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back to index backEUROtalk May,  2005

The high tech promise of the East

Competitive labour rates, government incentives and proximity to rich markets are key factors luring high tech manufacturers to Eastern Europe. But there are major considerations.

In recent years, there has been a noticeable trend for ‘technology' manufacturers to reconsider their regions of choice when it comes to locating production facilities. These manufacturers are shifting from the ‘silicon valleys' of America and Western Europe to lower cost production sites in Eastern Europe, Mexico and Asia. A considerable number have taken the move as an opportunity to re-engineer their supply chains and, in many cases, move to a vendor-managed inventory (VMI) model.

In Europe, this strategic shift to the East has been rapid. Production sites are now commonplace in countries such as the Czech Republic, Hungary and Poland. Obviously, this change of location has an impact on the operation of the supply chain – and not just through the introduction of VMI. A major consideration is the need for manufacturers to be able to transport raw materials and finished goods into, and out of, these regions with the same ease as they would operating in Western Europe.

What's the attraction?

Despite the potential issues surrounding movement of finished goods from Eastern Europe to Western regions, the benefits over ‘Western' solutions include lower employment costs, attractive set up deals and the swift modernisation of these areas which are looking for European Union (EU) membership in the next few years.

Ever-decreasing product life cycles and saturation for some products in a number of markets have driven this change. Computers, mobile phones and similar consumer electronic items are becoming redundant within months, and in some cases weeks, of hitting mass consumer markets. There is, therefore, a key business need to reduce the high production costs associated with these items and to ensure manufacturing overheads are as low as possible, enabling profits to be achieved quickly soon after a product hits the high street.

Not all functions have moved

As yet, the full range of manufacturing activities have not moved to these new locations. Research, development, testing and small batch manufacturing activities are still undertaken in Western regions where there is greater confidence in resolving the inevitable issues associated with new product creation within a ‘safe' manufacturing environment. Additionally, the product life cycle has evolved to such an extent that once mass manufacture is achieved processes and systems are in place to reduce product malfunctions.

So, why has this migration occurred? Simply, the perceived benefits outweigh the risks for the manufacturer, particularly in today's economic climate. Realistically, these regions can provide a workforce with lower overall costs, not just in terms of wages, but also with other staffing related costs. One particular challenge that manufacturers face is the lack of ‘technology' skilled people in these new production locations. However, as most operations are mass production orientated this can be resolved by implementing strict processes and by providing appropriate training. In addition, certain key towns are becoming a focal point for manufacturing. These locations, within former Warsaw Pact countries, offer a ready supply of experienced personnel. Pardubice in the Czech Republic, for example, was the former base of the Warsaw Pact's radar production and consequently, provides a well-qualified workforce keen for employment.

Key points

Considerations for Technology Manufacturers operating in today's market;

* Movement to areas of lower cost production

* Outsourcing to contract manufacturers

Driven by:

* Current market downturn and resultant mergers of market players

* Manufacturers becoming brand managers and outsourcing non-core competency operations

No duty or value-added tax

Both Hungary and the Czech Republic encourage the use of Free Trade Zone (FTZ) environments, allowing manufacturers to avoid duty and value-added taxes. As long as imported raw materials are consumed in the process of making finished goods, which then must be exported, no duty or value-added tax need be paid. This significantly enhances the value of these regions for manufacturers producing products for western consumption.

The local authorities are also increasingly keen for production sites to be positioned in their region, and companies are able to purchase land and develop sites at a fraction of the cost of other more industrialised areas. Additionally, there are deals available, often referred to as ‘sweetheart' deals whereby the contract manufacturer takes over a production facility in exchange for a sales commitment for a certain period of time from the Original Equipment Manufacturer (OEM) selling that facility.

As a result of this intra-continental shift in production, Eastern Europe is set to be at the centre of a new manufacturing powerhouse that will stretch from the Atlantic in the West to Russia's Ural Mountains in the East. The Czech Republic, Hungary and Poland are all aiming for inclusion in the EU in the next five years. Until that time it is to the benefit of all that these areas remain business friendly.

Of course, there are associated risks with operating in Eastern Europe. Exel has worked closely with global technology partners in this arena and has been able to assess these risks first-hand, particularly in the operation of VMI programmes. Perhaps inevitably, given the history of these countries, on some occasions workers take little personal responsibility for their actions and yet, still expect the full benefits of ‘western-style' employment. However, from Exel's global experience, similar issues were overcome in Spain less than a decade ago by training, educating and re-evaluating all aspects of a job to help workers accept responsibility and to help them derive personal as well as, collective success.

Know the regulations

Additionally, although specific areas operate as a FTZ, there still needs to be careful production of documentation for inbound and outbound shipments and for processes to follow local regulations. If a business does not comply with all local law then the penalties can be harsh. Exel's position as a leading customs broker, has helped customers comprehend and work within these regulations, to ensure deliveries are received on time and do not cause delays to the production process.

For technology companies working within many different markets worldwide, one of the ways of reducing the uncertainty of operating in these new ‘under-developed' markets is to collaborate with an existing supply chain provider who is already operating within these areas. This not only reduces the steep learning curves required in terms of administration, but also aids start-up and reduces the associated potential risks.

Additionally, experienced supply chain partners are able to introduce state-of-the-art systems into facilities to assist warehouse administration and inventory tracking, for example, providing a beneficial blend of westernised expertise with cost-effective human resources.

At present, only a handful of supply chain partners have the global infrastructure in place to provide contract logistics and freight management services capable of creating a seamless extension to manufacturers existing logistics networks in these areas.

This must be a key consideration for companies looking at Eastern Europe as a viable option in terms of manufacturing supported by a VMI solution. It is essential that there is a cost-effective and efficient network available to move finished product back into the high-cost, selling environments combined with a freight capability that can transfer raw materials from Asia, for example.

Local knowledge

There is also a growing opportunity for outbound movements. The development of stronger road networks between Eastern and Western Europe is helping, however these routes need to work in both directions for the customer to benefit fully. A robust understanding of transporting items from Frankfurt to Budapest, for example, will enable a supply chain provider to operate with local teams. A truck from Budapest travelling to the West to collect inventory will be cheaper than using western vehicles travelling the same route in reverse. Additionally, the local knowledge available becomes an invaluable bonus to the customer, particularly in expediting customs clearance.

VMI opens up further opportunities for both the manufacturer and supply chain partner. Such VMI programmes with appropriate, robust transport offerings enable all parties to establish a consolidated inbound solution for suppliers, supporting these manufacturers in order to ensure transport costs are minimised. This proposition is further enhanced by state of the art inventory track and trace capabilities which provide full supply chain visibility accessed through websitesand or EDI connectivity.

And the future?

Looking to the future, it is becoming clear that technology manufacturers will need to align with supply chain partners that can operate in a myriad of regions. This allows the transfer of operations from one area to another. The European solution, for example, can be replicated in the Americas and Asia, but to achieve these transfers seamlessly, the supply chain partner must understand the new geographies and operate on a truly global scale.

With the continuing trend for manufacturers selling in Europe to move production to Eastern Europe, supply chain providers must be able to provide value-added VMI solutions coupled with effective freight capabilities worldwide.

Source: Logistics Europe - GAI

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