China has long revelled in its role as the “world’s factory” but its dominance may be coming to an end.
Amid a rising tide of cost pressures, as well as president Xi Jinping taking a more hostile stance towards the West, chief executives are becoming increasingly keen to shorten their supply chains.
An American Chamber of Commerce survey in August found 40pc of US companies are already redirecting investment destined for China to other countries, or are planning to do so.
However, the US is not alone in moving away from China, as the president of one Japanese chip maker said that exporting from the country is just “no longer viable”.
Already, huge companies such as Apple, Dell, Microsoft and Nike have announced plans to shift production to the likes of Mexico, Vietnam, India and Thailand.
But these are not the only countries set to benefit as companies “nearshore” their supply chains, as the trend is also bringing manufacturing back to Europe.
Space to grow
Industrial real estate companies in central-eastern Europe (CEE), which covers the Czech Republic, Slovakia, Romania, Hungary, Poland, Serbia and Bulgaria, are booming.
Across the first six months of this year, developers rolled out 3.8 million sq metres of industrial space across CEE, according to Cushman & Wakefield property consultants.
Year-on-year, supply in the region expanded by 16pc, while a further 5 million sq metres of industrial and warehouse space is already under construction.
Earlier this year, CTP, Europe’s largest listed industrial developer, announced plans to invest €300m (£260m) in its warehouse portfolio in Poland. In 2023 alone, it will increase its estate by 600,000 sq metres, more than tripling in size.
In August, it also opened an office in Hong Kong to market warehouse space to businesses looking to diversify their supply chains out of China.
Taiwan electronics manufacturer Inventec has leased 52,000 sq m of manufacturing space in the Czech Republic “to reduce risk in the global supply chain”.
CTP’s chief executive Remon Vos is spearheading his firm’s expansion and is often travelling the world on his private jet, named “OK-VOS”.
“Western companies are saying let’s move production very close to home,” says Tomas Dvorak, senior economist at Oxford Economics. “But it’s still just scratching the surface. In two or three years it will really take off. It could be transformative. Across the region, probably we are talking about millions of jobs.”
“We are seeing more and more inquiries from manufacturers,” says Sally Bruer, head of EMEA logistics and industrial research at Cushman & Wakefield. “We’re talking about big tectonic plates for some businesses. Manufacturing is not a short-term game.”
Foreign direct investment (FDI) in manufacturing across CEE is climbing steadily. Six years ago in Hungary, manufacturing FDI was worth 2.03pc of GDP. By 2022 this had risen to 3.65pc, according to Oxford Economics.
“We are hiring people now to represent us in Taiwan and mainland China,” says Bert Hesselink, CTP’s client relationship director, who has just returned from trips to both countries. “The mood is expansionary. Many companies are making decisions about where they will produce their next product. Global supply chains are basically being cut into local supply chains.”
Other European real estate companies, such as Mountpark and WDP, have also been expanding in CEE.
“Those developers have a significant pipeline of land between them and will be able to deliver at scale,” says Bruer.
Demand is strongest from electronics and electric vehicle (EV) companies, says Hesselink.
Hungary is already Europe’s second-largest producer of EV batteries.
Audi has bolstered its Hungarian EV production line while Samsung’s battery arm is setting up a new production facility there. Last year, Volvo announced a €1.2bn investment in a new EV factory in Košice, Slovakia. In February, it also announced it planned to hire more than 500 people by the middle of the decade at a new EV software development centre in Krakow.
So-called nearshoring may not necessarily mean quitting the countries where they already have factories, but it certainly influences new investment decisions, says Bruer.
However, it is not just Western companies. Chinese firms selling goods to the European market also want to be closer.
“Chinese companies are investing heavily into expanding their EV supply chains in Europe,” says Hesselink, who adds that Chinese battery maker CATL is building a $7.6bn manufacturing factory in Hungary, and car manufacturers Nio and BYD are also exploring the CEE.
Companies want to de-risk their supply chains, says Hesselink, not only from the increasing political risks of operating in China but also to exposure from shock events such as the Evergreen container ship’s Suez Canal blockage in 2021 – which held up $400m of global trade an hour for six days.
Cleaner supply chains
CEE countries have big transportation advantages. Goods produced in Iłowa, which is close to the German border in Poland, for example, can reach 21 million customers within a five-hour drive. This matters both in terms of cost and logistics, but also for corporate sustainability goals.
“What is becoming increasingly important is the decarbonisation of supply chains,” says Hesselink.
Manufacturers here may not need to transport goods far at all, he adds, as consumer demand grows rapidly across Eastern Europe in the coming years.
China gets costlier
At the same time, China is pricing itself out of the market.
“The dynamic that drove a lot of manufacturing further away, particularly in the Far East, was primarily cost. Now the differential is eroding,” says Bruer.
Manufacturing wages in China rose by no less than 480pc between 2005 and 2021. Across the EU, over the same period, the increase was just 48pc.
In some CEE countries, wages are actually cheaper than in China. In 2021, the average hourly manufacturing wages in Serbia and Bulgaria were €5.6 and €5 an hour respectively, while the average equivalent in China was €6.1.
“There is also the inevitable factor around geopolitics,” says Bruer, “which is driving an awful lot of change” in sectors as semiconductors and EV production.
In terms of competition from countries in south-east Asia, Dvorak says Eastern Europe is way ahead in terms of “intellectual property rights and a stable business environment”.
Dvorak also adds that each country offers a range of cash grants and tax breaks to manufacturers and investors.
Hungary has one of the lowest corporation tax rates in the EU at 9pc and offers a partial exemption for 13 years after investment.
The Czech Republic also has corporate income-tax relief for up to 10 years, as well as cash grants of up to around €12,000 per job created.
All of which is contributing to a boom in interest across Eastern Europe.
“It’s business friendliness and cost-effectiveness,” says Hesselink.