On some foreign field

International firms opening or expanding existing industrial facilities in Poland and the CEE region is nothing new, but at the moment a surprising number are currently relocating production from Western Europe to this country and others in the region

Nathan North

The decision made by AB Foods in autumn last year to close its Twinings tea plant in Newcastle in the UK and move production to Poland was greeted very differently in both countries. In Britain it hit the headlines for the wrong reasons, when it was discovered that the move, which will result in the loss of nearly 400 British jobs, was being partly funded with an EU grant of EUR 12 mln. But in Poland, AB Foods' EUR 43 mln investment in the conversion of a former car warehouse into a 26,000 sqm Twinings tea factory in Swarzędz-Jasin outside Poznań was, of course, much more welcome. More recently, in May Japan Tobacco Inc. (JTI) announced that it is to close its cigarette factory in Hainburg, Austria (resulting in 320 redundancies) and move all of the factory's production to existing factories in Stary Gostków in Poland's Łodzkie province and Bucharest. Japan Tobacco Inc. has yet to reveal whether this will mean any expansion of these plants (the EUR 100 mln Polish facility, which also includes a 9,000 sqm warehouse, was opened in 2009).

Right here, right now
The question is, why are such companies moving here and why are they doing it now? Costs are obviously a major factor behind this new trend, as they always have been for international companies that are looking to invest in the region since the transformation to free market economies. But the difference now is maybe that with the finance for such investment at home still hard to come by, companies needing to expand can only afford to do so in the CEE region.  According to Marek Skrzydlak, a negotiator in the industrial department for Cushman & Wakefield's Warsaw office: "At the moment business is good, but finance is still tight, so to expand international firms require cheaper labour and operating costs, and countries in the CEE region such as Poland can provide this." Robert Dobrzycki, managing partner for Central Europe of industrial developer Panattoni Europe, agrees that "there is definitely a trend right now for Western European companies to relocate in the region. Such a trend in fact has existed since 1989, but it has been particularly visible since the end of the crisis, especially due to the need to save money, in terms of operational and labour costs."
As Błażej Ciesielczak, the country manager of Goodman Poland explains, a considerable amount of this activity was planned before 2008 but was put on hold with the onset of the credit crunch. "We have been seeing significant movement in the industrial sector recently, most of it from Western-based companies. The main drivers for this demand are investments that were halted during the crisis which need to be realised now, and companies that are modernising and investing in plants to further increase their competitiveness." Marek Skrzydlak points out that some of these plans were for upgrades of existing facilities from 'C' to 'A' class industrial space.

Threefold root
In the opinion of Renata Osiecka, the managing director of commercial property consultants Axi Immo, there are three main sources of the present demand for expansion on the region's industrial markets: "One is for companies that have taken over others that are present in certain markets - for example, Samsung, which bought out Amica - to expand their new subsidiaries plants in these locations. This is quite a good way to enter and expand on a market you are not present in. Another is the retail sector: "But this is not leading to too much foreign investment; it is rather that Polish companies are expanding to meet the increased demand from higher levels of consumption." One such example is TK Maxx, which in April began work on a 26,000 sqm packing centre in Wrocław in a PLN 90 mln investment expected to be completed in November. But in Renata Osiecka's view, it is the improving automotive sector that is the most important driver of the current demand, a sentiment which Robert Dobrzycki of Panattoni agrees with: "The demand from companies from the automotive sector with special requirements is much stronger at the moment and companies from this sector see the CEE region as a good place to locate," he says. According to Renata Osiecka, instead of expanding in their home countries, automotive companies are now finding it more advantageous to increase their production and facilities in the region - and particularly in special economic zones. This in turn has a significant knock-on effect, because automotive firms that are already present in the country also need to have all their subcontractors located nearby. "Such subcontractors can secure 5-10 year contracts with the anchor company - and the longer the contract, the more convenient for real estate," she adds, while pointing out that this is why both local and central government fight so hard to attract the large anchor companies.

In the zone
If located in special economic zones (SEZs) in Poland, such companies can receive tax exemption benefits, as well as having the advantage of the cheaper labour, distribution and raw material costs in the country. The Polish SEZs are to run until 2017, with the possibility that this deadline will be extended for maybe another two years. Marek Skrzydlak of Cushman & Wakefield feels that there is also demand from companies in Western Europe that are looking to take advantage of the more relaxed environmental regulations that are still in place in the CEE region as tighter laws are imposed in their home countries: "German heavy manufacturers are for sure moving to Silesia because of the environmental law." He reveals that the consultancy is currently waiting for one company that is planning to close its plant in the Benelux and relocate to a 10,000 sqm factory in Poland.

Minding the gap
How strong is the demand for relocating or expanding in the Central and Eastern European region and is it likely to keep growing in the foreseeable future? Marek Skrzydlak predicts that the market will grow significantly over the next couple of years: "The market for such projects is currently quite small - but there should be a big change this year as older projects are unfrozen and the optimism of companies improves," he explains. However, Błażej Ciesielczak of Goodman Poland seems a little more cautious: "I predict a growing trend in the next year or two, but nowhere close to the boom of 2007," he believes. And Robert Dobrzycki of Panattoni, while agreeing that this segment of the industrial development market is likely to grow, feels that since the disparity between operating and labour costs in countries such as Poland and the Czech Republic and those of Western Europe cannot last forever, this will be a short-lived phenomenon: "In the near future this market will increase," he claims, "but in the long term it will slow down because of the levelling effect. At the moment, however, a gap has appeared post-crisis."