EU Accession and Your Supply Chain

In Summary

Nothing is going to change so radically, and so rapidly, that your supply chain needs to be re-drawn as soon as the new members are "official." But, things will almost certainly evolve, and fairly soon, into a structure that demands different structures - inbound and outbound - to compete at the highest levels.

The time to begin planning is now. The clock is ticking.

Background

1 May marks a red letter day for the European Union (EU) in many respects. Just two years ago, free trade of goods and services among its 370 million citizens became a reality, with the disappearance of borders between the member states. Now, ten new members are poised to join the current fifteen.

What does this mean to the world of supply chains and logistics? Will there be radi-cal change? Are there significant new opportunities? Challenges? Threats? How will the Day One situation differ from the Year Five setting? Who's next to follow these ten? And, how soon? How will threats and opportunities be magnified (or di-minished) by the next wave of accession - and the next?

Legitimate questions, all. Trying to answer them may only lead to more questions. But, standing pat is not likely to be a long-term success strategy. Neither is jumping too soon. Let's visit the issues and trends, looking at how the landscape might change.

The Comfort Zone - The Pre-May 2004 E

The EU has been so successful recently that we tend to forget that it has been some 50 years in the making, based on concepts that reach back even 3 or 4 decades ear-lier. The Euro has been a spectacularly successful currency, even if it has not been universally adopted, for reasons of either national preference or national economic performance.

The fifteen-nation bloc (Germany, the United Kingdom and Ireland, France, Spain and Portugal, the Benelux countries, Italy, Austria, Sweden, Finland, and Greece) is an economic powerhouse, with a population of 378 million, territory of almost 3 ¼ million square kilometers, and total Gross Domestic Product (GDP) of $8,325 bil-lion. The quite comfortable per capita GDP is 23,210 (expressed in Purchasing Power Standards). Of the obvious European entities, only Switzerland and Nor-way/Iceland are not in the EU.

All is not Utopian. The average unemployment rate is 7.5% -not horrible, but not as good as might be desired. The annual GDP growth is 1.5% - solid enough, but not comparable with the Asian "tigers." And, Germany, for example, is still digesting the economic consequences of reunification.

On Accession Day . . .

What changes, and by how much, when the new kids move onto the block? The ten new members (Poland, the Czech Republic, Malta, Cyprus, Hungary, Latvia, Estonia, Lithuania, the Slovak Republic, and Slovenia) will raise the population to 453 mil-lion, eclipsing the US. Territory will increase to nearly 4 million square kilometers. GDP will rise, however, to only a little less than $8,700 billion. And, the ten's GDP increase of a healthy 2.4% will only be enough to nudge the EU's new increase to 1.6%.

The ten's per capita GDP (in PPS) of 10,700 will drag the new EU average to 19,200, a 17% drop. And average unemployment will jump to 8.9%, a nearly 19% increase because of the 15.1% the ten bring with them.

The ten new members are a mixed bag, with 80% of the population and economic power concentrated in Poland, Hungary, and the Czech Republic. Unemployment ranges from 20% (Poland) to 5.6% (Hungary), GDP growth from 7.7% (Latvia) to 1.1% (Poland), and inflation rates vary from .4% to 7.5% (Lithuania and Slovenia, re-spectively). Malta and Cyprus data have been omitted from these comparisons.

What Else Lurks In The Woods?

We'll return to the "new" EU in a moment. Four additional countries have already applied for EU membership - Croatia, Romania, Bulgaria, and Turkey. Romania and Bulgaria might join in 2007; timetables for the others are not established, al-though a Turkish accession might gather some political, if not economic, steam.

Simply reviewing a map raises obvious questions of who might be next after that, with Moldova, Ukraine, and Belarus - perhaps Russia, itself - presenting the next eastern frontiers. Then, there are inevitable questions of roles that Bosnia-Herzegovina, the Former Yugoslav Republic of Macedonia, the Federal Republic of Yugoslavia, and even Albania, might play if and when they get their acts together.

It's easy to speculate that any, or all, of these could happen someday, and not without some interim pain - and long-term opportunity.

Some Hard Realities

Drawing conclusions from maps and tables of data can be misleading. The transpor-tation infrastructures in the new members, and the next candidates (not to mention in those not yet slated) are sadly lacking, and in degrees that are difficult to imagine for those accustomed to dealing with mature and highly developed economies.

With the possible exception of rail in the former Soviet Socialist republics, it might be suggested that there is no infrastructure, to speak of. Poland, for example, enjoys only 257 kilometers of highways, a density 1/80th of Belgium's.

Education and literacy are mixed bags, with some pockets of excellent technical strength. Work ethics are highly variable, and often not culturally consistent with those in more developed countries.

In general, the new members (Malta and Cyprus aside) do not rank highly in the World Bank's' Corruption Perception Index, nor in Economic Freedom, with Roma-nia and Bulgaria faring somewhat worse. The Baltic States (Estonia, Lithuania, Lat-via) score well in Logistics Friendliness, but still lag the European leaders by wide margins.

Governments are working to reduce red tape, and infrastructure investment pro-grams are underway, notably the Trans European Network (TEN) initiative. But, significant improvements are years and years away.

Is EU Accession The Real Question?

With all the attention on the EU expansion because of the newfound ease of crossing borders, of harmonizing VAT structures (more of an objective than a reality), and so forth, it is easy to forget that fundamental economic factors are sending more and more manufacturing and distribution eastward, despite the well-known difficulties.

The economic development of the CEE ten and of the rest of Europe is, and has been, going on, independent of EU considerations. While open borders and taxation ad-vantages favor EU members, low costs have been trumping perceived political re-straints to eastward movement.

The cost factor differentials are, in fact, so dramatic that movement east becomes a "no-brainer," at least in the short term. Wages, for example, in the Central/Eastern Europe (CEE) ten are less than 1/5th the current EU average. They are only 1/16th the EU average in Bulgaria/Romania. Although facility costs in major CCE cities are al-ready up to those in the current EU, land costs for industrial property in CEE coun-tries are very attractive compared with the EU.

Manufacturing is already well-established in CEE nations, particularly in Poland, Hungary, and the Czech Republic. Industries range from automotive to fast-moving consumer goods (FMCG), from pharmaceuticals to apparel, and from electronics to home furnishings. While this has been developing over the past ten and more years, logistics operations have also been developing, for both local distribution and for ag-gregating inbound and outbound goods from/for Western Europe.

So, the restructuring of distribution networks beyond the EU is already underway.

What Will Happen, Really - The Consumption Side

The easy answer is, "Not much." The money, the people, the centroids of activity are going to be just where they are today. The major markets will overwhelmingly re-main in Germany, France, and the UK - at the beginning. But, a number of factors will act in concert to change that picture - at least change it sufficiently that the edges of the market will become more important and more demanding, and will need different logistics/service solutions.

The CEE/EU wage gaps are going to narrow, as more jobs go East, and as unem-ployment rates fall. This will, along with continually increased contact and commu-nication, drive up the size and appetite of consumer markets for all manner of prod-ucts, from hard goods to personal care.

What Will Happen Really - The Production Side

The existing trend for moving production to the East - into CEE countries and to others farther East will continue, driven by both the needs of local markets and the wage/land cost differentials. This, in turn, will put positive pressure on infrastruc-ture development, which will make additional economic activity even easier to con-sider.

Manufacturers will, in turn, be growing consumers of machinery and technology, stimulating even more movement of goods within the "new" EU (and farther East).

What Will Happen Really - The Logistics Side

Challenges will abound, with demand on both the production and consumption sides running ahead of infrastructure capabilities. The gap will be bridged by brute force - more labor, use of sub-standard technology, tolerating a certain amount of theft, en-during the time and travail that come with poor roads.

As things expand and improve, the old-model central distribution center for all of the European market will not be able to meet the demands of a geographically- and population-enlarged EU, not to mention the growth areas beyond EU borders. Look for the emergence of regional/second-tier distribution centers to serve local markets. These all mark significant departures from the very recently-vacated premise of country-specific distribution centers.

Also, look for more activity in the Baltic States, as points of entry from Scandinavia, and as entrée's to Russia, and Belarus.

With more manufacturing taking place farther East, some shift in air and sea port entry of materials may take place. And, with increasing two-way traffic (lorry, rail, multi-modal) of materials eastward for manufacture and westward for consumption, primary and secondary DC locations could need restructure, resizing, and mission redefinition.

Even with all these considerations, the traditional European logistics centers will continue to be strong players, both for the entry and the distribution of goods, with the possible exception of Austria as a gateway to the East. The newer developments are most likely to augment existing structural components, and help to redefine their mission(s).

At some point, for global multinationals, integrating Far Eastern, European, Ameri-can, and other sourcing with changing market sizes and shapes could lead to entirely new DC/logistics structures to serve the EU, the rest of Europe (especially Eastern Europe), the Middle East, and Africa (Northern, sub-Saharan, and South Africa).

In summary, the European world is going to change mightily, but slowly enough that there's no need to panic. It will continue to change in ways that make different logis-tics networks not only desirable, but imperative. The time to deal with the where, when, and how questions that go along with these changes is now.

The Supply Chain Group has uniquely qualified resources and insights to help you work through the questions - and the answers. A few, for example:

• Do your sourcing/purchasing strategies take advantage of the new possibili-ties?
• Are your warehouses located properly for the new markets - and for new roles for old markets?
• Do they have the capacity needed to fulfill new demands - or the material handling systems?
• Are your logistic systems capable of meeting tomorrow's emerging needs?
• Do your 3PL's have the network, the contacts, the resources, and the vision to serve new markets in the new European Union - and beyond?

Call us today.

About the Author

Art Van Bodegraven is a Partner in The Progress Group, and the former six-time Chairman of  TPG’s international affiliate, The Supply Chain Group.  He may be reached at (614) 336 0346, (614) 893 9414 (mobile), or avan@theprogressgroup.com.