Where to Set Up a Factory in Europe
Recently I spoke with an executive at a German EMS manufacturer who is considering opening a subsidiary in Eastern Europe because of the pressure on prices he is experiencing in his market. He asked me what my preferences would be. I told him that most companies try to be as close to their home country as possible. The EMS companies in Scandinavia focus on the Baltic States, in Germany, Austria and Switzerland they focus on the Czech Republic, Hungary and Slovakia. The main reason is the close proximity to the western end markets with low costs of transportation for the finished goods and to the ease of getting there and back on the same day from the mother company.
That might be an argument, but the reality is the cost of labour. The two main cost blocks for EMS companies are material costs and labour costs. Material costs are only variable to a very limited extent, depending on quantities purchased. Labour costs vary between 20 and 30% of revenues, depending on manufacturing depth and the degree of engineering. Looking at hourly labour costs, which consist of wages/salaries and (direct/indirect costs) non-wage costs such as employers’ social contributions, the European average for the 28 EU-Member States is €25.40. Denmark has the highest costs with €42.00, and Bulgaria the lowest with €4.40. Norway, not being part of the European Union, even has average costs of €50.20 per hour.
Low wage earners, defined as those employees earning two thirds or less of the national median gross hourly earnings, get €2.00 per hour in Romania, €1.70 in Bulgaria, €3.60 in Hungary, €4.60 in the Czech Republic and €4.90 in Estonia. For comparison, it is €15.70 per hour in Germany and €25.50 in Denmark. This is a complex subject and whoever would like to delve further into the details is welcome to contact me.
How are EMS companies performing in the Eastern countries? Let us just compare Estonia with Romania, since Estonia’s figures are about twice as high as those of Romania. In 2016, 20 EMS companies in Estonia had an average return on revenues of 3.7%; three out of twenty companies reported losses for 2016. In Romania, the average return on revenues of 27 EMS companies in 2016 was only 1.5%. Seven out of the 27 EMS companies reported losses, with one shutting down as a result. Five out of these seven companies had been reporting losses for the last four years. Three of these five companies were big international EMS companies. One global player started business in 2013 and did not manage to make a profit in the ensuing three years. If we leave aside the figures of these four international players, the average return on revenues for the remaining 23 EMS was 3.3%. My opinion: these big international EMS have spoiled prices and now cannot manage to get back to making a profit. To reduce costs, the first thing that they should do is fire the managers of these companies.
Productivity, measured in revenues per head is another criterion to be compared. Estonia had 118k euros per head in 2016, and Romania 91k euros. It is a complex subject requiring many facts and figures. Close proximity should not be the main reason for setting up a factory in another country.