Strategic Diversification Against Deindustrialization: Relocation to Central and Eastern Europe or Outsourcing?

Germany is undergoing a wave of deindustrialization which is far too strong to subdue anytime soon. Automotive manufacturers, which have been the driving force behind the country’s economy, are struggling with challenges that need immediate strategic action.

Among many counter-effective plans, manufacturing footprint diversification to automotive superpowers in the CEE region has emerged as a powerful alternative to outsourcing.

For automotive manufacturers and other industries deeply impacted by rising operational costs and energy prices, the decision of whether to outsource or relocate their factories within Central and Eastern Europe (CEE) is confusing, complicated, but very critical.

We will take a look at the pros and cons of both approaches and compare them specifically for automotive manufacturers and other high-stakes industries here. By the end of it, you’ll realize why moving production to CEE countries may be a better alternative.

The Automotive Industry’s Battle Against Deindustrialization

For years, Germany’s automotive industry has been the driving factor behind its industrial legacy. However, the recent deindustrialization in the country due to factors like increasing energy prices, growing labor shortages, and geopolitical uncertainties have brought doomsday to the industry.

The soaring energy costs have worsened things as the automotive industry relies heavily on uninterrupted production lines and access to energy.

Manufacturers are desperately looking for ways to adapt and strategically diversify their operations to preserve competitiveness and sustain profitability– with outsourcing and factory relocation appearing as the top two solutions.

Why Outsourcing Falls Short in the Deindustrialization Battle?

Outsourcing may be a widely used strategy globally but it has its own set of risks that harm your company’s long-term future. Especially in industries like automotive manufacturing that rely on robust quality control measures, proprietary technologies, and complex supply chains.

Let’s take a look at some key reasons to understand why outsourcing isn’t the most vital tool for fighting deindustrialization as a German automotive manufacturer:

1. Loss of Control and Oversight 

When manufacturing is outsourced, businesses lose their direct control over the production process. Outsourcing partners may not adhere to the same standards of quality or innovation, leading to a decline in the final product. 

For companies rooted in precision manufacturing—such as those in Germany’s automotive sector—this loss of control is a serious threat to their brand reputation.

2. Persistent Communication Barriers

Communicating becomes harder when you outsource productions to distant regions. Your vendors will use different languages, come from varying cultures, and work in their preferred time zones. Your company’s operational efficiency will suffer in this case.

3. Intellectual Property Risks

If you outsource productions to a region with poorly defined or weak IP laws, your intellectual property is at risk of theft. If your cutting-edge designs, techniques, and innovations get stolen, your company will be doomed and chaos will be unimaginable.

4. Dependency on External Partners

You are at the mercy of your outsourcing partners when you hand over your productions to them. If they fail to meet production targets or deliver inconsistent quality, you are doomed. Your supply chain will be affected and operation downtimes are imminent.

Due to these challenges, outsourcing is not the right thing to do if you are trying to defend against deindustrialization attacks.

Factory Relocation to CEE Can Be Your Trump Card

In contrast, manufacturing footprint diversification to automotive superpowers in the CEE region offers a more controlled, reliable alternative to outsourcing. The countries in Central and Eastern Europe have become the ideal manufacturing relocations lately due to great proximity, competitive labor markets, and significant investments in infrastructure.

Let’s explore the key advantages of relocating to CEE countries like Poland, Hungary, Slovakia, and the Czech Republic.

1. Proximity to Germany: Greater Control and Easier Logistics

Factory relocation to the CEE countries provides geographical advantages that are absent with outsourcing destinations in Asia or South America. These countries are so close to Germany that managing operations becomes smoother and you won’t face any supply chain issues.

This proximity enables companies to retain much-required control over their operations while significantly reducing transport costs and lead times.

For instance, Slovakia is rising up the ranks as the next automotive manufacturing leader in Europe. The country offers advanced infrastructure and facilities, and an amazing workforce that is highly skilled but works at fairly low wages.

2. Labor and Cost Advantages Without Sacrificing Quality

The CEE countries have advanced educational and vocational training programs. The talent produced here is not only capable but highly adaptable to advanced manufacturing technologies.

Additionally, they demand wages that are significantly lower than in Germany. For German manufacturers, it’s nothing less than a blessing as they can reduce operational costs without sacrificing the quality of their products.

3. Strong Regulatory Alignment with EU Standards

CEE countries operate under EU regulations, so you don’t have to worry about compliance problems as the transition will be seamless. However, when you outsource production, you are at the risk of regulatory misalignment with compliance, environmental, and labor laws.

Most importantly, German automotive companies can maintain strict adherence to EU environmental policies by relocating to CEE countries. It’s crucial as they are already facing immense scrutiny over emissions standards.

So, there is assurance that relocated factories will follow the necessary legal and ethical guidelines to prevent costly regulatory fines and reputational damage.

4. Robust Infrastructure and Supply Chain Resilience

CEE countries have invested heavily in upgrading their infrastructure to accommodate the influx of foreign manufacturers. Whether it’s road and rail networks, telecommunications, or energy supplies, these nations have developed the infrastructure required to support complex manufacturing operations.

For automotive manufacturers, where efficiency in supply chains is vital, the well-established logistics networks in CEE countries allow for seamless integration into global supply chains, ensuring production continuity and resilience even during periods of global disruption.

5. A Long-Term Solution Amid Rising Costs

Outsourcing often appears as the quick fix to reduce operational costs but you may end up neglecting the long-lasting downsides impacting your company’s future. On the other hand, factory relocation to CEE countries provides a long-term solution that balances cost efficiency with control.

As the global economy faces rising energy prices and inflation, especially in Europe, manufacturers need to adapt by shifting their footprint to regions where they can maintain control, quality, and profitability.

The CEE region’s commitment to becoming an automotive powerhouse is evident in the growing number of German manufacturers relocating their factories. Volkswagen and Mercedes-Benz, the two biggest automotive names in Germany, have recently established successful operations in Poland and Hungary, respectively.

Conclusione

German automotive manufacturers are at a crossroads. One way is outsourcing which offers short-term cost savings with critical associated risks like loss of control diminished quality, and over-reliance on external partners.

The other one is manufacturing footprint diversification to automotive superpowers in the CEE region offers a strategic alternative. With its skilled workforce, regulatory alignment, robust infrastructure, and geographical proximity, the CEE region allows companies to maintain their competitive edge while reducing costs and mitigating the risks of deindustrialization.

Experts recommend choosing the latter as factory relocation to CEE countries may be the key to ensuring long-term stability and success for German manufacturers.

Looking to address key business challenges but don’t know where to start? CE Interim, in collaboration with the worldwide Valtus Alliance, is equipped to provide expert interim management solutions for factory relocations, operational excellence, and supply chain optimization. With a global network that enables us to step in anywhere, anytime, we ensure your organization’s transitions are managed seamlessly. Let’s talk today!