After the Berlin wall fell Western European companies rushed east to see whether they could find opportunities to set up factories in Eastern Europe to substitute the production in the Far East.
The obvious advantages of the proximity to Western Europe, combined with the cheaper cost of labor versus production in Western Europe resulted in substantial investments especially in Central Europe. Countries close to Germany and Austria benefited most from the industrial desperado.
Romania started lagging behind, and remained to be so for the ten years following the revolution. Struggling with the reform process Government after Government failed to properly address the direct investment climate in Romania. For clarity’s sake I shall focus on investments that were made to develop industrial facilities to export products from Romania then “local-for-local industries” in which products are being produced for the local Romanian market. The first form of investment will generate foreign currency, improve the trade balance, and will employ a significant number of staff whereas the latter type of investment might spark consumptive behavior and is usually smaller in scale.
Either because of the lack of political will or because of the failure to understand the decision making process within multinationals with respect to their investment strategies Romania ended up with one of the lowest share of direct investment figures of the entire CEE region.
In their investment strategy multinationals focus on comparative analyses of several countries comparing geographical positioning, infrastructure, fiscal climate, legal and political stability, incentives etc. etc. Numerous comparisons at different headquarters have been made in the last ten years, and the results were definitely not favorable for Romania. In the electronics’ industry, where I work, the increasing globalisation does not allow countries to have a second chance. In plain terms it means that global companies might want to have a factory producing a product somewhere in Eastern Europe, somewhere in Asia (China), India and somewhere possibly in South America (Brazil) or in the border zone in Mexico to serve the populated developed markets. Definitely no producer of electronics is interested having factories of the same devices in every country. On the contrary clustering will bring evident benefits in terms of logistics etc. Philips has substantial industrial bases in Poland and Hungary. Adding production capacity in these countries means increasing productivity; adding Romania would mean adding cost.
In a theoretical traditional model the following choices have to be made with respect to the production of electronical products:
1. Closer to raw materials or closer to customers?
2. Manual labour processes or option for a higher degree of automatisation?
3. Produce yourself fully vertically integrated or subcontract?
Ongoing globalisation, the increased “merger-mania” but foremost the technological development have heavily influenced the conventional industrial considerations of where and what to produce, and this is where I believe the opportunity for Romania stands.
Due to the technological advancement, electronic devices have shorter and shorter life cycles. New applications demand new devices enabling these applications. Convergence of technology demands new devices. E-commerce accelerates business and time-to-market is critical.
The volume of production has become far more critical as because revenues must be made at the early stage in the life cycle of a product where customers are still prepared to pay a premium for the technological innovation. Flexibility, speed, efficiency as well as cost containment throughout the entire supply chain are of imminent importance. Consequently economies of scale are conditio sine qua non for a profitable production. Obviously this can be reached through a high degree of standardization.
Sophisticated products tend to become commodities. I became painfully aware when, blessed with ignorance, I attempted try to sell the first mobile phone to a mobile telephone operator and I started to explain to him all “nifty” features of the phone. In the midst of my sales pitch the procurement officer stopped me and said “Okay’ give me a price per kilo!” At of that moment I realized that the industry I work for had changed.
Due to this shift, multinationals are less and less interested to produce themselves. The core processes of the multinationals are more a more geared towards research and development, product development, marketing, distribution and sales.
Obviously leveraging their brand equity in the market place during the process. Subcontracting or supply chain facilitators have a growing importance in the technology industry. – The Romanian Government should become aware of this fact, as there might be an opening to attract subcontracting companies to Romania. The raising wage costs in Hungary and Poland might ignite this process. The recent favorable development of the “Unit Labor Cost” in Romania might be appealing to companies and result in starting the production of technological products to Romania. The explosive growth of the e commerce and telecommunication justifies new production capacity so no jobs will be lost in Western Europe.
Philips has decided to follow this route and has taken the decision to start production with subcontracting companies in Romania. If cost levels remain interesting and process management safeguards quality output, Philips will have products produced in Romania in excess of several hundreds of millions of dollars by the end of next year. Products made with Philips components and semi-conductors, inserted by Philips manufacturing equipment, and branded Philips to be sold throughout the world.
This new trend in the industry is in my view definitely a new opportunity for Romania that might put the country back on the map of industrial players in Central and Eastern Europe. This positive development will obviously depend very much on whether the Romanian government will provide legal and fiscal stability and whether she will keep her word this time around! And whether the Romanian executives customs as well as local authorities will be instrumental to make this happen. Nobody has to be convinced that you can find excellent workers in Romania. Everybody has to be convinced that there is a sustainable political will to take advantage of this opportunity.
Abrogation of legally granted incentives has a direct negative impact on the cost of production. There is a direct correlation between the increase of production cost and the decrease of orders placed in Romania. The flexibility and globalisation does not permit a country to be non-competitive.
Ironically that could mean that Romania might get a second chance to prove that she is the right country to attract major players that will provide employment and know how transfer but above all that will provide an influx of hard currency; all the necessary elements to move the country closer to the realities of the global economy.
Although you can only make a first impression once, Romania will have a second chance.
Jeroen M.M. van Heesewijk is the General Manager of Philips Romania