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Eastern Europe doesn’t exist any more. It has not suddenly been wiped out by a freak accident as a result of global warming; it is just not where it used to be. Strictly speaking, ‘Eastern’ Europe, today, is Russia. The countries formerly known as Eastern Europe have, since the fall of the Berlin Wall, moved back to the centre.

There is still a divide between East and West, only now it is fiscal rather than physical. Average earnings for a worker in the manufacturing sector in the UK are more than five times those of an equivalent worker in Poland. Big players, such as Amcor, Rexam, Chesapeake, Ball Packaging and RPC, have moved East in their droves, some following clients, others taking advantage of the cheap labour and land. Yet the influx of Western companies means the region is changing rapidly.

But Eastern Europe is not one thing. “It’s many and there’s a world of difference between, say, Slovenia and Romania,” says Robin Chater, the secretary general of the Federation of European Employers (Fedee). Considering Eastern Europe as a single entity needs to be avoided; a fact that underlines the value of research.

“If you’re relocating to Eastern Europe, it’s important to do it for the right reasons, and have a clear strategy and vision,” says Ian Mackinnon, chief executive of cosmetics and personal care packaging firm Swallowfield, which in January opened a facility in the Czech Republic. This is true for all aspects of the operation, but especially when it comes to finding a site and local workforce, when tapping into local knowledge is paramount.

“We spent a lot of time going to the Czech Republic, and looking at other countries including Poland, in order to find the best location. And you’ve got to wear out a bit of shoe leather, because you can’t do it from the UK,” says Mackinnon. It is also worth researching different parts of a country because there are areas that offer benefits to attract foreign firms.

Preferential terms
Poland, for example, has 14 special economic zones that offer preferential tax rates to inward investors. The Hungarian government also offers attractive terms to UK firms. János Prihoda, general manager of relocation specialist Inter Relocation Group in Budapest, adds that looking outside the more traditional regions can be beneficial. “It is no longer necessary to have the office close to Budapest. The land costs, rent and associated costs are much lower further away.”

After finding a suitable site, the next hurdle is to register the business, which can be plagued by red tape. “The levels of bureaucracy can be frustrating for Western companies,” says Chater, who attributes it to a business model left over from the Soviet period. “This is not like the UK or Ireland where you’ll get a warm welcome from an investment bureau,” he says.

Michael Dembinski, head of policy at the British Polish Chamber of Commerce (BPCC), describes the current situation, where companies have to register with the commercial courts, as “a rather tiresome process”, which can be particularly restrictive to small and medium-sized businesses. “Especially for owner-managed companies, which have to do everything in person, Poland is not really a business-friendly environment, but the current government is trying to slash the red tape,” he says.
Things are starting to change and, in recent years, there has been greater harmonisation of legislation with the rest of Europe. In Romania, for example, there has been a U-turn in the approach to legislation since the country received the green light for European Union membership in 2001. “Anybody going to do business in Romania today is going to find it a familiar environment,” says Brian Davies, the chairman of the British Romanian Chamber of Commerce (BRCC).

Davies is also chairman of shrink film manufacturer Sanders Polyfilms, which has been operating in Romania since 2000. He says that one of the major problems facing firms is a shortage of skilled labour, as many workers have left the country for better-paid jobs in Western Europe. Companies moving into the area are well-advised to invest in training.

Having trust in staff who are working in another country is crucial and, especially at the beginning, that could mean sending workers from the UK. Frances Wilson, international manager at the Chartered Institute of Personnel and Development, says that before transferring staff it is important to first check if their contract allows you to do so and also provide services to help them integrate into the new country and culture.

Beyond that, she says, companies also need to look into hiring local workers, and the best way to go about that – whether to use recruitment agencies, where to advertise vacancies and so on. Furthermore, companies should assess attitudes to payment and benefits. Childcare, for example, is important in the UK, because it is expensive, but it might not be elsewhere. “What is appropriate in one country is not necessarily in another. You need to be armed with as much information as possible,” says Wilson.

And when all the staff are in place, all the paperwork signed and the operation is up and running, it is important to maintain regular contact with the site. “You’ve got to be prepared to visit regularly because things can happen when you’re not there,” says the BRCC’s Davies.

Regional flux
The fact that getting to Bucharest or Bratislava from the UK is relatively easy these days is another plus for setting up in Eastern – or indeed Central – Europe, although food packaging companies may still find the journey time too long.

The main draw is still the prospect of operating in a lower-cost environment. However, the situation is changing. In areas of low unemployment, firms could end up having to pay Western prices for property and premiums for labour, according to Davies. Tax incentives will also have to change, owing to EU laws on competition, and people are likely to start returning from overseas.

Fedee’s Chater suggests that by 2020, the pay differential with Western Europe will have disappeared. “The window of opportunity is short, and people should get in within the next few years,” he says. This may mean it is already too late to embark on long-term plans in the region; perhaps Eastern Europe really doesn’t exist any more.

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EASTERN EARNINGS
Average annual gross earnings in industry and services
UK €44,496
Germany €42,382
Czech Republic €8,284
Poland €8,119
Hungary €7,840
Slovakia €7,040
Lithuania €5,543
Latvia €5,211
Romania €3,713
Bulgaria €2,195

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CASE STUDY: CLONDALKIN
Five years after following a major client to Poland, Irish packaging manufacturer Clondalkin has big plans for further expansion in Eastern Europe. And for Chris Hill, sales and marketing director of the company’s specialist packaging division, there’s no substitute for obtaining as much knowledge as possible about the country you’re moving to.

“You can get information from research organisations, but what you really need is someone on the ground who’s from the business and knows the local competition. Early in the process we acquired the services of a local production director, who was invaluable in providing contacts,” he says.

Boxes Prestige, part of Clondalkin’s Boxes Group, opened a site in Lublin, some 100 miles southeast of Warsaw, in 2003 after its client, cosmetics manufacturer Avon, decided to move production to Poland.
The original idea was to buy an existing company, but it was not possible to find a suitable partner, and Clondalkin eventually decided to build its own plant. The purchase of label manufacturer Harlands, also an Avon supplier, in 2005 provided an opportunity to set up a second business on the same site. 

Hill says there was ultimately a “smooth transfer” of operations and equipment from the UK, but there are “always things that come up” that you cannot plan for. “There’s a lot of bureaucracy in Poland – you need to get the right stamp on the right form – and that always takes longer than you expect,” he adds.

It is also important to “tap into the local workforce”, which Clondalkin has “found to be excellent”,
although the language barrier can sometimes be a problem. “There were a lot of initial meetings held in hotel rooms using the services of an interpreter,” says Hill.

A good production and sales plan are important, says Hill, but these need to be backed up by dedication. “Moving to Poland has been a good experience for us, but you’ve got to stick at it because it won’t always work out as you expect.”