International Molding Report: Eastern Europe: An undiscovered market

Editor's note: The information presented here on the EasternEuropean market is part of IMM's International Molding Reportseries, which is prepared by Agostino von Hassell of The ReptonGroup. Von Hassel also writes IMM's Molders Economic Index.

Molderscontemplating expansion plans should take a closer look at EasternEurope. This market has 150 million educated people, growing consumerspending power, and virtually no U.S. manufacturing presence.

What constitutes Eastern Europe? Countries included are theBaltic Republics, Poland, Hungary, the Czech and Slovak Republics,Romania, Bulgaria, Croatia, Slovenia, and even parts of Belarusand the Ukraine. The former East Germany is essentially and culturallypart of Eastern Europe, less anchored in the West than most peoplethink. As peace advances, the rest of the old Yugoslavia willbe added to this list soon.

A Flurry of Activity

The incentives for U.S. molders to consider Eastern Europeas a place to invest are numerous. The most appealing aspect isthat many Eastern European countries are now attempting to jointhe European Community (EC).

What that means in practical terms is simple. Governments havesped up legal and economic reforms, providing a framework thatallows business to invest by rules common in Western Europe. Subsidiesand tax incentives are plentiful as governments accelerate theirpush to boost economic growth to levels that make them more acceptableto the demands of Brussels, the headquarters of the EC.

What's more, as these countries join, they will enjoy a bountyof economic subsidies made available by Brussels. For example,when Portugal and Spain-countries with lower living standards-joinedthe European Union, Brussels started massive spending to boosteconomic growth. Why? The concept of the European Community worksonly if the various economies quickly reach similarly high levels.

First in line to benefit from this largesse-estimated to beat least 1 trillion euros over 10 years-will be firms alreadyoperating in Eastern Europe. That, in addition to the alreadyapparent market potential, has created a flurry of new investments.

Most have come from Western European countries. Germans leadthe way, claiming a space with money that the sword couldn't conquer.The German government, for more than 10 years, has favored massiveinvestments in Eastern Europe, and German language training isheavily subsidized as Berlin hopes to make German the lingua francaof the East. "We are almost a German colony," a Czechgovernment official interviewed for this report said. "Wewould like to balance that with some U.S. investment soon."

However, countries such as the Czech and Slovak Republics,Poland, and Hungary remain wary of German domination for understandablehistorical reasons. "We see new U.S. investment as a wayto counter creeping German colonialism," a senior officialin Poland's economics ministry said. U.S. firms are seen as leadersand innovators in advanced manufacturing technology as well asmanagement practices.

Brussels is already pushing these countries to seek more outsidefunds. In October Eric van Linden, head of the European Commissiondelegation in Slovenia, said the country needs to attract "muchmore foreign investment" and accelerate privatization.

Signs of Growth Abound

U.S. automotive molders are among the first who could findsolid opportunities in the East. "We would love to see U.S.suppliers become active here," a Czech officer at Volkswagen-ownedSkoda Auto AS (Mlada Boleslav, Czech Republic) told IMM. "Weneed the know-how for high-speed, high-quality parts molding tohelp us sustain our growth."

Growth is solid for Skoda and other car builders in EasternEurope. In the first nine months of 2000 Skoda boosted sales growthby 7.4 percent. Other Eastern carmakers have made similar gains.

Several other industries have emerged with promising opportunitiesfor growth, potentially ensuring profitable results for U.S. molders:

Examples of Investment

Here is a quick list of some of the more notable plastics-relatedinvestments of the immediate past, just to give you a flavor forwhat is currently being done.

Joint Ventures

It may also be worthwhile for U.S. molders to explore jointventures with existing molding operations in the region. But howto find these companies? The governments involved are openingdoors to foreign investors, providing leads and solid information.

There are also numerous and very aggressive companies thatcould make interesting investment targets. Consider Prodplastof Bucharest, Romania. The company molds car parts and consumerproducts in addition to operating extrusion and blowmolding facilities.With more than 800 skilled workers, the company is poised to takeoff and service a large part of that market. What's needed, sourcesthere say, is "U.S. technology, U.S. money, and U.S. know-how."

In the Czech Republic, Isolit-Bravo Jablonne-a molder of consumergoods and kitchen items-is growing quickly, with more than halfof its sales coming from contracts with foreign companies (mostlyin Western European) .

One final note of caution: While opportunities abound in EasternEurope, there are some severe structural problems that investorsshould consider. For instance, a number of former communist state-ownedeconomic structures have not yet been dismantled. The centralplanning mindset remains another obstacle in some cases, and corruptionis still a major problem in many countries. Prospective investorsshould have local advisors with a proven track record.