An Expanding European Microcosm: What localization means to the electronics supply chain


The growth of Europe as a political unit has served it well as a player on the global stage. But the economic vitality of Europe depends on more than political unions and reforms. Central and Eastern European (CEE) countries, a number of which identify with or are part of the larger European Union (EU), continue to set themselves apart from Western Europe as they find and develop their modern industrial strengths.


CEE is certainly benefiting from EU guidance and monetary support to improve infrastructure, social and educational structures, and especially in enticing manufacturing centers due, in part, to favorable trade agreements for European manufactured goods. Yet it is important to note that the present CEE growth is not rooted in EU support. Rather, this modern industrialization period for CEE comes from an economically organic set of market conditions: lower labor costs; multiple levels of skilled workers; geographic proximity to high-end consumer markets in Western Europe, the Middle East, and increasingly Russia; the rise in localization as a business and market strategy.

Europe's mixed bag of news
The European component market has suffered this year, as have many markets, but some relief may be in sight based on more favorable, but still declining, second quarter (2Q08) results, as reported by the Distributors' and Manufacturers' Association of Semiconductor Specialists (DMASS) ( An important difference in revenue generation fell along old lines: CEE grew by 11 to 24.9 percent, with the Baltics at the high end; while Western Europe and the UK declined between 3.5 to 16.3 percent, respectively. Germany was the only country to remain at a stable -0.5 percent level (equates to a volume of US$682 million).

The good news among these revenue numbers is that the downturn "was not driven by a lack of demand, […] but by continued price erosion and a weak dollar" (ibid.). Additionally, cyclicity for the European market traditionally shows a stronger first quarter (1Q) followed by declines for the remaining quarters. "Total European distribution books (net sales orders entered) in the second quarter of 2008 declined by 6.2 percent when compared to the first quarter of 2008 and declined by 2.5 percent when compared to the same period last year" ( Positive indicators in these numbers are the "flattening out" of the growth rate from 1Q08 to 2Q08, "suggesting a period of stability in the European Electronic Components industry" (ibid.).

Other indicators caution that manufacturing and services continued to slump in July (The Economist, August 16-22, 2008, p.51). While the EU’s economic woes may be at the beginning, CEE is walking at its own pace. The Baltics are in the midst of plummeting production and earnings, and a hefty inflation rate of 17 percent (ibid., p.53). Hungary, facing 6 percent inflation, seems to be pulling itself out of the near recent death-experiences, although it is heavily dependant on western European exports "which account for nearly 40% of GDP" (ibid., p.53). Poland, the largest CEE economy, is showing growth and reduced unemployment numbers but coupled with rising inflationary numbers that could pose problems if not dealt with early.

Since 2001, Russia has been tagged as one of the most important emerging economies in the world; today Brazil, Russia, India, and China (BRIC) represent over 15 percent of global production. Russia, unlike its three BRIC sisters, has been tracking with mainstream global indicators and does not show signs of overheating. However, Russia’s June consumer price inflation came in at 15.1 percent, which is unchanged month-over-month, but still a six year high (

Russia's hopes for progress are boosted by the overwhelming oil and fuel revenues; a year over year doubling amounting to US$70 billion by the first half of 2008 (ibid.). In 2007, Russia set a course for building its high-tech industry based on Putin's unequivocal support and US$5.5 billion investment in a state corporation for nanotechnology ( This investment program has proven elusive for some foreign investors, while others, such as Mikron are set to benefit: "Russia's Ministry of Industry and Trade has given formal approval to provide 27B roubles ($1.09B) to co-finance 65nm chip production […]" ( Yet vestiges of a broken system may strangle this well funded and well-coursed investment:

But the big problem for high technology in Russia is neither money nor ideas. It is the country's all-pervasive bureaucracy, weak legal system and culture of corruption. This may explain why the nanotechnology corporation has so far found only one project to invest in (and that is registered in the Netherlands). The share of high-tech products in Russia's exports is only 0.6% […].

The chain that turns a scientific innovation into a marketable product simply does not exist […]. And the key to creating it […] is not setting up state corporations, but unshackling the system from bureaucracy and letting private companies operate freely. (ibid.)

The greater the risk, the potentially greater the opportunity. Foxconn/Hon Hai has penetrated the Russian system, as have a number of others in the electronics industry. Some, such as Flextronics, have been stymied. More broadly, CEE is a promising foothold for Original Equipment Manufacturers (OEMs), Electronic Manufacturing Services (EMS), and Original Design Manufacturers (ODMs). The principle key to success in emerging economies remains the alignment with local networks, business and social cultural practices, and reliable value chain partners who have experience with the local markets and government agencies (cf. "From Hyperinflation to Healthy Growth" in MarketWatch Quarterly Summer).

Manufacturing in CEE: Localization's rebirth
Regional manufacturing, now dubbed 'localization', is a well-known strategy within the EMS sector. Producing locally has obvious advantages: time to market; demand-driven supply chains ('pull chains'); product/market customization; reduced logistics and landed costs; reduced or no trade restrictions or tariffs. Asia has been the world's manufacturing sector for some time now. However, recent macro economic forces have businesses reconsidering their strategies and alternatives and therewith moving (in some cases moving back) to North America and Europe.

Localization is now on the rise driven by global consumer demand and purchasing shifts coupled with recent changes to labor laws, wage increases, and importantly landed cost increases on products from Asia, and especially from China. A survey conducted by Manufacturing Market Insider (MMI 18:7, p.8) revealed:

Landed cost increases are not the only reason that an OEM might decide against China. The survey found other reasons as well. But these other reasons have not changed. What's new is that economics have begun to work against China.

[…] regional manufacturing, which [sic] always been a part of the EMS industry, is back in vogue.

With emerging economies and new middle classes as the revenue generating mantra for this year's electronics industry, CEE, unsurprisingly, is leading European demand by volume and therewith overall total revenue, while Western Europe continues to lead in high-end electronics.

The most recent trend in manufacturing migration from Asia to CEE has been in the LCD display sector. Poland, Romania, and Slovakia, in particular have benefitted from a good balance of economic and business variables leading to foreign investment in the hundreds of millions of Euros ( Companies such as Sony and Samsung are expanding manufacturing operations in Slovakia as the country prepares to adopt the Euro in 2009 (

CEE consumers are benefitting from declining prices for feature-rich products previously out of reach. The notebook sector is particularly strong with "CEE shipments […] up 26.7% in 2007, representing $8.3B in sales" and 2008 forecasts of "a 20% increase in shipments for CEE" ( While the new middle class of CEE has experienced wage increases driven by productivity improvements that have supported economic growth, the World Bank is warning of an economic slowdown for the region due to rising cost of living and inflation (,

Presently, CEE is experiencing rapid industrial growth as manufacturing firms zero in on the region to leverage market positions and reduce costs. Wages in CEE are typically less than one-third of those in Western Europe, but support a similarly well educated and skilled labor force. Coupled with landed cost improvements and no tariffs to the EU, CEE is the desired new manufacturing location (

Evidencing the move back to Europe and now into CEE, mergers and acquisitions (M&A) in the electronics manufacturing sector were up 32% for the first half of 2008 (MMI 18:7, p.3). A more detailed look at the M&A activity underscores the movement in Europe:

Of the 29 transactions tallied for the first half, 14, or nearly half, involved buying EMS assets in Europe or the Middle East. All but one […] were in Europe. […] MMI estimates that among EMS providers more restructuring activity is now taking place in Europe […]. Restructuring breeds M&A as providers and OEMs attempt to sell off unwanted operations. […] the EMS industry in Europe is not as mature as that in North America. Hence, Europe has a proportionately greater propensity for deal making at this stage of its evolution. (ibid., p.5)

There remains an important caveat to CEE localization trends, as exemplified by Flextronics' travails in Russia: business in CEE is not always as straight-forward as in Western Europe. In early 2008, Flextronics and Elcoteq were negotiating the acquisition of Elcoteq's Russian subsidiary in St. Petersburg. According to MMI, "Elcoteq’s 14,700-m2 plant […] has been a loss maker due to underutilization, […] partially caused by unfavorable custom duties on imported components" (MMI 18:2, p.7). One of the important conditions for this deal to succeed was approval for the Flextronics venture from Russian competition authorities as well as customs authorities.

"While Hon Hai moves forward with its plans to enter Russia, Flextronics' way into the country has been blocked, at least for now. […] Russia's competitions authorities […] refused to approve [the] acquisition" (MMI 18:5 p.6). Flextronics terminated the contract and agreed to pay Elcoteq one million Euros in compensation. "According to Elcoteq, demand for home communications and related EMS in the Russian market is promising provided that customs practices change"(MMI 18:7 p.6).

Supply chains with established partners key to success
Demand is strong in CEE and manufacturing opportunities are abundant; but challenges to succeeding in this less mature market can also be plentiful. As new distribution networks arise, established patterns from a previous era surface. Aligning with established and reputable supply chains that have networks in the local markets acts as a means for reducing the fragmentation typical of emerging, and potentially inefficient, markets.

Of note is that the majority of the most successful ventures have involved utilizing local supply bases. By working with established supply chains familiar with the intricacies of local business processes, companies are able to best leverage the advantages of localization while limiting the challenges still present in these less mature markets. This lack of maturation is not based on the historical depth of industrialization, rather on the openness and freedom of private businesses from bureaucratic constraints. There is an added bonus to the preference of local and/or established supply chains: other industries, such as automotive, aerospace and medical, are increasing their demand for locally manufactured components ( Accessing and partnering with these supply chains is quickly revealed as an obvious means to diversify revenue streams and support local and regional demand for a wide variety of products.


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