CEE & Germany complementary
Germany’s geographical location at the heart of Europe has long ensured close links with Central and Eastern Europe (CEE). Germany is the largest investor in CEE while investment by CEE companies in Germany is now starting to increase. Economic growth in both Germany and CEE is faster than the rest of the eurozone, which could reinforce the links between the country and region in the coming years.
“CEE remains attractive as a manufacturing location for Germany,” explains Thorsten Mehltretter, head of clients at ING. “Its proximity to Germany and Western Europe, skilled labour force and relatively low labour costs (compared to Germany) make it a good outsourcing location. Moreover, there is also growing interest by German companies to target local consumers in CEE, given economic growth in the region.”
The world and the differences between countries and regions are becoming smaller and smaller. This is even more apparent in the world of business. Most large corporates are international players. In a globalised world, local knowledge seems less important. But is this really the case? In a globally commoditised world, the difference might be in the details and having the right connections to tie the knots. In this series of articles on international ties and connections we set out to present our views on how connecting countries, companies and people can help corporates to realise their ambitions.
Until 2009, the Czech Republic was the largest recipient of German investment but since then Poland - which uniquely in Europe did not suffer a recession as a result of the financial crisis of 2008 - has overtaken the country. Slovakia is the third largest investment destination for German companies. (Source: ING Trade Study 2013.)
German companies expanding in CEE adopt a number of approaches including growing their supply chain through partnerships, mergers and acquisitions and organic growth. From a supply chain perspective, CEE is broadly competitive with Asia, according to Mehltretter. “German companies need to weigh up the benefits of CEE given its proximity and skilled labour force,” he notes. “They can outweigh cost advantages of manufacturing in Asia.” Martijn Kamps, head of corporate and FI lending Germany at ING Commercial Banking, adds that the growing consumer market in CEE adds further to the region’s advantages: “It can make sense to both manufacture and sell in the region.”
The increasing pace of many sectors also favours CEE. “The fashion industry has traditionally been in Asia because of low costs but time-to-market is shortening,” says Kamps. “Therefore, there isn’t time to wait six months for a container to arrive from Asia. As a result, production in shifting to Turkey. It has higher labour costs but the cost is worthwhile because of the time-to-market benefits companies can enjoy.”
Stefan Verhoeven, head of corporate and FI lending Central and Eastern Europe at ING Commercial Banking, says that there are also potential quality benefits to producing in CEE rather than Asia. “LCD TVs are assumed to be an Asian business but we know one Slovakia company that attracts orders from European retailers for quality reasons, for example,” he notes.
Where investment is targeted
The car sector in CEE has received huge levels of investment from German companies since the early 1990s. In addition, industrial companies have also spearheaded the expansion of German companies into CEE. “There is a long traditional of expertise and innovation in engineering in Germany and those companies have increasingly sought manufacturing partners in CEE to lower their costs,” says Mehltretter.
There have also been notable CEE successes by German retailers. “German retail is extremely competitive so those companies that have been successful in Germany are able to use their know-how to replicate their strategy in CEE,” says Mehltretter. “The financial crisis created a shift in CEE consumer behaviour and budget retailers - the strongest of which are from Germany - have been able to flourish as a result,” adds Verhoeven.
Given high energy prices in Germany, partly as a result of the government’s commitment to phase out nuclear power and instead rely on renewables, opportunities are emerging for energy production in Romania, Slovakia and Hungary. “There is a need to upgrade distribution networks and other capabilities to make this a reality,” says Verhoeven. “High energy costs could also be a driver for manufacturing companies from Germany to expand into CEE,” adds Tibor Bodor, head of corporate clients, Central and Eastern Europe at ING Nederland.
Investment between CEE and Germany is no longer flowing in one direction only. Some CEE companies are expanding into Germany and Western Europe in search of new growth opportunities - most notably Russia’s Gazprom - and high spending consumers. Other investors seek the relative stability of Germany compared to their home markets and are buyers of equities and real estate.
While CEE can be broadly characterised as being supportive of entrepreneurship, it is important to consider the diversity of CEE. “Every country has different characteristics,” says Verhoeven. Bodor agrees that CEE can more usefully be seen as a number of distinct groupings of countries. “For example, there are faster growing emerging market countries, such as Kazakhstan, Russia and Turkey, and a slower growing Central European group of countries.”
While much of central Europe may be experiencing a slow recovery, it offers great opportunities for German companies because it is part of the EU. “Regulations, tax and culture are much closer to that of Germany and that makes it attractive,” says Bodor. “When Daimler-Benz invested in Hungary, for example, it was attracted by more than just cheap labour and straightforward logistics given the proximity to both buyers and suppliers: EU membership was crucial.”
Given the diversity of CEE, Kamps says that companies expanding into the region need a clear plan. “Serious work is required,” he says. “Language can be a barrier, as can distance. Companies need to take into account the divergent histories of countries across the region. German companies produce excellent products but there have been failures because the right infrastructure hasn’t been put in place or the cultural differences haven’t been understood.”
German companies need to ensure that they understand consumer behaviour and the implications of differences in GDP per capita in different markets and tailor their strategy accordingly. “A car manufacturer may not be able to sell high specification models in certain markets, for example,” says Verhoeven. “Also retail preferences differ across the region and it is necessary to build up an appropriate network that takes into account the real estate market.”
Mehltretter says that depending on the type of investment it can be effective for German companies to involve multilateral agencies such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). “It can improve the perception of an investment locally,” he says. Equally, German companies should make sure they take advantage of support from German embassies and Chambers of Commerce. Companies in CEE may find that support from Germany’s export agency Euler Hermes, particularly in the form of buyer credit cover, can prove instrumental in lowering transaction risks.
For both German and CEE companies, ING, which has been in CEE for 20 years and has remained in the region during difficult times, can offer a wealth of support and guidance to expand into new markets. “It is important to be on the ground to understand local requirements,” says Verhoeven. “Companies need a local partner to help them work through the challenges. We know that a one-size fits-all approach doesn’t work in CEE because we’ve worked through all those challenges ourselves.”
ING offers a full range of payments and cash management (PCM), lending (including in the syndicated loan market where ING is ranked as a leading bookrunner, and support for multilateral lending from entities such as the EBRD and EIB), debt capital markets services, M&A advisory, structured finance and financial markets (including foreign exchange) services in 11 countries in the region as well as in Germany and across Western Europe. “Where there is a local currency, it is especially important to look at lending, PCM and risk management together so that risks can be hedged effectively,” says Verhoeven.
ING services clients in their home country through a dedicated parent account manager (PAM), who works closely with local account managers (LAMs) in each country. “A corporate treasurer knows they can rely on their PAM to ensure that a facility they need in Hungary, for example, is put in place on schedule. Our people, their reliability and their ability to deliver for clients is what differentiates us,” says Mehltretter. Bodor adds: “Organisationally, our structure and processes are straightforward and client-focused. While our knowledge is specific to every market, our model and products are harmonised so the client knows what to expect wherever they work with us.”