European Facilites: Fallout from the Fallback

he queues were shorter, but the destinations more varied.

       
That is one conclusion to draw from the annual “European Investment Monitor” report from Ernst & Young. European new facilities and expansions dropped 12 percent in 2001, but it was a good year nonetheless for “gatecrashers, EU (European Union) accession countries and EU countries that bucked the trend,” says report author Mark Hughes, lead advisor for Ernst & Young’s International Location Advisory Services office in London.

       
The report tallied 1,974 investment projects in Europe in 2001, compared to the 2,243 projects recorded in 2000. The U.S. economic downturn was a major factor in the drop-off.
“This really hit countries like the UK, Ireland, the Netherlands and Switzerland – the main recipients of U.S. projects,” he says.

       
U.S. companies initiated 733 investment projects in Europe in 2001, EIM found. That marked a 26 percent decline from the 985 projects in 2000. Correspondingly, the U.S. share of total European projects dropped to 37 percent from 44 percent in 2000.

       
Intra-European ventures, on the other hand, proportionally increased to rank as last year’s largest source of total projects, accounting for 48 percent of all projects, compared to 43 percent the previous year.

       
“The good thing about it is its comprehensiveness, with no limitations around size, nature, or location,” Hughes says of the report. “We can substantiate trends, so you can clearly see the mobility in manufacturing, plus where it is ending up. A lot of things people talked about a couple of years back, you can see on the ground now. It is a wake-up call for the eastern European countries.”

Countries on the Verge

Which areas were most successful last year in holding or improving their market shares of investment projects? The report characterized them as “gatecrashers, EU accession countries and EU countries that bucked the trend.”

       
“We are beginning to see countries like Romania, Russia, Bulgaria, the Ukraine and Turkey seriously gatecrashing the party for the first time in the post-Communist era,” reads the EIM report. “Risk is becoming more manageable, with recognition of their longer-term potential for EU affiliation and market opportunities.”


       
Central and Eastern European nations set to join the EU – the Czech Republic, Estonia, Hungary, Poland and Slovenia – have also placed themselves in good position. Those nations, Hughes says, “have continuing advantages around costs, skills and, in some cases, infrastructure, [and they have] EU market access. Also, acceptance of their coming political accession to the EU and associated economic/industrial stability comes without some of the burdens of EU regulation and cost.”

       
The EIM report cites Turkey and Romania as countries that have gone from high to medium risk. They are part of a growing list of nations that want to emulate the success of the central European countries, but may still have significant barriers to entry.

       
“You have to look way back at these countries in terms of their early industrial development,” says Hughes. “People tend to forget that the Czech Republic was a center of the motor industry in the 1930s, whereas Turkey and Romania weren’t as advanced, even then. Can these places become more like Hungary and Poland, and be seen as contender locations? You still have to be fairly aggressive to go into these places. There are massive bureaucratic issues to go into Turkey … but there are also around 180 million people there, and it’s a growing market, so it has attractions in its own right.”

       
Romania’s best attribute is its potential as a base for exporting, says Hughes. Slovenia has had some success too. He says their continued success will depend in large part on how much they privatize and liberalize their markets, and how much they become integrated into the broader European economy.

       
The trend buckers include Finland – judged best business climate; Sweden – reduced cost base with advanced infrastructure and market access to both the EU and the Baltic; Spain – costs and continuing deregulation, coupled with strong market growth; and Germany – sheer economic weight. Hughes said Moody’s upgrade of Spain’s solvency rating to AAA has had a significant effect on FDI, as have similar upgrades in other countries.

       
“There is quite a strong relationship,” he says. “Hungary, Spain, Russia and Sweden all had their ratings reviewed in the last few months. It gives an indication of maturity and risk and stability, which form the backdrop for inward investment, either from a market perspective, or as a production base.”

A Crowd at the Gate

Competition is going to grow even more intense for European investments as the number of players expands.

       
“There are many more guests at the inward investment party, as the EU extends and convergence increases,” he says. “It is almost inevitable that countries like the UK and France will resize to a lower market share more akin to their overall economic weight in Europe.”

       
Setting realistic targets is a must for European areas that hope to succeed in the increasingly competitive environment, Hughes advises, with pharmaceuticals supplying the best example.

       
“Choice of target sectors is more difficult and demands a best-in-class position,” the report explains. “Pharmaceuticals typifies the issues. Many agencies have opted to target pharmaceuticals, yet it represents only 5 percent of the total. Not only are there insufficient numbers to meet all aspirations, but success also requires a globally competitive position.”

       
Hughes believes that the UK ought to spend more energy seeking investment from countries other than the U.S. But which ones?

       
“There are two types of countries,” he says. “The long punt kind are the emerging ones, the high-risk countries. Do you look at China as an origin of inward investment? India has produced projects, as has Singapore. We would argue for surgical strikes for inward investment from these countries, but projects will emerge from those types of places. Therefore, if you put forth the right effort, it’s more likely you’ll get them, because other people won’t be putting in that effort.”

       
The more established countries make up the other type, he explains, although they are not necessarily synonymous with large economies.

       
“Switzerland, Finland, Sweden … almost because of their smallness, they have to grow outside of their country,” Hughes says. “Spain, given general economic growth, is another place. Look at the classic drivers of FDI, and then look at which countries have those characteristics. Central and Eastern Europe are producing outward investment, but in near proximity, with Hungarian investment in Poland for instance.”

       
Hughes says that the raising of health taxes in the UK to 11 percent will just add to the loss of the nation’s cost-competitive position, although he notes that the relative importance of labor costs to a project varies widely, depending on the project’s nature.

       
“Given changes in exchange rates, over a three- to four-year period, the country’s cost base has moved 15-20 percent in the wrong direction,” he says. “This is just another component of the wrong direction.” He adds that R&D tax credits in the proposed national budget will help certain types of projects, but won’t benefit the broad swath of investment types.

       
On the other hand, EIM reports that Central and Eastern European nations “consistently performed well (aside from Poland, which saw a 42 percent decline). Bulgaria, Croatia, the Czech Republic, Hungary, Romania, Russia, Turkey and the Baltic States all saw their project numbers and market share improve in 2001.”

       
The Czech Republic in particular continues to perform well in the automotive component and electronics sectors, and only figures to improve now that it has put new incentive schemes in place.

       
“It has a good strong broad proposition across a range of factors,” explains Hughes. “A competitive cost base, a good supplier industry that supports putting a fully integrated plant there, a good skill base, reasonable infrastructure, good geographical proximity to western and central markets.”

       
With accession to the EU within a five-year time frame, Hughes sees nothing altering the Czech solid position … except the competitive fire it will ignite in others.

       
“It’s always the case of how competitors are going to react,” he observes, noting Poland’s revamping of its own incentive scheme. “If everything remains the same, it’s standing should get better, but the world doesn’t stand still.”

       
Among Western European countries, only Finland, Portugal and Sweden matched the Central and Eastern European nations’ 2001 performance, EIM notes. “Germany and Spain,” the report adds, “marginally increased their number of projects and market share position, respectively.” Austria has also made some headway as a launch pad for central and Eastern Europe.

       
“Austria was relatively quiet last year, but that doesn’t mean it hasn’t been establishing its position,” says Hughes. “They have set up on-border manufacturing zones, where you can try to marry the benefits of Hungary and Austria, and they seem to have been very successful.”

Find Yourself a City to Live In

Greater London, with 94 investment projects in 2001, remained No. 1 among European regions. Spain’s Catalonia region finished second with 86 projects, while Paris was third with 61 projects (see top 20 regional chart accompanying this feature).

       
Among 2001’s major upward regional movers were Stockholm, which rose from No. 16 to No. 4, and Moscow, which rose from No. 28 to a tie for No. 5. Other major regional upsurges came from Madrid, which moved from No. 22 to No. 10; Uusima/Helsinki, Finland, which moved from No. 54 to No. 12; and Stredocesky/Prague, Czech Republic, which moved from No. 35 to a tie for No. 15.

       
Even leading regions, however, saw a sharp drop-off from 2000 totals. Dublin, for example, experienced a 57 percent decrease, and North Holland/Amsterdam recorded a 56 percent decline. Even No. 1 London saw its 2001 tally decline by 48 percent, while No. 3 Ile-le-France/Paris recorded a 31 percent decline. At the same time, Madrid, Uusima/Helsinki, Moscow, Prague and Stockholm have made huge gains in attracting projects. So just what are they doing right?

       
“Stockholm and Helsinki have a similar aura around them in terms of a skills base and tech focus,” says Hughes. “And not just tech, but other types of R&D, such as pharmaceuticals … a more broad-based tech environment. Whereas Moscow is about market entry. Prague is within the Czech Republic proposition. And Madrid is more market related.”

A Future in Regions

While increasing regulations issued by the European Union (e.g. recent rules governing recyclability of durable goods) are prompting a more direct lobbying presence by many industries in Brussels, Hughes thinks that the era of one European headquarters is essentially over.

       
“The day when people said, ‘We must have European headquarters and we must have it in Brussels are gone,” he says, noting that EU directives have the effect of producing national legislation that makes EU countries more alike, thus promoting the idea of more targeted outposts in various regions, which can be located according to logistics and strategy goals, not to mention the variety of tax rates in different nations.

       
“For instance, the UK is producing a raft of employment legislation in the last five years that didn’t exist previously,” he says. “It makes it look more like continental Europe. In a sense, they’re creating a single market, eroding some of the country-level differences. National issues are becoming more about regions and cities.”

       
Such a development also means that countries contiguous to the EU are pulling into line, giving Europe much more economic size and weight than before … enough to compare it to NAFTA, says Hughes.

       
“In a sense, it’s so big, it’s more like five to eight super-regions in Europe. Much like how you might think of six to 10 regions in the U.S. You might see three regional contact centers or shared service centers in Europe, covering natural areas, like the Nordic/Baltic, the Mediterranean Arc, Middle Europe and Northwest Europe. They are a reflection of historical trading and relationship patterns.”

The Momentum of Sustainability

As for the recycling regulations in particular, Hughes has a positive take on what would seem at first blush to be a burdensome development.

       
“The recycling in some sense is producing new projects – we’re working on one at the moment,” he says. “The end-of-life vehicle recycling directive is producing the need for recycling plants around Europe. And it’s not just vehicles – it’s fridges, computers, telephones, all electrical and electronic equipment. Over the next few years you’ll be legally required to recycle it. Some of the people in the market to supply or support that demand are forming companies. Where do you site those? Do you do it within country or on some regional level? It comes down to volume, logistics and supply chain.”

       
Yet one finding of note was the relatively high percentage of projects undertaken at new locations: 59 percent of manufacturing projects, and 78 percent for R&D projects. Will that trend continue?

       
“I think what we’re seeing is on the one hand, a greater realization that people do have choices, and have more freedom to site these projects,” says Hughes. “There is less location inertia. Also, there are more locations that can actually support these activities. I would be surprised if that reversed itself. But I doubt it would go over the 80 percent mark. There’s always an existing benchmark location as an option.”

       
Hughes notes that while the Finns, Swedes and Czechs do a lot of work from the city level, much economic development work related to cities like Moscow and Madrid is performed at the national level. But everywhere, cities are on the lookout for new corporate citizens. In the U.S., it’s called brownfield redevelopment. In Europe, the code word is “urban regeneration.”

       
“It is one of these things that goes through cycles,” says Hughes. “Urban regeneration is back on the agenda, both because ‘we shouldn’t be using greenfield land,’ and because these places are usually center city areas, next to or in the middle of deprived community areas.”
Hughes noted the “almost ridiculous” number of cities represented at the MIPIM conference earlier this year, looking more for real estate investors to help regenerate localities than for straight-ahead corporate tenants.

       
“Everybody’s trying to do it,” he says. “The issue they have is the competing agendas for those types of projects. Trying to satisfy that plethora of interests is a real difficult challenge.”

       
Hughes observes that community and environmental issues have assumed ever greater importance, whether the matter at hand is investment or divestment. He cites the Michelin downsizing at Stoke-on-Trent in the UK, where a company economic development agency was actually established to look at the physical regeneration of the site and the creation of employment opportunities for the workers they were going to release. But the same idea applies to growth projects too, so that the locality senses it has a hand in the whole life cycle.

       
“For large scale inward investment, there is a growing onus on companies to connect with the community in which they are investing,” he says.

Filling In the Big Picture

Having documented more than 11,000 projects since 1997, Hughes and his colleagues are gaining ground in their efforts to demonstrate clear trends in the blur of activity that characterizes today’s high-speed project environment. But then again, while companies may be more mobile, they’re also being more careful.

       
“Let’s say, if we’re lucky, they return late this year or early next year,” he says of corporates coming back to the market. “That will be a two-year period from when a company reduced its scale of investment to when it turned it back on. Not only will its circumstances have changed, but the picture of Europe in terms of what you do where will have changed as well.
“In 2003 I think there will be some interesting outcomes. The person making a decision will have two challenges around how they configure their operations: What activities really go together or can be separated within a corporate? And how does it configure itself?”

       
Plans call for a five-year review next year, as well as the annual report. But Hughes is already seeing a different way of viewing site selection work within the broader realm of corporate and country strategy, especially during the slow crawl out of recession. Location projects are now more all-encompassing, he says, involving core strategy decisions that go to the core of a company … including whether they ought do be performing certain functions at all, or outsourcing to ready service providers and contractors.

       
“We do less and less straightforward location selection, and more strategic configuration,” he says. “It’s very much about work process flows, supply chains. How does a company configure itself? These are good business issues, but political and personal issues as well … and we do have to wear our flak jackets when we get into those discussions.

       
“All these things are happening at the same time,” says Hughes. “More people are asking themselves these questions more often than they did in the past. For an economic development agency, when somebody arrives on their doorstep, they have to know what’s going through their heads.”

       
If the growing richness and breadth of projects, sectors and regions is any indication, the first step in the reading of minds may be the reading of maps.