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hen SYKES, a world leader of customer care management (CRM) solutions, decided to locate a call center in Sveg, Sweden, the decision was based on the fact that SYKES could service all of Scandinavia from this low-cost, remote location. SYKES typically locates facilities in remote areas. Helping Sveg land the facility was a young, educated and available work force; the fact these people had few other job opportunities; inexpensive real estate; and some airport service.
SKYES is increasingly typical of U.S. companies that want to take a regional approach to operating in Europe. In today’s economy, location criteria do not necessarily point companies to the traditional, known places such as Europe’s major cities. As SYKES executives found, in Sweden at least, education levels through the whole nation are high, as is information technology (IT) penetration. And there can be advantages to going outside major commercial centers and embarking on a regional approach rather than one that is country-specific or pan-European. Of course, much depends on the specific industry and corporate goals.
According to consulting firm Ernst & Young (E&Y), which studies corporate location trends, companies are shying away from the concept of the pan-European headquarters in favor of setting up shared services centers. “Less is being put into a headquarters, and higher-value activities, such as legal and accounting services, [are going] into shared service centers that once would have been labeled a headquarters,” says Mark Hughes, executive consultant with E&Y’s Location & Real Estate Advisory Services practice in London (www.ey.com/location). “This is very interesting in terms of what it might mean for locations,” he adds. “Whereas call centers might go to remote, regional places, these locations may not readily be put on the list for shared service centers or ‘centers of excellence.’ Companies might not be able to attract their legal or financial people to the remote areas,” Hughes says. “So these centers still go to major locations.”
While Barcelona, Spain, was the flavor of the year for shared service locations in 2000, companies are now considering Prague, in the Czech Republic, or Budapest, Hungary, when considering lower value shared service entities. “The issue is to drive down costs,” Hughes says.
Sweden is promoting its location attributes aggressively. Kai Hammerick, director general of Invest in Sweden, maintains that Sweden is particularly competitive for high-valued work. “Once a high-cost country, Sweden now offers some of the most competitive cost advantages in the European Union (EU),” he notes, pointing to a recent surge in regional headquarters announcements. Further arguments in favor of Sweden come from the Global Leaders of Tomorrow (GLT), a network of young business executives that, in conjunction with consultancy A.T. Kearney, has developed a “future index” that indicates that Sweden is the EU country best prepared to tackle the challenges of the future. The index considers such factors as visionary leadership, level of education, electronic infrastructure and the use of the Internet.
FDI Trends
E&Y’s Location & Real Estate Advisory Services group is monitoring a number of key trends in Europe relevant to projects of all types: logistics, new and expanded facilities, headquarters, manufacturing, call centers and facilities for research and development as well as and sales and marketing. Year 2000 results of the firm’s European Investment Monitor database tallies show 2,243 new, expanded or new co-location facilities in Europe, up from 2,135 in 1999. The total includes 1,616 new locations, 502 expansions and 125 new co-locations.
Top on the list was the United Kingdom with a total of 575 new and expanded locations, followed by France (353), Germany (170) and Spain (148). “Overall, at 44 percent, U.S. investment was equal to the whole of the European Union in terms of number of projects,” Hughes reports. “This is overwhelmingly important. The United Kingdom is undoubtedly the number one destination compared to other locations in Europe,” he says, with 26 percent of all projects recorded.
Poland saw the largest increases in the Year 2000, with automotive, electronics and manufacturing firms securing locations there. Although Catalonia (Barcelona, Spain) and Lombardy (Milan, Italy) saw increases in investments, Hughes points out that U.S. companies generally are not going there. “They still like London, Paris, Bavaria, Amsterdam and Ireland,” he says.
“Last year, software was the largest profile industry sector,” says Hughes. “The United States encompassed 70 percent of those projects. We are waiting with baited breath to see what happens this year. The United Kingdom, Ireland, the Netherlands and Switzerland were over-reliant on U.S. investments last year, particularly in software, electronics and the business service sector for sales and marketing activity.”
Breaking E&Y’s list down by industry, one finds that sales and marketing sites were the primary project type with the United Kingdom heading the list for foreign direct investment in this group (198); France was second (85), followed by Germany (74) and The Netherlands (36). Next came manufacturing, with France winning 62 new locations, followed by the United Kingdom and the Czech Republic in second place (52), and Hungary (45). Top headquarters locations weighed in with the United Kingdom claiming the top spot (94); Germany placed second (13), followed by Switzerland (12) and France (11). R&D facilities went mainly to the U.K. (37), France (18), Ireland (17) and Sweden (15). For logistics locations, companies preferred France (27), the U.K. (18), The Netherlands (12) and Belgium (10). Calls centers found their home primarily in the United Kingdom (33), followed by France (14), Germany (9) and Ireland (8).
Low Cost Centers
E&Y’s Hughes points out that if a firm is located in the United Kingdom, but is looking for lower-cost operations, it would need to go to Eastern Europe to make a big difference. “We are seeing a demonstrated, growing interest in Eastern Europe cities,” he comments. “There is not a lot happening yet, but people are looking at Prague and Budapest.” American firms are less interested in setting up manufacturing operations in Europe. Nevertheless, France outpaced the U.K. for attracting manufacturing facilities. Hughes points to France’s high productivity, excellent infrastructure, and the fact it is in the Eurozone as reasons for the activity. “Even with a 35-hour work week, companies are able to push up productivity, thereby making France more attractive,” he says.
Whereas Germany used to be the primary location for manufacturing 10 years ago, Hughes says the country has experienced significant merger and acquisition activity. “Now many of these companies want greenfield sites, but with a low cost base,” he says. “This means Eastern Europe.” Sites on the western end of Eastern and Central Europe such as the former East Germany, western Poland and the Czech Republic that have better access to Western Europe’s transportation networks are preferred locations.
Rene Buck, vice president of The Netherlands-based consulting firm Buck Consultants International (www.bciglobal.com), points out that labor costs in Central and Eastern Europe are one-fourth the costs of those in Western Europe. “For that reason, it makes sense for companies to relocate there,” Buck says. He points to the automotive sector and electronics parts manufacturers as prime industries.
Once such countries as Hungary, the Czech Republic, Poland and Estonia joint the EU, they will be able to offer incentives that will make their locations even more attractive. Overall, the trend in Europe today is to give fewer incentives. “Countries such as Spain, Italy and Ireland are very worried about the expansion of the EU, because those subsidies will shift to those new entrants,” Hughes points out. For this very reason, Ireland recently voted against these countries’ admittance into the EU, therefore delaying their membership. “But overall, talks are going reasonably well, so the risk is known and quantifiable than going farther afield,” Hughes says.
Portugal is sometimes mentioned as an alternative low-cost country. A report recently released by Eurostat, the statistical office of the European Communities in Luxembourg, revealed that Portugal continues to have the most competitive average hourly labor costs in the EU — US$6.27 per hour compared to Ireland at $14.52; Spain, $13.71; and Greece, $10.57. Rene Buck is quick to point out that in the past large projects such as those of Siemens and AutoEuropa located to Portugal. “But now such projects favor Eastern and Central Europe,” he says. “Portugal is too much on the periphery of Europe. Labor costs are definitely lower there, and financial incentives are available. But these do not compensate for its problematic geographic location.”
Yet Jean Claude Goldenstein, managing partner of Harrison, N.Y.-based JCG International, maintains that unlike Eastern Europe countries, Portugal’s EU membership offers advantages. “If I were an executive, I would stay within the EU,” Goldenstein says. “Portugal offers no political risk, not currency risk and Europe’s best labor rates.”
Exchange rates continue to play a significant role in economic development. “The euro’s 20 percent depreciation against the U.S. dollar and the British pound has made Eurozone countries lower cost without having to do anything,” Hughes states. This, of course, creates an argument against locating in the United Kingdom, which not being within the Eurozone, now is at a cost disadvantage. Overall, E&Y is finding that changes are in the wind for today’s European investment climate. Last year everything was about people, speed and the Europeanization of Europe,” Hughes says. “Now conversations center on efficiency, reducing costs, and trimming a company’s cost base.”
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