With cheap labor era over, big firms mull leaving East Europe

Published 26.07.2017 20:13
Updated 26.07.2017 20:14
Volkswagen Slovakia employees attend a strike in demand of higher wages in Devinska Nova Ves near Bratislava, Slovakia, June 20. The banner reads: Do not humiliate us.
Volkswagen Slovakia employees attend a strike in demand of higher wages in Devinska Nova Ves near Bratislava, Slovakia, June 20. The banner reads: "Do not humiliate us."

With employment rates at record highs, and workers demanding wages closer to Western levels, the cheap labor market is running dry, investment expansion may lap the shores of Turkey and the southern Mediterranean

Central and Eastern Europe faces the end of an economic era. With employment rates at record highs, and workers demanding wages closer to western levels, the cheap-labor model that has driven growth since the fall of communism is on the way out.

The challenge that faces governments and companies in the region over the coming years is to find new avenues to growth. A walkout at the Volkswagen factory in Bratislava last month, the first strike at a major Slovak car plant, led to a staggered 14 percent pay hike in what has become the latest and starkest sign of the shifting economic landscape. VW was one of dozens of big Western manufacturers beating a path to Slovakia, the Czech Republic, Poland and Hungary after the fall of communism in search of cheap labor.

The rush eastwards marked the birth of an economic model that transformed the region. But a quarter of a century down the line, the regional labor market is running dry, with record low unemployment rates of around 3-7 percent across the region. As a result wages are rising faster than in the West - led by Hungary with a 12.8 percent year-on-year leap in March.

Zoroslav Smolinsky, the VW Slovakia union leader who engineered the strike, had joined the production line in 1992, when the plant had just been taken over by Germany's VW . He was paid the equivalent of 75 euros a month at the time. "We could live on it," he said. "We had to."

Today Volkswagen's 12,300 workers in Bratislava earn an average of 1,804 euros a month. Such rates, however, remain less than half the average Volkswagen pay packet in Germany, and Smolinsky says such huge disparity can no longer be justified.

"Times have changed," the 48-year-old said. "We're in the EU and have to keep up with trends and gradually narrow the gap."

The strike was resolved with the wage increase phased over more than two years, as well as a 500 euro one-off bonus for each employee and an extra day of holiday. VW is not alone in facing rising labour costs and strife. French carmaker Peugeot and South Korea's Kia have both raised pay this year in Slovakia, while Audi and Mercedes have faced strike threats in Hungary.

The moves by the car makers are particularly significant because the auto industry represents the lion's share of foreign investment in Central and Eastern Europe. Volkswagen units, for example, are the biggest companies in Slovakia and the Czech Republic, while Slovakia has become the world's top carmaker per capita, producing more than 1 million a year.

Moscow-based investment banking group Renaissance Capital said foreign investors would not abandon existing projects in the region, but new investments were likely to go elsewhere.

"Never again is Central Europe likely to offer what it did in the 1990s," it said in a note to investors.

Volkswagen signalled it could steer clear of Slovakia for future investments if faced with another costly showdown with workers. Renaissance Capital said investors in search of cheap labour would ultimately look further south and east.

"When European business confidence is high again, we think the next wave of investment expansion will lap the shores of Turkey and the southern Mediterranean," it added, also singling out Morocco, Tunisia, Egypt and possibly Ukraine and Iran.

Big manufacturers share less of their income with employees in Central and Eastern Europe than they do in Western Europe. In the EU, wages on average accounts for 47.5 percent of economic output, according to Eurostat - but while that figure reaches 50.9 in Germany it drops to just 40.4 in the Czech Republic. But workers in Central and Eastern Europe are less financially productive. According to OECD data, an hour of work in Germany produces 52.7 euros of German economic output, but just 19.4 euros in the Czech Republic. Part of the reason is that many Czech firms produce lower-margin components for global chains rather than the finished products that deliver higher margins and profits.

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