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17.01.2007

CEE countries gaining the edge in medium/high tech sectors

  • CEE countries are clear winners in international trade, increasingly specialising in medium/high tech production
  • Good prospects for services, construction and capital-intensive goods

The Central and Eastern European (CEE) countries are definitely among the winners in international trade performance in the past decade. Within 10 years they have been able to more or less double their market share in total world import demand to 4 per cent, and similarly impressive growth has been recorded in terms of their market share in total EU15 imports. Today, the CEE countries supply 8 per cent of total EU15 imports, clearly emerging as a key manufacturing arm for the old Europe.

Such a good performance comes in the context of successful deep structural changes, says the latest sector analysis of CEE markets carried out by the "New Europe Research Network" of UniCredit Group. Over the past years, the CEE countries have experienced a transformation in their international specialisation and production structure, from more traditional sectors to new medium/high tech production. From 1995-2005, the CEE countries have gained new comparative advantages in manufacturing sectors requiring technological expertise such as transport equipment (i.e. automotive products and spare parts, ships, locomotives, etc.), and electrical and optical equipment (electric motors, radio/television equipment, optical and medical instruments, computers, etc).

Those sectors clearly emerged also at the domestic level, with their relevance in total manufacturing output increasing from 13 per cent in 1995 to 23 per cent in 2005. Such developments have been seen especially in Central Europe. On the other hand, more traditional sectors like food, textiles and leather are losing ground as competition from low-cost emerging economies intensifies.

Foreign investment has played a significant role in shaping those structural changes, enhancing the region's competitive advantages. "The sectors with the strongest foreign direct investment (FDI) are also those with the highest gains in terms of international trade market shares, so there's a clear correlation here. As the CEE region continues to attract high levels of FDI, innovation in the manufacturing sectors has been given an additional boost", says Johann Strobl, Chief Financial Officer of Bank Austria Creditanstalt and the CEE Division of the UniCredit Group.

CEE countries as a manufacturing arm of the old EU
The CEE countries have carved out a good competitive position for themselves as production locations, as can be seen from their increasing presence in international trade and the strong FDI flows.

Most recently, even the impressive results achieved by Chinese producers, which have been able to more than triple their international trade position within a relatively short time, do not jeopardise future growth opportunities in CEE. The competition between China and the CEE countries on European markets reveals some clear differences in emphasis: while China focuses its export activities on labour-intensive sectors including textiles and leather, and has developed a strong competitive position in a few capital-intensive areas such as electronics (particularly in manufacturing computer components), the CEE countries' exports now cover a different spectrum, with medium/high tech sectors representing the lion’s share. Since the year 2000 the CEE countries have achieved significant gains in international trade in the sectors of machinery, plant and equipment (+ 4 per cent), rubber and synthetic materials (+ 5.4 per cent), other non-metallic mineral products (3.2 per cent), transport equipment (2.7 per cent), electrical equipment (+ 3.5 per cent), and timber and wood products (+ 4.4 per cent).

"This development shows that the countries in Central and Eastern Europe are clearly gaining the edge on account of their flexibility, strength and know-how. The CEE countries have traditionally placed a strong emphasis on education and on the quality of the local operating environment. For these reasons, they are increasingly attracting companies that produce capital- or knowledge-intensive products, rather than companies seeking the lowest possible production costs – most likely to be found in the Far East nowadays. This is changing the pattern of production in the CEE countries", says Debora Revoltella, UniCredit Group Chief Economist for Central and Eastern Europe. Geographical proximity makes CEE an ideal location to develop manufacturing centres to serve the whole European market, as the example of the automotive industry shows.

There are several reasons why foreign companies set up operations in the CEE region. However, as CEE is not a homogeneous region, one has to look at the situation country by country. In the Czech Republic and Slovakia, for instance, it is the business environment that offers a distinct advantage. In Turkey and Poland investors also appreciate the large domestic market, while Bulgaria and Romania still offer relatively lower labour cost, in a sound and dynamic environment with a strong industrial tradition and an educated workforce.

Strengthening overall competitiveness with a specialisation model based on low labour cost is the key opportunity for sustained strong growth in the future. "A growing relevance in terms of size of the local market, the opportunity to build pan-European manufacturing centres, an educated and dynamic workforce and a business friendly operating environment – all these factors will drive future CEE growth. Maintaining the strong momentum is the real challenge ahead", says CFO Johann Strobl.

Sector outlook
"In the coming years we are expecting to see above-average growth rates in the capital-intensive industries, characterised by a higher contribution from technological sectors such as electrical and optical equipment and transport", says economist Debora Revoltella. "For example, the growth of output of transport equipment (mainly automotive) in Central Europe, as well as in Turkey and the new EU member states Bulgaria and Romania, will move in a double-digit range. The CEE region has already become a manufacturing centre for the whole European market in the sector - Fiat has production facilities in Poland and Turkey, VW in Poland and Slovakia, Audi in Hungary, Skoda, Toyota PSA and Hyundai in the Czech Republic, and Kia and PSA Peugeot Citroën in Slovakia. On top of those, Renault is already present in Romania and entering Turkey."
The construction industry enjoys a particularly favourable outlook as the positive development will be additionally underpinned by a large number of infrastructure projects: the UniCredit Group's CEE economists are working on the assumption of 9 per cent growth for the region as a whole.

The good performance of the above-mentioned sectors is likely to have a positive influence also on other related industries, among which rubber and synthetic materials and non-metallic mineral products (cement industries, glass, ceramic products, bricks and tiles) are likewise expected to benefit from this environment. The outlook for basic metals and manufactured metal products, a quite significant traditional sector in most of the countries in the region, is limited to stable, due to the widespread need for modernisation and restructuring and the strong dependence on metal prices. Prospects for machinery and equipment are promising, given the strong investment demand throughout the region.  

In the agriculture, food, beverages and tobacco sectors the current trend is expected to continue along a steady path. Labour-intensive sectors such as the textile and leather industries, on the other hand, are facing a less favourable outlook: UniCredit Group's economists forecast a downward trend until 2008 for all countries except Bulgaria, the Czech Republic and Slovakia. 

"Despite a weaker development in labour-intensive sectors, we predict an overall positive trend for manufacturing industry in Central and Eastern Europe in the coming two years. Compared with the past decade, however, the countries' technological know-how will play an even greater role. This applies also to the services sector, where knowledge-intensive high tech industries in particular will be able to benefit from good growth opportunities. One of the key challenges facing the CEE countries in the coming years will be to further expand their expertise and make use of the experience they have gained to further develop know-how-intensive areas of production", concludes Chief Economist Debora Revoltella.

 Sector Analyses Presentation (PDF; 1560 KB)
 Sectoral Analyses

Requests: Bank Austria Creditanstalt, Communications CEE
Ildiko Füredi-Kolarik, tel. +43 (0)50505-56 102, ildiko.fueredi-kolarik@ba-ca.com 
Silvia Stefan, tel. +43 (0) 50505-57126, silvia.stefan@ba-ca.com