THE PETIT SUPPLY CHAIN - MANUFACTURING IN CENTRAL AND EASTERN EUROPE RADU GEORGE DUMITRESCU - Charlemagne Prize Academy
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THE PETIT SUPPLY CHAIN
MANUFACTURING IN CENTRAL AND EASTERN EUROPE
RADU GEORGE DUMITRESCUTable of Contents
Introduction ............................................................................................................................2
1. The Great Rival – China .....................................................................................................3
2. The Great Competitor – The United States .......................................................................6
3. The European Revival .......................................................................................................8
Manufacturing in the EU ......................................................................................................9
Case Study – Made in Poland .............................................................................................13
Case Study – Made in Romania ..........................................................................................14
Trading in Poland & Romania .............................................................................................15
4. European Manufacturers in CEE & Asia ..........................................................................15
5. Policy Options and Recommendations ............................................................................18
a) Population ..................................................................................................................19
b) Labor costs ..................................................................................................................20
c) Infrastructure ..............................................................................................................21
d) Barriers to trade ..........................................................................................................22
e) Debureaucratization ...................................................................................................23
f) Investments ................................................................................................................24
g) Stockpiling ..................................................................................................................24
6. Conclusion. .....................................................................................................................24
7. Bibliography ...................................................................................................................25
1Introduction
The damages caused by the COVID-19 pandemic in all aspects of life are far-reaching,
multifaceted, and incalculable. From schoolchildren who experienced a year-long gap in their
education – supplanted, in countries where such a thing was possible, by online classes – to
entire business models that were taken apart and rendered unprofitable almost overnight, the
pandemic affected everyone. As it appears to draw to its end, recovery is on the agenda of every
government and business in the world. Destructive as it has been, the pandemic has also given
these very actors the opportunity to overhaul entire social and economic systems. The objective
of that overhaul, as many of them have decided, is preparing for the next crisis. It is that
preparedness that officials in the European Union have taken up numerous times in speeches and
public statements, reformulating the Union’s economic slowdown and shutdown as conclusive to
one fact – the EU needs a more resilient economy, one that can withstand such shocks in
demand, but most of all, in supply.
The present policy paper comes in support of demands for increased economic resilience
and argues that shortened – petit – supply chains that stretch from Berlin and Paris to Bucharest
and Warsaw, and not to Beijing, are a way to attain such resilience. The paper argues that
Western manufacturers would profit from producing their goods in the CEE. Companies
manufacturing in the CEE would increase their resilience while maintaining their international
competitiveness. To substantiate such claims, the paper draws on twenty product case studies
placed in comparison – ten product manufactured European brands which produce in the CEE
and ten similar products made by European manufacturers in Asia, mainly China. The findings
suggest that while six out of the ten pairs favored the Asian-made products in terms of price, the
differences were small. The paper concludes that CEE-based manufacturers can be competitive
internationally and that they can, in almost half the cases, beat the Asia price.
The paper is structured in the following way. In the first part, the importance of
manufacturing and foreign investments is highlighted, pointing to the rise of China as having
occurred following such developments. Since the 1990s, China has become the workshop of the
world and has profited immensely as a result, attracting Western firms with low labor costs and
friendly regulation, convincing them to produce in China and to export to Western markets.
The second part summarizes the policies planned by the Biden administration in the wake
of the pandemic. The American economic recovery, as it shall be shown, is premised on trade –
but also on the return of American manufacturing businesses to their home country. To quell the
criticisms brought forth by domestic populists and provide the American middle class with good-
paying jobs, the new administration of the United States relies on manufacturing. The same
section underlines how American companies have realized the potential in producing closer to
their markets in Europe. P&G and Ford, two large American corporations, have recently
increased their investments in the Central and Eastern European region to that end.
The third part of the paper documents the recognized connection between the resilience
of the European economy and the strengthening of supply lines within Europe. The chapter goes
on to present two case studies, those of Poland and Romania, the most populous CEE countries,
and their economic context.
Part four offers the results of original research. It compares similar products of European
manufacturers who produce either in Asia, mainly China, and the CEE. The comparative advent
shows that although six of the ten products made in the CEE were more expensive than their
2Asian-made counterparts, the differences were small, making manufacturing in the CEE globally
competitive.
Part five builds on previous sections of the paper and makes policy recommendations
regarding population, labor costs, infrastructure, barriers to trade, debureaucratization,
investments and stockpiling, all of which can aid European manufacturers make their goods in
the CEE, therefore in the EU.
The sixth and final part draws conclusions, arguing that the European manufacturing
sector, predicated on regional cooperation and investments supported by the EU and by national
governments, can be the backbone of the European post-pandemic recovery.
1. The Great Rival – China
Since its opening up to the world, China has become a crucial part of the global economy. Its
integration into global trade, however, occurred gradually, as more and more foreign direct
investments (FDI) entered the country.
Most of the FDIs in China went into manufacturing – 70% by 2001.1 The constant inflow
of FDI into China strengthened its capacity to be a production base for manufacturing exports. A
domino effect known to economists and industrial planners occurred. The competition boosted
the development of some supporting industries, and essentially established an important
industrial cluster. For example, China’s Pearl River Delta and Yangtze River Delta regions have
emerged as world-class information technology clusters, while Shanghai and Guangdong became
manufacturing centers. Such clusters inevitably produced spillover, as other companies were
contracted to provide assistance, maintenance or as employees leave and form their own firms.
FDI are only part of the story. China’s manufacturing growth in the last two decades of
the 20th century occurred on the back of a population of hundreds of millions of rural workers
who moved to the cities to take low-paying manufacturing jobs. As the supply of labor was great,
wages in the sector were kept down. Starting with the 2000s, however, rising wages, not just in
manufacturing, “began to be a defining feature of China’s economy.”2 One of the primary
reasons for which FDI flowed to China up to 2001 was its low wages. For two decades, those
wages have been rising.
Roughly around the same time, before the financial crisis of 2008, countries of the CEE
were basing their economic growth on FDI as well. FDI to the region boomed in the early 2000s,
but stopped after the crisis. 3 This led to a slowdown of economic growth and disenchantment
with capitalism and, because they were connected since 1989, with democracy. It also created a
space for political actors for whom democratic rules are not crucial.
Back in China, market forces led to a constant increase in salaries between 1995 and
2015. This growth occurred across the board, and it did not skip manufacturing. However, recent
wage trends in China bring it closer to more developed economies of the world. Rozelle et al.
1
Guoqiang Long, “China’s Policies on FDI: Review and Evaluation” in Theodore H. Moran, Edward M. Graham,
Magnus Blomstrom (eds.), Does foreign direct investment promote development?, (Washington DC: Institute for
National Economics, 2005), 318.
2
Scott Rozelle, Yiran Xia, Dimitris Friesen, Bronson Vanderjack, Nourya Cohen, “Moving Beyond Lewis:
Employment and Wage Trends in China’s High- and Low-Skilled Industries and the Emergence of an Era of
Polarization,” Comparative Economic Studies, 62, (October 2020), 556.
3
Dorothee Bohle, "Capitalist Transformations In East Central Europe Since The Great Recession," Lecture, College
of Liberal Arts and Human Sciences, Blacksburg, March 8, 2021, https://liberalarts.vt.edu/research-
centers/ceuttss/events/2021/JMBohleTalk.html.
3note how wages in the country have been “rising for professionals employed in formal skill-
intensive industries; and falling for workers in the informal labor-intensive service sector.”4 This
occurred in part because “the supply of labor into the service sector of the informal economy is
being fueled by the flow of labor out of manufacturing and construction.” 5 Simply put, the
supply of labor in the services is greater, while the increased specialization and automation in
manufacturing is pushing wages in the industries up.
To maintain competitiveness, the Chinese government aggressively pursued automation,
leading to the further displacement of jobs in manufacturing.6 Tellingly, the “Made in China
2025” initiative of the Chinese government places the focus on automation and the use of robots,
not of cheap labor. But as robots can be used anywhere on the globe to decrease wage costs,
China’s competitive edge in manufacturing is vanishing. The sector had employed hundreds of
millions of workers in China, but in the mid-2010s companies like Samsung or Nike, among
other large brands, started moving out of China and into the vicinity, to countries like Vietnam or
Bangladesh. 7
The more recent trade war between the US and China further “incentivized
manufacturing companies to begin reshoring, as supply-chain uncertainty and political pressure
from US politicians made firms consider moving their operations outside of China.” 8 Even
before the pandemic, in 2019, Chinese exports began to drop in favor of other Asian exporters
but “the political fallout from the COVID-19 crisis is expected to make reshoring out of China a
far more immediate concern.” 9
Beyond the effects of the pandemic itself, one has to take into consideration that China
cannot be considered a partner of the same caliber to the EU as another liberal democracy, as it
lacks transparent, democratic decision-making and protections for minorities.
Producing in China implies far more than an economic dimension, as Finnish forestry
company Stora Enso can attest. When it was revealed that the company was supplying pulp used
in Xinjiang’s work camps for Uyghurs, Stora Enso decided to stop producing wood pulp. The
association once formed, however, the company’s reputation was already tainted. As Braw puts
it for Politico, “Western firms are starting to realize that even the faintest link to Xinjiang’s ‘re-
education camps’ can be toxic to their reputation.” 10 On the other side, the Chinese state has
sponsored boycotts of companies it saw as critical to its practices. In China, Swedish brand
H&M was de-platformed from e-commerce sites and its physical shops were closed by landlords
after voicing concerns over Xinjiang. The Chinese government also uses its consumer market as
leverage over EU companies, as it did with Ericsson, which was transformed into an advocate for
Huawei’s access to 5G networks before the Swedish government. Ericsson makes 10% of its
revenue in China, and only 1% in Sweden. When Australia called for a deeper probe into the
4
Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 555.
5
Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 555.
6
Hong Cheng, Ruixue Jia, Dandan Li, and Hongbin Li, “The Rise of Robots in China,” Journal of Economic
Perspectives 33, 2 (Spring 2019): pp. 71–88 as cited in Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving
Beyond Lewis,” 570.
7
Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 576.
8
Rozelle, Xia, Friesen, Vanderjack, and Cohen, "Moving Beyond Lewis,” 576.
9
Patrick Van den Bossche, Brooks Levering, Yuri Castaño, and Brandon Blaesser, “Full Report – Kearney,”
Kearney, 2020, http://www.kearney.com/operations-performance-transformation/us-reshoringindex/full-report.
10
Elizabeth Braw, “For Western Companies, China is a risky bet,” Politico, April 5th, 2021,
https://www.politico.eu/article/western-companies-china-risk-
xinjiang/?utm_source=RSS_Feed&utm_medium=RSS&utm_campaign=RSS_Syndication.
4origin of the novel coronavirus, Australian coal ships were left stranded by the Chinese
government for nine months.11 Such events are not isolated.
It is economic factors, however, that have weighed heavy on production in Asia during
the pandemic. A pandemic-created unforeseen global shortage of chips serves as the perfect
example for the vulnerabilities in a global, stretched supply chain. The world’s largest
chipmakers – 91% of contract chipmaking – are both in Asia, specifically Taiwan and South
Korea, and their delivery times to companies like Volkswagen or General Motors reached delays
of 22 weeks in 2021. Car and smartphone makers were the first casualties this delay. The auto
industry as a whole is projected to lose $61 billion in sales in 2021 due to the shortage in chips.
American company Intel already set up a $20 billion investment in its own chip plant, which
would allow it to produce chips for other companies as well. 12
As vaccination was rolled out in the US and Europe by spring 2021, German
multinational Siemens saw solid increases in revenue – but also shortages in its supply chains.
Steel, plastics and freight capacity, from China to Europe, were lacking. Stockpiling in China, a
global shortage in semiconductor chips, other delays, and electronic bottlenecks were affecting
Siemens’ performance. Swiss company ABB and France’s Schneider Electric saw similar
problems with delivery and production constraints. 13 To move away from risk, some of these
companies may reasonably consider moving from China.
Representing the interests of 1700 European companies in China, The EU Chamber of
Commerce in China compiled and published a report on the costs of decoupling from the
Chinese economy. This comes in a context where more and more European companies seek to
mitigate their exposure in China. The report highlighted the “politicization of business” that is
“making the Chinese business environment increasingly difficult for foreign companies to
navigate,” which, along with the “souring of public opinion in home markets towards China,” 14
places European businesses between a rock and a hard place. The same report notes that
“pandemic-related fluctuations in supply and demand” 15 led to shortages and convinced “most
European companies” that “expanding locally and further onshoring their supply chains” 16 was
the best way to build resilience. However, “many European companies report a desire to further
invest in China” while at the same time “onshore supply chains for the local market to avoid
potential future disruptions.” 17 As part of the same strategy geared toward achieving resilience,
European corporations can either build separate supply – one for China and one for the rest of
the world, or develop swappable products in multiple parts of the world. As the EU Chamber of
Commerce in China notes, however, “the costs of either option are considerable.” 18 The final
recommendations of the report for European companies underline the need to “strengthen supply
chain monitoring up- and downstream both to identify suppliers and customers relocating to
11
Annabelle Timsit, “European Companies Have No Intention Of Decoupling From China," Quartz, June 10th,
2021, https://qz.com/2019470/european-companies-double-down-on-china-amid-tensions-and-covid/.
12
Ian King, Debby Wu and Demetrios Pogkas, “How a Chip Shortage Snarled Everything From Phones to Cars,”
Bloomberg, March 29th, 2021, https://www.bloomberg.com/graphics/2021-semiconductors-chips-
shortage/?fbclid=IwAR04adac12BWoXKqA4FlYoP9ZfJu2gwBYXFOfiX8QeAsU78jUdmPVwrYEts.
13
John Revill, “Siemens flags supply bottlenecks after raising guidance,” Reuters, May 7th, 2021,
https://www.reuters.com/article/uk-siemens-results-idUKKBN2CO0CG.
14
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation (European Union Chamber of
Commerce in China and the Mercator Institute for China Studies, 2021), 7.
15
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 6.
16
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 7.
17
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 7.
18
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 5.
5markets with lower labor costs.”19 Finding – or building – new supply chains is key to obtaining
resilience.
However, China remains a magnet for European companies even after the pandemic.
According to the Business Confidence Survey 2021 conducted by the EU Chamber of
Commerce in China, “three out of four companies ended the year with positive earnings before
interest and tax.”20 Like consumers everywhere, the Chinese bought more “cars, goods and
clothing” while in lockdown. Almost 70% of respondents were optimistic about future earnings
in China, and many are looking to build a more secure position within China, rather than
diversify outside of it. Problems still abound for European companies in China, like the
politicization of the business environment, spotty market access (due to a lack of bureaucratic
transparency), unequal treatment compared to local firms, compelled technology transfers and
infringements on intellectual property rights. Still, the survey notes that “a mere 9% of European
companies are considering moving any current or planned investment out of China, the lowest
level on record.”21 This is because many European companies “simply cannot” move out of
China even partially due to high decoupling costs and the fear of missing out on a growing
market. Moreover, a “third of manufacturers report that they have at least one imported
component or piece of equipment for which there are no viable alternatives, and about half note
that alternatives will come with higher costs, lower quality and/or compatibility issues.” 22 For
such companies, diversification and relocation remain costly.
China cannot be totally or easily abandoned, but failing supply lines and panic-inducing
shortages taught the richest economy in the world – the US – an important lesson.
2. The Great Competitor – The United States
China’s place in the global economy as the workshop of the world is not as secure as it was
before the pandemic – and the United States plans to secure its own supply lines through
manufacturing. The Biden administration specifically recognized the need for the United States
to “out-compete China” and to create jobs. To do so, the American Jobs Plan put forth by the
administration included investments into infrastructure, with goals of modernizing 20,000 miles
of highways and fixing the ten most economically significant bridges and thousands of smaller
ones, and of giving Americans access to high-speed internet. The same plan aims to “revitalize
manufacturing,” which it sees as an “Arsenal of American Prosperity,” and to “secure U.S.
supply chains.”23
To reach its goals, the Biden administration proposed targeted policies such as $180
billion investments into R&D, split up into a $50 billion investment into a national technology
directorate, $40 billion in laboratories across the US, and other sums for breakthrough
technologies and research incubators.24 “Utility-scale energy storage, carbon capture and storage,
hydrogen, advanced nuclear, rare earth element separations, floating offshore wind,
19
Mikko Huotari et al., Decoupling: Severed Ties and Patchwork Globalisation, 37.
20
European Business in China: Business Confidence Survey 2021 (European Union Chamber of Commerce in
China and Roland Berger, 2021), 1.
21
European Business in China: Business Confidence Survey 2021, 11.
22
European Business in China: Business Confidence Survey 2021, 16.
23
Fact Sheet: The American Jobs Plan (White House, March 31st 2021), https://www.whitehouse.gov/briefing-
room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-
plan/?fbclid=IwAR37h0FaW2I_Ooa0jZVYIycCvsTgf-yywzGhpwAj0cUt2rH5TjePlRjZi8Q.
24
Fact Sheet: The American Jobs Plan
6biofuel/bioproducts, quantum computing, and electric vehicles” are what the US plans to invest
billions on.
Investing in research means investing in manufacturing. As the Plan notes, “U.S.
manufacturing sector accounts for 70% of business R&D expenditure, 30% of productivity
growth, and 60% of exports. Manufacturing is a critical node that helps convert research and
innovation into sustained economic growth.”25 A healthy middle class and a global competitive
edge also reside in the ability of a state – or of a Union – to invest in manufacturing. The Plan
envisions $300 billion spent by the Biden administration to “strengthen manufacturing supply
chains for critical goods,” meaning producing “here at home, the technologies and goods that
meet today’s challenges.”26 The investment includes $50 billion for an office dedicated to
monitor domestic industrial capacity and to plan investments and $50 billion in semiconductor
manufacturing. Billions more go to medical countermeasures manufacturing, which includes
everything from masks to prototype vaccines.
The Plan also places funds towards the development, in the United States, of clean
manufacturing technologies and the social infrastructure around it. Electric car plants, ports,
nuclear reactors are therefore accompanied by what the plan calls regional innovation hubs.
These are meant to create new businesses with the assistance of a billion-dollar Community
Revitalization Fund targeted at rural communities suffering from disinvestment.
The US’ Plan includes other policies, such as the increased access to capital for domestic
manufacturers. All in all, $52 billion are meant to enlarge existing capital access programs and
support rural manufacturing and clean energy. Tax credit extensions for the auto sector and the
creation “of a new financing program to support debt and equity investments for manufacturing
to strengthen the resilience of America’s supply chains” are also part of the plan. Finally, $31
billion is to serve as venture capital for small businesses active in manufacturing.
Aside from its domestic investments meant to revive manufacturing and shorten supply
chains, the US, through its companies, also sees the benefit of producing in the CEE and selling
to Western Europe. Procter & Gamble, an American company, first came to Romania in 1994.
Today, its Urlați plant “is one of the most technologically advanced and environmentally friendly
P&G Plants worldwide, serving over 1 billion consumers across over 40 markets in Europe,
Turkey, Israel, Central Asia and the Caucasus Region.”27 There is no reason why European
companies cannot have the same success.
Another American company, car-maker Ford, plans to invest $300 million by 2023 in its
factory in Craiova, Romania, in order to boost production and develop the capabilities to produce
electric cars. The investment is part of a string of steps that will see funds directed to the factory
in Koln but also the one in Turkey. Already in Craiova 600 robots were installed to speed up the
production, alongside the 6000 employees.28
25
Fact Sheet: The American Jobs Plan
26
Fact Sheet: The American Jobs Plan
27
“PG Romania,” P&G, accessed July 26th 2021, https://www.pgcareers.com/location-Romania.
28
Bogdan Alecu, “Americanii de la Ford anunţă un plan major de investiţii de 300 de milioane de dolari în fabrica
de la Craiova, care va deveni a treia fabrică Ford din Europa care va produce maşini electrice,” Ziarul Financiar,
May 3rd 2021, https://www.zf.ro/auto/americanii-de-la-ford-anunta-un-plan-major-de-investitii-de-300-de-
20058025.
73. The European Revival
With China in the proverbial ropes and the United States out of its isolationist phase, the EU has
begun looking to the resilience of its own supply lines. In an interview given in May, EU
Commissioner for Internal Market Thierry Breton argued that the Union “needs to be more self-
sufficient in critical areas and react quickly when production is needed, as has recently been the
case with the vaccines.”29 The Commissioner stressed that self-sufficiency does not mean
autarky, but a reaction to a rapidly changing world which cannot be met with naivety. In crises,
domestic production is an added layer of security.
The pandemic offered valuable lessons in that sense. From producing, buying and
distributing the vaccine, the Commission learned that “we need to produce some critical parts in
Europe because we cannot depend for those elements on others.” The Commissioner named 137
highly dependent products, among which “hydrogen, raw materials, batteries, semiconductors,
an extremely important subject, cloud and data and active pharmaceutical ingredients” and 34
others which have low diversification potential and can be found in one or two countries only.
To secure Europe’s production capabilities, they need to be brought closer to home. Looking at
US and China, Breton noted that the diversification of production would bring a balance of
powers.30 Proof, if necessary, came quickly. The same month, Lithuania and other Eastern
members of the EU distanced themselves from a Chinese initiative, the 17+1 forum, meant to
forge relations between the region and China. This came after China imposed sanctions on EU
lawmakers in retaliation to the EU’s own sanctions on Xinjiang officials over Beijing’s forcing
of Uyghurs into internment camps. 31
Recognizing the changes brought about by the pandemic, in spring 2021 the Commission
updated its EU Industrial strategy. The new measures were specifically meant “to strengthen the
resilience of our Single Market”32 and to recognize the “need to better understand our
dependencies in key strategic areas and presents a toolbox to address them.” 33 The Commission
especially highlighted the damage sustained by the single market during the pandemic due to
supply restrictions and border closures, which put a stop to the free movement in Europe. To
make the single market more resilient, the Commission proposed the creation of a Single Market
Emergency Instrument to “address critical product shortages by speeding up product availability
and reinforcing public procurement cooperation.” Another measure was that of directing
investments toward SMEs, allowing them to delay payments and to address solvency risks.
29
Jorge Valero, “Breton: Europe was too naïve before, now we are in the driving seat,” Euractiv, May 5th 2021,
https://www.euractiv.com/section/economy-jobs/interview/breton-europe-was-too-naive-before-now-we-are-in-the-
driving-seat/?fbclid=IwAR3rvUWsx_UKXQUPLW5cyZIFlT2k6S-6LV5e4mKPzQnMcso2k3MFfI69LRY.
30
Jorge Valero, “Breton: Europe was too naïve before, now we are in the driving seat.”
31
Stuart Lau, “Lithuania pulls out of China’s ’17+1’ bloc in Eastern Europe,” Politico, May 21st 2021,
https://www.politico.eu/article/lithuania-pulls-out-china-17-1-bloc-eastern-central-europe-foreign-minister-
gabrielius-
landsbergis/?utm_medium=Social&utm_source=Facebook&fbclid=IwAR0SolfFMpJZvC0yBtcDKxdCYGjl4g8japa
xHpDkBIEuhxFlVQ0i1QXciPg#Echobox=1621621607.
32
European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s
recovery,” European Commission Press Corner, May 5th 2021,
https://ec.europa.eu/commission/presscorner/detail/en/IP_21_1884?fbclid=IwAR0l19rOLZBcfqeIGuZmM09qFHTc
sFkmfej7lZG5DCxDlzPyGhcRMLcvYRE.
33
European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s
recovery.”
8When it comes to dependencies, the Commission echoed messages of its president and
other members and asserted its commitment to openness to trade but also signaled the need to
“address strategic dependencies, both technological and industrial.” Analyzing trade data through
its Observatory of Critical Technologies, the Commission found dependencies in the area of
advanced technologies, raw materials, batteries, pharmaceuticals, but also renewables, energy
storage, cybersecurity. The Commission also designed a series of solutions meant to remedy
dependencies. First and foremost, “diversifying international supply chains”34 and the formation
of “new industrial alliances” for innovation, job creation and increased competitiveness. Such
alliances are to be formed on processors and semiconductor technologies, industrial data, edge
and cloud, and others. Finally, the Commission plans to support member states’ pooling of
public resources in the Important Projects of Common European Interest (IPCEIs) from the EU
budget.
Manufacturing in the EU
Preparing for the aftermath of the pandemic, the European Parliament’s policy
department for economic, scientific and quality of life policies noted in a report that “the
COVID-19 pandemic unveiled weaknesses, as many businesses were initially unable to cope
with shortages in supplies caused by closed borders and closed manufacturing sites” but that
“most supply chains quickly recovered and have been affected less severely during subsequent
waves.”35 The authors of the report commented that companies involved in value chains that
proved vulnerable, like those of microelectronics, electric cars, batteries and AI technology,
should be supported in diversifying their production but that “this should not lead to a sustained
policy drive for relocation, as this trend could be at odds with the need to keep the EU industry
internationally competitive.” 36 Protectionism is discouraged in the EU, and rightly so, but, as it
will be shown, a strategic revamping of European manufacturing need not go against the laws of
the market.
The story of the pandemic’s impact on European industries closely follows each wave of
rising infections. Global supply chains were disrupted between March and April of 2020, and
manufacturing was affected by shortages until the third quarter of 2020. 37 The same period saw
the lifting of quarantine measures in most EU countries and the resurgence of economic activity
– but that again was halted by rising infections in the last months of 2020. While recovery is
expected to be slow, it is also worth noting that the “EU economy experienced a stronger shock
than China and the US (2% growth and -3.6% decrease respectively) in 2020, while it is
significantly lagging behind the recovery forecasts for China (7.9% and 5.2% change on
preceding year for 2021 and 2022, respectively).” 38
34
European Commission, “Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe’s
recovery.”
35
Jan Maarten de Vet, Daniel Nigohosyan, Jorge Nunez Ferrer, Ann-Kristin Gross, Silvia Kuehl, Michael
Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” European Parliament, DG Internal Policies,
Policy Department for Economic, Scientific and Quality of Life Policies (March 2021) 9.
36
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 9.
37
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 12.
38
Global Economic Prospects (World Bank, Washington, DC, 2021,) as cited in De Vet, Nigohosyan, Ferrer, Gross,
Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 14.
9The manufacturing sector in the EU, taken by itself, dropped between March and April
2020 but then rebounded in May and June only to drop again – less than the first time – in
September and November. Although the manufacturing industries were not hit as hard the
services and cultural sector, which require interaction more than anything else, the lack of
investments is likely to prolong recovery. 39
The automotive industry, representing 8.5% of all EU manufacturing and employing 2.6
million people, was among the ones hit hardest by the first wave of the pandemic. Supply chains
were cut off by the first shutdowns of Chinese and European factories, in March and May. With
an average factory downtime of 30 days and losses of €100 billion, companies were forced to lay
off workers or place them on short-term working schedules. In total, 1.1 million jobs were
affected due to factory shutdowns in the first wave.40
Dependencies in the EU economy are not limited to the automotive. Another value chain
essential to European economy – and to its degree of climate-friendliness – is that of batteries.
Lithium-ion batteries are made from cobalt and lithium mined in Africa and Latin America and
are used by electric vehicles. The major supplier along the whole value chain, however, is China.
This extends to raw material extraction to battery recycling, with other notable processors and
suppliers being Japan and South Korea. All three Asian country “account for 86% of the global
supply, while European firms are producing less than 20% of the global quantity.” 41 While China
assembles 66% of the world’s battery packs, Europe “is almost fully dependent on imports of
battery cells, exposing the industry to supply unpredictability and potentially higher costs.” 42
Due to the pandemic, mines, processing and assembling plants in Asia shut down. Lithium is
available in the EU, but cobalt and nickel are not. Battery shipments decreased by 14% as a
result, halting electric car production in the Union and globally. The European battery industry,
however, understood the lesson years ago, with the creation of the European Battery Alliance
and the more than ten battery factories currently under construction in the EU. By the end of
2020, “investments in the EU were outperforming the US and China” in the sector.43
Regarding micro and nanoelectronics, European companies “depend largely on non-
European suppliers, and Europe has shifted from a manufacturer of such technologies to a
user.”44 China, South Korea and Singapore have close to 60% of the market share, while the US-
dominated the high-tech market with 47% of global sales shares. Dependent on outside
producers, the EU is vulnerable when it comes to semiconductors. Due to protectionist measures
in the US and slowdowns caused by the pandemic in Asia, a shortage of much-demanded
semiconductors occurred in 2020.
39
World Bank, 2021, Global Economic Prospects, available at: https://www.worldbank.org/en/publication/global-
economic-prospects.
40
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” pp. 16-18.
41
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 43.
42
Boris Dyatkin and Shirley Meng, “COVID-19 disrupts battery materials and manufacture supply chains, but
outlook remains strong,” MRS Bulletin, 45, 6 (December 2020), pp. 700-702 as cited in De Vet, Nigohosyan, Ferrer,
Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU industries,” 43.
43
Henrique Ribeiro, “Deglobalization trend gains pace in lithium battery supply chain,” S&P Global,
https://www.spglobal.com/en/research-insights/articles/deglobalization-trend-gains-pace-in-lithium-battery-supply-
chain.
44
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 46.
10The conclusion is singular – the EU needs to be able to produce its own chips and
semiconductors, and European companies are more than able to do it. However, the main
obstacle is represented by the initial large-scale investments. The same investments would also
have to take into account the cost of extensive automation so as to decrease labor costs. As the
policy department notes, the EU could “set up an IPCEI on Microelectronics that allows Member
States to set up cooperation projects and be granted exceptions from EU State Aid rules.” 45 Such
a project already exists between France, Germany, Italy and the UK, but the industry needs
bolstering and widening to other regions of Europe.
Nowhere has the ability to produce crucial materials been more obvious than in the
healthcare sector during the pandemic. Critical medical and protective equipment, not to mention
pharmaceuticals, are part of strategic value chains for the EU. The chain itself has three major
components, namely R&D, raw ingredients and the manufacturing of the final product. While
research in this highly globalized value chain is the costliest part, it is also the most outsourced to
start-ups or academic organizations. In this, the EU handles itself well. When it comes to the
manufacturing of the finished product, however, Chinese and Indian producers dominate the
market. The initial stages of the pandemic came with slowdowns of production in China and
India and with subsequent generic drug shortages and price restrictions. But the EU can
manufacture its own drugs. Up to 77% of active pharmaceutical ingredients are also
manufactured in Europe.46 As stockpiling was more of an issue than production, the “key
question seems not to be reshoring but the diversification of suppliers,” and pharmaceutical
brands “might look to partner more with European contract manufacturing organizations and
even move API plants to Eastern Europe.”47 The pandemic, the policy department notes, could
thus “accelerate the trend to diversify and, as a consequence, increase manufacturing in Europe”
when it comes to pharmaceuticals, as the EU’s own Pharmaceutical Strategy of 2020 intends to
enhance crisis preparedness through diversification of drug production. In December 2020, the
EU4Health program was set up to support the domestic manufacturing of European
pharmaceuticals.
When it comes to protective equipment such as masks, the beginning of the pandemic
saw a spike in demand and EU imports exploded in February 2020. The low-cost surgical masks,
the most common protective equipment, had China and Malaysia as leading producers. As
borders closed down, so did the exports of masks – even among EU member states. Keeping
itself open to imports, however, the EU managed to satisfy demand by combining a heightened
domestic production of masks and by importing from non-traditional sources. When it comes to
masks, reshoring is not an option “due to required economies of scale, established regional
supplier networks, and the higher wages and sustainability standards in the EU.” Instead,
international trade and stockpiling for the future are key. 48
Resilience and solidarity are connected when it comes to supply chains. The pandemic
brought this principle to the fore, along with concepts such as strategic, digital and technological
autonomy or sovereignty. Such concepts could be heard from European policymakers and
45
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 46.
46
European Federation of Pharmaceutical Industries and Associations, EFPIA contribution to DG Trade
Consultation on “A renewed trade policy for a stronger Europe” (November 2020).
47
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 48.
48
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 49.
11political leaders – such as Commission President von der Leyen – throughout 2020. Self-
determination and independence are tied into Europe’s ability to thrive on its own if necessary.
Logically, access to resources and capabilities means considering the relocation of supply chains
vital to European firms. The policy department of the EU’s DG Internal Policies correctly argues
that “protectionist policies could in the long run hurt Europe’s resilience and threaten access to
crucial technologies, especially for smaller Member States that rely more on access to foreign
technologies”49 and warns that reshoring has not yet been proven effective on a large scale. To
be cut off from global suppliers and competition has never proven to be a successful recipe for
economic growth, but diversification of production is another matter entirely. The same report
admits that “global value chains will remain vulnerable to exogenous shocks” and that
“industries, in general, are not looking for ways to move their complete value chains back but
rather focus on diversifying their sourcing.”50
To understand reshoring and diversification, one needs to go back to basics. Offshoring
and outsourcing are strategies that increase competitiveness by decreasing production costs
through relocation, either directly or through a supplier, to lower-cost countries. Offshoring
makes a certain product more competitive by decreasing its production – and therefore final –
price. It is the form in which FDI came to China. The literature on China’s economic rise notes
that drivers of FDI into China were the population, natural resources, “cheap labor, quality
infrastructure, open trade policies, regulatory reforms, easy access to foreign market, foreign
investors protection, favorable tax policies and the depreciation of Yuan.” 51
Reshoring is the opposite of offshoring. It is the relocation of production back to the
company’s home country or a country in the same region (nearshoring). Relocation is a complex
process, whether it is offshoring or reshoring, and involves consideration regarding the
advantages offered by a certain location. In the 1990s, Western manufacturing firms offshored to
countries like China because of the low labor costs, the benefits brought by the industrial clusters
that were already forming, the ease of access to raw materials and the infrastructure that aided
exports, not to mention the growing Chinese market.52
A company relocates because of “three distinct supply chain-related aspects: operational,
tactical, and strategic.”53 The first aspect regards cost-efficiency, the second considers the long-
term advantages of a location, while the third centers on the global competitiveness resulted from
the move. Europe must offer advantages in all three to convince firms to reshore. A Western
company can obviously benefit strategically and tactically from being closer to its markets, in a
familiar cultural context, and under the EU’s legislative and regulatory watch, in a solid, liberal
democratic setting where transparency is the rule and corruption lower than in other parts of the
world. In one study, Bray, Colak and Serpa analyzed 27,807 auto components made by 529
49
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 50.
50
De Vet, Nigohosyan, Ferrer, Gross, Kuehl, Flickenschild, “Impacts of the COVID-19 pandemic on EU
industries,” 50.
51
M. Asim Fasheem, M. Khyzer Bin Dost, Answer Hussnain, Syed Usman Izhar, Ali Raza, Amber Shakeel,
“Factors Attracting FDI Inflow in China,” Kuwait Chapter of Arabian Journal of Business and Management Review,
1, 4 (December 2011) 135.
52
Sunil Chopra and Peter Meindl, Supply Chain Management Strategy and Operation (Boston: Pearson, 2015), pp.
13–17.
53
Pourya Pourhejazy and Alison Ashby, “Reshoring Decisions for Adjusting Supply Chains in a Changing World:
A Case Study from the Apparel Industry,” International Journal of Environmental Research and Public Health 18,
9 (May 2021), 4.
12upstream component factories and assembled by 275 plants and found that “defect rates are
higher when the upstream and downstream factories are farther apart. Specifically, we estimate
that increasing the distance between an upstream component factory and downstream assembly
plant by on order of magnitude increases the component's expected defect rate by 3.9%, and also
that quality improves more slowly across geographically dispersed supply chains.” 54 Moreover,
defects increased with the complexity of the component.
However, pure cost-efficiency side of the argument has been a strong obstacle to
reshoring – and the primary reason why firms offshored in the first place. Even though when it
comes to reshoring the cost argument loses its primacy in favor of multiple other
considerations,55 to convince European manufacturers to once again produce in Europe, their
costs must be decreased. This can best be done in the CEE, with lowered labor costs as a prime
motivator.
Although proximity manufacturing – producing something close to the market – has not
been properly researched, the existing literature and case studies show that it has the potential to
increase sustainability. 56 Aside from that, studies have shown that in the clothing industry
proximity manufacturing can lead to “short lead time, high product quality, innovation, and high
profits either through cost reductions or sales and price improvement.”57 In this, clusters of
producers and suppliers, facilitated by governments through favorable trade policies that make
raw and intermediate materials available, worked best. Carbon footprint taxation, acts obliging
companies to make the country of origin clear in advertising and tax credits for domestic
producers also enhanced the success of proximity manufacturing. For European manufacturers,
the closest – cost-efficient – location to produce is the CEE, in countries like Poland and
Romania.
Case Study – Made in Poland
Poland has been identified by US’ International Trade Administration, the body in charge
with aiding American investments abroad, as attractive for investors due to its “large population,
well-educated and competitive workforce, strong prospects for economic growth and location
affording broader access to the European Union market of 500 million” but also its adoption of
EU legislation. Before the pandemic, US FDI to Poland stood at $13 billion, with American
companies active in “automotive, aerospace, information technology hardware and software,
food products, transportation and pharmaceuticals, paper production, appliances and financial
services.”58
54
Robert Bray, Ahmet Colak and Juan Camilo Serpa, “Supply Chain Proximity and Product Quality,” Management
Science 65, 9 (May 2019), 1.
55
Malin Johansson and Jan Olhager, “Comparing offshoring and backshoring: The role of manufacturing site
location factors and their impact on post-relocation performance,” International Journal of Production Economics,
205 (August 2018) as cited in Pourhejazy and Ashby, “Reshoring Decisions for Adjusting Supply Chains in a
Changing World,” 5.
56
Petchprakai Sirilertsuwan, Daniel Ekwall and Daniel Hjelmgren, “Proximity manufacturing for enhancing
clothing supply chain sustainability,” International Journal of Logistics Management 29, 33, (June 2018), 2.
57
Sirilertsuwan, Ekwall and Hjelmgren, “Proximity manufacturing for enhancing clothing supply chain
sustainability,” 26.
58
“Poland – Country Commercial Guide,” International Trade Administration, November 10th, 2020,
https://www.trade.gov/knowledge-product/poland-advanced-manufacturing.
13The ITA also notes that corruption is not widespread in Poland and that the country “does
well when it comes to cross-border trading and credit access and is improving in areas such as
enforcing contracts and collecting taxes.” 59
When it comes to manufacturing, Poland is a growing base for the industry in the region.
Manufacturing represented 22.4% of Poland’s GDP in 2019, and overall production in the sector
grew by 4% the same year. Supported by the government through tax incentives and grants for
procurement and R&D through the Industry 4.0 Platform, additive manufacturing and new
technologies involving robotics and automation are bound to make an impact. The key
infrastructure when such plans are laid out is the internet network. Connected, digitally
integrated in 5G high-speed networks, the machines of the future will make labor costs trivial.
Before the pandemic, Poland funded projects such as the 3M SuperHub in Wroclaw, a
factory manufacturing 12000 types of products60 which was highly automated in production,
supply chain and safety measures thanks to the use of drones. A model for plants of the future,
the SuperHub was supervised by the National Center for Research and Development (NCBiR)
and the Agency for Industry Development (ARP). National financial policies, alongside the
European “Horizon 2020” program, funded R&D in Polish manufacturing before the pandemic.
Two critical manufacturing industries uplift Poland’s economy – the automotive and
aerospace manufacturing. Fiat, Toyota, Volkswagen, Opel, alongside their suppliers invest and
profit from their investments in Poland. As the ITA notes, “in 2019, Poland produced over
600,000 vehicles. Poland manufactures engines (Daimler, PSA, Volkswagen Motor), tires
(Goodyear, Michelin, Bridgestone), parts and components (Valeo, Hutchinson, BorgWarner,
Faurecia, Johnson Controls, Delphi).”61 In 2020 Mercedes built a plant in Poland with an
investment of $650 million, employing a thousand people. Polish aerospace manufacturing takes
place in Southeast Poland – Aviation Valley – a cluster of industry and manufacturing not unlike
those in large Chinese centers. Over 160 companies (Sikorsky, Augusta Westland, Pratt &
Whitney and Airbus) and their 30,000 employees are present there.
Case Study – Made in Romania
The same International Trade Administration sees Romania as a country with vast
potential, especially in sectors like “agriculture, manufacturing, auto assembly, textiles and
footwear, petroleum refining.” Access to the Black Sea also allows Romania to shorten distances
for export costs to markets in the region. However, companies in Romania are plagued by a
context of corruption, bureaucracy, political instability and an unreliable judicial system. The
country’s infrastructure negatively impacts business costs and productivity, not to mention its
connection with the rest of the EU. Poor infrastructure alone “holds back the country’s ability to
realize its full potential for new investment, trade, and tourism.” 62 Another problem is the fact
that Romania does not currently use the euro, but the local currency, lei. This happens although
major consumer items (cars, homes, big appliances) are prices in euros. As the ITA notes, “this
59
“Poland – Country Commercial Guide,” International Trade Administration.
60
Wroclaw Technology Park, Wroclaw Technology Park joins forces with 3M,” accessed July 20th 2021,
https://www.technologpark.pl/en/2020/02/wroclaw-technology-park-joins-forces-with-3m/.
61
“Poland – Country Commercial Guide,” International Trade Administration.
62
“Poland – Country Commercial Guide,” International Trade Administration.
14creates trade inefficiencies due to higher transaction costs and exchange rate fluctuations.”63 The
same can be said, to some extent, about Poland. Finally, labor shortages in the west and north of
Romania leave employers without a reliable workforce. This happens although the eastern half,
Moldova, sees high unemployment.
Trading in Poland & Romania
Poland and Romania can serve as destinations for new investments in EU manufacturing
due to numerous reasons, as it has been shown. The two countries also have favorable tax rates.
Poland levies a 19% tax on corporate income – in some cases this shrinks to 9%.64 Romania’s
corporate tax is even lower, at 16%, and micro-companies pay between 1-3%.65 Romania’s top
export partners are Germany (22.97%), Italy (11.43%), France (7.10%), Hungary (4.88%), UK
(4.25%). Its top ten partners are 8 EU countries, the UK and Turkey. However, in 2018 the
country imported more than it exported, $97.8 billion and $80 billion respectively. 66 As for
imports, Romania’s top five partners included China, but only in fifth place, after Germany,
Italy, Hungary and Poland.
Poland’s top export partners in 2018 were Germany (28.15%), Czech Republic (6.36%),
UK (6.19%), France (5.55%), Italy (4.6%). In its top ten partners are 8 EU countries, Russia and
the United States. As for imports, 22.4% of them come from Germany, 11.5% from China, and
7.3% from Russia. In its top ten importing partners are 8 EU countries, China and Russia.
However, in 2018 the country imported more than it exported, $267.69 billion and $261.8 billion
respectively. 67
For both Romania and Poland, imported intermediate goods exceeded the exported
intermediate goods. In 2018, Poland imported intermediate goods worth $64.3 billion and
exported goods of the same type worth $47.3 billion. In the top 5 other product types (consumer
goods, capital goods, machines and electronics or transportation), exports exceeded imports.
Romania imports more consumer goods, capital goods, machines and electronics than it exports
(it exports more transportation goods than it imports). Romania also imports intermediate goods
worth $22.5 billion and exports goods of the same type worth only $13 billion. To produce those
goods at home would boost the economies of both countries and lessen the unequal development
between EU regions. By encouraging investing in the CEE, the EU shows solidarity.
4. European Manufacturers in CEE & Asia
Country case studies, taking into account the context of manufacturing, have their limits.
Comparative approaches are widely used in social sciences in order to draw up conclusions and a
63
“Romania – Country Commercial Guide,” International Trade Administration, August 19th, 2020,
https://www.trade.gov/knowledge-product/romania-market-overview.
64
PwC, “Poland: Corporate – Taxes on corporate income,” July 13th, 2021,
https://taxsummaries.pwc.com/poland/corporate/taxes-on-corporate-income.
65
PwC, “Romania: Corporate – Taxes on corporate income,” July 16th, 2021,
https://taxsummaries.pwc.com/romania/corporate/taxes-on-corporate-income.
66
World Bank, “Romania Exports by country 2018,” accessed June 11th, 2021,
https://wits.worldbank.org/CountryProfile/en/Country/ROM/Year/2018/TradeFlow/Export/Partner/by-country.
67
World Bank, “Poland Exports by Country 2018,” accessed June 13th, 2021,
https://wits.worldbank.org/CountryProfile/en/Country/POL/Year/2018/TradeFlow/Export/Partner/by-country.
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