The Petit Supply Chain Manufacturing in Central and Eastern Europe

THE PETIT SUPPLY CHAIN MANUFACTURING IN CENTRAL AND EASTERN EUROPE

RADU GEORGE DUMITRESCU

Table of Contents

Introduction ...... 2 1. The Great Rival – China ...... 3 2. The Great Competitor – The United States ...... 6 3. The European Revival ...... 8 Manufacturing in the EU ...... 9 Case Study – Made in Poland ...... 13 Case Study – Made in Romania ...... 14 Trading in Poland & Romania ...... 15 4. European Manufacturers in CEE & Asia ...... 15 5. Policy Options and Recommendations ...... 18 a) Population ...... 19 b) Labor costs ...... 20 c) Infrastructure ...... 21 d) Barriers to trade ...... 22 e) Debureaucratization ...... 23 f) Investments ...... 24 g) Stockpiling ...... 24 6. Conclusion...... 24 7. Bibliography ...... 25

Introduction

The damages caused by the COVID-19 pandemic in all aspects of life are far-reaching, multifaceted, and incalculable. From schoolchildren who experienced a year-long gap in their education – supplanted, in countries where such a thing was possible, by online classes – to entire business models that were taken apart and rendered unprofitable almost overnight, the pandemic affected everyone. As it appears to draw to its end, recovery is on the agenda of every government and business in the world. Destructive as it has been, the pandemic has also given these very actors the opportunity to overhaul entire social and economic systems. The objective of that overhaul, as many of them have decided, is preparing for the next crisis. It is that preparedness that officials in the European Union have taken up numerous times in speeches and public statements, reformulating the Union’s economic slowdown and shutdown as conclusive to one fact – the EU needs a more resilient economy, one that can withstand such shocks in demand, but most of all, in supply. The present policy paper comes in support of demands for increased economic resilience and argues that shortened – petit – supply chains that stretch from Berlin and Paris to Bucharest and Warsaw, and not to Beijing, are a way to attain such resilience. The paper argues that Western manufacturers would profit from producing their goods in the CEE. Companies manufacturing in the CEE would increase their resilience while maintaining their international competitiveness. To substantiate such claims, the paper draws on twenty product case studies placed in comparison – ten product manufactured European brands which produce in the CEE and ten similar products made by European manufacturers in Asia, mainly China. The findings suggest that while six out of the ten pairs favored the Asian-made products in terms of price, the differences were small. The paper concludes that CEE-based manufacturers can be competitive internationally and that they can, in almost half the cases, beat the Asia price. The paper is structured in the following way. In the first part, the importance of manufacturing and foreign investments is highlighted, pointing to the rise of China as having occurred following such developments. Since the 1990s, China has become the workshop of the world and has profited immensely as a result, attracting Western firms with low labor costs and friendly regulation, convincing them to produce in China and to export to Western markets. The second part summarizes the policies planned by the Biden administration in the wake of the pandemic. The American economic recovery, as it shall be shown, is premised on trade – but also on the return of American manufacturing businesses to their home country. To quell the criticisms brought forth by domestic populists and provide the American middle class with good- paying jobs, the new administration of the United States relies on manufacturing. The same section underlines how American companies have realized the potential in producing closer to their markets in Europe. P&G and Ford, two large American corporations, have recently increased their investments in the Central and Eastern European region to that end. The third part of the paper documents the recognized connection between the resilience of the European economy and the strengthening of supply lines within Europe. The chapter goes on to present two case studies, those of Poland and Romania, the most populous CEE countries, and their economic context. Part four offers the results of original research. It compares similar products of European manufacturers who produce either in Asia, mainly China, and the CEE. The comparative advent shows that although six of the ten products made in the CEE were more expensive than their

Asian-made counterparts, the differences were small, making manufacturing in the CEE globally competitive. Part five builds on previous sections of the paper and makes policy recommendations regarding population, labor costs, infrastructure, barriers to trade, debureaucratization, investments and stockpiling, all of which can aid European manufacturers make their goods in the CEE, therefore in the EU. The sixth and final part draws conclusions, arguing that the European manufacturing sector, predicated on regional cooperation and investments supported by the EU and by national governments, can be the backbone of the European post-pandemic recovery.

1. The Great Rival – China

Since its opening up to the world, China has become a crucial part of the global economy. Its integration into global trade, however, occurred gradually, as more and more foreign direct investments (FDI) entered the country. Most of the FDIs in China went into manufacturing – 70% by 2001.1 The constant inflow of FDI into China strengthened its capacity to be a production base for manufacturing exports. A domino effect known to economists and industrial planners occurred. The competition boosted the development of some supporting industries, and essentially established an important industrial cluster. For example, China’s Pearl River Delta and Yangtze River Delta regions have emerged as world-class information technology clusters, while Shanghai and Guangdong became manufacturing centers. Such clusters inevitably produced spillover, as other companies were contracted to provide assistance, maintenance or as employees leave and form their own firms. FDI are only part of the story. China’s manufacturing growth in the last two decades of the 20th century occurred on the back of a population of hundreds of millions of rural workers who moved to the cities to take low-paying manufacturing jobs. As the supply of labor was great, wages in the sector were kept down. Starting with the 2000s, however, rising wages, not just in manufacturing, “began to be a defining feature of China’s economy.”2 One of the primary reasons for which FDI flowed to China up to 2001 was its low wages. For two decades, those wages have been rising. Roughly around the same time, before the financial crisis of 2008, countries of the CEE were basing their economic growth on FDI as well. FDI to the region boomed in the early 2000s, but stopped after the crisis.3 This led to a slowdown of economic growth and disenchantment with capitalism and, because they were connected since 1989, with democracy. It also created a space for political actors for whom democratic rules are not crucial. Back in China, market forces led to a constant increase in salaries between 1995 and 2015. This growth occurred across the board, and it did not skip manufacturing. However, recent wage trends in China bring it closer to more developed economies of the world. Rozelle et al.

1 Guoqiang Long, “China’s Policies on FDI: Review and Evaluation” in Theodore H. Moran, Edward M. Graham, Magnus Blomstrom (eds.), Does foreign direct investment promote development?, (Washington DC: Institute for National Economics, 2005), 318. 2 Scott Rozelle, Yiran Xia, Dimitris Friesen, Bronson Vanderjack, Nourya Cohen, “Moving Beyond Lewis: Employment and Wage Trends in China’s High- and Low-Skilled Industries and the Emergence of an Era of Polarization,” Comparative Economic Studies, 62, (October 2020), 556. 3 Dorothee Bohle, "Capitalist Transformations In East Central Europe Since The Great Recession," Lecture, College of Liberal Arts and Human Sciences, Blacksburg, March 8, 2021, https://liberalarts.vt.edu/research- centers/ceuttss/events/2021/JMBohleTalk.html.

3 note how wages in the country have been “rising for professionals employed in formal skill- intensive industries; and falling for workers in the informal labor-intensive service sector.”4 This occurred in part because “the supply of labor into the service sector of the informal economy is being fueled by the flow of labor out of manufacturing and construction.”5 Simply put, the supply of labor in the services is greater, while the increased specialization and automation in manufacturing is pushing wages in the industries up. To maintain competitiveness, the Chinese government aggressively pursued automation, leading to the further displacement of jobs in manufacturing.6 Tellingly, the “Made in China 2025” initiative of the Chinese government places the focus on automation and the use of robots, not of cheap labor. But as robots can be used anywhere on the globe to decrease wage costs, China’s competitive edge in manufacturing is vanishing. The sector had employed hundreds of millions of workers in China, but in the mid-2010s companies like Samsung or Nike, among other large brands, started moving out of China and into the vicinity, to countries like Vietnam or Bangladesh.7 The more recent trade war between the US and China further “incentivized manufacturing companies to begin reshoring, as supply-chain uncertainty and political pressure from US politicians made firms consider moving their operations outside of China.”8 Even before the pandemic, in 2019, Chinese exports began to drop in favor of other Asian exporters but “the political fallout from the COVID-19 crisis is expected to make reshoring out of China a far more immediate concern.”9 Beyond the effects of the pandemic itself, one has to take into consideration that China cannot be considered a partner of the same caliber to the EU as another liberal democracy, as it lacks transparent, democratic decision-making and protections for minorities. Producing in China implies far more than an economic dimension, as Finnish forestry company Stora Enso can attest. When it was revealed that the company was supplying pulp used in Xinjiang’s work camps for Uyghurs, Stora Enso decided to stop producing wood pulp. The association once formed, however, the company’s reputation was already tainted. As Braw puts it for Politico, “Western firms are starting to realize that even the faintest link to Xinjiang’s ‘re- education camps’ can be toxic to their reputation.”10 On the other side, the Chinese state has sponsored boycotts of companies it saw as critical to its practices. In China, Swedish brand H&M was de-platformed from e-commerce sites and its physical shops were closed by landlords after voicing concerns over Xinjiang. The Chinese government also uses its consumer market as leverage over EU companies, as it did with Ericsson, which was transformed into an advocate for Huawei’s access to 5G networks before the Swedish government. Ericsson makes 10% of its revenue in China, and only 1% in Sweden. When Australia called for a deeper probe into the

4 Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 555. 5 Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 555. 6 Hong Cheng, Ruixue Jia, Dandan Li, and Hongbin Li, “The Rise of Robots in China,” Journal of Economic Perspectives 33, 2 (Spring 2019): pp. 71–88 as cited in Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 570. 7 Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 576. 8 Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 576. 9 Patrick Van den Bossche, Brooks Levering, Yuri Castaño, and Brandon Blaesser, “Full Report – Kearney,” Kearney, 2020, http://www.kearney.com/operations-performance-transformation/us-reshoringindex/full-report. 10 Elizabeth Braw, “For Western Companies, China is a risky bet,” Politico, April 5th, 2021, https://www.politico.eu/article/western-companies-china-risk- xinjiang/?utm_source=RSS_Feed&utm_medium=RSS&utm_campaign=RSS_Syndication.

4 origin of the novel coronavirus, Australian coal ships were left stranded by the Chinese government for nine months.11 Such events are not isolated. It is economic factors, however, that have weighed heavy on production in Asia during the pandemic. A pandemic-created unforeseen global shortage of chips serves as the perfect example for the vulnerabilities in a global, stretched supply chain. The world’s largest chipmakers – 91% of contract chipmaking – are both in Asia, specifically Taiwan and South Korea, and their delivery times to companies like Volkswagen or General Motors reached delays of 22 weeks in 2021. Car and smartphone makers were the first casualties this delay. The auto industry as a whole is projected to lose $61 billion in sales in 2021 due to the shortage in chips. American company Intel already set up a $20 billion investment in its own chip plant, which would allow it to produce chips for other companies as well.12 As vaccination was rolled out in the US and Europe by spring 2021, German multinational Siemens saw solid increases in revenue – but also shortages in its supply chains. Steel, plastics and freight capacity, from China to Europe, were lacking. Stockpiling in China, a global shortage in semiconductor chips, other delays, and electronic bottlenecks were affecting Siemens’ performance. Swiss company ABB and France’s Schneider Electric saw similar problems with delivery and production constraints.13 To move away from risk, some of these companies may reasonably consider moving from China. Representing the interests of 1700 European companies in China, The EU Chamber of Commerce in China compiled and published a report on the costs of decoupling from the Chinese economy. This comes in a context where more and more European companies seek to mitigate their exposure in China. The report highlighted the “politicization of business” that is “making the Chinese business environment increasingly difficult for foreign companies to navigate,” which, along with the “souring of public opinion in home markets towards China,”14 places European businesses between a rock and a hard place. The same report notes that “pandemic-related fluctuations in supply and demand”15 led to shortages and convinced “most European companies” that “expanding locally and further onshoring their supply chains”16 was the best way to build resilience. However, “many European companies report a desire to further invest in China” while at the same time “onshore supply chains for the local market to avoid potential future disruptions.”17 As part of the same strategy geared toward achieving resilience, European corporations can either build separate supply – one for China and one for the rest of the world, or develop swappable products in multiple parts of the world. As the EU Chamber of Commerce in China notes, however, “the costs of either option are considerable.”18 The final recommendations of the report for European companies underline the need to “strengthen supply chain monitoring up- and downstream both to identify suppliers and customers relocating to

11 Annabelle Timsit, “European Companies Have No Intention Of Decoupling From China," Quartz, June 10th, 2021, https://qz.com/2019470/european-companies-double-down-on-china-amid-tensions-and-covid/. 12 Ian King, Debby Wu and Demetrios Pogkas, “How a Chip Shortage Snarled Everything From Phones to Cars,” Bloomberg, March 29th, 2021, https://www.bloomberg.com/graphics/2021-semiconductors-chips- shortage/?fbclid=IwAR04adac12BWoXKqA4FlYoP9ZfJu2gwBYXFOfiX8QeAsU78jUdmPVwrYEts. 13 John Revill, “Siemens flags supply bottlenecks after raising guidance,” Reuters, May 7th, 2021, https://www.reuters.com/article/uk-siemens-results-idUKKBN2CO0CG. 14 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation (European Union Chamber of Commerce in China and the Mercator Institute for China Studies, 2021), 7. 15 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 6. 16 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 7. 17 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 7. 18 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 5.

5 markets with lower labor costs.”19 Finding – or building – new supply chains is key to obtaining resilience. However, China remains a magnet for European companies even after the pandemic. According to the Business Confidence Survey 2021 conducted by the EU Chamber of Commerce in China, “three out of four companies ended the year with positive earnings before interest and tax.”20 Like consumers everywhere, the Chinese bought more “cars, goods and clothing” while in lockdown. Almost 70% of respondents were optimistic about future earnings in China, and many are looking to build a more secure position within China, rather than diversify outside of it. Problems still abound for European companies in China, like the politicization of the business environment, spotty market access (due to a lack of bureaucratic transparency), unequal treatment compared to local firms, compelled technology transfers and infringements on intellectual property rights. Still, the survey notes that “a mere 9% of European companies are considering moving any current or planned investment out of China, the lowest level on record.”21 This is because many European companies “simply cannot” move out of China even partially due to high decoupling costs and the fear of missing out on a growing market. Moreover, a “third of manufacturers report that they have at least one imported component or piece of equipment for which there are no viable alternatives, and about half note that alternatives will come with higher costs, lower quality and/or compatibility issues.”22 For such companies, diversification and relocation remain costly. China cannot be totally or easily abandoned, but failing supply lines and panic-inducing shortages taught the richest economy in the world – the US – an important lesson.

2. The Great Competitor – The United States

China’s place in the global economy as the workshop of the world is not as secure as it was before the pandemic – and the United States plans to secure its own supply lines through manufacturing. The Biden administration specifically recognized the need for the United States to “out-compete China” and to create jobs. To do so, the American Jobs Plan put forth by the administration included investments into infrastructure, with goals of modernizing 20,000 miles of highways and fixing the ten most economically significant bridges and thousands of smaller ones, and of giving Americans access to high-speed internet. The same plan aims to “revitalize manufacturing,” which it sees as an “Arsenal of American Prosperity,” and to “secure U.S. supply chains.”23 To reach its goals, the Biden administration proposed targeted policies such as $180 billion investments into R&D, split up into a $50 billion investment into a national technology directorate, $40 billion in laboratories across the US, and other sums for breakthrough technologies and research incubators.24 “Utility-scale energy storage, carbon capture and storage, hydrogen, advanced nuclear, rare earth element separations, floating offshore wind,

19 Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 37. 20 European Business in China: Business Confidence Survey 2021 (European Union Chamber of Commerce in China and Roland Berger, 2021), 1. 21 European Business in China: Business Confidence Survey 2021, 11. 22 European Business in China: Business Confidence Survey 2021, 16. 23 Fact Sheet: The American Jobs Plan (White House, March 31st 2021), https://www.whitehouse.gov/briefing- room/statements-releases/2021/03/31/fact-sheet-the-american-jobs- plan/?fbclid=IwAR37h0FaW2I_Ooa0jZVYIycCvsTgf-yywzGhpwAj0cUt2rH5TjePlRjZi8Q. 24 Fact Sheet: The American Jobs Plan

6 biofuel/bioproducts, quantum computing, and electric vehicles” are what the US plans to invest billions on. Investing in research means investing in manufacturing. As the Plan notes, “U.S. manufacturing sector accounts for 70% of business R&D expenditure, 30% of productivity growth, and 60% of exports. Manufacturing is a critical node that helps convert research and innovation into sustained economic growth.”25 A healthy middle class and a global competitive edge also reside in the ability of a state – or of a Union – to invest in manufacturing. The Plan envisions $300 billion spent by the Biden administration to “strengthen manufacturing supply chains for critical goods,” meaning producing “here at home, the technologies and goods that meet today’s challenges.”26 The investment includes $50 billion for an office dedicated to monitor domestic industrial capacity and to plan investments and $50 billion in semiconductor manufacturing. Billions more go to medical countermeasures manufacturing, which includes everything from masks to prototype vaccines. The Plan also places funds towards the development, in the United States, of clean manufacturing technologies and the social infrastructure around it. Electric car plants, ports, nuclear reactors are therefore accompanied by what the plan calls regional innovation hubs. These are meant to create new businesses with the assistance of a billion-dollar Community Revitalization Fund targeted at rural communities suffering from disinvestment. The US’ Plan includes other policies, such as the increased access to capital for domestic manufacturers. All in all, $52 billion are meant to enlarge existing capital access programs and support rural manufacturing and clean energy. Tax credit extensions for the auto sector and the creation “of a new financing program to support debt and equity investments for manufacturing to strengthen the resilience of America’s supply chains” are also part of the plan. Finally, $31 billion is to serve as venture capital for small businesses active in manufacturing. Aside from its domestic investments meant to revive manufacturing and shorten supply chains, the US, through its companies, also sees the benefit of producing in the CEE and selling to Western Europe. Procter & Gamble, an American company, first came to Romania in 1994. Today, its Urlați plant “is one of the most technologically advanced and environmentally friendly P&G Plants worldwide, serving over 1 billion consumers across over 40 markets in Europe, Turkey, Israel, Central Asia and the Caucasus Region.”27 There is no reason why European companies cannot have the same success. Another American company, car-maker Ford, plans to invest $300 million by 2023 in its factory in Craiova, Romania, in order to boost production and develop the capabilities to produce electric cars. The investment is part of a string of steps that will see funds directed to the factory in Koln but also the one in Turkey. Already in Craiova 600 robots were installed to speed up the production, alongside the 6000 employees.28

25 Fact Sheet: The American Jobs Plan 26 Fact Sheet: The American Jobs Plan 27 “PG Romania,” P&G, accessed July 26th 2021, https://www.pgcareers.com/location-Romania. 28 Bogdan Alecu, “Americanii de la Ford anunţă un plan major de investiţii de 300 de milioane de dolari în fabrica de la Craiova, care va deveni a treia fabrică Ford din Europa care va produce maşini electrice,” Ziarul Financiar, May 3rd 2021, https://www.zf.ro/auto/americanii-de-la-ford-anunta-un-plan-major-de-investitii-de-300-de- 20058025.

3. The European Revival

With China in the proverbial ropes and the United States out of its isolationist phase, the EU has begun looking to the resilience of its own supply lines. In an interview given in May, EU Commissioner for Internal Market Thierry Breton argued that the Union “needs to be more self- sufficient in critical areas and react quickly when production is needed, as has recently been the case with the vaccines.”29 The Commissioner stressed that self-sufficiency does not mean autarky, but a reaction to a rapidly changing world which cannot be met with naivety. In crises, domestic production is an added layer of security. The pandemic offered valuable lessons in that sense. From producing, buying and distributing the vaccine, the Commission learned that “we need to produce some critical parts in Europe because we cannot depend for those elements on others.” The Commissioner named 137 highly dependent products, among which “hydrogen, raw materials, batteries, semiconductors, an extremely important subject, cloud and data and active pharmaceutical ingredients” and 34 others which have low diversification potential and can be found in one or two countries only. To secure Europe’s production capabilities, they need to be brought closer to home. Looking at US and China, Breton noted that the diversification of production would bring a balance of powers.30 Proof, if necessary, came quickly. The same month, Lithuania and other Eastern members of the EU distanced themselves from a Chinese initiative, the 17+1 forum, meant to forge relations between the region and China. This came after China imposed sanctions on EU lawmakers in retaliation to the EU’s own sanctions on Xinjiang officials over Beijing’s forcing of Uyghurs into internment camps.31 Recognizing the changes brought about by the pandemic, in spring 2021 the Commission updated its EU Industrial strategy. The new measures were specifically meant “to strengthen the resilience of our Single Market”32 and to recognize the “need to better understand our dependencies in key strategic areas and presents a toolbox to address them.”33 The Commission especially highlighted the damage sustained by the single market during the pandemic due to supply restrictions and border closures, which put a stop to the free movement in Europe. To make the single market more resilient, the Commission proposed the creation of a Single Market Emergency Instrument to “address critical product shortages by speeding up product availability and reinforcing public procurement cooperation.” Another measure was that of directing investments toward SMEs, allowing them to delay payments and to address solvency risks.

29 Jorge Valero, “Breton: Europe was too naïve before, now we are in the driving seat,” Euractiv, May 5th 2021, https://www.euractiv.com/section/economy-jobs/interview/breton-europe-was-too-naive-before-now-we-are-in-the- driving-seat/?fbclid=IwAR3rvUWsx_UKXQUPLW5cyZIFlT2k6S-6LV5e4mKPzQnMcso2k3MFfI69LRY. 30 Jorge Valero, “Breton: Europe was too naïve before, now we are in the driving seat.” 31 Stuart Lau, “Lithuania pulls out of China’s ’17+1’ bloc in Eastern Europe,” Politico, May 21st 2021, https://www.politico.eu/article/lithuania-pulls-out-china-17-1-bloc-eastern-central-europe-foreign-minister- gabrielius- landsbergis/?utm_medium=Social&utm_source=Facebook&fbclid=IwAR0SolfFMpJZvC0yBtcDKxdCYGjl4g8japa xHpDkBIEuhxFlVQ0i1QXciPg#Echobox=1621621607. 32 European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s recovery,” European Commission Press Corner, May 5th 2021, https://ec.europa.eu/commission/presscorner/detail/en/IP_21_1884?fbclid=IwAR0l19rOLZBcfqeIGuZmM09qFHTc sFkmfej7lZG5DCxDlzPyGhcRMLcvYRE. 33 European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s recovery.”

When it comes to dependencies, the Commission echoed messages of its president and other members and asserted its commitment to openness to trade but also signaled the need to “address strategic dependencies, both technological and industrial.” Analyzing trade data through its Observatory of Critical Technologies, the Commission found dependencies in the area of advanced technologies, raw materials, batteries, pharmaceuticals, but also renewables, energy storage, cybersecurity. The Commission also designed a series of solutions meant to remedy dependencies. First and foremost, “diversifying international supply chains”34 and the formation of “new industrial alliances” for innovation, job creation and increased competitiveness. Such alliances are to be formed on processors and semiconductor technologies, industrial data, edge and cloud, and others. Finally, the Commission plans to support member states’ pooling of public resources in the Important Projects of Common European Interest (IPCEIs) from the EU budget.

Manufacturing in the EU

Preparing for the aftermath of the pandemic, the European Parliament’s policy department for economic, scientific and quality of life policies noted in a report that “the COVID-19 pandemic unveiled weaknesses, as many businesses were initially unable to cope with shortages in supplies caused by closed borders and closed manufacturing sites” but that “most supply chains quickly recovered and have been affected less severely during subsequent waves.”35 The authors of the report commented that companies involved in value chains that proved vulnerable, like those of microelectronics, electric cars, batteries and AI technology, should be supported in diversifying their production but that “this should not lead to a sustained policy drive for relocation, as this trend could be at odds with the need to keep the EU industry internationally competitive.”36 Protectionism is discouraged in the EU, and rightly so, but, as it will be shown, a strategic revamping of European manufacturing need not go against the laws of the market. The story of the pandemic’s impact on European industries closely follows each wave of rising infections. Global supply chains were disrupted between March and April of 2020, and manufacturing was affected by shortages until the third quarter of 2020.37 The same period saw the lifting of quarantine measures in most EU countries and the resurgence of economic activity – but that again was halted by rising infections in the last months of 2020. While recovery is expected to be slow, it is also worth noting that the “EU economy experienced a stronger shock than China and the US (2% growth and -3.6% decrease respectively) in 2020, while it is significantly lagging behind the recovery forecasts for China (7.9% and 5.2% change on preceding year for 2021 and 2022, respectively).”38

34 European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s recovery.” 35 Jan Maarten de Vet, Daniel Nigohosyan, Jorge Nunez Ferrer, Ann-Kristin Gross, Silvia Kuehl, Michael Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” European Parliament, DG Internal Policies, Policy Department for Economic, Scientific and Quality of Life Policies (March 2021) 9. 36 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 9. 37 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 12. 38 Global Economic Prospects (World Bank, Washington, DC, 2021,) as cited in De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 14.

The manufacturing sector in the EU, taken by itself, dropped between March and April 2020 but then rebounded in May and June only to drop again – less than the first time – in September and November. Although the manufacturing industries were not hit as hard the services and cultural sector, which require interaction more than anything else, the lack of investments is likely to prolong recovery.39 The automotive industry, representing 8.5% of all EU manufacturing and employing 2.6 million people, was among the ones hit hardest by the first wave of the pandemic. Supply chains were cut off by the first shutdowns of Chinese and European factories, in March and May. With an average factory downtime of 30 days and losses of €100 billion, companies were forced to lay off workers or place them on short-term working schedules. In total, 1.1 million jobs were affected due to factory shutdowns in the first wave.40 Dependencies in the EU economy are not limited to the automotive. Another value chain essential to European economy – and to its degree of climate-friendliness – is that of batteries. Lithium-ion batteries are made from cobalt and lithium mined in Africa and Latin America and are used by electric vehicles. The major supplier along the whole value chain, however, is China. This extends to raw material extraction to battery recycling, with other notable processors and suppliers being Japan and South Korea. All three Asian country “account for 86% of the global supply, while European firms are producing less than 20% of the global quantity.”41 While China assembles 66% of the world’s battery packs, Europe “is almost fully dependent on imports of battery cells, exposing the industry to supply unpredictability and potentially higher costs.”42 Due to the pandemic, mines, processing and assembling plants in Asia shut down. Lithium is available in the EU, but cobalt and nickel are not. Battery shipments decreased by 14% as a result, halting electric car production in the Union and globally. The European battery industry, however, understood the lesson years ago, with the creation of the European Battery Alliance and the more than ten battery factories currently under construction in the EU. By the end of 2020, “investments in the EU were outperforming the US and China” in the sector.43 Regarding micro and nanoelectronics, European companies “depend largely on non- European suppliers, and Europe has shifted from a manufacturer of such technologies to a user.”44 China, South Korea and Singapore have close to 60% of the market share, while the US- dominated the high-tech market with 47% of global sales shares. Dependent on outside producers, the EU is vulnerable when it comes to semiconductors. Due to protectionist measures in the US and slowdowns caused by the pandemic in Asia, a shortage of much-demanded semiconductors occurred in 2020.

39 World Bank, 2021, Global Economic Prospects, available at: https://www.worldbank.org/en/publication/global- economic-prospects. 40 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” pp. 16-18. 41 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 43. 42 Boris Dyatkin and Shirley Meng, “COVID-19 disrupts battery materials and manufacture supply chains, but outlook remains strong,” MRS Bulletin, 45, 6 (December 2020), pp. 700-702 as cited in De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 43. 43 Henrique Ribeiro, “Deglobalization trend gains pace in lithium battery supply chain,” S&P Global, https://www.spglobal.com/en/research-insights/articles/deglobalization-trend-gains-pace-in-lithium-battery-supply- chain. 44 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 46.

The conclusion is singular – the EU needs to be able to produce its own chips and semiconductors, and European companies are more than able to do it. However, the main obstacle is represented by the initial large-scale investments. The same investments would also have to take into account the cost of extensive automation so as to decrease labor costs. As the policy department notes, the EU could “set up an IPCEI on Microelectronics that allows Member States to set up cooperation projects and be granted exceptions from EU State Aid rules.”45 Such a project already exists between France, Germany, Italy and the UK, but the industry needs bolstering and widening to other regions of Europe. Nowhere has the ability to produce crucial materials been more obvious than in the healthcare sector during the pandemic. Critical medical and protective equipment, not to mention pharmaceuticals, are part of strategic value chains for the EU. The chain itself has three major components, namely R&D, raw ingredients and the manufacturing of the final product. While research in this highly globalized value chain is the costliest part, it is also the most outsourced to start-ups or academic organizations. In this, the EU handles itself well. When it comes to the manufacturing of the finished product, however, Chinese and Indian producers dominate the market. The initial stages of the pandemic came with slowdowns of production in China and India and with subsequent generic drug shortages and price restrictions. But the EU can manufacture its own drugs. Up to 77% of active pharmaceutical ingredients are also manufactured in Europe.46 As stockpiling was more of an issue than production, the “key question seems not to be reshoring but the diversification of suppliers,” and pharmaceutical brands “might look to partner more with European contract manufacturing organizations and even move API plants to Eastern Europe.”47 The pandemic, the policy department notes, could thus “accelerate the trend to diversify and, as a consequence, increase manufacturing in Europe” when it comes to pharmaceuticals, as the EU’s own Pharmaceutical Strategy of 2020 intends to enhance crisis preparedness through diversification of drug production. In December 2020, the EU4Health program was set up to support the domestic manufacturing of European pharmaceuticals. When it comes to protective equipment such as masks, the beginning of the pandemic saw a spike in demand and EU imports exploded in February 2020. The low-cost surgical masks, the most common protective equipment, had China and Malaysia as leading producers. As borders closed down, so did the exports of masks – even among EU member states. Keeping itself open to imports, however, the EU managed to satisfy demand by combining a heightened domestic production of masks and by importing from non-traditional sources. When it comes to masks, reshoring is not an option “due to required economies of scale, established regional supplier networks, and the higher wages and sustainability standards in the EU.” Instead, international trade and stockpiling for the future are key.48 Resilience and solidarity are connected when it comes to supply chains. The pandemic brought this principle to the fore, along with concepts such as strategic, digital and technological autonomy or sovereignty. Such concepts could be heard from European policymakers and

45 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 46. 46 European Federation of Pharmaceutical Industries and Associations, EFPIA contribution to DG Trade Consultation on “A renewed trade policy for a stronger Europe” (November 2020). 47 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 48. 48 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 49.

11 political leaders – such as Commission President von der Leyen – throughout 2020. Self- determination and independence are tied into Europe’s ability to thrive on its own if necessary. Logically, access to resources and capabilities means considering the relocation of supply chains vital to European firms. The policy department of the EU’s DG Internal Policies correctly argues that “protectionist policies could in the long run hurt Europe’s resilience and threaten access to crucial technologies, especially for smaller Member States that rely more on access to foreign technologies”49 and warns that reshoring has not yet been proven effective on a large scale. To be cut off from global suppliers and competition has never proven to be a successful recipe for economic growth, but diversification of production is another matter entirely. The same report admits that “global value chains will remain vulnerable to exogenous shocks” and that “industries, in general, are not looking for ways to move their complete value chains back but rather focus on diversifying their sourcing.”50 To understand reshoring and diversification, one needs to go back to basics. Offshoring and outsourcing are strategies that increase competitiveness by decreasing production costs through relocation, either directly or through a supplier, to lower-cost countries. Offshoring makes a certain product more competitive by decreasing its production – and therefore final – price. It is the form in which FDI came to China. The literature on China’s economic rise notes that drivers of FDI into China were the population, natural resources, “cheap labor, quality infrastructure, open trade policies, regulatory reforms, easy access to foreign market, foreign investors protection, favorable tax policies and the depreciation of Yuan.”51 Reshoring is the opposite of offshoring. It is the relocation of production back to the company’s home country or a country in the same region (nearshoring). Relocation is a complex process, whether it is offshoring or reshoring, and involves consideration regarding the advantages offered by a certain location. In the 1990s, Western manufacturing firms offshored to countries like China because of the low labor costs, the benefits brought by the industrial clusters that were already forming, the ease of access to raw materials and the infrastructure that aided exports, not to mention the growing Chinese market.52 A company relocates because of “three distinct supply chain-related aspects: operational, tactical, and strategic.”53 The first aspect regards cost-efficiency, the second considers the long- term advantages of a location, while the third centers on the global competitiveness resulted from the move. Europe must offer advantages in all three to convince firms to reshore. A Western company can obviously benefit strategically and tactically from being closer to its markets, in a familiar cultural context, and under the EU’s legislative and regulatory watch, in a solid, liberal democratic setting where transparency is the rule and corruption lower than in other parts of the world. In one study, Bray, Colak and Serpa analyzed 27,807 auto components made by 529

49 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 50. 50 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 50. 51 M. Asim Fasheem, M. Khyzer Bin Dost, Answer Hussnain, Syed Usman Izhar, Ali Raza, Amber Shakeel, “Factors Attracting FDI Inflow in China,” Kuwait Chapter of Arabian Journal of Business and Management Review, 1, 4 (December 2011) 135. 52 Sunil Chopra and Peter Meindl, Supply Chain Management Strategy and Operation (Boston: Pearson, 2015), pp. 13–17. 53 Pourya Pourhejazy and Alison Ashby, “Reshoring Decisions for Adjusting Supply Chains in a Changing World: A Case Study from the Apparel Industry,” International Journal of Environmental Research and Public Health 18, 9 (May 2021), 4.

12 upstream component factories and assembled by 275 plants and found that “defect rates are higher when the upstream and downstream factories are farther apart. Specifically, we estimate that increasing the distance between an upstream component factory and downstream assembly plant by on order of magnitude increases the component's expected defect rate by 3.9%, and also that quality improves more slowly across geographically dispersed supply chains.”54 Moreover, defects increased with the complexity of the component. However, pure cost-efficiency side of the argument has been a strong obstacle to reshoring – and the primary reason why firms offshored in the first place. Even though when it comes to reshoring the cost argument loses its primacy in favor of multiple other considerations,55 to convince European manufacturers to once again produce in Europe, their costs must be decreased. This can best be done in the CEE, with lowered labor costs as a prime motivator. Although proximity manufacturing – producing something close to the market – has not been properly researched, the existing literature and case studies show that it has the potential to increase sustainability.56 Aside from that, studies have shown that in the clothing industry proximity manufacturing can lead to “short lead time, high product quality, innovation, and high profits either through cost reductions or sales and price improvement.”57 In this, clusters of producers and suppliers, facilitated by governments through favorable trade policies that make raw and intermediate materials available, worked best. Carbon footprint taxation, acts obliging companies to make the country of origin clear in advertising and tax credits for domestic producers also enhanced the success of proximity manufacturing. For European manufacturers, the closest – cost-efficient – location to produce is the CEE, in countries like Poland and Romania.

Case Study – Made in Poland

Poland has been identified by US’ International Trade Administration, the body in charge with aiding American investments abroad, as attractive for investors due to its “large population, well-educated and competitive workforce, strong prospects for economic growth and location affording broader access to the European Union market of 500 million” but also its adoption of EU legislation. Before the pandemic, US FDI to Poland stood at $13 billion, with American companies active in “automotive, aerospace, information technology hardware and software, food products, transportation and pharmaceuticals, paper production, appliances and financial services.”58

54 Robert Bray, Ahmet Colak and Juan Camilo Serpa, “Supply Chain Proximity and Product Quality,” Management Science 65, 9 (May 2019), 1. 55 Malin Johansson and Jan Olhager, “Comparing offshoring and backshoring: The role of manufacturing site location factors and their impact on post-relocation performance,” International Journal of Production Economics, 205 (August 2018) as cited in Pourhejazy and Ashby, “Reshoring Decisions for Adjusting Supply Chains in a Changing World,” 5. 56 Petchprakai Sirilertsuwan, Daniel Ekwall and Daniel Hjelmgren, “Proximity manufacturing for enhancing clothing supply chain sustainability,” International Journal of Logistics Management 29, 33, (June 2018), 2. 57 Sirilertsuwan, Ekwall and Hjelmgren, “Proximity manufacturing for enhancing clothing supply chain sustainability,” 26. 58 “Poland – Country Commercial Guide,” International Trade Administration, November 10th, 2020, https://www.trade.gov/knowledge-product/poland-advanced-manufacturing.

The ITA also notes that corruption is not widespread in Poland and that the country “does well when it comes to cross-border trading and credit access and is improving in areas such as enforcing contracts and collecting taxes.”59 When it comes to manufacturing, Poland is a growing base for the industry in the region. Manufacturing represented 22.4% of Poland’s GDP in 2019, and overall production in the sector grew by 4% the same year. Supported by the government through tax incentives and grants for procurement and R&D through the Industry 4.0 Platform, additive manufacturing and new technologies involving robotics and automation are bound to make an impact. The key infrastructure when such plans are laid out is the internet network. Connected, digitally integrated in 5G high-speed networks, the machines of the future will make labor costs trivial. Before the pandemic, Poland funded projects such as the 3M SuperHub in Wroclaw, a factory manufacturing 12000 types of products60 which was highly automated in production, supply chain and safety measures thanks to the use of drones. A model for plants of the future, the SuperHub was supervised by the National Center for Research and Development (NCBiR) and the Agency for Industry Development (ARP). National financial policies, alongside the European “Horizon 2020” program, funded R&D in Polish manufacturing before the pandemic. Two critical manufacturing industries uplift Poland’s economy – the automotive and aerospace manufacturing. Fiat, Toyota, Volkswagen, Opel, alongside their suppliers invest and profit from their investments in Poland. As the ITA notes, “in 2019, Poland produced over 600,000 vehicles. Poland manufactures engines (Daimler, PSA, Volkswagen Motor), tires (Goodyear, Michelin, Bridgestone), parts and components (Valeo, Hutchinson, BorgWarner, Faurecia, Johnson Controls, Delphi).”61 In 2020 Mercedes built a plant in Poland with an investment of $650 million, employing a thousand people. Polish aerospace manufacturing takes place in Southeast Poland – Aviation Valley – a cluster of industry and manufacturing not unlike those in large Chinese centers. Over 160 companies (Sikorsky, Augusta Westland, Pratt & Whitney and Airbus) and their 30,000 employees are present there.

Case Study – Made in Romania

The same International Trade Administration sees Romania as a country with vast potential, especially in sectors like “agriculture, manufacturing, auto assembly, textiles and footwear, petroleum refining.” Access to the Black Sea also allows Romania to shorten distances for export costs to markets in the region. However, companies in Romania are plagued by a context of corruption, bureaucracy, political instability and an unreliable judicial system. The country’s infrastructure negatively impacts business costs and productivity, not to mention its connection with the rest of the EU. Poor infrastructure alone “holds back the country’s ability to realize its full potential for new investment, trade, and tourism.”62 Another problem is the fact that Romania does not currently use the euro, but the local currency, lei. This happens although major consumer items (cars, homes, big appliances) are prices in euros. As the ITA notes, “this

59 “Poland – Country Commercial Guide,” International Trade Administration. 60 Wroclaw Technology Park, Wroclaw Technology Park joins forces with 3M,” accessed July 20th 2021, https://www.technologpark.pl/en/2020/02/wroclaw-technology-park-joins-forces-with-3m/. 61 “Poland – Country Commercial Guide,” International Trade Administration. 62 “Poland – Country Commercial Guide,” International Trade Administration.

14 creates trade inefficiencies due to higher transaction costs and exchange rate fluctuations.”63 The same can be said, to some extent, about Poland. Finally, labor shortages in the west and north of Romania leave employers without a reliable workforce. This happens although the eastern half, Moldova, sees high unemployment.

Trading in Poland & Romania

Poland and Romania can serve as destinations for new investments in EU manufacturing due to numerous reasons, as it has been shown. The two countries also have favorable tax rates. Poland levies a 19% tax on corporate income – in some cases this shrinks to 9%.64 Romania’s corporate tax is even lower, at 16%, and micro-companies pay between 1-3%.65 Romania’s top export partners are Germany (22.97%), Italy (11.43%), France (7.10%), Hungary (4.88%), UK (4.25%). Its top ten partners are 8 EU countries, the UK and Turkey. However, in 2018 the country imported more than it exported, $97.8 billion and $80 billion respectively.66 As for imports, Romania’s top five partners included China, but only in fifth place, after Germany, Italy, Hungary and Poland. Poland’s top export partners in 2018 were Germany (28.15%), Czech Republic (6.36%), UK (6.19%), France (5.55%), Italy (4.6%). In its top ten partners are 8 EU countries, Russia and the United States. As for imports, 22.4% of them come from Germany, 11.5% from China, and 7.3% from Russia. In its top ten importing partners are 8 EU countries, China and Russia. However, in 2018 the country imported more than it exported, $267.69 billion and $261.8 billion respectively.67 For both Romania and Poland, imported intermediate goods exceeded the exported intermediate goods. In 2018, Poland imported intermediate goods worth $64.3 billion and exported goods of the same type worth $47.3 billion. In the top 5 other product types (consumer goods, capital goods, machines and electronics or transportation), exports exceeded imports. Romania imports more consumer goods, capital goods, machines and electronics than it exports (it exports more transportation goods than it imports). Romania also imports intermediate goods worth $22.5 billion and exports goods of the same type worth only $13 billion. To produce those goods at home would boost the economies of both countries and lessen the unequal development between EU regions. By encouraging investing in the CEE, the EU shows solidarity.

4. European Manufacturers in CEE & Asia

Country case studies, taking into account the context of manufacturing, have their limits. Comparative approaches are widely used in social sciences in order to draw up conclusions and a

63 “Romania – Country Commercial Guide,” International Trade Administration, August 19th, 2020, https://www.trade.gov/knowledge-product/romania-market-overview. 64 PwC, “Poland: Corporate – Taxes on corporate income,” July 13th, 2021, https://taxsummaries.pwc.com/poland/corporate/taxes-on-corporate-income. 65 PwC, “Romania: Corporate – Taxes on corporate income,” July 16th, 2021, https://taxsummaries.pwc.com/romania/corporate/taxes-on-corporate-income. 66 World Bank, “Romania Exports by country 2018,” accessed June 11th, 2021, https://wits.worldbank.org/CountryProfile/en/Country/ROM/Year/2018/TradeFlow/Export/Partner/by-country. 67 World Bank, “Poland Exports by Country 2018,” accessed June 13th, 2021, https://wits.worldbank.org/CountryProfile/en/Country/POL/Year/2018/TradeFlow/Export/Partner/by-country.

15 pathway forward for individuals, groups, states, or groups of states. Companies and products are not an exception. If a CEE-based manufacturer manages to be competitive in the highly- competitive EU market, then its case can prove instructive for policymakers looking to revitalize European manufacturing by encouraging European companies to relocate their factories in the CEE, within the EU, and thus benefit from increased tax income and the creation of jobs. In this way, solidarity can be extended to both European workers and European companies. To that end, a database has been compiled bringing together ten European manufacturers producing in the CEE and ten of their European competitors producing in Asia, mainly China. Each CEE-based manufacturer’s product price is compared to that of a similar product – that is also marketed in Europe – made in Asia. In this way, competitiveness is measured. The first pair, for example, compares the Philips Kettle HD4646/70 1.5 litre 2400 W and the Russell Hobbs Adventure Kettle Polished. Both products can be found on the European market, and they are separated by €2,98 in terms of price, a difference which makes the first more expensive than the second. The Phillips kettle was made in Białystok, Poland. The facility is one of several that the company operates in Poland – the others being Warsaw, Lodz, Saw, Piła, Kętrzyn, and Bielsko-Biała –, where it has an extensive, 90-year history, connecting it to crucial events for the Polish nation.68 Philips proudly exhibits its time-tested committment to its Polish branch on its website, as well as its investments there,69 as do most of the companies included in the database that manufacture their products in the CEE. Less transparent with its supply chain, Russell Hobbs, a UK-based brand of home appliances and personal care products operating out of Failsworth, England, since 1952, does not make public its production and manufacturing centers. East Asia is the most precise that one can go with the origin of its Adventure Kettle Polished. If Philips boasts around 5000 employees in its Polish facilities,70 Russell Hobbs employs between 1000 and 5000 people in East Asia.71 Numerous companies in the database produce both in the CEE and in Asia. German tire- maker Continental, for example, opened a passenger car tire factory in Timisoara, in the west of Romania, in 2000. Eleven years later, the company inaugurated its first tire plant in China. A giant employing almost a quarter million people in 59 countries, Continental nevertheless continually invested in Romania – €175 million in 2017, €240 million in 2018 and €150 million in 2020, despite the pandemic.72 The company is the largest car components manufacturer in Romania. Pirelli, Continental’s direct competitor in the database, is also one of the world’s major tire producers, employing 31600 people globally – and over 4000 in China and Indonesia.73 The company has manufacturing sites in 12 countries, among which Romania, Germany, Italy and the UK. However, its Yanzhou plant, in China, can produce 7 million high-end car tires per year

68 “History,” Phillips, accessed July 5th 2021, https://www.philips.pl/a-w/about-philips/philips-na- swiecie/historia.html. 69 2020 Annual Report, Philips, accessed June 22nd 2021, https://www.results.philips.com/publications/ar20. 70 “Philips in Poland,” Phillips, accessed July 5th 2021, https://www.philips.pl/a-w/about-philips/philips-na- swiecie/local-index.html. 71 2019 Annual Report, Spectrum Brands, accessed June 18th 2021, https://investor.spectrumbrands.com/financials/annual-reports. 72 Andrei Chirileasa, “Continental buys new building to expand production and logistic center in Timisoara,” Romania Insider, April 8th 2021, https://www.romania-insider.com/index.php/continental-expansion-logistic-center- timisoara-apr-2021. 73 “Pirelli in the world,” Pirelli, accessed July 2nd 2021, https://corporate.pirelli.com/corporate/en- ww/aboutus/worldwide-presence.

16 and alone accounts for 3000 of the company’s employees.74 Expanding in China, Japan and South Korea, Pirelli is a successful European brand, and its Pirelli Cinturato All Season Tires are – in the least expensive option – €2,23 cheaper than Continental’s Continental AllSeasonContact Tires. Still, Continental is able to compete with Pirelli on the European market, offering a comparable product at a competitive price. Some CEE manufacturers are not only able to compete with the products manufactured outside of Europe, but also to offer a cheaper price. Faulhaber’s Hungary-made motor is cheapter than the one built by the Swiss Maxon group in South Korea. Employing 300 in Albertirsa,75 Hungary, the German company was able to increase its net sales revenue by 36.85% in 2019. Its’ total assets recorded a growth of 18.48% the same year.76 Other products outpacing their China-made counterparts are Bosch’s Hungarian-made IXO cordless screwdriver, cheaper at €55,94 than Einhell’s Chinese-made €57,99 TC-CD cordless screwdriver. So is the Bosch MCM4100 Compact Food Processory Styline, made in Slovenia, which is almost half the price of Philips’ Viva Compact food processor, made in China. Siemens’ power supply, made in Romania, is cheaper than Puls’ China-made one. Siemens has a history of 114 years in Romania, opening its first office in the country in 1905 under the name “Romanian Electricity Company – Siemens Schuckert Anonymous Society.”77 On the other side, Puls’ annual growth rate of market sales has been over 60%, and sales offices have been successively established in Shanghai, Beijing and Guangzhou. PULS embraces the “Made in China” label and plans to grow alongside China.78 Bosch’s 40CM Electric Chainsaw, made in Hungary, is more expensive than Husqvarna’s Poulan Pro Gas Chainsaw. So are Phillips Saeco’s Saeco PicoBaristo Deluxe Fully Automatic Coffee Machine, which at €555 is more expensive than De’Longhi’s €519 Eletta Plus ECAM series. Kärcher’s 17 Litre 1000W Wet & Dry Vacuum Cleaner - 230V, made in Romania, is more expensive than the made-in-China Nilfisk 18 Litre 1200W Wet & Dry Vacuum Cleaner - 230V. In China, German company Abus makes brass padlocks that are available in the EU for less than half the price of the Assa Abloy brass padlocks made in Romania. And yet, the Swedish company, under its Yale brand, has been present in Romania since 1998. There it produces safety cylinders, digital and rim locks, security sets and many others products which are then shipped to Western Europe. In fact, 95% of Yale’s products made in Romania are sold outside of the country, and the company plans investments of €10 million up to 2025 meant to increase production.79 At the same time, Assa Abloy employs 7625 people in

74 “Pirelli focuses on win-win business model,” China Daily, April 25th 2019, https://www.chinadailyhk.com/articles/32/115/227/1556165913351.html. 75 “FAULHABER Motors Hungaria Kft.,” Faulhaber, accessed June 13th, 2021, https://www.faulhaber.com/en/about-faulhaber/locations/faulhaber-motors-hungaria-kft-hu/. 76 "Faulhaber Motors Hungaria Kft. Company Profile - Hungary | Financials & Key Executives | EMIS". 2021. Emis.Com. https://www.emis.com/php/company-profile/HU/Faulhaber_Motors_Hungaria_Kft_ 77 Aurel Dragan, “Siemens recorded a turnover of over RON 1 billion in 2018, up 22 percent,” Business Review, March 29th 2019, https://business-review.eu/news-ro/siemens-recorded-a-2018-turnover-of-over-ron-1-billion-up- 22-percent- 198746#:~:text=The%20total%20number%20of%20Siemens,other%20areas%2C%20including%20software%20de velopment.. 78 “Puls in China,” Puls, accessed June 12th 2021, https://www.pulspower.com/company/about-puls/sales- locations/china/. 79 Alina-Elena Vasiliu, “Assa Abloy, un producător suedez de încuietori, trimite 95% din producţia din România la export. Compania are un plan de investiţii de 10 mil. euro până în 2025,” Ziarul Financiar, https://www.zf.ro/companii/assa-abloy-un-producator-suedez-de-incuietori-trimite-95-din-19885595.

China, where a part of its sites are located.80 The production capabilities of the entire Assa Abloy group were hit by the Covid-19 pandemic, but the company was able to minimize supply chain risk by diversifying its sourcing from Mexico when US suppliers were shut down and from Eastern Europe when Western European producers had to close. The Romanian plant was part of that strategy. De’Longhi is its own success story. De’Longhi Romania became the group’s largest production center after it produced more than 4.4 million espresso machines, mixers, and blenders at the Jucu factory near Cluj-Napoca, which it operates since 2012. From there it exports espresso machines and other small appliances to the UK, France and Germany. The Romanian plant overtook last year the production unit in China and became the group’s largest.81 Having a plant in Eastern Europe "made it possible to diversify the Group's industrial platform.” In China, De'Longhi found enhanced risks to its operations due to high turnover in the workforce, difficulty in finding employees and higher wages and production costs, not to mention endangered intellectual property and a case of child labor. For that reason, most of De’Longhi’s automatic coffee makers sold in Europe are made in Europe – in Romania or Italy.82 In total, six out of the ten CEE-based European manufacturers offered products that were more expensive than those made by their competitors in Asia, mainly China. Their continued presence – and continuous investments – on the highly-competitive European market alongside these competitors, however, shows that is possible to manufacture in the CEE and remain competitive in Europe and globally. De’Longhi and Assa Abloy, among others, have continually invested in their plants in the CEE precisely to minimize supply chain risks. More than anything, producing in the region allowed these manufacturers and other like them to proudly state that they are doing so when they marketed their products.

5. Policy Options and Recommendations

Relocation of supply chains and the reliance entirely on domestic capabilities will render European companies uncompetitive. Projects such as the Important Projects of Common European Interest (IPCEI), however, recognize the strategic importance of some goods and materials even though overall “EU industries showed a great deal of resilience”83 during the pandemic, and even though global supply chains are vital to European firms, shorter supply chains that stretch to Budapest and Bucharest, not to Beijing, are closer to home, safer politically and economically profitable. The strengthening of domestic sourcing, along with stockpiling, can guard against supply shocks. The EU should not look to be 100% autonomous, as that is not possible, but strategically

80 Annual Report 2020, Assa Abloy, accessed June 15th 2021, https://www.assaabloy.com/group/en/investors/reports-presentations/annual-reports/2020. 81 “De’Longhi Romania becomes group’s largest production centre, needs more workforce,” Romania Insider, May 22nd 2019, https://www.romania-insider.com/delonghi-romania-big-production. 82 Annual Report 2018, Delonghi Group, accessed June 9th 2021, https://www.delonghigroup.com/sites/default/files/DL_BILANCIO%20CONSOLIDATO%202018_ENG_pagine%20sin gole.pdf. 83 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 42.

18 autonomous when it comes to certain goods or components. The EU Action Plan on Critical Raw Materials is one example of policies that work to that end. A competitive Europe is one that invests into research, diversifies production through enhancing domestic capabilities and establishes connections with reliable outside partners. Cooperation between member states or action at the level of the EU must be taken to encourage post-pandemic investments in the manufacturing sector. Complementarity and coordination are vital principles in the regional CEE manufacturing industry. The role of the EU is to set strategic goals and link national economies and production capabilities. Clusters of innovation and industry should be propped up through financial instruments and the ensuring of access to the newest technologies. The best opportunity for such investments comes with the Recovery and Resilience Facility, the largest package of grants and loans the EU has ever created. The RRF stands at €750 billion, which includes various programs, and some of the funds must go toward the enhancing of production capabilities in the CEE, thus to the diversification of strategic – and not only – goods in the region. The RRF must support the shortened supply chains for chips, pharmaceuticals, and batteries, among others. As the DG Internal Policies report notes, however, “the pharmaceutical sector and its value chains are absent from the NGEU guidelines.”84 Any mentions of other strategic goods are scant in the national programs. As such, the EU must take it upon itself to set up regional links and networks of manufacturers. As it has been argued, manufacturing can be most cost-effective in the CEE, and to aid manufacturers invest in the region, a series of policies are crucial.

a) Population

Starting with the 1980s, China opened itself to the outside world – and outside money. It was not until 1992, however, that FDI into China became significant. In 2006, at its peak, over $87 billion found its way into the country. Until 2006, China had received FDI inflow worth $293 billion.85 Some of the investors saw China as a production hub, but also as a market itself, due to its population of approximately 1.4 billion people. By comparison, the CEE has a combined population of only 101.7 million – as much as the six largest cities in China put together. Aside from its smaller initial size, the CEE is plagued by other issues connected to population. A report of the EU Parliament shows that 5% of EU citizens leave the region in which they were born in search for new opportunities elsewhere across Europe. However, included in that part of the EU population was 25% of the active population in Eastern Europe.86 This migration, especially of young, educated individuals, fuels regional differences and demographic issues such as aging. It also robs companies of workforce. If these people could find a well-paying job in their own region, such problems would be ameliorated. Manufacturing can provide new employment opportunities in the CEE.

84 De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 62. 85 M. Asim Fasheem et al., “Factors Attracting FDI Inflow in China,” 128. 86 Alexandra Loy, “PE a aprobat raportul inițiat de Daniel Buda privind Inversarea tendințelor demografice din regiunile UE utilizând instrumentele politicii de coeziune,” Calea Europeana, May 20th, 2021, https://www.caleaeuropeana.ro/pe-a-aprobat-raportul-initiat-de-daniel-buda-privind-inversarea-tendintelor- demografice-din-regiunile-ue-utilizand-instrumentele-politicii-de-coeziune/.

Up until the last decade, China attracted FDI with its young, educated workforce. The EU’s population, by comparison, is an aging one, and that of the CEE is no exception.87 For the region to become more attractive as a consumer market and to be able to offer a workforce necessary for manufacturing clusters, migration to the region must be encouraged. At the moment, the CEE EU members score higher than China on the overall Migrant Integration Policy index, but lower than Western European countries.88

Figure 1: Overall Score, 2019

Policies geared toward the welcoming and the integration of legal, educated and younger migrants can only aid CEE’s economic development.

b) Labor costs

The literature of development and FDI highlights low labor cost and high unemployment as attractive to FDI, and China’s case was no exception.89 Especially if highly educated and relatively cheap, the importance of labor cannot be overstated. In this respect, the CEE can compete with China. The mean nominal hourly labor cost per employee in manufacturing in the CEE is $17.5, higher than China’s $13.7, but only 44.8% of that in non-CEE EU member states. While salaries are posited to grow in the future in the CEE, so will those in China. The policies direct at encouraging population growth, primarily through immigration, will also ensure that such a growth remains controllable.

87 Eurostat, “Population structure and ageing,” accessed July 1st 2021, https://ec.europa.eu/eurostat/statistics- explained/index.php?title=Population_structure_and_ageing#:~:text=The%20median%20age%20of%20the,years%2 C%20while%20half%20was%20younger. 88 Migration Integration Policy Index 2020, “Migrant Integration Policy – Overall score,” accessed June 5th, 2021, https://www.mipex.eu/play/. 89 M. Asim Fasheem et al., “Factors Attracting FDI Inflow in China,” 131.

Figure 2 Mean nominal hourly labour cost per employee in manufacturing (USD) Source: ILO (2019)

50 39.03 40

30 17.5 20 13.7 10

0 NON - C E E CEE CHINA

When it comes to growth, and therefore productivity, the CEE has a strong showing as well. Even during the pandemic, Romania, Lithuania and other Eastern EU members saw an unexpected growth in output in the fourth quarter of 2020.90 CEE employees also benefit from ties to other EU companies and economies. Data shows that in 2019, 28.1% of all Romanian employees worked for a foreign multinational, most of them (16.4%) in a German-owned company. On the second and third place one could find France (12.6%) and Italy (8.8%).91

c) Infrastructure

The same development literature that highlights labor costs also proves that physical and technological infrastructure attracts more FDI.92 The CEE, however, presents gaps in its infrastructure, which are exploited by third-actor states such as China, through its 17+1 initiative in Eastern Europe and the Western Balkans. Designed as a counterweight to Western ties in the region. However, China’s political and economic influence in Eastern Europe is low. Analyses have shown that only Serbia and Hungary have been more open to China’s advances – and that only out of a “desire for strategic autonomy vis-a-vis the West,” a product of “home-grown dissatisfaction with the West, and not caused by a strategic detachment from Western structures.”93 Greatly exaggerated, the danger of Chinese influence in Eastern Europe is not to be completely ignored. With gaps in strategic sectors of the economy, such as infrastructure, countries of the CEE need to strengthen their ties with the rest of the EU. A better linking between lagging regions and leading regions, from an economic standpoint, will take place if the former become a manufacturing center for the latter. For such industrial clusters to form, “transport links, access to finance, and cooperation with the

90 Andra Timu, „Romania’s Economy Outshines After Shunning Lockdown,” Bloomberg, February 16th, 2021, https://www.bloomberg.com/news/articles/2021-02-16/romania-s-economy-outshines-rest-of-eu-after-shunning- lockdown. 91 Biziday, “INS: După statul român, companiile germane reprezentau cel mai mare angajator din România, înainte de pandemie. Peste 28% dintre salariații din companiile din țară erau angajați în multinaționale cu capital străin,” accessed July 26th, 2021, https://www.biziday.ro/ins-dupa-statul-roman-companiile-germane-reprezinta-cel-mai- mare-angajator-din-romania-urmate-de-cele-din-franta-peste-28-dintre-salariatii-din-tara-sunt-angajati-in- multinationale-controlate-din/?fbclid=IwAR24yjRzvJOqC_k-Slhv_0Sq5AgaLWj9- Xh_B2rPuspvfEdNIUcl0GDY_Z8. 92 M. Asim Fasheem et al., “Factors Attracting FDI Inflow in China,” 132. 93 Marius Ghincea, Clara Volintiru and Ivan Nikolovski, “Who Summons the Dragon?” Global Focus, 2021, 4.

21 universities and research centres”94 are necessary. Such infrastructure reforms aid enterprises access global value chains, but they also enhance European supply chains. An industrial policy focused on manufacturing may, in this way, also improve regional coherence in the EU. RRF funds must, therefore, be used to build CEE’s roads, bridges, railways and ports.

d) Taxes

Treated as a single country, the eleven CEE countries have an average combined corporate tax rate of 16.9%, lower than the OECD average of 21.7%, the worldwide average of 23.9%95 or China’s rate of 25%. A regional, uniform tax rate across the member states around this average value would maintain the competitive edge of all CEE countries in attracting investments and avoid fragmenting investments and forcing the CEE states to compete for them in a tax race to the bottom.

Figure 3 Combined corporate tax rate (%) Source: OECD

30 23.9 25 25 21.7 20 16.9 15 10 5 0 CEE OECD WORLWIDE CHINA

e) Barriers to trade

In Asia, China was a champion in the ease of doing business and exporting goods. Where China had been lacking in the period was in the ability of the legal system to enforce contracts96 - but it improved on that later on. A complex, nontransparent and biased tax incentive system97 that applied two sets of tax laws for foreign and domestic companies that discouraged FDIs from China was also later replaced. Reduced tariffs, preferential policies for foreign trade aided FDI inflow and the growth of Chinese industries. Growth was especially visible on the coasts, where exporting was easier.

94 Gergely Hudecz, Rolf Strauch, Thomas Wieser, “Addressing the risk of regional disparities,” European Stability Mechanism, September 22th, 2020, https://www.esm.europa.eu/blog/addressing-the-risk-of-regional-disparities 95 Elke Asen, “Corporate Income Tax Rates in Europe,” Tax Foundation, April 8th, 2021, https://taxfoundation.org/2021-corporate-tax-rates-in-europe/. 96 Wanda Tseng and Harm Zebregs, “Foreign Direct Investment in China: Some Lessons for Other Countries,” IMF Policy Discussion Paper (February 2002), 20. 97 Tseng and Zebregs, “Foreign Direct Investment in China,” 23.

Figure 4 Source: World Bank (2021)

Ease of doing business: CEE vs China

Resolving Insolvency Enforcing Contracts Trading across Borders Paying Taxes Protecting Minority Investors Getting Credit Registering Property Getting Electricity Dealing with Construction Permits Starting a Business Global Rank

0 20 40 60 80 100 120

China CEE

If one treats the CEE region as a singular country, adding up and averaging its scores in the 2021 Ease of Doing Business index compiled by the World Bank, one would better note its strengths and weaknesses vis-à-vis to China in particular. In the index, the smaller the values, the better. Key takeaways:

 The CEE scores much better than China when it comes to trading across borders. It is also easier for businesses to get credit in the CEE.  The two are on par when it comes to resolving insolvency or registering property – although the CEE has a slight advantage in the former, while China has it in the latter.  It is more than twice as easier to pay taxes in the CEE than in China, but enforcing contracts, getting electricity for one’s business, dealing with construction permits and starting a business are all much easier to do in the Asian country than in the CEE. China also protects minority investors more than the CEE does collectively.

The differences between CEE countries, however, are not to be ignored. The creation of a CEE Industry Best Practices and Policies Office that would coordinate industrial policy in the countries of the region, implementing the best-proven policies as shown in various states, would aid the economy of the region as a whole. Other policies, such as the Polish model of Industry 4.0, can also be expanded in the whole region, creating clusters of industry and innovation across the CEE.

f) Debureaucratization

By 2010, FDI-fueled businesses in China accounted for over half of the country’s exports and imports, 30% of its industrial output and 10% of employees. However, the way China attracted FDI was in a highly decentralized way. This could entail red tape and corruption from

23 local governments. The solution was “one stop” facilities made for investors to conduct all bureaucratic procedures in one place. As it has been noted, the American Jobs Plan included a $50 billion investment into an office dedicated to monitoring domestic industrial capacity. The EU and the CEE need to follow suit. What is need is one authority, one office, for opening a factory in any EU state. Such debates already took shape in Finland,98 The cutting of red tape needs to happen in at European level, simplifying and homogenizing procedures.

g) Investments

Even before the pandemic, countries that were traditionally attractive for manufacturers all over the globe have lost their shine, as reshoring companies are looking to develop competences rather than cut costs.99 However, the main obstacle to firms’ reshoring remains the necessary large investments in the construction of plants. Firms that reshore face the need of such large investments. A combination of policies can aid companies overcome such a challenge. Grants, tax reductions or reimbursements, government-backed loans, the creation of a special status for industrial clusters are all viable options. The EU should follow the US in setting up increased access to capital for domestic manufacturers. This can be done through a venture capital fund that would support small and medium manufacturers in remote communities.

h) Stockpiling

Orgalim, an EU-wide federation of technology industries which together represent EU’s largest manufacturing sector, with an annual turnover of over €2 billion, noted that the electronic engineering sector “is currently struggling with bottlenecks in component deliveries: the unavailability of semiconductors.” The mechanical engineering sector is also seeing bottlenecks in “industrial metals and electronic components” leading to “massive price increases and supply chain disruptions.” The metalworking industry, by comparison, is recovering better, thriving off of demand from the Chinese economy.100 Orgalim sees the shortages in raw materials as a break to growth and recovery in the post-pandemic European economy. Such shortages cannot be passed to the consumer due to the pressures of the international competition and reduce the willingness of companies to invest. As it has been shown, batteries for electric cars require cobalt, which cannot be found in the EU. Where reshoring is not a viable option due to natural scarcity, economies of scale or prohibitive initial investment costs, stockpiling can prove to be a solution. The EU needs to ensure the availability of raw materials, even at a higher price.

6. Conclusion.

Two key conclusions can be drawn. First, shortened, European supply lines increase the resilience of the EU economy, especially with strategic primary and intermediate goods. Second, European manufacturing can be most cost-effectively done in Central and Eastern Europe.

98 AmCham Finland, “A one-stop shop for FDI? The Finnish Parliamentary Elections,” accessed July 3rd, 2021, https://amcham.fi/a-one-stop-shop-for-fdi-the-finnish-parliamentary-elections/. 99 Johansson and Olhager, “Comparing offshoring and backshoring,” 43. 100 “Positive signals but crisis not over for Europe’s technology industries,” Orgalim, Spring Report 2021

“Produce in Europe” and “buy European” have to become the norm in the EU, replacing similar encouragements that have a particular nation instead of the Union at their core. If economic nationalism and autarky are bankrupt business strategies for a Europe that needs its companies to be successful globally, encouraging European companies to shorten their supply chains, to diversify production and sourcing by making some things closer to home, can only be beneficial to all stakeholders. Consumer electronics, robotics and automotive goods have to be considered strategic goods alongside pharmaceuticals and certain raw materials, and value chains can be remolded through European and national – or combined – financial instruments. Europe cannot become overly protective with its strategic industries, but it does need to ensure their functioning – the pandemic has shown this much. It is not too late for Europe’s recovery to take the shortening of supply chains into consideration. It is true that “to ensure the competitiveness of the EU industry, relocation decisions should remain business decisions”101 but business decisions are shaped by context, and policies shape context. Armed with the right policies that would boost population through immigration, invest in infrastructure, remove barriers to trade, harmonize corporate tax rates, create one-stop-shops for FDI, ensure capital for manufacturers and create stockpiles of critical materials, EU stakeholders can jumpstart the economy of the Union. In international trade, Europeans need not be naïve or autarkic, but driven by fairness and solidarity, both of which have to be extended to European manufacturers.

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