Government grants in Eastern Europe to boost electronics manufacturing

Electronics manufacturing is a prefered, strategic industry in almost all Eastern European countries. It means, when you establish here a new manufacturing plant, you can expect more "good points" from governments, which concludes higher grants.

Generally we can say, Eastern European governments' threshold stimulus is around 10 million euros investment and approx. 100 new jobs in electronics industry, under these numbers you are a very small investor. Governments normally sign an agreement with investor, so receiving a government grant is a contractual connection between the company and the government. It means, you get some money, but you also have some obligations, e.g: for job creation money you have to employ your staff for 1-2 years - and when you could't, you have to pay back the grant.

The subsidizing process always starts at the governmental investment promotion agencies: the PAIZ in Poland, The HITA in Hungary, the CzeckInvest in the Czech Republic, the Sario in Slovakia, and the RomTradeInvest in Romania. Decision making about the government subsidy requires normally 1-3 months.

There are several dues you can apply for, here we overview the most important:

#1 Real Estate development subsidies

Fundamentally there are 2 types of property grants: a) transfer of industrial land at a discount (e.g: in the Czech Republic) and b) building subsidies (e.g: in Hungary). When you think about real estate grants, do not forget: real estate business is a particular profession, and real estate costs are approx. 10% only of the total investment - it's much easier to lease a property on a subsidized fee.

Case study: subsidized leasing in Polgar, Hungary Polgar Industrial Park, Hungary won an EU grant in 2012 for development of a new, 7,000sq.meter (75,000 sq.feet) manufacturing hall, available from Q4 2012. The grant provides a leasing fee discount for potential investors, and in the meantime they don't have to invest in a real estate.

#2 Machinery purchasing grant
Most countries do not separate the real estate and machinery grants - they simply subsidizes investments in "assets". The machinery can be the main "eligible cost" of investment projects, e.g in the Czech Republic, "a basic condition is a minimum investment in long-term tangible and intangible assets in the amount of CZK 50 million in Regions I, of which at least CZK 25 million must be invested in new machinery, and  CZK 100 million in Regions II, of which at least CZK 50 million must be invested in machinery, whereas at least half of the minimum investment amount must by financed with the investor’s own capital." (CzechInvest's brochure 2012) 

#3 Job creation and other HR-related subsidies

The G-spot of Eastern European governments is job creation, this is the magic word you should build on. Many countries simply provides a "head money" for each new job created. For example, if you invest 40 million Polish Zloty (approx. 10 million EUR) in Poland, AND create 250 new jobs in electronics, the Polish government will grant you 800-3900 EUR per new jobs. The final job creation grant in Poland depends on the number of new jobs created, the percentage of employees with higher education, location, attractiveness of the products on the international markets etc. Other governments subsidize also smaller costs (e.g: employees' commuting cost in Hungary, training costs in many countries etc), but these are the typical schemes.

#4 Tax relieves

Eastern European governments are a bit shy when its about tax relieves. Before EU accession, most government provided large scale corporate income tax relieves, but the European Union doesn't like it indeed. However, most of the governments found smart, EU-compatible solutions for tax relieves. For example, the Hungarian government provides "development tax allowance", with the following scheme:

• Amount of subsidy: exemption for 80% of the corporate tax payable for 10 years following installation. Up to HUF 500 M turnover the corporate tax rate is 10%, above HUF 500 M the tax rate is 19%.
• Conditions: investment volume min. HUF 3 B (EUR 11.3 M), min. 150 new jobs OR HUF 1 B (EUR 3.7 M) investment volume and 75 new jobs in preferred regions
• Application: depending on investment volume request or application needs to be submitted
• Provider of incentive: Ministry for National Economy

#5 Cash grants

In the love packages of Eastern European governments there is two types of cash. All the grants above have specific goals, preferences, and obligations (e.g: re-training grants have to spend for local trainings), but when you hear about "cash grants" it means in general: you get money (normally not more than 5% of total investment costs) as a bonus.

The European sandbox

Finally: the government grants ("state aid" in European jargon) are generally prohibited by European Commission (the "federal government of EU"), because government grants have a negative impact on internal market competition. However, there are some exceptions, when EU not prohibits but supports state aids: the underdeveloped regions of Eastern Europe can provide grants on this way. The understanding of EU state aid policy can help to make better investment decisions, so lets take a look at the following presentation:

State Aid Rules - EU Commission from ICIP Serbia - EU funded project

Comparison of competitive advantage(comprehensive competitiveness) in investing CEE and China

The emerging countries have becoming the main force in current economy, especially BRICs and CEE countries. Everyone is asking a “why” behind this then let’s see it in the following video. But today we are not going to talk about the reason, however something make you a wise investment

 

                                                                                                                                              

 

Since 1980s, China and most CEE countries regard attracting FDI as an important move and undertaking their system transformation. The German-funded enterprises took pretty huge proportion in both of their FDI. And now this is an article which analyzing the competitive advantage in investing China and CEE countries from the view of German enterprises, both of them have their own advantage. In general, the competitive advantage of China is relative higher than CEE countries, however it also depends on which industry they want to put.

 

Here now both China and CEE countries are the target of German enterprises for investing, so many German-funded enterprises made a hard choice before they deciding invest between China and CEE area recently, even if there are various document and literature about comparing competitive advantage all over the world, still there is nothing exact criteria which telling us which is relative better, I am writing from my point of view here comparing the two area after collecting the material from different place.

 

In terms of comprehensive competitiveness:

On the basis of The Eclectic Theory of International Production from J.H Dunning, there are three main factors which affect FDI, monopolistic advantage, internalization advantage and location specific advantage. The market size, economy development and political stability in location specific advantage became the most essential dimensions for attracting investment to the host countries. All of those dimensions are related to a nation’s comprehensive strength. Whether a country with high competitiveness in investment is directly depend on its macroscopic condition which include the quantity and quality of the whole population, national economy and development situation, culture, society…

Compare to CEE countries, China has a huge market with 9.6 million square kilometers and the population around 1.3 billion, however if we put the EU-15 together then measure the territory (around 1.34 million square kilometers) and population (around 1.4 billion), that are the reasons China has kept attracting the foreign investment for a long time among those developing countries. As I know the big market with rapid process in industrialization is an essential factor why some of the German company chose China, it is a huge emerging market which unique enough in the world. While we have to highlight the geographic advantage for CEE countries, this factor can efficiently decrease the operating cost as I mentioned before in the location specific advantage, they possess a kind of geographic advantage which most of the developing countries couldn’t be able to achieve, such as well-educated labor but relative cheap and easier channel to the EU market. I think this is more attractive for American and Japanese investors because of the entry of EU market. We can see it is true that the investment from USA is more than Germany in Poland, I put Poland here because it is regarded as the most attractive country in EU 15 recently. Therefore, it is obvious that the competitiveness of investment was improved after they entered European Union.

Let’s see it from the GDP growth, China has kept an average growth in GDP recent years around 10.6% and became the fastest one worldwide, others couldn’t compete with China even if the growth in CEE countries are increasing as well, the GDP growth leads the change in purchasing power of Chinese citizen and the potential market has been proved by the significant change. But the pity is our GDP per capita is much less than CEE countries, the population and regional difference are still the major problems for China’s economy, as I said before large population can provide huge market and labor however coin has two sides, we couldn’t avoid the weakness as well as opportunities. The GDP per capita in CEE countries is 18394 US dollars in average, much higher than China. It seems CEE countries have entered the mature period of attracting FDI, in the meantime it means the labor costs and consumption per capita is higher than China.

 

 

The third thing I want to mention that it is well known that Chinese society and political situation remains stable for a long time, it ensures the profit sustainable, stable and secure, as I learned from marketing course there are many factor affect a country’s attractiveness for investors, one important of them is stable and peaceful society and political situation. In contrast with CEE countries, we don’t have the political transformation during the early 1990s, and we didn’t suffer a lot from the financial crisis in Asia in the middle of 1990s, when people asking why we invest China, these can be perfect explanations for answering their question. The international investments are trying to pursuing high profit and on the other hand security is necessary, it ensures everything. Let me ask why you don’t Libya at this moment? Considering the history of CEE countries, they have experienced a long economic and political transformation and suffered from the transition for several years, China will take the preemptive opportunities in terms of security, stability and sustainability.

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1. John Harry Dunning, OBE (June 26, 1927 – January 29, 2009) was a British economist.

2. http://en.wikipedia.org/wiki/EU15#1995_enlargement by accumulating the data from Wikipedia—not so accurate.

3. “20 years of American invest in Poland” check the bibliograph: https://www.kpmg.com/PL/en/IssuesAndInsights/ArticlesPublications/Pages/20-Years-of-American-Investment-in-Poland-Report.aspxthere are some materials I read from the report and some opinions based on it

 

 

Does your investment made the best choice in CEE countries? Part2 (Cont’d)

No.4: Aircraft industry

There are not too many aircraft industry in CEE countries, but in some typical country it has relative advanced technology in manufacturing aircraft.

Czech Republic:

It mainly provides civil aircraft, light sport aircraft and private aircraft, the average annual production is 550 light aircrafts and sport aircraft also 1400 aircrews. It holds the whole intellectual property, 80%of its production are exported. It is the second largest aircraft producing country which after Germany. Recently, the new aircraft such as light fighter, sport airplane, glider and air traffic control system has become the main production in Czech aircraft industry. Nowadays, there are 7 main aircraft manufacturers, the biggest two are Aero Vodochody and Evektor-Aerotechnik.

Poland:

Poland starts its aircraft industry since the beginning of 20 century. It has high technology in aircraft repairing and producing. There are around 55 enterprises of aircraft producing in Poland, which mainly exports to America, Venezuela, Italy, Greece, Canada, Spain, Germany, Korea, Indonesia, Vietnam and Iraq. For the most important is the education resources there, for example they have a university called Rzeszow University of Technology, they set there a high-tech center. On the other hand, Poland has potential in repairing and maintaining. Till 2006, there are 28 enterprises in Poland have got the Part-145 aircraft repairing certificate.

Slovakia:

In Slovakia, it has a solid foundation in mechanical manufacturing industry, the most advanced technology is DV-2 engine which is widely used in trainer aircraft.

 

No.5: Viniculture

You can find pretty nice weather and comfortable climate there in CEE which is good for producing grape wine also they have long history in viniculture. Romania, Bulgaria, Hungary, Czech, Serbia and Macedonia are all the famous wine country.

Hungary:

Hungary has long history in producing grape wine, the variety and quality of grapes are quite high in Hungary. The famous grape wine as we can count are Bikaver, Tokajiaszu, Ekfrakos,Liszt’s favorite Kdarka and so on. For the Tokajiaszu is the well known world sweet wine. The royal France call it the king of the wine.

Bulgaria:

Bulgaria is pretty rich in producing grapes, as one of the top 15 wine producing countries, wine-making industry has become an important traditional industry. The Vinaria exhibition of Plovdov will take place every year in Bulgaria, it is the largest exhibition in CEE countries. The president of Bulgaria says wine is the image of its country and it is the main feature of its national economy. There are 255 enterprises have registered in the national grape and wince association. The main export markets are Russia, Poland, Germany, UK and Czech.

Romania:

Romania is one of the biggest world wine producing countries. They call themselves “the land of wont”. It is well-known by its quality and designing, especially Feteasca regala and Recas are the most favorable wine. The main manufactures are Vincon in Varabcea, Murfatlar, Halewood Group.

Hope you will know more about CEE countries after read this article, and does your investment made the best choice?

Source:

http://en.wikipedia.org/wiki/Central_and_Eastern_Europe

http://en.wikipedia.org/wiki/Motor_industry

eepcindia.org/bulletin/b20050810/OMI.pdf

www.iese.edu/research/pdfs/DI-0920-E.pdf

Does your investment made the best choice in CEE countries？(Part1)

As we know the Central East Europe contains Poland, Hungary, Czech, Slovakia, Slovenia, Romania, Bulgaria, Serbia, Croatia, Bosnia etc. 13 countries with total area 117 square kilometers, population over 120 million which has total GDP around 0.9 billion dollar, total foreign trade 0.89 billion dollar. This area has pretty strong foundation in various industries such as motor industry, generating equipments, mining as well as aircraft manufacturing, shipbuilding, even on biotechnology, pharmacy and also has advantage in producing agricultural products and grape wine.  All of these industries experienced a rapid development since 7 of them (Poland, Hungary, Czech...) entered the EU, and becoming more competitive.

From now on, let me specifying some dominant industries and put them into these main CEE countries which has dominant in each industry as well.

No.1: Motor industry

Czech Republic:

Since the data shows motor industry already has over 100 years history in Czech Republic, it is the most important department in processing industry there. It also takes 20% in its economy which makes car being the major export product and the export has topped 9% of the total export in Czech. Škoda is the main place they produce cars, its annual output has reached 500,000 cars and selling to all over the world, obviously it became the bellwether in its field. Nowadays, the first car “Octavia” which corporate with Shanghai Volkswagen was coming to the market. Not only in small cars but coach has taken a competitive position in West European market. We can see the biggest coach producing factory is Karosa there.

In addition, more than 40 car manufacture out of the top 100 has set the branches in Czech.

Poland:

Since 1990, the motor industry has developed well in Poland by absorbing foreign investment. The output of cars and export continuously increasing, the product quality and level of skills has improved as well, Poland became the No.8 car-making country in Europe, just after Russia, Czech and Sweden. The three biggest manufacturers are Fiat, Opel and Volkswagen which are well-known by all of us. The high criteria for fitting technology and various devices to choose give incentives for famous company investing there.

Slovakia:

Motor industry takes a pretty important strategic position in Slovakia. Volkswagen AG is the most powerful enterprise there, some well-known manufacturers like the PSA from France and the Kia from Korea has also invest plants there. In 2006, these three manufacturers has producing 295390 cars in total which occupies 28.4% of total industrial output. Except investing in plants, the fittings became attractive too, the investment of fitting keeps climbing. The worldMarkets Research Centre(WMRC) says Slovakia and India, Thailand, Iran as well as Czech are the most attractive countries of motor industry, they will be the center for developing new cars in the near future.

Hungary:

Motor industry is a traditional industry in Hungary. Since 90s of 20th century, car and its fitting industry got rapid development and became the main pillar of Hungarian motor industry, the foreign investment takes a huge portion. In 1992, the Suzuki from Japan set the first manufacturer in Hungary, then Opel Germany in 1994, Audi in 1997. Audi started car assembling since 1998 but not just producing the engine. The General Motor is producing automobile gearbox for all European countries as well as exporting to China.

Romania:

The industrial base in Romania is very well. It mainly has Dacia, Oman, Roman Corporation. Dacia started producing Renault(Romania) and named it as DACIA 1300, this car kept its production around 35 years. In 1999, Renault purchased Dacia, and then produced SuperNova and Solenza in 2000 and 2003. In 2004, Dacia offered an economic car which called Logan, it was acclaimed by the market. However the Roman Corporation stopped its production under a fierce competition in the market, now they are looking for the substitution.

All of these helped CEE countries in increasing more working position.

No.2: Environmental Protection Technology and Equipment:

In CEE countries for example Hungary, Czech and Slovakia, they have pretty high level in dealing with industrial sewage, waste disposal and microbiological treatment.

        Here I mention the R-AN-D-N technology from Czech, which is widely used in different area. Also the USBF technology to processing the sewage, it has applied in so many countries such as USA, Germany, Italy, Canada, Spain and so on.

No.3: Pharmacy

Hungary:

It has more than one year history and it became one of the most competitive industry in Hungary.

There are more than 20 pharmaceutical factory, The biggest one IS Richter Gedeon. This company has over 100 products and 140 kind of preparation. This company has its own R&D department and producing medicine by their own, these products can apply for all the therapeutic area. Two third of its products has sent to over 100 countries.

Egis pharmaceutical factory is the second biggest one in Hungary which has a long history.

Chinoin ranks the third one, it exporting its products to more than 80 countries.

See more please check the following article（part2).

Source&Links:

http://en.wikipedia.org/wiki/Central_and_Eastern_Europe

http://en.wikipedia.org/wiki/Motor_industry

eepcindia.org/bulletin/b20050810/OMI.pdf

www.iese.edu/research/pdfs/DI-0920-E.pdf

Is it hard to creat the superiority of Chinese talent in electronic industry?

It is quite a controverisal topic to mention, people will ask “is there any superiority of talents in China” rather than “is it hard to create it in China”.

Since China do not take any advantage in high end electronic core technology, furthermore, we can say China has pretty huge gap in core technology comparing with others such as a country like United States. However, a lot of skilled worker appears there with the trend that global electronics manufacturing industry shifting to China. The scale-up pattern let China got the talent advantage consequently.

The multinational semiconductor suppliers are saying China has the smartest electronics engineer as we can always see from the articles and magizines. However it does not mean China holds the competitive advantage even if they have amount of skilled workers (or people call them blue collar workers) in electronic designing.

Nowadays do you know what are these skilled engineers doing everyday? Repeating amount of similar designing work or making the so called creative product which driven by latest devices. There are several electronic devices to choose on the prefect competition market, the engineers just need to follow the white book then apply any kind of device into their product. Although the various devices provide better choice, it is not good for Chinese engineers to make deeper research in a certain chip or a single component. Of course the new ideas to make amazing product appearing every single moment in their mind, however they lost the chance to compete in the market just because the use and choose of device is not serious enough so that the costs are not effectively saved.

For this let’s see an example, the iPhone from Apple. People dismantled iPhone found there are not such new or advanced components, while all the components can be found on the market and available, the only difference is the engineer put more efforts and deeper technical analysis into it. Finally, iPhone comes to our life, the society accept it.

  

Well, think from another side, abundant skilled engineers provides a stable basis for the development in  electronic industry, if you are an investor, trust them coz as long as some of their engineers start to look deeper, focusing on a specific area, you will see the great effect; if you are an emerging country as well, the situation in China will let it be a worthy opponent; if you are just a bystander, well then let’s wait and see, no one knows better than the market.