Manufacturing and offering logistics services in Central and Eastern Europe

1. Manufacturing and offering logistics services in Central and Eastern Europe  David Chelly EMILSchool of Industrial and Systems Engineering Georgia Institute of Technology4th of October, 2005

2. Aims of the session • This session provides EMIL participants with the necessary facts and figures to understand the challenges and opportunities of manufacturing and offering logistics services in Eastern and Central Europe.  • This session may interest them, as Central and Eastern European countries offer excellent opportunities to American companies.

3. The instructor • David CHELLY • Head of a consultancy firm and a website (http://www.centreurope.org) specialized in business with Central & Eastern Europe • Former expatriate in Prague and Sofia, professor of management in various business and engineering schools • Ph.D in Management Sciences, post-graduate diploma in Finance, degrees in Money and Banking, Law, Accounting and Sociology. contacts@centreurope.org

4. The session’s outline & assignment • 1. Central and Eastern Europe basics • 2. The political and business environment • 3. Manufacturing in Central and Eastern Europe • 4. Offering Logistic services in Central and Eastern Europe • Assignment: 5-10 pages on your company’s presence in one Central and Eastern European country (see documents).

5. I. Central and Eastern European basics

6. A rich and ancient history • It is not because we (French people) don’t know Central and Eastern Europe history that these countries do not have any history. • Almost all CEE countries have played a major role in Europe in their history Cyrille and Méthode, inventors of the Cyrillic alphabet Charles the IVth (1346-1378), King of Rome and Empereur of the Holy German Empire

7. Central Europe • Long dominated by the Habsburg Empire, the history of Central Europe has been marked by education, art and modernism. • While in 1789 in France only a third of the citizens were able to speak and read French, education in German had been compulsory for a century in the whole Habsburg kingdom • Czech TV commercial for the preservation of art >>

8. Eastern Europe • Eastern European countries used to live under the Ottoman and the Russian Empires rule, which prevented their economic development. • The Orange revolution in Ukraine >> Vlad Tepes (1428-1476), a Romanian figure of the struggle against the Ottoman Empire.

9. Central and Eastern European countries on the map

10. Central and Eastern Europe map

11. An generalized improvement of the economic performances • Hyper-inflation had severely hit most CEE countries • But this issue is today under control • After a deep collapse of their GDP, Central European countries have been achieving steady economic growths, followed by most Eastern European countries The Bric Nation to outdo Europe and the US >>

12. II. The political and business environment

13. The communist heritage • Central and Eastern European countries have lived forty (seventy) years of communism, which still influence local behaviors and habits. • The communist heritage: • Corrupted civil servants, • unreliable businessmen, • opportunist politicians…

14. Young democracies with unstable governments • Local democracies suffer from a lack of political maturity. • The leading coalitions are not able to keep the power due to a too large number of political parties and to political scandals But the political risk is limited to only a few countries in the CIS and in the Balkans

15. Ailing institutions • Most Central and Eastern European states suffer from bureaucracy and corruption • (cf. World corruption index >> • Most institutions (The Police, Universities, Hospitals…) in Central and Eastern Europe are in crisis • Income inequalities and regional discrepancies are widening • Eastern Europe faces a serious demographic problem. • On the main square of Sofia, one can buy the most recent software CDs for a few dollars.

16. Towards a stronger Europe? • A group with 25 + countries offers a stronger opposition to the other world powers • The US response • The EU must adjust itself to the enlargement process • Is it able to ? • How far can we go ? Will they get along together ?

17. III. Manufacturing in Central and Eastern Europe

18. Why invest in Central and Eastern Europe ? • Foreign direct investments in all sectors and from all countries are welcomed and little restricted. • (cf. Index of Economic Freedom >> • Central and Eastern European countries benefits from an relatively cheap labour force and an advantage of territorial location. • But the main reason for FDI is good access to domestic and foreign markets

19. A qualified workforce… • The workforce is • Qualified, especially in technical fields • relatively cheap, especially in Eastern Europe • respectful for hierarchy and rules and able to stand hard working conditions • So how can we explain such low salaries? In spite of a high qualification in technical fields such as computer sciences, Bulgaria’s wages are about 10 times lower than in Western Europe

20. … but a low labor productivity • World competitiveness rankings >> • Commitment (especially towards foreign investors), sense of initiative, mutual trust between workers, customer satisfaction, ability to communicate and ethics at work are low • « pretend to pay us and we will pretend to work » • « the one who does not steal, steals his family » (Czech proverbs) • Workers tend to behave in a more productive way in Eastern Europe than in Central Europe

21. Where and how to invest ? • A few countries attract the majority of FDI • Privatizations, Joint ventures and licensing offer limited opportunities • The most profitable way of investment is the Greenfield investment • Good personal networks are crucial to succeed in Central and Eastern Europe

22. IV. Offering logistic services in Central and Eastern Europe

23. The transportation and logistics sector • Unlike Eastern Europe, Central Europe has a relatively well-developed infrastructure. • Vilnius 2020 >> • The Central and Eastern European Freight Transport Sector is leaded by the road haulage. • Major Industrial Sectors: Automotive, fast moving consumer goods (FMCG) / Retail, Healthcare / Pharmaceutical, High Tech Electronics GDP Growth in Central and Eastern Europe is mainly driven by foreign investment and consumption of foreign goods

24. The transportation and logistics market • Almost all main transport players in market come from Western Europe and the US. • The local know-how, plants and equipments have not yet catched up with European standards • Road Networks, Customs Issues, Security Issues need to be improved. • But transportation and logistic costs are almost as high as in Western Europe. • Each unveiling of an hypermarket is celebrated by hours of queues of avid consumers.

25. Opportunities for US firms in offering logistic services • The distribution sector is very atomized. • Logistics and transportation is a priority for the EU. • Thanks to a strategic location and buoyant local economies, the logistics and transportation sector of most Central and Eastern European countries is growing rapidly • Local companies urgently need assistance from the West with a comprehensive updating of equipments/technologies and restructuring their organization.

26. More information… www.centreurope.orgEast-west business portal