Going East – CEE seen from a Western MNC perspective Arnold Schuh Competence Center for Central & Eastern Europe Presentation at the Matej Bel University, Banska Bystrica – October 4, 2011 Let‘s go east – What motivates Western MNCs to expand to CEE? • 20 countries in close proximity • 330 mio. inhabitants • Underdeveloped markets • Educated workforce at lower costs • European culture = Baltic states = Central-Eastern Europe = South-Eastern Europe = European CIS PAGE 2 SCHUH - GOING EAST Before 2008: CEE as a highly dynamic but fragmented region Per Capita GDP 2007 (in €) 40,000 35,000 Austria 30,000 25,000 Germany 20,000 Czech Rep. 15,000 Hungary 10,000 5,000 Poland Romania 0 0 Estonia Russia Serbia Ukraine 5 10 Real GDP Growth 2007 (in %) 15 Pre-crisis economic growth model for CEE Bruegel, 2010; EBRD Transition Report 2010 Intention to achieve a rapid political & economic integration into EU (single market, EU funds, EU norms) High degree of liberalization in external economic relations Opening of financial markets to foreign financial investors Strong technology & know-how transfer and FDI from the West to CEE Access to high-income countries Integration into transnational production networks Significantly higher growth than in Western Europe PAGE 4 SCHUH - GOING EAST CEE even outperformed other emerging markets Bruegel, 2010 Average GDP growth rates 2002-08 GDP at constant prices; Horizontal lines refer to group averages; blue line: unweighted averages; red line:GDP-weighted averages Economic growth varied due to starting positions and reform speed Roland Berger, 2009 Real GDP development (1989-2008, in %) PAGE 6 SCHUH - GOING EAST FDI as driver of change: Nearly €600 bn. since 1993 Roland Berger, 2009 Total FDI inflow by year, 1993-2008, in € bn. The business model for CEE before 2008 Skilled labor at lower costs Huge market potential & growth PAGE 8 SCHUH - GOING EAST Favorable resource situation Above average returns High business risk but „EU umbrella“ Fast entry & quick expansion Convergence drives market growth & development in banking industry Convergence drives market growth & development in banking industry CEE was a good investment story – at least until 2008 Erste Group Bank share price Early 2009 - CEE in big trouble PAGE 11 SCHUH - GOING EAST CEE was the hardest hit region by the recent economic slowdown UniCredit, 2010 GDP growth/decline in % YoY (2008-10) 10 5 0 -5 -10 -15 -20 2008 2009 2010F Was CEE to blame for the crisis? Crisis was imported to a high degree Collapse of markets – dependence on Western markets for growth (automotive, consumer electronics) Drying-up credit from abroad Currency weakening in late 2008 Difficult liquidity situation of households & companies „Home made“ problems Overheated economies & real estate markets Excessive external debt High proportion of loans in foreign currency LAT 90%, EST 86%, HUN 60% vs. POL 32%, CZ 9% Fiscal irresponsibility (e.g., Hungary) PAGE 13 SCHUH - GOING EAST Impact of crisis on CEE economies varied Schuh, 2009 Fiscal deficit Industry specialization Foreign exchange regime Dependence on exports Impact of crisis on CEE economies External financing gap SCHUH - GOING EAST Size of domestic market Stock of foreign investment Is the business model for CEE still valid after the crisis? Lower input costs Still huge market potential but slower growth Resource situation remains favorable Still reasonable returns Higher risk premia & more caution in new investments Selective approach & optimization of operations After grim year 2009, region is back to growth path UniCredit CEE Quarterly, 02/2011 GDP growth rates (2009-12) UA RUS SER ROM EST 2012f HUN 2011f 2010e POL 2009 SLK CZR Euro zone -20 -15 -10 -5 0 Changes in real GDP (in %) 5 10 By 2020 many countries will still be significantly below Western levels of 2010 Erste Bank, 2011; EIU By 2030 the most developed part of CEE will be where Western Europe is today Erste Bank, 2011; EIU Back to business as usual? EBRD‘s new growth agenda for CEE EBRD, Transition Report 2010 Strategy review for CEE – Major decision areas for MNCs Role of CEE in the global strategy Organizational model Product & marketing strategies PAGE 20 SCHUH - GOING EAST Participation in CEE markets Activity location in CEE CEE has lost its luster but remains attractive CEE lost its former status as growth region – especially compared to BRIC and Turkey However, CEE remains attractive for Western MNCs due to higher growth rates and market potential CEE is not regarded as homogeneous region anymore MNCs pay more attention to soft factors such as quality of institutions, political stability & competitiveness MNCs follow a more cautious and selective investment approach PAGE 21 SCHUH - GOING EAST R O L E O F C E E CEE lost its position as a global growth engine Roland Berger, 2010 GDP development (2000 = 100) R O L E O F C E E PAGE 22 SCHUH - GOING EAST CEE countries are losing on competitiveness, only Poland, Russia & Czech Republic improved Roland Berger, 2010; World Economic Forum, 2010 Global Competitiveness Report (2004-2010, ranks) R O L E O F C E E Mixed foreign investment pattern in CEE wiiw, 2011 FDI inflows, in mio. € R O L E O F C E E PAGE 24 SCHUH - GOING EAST Regional players benefit from the withdrawals of weaker firms The crisis triggered a round of portfolio restructuring among MNCs in CEE Most direct investors stick to their presence in CEE Geographic expansion into new countries is on hold for now Regional players are better positioned to take advantage from the situation than newcomers PAGE 25 SCHUH - GOING EAST P A R T I C I P A T I O N Examples of country portfolio restructurings (2009-11) Withdrawals ABInBev sold 11 breweries in CEE Carrefour exits Russia Vattenfall withdraws from Poland Allied Irish Banks sell Polish subsidiary to Santander GE Money withdrew from Romania PAGE 26 SCHUH - GOING EAST Expansion PepsiCo bought 66% of Russian Wimm-Bill-Dann Groupe Danone merged its dairy unit with Russian Unimilk to become the largest dairy company in Russia and CIS UniCredit plans to open 900 branches in CEE and Turkey P A R T I C I P A T I O N Manufacturing continues going East Subsidiaries in CEE expand their production capacity at the expense of their West European sister companies: Modern technology, more flexible & cost efficient „Re-industrialization“ of CEE is best reflected in automotive sector: + 27,000 new jobs in 2009 compared to +6,000 in Western Europe (Ernst & Young European Investment Monitor 2010) CE & SEE countries also improved their position as service providers (IT, business processes) PAGE 27 SCHUH - GOING EAST A C T I V I T Y L O C A T I O N Local foothold & diversified approach characterizes winners Local producers have lower costs and benefit from depreciating local currencies MNCs with multi-tier strategies are in a better position than focused premium-product marketers Increased price-sensitivity favors business models centering on affordability Geographic & segment-related diversification as a winning strategy to cope with fluctuations in demand and increased uncertainty PAGE 28 SCHUH - GOING EAST P R O D U C T M A R K E T I N G Multi-tier brand strategy immunizes Henkel CEE against market swings Schuh & Holzmüller, 2003 PriceIndex 100 80 60 Detergent brands Persil Palmex, Tomi Rex Brand Positioning Premium brands stand for quality, performance, image & innovation Medium-market brands: good quality for traditional & brand-loyal customers Economy-segment: „More value-for-money“ claim for price-sensitive segment P R O D U C T M A R K E T I N G Organization for CEE: Centralize > decentralize > centralize …? Expansion to CEE has been guided by highly centralized control Good performance and improved qualifications led to more autonomy for local management Need to balance entrepreneurial spirit of local management and desire for control During crisis pendulum swung towards centralization again: Lack of restructuring experience in most CEE countries Centralized management of investments, costs, liquidity, capacity & key accounts Use of simplified structures PAGE 30 SCHUH - GOING EAST O R G A N I Z A T I O N Switching from survival to growth mode again Wait for completion of strategy reviews to understand organizational rearrangements Pendulum swings back to a more decentralized organizational model again Slower market growth forces management to continue the search for cost savings: clustering of smaller markets, concentration of back-office functions in shared service centers Challenge for management to find a good balance between strict cost discipline and encouragement of new growth initiatives PAGE 31 SCHUH - GOING EAST O R G A N I Z A T I O N Great challenge: How to manage complexity in CEE? How to respond strategically and organizationally to these biased structures? Country Product Segments • EU vs. nonEU Advanced vs. emerging Large vs. small Low vs. high price Global vs. local Essential vs. „luxury“ Growing vs. mature Urban vs. rural Modern vs. traditional trade Young vs. old PAGE 32 SCHUH - GOING EAST Company Markt leader vs. follower Profitable vs. loss-making O R G A N I Z A T I O N Conclusions – “CEE reloaded” For CEE the recent crisis was an interruption of the catching-up process The image of CEE as a growth region is shattered, however, the business model for CEE is still valid Improving the competitiveness of the economies should be on top of the national agenda – more attention is paid to quality of institutions and business climate Crisis means the end of CEE as a homogeneous region, we see a more differentiated investment approach today Challenge for MNC management is how to deal with this multifaceted hybrid market situations and how to integrate the operations into the corporate group Dual focus on growth and cost efficiency will continue PAGE 33 SCHUH - GOING EAST References Bruegel Study –Becker et al.: Whither growth in central and eastern Europe? Policy lessons for an integrated Europe, Bruegel Blueprint Series, 2010 EBRD: Transition Report, London 1999-2010 EIU: Corporate Structures in 2010, Economist Corporate Network, Geneva 2004 EIU: Rethinking CEE: Changing Corporate Structures in CEE, Economist Corporate Network, Geneva 2010 Erste Group: A Macro-Economic Picture of Central and Eastern Europe, Presentation to the MKO, May 19, 2011, Vienna. Roland Berger Strategy Consultants: 20 years of the CEE economic region – Assumptions for sustainable development, CE Business Club, Zagreb/Vienna Nov. 25, 2009 Roland Berger Strategy Consultants: CEE in 2020 – Trends and perspectives for the next decade, November 2010 Schuh, A. & Holzmüller, H.: Marketing Strategies of Western Consumer Goods Firms in CEE, In: Stüting H.-J. et al. (Eds.): Change Management in Transition Economies, New York: Palgrave Macmillan, 2003 Schuh, A.: The Impact of the Current Economic Crisis on Strategies of Multinational Corporations in Central and Eastern Europe, Akademija MM, 9(14), 2009. UniCredit Group: CEE Quarterly, UniCredit Research, http://www.bankaustria.at/de/open.html?opencf=/de/18513.html World Economic Forum (2010): The Global Competitiveness Report 2010-11: http://www.weforum.org/issues/global-competitiveness wiiw: Publications of the Vienna Institute for International Economic Studies, Vienna: www.wiiw.ac.at/ PAGE 34 SCHUH - GOING EAST Data sources for CEE Go to the homepage of the Competence Center for CEE at WU Vienna with more than 50 CEE-related resources. http://www.wu.ac.at/cee/en CEE Resources CEE Management/Business 35 SCHUH - GOING EAST Contact COMPETENCE CENTER FOR CENTRAL AND EASTERN EUROPE Augasse 2-6, 1090 Vienna, Austria ASS.PROF. DR. ARNOLD SCHUH Director T +43-1-313 36-4608 F +43-1-313 36-90 5284 arnold.schuh@wu.ac.at www.wu.ac.at/cee SEITE 36 SCHUH - GOING EAST