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Going East – CEE seen from a Western MNC perspective

Going East – CEE seen from a Western MNC perspective. Arnold Schuh Competence Center for Central & Eastern Europe Presentation at the Matej Bel University, Banska Bystrica – October 4, 2011. Let‘s go east – What motivates Western MNCs to expand to CEE?.

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Going East – CEE seen from a Western MNC perspective

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  1. Going East – CEE seen from a Western MNC perspective Arnold Schuh Competence Center for Central & Eastern Europe Presentation at the MatejBel University, BanskaBystrica – October 4, 2011

  2. Let‘sgoeast – Whatmotivates Western MNCs toexpandto CEE? • 20 countries in closeproximity • 330 mio. inhabitants • Underdevelopedmarkets • Educatedworkforceatlowercosts • European culture = Baltic states = Central-Eastern Europe = South-Eastern Europe = European CIS Schuh - Going East 2

  3. Before 2008: CEE as a highlydynamic but fragmentedregion

  4. Pre-crisiseconomicgrowth model for CEEBruegel, 2010; EBRD Transition Report 2010 • Intention toachieve a rapid political & economicintegrationinto EU (singlemarket, EU funds, EU norms) • High degreeofliberalization in externaleconomicrelations • Openingoffinancialmarketstoforeignfinancialinvestors • Strong technology & know-howtransferand FDI fromthe West to CEE • Access tohigh-income countries • Integration intotransnationalproductionnetworks Significantlyhighergrowththan in Western Europe Schuh - Going East

  5. CEE evenoutperformedotheremergingmarketsBruegel, 2010 Average GDP growthrates 2002-08 GDP at constant prices; Horizontal lines refer to group averages; blue line: unweighted averages; red line:GDP-weighted averages

  6. Economicgrowthvaried due tostartingpositionsandreformspeedRoland Berger, 2009 Real GDP development (1989-2008, in %) Schuh - Going East

  7. FDI asdriverofchange: Nearly €600 bn. since 1993Roland Berger, 2009 Total FDI inflow by year, 1993-2008, in € bn.

  8. The business model for CEE before 2008 Schuh - Going East

  9. Convergencedrivesmarketgrowth & development in bankingindustry Convergence drives market growth & development in banking industry

  10. CEE was a goodinvestmentstory – at least until 2008 Erste Group Bank shareprice

  11. Early 2009 - CEE in bigtrouble Schuh - Going East

  12. CEE was thehardesthitregionbytherecenteconomicslowdownUniCredit, 2010 GDP growth/decline in % YoY (2008-10)

  13. Was CEE toblameforthecrisis? • Crisis was importedto a highdegree • Collapseofmarkets – dependence on Western marketsforgrowth (automotive, consumerelectronics) • Drying-upcreditfromabroad • Currency weakening in late 2008 • Difficultliquiditysituationofhouseholds & companies • „Home made“ problems • Overheatedeconomies & real estatemarkets • Excessiveexternaldebt • High proportionofloans in foreigncurrency • LAT 90%, EST 86%, HUN 60% vs. POL 32%, CZ 9% • Fiscalirresponsibility(e.g., Hungary) Schuh - Going East

  14. Impact of crisis on CEE economiesvariedSchuh, 2009 Fiscaldeficit Industryspecialization Dependence on exports Impact ofcrisis on CEE economies Foreignexchangeregime Size of domestic market Externalfinancinggap Stock of foreign investment Schuh - Going East

  15. Is thebusiness model for CEE still valid after thecrisis? • Resourcesituationremains favorable • Lowerinputcosts • Higher riskpremia & morecaution in newinvestments • Still reason-ablereturns • Still hugemarket potential but slowergrowth • Selectiveapproach & optimizationofoperations

  16. After grimyear 2009, regionis back togrowthpathUniCredit CEE Quarterly, 02/2011

  17. By 2020 many countries will still besignificantlybelow Western levelsof 2010Erste Bank, 2011; EIU

  18. By 2030 themostdevelopedpartof CEE will bewhere Western Europe istodayErste Bank, 2011; EIU

  19. Back tobusinessasusual? EBRD‘snewgrowthagendafor CEEEBRD, Transition Report 2010

  20. Strategyreviewfor CEE – Major decisionareasfor MNCs Schuh - Going East

  21. CEE has lost itsluster but remainsattractive • CEE lost itsformerstatusasgrowthregion– especiallycomparedto BRIC and Turkey • However, CEE remainsattractivefor Western MNCs due tohighergrowthratesandmarket potential • CEE isnotregardedashomogeneousregionanymore • MNCs paymoreattentiontosoft factorssuch asqualityofinstitutions, politicalstability& competitiveness • MNCs follow a morecautiousandselectiveinvestmentapproach ROLE OF CEE Schuh - Going East

  22. CEE lost itspositionas a global growthengineRoland Berger, 2010 GDP development (2000 = 100) ROLE OF CEE Schuh - Going East

  23. CEE countries arelosing on competitiveness, onlyPoland, Russia & Czech RepublicimprovedRoland Berger, 2010; World Economic Forum, 2010 ROLE OF CEE Global Competitiveness Report (2004-2010, ranks)

  24. Mixed foreigninvestmentpattern in CEEwiiw, 2011 ROLE OF CEE FDI inflows, in mio. € Schuh - Going East

  25. Regional playersbenefitfromthewithdrawalsofweakerfirms • The crisistriggered a roundofportfoliorestructuringamong MNCs in CEE • Most directinvestors stick totheirpresence in CEE • Geographicexpansionintonew countries is on hold fornow • Regional playersarebetterpositionedtotakeadvantagefromthesituationthannewcomers PARTICIPATION Schuh - Going East

  26. Examplesofcountryportfoliorestructurings (2009-11) Withdrawals Expansion • ABInBevsold 11 breweries in CEE • Carrefour exitsRussia • Vattenfall withdrawsfromPoland • Allied Irish Banks sellPolishsubsidiaryto Santander • GE Money withdrewfrom Romania • PepsiCobought 66% ofRussian Wimm-Bill-Dann • GroupeDanonemergeditsdairyunitwithRussianUnimilktobecomethelargestdairycompany in Russiaand CIS • UniCreditplansto open 900 branches in CEE and Turkey PARTICIPATION Schuh - Going East

  27. Manufacturing continuesgoing East • Subsidiaries in CEE expandtheirproductioncapacityattheexpenseoftheir West European sistercompanies: • Modern technology, more flexible & costefficient • „Re-industrialization“ of CEE isbestreflected in automotivesector: + 27,000 newjobs in 2009 comparedto +6,000 in Western Europe (Ernst & Young European Investment Monitor 2010) • CE & SEE countries also improvedtheirpositionasserviceproviders(IT, businessprocesses) ACTIVITY LOCATION Schuh - Going East

  28. Localfoothold & diversifiedapproachcharacterizeswinners • Localproducershavelowercostsandbenefitfromdepreciatinglocalcurrencies • MNCs withmulti-tierstrategiesare in a betterpositionthanfocusedpremium-productmarketers • Increasedprice-sensitivityfavorsbusinessmodelscentering on affordability • Geographic & segment-relateddiversificationas a winningstrategytocopewithfluctuations in demandandincreaseduncertainty PRODUCT-MARKETING Schuh - Going East

  29. Multi-tierbrandstrategyimmunizes Henkel CEE againstmarketswingsSchuh & Holzmüller, 2003 Price-Index Brand Positioning Detergent brands PRODUCT-MARKETING Premium brands stand for quality, performance, image & innovation 100 Persil Medium-marketbrands: goodqualityfor traditional & brand-loyal customers Palmex, Tomi 80 Economy-segment: „More value-for-money“ claim for price-sensitive segment 60 Rex

  30. Organization for CEE: Centralize > decentralize > centralize …? • Expansion to CEE has been guided by highly centralized control • Good performance and improved qualifications led to more autonomy for local management • Need to balance entrepreneurial spirit of local management and desire for control • During crisis pendulum swung towards centralization again: • Lack of restructuring experience in most CEE countries • Centralized management of investments, costs, liquidity, capacity & key accounts • Use of simplified structures ORGANIZATION Schuh - Going East

  31. Switchingfromsurvivaltogrowthmodeagain • Waitforcompletionofstrategyreviewsto understand organizationalrearrangements • Pendulumswings back to a moredecentralizedorganizational model again • Slowermarketgrowthforcesmanagementtocontinuethesearchforcostsavings: clusteringofsmallermarkets, concentrationof back-officefunctions in sharedservicecenters • Challenge formanagementto find a goodbalancebetweenstrictcostdisciplineandencouragementofnewgrowth initiatives ORGANIZATION Schuh - Going East

  32. Great challenge: Howto manage complexity in CEE? ORGANIZATION Howtorespondstrategicallyandorganizationallytothesebiasedstructures? Country Product Segments Company • EU vs. non- • EU • Advancedvs. • emerging • Large vs. • small • Low vs. high • price • Global vs. • local • Essential vs. • „luxury“ • Growing vs. • mature • Urban vs. • rural • Modern vs. • traditional • trade • Young vs. old • Markt leader • vs. follower • Profitable vs. • loss-making Schuh - Going East

  33. Conclusions – “CEE reloaded” • For CEE therecentcrisis was an interruptionofthecatching-upprocess • The imageof CEE as a growthregionisshattered, however, thebusiness model for CEE is still valid • Improvingthecompetitivenessoftheeconomiesshouldbe on top ofthe national agenda – moreattentionispaidtoqualityofinstitutionsandbusinessclimate • Crisismeansthe end of CEE as a homogeneousregion, wesee a moredifferentiatedinvestmentapproachtoday • Challenge for MNC management is how to deal with this multifaceted hybrid market situations and how to integrate the operations into the corporate group • Dual focus on growth and cost efficiency will continue Schuh - Going East

  34. References • Bruegel Study –Becker et al.: Whither growth in central and eastern Europe? Policy lessons for an integrated Europe, Bruegel Blueprint Series, 2010 • EBRD: Transition Report, London 1999-2010 • EIU: Corporate Structures in 2010, Economist Corporate Network, Geneva 2004 • EIU: Rethinking CEE: Changing Corporate Structures in CEE, Economist Corporate Network, Geneva 2010 • Erste Group: A Macro-Economic Picture of Central and Eastern Europe, Presentationtothe MKO, May 19, 2011, Vienna. • Roland Berger Strategy Consultants: 20 years of the CEE economic region – Assumptions for sustainable development, CE Business Club, Zagreb/Vienna Nov. 25, 2009 • Roland Berger Strategy Consultants: CEE in 2020 – Trends andperspectivesforthenextdecade, November 2010 • Schuh, A. & Holzmüller, H.: Marketing Strategiesof Western Consumer GoodsFirms in CEE, In: Stüting H.-J. et al. (Eds.): Change Management in Transition Economies, New York: Palgrave Macmillan, 2003 • Schuh, A.: The Impact of the Current Economic Crisis on Strategies of Multinational Corporations in Central and Eastern Europe, Akademija MM, 9(14), 2009. • UniCredit Group: CEE Quarterly, UniCredit Research, http://www.bankaustria.at/de/open.html?opencf=/de/18513.html • World Economic Forum (2010): The Global Competitiveness Report 2010-11: http://www.weforum.org/issues/global-competitiveness • wiiw: Publications of the Vienna Institute for International Economic Studies, Vienna: www.wiiw.ac.at/ Schuh - Going East

  35. Data sourcesfor CEE • Go tothehomepageofthe Competence Center for CEE at WU Vienna withmorethan 50 CEE-relatedresources. • http://www.wu.ac.at/cee/en • CEE Resources • CEE Management/Business Schuh - Going East

  36. Contact COMPETENCE CENTER FOR CENTRAL AND EASTERN EUROPE Augasse 2-6, 1090 Vienna, Austria ASS.PROF. DR. ARNOLD SCHUH Director T +43-1-313 36-4608 F +43-1-313 36-90 5284 arnold.schuh@wu.ac.at www.wu.ac.at/cee Schuh - Going East

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