundamental economic factors driving growth in China, which are similar to what's happening in Central Europe.

The first is the trend toward ``westernization.''

This is not a move away from the region's cultural values, but to a more rich lifestyle, he said. It's the ambition to go from no diapers to cloth diapers to disposable diapers; to wash hair in shampoo rather than carbolic soap; to drive a motorcar rather than a bicycle.

``This is a common human value, and it is certainly driving huge growth in China,'' Mr. Morgan said.

Another element propelling growth in China is the large amount of inward capital investment for both export and local consumption aimed at taking advantage of lower labor rates. Inward capital investment is capital investment in a country by a company with headquarters outside of that country.

The third economic factor is that the economic growth from this inward capital investment is leading to higher standards of living, which spurs higher local consumption.

These economic drivers also apply exactly to Central Europe, Mr. Morgan said.

``They clearly want to buy Western-branded products. They, too, want to be dressed in Levi jeans. They want to have a modern motor car.''

The amount of inward investment between the two regions also is similar.

In 2004, China had $60 billion worth of inward investment in the country, while Central Europe had $44 billion, he said, citing data from the World Bank. The reason for this, he said, is that Central Europe's labor rates also are low.

In China, the average monthly salary was around $225 in 2004, while that of Slovak Republic was $318 and Russia $233, according to 2004 data from the International Labor Organization and the British Embassy in China. Wages in China have risen since then and are probably closer to $300 a month today, Mr. Morgan said.

By comparison, the average monthly wage in the U.S. and Germany in 2004 was $3,000 and $2,500, respectively.

For companies with a labor-intensive manufacturing process that want to invest somewhere to take advantage of lower labor costs and that have markets or aspirations in Europe or Central Europe, ``then surely closer to home and closer to that market makes sense, rather than going to China,'' Mr. Morgan said.

China may be considered the world's most dynamic economy, but the economic growth rate in Central Europe has risen just as fast, Mr. Morgan said.

Over the period of 1999-2004, the average annual growth rate of Central Europe actually outpaced that of China by nearly 50 percent-14.9 percent to 10.8 percent, Mr. Morgan said.

Even if these figures were rebalanced in euros, Central Europe's average economic growth rate still would be 11.4 percent, comparing favorably with that of China.

Another comparison is population. While China's population is much larger than Central Europe's-1.3 billion vs. 478 million-the gross domestic product of each is similar, $1.65 trillion vs. $1.81 trillion respectively.

``Inherently, the Central European population is wealthier than the Chinese population,'' Mr. Morgan said. ``So if you're looking at a market which can already afford the material that your company sells, then Central Europe should be part of your thinking.''

Both regions also have healthy automotive industries, Morgan said, with China producing 4.9 million vehicles in 2004 and Central Europe 3.8 million.

Turkey, for example, has five auto makers assembling 635,000 cars annually. The country also has 14 commercial vehicle manufacturers producing about 180,000 trucks, coaches and buses along with more than 100 component suppliers supporting the industry.

All told, the automotive industry employs 500,000 in Turkey.

Auto makers are investing in Central Europe. Fiat S.p.A. is building a plant in Poland, and Volkswagen A.G., General Motors Corp. and Toyota Motor Corp. are constructing plants in Slovak Republic.

``When these three plants are completed, the Slovak Republic will produce more cars (per capita) than any other country in the world,'' Mr. Morgan said.

Along with the expansion of the automotive industry in Central Europe is the corresponding demand for plastics and elastomeric products, Mr. Morgan said.

``There's huge growth of elastomers in the region,'' he said. ``People need to be thinking of taking a share of that. If they don't, their competitors will.''

It should be noted the tire industry is investing heavily in the region as well.

* Bridgestone Corp. is building a $258 million truck tire plant in northwestern Poland;

* Hankook Tire Co. Inc. is building a $635 million passenger/light truck tire factory in Hungary;

* Pirelli & C. S.p.A. is close to completing work on a $130 million car tire plant in Romania; and

* Group Michelin recently added car and light truck tire capacity to its Taurus Rubber factory complex in eastern Hungary and opened a car tire plant in Russia.

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