Topic of the month November

Expanding the European Market (2)

From favorable production costs to abundant labor, Eastern Europe holds distinct advantages for manufacturers operating in the high-tech market.
Last month, we had a look on Poland and Hungary.

Bulgaria

Another country that is expanding its automotive sector is Bulgaria — a nation of nearly 8 million that is scheduled to join the EU in 2007. Unlike other countries in the region, Bulgaria does not manufacture automobiles. However, demand for parts has made the automotive industry one of the fastest-growing sectors in Bulgaria. Its market size for automotive parts and service equipment is estimated to be about $100 million. In particular, demand for automotive repair and service equipment has grown an average of 15 percent annually over the past three years, according to the U.S. International Trade Administration.

U.S. companies such as Ford and GM-Opel have established their own service centers throughout Bulgaria. The distributor for Ford in Bulgaria, as well as for Volvo and Jaguar, is Moto-Pfohe GmbH, based in the capital of Sofia. Moto-Pfohe houses sales, service, and spare parts in the same facility, and operates 13 branches in the country. The most recent opened in May 2000 in Plovdiv, the second-largest city.

Czech Republic
Another industry that has experienced tremendous growth in the past few years, and particularly since September 2001, is the safety and security-equipment industry. A leading regional manufacturer in this industry is the Czech Republic, a country of more than 10 million people that lies between Germany and Poland. The U.S. International Trade Administration estimates the industry's value at about $133 million for 2002. The Czech Republic is home to such U.S. companies as Honeywell; Dillon Precision Products, Inc.; and Sturm, Ruger & Co.
About one year ago, the Alarm Device Manufacturing Company (ADEMCO), a division of Honeywell Corp. based in Syosset, N.Y., opened a new plant in Brno, in the southeast Czech Republic.

ADEMCO is responsible for the design, manufacturing, and marketing of security products for commercial and residential uses. John Tyhacz, vice president of global operations for the Security and Fire Division of Honeywell, which posted sales of $1.9 billion last year, says that Brno has proven to be an excellent location for access to the European market. "We are doubling the size of our production facility by the end of the year. The main reasons that we chose the Czech Republic are the cost-effective, technically skilled labor base and the proximity to our European customer base,” he says.

In addition to customer proximity, the distance from suppliers is also an advantage for ADEMCO. "We see good opportunities to source raw materials within the Czech Republic, further leveraging the cost-effective labor and technical talent,” Tyhacz says. Another benefit of the Czech Republic over some of its neighbors is its lower inflation rate.

In the Czech Republic, the market for safety and security equipment has risen from 12 percent to 14 percent annually in recent years, according to the International Trade Administration. The country's impending entry into the European Union will have positive and negative effects for high-tech manufacturers such as ADEMCO. On the positive side, EU accession means that the country will need to invest more in security equipment, particularly for government buildings. However, there are also risks to joining the EU. "Costs may increase at a greater rate, possibly moving selected labor-intensive operations further east,” to countries such as Belarus and Ukraine, Tyhacz says.

In addition to those mentioned, other countries in the Central and Eastern European region also offer opportunities to manufacture in high-tech industries. One of the strongest attractions of the region is its production costs, and although it is likely that they will eventually be on par with those in Western Europe, costs may remain lower for at least the next decade. As these countries join the EU, the elimination of customs borders is certain to promote even more investment, since transaction costs will be greatly reduced.

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