On May 1, ten countries joined the European Union, the largest expansion in the EU's history, which now numbers 25 member countries. Significantly, most of the countries joining the EU last month were formerly part of the Soviet bloc, and their accession into the EU has been hailed by some as the end of the Cold War and the beginning of a new day for a united Europe.
While for the moment at least, political differences have been set aside, the creation of a truly unified EU faces many roadblocks. E.F. Riccio, a professor at the Ukrainian Academy of Foreign Trade, agrees with most observations that the infrastructure in many of the new member nations will require significant improvement. Those nations are at least in a better position than the former Soviet Union because they maintained some of their old culture under Soviet rule and they kept things up to date and under repair when the Soviets pulled out, he says.
“There are no simple questions in this part of the world because the answers are always very complicated,” observes Riccio. The economies and politics were inextricably linked in the Communist bloc, and industrial development was not always logical. Factories were located in remote areas during the Cold War era in part because they would be far from an American bomber attack and also because the Soviet Union had put many of its citizens in those countries and it needed to employ them.
Some factories were simply abandoned when the Soviets left, so their condition and location may be questionable. In many cases, the supply chain dissolved when the Soviets left and some countries like Estonia returned to their traditional agricultural economy. Reindustrialization has taken place on a more logical scale in Estonia and other countries, explains Riccio, and in a manner suitable to the resources of the regions.
Human resources and logistics talent are key factors for any company expanding into the new EU countries or sourcing in those countries. Unemployment rates in some of the countries are well into the double digits, suggesting a substantial supply of cheap labor could be available. But how qualified is the labor pool throughout Eastern Europe?
According to Riccio, there have been substantial changes throughout the education system, and in many of the countries, the qualifications of university graduates are at least on a par with Western European countries. The old system of “I will talk and you will listen” has been replaced with a more interactive teaching method, says Riccio.
Gone also are the Marxist economic models. Employers told universities they were not satisfied with graduates who had only a narrow theoretical understanding of a discipline. “What they need now are students who can learn something on their own,” Riccio explains.
“The younger generation has not been educated under the Communist schools,” says Jacques Clay, a Paris-based executive with Open Harbor Inc., a provider of global trade management solutions. The universities are producing a high caliber of engineering talent. “They really want to work, and they want a good standard of living.”
That said, the wage disparity can be huge. In some of the Eastern countries, workers make as little as one-tenth the wage of a worker in Germany or the U.K., Clay notes.
Ireland-based Henry Rooke, director of outsourcing logistics for Lucent Technologies, feels education in the new EU countries can be every bit as sophisticated as the original EU countries. It does vary among the countries, though, he cautions.
“It's very difficult to generalize, but some of the [new EU] countries do have very competent education programs and a well educated work force,” Rooke says.
“Logistics companies can be a catalyst for change in Eastern Europe,” observes Dave Kulik, global managing director for TNT Logistics. “We already understand the market, we understand the rules, and the rules are now consistent with the rest of Europe. We know the labor market very well, and we certainly understand the infrastructure there.”
Of course, the definition of “logistics” itself is an important point to consider. In some Eastern European countries, logistics is still equated to transportation, and more specifically, trucks.
“It's fair to say,” Rooke notes, “that the logistics infrastructure in some of the Eastern European countries is not as well developed as in some of the other EU countries. However, in terms of being able to find the talent to apply towards that, it's there.”
Logistics companies and motor carriers are revisiting their hub and spoke system that is now concentrated in the western parts of Europe, says Andreas Giger, vice president of operations-managed services Europe, for trade management solution provider Vastera Inc. Some have already started building hubs in Poland and the Czech Republic to serve the eastern part of the European Union.
There is no shortage of capacity in the eastern part of the EU, says Giger. In fact, some of the motor carriers have begun to announce new, shorter transit times into the acceding countries. Giger offers the example of Frankfurt, Germany, to Slovakia, which has been reduced from seven days to 48 hours.
Most goods movement around Europe is done by road transport, notes Lucent's Rooke. It's a matter of realizing that transit times can be a little longer than the mileage would imply due to the state of the infrastructure. Rooke has no problem finding quality rolling stock, including air ride suspensions, that is important to the sophisticated electronic devices Lucent is shipping.
Though he's quick to point out that Lucent's product is not a typical target for cargo theft, Rooke acknowledges measures have been taken to counter some of the cargo theft problems that plagued the Eastern European countries when they first became independent nations. Tracking devices and physical security have become common practice among European technology companies, and the same services and capabilities are available to other shippers as well.
Much work remains to bring the new Eastern European members of the EU up to the levels of logistics proficiency the U.S. and Western European countries are accustomed to, according to Rooke and others inside the European market. There will be a level of simplification and duty savings, but U.S. companies that have moved plants into the new EU countries aren't sure what it will be, says Michelle Unger, director of EU sales for Vastera.
“There's no difference between moving into a Eastern European country and moving into any other country that was new to Lucent,” says Rooke. He, like others who have been operating for years in Eastern Europe, urges companies to do their due diligence and look at infrastructure, labor availability, access and all of the other things they would examine in any new expansion.
The physical components of a logistics operation or logistics support for manufacturing are the most obvious places to look. Rooke notes that transportation capacity is easy to find. Larger operators are already present in the various markets, but there are also smaller carriers that operate in local markets handling shorter hauls. Lucent has found it beneficial to use these carriers.
Rooke points out that many of the larger operators also use these local carriers under an agency agreement. They gain local capacity and knowledge of local conditions. As the market develops, these large organizations will have their own presence in the more lucrative areas.
Anyone looking to expand into Eastern Europe needs to understand what the capability is within each country in terms of infrastructure, Rooke stresses. For non-EU countries you might deal with, understand that trade barriers may still exist or may have implications for your particular business. LT
Europe's most highly educated cities
1. London, U.K.
Source: Buck Consultants International
A somewhat contrary view
Manufacturing operations began moving into the European Union's newest member nations in the 1990s, driven by lower labor costs, says Ron Roust, Holland International Distribution Council. Logistics firms followed those manufacturing operations, but most of the flow of goods has been to Western European nations, not the local markets where the factories were located.
Much attention has focused on the 25% increase in population that joined the EU on May 1, 2004. But the gross domestic product (GDP) has increased only 4.5%, Roust points out. It is a small and fragmented domestic market. So, distribution operations have been put in place largely to support manufacturing.
The Netherlands still has 51% of European distribution centers, Roust notes. Central distribution operations have not yet moved into the eastern nations. That is not likely to happen until the GDP increases significantly, he continues.
There has been some progress on that front. Since the acceding nations began negotiating entry into the EU, labor costs have gone up 15%, notes Roust. It will take as long as 10-15 years for labor costs in countries like Poland and Hungary to reach the level of Western European nations. That has led some of the new EU members to lower statutory tax rates to attract companies to locate there.
In addition to the lack of a large local market, infrastructure and less reliable transit times make the Eastern European nations less attractive for centralized distribution operations.
Roust expects The Netherlands to retain its present dominant position in logistics because, as he says, it offers the three things companies look for when deciding where to locate distribution operations: location, infrastructure and third-party logistics services.
Enlargement of the EU — for better or worse
Here are a few of the anticipated positive and negative impacts of the recent enlargement of the European Union.
• Customs changes will provide easier and quicker access to these markets, whether intra-Europe or from other parts of the world.
• Infrastructure is less developed.
Who's new in the EU?