Trend Spotting December 28, 2006, 11:45AM EST

The Chinese Discover Central Europe

In a strange paradox of globalization, mainland manufacturers are spending millions to establish factories in EU member countries

The grain fields around the Czech town of Nymburk are fallow at this time of year. But by next summer a new kind of harvest will be added to the wheat and barley. Chinese electronics manufacturer Sichuan Changhong is building a $30 million factory in Nymburk that will turn out 1 million flat-screen televisions a year when it swings into full production. "Getting Changhong into Nymburk is a big success for us," says Ladislav Kutik, mayor of the town of 15,000 an hour east of Prague.

Kutik and his fellow Czechs are experiencing one of the stranger paradoxes of globalization. China's rise has created plenty of headaches for Central Europe: Competition from the mainland has devastated the region's low tech, low-margin industries such as textiles and shoemaking. But like Changhong, growing numbers of companies are starting to manufacture in Central Europe as an alternative to production in China. While Japanese electronics manufacturers have been making their goods in the region for a decade or more, their counterparts based in China and Taiwan now are both opening new plants and expanding older ones there to get closer to Europe's wealthy consumers.

Dozens of Chinese and Taiwanese companies have plowed a total of at least $300 million into the region. In the Czech Republic, Taiwan's Foxconn Technology Co. manufactures PCs and other gadgets for the likes of Hewlett-Packard (HPQ), Cisco Systems (CSCO), and Apple Computer (AAPL) at an $80 million plant employing 5,000 people in the city of Pardubice, 60 miles east of Prague. Taiwanese TV manufacturer Tatung Co. has a factory in the western Czech city of Plzen that churns out 50,000 flat-screen sets monthly. Mainland consumer electronics maker Hisense Co. in November opened a TV plant employing 110 people in the Hungarian city of Szombathely, on the Austrian border. And in October, Shanghai-based SVA Group inaugurated a factory making TVs and other electronic products in the central Bulgarian city of Veliko Turnovo.

The attraction is simple: Central Europe provides a back door to the European Union. Since the EU expanded into the former Soviet bloc countries in 2004 (Bulgaria and Romania are scheduled to join on Jan. 1, 2007), the region has offered a manufacturing base where wages are still a fraction of those in Western Europe. Governments in the new member states are eager to attract investment, often offering rich incentives to manufacturers that will create jobs. Foxconn and Changhong, for instance, have been granted 10-year tax holidays in the Czech Republic. And producing in the EU lets companies avoid the 14% tariff Brussels slaps on televisions made in China. "To enter the European market, we have to be here," says Wang Wensheng, general manager of Changhong's Czech subsidiary.

Speed Counts

Manufacturing in the region can make sense even for goods that don't face tariffs. Operating in Central Europe lets companies quickly boost output to meet spikes in demand and get products to users far faster than shipping them by boat or even air from China. Foxconn makes millions of computers for HP at its sprawling 200,000-worker facility in south China. But if HP needs fast turnaround on PCs for Barcelona or Berlin, workers in the Pardubice factory can put them on a truck in as little as 24 hours. "When customers want things basically yesterday, you can't afford to have them sitting on a ship for 35 days," says Jim B. Chang, chief of Foxconn's operations in the region.

That's not to say it's cheaper to operate in Central Europe than in China. Far from it. Labor rates in the Czech Republic are roughly $500 per month for a 40-hour week. That compares with about $100 to $150 monthly in China for much longer hours. And while productivity in Czech plants is roughly equal to that in Chinese factories, absenteeism hits 15% some days. Those issues, plus surging currencies and growing labor costs, have prompted some companies to look at Ukraine and Russia. "Our presence in the Czech Republic won't shrink," Chang says. "But if we need to expand much more, we'll go farther into Eastern Europe."

Rocks is the senior editor, Global Business, for BusinessWeek. Zachovalova is a correspondent for BusinessWeek in Prague. Saminather is a reporter for BusinessWeek in New York.

Reader Discussion


Local Business Directory

Find the business resources you need, where you need them

BW Mall - Sponsored Links