Production location Eastern Europe: The labor market

The situations in which a manufacturing company looks for a new location are manifold: capacity bottlenecks, cost reduction, opening up local markets – to name just a few. Since the coronavirus pandemic, another point has to be added to this list: securing supply capability through local or continental production, known as nearshoring.

Eastern Europe is an obvious choice for many companies, and not just for geographical reasons. Low labor costs, fast time-to-market, good education, a large workforce – but all that glitters is by no means gold.

That is why it is not enough to focus on the figures, data and facts. Admittedly, they are irreplaceable and your company’s management ultimately wants to see figures above all else. But the success of a new production site depends not least on many soft factors. It is therefore also worth learning from successful and failed relocation projects in recent years.

In my work as a consultant, I have already been able to support numerous projects. In addition to the hard facts, I would therefore like to tell you about my personal experiences and provide you with valuable insights and practical tips for your location search.

This first part of the article series “Location Search Eastern Europe” deals with the labor markets of various countries and their local differences.

Location decisions are constitutive decisions

Before I come to the specifics of the labor markets in Eastern Europe, I would like to talk about the importance of location search in general.

The success factors of a company are numerous and varied. It needs a workforce with sufficient numbers, qualifications and morale, competitive wage costs, good market access, political and legal stability and much more. It is striking: Many of these criteria are location-specific characteristics, conditions or influencing factors – the so-called location factors.

This makes it clear that the selection of a new production site is a constitutive decision for a company. It has a significant influence on the future direction of operations and on overall success. Its impact should therefore not be underestimated.

Typically, a project to find a new location is therefore assigned to the management or division management. In medium-sized companies, the shareholders are often also involved in the decision.

Set up location projects correctly

It is therefore necessary that a project for site search is set up correctly. Involve all functions of your company that will be involved in the subsequent operation of the new production facility: Production, logistics, supply chain, purchasing, sales, real estate, HR, finance and legal. Allow sufficient time for the search and discussions on site.

This may sound biased coming from a consultant, but as a medium-sized company, you should also draw on the expertise of an experienced and independent consultancy. With their experience and local network, they can help you to better structure your decision-making process and make a better decision.

Young workers for your production site

Let’s start with the basics: the total number of inhabitants of the Eastern European states within the EU is 103 million, which is similar to that of Germany, Austria and Switzerland combined (99 million). Poland has by far the largest population at 38 million. A further 76 million people live in the Eastern and South-Eastern European countries outside the EU.

It is interesting to note that the age structure of the population in the eastern countries differs from that in the DACH region. In the German-speaking countries, for example, the 50 to 60-year-olds make up by far the largest proportion of the population, whereas in Eastern Europe the 30 to 45-year-old group dominates. In university cities such as Lublin (PL) or Sibiu (RO), these people have often been able to complete a good education. The harmonization of higher education in Europe also ensures that many students have already worked abroad and have internalized local standards.

However, these young professionals are not only an important success factor for manufacturing companies in theory. Workers, engineers and managers between the ages of 25 and 45 were specifically recruited for the successful relocations that I was able to accompany. With their motivation, these employees have made a major contribution to the success. You should follow these examples and strive for a similar personnel policy for your new production site.

Significant labor cost advantages in Eastern Europe

The economy of Eastern Europe is characterized by development and dynamic growth in some places and stagnation in others. Accordingly, the labor market is also structured in a locally specific way: While cities such as Poznan (PL), Timișoara (RO) and Košice (SK) have experienced strong development in the last decade, regions such as Târgu Mureş (RO) and Rzeszów (PL) still have some catching up to do.

Labor cost benefits for industrial employees

However, wage costs remain at an attractive level. For example, an hour’s work in the manufacturing industry costs an average of EUR 5.85 in Romania, EUR 9.18 in Poland and EUR 12.09 in Slovakia.

In comparison, an hour’s industrial labor costs EUR 41.01 in Germany, EUR 38.24 in Austria and EUR 51.83 in Switzerland – so the savings are a considerable 70-90%. Figure 1 shows the comparison of labor costs per hour worked for selected Eastern European countries.

For all countries, premiums of 20-30% are realistic near urban centers and in economically strong regions. However, the gap between the regions is much more pronounced in Eastern European countries such as Poland. You should therefore aim for a rural location if your company is active in a cost-sensitive sector.

Labor cost benefits for managers and specialists

However, you cannot expect the same wage cost advantages for more highly qualified employees. The mobility of these employees is higher, meaning that their salaries have converged considerably, particularly in countries bordering Germany and Austria. For positions such as plant managers, vice presidents or managing directors, you should therefore expect to pay local wage costs. Even for employees with a university degree, such as engineers, you can only expect half the wage cost advantages of 35-45%. Irrespective of this, you should expect expats to be posted during the first 3-5 years and also expect the associated additional wage costs.

The development of wage costs

Reference is often made to the convergence of wage costs and that this wage cost advantage of Eastern European countries will soon be equalized. For this reason, the dynamics of wage cost development should also be considered at this point.

A look into the future

In general, a higher dynamic can be observed in Eastern Europe. Annual growth rates of 5-9% are quite realistic. Countries such as Bulgaria, Romania and the Baltic states in particular have seen strong growth in the last decade. By contrast, the increases in Germany and Austria were much more moderate at 2.5% and 1.9% respectively. The growth rate of 4.8% in Switzerland was driven in particular by changes in the exchange rate of the Swiss franc against the euro.

However, a projection into the future shows that the labor cost advantages will largely remain intact: Assuming the rates of increase shown, the labor cost advantage will reduce from 70-90% today to 55-75% in 2030. In 2040, this advantage will fall moderately to 40-55%. Despite these prospects, it can therefore still be assumed that the establishment of a new production facility in Eastern Europe will have a positive profitability at the present time.

Not yet Chinese conditions

An interesting observation can be made when comparing the growth rates of Eastern European countries with those of China. Here, the annual increase is a remarkable 26.4%. Numerous companies such as Berndes, Cartronic, Fackelmann, Kathrein, Märklin and Sennheiser have therefore decided in recent years to close their extended workbench in China and relocate back to Europe. In analogy to offshoring, this ongoing trend is referred to as nearshoring.

Finally, on the subject of wage costs, reference should also be made to standard national allowances and bonuses. These can mean an increase of up to 20% and include payments for public transport or shuttle services, sports tickets, attendance bonuses and performance bonuses. You should compare these with the bonuses paid at your other locations and be sure to take them into account in your profitability comparison.

Employees for your production site

Unemployment in the EU28 countries

Unemployment in Eastern Europe is generally low in 2020. In Slovakia and the Baltic states, the figures are still well above 5%. Seasonally adjusted, for example, only 3.5% of people of working age are registered as unemployed in Poland, 4.4% in Bulgaria and just 2.1% in the Czech Republic. For comparison: German unemployment is 3.2%, the figure for Austria is 4.6% and in Switzerland it is 2.8%.

However, youth unemployment is significantly higher. While the figure in Germany is 5.8%, Poland (9.2%), Hungary (12.4%) and Slovakia (16.6%) have significantly higher rates of youth unemployment. Younger workers and trainees are therefore much more readily available to companies in Eastern Europe and should therefore be specifically taken into account by companies in their recruitment plans.

Just like in Germany, unemployment also varies greatly from region to region. In eastern and south-eastern Polish districts, for example, the figure is 15.2% (Włodawa), 13.4% (Chełm Land) and 12.8% (Hrubieszów). Vaslui County in Romania also recorded 8.8% unemployment.

High unemployment in the states of origin

The unemployment rate is also rising in the Balkans. In these new states, 13-18% of people of working age are unemployed as a result of conflicts and the political uncertainties of recent decades. In some cases, youth unemployment in these countries is more than 50%. At this point, however, it should be noted that these countries are not (yet) members of the EU and therefore have different legal and political conditions (these will be discussed in detail in subsequent articles in the series).

Notes on the data situation

Unfortunately, comprehensive statistics on unemployment rates and final salaries at regional level are not available for Europe as a whole. The EU Commission’s job mobility portal offers some data and the national statistics offices also provide some information.

As a general rule, you should therefore not just trust the figures, but supplement them with local advice or your own observations. I have always discussed these figures in discussions with local companies and agencies. Over time, we have been able to build up a comprehensive database, which we now use in our projects.

Education is the key to success

This insight is not only valid for the individual, but also for companies. The educational infrastructure of Eastern European countries is therefore an integral part of the labor market analysis. Two groups of employees are particularly relevant for manufacturing companies: Engineers and skilled workers.

University education in the region

The demand for engineers has been the subject of media coverage for many years. As a result, the number of graduates has risen continuously in many countries. In comparison, Poland has the highest number of graduates, which is not surprising given the size of the population and the large number of technical colleges and universities. However, a comparison with Germany shows that, at 81,000 in 2019, significantly more engineers were trained in relative terms (measured against the population). At 517,000, the number of all graduates almost reached the German level of 569,000. These facts underline the high pace of economic development in Poland.

However, good numbers of graduates are also being achieved in some other Eastern European countries. In Romania, for example, with 22,000 engineers, significantly more young people choose a technical education than in Austria with 17,000 graduates. With 12,500 engineering graduates, the Czech Republic is also on a similar scale to Switzerland with 14,000.

For the other countries, it can be seen that higher technical education does not take place on the necessary scale. This can be attributed to the low number of educational institutions with the appropriate focus. Accordingly, no general recommendation for development-oriented or complex manufacturing processes can be made for these countries.

Vocational training at the production site

In most Eastern European countries, vocational training is not nearly as widespread and well developed as in Germany, Austria or Switzerland. Although there are vocational schools in larger cities, the German dual training model is rarely found. However, vocational schools are willing to do so. As the qualifications required vary greatly from company to company, it is always necessary to consider each individual case. In principle, you as a local company must show initiative and organize the training of the required skilled workers according to local standards yourself.

In addition to the labor market, it is equally important to consider the real estate market in detail when choosing a production location. You can find out how to select the ideal property for your location in the second part of the series “Finding a location in Eastern Europe”.

Summary

The labour markets in the countries of Eastern Europe are characterized by young employees and strong regional differences. As a rule of thumb, the further east you go, the more employer-friendly the situation. However, you need to look closely to find the needle in the haystack or the attractive location for your company. You should therefore seek experienced advice to ensure the success of your project.