rnst & Young's six-month update to its annual European Investment Monitor report shows a slight rise in projects compared to the same period in 2001, driven by the resilience of the manufacturing sector, particularly in the automotive and software sectors. Unemployment in the Euro Zone's 12 countries hovered at 8.3 percent at the end of August. Scheduled tax cuts in both Germany and Austria have been delayed because of costs related to the massive August floods. But the business of making things continues to push onward.

Mark Hughes

"Probably against most expectations manufacturing has actually increased its number of projects in absolute and relative terms compared with Jan-June 2001," reads the summary. "Project numbers have increased by 49 and market share from 40 percent to 48 percent." That's up from a low of 34 percent as recently as 2000.

"It's not what you'd expect, is it?" says Mark Hughes, lead advisor for Ernst & Young's Inte rnational Location Advisory Services in London. He says manufacturing may just be steady while all else dwindles. "The way we're looking at it is the projects have plateaued," he says. "You can spin that either way."

There were 923 announced projects from January through June of this year, slightly up from 912 in 2001. The market position of the United States as an investment source continues to weaken, from 42 percent of projects during the same period in 2001 to just 32 percent this year. Much of that recession has been usurped by projects originating from countries like Germany, France and Italy.

Hughes says many of the manufacturing projects are expansions, rather than greenfield projects. "My guess is they are a product of rationalization," he says, "and expansion of existing operations in Central and Eastern Europe."

Destinations Moving
Toward Accession Zone

Indeed, the clusters there have become entrenched enough that not only is a higher proportion of new projects located in the EU-accession region, but 44 percent of all manufacturing expansions also occurred there.

It is merely the continuation of a climb that started from a low point of 18 percent in 1999. Of the 11 projects creating or safeguarding more than 1,000 jobs, nine were in non-EU countries. More than 50 percent of German projects went to non-EU countries in Central and Eastern Europe. That trend is in pronounced contrast to U.S. interests there: while the U.S. is still the largest source of European projects, at 294, only 13 percent of them were located in that growing region of Europe.

"Their arrival in the EU really is on the horizon now," says Hughes of the 10 accession countries: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Malta, Lithuania, Poland, Slovenia and Slovakia. Expansion in those nations is also a natural consequence, now that the base of operations there is so much greater.

While the French continue to invest plenty right at home (a 13-percent share of projects), they also have increased their outward investment, reaching their highest level in the past five years at 6 percent of all projects.

The United Kingdom still leads the pack with 15 percent of projects, or 135 during the examined period. But the hot spots are all in the east, as EU-accession countries like Hungary, Russia, Poland and Lithuania see a pronounced rise in projects and interest, all with more than 40-percent growth. Romania has seen its market share rise from less than 1 percent a year ago to 4 percent in 2002.

The forthcoming $132-million Rolls-Royce facility in Inchinnan, a rendering of which is shown superimposed on the brownfield site, will make components for the company's compressor systems division. The site was chosen in part for its proximity to Glasgow Airport.

Automotive and Pharma
Lead Sector Surge

Although software still leads the way with 149 projects (nearly a third of those going to the U.K.) the automotive sector "has proved to be one of the most resilient sectors," reads the update, putting forth 134 total projects, or 14 percent of the total. For the first time, the Czech Republic has become the most popular destination for those projects, driven by component manufacturers, while the U.K. retains the lead in assembly projects. And it comes as no surprise that the telecom (down 70 percent) and electronics (down 59 percent) continue to experience the largest letdown.

"The Czech Republic just storms away in auto," says Hughes. Among recently announced Czech projects is the US$11.7-million investment by Aisin Seiki in a new auto parts plant in Pisek that will employ 70.

The decision in August by Swiss giant Novartis to build a $214-million plant in Grimsby on the northeast coast of England was the latest inoculation against a downturn in the steady biopharma sector.

"In terms of inward investment, it probably is not the strongest growth sector," says Hughes, "but currently it's one of the more resilient ones. It's a high priority for the EU, which is making a huge push to be competitive with the U.S. and Japan."

A program called the Sixth Framework, to be officially launched in November of this year, provides billions of euros to support R&D within Europe, with pharmaceuticals one of the primary sectors slated to receive funding.

The U.K. is bolstering the pharma growth with the establishment of two genetic lab facilities and six "Genetic Knowledge Parks," centers of excellence that will bring together on a single site, or in collaboration between sites, the expertise and talent of clinicians, scientists, academics and industrial researchers.

Cities On the Make

As for metros, "Prague, Moscow, St Petersburg, Bucharest and Heves (Hungary) all experienced a significant increase in number of announced projects ? in most cases by 100 percent over the same period in Jan-June 2001." The Rhone Alps area of France (dominated by Lyon) experienced one of the largest increases in projects, while Stockholm had the most noteworthy downturn. Heves, to the northeast of Budapest, has seen manufacturing investments from Philip Morris and Robert Bosch, benefiting from its "close to Budapest but not in Budapest" status. The presence of two Russian cities on that list is also a highlight worth noting.

"Generally our Russian advisors are saying they are feeling an upward movement in inward investment, though not necessarily in any statistics," says Hughes. Asked if he thinks that trend is in part due to President Vladimir Putin's call to Russians worldwide to bring their investment money back home to roost, Hughes says, "We could be seeing part of it. That's been a tactic that's worked in other countries. The Irish deployed it 15 years ago, and Scotland too. Look at the people of Central and East European stock who went to the U.S. They're really turning the emotional screw, aren't they? The other thing is that Russia is seen to be a reasonably stable, high-growth opportunity."

It has been for such companies as Ford, Michelin and Volkswagen, in any case. Ford Motor Co. is investing $150 million in a plant near Leningrad where the Ford Focus will be assembled, and General Motors has just signed off on a $338-million joint venture with Avtovaz in Togliatti.

Transgression, Accession And Recession

Meanwhile, in response to both steel tariffs by the U.S., as well as a favorable ruling by the World Trade Organization in favor of the EU, European Union officials are weighing their options in imposing punitive duties of their own, which according to some estimates could reach a value as high as $4 billion. How such a development would affect facility location trends remains to be seen.

Another possible thorn in the side of European project growth is the possibility that Irish voters might scuttle the EU accession process, although Hughes says the Irish government has swung into action in persuading people of the merits of accession.

"It seems to be around a couple of issues," he says. "One is the impact of accession states on state subsidies. The EU now is generally trying to reduce the amount of state aid given to companies. The amount of aid in the mid-'90s was 36 billion euros ($35.1 billion) per annum, and was down to 28 billion ($27.3 billion) in the late '90s."

Adding to Irish apprehension is the shifting of much of that aid to central and eastern Europe already. Poland, for one, has been able to introduce a new tax scheme that includes such features as up to a 20-percent project funding and cash grants of 4,000 euros ($3,904) per job, and some Irish fear that Ireland is losing its longstanding incentives advantage. But Hughes points out that "the EU always seems to find a way around things. Whatever roadblock is put in front of them, they seem to find a way. In theory it could scuttle the process, but in practice it probably won't."

[Mr. Hughes was prescient, as the EU did indeed find a way to convince the Irish voters, who voted for accession in November.]

Meanwhile, one vote that has meant real jobs in Ireland was MBNA's decision to invest $31.3 million in an expansion of their call center operation at Carrick-on-Shannon, a move that will add 500 to the payroll. While the nature of the jobs is of a different tenor, the move will go some way to ameliorating the area's letdown after the September announcement by telecom gear maker Tellabs that it would close its Shannon manufacturing plant.

The project is an anomaly for the sector however.

"We're not doing as many call center projects, nowhere near as many," says Hughes, noting that the basic maturity of the market has cooled off the sector, as well as R&D and headquarters facilities. But there has been a slight surge of late. "We actually have Russian cities on the list," he says of the contact center blip. "Their cost advantages are not quite at the Indian level, but they're not far off of it. You might pay $8,000 in Russia, whereas it might be $25,000 to $30,000 in the U.K. Admittedly, they'll only entertain that option if they're already there and know how to work in places like that."

The "U.S. Investor Confidence Survey 2002," a joint study by the American Chamber of Commerce together with the U.S. Embassy and Austrian Business Agency, found that U.S. firms are still looking with favor on that "cultural crossroads" country, although Hughes notes that the uptick in projects throughout central and Eastern Europe has taken away some of that pulling power. Recent locations include Baxter's 205-million-euro ($200-million) vaccine production facility, automotive investments by BMW, Opel, Magna and MAN totaling 1.2 billion euros ($1.17 billion) and many headquarters sites for multinationals.

"They seem to be unaffected by the downturns that are taking place elsewhere," says Hughes. "But they do make a great play -- the openness, the know-how, the talent pool, the languages, the stability, the skill base. Now it is not necessarily open arms for everything. They do go after only certain types of projects."

Not far away, Germany suffers. Office space demand is significantly down in Berlin and Frankfurt, unemployment is up, talk of tax increases is in the air, and a pending election at press time held much in the balance. Even stalwart Bayer AG has had to lay off around 2,000 workers -- this despite the costs that such moves engender in a country known for its strong worker protection laws and unions. Hughes says inward investment proceeds apace, however, even if more and more German companies are going, like everyone else, to central and eastern Europe.

"They do have problems -- their economy is not in good health at the moment," he observes. "There is a potential change coming up in terms of the political mandate, and they are struggling to make significant changes in tax practices. The other thing we do come across, particularly in Germany, is that there's almost a cultural reticence to self-promote, to release information. Everything is confidential. I'm sure there's underreporting of projects for Germany. But they do manage to put a good picture on things. A lot of the focus in Germany is on helping indigenous companies."

Scots On a Roll

In Scotland, Rolls-Royce formally announced in June the location of its $132-million, 50,000-sq.m. (538,195-sq.-ft.) factory on a brownfield site in Inchinnan Industrial Estate, Renfrewshire, Scotland, not far outside Glasgow, where the Silicon Glen has lost some of its lustre with the downsizing of Compaq and other high-tech operations. Rolls-Royce Compressor Systems manufactures components which go into the majority of the company's gas turbines used in the civil aerospace, defense, marine and energy markets. The new facility, to be completed by 2005, will replace the World War II-era Hillington facility nearby, meaning most of the 1,000-person work force will be able to commute to the new location.

The skills, experience and commitment of that work force were a major factor in the decision, as was, more than likely, the generous funding made available to the project by the Scottish Executive, the devolved government for Scotland established in 1999, following the first elections to the Scottish Parliament. It is responsible for most of the issues of day-to-day concern to its people and manages an annual budget of some $31.2 billion. The applicant for the project was not Rolls-Royce, but Scottish Enterprise, under the code name "Project Ace."

"They brought in [chief executive] Robert Crawford a couple of years ago, and there was a refocus of the agency," as well as a bit of prescience, says Hughes. "They reacted to the downturn in electronics and technology, and were already shifting to attract R&D and pharmaceutical projects."

Add aerospace. The Inchinnan option was chosen from nine initial contenders, among them the omnipresent Czech Republic and the Eurocentral complex at Mossend, Lanarkshire, an enterprise zone between Edinburgh and Glasgow.

"It will be a modern, clean, low-noise facility which will set new manufacturing standards for the aerospace sector," said Rolls-Royce Compressor Systems Managing Director Royan Anthony of the forthcoming plant. "Transferring to Inchinnan will help Rolls-Royce to remain internationally competitive for years to come."

Another reason Rolls Royce chose the location was the speed at which it could occur there. This despite some voiced objections to that very speed, which some residents saw as a shifty way of changing longstanding land use rules to satisfy the project's goals. The last hurdle was cleared in July, when the Scottish Executive gave its final go-ahead. Hughes says that momentum is typical of Scotland's aggressiveness.

Inward investment statistics for Scotland's most recent fiscal year show that 59 Scottish projects resulted in investment of over $415 million, creating 4,902 new jobs and safeguarding 1,484 others. The increase in manufacturing investment is bolstered by an increase in the business infrastructure to support it, ranging from a new $15.4-million aircraft maintenance facility for Irish airline Ryanair at Glasgow Prestwick International Airport to the first-ever Radisson Hotel in Glasgow, scheduled to open in November.

"It is a smaller nation that knows where it wants to go," says Hughes. "In a smaller country, that kind of thing can make a difference." So does a very positive educational climate, with a distinct advantage over its neighbors.

"It does have a very strong university base," Hughes adds. "In the U.K., you don't pay fees if you go to a Scottish university, but you do at an English university. Everybody knows that whatever you attract a student to, you have a much higher chance of getting them to stay there."

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