Thomas White Global Investing
Germany, Eastern Europe Give Lessons in Free Trade
Germany stamp
January 4, 2013
A Postcard from Europe
Germany, Eastern Europe Give Lessons in Free Trade

German growth engine, powered by east and central Europe

Economies in east and central Europe are attracting huge foreign investments into the automobile sector, thanks to low labor costs and good connectivity.

When Paris sneezes, the whole of Europe catches a cold, so went a 19th century saying. That was then. In the current context, it is the economic health of Germany that matters not just to stabilize the entire Euro-zone, but also to drive the former communist economies of eastern and central Europe. The bulwark of the Euro-zone economy is the destination for a quarter of the region’s exports. Nowhere is the partnership more evident than in the automobile manufacturing industry spread across Poland, the Czech Republic, Hungary, Slovakia and the like.

In fact, the cooperation stretches far beyond auto parts manufacturing and engineering. And that partnership works to the advantage of both parties. The skilled labor force in eastern and central Europe lubricates and feeds the German growth engine, but German workers are also free to hop across the border to be employed in factories run by home-grown multinationals in countries such as Poland. Likewise, Polish workers can work at German factories run by companies such as Siemens AG. To put things in perspective, a slowdown in Germany during 2012 dragged down the manufacturing indices in Poland and the Czech Republic, two market-oriented economies with close ties to Germany. On the other hand, when the situation improved in the Euro-zone’s biggest economy in November last year, it even reflected in the manufacturing indicator for Hungary, often considered the weakling among the central European economies.

All this has been made possible by generous investments made by German companies across their territorial borders. One of the first direct investments by a German firm abroad was made way back in 1991 when Volkswagen AG took over Czech Republic’s Skoda Auto soon after the collapse of communism in 1991.  Since then, Skoda has become the crown jewel among the German automaker’s fleet of brands. Needless to say, it was just the beginning. According to a report in The Financial Times, Germany has invested some €23 billion in cumulative foreign direct investment in Poland and an equal amount in the Czech Republic as well. German companies have pumped €16 billion into Hungary and €9 billion into Slovakia, the report adds. Volkswagen has raced ahead since it tasted success with Skoda, and has a huge car plant located outside the Slovakian capital of Bratislava, which makes SUVs for Audi, Porsche, and VW brands, the FT notes. Mercedes-Benz too has established a €800 million factory in Hungary, attracted by lower labor costs and good transport links to the company’s manufacturing facilities in Germany.

Still, there seems to be lot on action on the ground besides auto parts manufacturing. Germany-based Union Investment Real Estate recently purchased a shopping center in Lodz, Poland for €390 million. Moreover, German airliner Lufthansa has set up a business processing center in Krakow. Other investments include a €44 million aerosol can factory built in Zgorzelec, Poland by German cosmetics firm Maxim Gruppe.

While investment into Germany from its neighbors is slow compared to the outflows, the quantum of investment has been increasing steadily over the years. For instance, Poland, which had invested €200 million in Germany in 2007, pumped in some €478 million by 2010. Polish utilities group TP-Elbud spent €1 million to establish a factory in the German town of Gorlitz. Investments from the Czech Republic also went up during the same period.

Such flourishing trade ties would have been unthinkable just two decades back when these economies were reeling under the shadow of the Iron Curtain. But now, outdated ideologies have given way to sound business investments, which bring the benefits of globalization to companies and economies alike.

 

Image Credit: Cedric_Ramirez on Flickr under a Creative Commons License

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