How to select your new food processing site in Eastern Europe?by Dr. Balazs Csorjaninvestment promotion specialist

2015 edition

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Central- and Eastern EuropeWhen we talk about “Eastern Europe” we think about the Eastern member states of European Union. The low-cost manufacturing region of the world’s largest market provides cultural, geographical, economic and legal nearness to the European market.

These few slides try to guide you when it’s about starting a new food processing facility in the region.

“Tell me where Central Europe is and I can tell you

who you are.”Jacques Rupnik

Food industry in CEEIn general we can say that Eastern Europe is one of the leading agricultural & food processing locations of Europe, with numerous (and highly subsidized) farms, strong education and infrastructure, stable business environment.Leading locations are Hungary, Poland and Romania.

Hungarian food processing industryThe country traditionally has a strong food economy: including the food, soft drinks and tobacco sub-sectors, this industry is the 2nd largest employer and the 3rd largest producer of the processing industry in Hungary.

Food business has a strong EU market focus: 70% of food export goes to Europe (and 47% of food processing investments came from the EU).

The country provides good natural conditions, effective farms and developed infrastructure.

2nd largest employer 3rd largest producer of processing industry

48% share of foreign capital in the industry

Poland’s food processing industryPoland has one of the largest and strongest agriculture and food sector in Eastern Europe. The land market is highly liberalized and foreign investors are welcomed also in agriculture. This resulted an effective, market-driven development of local food business.

Doubled production between 2004 - 2014

300k employees meat livestock and meat products have the largest, 20% share in

Polish agri-food export

Romanian food processing sectorBehind the two leading countries, in recent years Romania became the most frequented location for CEE food investors. The agricultural population (3 million employees) is one of the biggest in Eastern Europe, and the 200 thousand employees in food processing industry are also meaningful. Meat, cereals and beverages are the most important product categories.

Raw material trendsBoosting agri-production

Rising prices (e.g +18% for cereals or +9% for milk in 2011, +9% for cereals but -5% for milk in 2012)

Increasing efficiency (agri.income per annual labour unit) e.g +43% in Romania

Real Estate supplyIn Central and Eastern Europe, there are approx. 1,000 industrial parks. Hungary and the Czech Republic have the most wide-spread industrial park networks (approx. 200-200 IPs), and Poland has a modest network, but larger business parks.

The number of industrial brown field sites can be estimated for more thousands, however be careful with these old industrial facilities: there can be relevant environmental issues thanks to the communistic heavy industrial track record.

Industrial real estate markets are liberalized everywhere, you can get a property quickly (but hire a local attorney).

Real Estate costsIn CEE, property prices are relatively high, thanks to the weak supply. However, note: the property costs are under the 25% of total costs of a new manufacturing plant.

In numbers, industrial land average sales prices are everywhere between 20-40€ per sq.meter in larger cities, and under 20€ in smaller towns. 10€ per sq.meter is a good deal, however some municipalities offer free of charge industrial land.

Industrial hall rental markets are relatively small outside larger cities, but the average rental fees are between 2 and 5 € per sq.meter per month.

MotorwaysDeveloped infrastructure makes Central- and Eastern Europe more attractive location than other emerging countries of the world.

The European Union has a vision about the cross-European transportation, called Trans-European Transport Network (TEN-T). The goal of TEN-T developments (funded by EU) is to make the EU internal market more competitive and to speed up the market access. The developments of member states fit into this framework, including the low-cost CEE Region.

Regarding national motorway networks, Hungary and the Czech Republic have the most developed motorway systems.

RailwaysThe Central- and Eastern European motorway network is underdeveloped compared to the Western European networks, but the CEE railway network is in much better status. The extended railway network was built in the last century, and large-scale EU programmes are running to rebuilt and develop it. The European Union prefer railway transportation, because environmentally it seems to be cleaner. However, the Eastern European rail cargo companies are often not so reliable and not flexible enough, that's why the road transportation has significantly bigger share.

Manufacturing sites and business parks have often a railway access, the typical construction cost of 1 km (0.62 miles) industrial rail is roughly 1 million euros.

Energy pricesThe CEE electricity market is highly regulated by the EU. The EU has a competitive energy market (theoretically), separating the grid developers and energy providers. (On-site grid development is managed by business parks). As a key account, you can achieve competitive energy prices.

EU energy price statistics can be checked here >>

Czech Republic had the lowest and Latvia had the highest industrial electricity price level in 2014.

Czech Republic had the lowest and Slovenia had the highest natural gas price level in 2014.

Infrastructure: water and sewageWater infrastructure is typically managed by local governments, municipalities price the service and can fix issues.

However, there are EU guidlines for water treatment and environmental issues (not country-specific).

Large-scale water supply is available mostly alongside the rivers only.

UnemploymentAs far as CEE is one of the most dynamic region of the European economy, the unemployment is relatively not so high (compared to Spain, Ireland or Greece, see the map on the right), however, there are relevant in-country differences.Generally we can say: Eastern Poland, Eastern Slovakia and Eastern Hungary have the highest unemployement rate.

Labor costsNot independently from unemployment, the Czech Republic and large cities like Budapest (Hungary) and Bratislava (Slovakia) have the highest wage level: average labor costs (involving taxes and social contributions) are between €1200-€1800 per month in these locations.

The low-cost Eastern parts of Poland, Slovakia and Hungary have a much more modest wage level: average labor costs are between €600-€1200 per month.

Romania and Bulgaria provides a superlow cost wage level (around 5-600 € per month)

learn more here >>

EducationThe Eastern European vocational training systems follow more or less the “German modell”. The so called dual education means: vocational school students learn practical skills at companies. In BSc/MSc engineering trainings companies are also present.

Recruiting are usually managed by professional recruitment agencies, but university job fairs and governmental labor offices recruiting between job seekers can be a relevant help.

Finally: labor market regulations are definitely flexible and business friendly.

Grants for manufacturingWhen it’s about industrial site selection, grants can be the cherry on the cake. I don’t suggest to make a decision based on grants only, but why shouldn’t calculate with free money when some governments and municipalities provide it?

Governments provide grants for job creation, for acquisition of assets, tax relieves and more. Here you can learn more about Eastern European grants for manufacturing.

Case study: Wassim Cheese in Hajduboszormeny, Eastern HungaryThe Jordanian-owned Wassim Cheese is the producer and exporter of the kashkawan cheese 'Hajdu'. It's a semi-hard cheese with Balkanian origin, and it's very popular in the Middle East: the company exports it to Saudi Arabia, Lebanon, Jordan, Kuwait, United Emirates, Yemen, Iraq.

The expanding export markets resulted expansion in the Hajduboszormeny plant. In 2013, the company opened its new 1700 sqm. manufacturing hall and a waste water pre-treatment special equipment. Wassim Cheese is not just a leading employer, but also a the main partner for the local dairy farmers.

The food processing developments of Wassim Cheese is not an accident. Hajduboszormeny and its award-winning vicinity, the Hajdusag is traditionally a food processing location, based on superior soil and climatic conditions, infrastructure and vocational training. The municipality and its business park is targeting food processing investors with special incentives, industrial land discount and dedicated vice mayor.

How to select your new site?

long listing: 10-20 potential sites might fit to your criteria

site selection questionnaire - answers from the long listed locations

facilities, transport, labour issues, regulations and taxes

short listing: the most promising 4-8 sites

visit personally each one

listen to your instincts - it's not a science

rank and propose 2-3 to your board

Potential risksDuring the site selection process, beside infrastructure, real estate and labor market, analyze this:

● start-up time: existing halls for rent? supportive authorities?

● logistics: local service providers? transportation networks (e.g: TEN-T) connections?

● wage trends: competing employers in the city? labour market potential?

● transparency: level of corruption? political stability? fair business customs?

Site selection assistanceThere are several ways to get help from professional site selection resources:

● non-profit governmental investment promotion agencies (IPAs): HIPA (Hungary), CzechInvest (Czech Republic), PAIZ (Poland), Sario (Slovakia)

● World Bank's investment portal, www.fdiintelligence.com, www.siteselection.com

● consultants and real estate agents● … and last but not least: ask our free of

charge help

About us

Manufacturing Hungary Blog is an information source about the manufacturing topics in Hungary and Eastern Europe. Our goal is to support site selection team’s job, providing useful information.

Dr. Balazs Csorjan, investment promotion specialist, the former regional director of Hungarian governmental investment promotion agency. Dr. Csorjan has taken part in more hundred site selection projects - he knows your questions.

If you liked this presentation, please do not forget to share it - maybe your partners will

like it, too.

Otherwise, do not hesitate to e-mail your questions: csorjan@m35businesspark.hu or download the file.

thnx a lot!