Type: Guides Archives

Mitigating Deindustrialization: CEE Relocation vs. Outsourcing for Shareholder Value

Not enough time to read the full article? Listen to the summary in 2 minutes. The dark clouds of deindustrialization are looming over the German industrial landscape, formed due to rising operational costs, energy crises, and regulatory pressures. They threaten profitability, and shareholder value while companies struggle for the sunshine of growth. If you are a business owner in Germany, alternative strategies like outsourcing and relocating factories to Central and Eastern Europe (CEE) can be your much-needed shelter. They offer cost-saving opportunities, protect operational efficiency, and maintain global competitiveness. However, it’s hard to select one. This in-depth guide will compare both strategies to understand which one better mitigates deindustrialization risks and safeguards shareholder value. Let’s dive in! What are Key Deindustrialization Risks? Deindustrialization refers to the phenomenon of a country’s industrial activity and employment decreasing or being removed, especially in manufacturing and heavy industries. Germany has been the prime victim of this dreadful trend due to a mix of factors. In Germany, deindustrialization is marked by several risks that harm industrial companies: Rising Energy Costs: Energy-intensive sectors such as manufacturing face unsustainable electricity and gas prices. In 2023, Germany’s industrial energy costs ranked among the highest in Europe, increasing by 45% over the past two years, according to Eurostat. Operational Inefficiency: Strict regulations, coupled with supply chain disruptions and labor shortages, and decreasing labor morale are contributing to reduced operational efficiency and competitiveness. Declining Productivity: German companies have long been known for their high productivity standards. However, the recent landscape shift has hampered it drastically. If your business is facing similar issues, you must take tactical timely actions. Impact of Deindustrialization Risks on Shareholder Value The risks involved with growing deindustrialization are eroding shareholder value and leaving German companies suffering. Rising costs are destroying margins which makes it highly difficult to sustain profitability. This makes investor confidence shake and causes companies to claw for capital and look for new investment opportunities. If not handled promptly, the situation may result in long-term damage, hinting at the probable end of companies. Even the biggest players are worried. Comparing Outsourcing and Factory Relocation to CEE to Mitigate Deindustrialization Risks Companies must implement prompt strategies to mitigate risks involved with deindustrialization. Factory relocation to CEE and outsourcing have emerged as the two optimal solutions. However, you must select the most ideal approach for your business. We’ll help you decide which plan is better for you: Quality Control and Process Optimization Outsourcing: While outsourcing to distant locations like Asia or South America may seem cost-effective, it often results in reduced control over quality. According to a KPMG report, 41% of companies face quality issues in outsourced operations. CEE Relocation: On the other side, factory relocation to CEE countries allows businesses to maintain greater oversight on production. The great proximity of this region to Germany and proper alignment with EU quality standards ensure that there is robust quality assurance. For instance, companies in Poland and Hungary benefit from a highly skilled workforce with expertise in manufacturing, ensuring that quality is maintained at a competitive cost. Winner: CEE relocation allows better process optimization and quality control. Data Security and Intellectual Property Outsourcing: In many low-cost outsourcing destinations, the legal protections for intellectual property (IP) and data security are weaker, which makes German companies vulnerable to IP theft. A McKinsey study found that 22% of firms outsourcing to non-EU regions face significant data security concerns, which is no surprise. CEE Relocation: By relocating to CEE countries within the EU, businesses benefit from strong data protection regulations under GDPR as the framework safeguards intellectual property and proprietary information– reducing risks and reaping rewards. Winner: CEE relocation, due to robust IP security and data protection laws. Communication and Coordination Outsourcing: Managing operations from distant locations is tough. Communication gaps amplify your problems. They are unavoidable as outsourcing regions have different languages, cultures, and time zones. According to a PwC report, 30% of companies encounter delays and misunderstandings when they outsource operations to faraway regions like China, India, and the Philippines. This creates inefficiencies, leaving shareholders dissatisfied. CEE Relocation: Relocating factories to CEE countries minimizes these issues. These countries have cultural and geographical proximity to Germany. It makes sure smoother communication and coordination. Language barriers are also minimized, and time zone differences are negligible, allowing for more efficient collaboration. Winner: CEE relocation, thanks to cultural alignment and proximity. Market Proximity and Logistics Outsourcing: Logistical challenges are common with distant outsourcing hubs like Asia. You’ll be fed up with long shipping times, increased transportation costs, and complex customs processes. This makes it harder for German businesses to meet the demands of European customers in a timely manner. CEE Relocation: CEE countries integrate seamlessly into the European supply chain. The Eurostat report also highlighted that transportation costs from CEE countries are 30-40% lower than those from Asia. When lead times are shorter, your company can quickly respond to market demands. Winner: CEE relocation, due to proximity and lower logistical costs. Cost Efficiency and Innovation Opportunities Outsourcing: Outsourcing operations to vendors in Asia or South America provide short-term cost-saving opportunities. However, the risks like poor output quality, delay in delivery, and IP vulnerabilities outweigh them greatly. So, there is no future growth potential. CEE Relocation: While labor costs in CEE countries are 40-60% lower than in Germany (World Economic Forum), these nations also boast a technically skilled workforce. This enables companies to drive innovation without sacrificing cost efficiency. As you can access a highly skilled talent pool at nominal wages, it’s a long-term solution for shareholder value growth. Winner: CEE relocation provides cost savings and long-term innovation potential. Infrastructure and Workforce Outsourcing: Outsourcing destinations like Southeast Asia may offer competitive wages, but the infrastructure is often underdeveloped compared to Europe. When the transportation network is poor, operational delays and inefficiencies can’t be avoided. CEE Relocation: Countries like Poland, Hungary, and the Czech Republic have invested heavily in industrial infrastructure. According to the World Bank, Poland ranks among the top 25 nations globally for

Navigating Deindustrialization: CEE Factory Relocation vs. Outsourcing and Loss of Control

Not enough time to read the full article? Listen to the summary in 2 minutes. Amid chaotic deindustrialization in Germany, industries are facing threats like rising operational costs, energy shortages, and fierce global competition. Businesses are looking for alternative strategies like outsourcing to counter these issues and maintain their competitiveness globally. However, outsourcing isn’t a foolproof alternative. If you are choosing it, you are at the risk of loss of control, reduced quality, and too much dependence on external partners. This brings us to our other option which is fairly better and keeps you in control of your business while also saving money– Factory relocation to CEE countries like Slovakia, Czechia, Hungary, Poland, Romania, Serbia etc. This region is proving to be a goldmine for operations. Here, we’ll explore why CEE factory relocation to counter deindustrialization of Germany is a more stable and effective solution than outsourcing for businesses. Let’s move further to understand how moving factories to this high-potential region can transform German companies and provide the operational stability they need to survive and thrive amid tough times. Understanding the Severe Impact of Deindustrialization on German Companies Germany, which was once an industrial example setter, is now undergoing a growing phase of deindustrialization. Its industries are deeply affected by factors like high energy prices, stringent regulations, supply chain disruptions, and shifting labor markets. Hence, it’s common for your business to face difficulties sustaining production at competitive levels. This is clearly visible in energy-intensive sectors such as automotive, steel, and chemical, where the rising costs of electricity and gas have forced businesses to reevaluate their operations. The energy costs in Germany have been among the highest in Europe recently, which directly hits manufacturing competitiveness. Businesses have already begun moving operations abroad. This has raised alarms about the country’s long-term industrial future and prompted many firms to look for solutions closer to home, with CEE countries emerging as a prime option for relocation. However, some businesses have chosen ‘outsourcing’ to deal with the chaos. Why Outsourcing is Not the Ideal Way to Counter Deindustrialization in Germany? Outsourcing operations to distant locations like Asia or South America has been a common strategy for reducing costs used by German companies. However, there are certain risks involved. The loss of control over critical aspects of the business is the most threatening one. A major concern is the difficulty in maintaining quality standards when production is outsourced. German companies, known for their engineering precision and high-quality standards, often find that quality declines when manufacturing is moved to lower-cost countries with less stringent regulatory environments. Your business can face problems like inconsistent product quality, delayed deliveries, and difficulties in implementing new techniques and innovations. Additionally, communication barriers are unavoidable when outsourcing to regions with different languages, cultures, and time zones. This can result in project delays, misunderstandings, and an overall reduction in operational efficiency. The further you move production from the company’s base, the harder it is to manage day-to-day activities and maintain alignment with the company’s strategic goals. More importantly, outsourcing poses risks to data security and intellectual property. In regions with weaker legal protections for intellectual property German companies may face challenges in safeguarding their designs, processes, and innovations. Your business might be at the risk of costly legal battles that are devastating or even encounter the unauthorized use of proprietary technology by others, often giving rise to immortal competitors. How Factory Relocation to Central and Eastern Europe Countries Emerge as a Better Alternative? Experts have chosen factory relocation to CEE countries as a far more stable alternative to outsourcing. It allows German companies to retain greater control over their operations. This region offers a favorable business environment with proximity to Germany, making oversight and collaborations easier. The geography and culture of this region are incredibly similar to Germany, which leaves space for minimal logistical challenges and communication barriers compared to primary outsourcing locations which have varying cultures and geographies. Additionally, the regulatory frameworks in CEE countries properly align with EU standards. This ensures that your business can maintain the same level of quality and innovation control that it achieved with domestic operations, reducing the chances of diminished quality or innovation delays. Companies can supervise production and implement changes more effectively. Countries like Poland, the Czech Republic, and Hungary have also made significant investments in infrastructure and workforce training, making them attractive destinations for factory relocations. And you still have the option to stay in Europe, but outside of the EU regulation when you decide to relocate your factory to Serbia, North Macedonia, or Bosnia and Herzegovina. Cost Effectiveness Without Compromising Control Outsourcing might seem a cost-effective option but its long-term financial and operational risks clearly outweigh the short-term savings. On the contrary, CEE factory relocation allows companies to achieve cost savings without the risks associated with outsourcing. The talent in CEE countries is ready to work at significantly lower rates than the one in Germany. However, it holds the same or even better level of technical expertise and working morale. This lets German companies reduce operational expenses without sacrificing quality and control. For instance, Poland has seen increased foreign investment from German companies due to its competitive labor markets, strong industrial base, and well-developed transport links to Western Europe. Regulatory Advantages and Compliance Management CEE countries offer a robust regulatory alignment with strict EU standards. Unlike prime outsourcing destinations, CEE countries adhere to strict data security, labor, and environmental regulations to make sure that German companies continue to meet the high standards required by European and global markets. This is especially important for industries with sensitive intellectual property or stringent regulatory requirements, such as automotive or aerospace manufacturing. By relocating to CEE, German companies can maintain compliance with EU regulations, minimizing legal and operational risks while ensuring that their innovations remain protected. Mitigates Potential Risks Once the leader of industrialization, Germany is now undergoing a phase of deindustrialization, leaving businesses worried about potential risks and mishaps. The cost of production is rising