Mitigating Deindustrialization: CEE Relocation vs. Outsourcing for Shareholder Value

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 logistics efficiency, ensuring a smooth flow of goods and resources. With a well-developed infrastructure and an incredibly skilled workforce, it has turned into an ideal destination for German manufacturers.

Winner: CEE relocation, due to advanced infrastructure and workforce training.

Regulations and Compliance

Outsourcing: Outsourcing to regions outside the European Union (EU) may offer short-term cost savings but it makes navigating regulatory environments difficult. You may face compliance issues and legal risks. Labor, environmental, and safety standards are weaker there. Protecting your company from potential fines and reputational damage becomes harder.

CEE Relocation: When you relocate to any of the CEE countries, you follow the same EU regulations that are followed in Germany. This includes labor, environmental, and safety standards, ensuring that German companies maintain a positive reputation while avoiding legal risks.

Winner: CEE relocation, offering strong regulatory alignment and compliance.

Final Verdict

Factory relocation to CEE countries is the clear victor of this battle. Outsourcing can be a short-term approach but it poses critical risks in the long run. Relocating to CEE countries is a more comprehensive solution that allows businesses to check all boxes to stay competitive.

It allows you to maintain quality, enhance control, and boost efficiency while avoiding misunderstandings, compliance issues, and supply chain disruptions. It’s the most optimal strategy for German companies concerned with the risks of deindustrialization and sustaining shareholder value.

Is your company struggling to manage deindustrialization risks? Discover how CEE factory relocation can protect shareholder value and ensure sustainable growth. Unsure how to address your organization’s pressing challenges? CE Interim, as a trusted member of the Valtus Alliance, offers top-tier interim management solutions to help your business tackle factory relocations, achieve operational excellence, and optimize supply chains. With the ability to step in wherever and whenever needed, our global expertise ensures your company’s transitions are smooth and successful. Let’s get started!