China has long been the flagship nation for U.S. manufacturers looking for low-cost sourcing opportunities. In addition to the low wages, China offers a variety of perks such as beneficial lending rates, political stability and an overall production-friendly environment for companies to conduct business.
And for years, packaging solutions provider MeadWestvaco (MWV) took advantage of those prime conditions. But according to Craig Reed, the company's vice president of procurement and logistics, the Chinese government's recent efforts to control and even curb the accelerated rate of industrial growth has caused many companies to start looking elsewhere for competitive advantage.
"Long lead times and total cost of ownership concerns are things that manufacturers are starting to see [in China], in addition to security risks and port capacity issues," Reed explains. "It causes you to think about how to diversify your global strategy from a low-cost country perspective."
For MWV, one result of that introspection was to start exploring some of the more promising opportunities in Central and Eastern Europe. From the Baltic states and post-Soviet Russia, Ukraine and Belarus to Turkey, Romania, Poland and the former Yugoslavia, the area can provide ready access to lower-cost raw materials and less aggressive labor unions than many of their neighbors to the west.
"Growth is skyrocketing in Europe the further you move east," notes MeadWestvaco's director of global sourcing David Hauxwell. "That has to do with the fact that those are primarily untapped areas. Going into central Europe is not necessarily a new thing for a lot of companies, but what you are seeing is that they are continuing to march further and further east."
An important factor in stimulating this development is that as more countries have joined the European Union (EU), its laws and regulations are allowing companies to feel secure in how their products and intellectual property are managed, and that they are being supplied safe and secure commodities.
"EU membership is very important as you look forward to your Eastern or Central European sourcing strategy. It offers manufacturers and suppliers benefits that help them become more competitive and meet the demands that we [in the United States] require in our culture and our companies."
-- David Hauxwell, director of global sourcing for MeadWestvaco
To spur growth, many of these nations have taken fairly proactive roles, establishing simplified tax structures and other government incentives to encourage U.S. manufacturers to buy materials and other products from local suppliers. The most significant draw is the labor rates, which decrease the further you move east.
"Central European wages might seem high relative to eastern Europe, but it's still four to ten times less than what it is in Western Europe -- particularly Germany and France," adds Hauxwell. "So you can't let that dissuade you from looking at Central Europe as well, because it's still far better from a labor perspective."
Workforces in both areas are also highly skilled in many cases, often speaking multiple languages (including English), which can dramatically improve communication barriers that are still common when dealing with Chinese suppliers. The caveat, Hauxwell warns, is that you have to be careful in certain areas when it comes to consistent levels of productivity.
"Productivity [in Central and Eastern Europe] varies dramatically from country to country depending on the education system, the infrastructure and the invested capital they have on the ground. And it tends to go down as you move east," he explains. "So while it's great to get a lower rate, if you end up spending more [total] dollars on labor, then you've shot yourself in the foot."