Topic of the month November

Expanding the European Market (1)

From favorable production costs to abundant labor, Eastern Europe holds distinct advantages for manufacturers operating in the high-tech market.

Manufacturers have more reason than ever to look east; the automotive and high-tech industries are gaining momentum in the emerging markets of Central and Eastern Europe. Not only is the region holding onto its claim as a production base for Western Europe and elsewhere, but its own markets are growing at even faster rates. Foremost among the reasons for locating in countries such as Poland, the Czech Republic, and Hungary are the lower costs of labor, land, energy, and other production inputs compared to those in more developed countries. As these and other countries prepare to enter the European Union (EU) within the next few years, the benefits of locating there are becoming even more apparent.

Corporations must take into account a number of factors in determining the best location for their plants. In Eastern Europe, as elsewhere, manufacturers consider the location of their end users as well as their suppliers. Many companies entered the region in the early 1990s after the lifting of the Iron Curtain and have since expanded their operations. These companies often choose to partner with other firms before branching out on their own. Although it may not have been a factor in their initial location decision, industry giants such as Visteon, Honeywell, and Guardian Industries are looking forward to the EU expansion that is slated to take place in the near future. The elimination of customs borders is the most anticipated benefit, since a smooth crossing will improve supply-chain efficiency.

Poland

Poland, with a population of more than 40 million, has some advantages over other countries in the region; namely, that it borders not only Germany and Scandinavia but also four countries in the Commonwealth of Independent States. One of the industries with the greatest prospects for investment is the construction materials and equipment sector — estimated at $10.1 billion by the U.S. International Trade Administration. One such company that recently opened a plant in Poland is Guardian Industries Corporation, based in Auburn Hills, Mich., a manufacturer of float glass and fabricated glass products for construction and automotive applications.

Guardian Industries began production in July at its new factory in Czestochowa, about 75 miles north of Krakow in southern Poland. With a capacity of 650 tons of float glass per day, it supplies growing commercial-building and home-building industries in Poland and the surrounding countries. Plant manager Janos Egyud says that locational advantages will be enhanced when Poland joins the EU. "In addition to the elimination of border delays, regulation changes will require the new EU members to use higher-quality glass as building materials. So, there will be a greater demand for our products,” he says. The market for building glass is in the range of $320–$400 million for Poland, the Czech Republic, and the Baltic states, according to Egyud.

One of the greatest advantages for Guardian Industries of locating in Poland is that the country is in the midst of a growing Central European economy, since what was formerly the eastern limits of Europe have shifted to include nations such as Belarus, Ukraine, and Lithuania. The company evaluated six other locations within the country, but Czestochowa stood out due to its location with respect to Guardian's other plants in the region. Says Egyud, "We have plants in Hungary and eastern Germany and the Czestochowa facility is the same distance from both. Our plans are to collaborate with these plants beginning in October to produce specialty glass and by doing so achieve freight advantages. Each plant produces a unique product that can serve the other markets, so collaboration will be beneficial in a number of respects.”

Achieving efficient transport is particularly important to Guardian Industries since Poland has some deficiencies in the areas of road and rail transportation, although the overall difference from other Eastern European countries is not significant. "There are few highways and a trucking ban exists on the weekends for Central Europe,” Egyud says. "The rail network itself is good, but the railways are not flexible in their services. The system is much too bureaucratic, which is due to the fact that 90 percent of it is state-owned. However, improvements should accelerate within the next four to five years,” he predicts.

Hungary

Hungary, located in Central Europe and home to a population of more than 10 million, has experienced some significant U.S. investment in the automotive industry in the past two years. Last year, new car sales there increased by 11.3 percent over 2000, to a total of 150,000 units. With increasing ownership, the need for engine spare parts, lubricants, and other components will also grow.

One successful supplier of automotive parts is Visteon Corporation, based in Dearborn, Mich., which recently reached the 10-year milestone at its manufacturing plant in Szekesfehervar, Hungary, about 40 miles southwest of Budapest. The facility, known as the Alba plant, is 430,000 square feet and employs more than 1,400 people.

Visteon plans to complete the second phase of a two-phase expansion next year. Says Gopal Chandramowle, the plant's manager, "the expansion involved reorganizing the floor space to accommodate additional products. In order to gain speed and efficiency, the plant underwent an extensive manufacturing-process re-layout. What required 1,000 square feet of space before may now take only half as much. Lean manufacturing is driving productivity.”

Chandramowle says that since the plant opened in 1992, Hungary's economy has undergone a tremendous transformation. Labor is readily available and the local supply base is vibrant. What stands out in particular are three changes: the government's commitment to fostering economic development; infrastructure that meets global standards; and an emphasis on education that supports a Western-style economy. Hungary is also less expensive than Western Europe for inputs such as power and labor.

Within Hungary, Visteon chose a location that lies between the capital Budapest and Austria, and is well connected by road. "Another reason for selecting Szekesfehervar was that there was a company that was involved in a related industry located there and thus the workers were already trained. When that company privatized, employees were let go, which increased the available labor pool. Another benefit is that the city provides incentives, including training grants and infrastructure grants,” Chandramowle says. Locating near its OEM customers was also an important consideration for Visteon.

The availability of skilled labor was the number-one consideration for Visteon. Logistics infrastructure ranked a strong number two. "In order to maximize the benefits of lean manufacturing,” Chandramowle notes, "we require very good logistics support to ensure delivery of goods and services from our suppliers and shipment of the final product to our end customers, who are spread throughout Europe [90 percent] and worldwide [10 percent].”

Chandramowle says the plant uses local talent, the local supply base, and local tools and machinery within a radius of about 50 to 100 miles. That way, he says, "the time to market is much faster than if these components were dispersed.” He adds that a number of misconceptions existed prior to the company locating in Hungary, including a supposed lack of transparency in laws and regulations and an inflexible work force.

Next month, we will have a look on Bulgaria and the Czech Republic.

Source: OGIS GmbH, www.glassglobal.com (The foregoing information was compiled from publicly available information in annual reports and news releases)