First manufacturers moved their operations to China. Lower wages and government incentives helped China become a key destination for manufacturing. With a large labor pool, it served as the low cost option.
However, after the manufacturing boom, the country’s raw materials and labor costs have gone up, and quality has become a concern following a series of recalls. China simply isn’t as attractive for foreign companies as it had been in the past.
“The number of businesses in China has caused problems with gas, water and utility shortages,” said Rich Folts, Partner, Battalia Winston.
In China, the infrastructure remains a problem, although the Chinese government has made investments for improvement. However, in addition to considering the physical infrastructure, companies should consider an area’s legal infrastructure, according to William Gamble, Principal, Emerging Market Strategies.
“In the U.S., companies just assume that contracts will be enforced, businesses will have legal sources to turn to, etc. That is not always the case in other countries,” Gamble said. “In China, for example, regulations can change overnight. What was true when you wrote up your business plan may not be the case when you move to put your plan into action.”
Gamble adds that companies need to realize that government regulators may be impartial referees, or they may be corrupt players.
An increasing number of companies have moved on to countries in Eastern Europe, including Poland, Slovakia, and the Czech Republic, among others. But how do you know if moving to Eastern Europe is right for you?
“Manufacturers want a stable environment,” Gamble notes. “While the countries of Eastern Europe may not necessarily be stable, they are more reliable than China because they are controlled by the European Union.”
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“There is a limited pool of talent at the managerial level,” Folts said. “The workers sign with firms that essentially become talent brokers -- foreign companies need to go through them in order to get to the talent pool.”
“The labor pool can vary by country in terms of skills and availability,” Gamble said. “Each country has a different set of variables.”
“In China, the young, educated workers typically change jobs every year or less,” Folts added. “That’s not really an issue in Eastern Europe.”
Gamble notes that businesses should take a long, hard look at the products they plan to make and where they intend to sell them to determine the best location to produce them.
“For companies with customers in North America or Europe, it may be cheaper to do business in Eastern Europe than to work in China,” Folts suggested.
“Depending on what you make and who you want to sell it to, you may face some transportation or labor issues,” Gamble said. “You need to develop a strategy and look at your supply chain. If you’re creating something that involves a high degree of intellectual property, you’ll want to stay away from China, for example.”
“U.S. companies feel more comfortable in Eastern Europe compared to China because the culture is similar,” Folts added.
The manufacturing boom in China has led to increasing wages, a shortage of plant managers, and higher commodity costs. Underdeveloped Eastern European countries are providing an alternative for manufacturers, as they are much like China before the boom.
Although the region of Central and Eastern Europe can provide cost savings to companies, it still has its drawbacks.
One drawback of working in Eastern Europe is the travel. As U.S. companies move to global enterprises, they need managers where they have new plants. However, despite traveling around the globe, going to Eastern Europe isn’t exactly a vacation.
“It’s hazardous duty -- you have to want to do it,” Folts said. “The living conditions are a problem, so managers need to leave their families behind, travel to the site for a few weeks at a time, then travel home for a week. It’s grueling.”
For now, the main drivers pushing manufacturers towards Eastern Europe over China are the labor costs and the infrastructure. Quality/safety concerns may also have some influence, as consumers are more aware of where products are manufactured now, according to Folts.
“You can look at headlines in the paper that may or may not be true and base your decisions without knowing the whole story, or you could do your homework,” Gamble advised.
To be successful, you need a strategy. You need to look at the country, its laws and politically stability, its labor pool, etc. Then you need to build a strategy based on what you plan to make and where you plan to sell it to be sure that you’re on the right track.