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t’s less than a year before 10 new countries join the European Union, as the accession votes succeed like so many dominoes falling in a line. But they are not the only places active in attracting corporations: heretofore undervalued E.U. nations and the group of nations slated to arrive next are all making a significant play for corporate facility dollars.
Like the U.S., many Euro-zone countries are laboring under budget deficits, which may next cause them to labor under E.U. sanctions. This in a region that already has to play down its labor cost and inflexibility and its high level of regulation.
“With many European countries controlled by left-wing or socialist governments where the primary concern seems to be employment protection and the protection of unsustainable pension rights, the medium-term future is in the balance,” says Douglas Blausten, the head of corporate real estate at strategic consulting arm of British firm Cyril Leonard. “The U.K. alone stands out in maintaining its pole position in inward investment, but even the U.K. has suffered a 30-percent downturn in inward investment from the U.S. With the economic downturn comes the need for raising extra taxes to bolster national treasuries, which therefore has a negative effect on pro-business legislation and activity.”
Indeed, even as London continues to lead the way in attracting European headquarters facilities, the U.K. is attracting unwanted attention for its tax scheme. Ernst & Young has warned that official government projections for economic growth are “wildly optimistic,” and that taxes will probably have to be raised in order to come up with as much as $16.4 billion.
Meanwhile, throbbing regulatory headaches continue to emanate from Brussels in the wake of the genetically modified food battle and the ongoing threat, backed by the World Trade Organization, to impose billions of dollars in duties on American imports in response to U.S. tax breaks for U.S. exporters.
The latest E.U. proposal, still in the debate stage, would require industrial chemical manufacturers to test their products themselves for safety, which figures to have a substantial effect on the export of U.S. chemicals to European users, which amounts to some $20 billion annually. The European chemical industry, led by giants like BASF, produces more than a quarter of the world’s chemical output, and is Europe’s third-largest manufacturing employer.
Sour Brew in Germany
The German economy has shown few signs of resurgence, least of all from facility investment. And the government in late April revised downward its 2003 economic growth forecast, from 1 percent to 0.75 percent. In the meantime, the exodus of homegrown companies continues, with such names as Siemens and Porsche moving units to more hospitable business climes. One of the prime reasons? An average corporate tax rate of 39 percent.
The most recent leave-taker is chip maker Infineon Technologies (a former Siemens business unit), which is looking at moving its headquarters to an as-yet-unchosen location in Switzerland, the United States, Asia or elsewhere in Europe – just as it has moved virtually all of its other functions abroad. The Swiss canton of Zug is home to offices from Siemens and fellow German giant BASF.
“We have the feeling that there are probably more stable locations than the one we are currently in,” said Infineon CEO UlrichSchumacher at a news conference. A decision could come as early as September.
This comes on top of the shift of its automotive and industrial electronics division to Villach, Austria, as the company pursues a cost reduction strategy slated to save some $551 million. But the company’s R&D operation is likely to stay at home, having received substantial subsidies in return for investing some $3.3 billion over the past four years.
Despite the gloom, Cyril Leonard’s Blausten observes that “international investors are beginning to wake up to the opportunity of buying into a German market that will bottom out soon and then start to see a gradual stabilization and good growth pattern over the next five to seven years.”
Berlin’s East City is seeing some office development activity, while nearby Brandenburg is welcoming industrial tenants, including several large-scale manufacturers. Hamburg, bolstered by its port facilities, is nevertheless suffering from both an oversupply of office space and from Germany’s overall economic struggles.
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Feast in the East
New logistics and new players level the field.
 John Patelski, president of Chicago-based A. Epstein & Sons, says there’s a reason his firm has had an office in Warsaw, Poland, for 30 years. Food processing has been an especially strong-performing sector. The company provided a suite of services during the construction of this 45,000-sq.-ft. plant in Poland, completed in 1999. 
Denmark-based LEGO is popping together a US$10.3 million plant in Kladno, Czech Republic, that will employ up to 450 people when it opens in the fall of 2003, right next door to the company’s first Kladno installation, opened in 2000. Part of the property formerly belonging to metallurgical and machining firm Vitkovice is now a thriving business park in Prague. BOHEMIAN SPACE AVAILABLE: Bolstered by a continuing cleanup investment that will total some $50 million, the 890-acre (360-hectare) former military airport in the Northwest Bohemian city of Zatec, Czech Republic, is attracting major interest from manufacturers – including one whose project promises 3,500 employees. The cleanup is expected to be complete by the end of 2004. |
Belgium and France Reforming?
International politics notwithstanding, the distinctive whiff of tax reform is in the air over France and its northern neighbor Belgium.
In December 2002, the Belgian Senate passed its corporate tax reform bill. Among other actions, it reduces the corporate tax rate from just over 40 percent to just under 34 percent, with the goal of reaching 30 percent (the current rate in the U.K.) in the near future. However, new rules have come into effect limiting tax depreciation of assets, as well as introducing a 10-percent tax on “liquidation surpluses” and omitting regional taxes from tax-deductible status.
Expect new investment in France as a result of a December 2002 law passed by the French parliament that relieves property companies from paying corporate taxes. The companies are also allowed to distribute 85 percent of their income and 50 percent of capital gains in dividends. And the companies pay a one-off exit tax on unrealized capital gains of 16.5 percent over a four-year period.
The country’s new R&D support strategy, to be implemented in 2004, plans to reduce the tax and social services burden on startups, as well as reducing taxation on all companies with research activities in the country. The plan also calls for increased public-private partnerships, thus increasing financing avenues, and for a renewal of the research tax credit for R&D expenses. France points to the $4-billion Crolles nanotechnology R&D center in the Grenoble region as the ultimate example of R&D’s power in the country, drawing on investments by Philips, Motorola and STMicroelectronics.
At the same time that France is seeking to make inroads however, the EU is seeking a roadblock on other breaks, calling the country’s special tax treatment of international headquarters and logistic centers “in breach” of EU rules on state aid. The EU Commission brought down a similar ruling in February 2003 against a Belgian scheme for “coordination centers.”
Making the Team
At press time, Lithuania was the most recent official entrant into the E.U. accession sweepstakes, with fireworks over Vilnius putting an exclamation point on the nearly 90-percent “yes” vote. A May vote in Poland and June vote in the Czech Republic were widely expected to follow suit. Erik Enroth, executive director of Invest in Sweden USA, says the proximity of the accession countries will be a big positive for his country, especially for historically and culturally related countries Estonia, Latvia and Lithuania.
“Sweden will serve as a conduit and bridgehead for companies,” he says, noting the neighboring countries’ still-developing infrastructure. “We are expecting a pattern where Sweden will be the preferred location for Baltic regional headquarters.”
“Corroborating this is there are lots of people from those countries who actually live in Sweden, which has a high percentage of foreign-language nationals,” says his colleague Goran Erikson, noting the plethora of Estonians, Danes, Finns and Norwegians. Many observers point to established corporate hot spots as continuing to attract the R&D and higher-tech operations, while the lower-wage and manufacturing plants go to the new E.U. territories.
Construction supply, of course, is a trend indicator like no other. Finnish plastic plumbing manufacturer Upnor is moving production out of Frankfurt to a subsidiary in Virsbo, Sweden, citing the main continent’s construction decline. And large multinational construction concerns in the region are moving in to acquire or partner with operations in Poland and the Czech Republic.
Already There
Poland, Hungary and the Czech Republic lead the pack of 10 EU accession countries, due to become official in the spring of 2004. But the Czech Republic hardly needs any help making an impression, and tends to be in a class by itself when it comes to accession-country industrial backbone. Led by investments from German and Japanese companies, the country attracted more than $8.4 billion in foreign direct investment (FDI) in 2002.
“The structure of investment is beginning to move from quantity to quality, which reflects in the sharp rise of projects of technology centers and strategic centers,” says Martin Jahn, CEO of CzechInvest. Among recent investors: Honeywell, Matsushita, Logica, Denso, Bosch, Black & Decker and Rieter.
According to Colliers International, GDP growth in the Czech Republic will reach 3.2 percent in 2003, as the country’s fortunes rebound strongly from the devastating floods of August 2002. Year-over-year growth is forecast at 8 percent for 2003 and 10 percent for 2004.
Even with all this apparent success, there was still 9.2-percent unemployment in 2002 in the Czech Republic. So the projects continue. Japanese air-conditioning firm Daikin will employ 100 to launch production at its new plant in Pilsen’s Borska Pole industrial zone in 2004.
“We chose the Czech Republic as the location for our investment mainly due to its ideal position in Central Europe,” announced Jiro Tomita, General Manager of Daikin Europe. “Of course, the low wage costs and broad supplier base also played a role in the decision.” Fellow Japanese firm Aisin, a maker of automotive water and oil pumps, is investing in Pisek, creating at least 70 new jobs.
The success of Prague and its surrounding area is comprehensive, from new office development in places like Andel City to new industrial projects like Toyota’s new joint venture plant with PSA-Citroen, being built in Kolin. But what better way to illustrate the building boom in the republic than with a new LEGO plant?
The Danish toy company is popping together a $10.3-million, 172,228-sq.-ft. (16,000-sq.-m.) plant in Kladno that will employ 350 to 450 people when it comes on line later this fall, right next door to the company’s first Kladno plant, established in 2000.
“Poland must remain one of the most interesting of the new arrivals,” says James Glerum, Cyril Leonard’s central Europe specialist, primarily because of its east-west trade route location and its population. “Unlike most of the other central and east European countries, Poland has cities outside its capital with populations that exceed half a million,” he adds.
In the European Cities Monitor 2002, Cushman & Wakefield Healey & Baker’s annual survey ranking Europe’s top metros for business location, Warsaw ranked 27th overall, but first among those cities being considered for future locations. The rest of the top five future locations included, in order, Budapest, Hungary; Prague, Czech Republic; and Moscow, which was tied with London for fourth place.
John R. Patelski is president of Chicago-based architecture, construction and engineering firm A. Epstein and Sons, which has maintained an office in Warsaw, Poland, for more than 30 years.
“That office has a pretty broad-based set of projects,” with a lot of work in food processing, he says. The company has also diversified into some high-profile office tower projects, as well as a software development center in Krakow.
“Warsaw is a city a lot like Chicago,” he says. “A lot of business is transacted in English.”
Much of that business these days has to do with cross-border trade and logistics issues, which Patelski says will now rise to the fore across the E.U.
“I suspect that as the EU starts to take hold and people are more comfortable with operating in a structure that’s proven itself, logistics trends are going to change dramatically in Europe over the next decade,” he says.
Patelski’s experience with a bump up in the food business is borne out by the numbers. A recently released report from Deloitte Consulting showed that overall FDI by U.S. companies was down significantly in 2002, decreasing by 37 percent to $23 billion. But the food processing sector bumped up from $1.7 billion in 2001 to $11.9 billion in 2002, driven largely by U.S. firms acquiring a foothold in Europe. Peter Koudal, Director of Deloitte Research, says a little over half of the conservatively estimated $400 billion invested overseas goes to Europe.
More than 45 of the world’s top 50 multinational companies are present in Hungary, and foreign companies employ 43 percent of its work force. Istvan Csillag, Hungary’s minister of economy and transportation, has spoken of following the Irish model in attraction and retention of corporate operations. That’s why he launched a new incentive program called “Smart Hungary,” designed to provide more tax benefits and less red tape to prospective investors. Any investment over $46.6 million receives a development tax benefit for five years, a tax-free investment reserve fund allows deferral of tax payments for up to four years and new subsidies are in place to lure companies to customized sites.
While the Hungarian government is clear about complying with EU subsidy regulations upon accession in 2004, its new program is not as generous as its former subsidy system, some elements of which may be grandfathered into the new age of EU membership.
Even as the “EU 10” march steadily toward membership, the next wave of countries is preparing the ground for its own debut. Bulgaria, with a provisional EU accession year of 2007, has made great strides, most notable in the country’s decline in inflation from 600 percent in 1997 to 5.7 percent in 2002. But the unemployment rate, though falling, was still at an average of 17.5 percent in 2002. In addition, legislation favorable to REITs was adopted in early 2003.
Among other firms, Unilever has plans to invest $11 million in the country.
Slovakia holds much promise due to its location bordering Hungary, Poland, Austria, the Czech Republic and the Ukraine. Bratislava is notable not only as the capital city, but as a road transportation hub. While much of the industrial product is outmoded, new projects like the Logisticko-Distribucny Park in Bratislava and the AIG/Lincoln Autologistic Park in Lozorno are operating and expanding. The latter was developed exclusively for Volkswagen suppliers.
According to U.S. ambassador to Slovakia Ronald Weiser, a number of U.S. companies are looking hard at the country, among them Visteon, software producer Covansys and the plastic bottle producer Plastipak. US firms already active in Slovakia include US Steel, which owns the VSZ Kosice steelworks, and the washing machine producer Whirlpool.
“Although small in population, [Slovakia] offers a number of incentives to incoming foreign investment,” says James Glerum, noting the country’s low cost of labor and high language skills.
So now that this round of accession is all but complete, where to look for the next wave?
“Croatia, in terms its attractiveness both as a tourist destination … and its attractive inward investment policies,” says Glerum. “Romania, which has always lagged behind the other countries due to its historic political mismanagement is now settling down as a proper democracy, although land laws and lenders’ rights remain difficult.”
Nonetheless, according to Colliers International, opportunity beckons in the nation known for its pint-sized gymnasts and outsized personalities. Manufacturers and other end users are flocking to Bucharest and other metros. Electrolux is moving a sizable chunk of its production from Sweden, Italy and Germany to a plant in Satu Mare. Logistics facilities and business parks like the Metav Business Park (30,000 sq. m. of office, 80,.000 sq. m. of warehouse) continue to appear.
In February, Aurel Vainer, vice-president of the Chamber of Commerce and Industry of Romania and Bucharest (CCIRB), received the representatives of Arcelic – one of the biggest Turkish producers of refrigerators. In 2002, the company bought 71 per cent of the stake in Arctic Gaiesti, a refrigerator factory. The Turkish company plans to double production at Arctic and to export 75 per cent of the output to Western markets.
The Deloitte report showed that, while globalization is usually driven by low wages, a remarkable amount of U.S.-based FDI goes to relatively high-wage countries. With 94 percent of their FDI going to fellow high-wage countries (more than $10 per hour in 1995 dollars), the site selection decisions of U.S. companies are evidently driven as much by skills and quality of life as they are by straight wages.
“Rather than focusing solely on labor costs, investors are drawn to a host country’s skill and educational levels,” notes Deloitte’s global manufacturing expert Todd Lavieri. “The political and economic stability of the nations also have become a much more important factor in the decision process of U.S. manufacturing firms.”
Some corporate real estate directors are establishing better connections with their human resources counterparts, and Ernst & Young’s Peter Ferrigno, a human capital partner in the firm’s Czech Republic office, writes in a special report that there is good reason. With free movement between member states, businesses must address some key questions.
“Do you bring the workers to the work, or move the jobs to their countries?” he asks. “How do you retain key workers in Accession Countries, if they want to go to the ‘old EU’ to earn more?”
Real Evidence of Bio-Growth
Headaches aside, several European countries have built on their solid industrial bases with fresh injections of biotech and pharmaceutical business.
Goran Erikson of Invest in Sweden says Sweden is seeing a lot of interest from biotech in part because of the country’s advances in stem cell research, but also because of its established leadership in IT infrastructure, modeled by the Stockholm suburb of Kista. For years, the southern part of Sweden has been known for its medical innovations and companies, which stretch into Denmark as well. Colleague Erik Enroth says the pullout of R&D from Uppsala to New Jersey by the former Pharmacia (now part of Pfizer) was a blessing in disguise.
“Everyone thought it would be a disaster for the city,” he says. “But all the researchers did not move to New Jersey, and actually many PhDs stayed behind. They all had pet projects in their desk drawers. More or less overnight, more than 70 companies were started in the biotech area, and the town is prospering like never before.”
Europe still finds itself lacking in the critical mass that makes clusters like San Diego’s work. But a factor contributing to that mass is the industry’s increasing consolidation. After just 14 pharmaceutical or biotech deals in 2001, there were 63 in 2002. Among several up-and-comers are a handful of Swiss companies, including Basel-based Lonza Group, which is now constructing a new $77.3-million biopharma plant in Visp that will create more than 100 new jobs.
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Massachusetts-based Genzyme is in the process of building several facilities throughout Europe, with operations being established in Ireland, England and Belgium, all in support of the production of Renagel, used for the treatment of renal disease. The $132-million project in the Belgian city of Geel, east of Antwerp, will double employment from 100 to 200. The work will be mechanically complete in mid-2004.
“Our business is focused on different diseases,” says Mark Bamforth, Genzyme’s senior vice president for corporate operations, who says the company faces a complex operational challenge in order to have different technologies available for different products. “Two buildings – the second is in construction – would take output from our Belgium plant, as well as back up the facility in Massachusetts,” he says. “Our approach is to try and build around our centers of excellence on different sites. Ireland is becoming a hub where many of our future products will be finished.”
The location arose directly out of product strategy, when Renagel was identified as a mainstream product for kidney dialysis patients rather than a niche product. With an immediate need for a significant increase in capacity, Genzyme tried contracting out of its UK plant, but experienced difficulties with both technical specifications and with conveying to the third-party provider the company’s sense of urgency. Then serendipity took a turn.
“We took over a plant that was making eyeglasses, and got a tremendous amount of assistance from the Ireland Development Authority [IDA],” says Henry Fitzgerald, vice president of engineering and facility development.
Among the head-turning attributes of IDA’s friendly one-stop shopping approach: a 99-year lease, with clauses turning the property back over to the IDA if things don’t work out; and a 10,000-euro ($11,744) payment to the company for each employee it hires and retains for one year. Right now there are 100 people on site, with plans for the payroll to reach 125 by the end of 2003.
“We were able to save about a year by converting that facility for the manufacture of tablets,” says Bamforth. He further points out the country’s established reputation in the field, with strong government support, a stable fiscal structure and an agreeable corporate taxation rate of 12.5 percent.
Around $140 million will be spent in Waterford, where installation of a second-phase vial-fill line is adding 100,0000 sq. ft. (9,290 sq. m.) to the original 125,000-sq.-ft (11,613-sq.-m.). plant. Instead of being entirely climatically controlled, the fill lines will be enclosed in a bubble of sorts. That phase is about 60-percent complete, with mechanical completion expected in October 2003 and validation one year later.
“This facility, and our new plants in the U.K., will enable us to assume greater control over product supply and will lead to improved product margins,” says Bamforth.
Change in Plans
The scope of the Belgium complex has embraced part of what was a planned build-out of capacity in the company’s headquarters town of Framingham, Mass., as Genzyme, along with the rest of the biotech community, sought to build up its capacity of monoclonal antibodies.
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A related motivation was not market-related at all: when the company’s Dutch joint venture partner in the making of a product to treat the deadly Pompe disease went into receivership in late 2001, Genzyme was morally bound to proceed with continuing production of the drug.
“We have nine patients who are alive because of the product coming from the pilot plant,” says Bamforth. “Therefore we had an obligation to ensure the ongoing operation of that facility. So we bought the facility, kept 100 employees, and we realized we could implement part of the Framingham expansion in our facility in Belgium.”
As in Ireland, the takeover of the plant saved Genzyme about 18 months in ramp-up time.
“There are products in queue, and any one of 10 to 15 is likely to be a candidate for that facility,” says Fitzgerald. “We’re investing heavily – 120,000 sq. ft.[11,148 sq. m.], and we’re going to add to that by constructing another 40,000 sq. ft. [3,716 sq. m.] We’re going to make it into a first-rate purifications facility.”
Different Standards, Different Needs
As a result, none of the original Framingham plan has gone forward, although Gerraghty says there is space to do something when the need arises.
“We own two properties adjacent to our existing properties, and we’re still evaluating our use of that space,” he says. “I have no doubt we will be constrcting something because we have ongoing needs.”
The plants in both Ireland and Belgium had similar power and water needs, as well as sensitivity to environmental impacts. Fitzgerald says water is never an issue in Ireland. But in Belgium, water supply and management, like a lot of things, is different.
“Among things we added cost for was we have to store enough water on site so that in the event of an emergency we could pump enough water, because there isn’t enough water pressure,” he says. “That’s because there haven’t been industrise that use quite the amount of water biotech companies would typically use.”
That’s about 100,000 gallons a day, with all of the effluent needing treatment. Fitzgerald adds that such buildings aren’t traditionally sprinklered in Belgium either. But in both countries, he says, difference does not amount to difficulty.
“We found the proces of dealing with the local authorities clear,” he says. “There were no agendas we had to interpret.”
