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German Companies And Nearshoring

An Exaggerated Trend?

In line with Germany’s historical competitiveness strategy, which focuses on quality and not cost when it comes to considering nearshoring, German companies prefer countries that have a reputation for being innovative and having an environment that fosters innovation. This is an important piece of information for Serbian policymakers who hope to attract more FDI by tapping into this trend

I t is widely believed that the COVID-19 lockdowns disrupted global supply chains and pushed many to consider nearshoring. Euler Hermes, a global leader in trade credit insurance, recently surveyed a sample of high-level executives in 1,181 companies in the U.S., the UK, France, Germany and Italy, covering a wide array of industries, from IT, tech and telecoms, machinery and equipment, chemicals, energy and utilities, to the automotive and agrifood sectors.

According to the results, between 13 and 18 per cent of French companies consider reshoring in the medium to long term, vs. three to six per cent in Italy and six to 10 per cent in Germany. This is the result of the survey sample showing that 76 per cent of German companies report that less than half of their suppliers are located outside the country, as opposed to an average of 65 per cent for other countries.

German companies said that they’d rather move their production to, or find new suppliers in, Austria, which is likely because a third of German companies’ suppliers are already in Austria. In choosing other countries where they would move their production, about 30 per cent stated that the (selected) country has to have a reputation for being innovative and having an environment that fosters innovation”. This reason shows up among the top three reasons, behind choosing supplier locations. In comparison, only an average of 20 per cent chose the same answer.

Marcus How, head of Research & Analysis at ViennEast Consulting, a Vienna-based investment risk advisory company specialising in the CESEE regions, recently wrote an opinion piece for SEE News in which he claims that “Central Eastern and Southeast Europe (CESEE) is in pole position to benefit from industrial nearshoring in particular, given its safe haven status, the skillset of its workforce relative to its cost, legal protections and access to Western European hubs”.

In the recent survey, German companies stated that they might consider nearshoring and that the Western Balkans might benefit from this, but that this remains unclear

Yet, as noted previously, instances of nearshoring are relatively rare. Eurofound recorded only 15 instances of reshoring in EU member states in CESEE between 2014 and 2018, of a total of 250 in the wider bloc. In comparison, there were 25,000 cross-border investments during the observed period.

Such modest numbers are the result of two major trends: first, the process is slow and expensive for companies; and second, CESEE countries differ strongly in terms of being fit for such a process. How believes that industrial capacity and infrastructure quality are key to attracting companies that are considering nearshoring. He outlines Serbia and North Macedonia as having developed limited manufacturing that is systematically integrated into GVCs. But this is not enough. Neither low labour costs and taxes, nor deeper integration into GVCs on account of increasing trade and convergence with the rest of the EU, will be sufficient, claims How.

According to him, “governments will need to be strategic in courting these investments, where currently they are blandly managerial, even under populist or otherwise authoritarian elites. This can partly be done through improvements to the business environment, including through institutional reform, an area in which most countries in the region are badly lagging. In this sense, the same old lessons still apply”.

How prizes Serbia as a possible viable alternative for companies seeking nearshoring options, as the country combines tax relief measures with customs waivers on machinery, and cash grants to subsidise investment in its manufacturing sector, while maintaining an effective system of technical education for its labour force. “It has emerged as a leading destination for greenfield FDI, partly as a result of this, and partly because of other unique advantages – and all in spite of its institutional regression,” writes How.

While some experts praise Serbia for combining tax relief measures with customs waivers on machinery, and cash grants to subsidise investment in its manufacturing sector, as attractive points for companies considering nearshoring, German companies already operating in the Western Balkans give more weight to the quality of the workforce and institutions

The Vienna Institute for International Economic Studies offers a slightly more nuanced and optimistic view on nearshoring in the Western Balkan countries. In a survey conducted in November and December 2020 by the Chamber Partnership Western Balkans, the Delegation of German Economic Affairs in Bosnia- Herzegovina, the Delegation of German Industry and Commerce in North Macedonia, the German-Serbian Chamber of Commerce and Germany Trade and Invest, companies stated three main reasons for investing abroad: relatively lower labour costs (32%), entering new markets (21%) and finding workers who cannot be easily found at home (18%).

WIIW found that the quality and availability of labour is the main reason for investing abroad. Contrary to How’s claims, this survey showed that lower taxes abroad are of minor importance, as well as incentive schemes that governments provide to foreign investors. Instead, stability, governance and institutions of the country were rated as the second most important reason to invest. Interestingly, relocation due to the pandemic was rarely mentioned, at least among companies included in the survey. Asked how COVID-19 has affected their plans to invest in the Western Balkans, most companies stated that they were not affected (60%), while about a fifth said that they postponed their plans until after the pandemic, while 6% say they cancelled their investment plans completely.

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