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10 Questions

with Martin Kálovec
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September 12th, 2007 issue

KURT VINION/THE PRAGUE POST
Outsourcing expert Martin Kálovec predicts the country will remain a production hub for Western Europe.
The Kálovec File

Job title: Principal, Boston Consulting Group
Age: 35
Nationality: Slovak
Previous positions: Strategy consultant, Arthur D. Little International
Education: Ph.D. in economics, CERGE-EI, Prague; M.A. in international trade, University of Economics in Prague

The Czech Republic has slipped in recent rankings released by the consulting firm A.T. Kearney that gauges the attractiveness of countries as outsourcing destinations. It dropped from seventh place in 2005 to 16th in 2007, passed by Bulgaria (No. 9) and Slovakia (No. 12). Martin Kálovec, an outsourcing expert, talks to The Prague Post about the long-term viability of the country as a manufacturing destination.
➊ How long do you expect the Czech Republic and the rest of Central and Eastern Europe (CEE) to remain as production centers for Western Europe?
Looking at economic fundamentals, we expect the movement of production and assembly plants from Western Europe to the CEE region and other low-cost regions, like China, will continue for some time. In fact, CEE countries have less than their fair share of production, compared to China, which means you should expect more to be built. You can’t stop this flow. There’s a powerful underlying economic force that’s moving production.
➋ What is it about the CEE region that continues to make it attractive?
We found that the cost advantage here versus Western Europe — in terms of production cost and also transportation and other costs you have before a laptop or handbag makes it to France or Germany — will take decades to evaporate. Until then, there’s a good economic rationale for migrating production.
➌ Will these investments go to the Czech Republic?
There are companies that moved into the Czech Republic and Slovakia in the 1990s that are already moving to Russia. However, right now many industries are primarily looking at the Russian consumer rather than its workers. But as time goes by production may follow.
➍ Why not move straight to China?
From a West European perspective, it’s about as expensive to produce goods in the CEE region and move them to Western Europe as it is to do it from China. For some products it’s more expensive, some less. For goods with high transportation costs — because they’re very heavy — Europe is cheaper; light goods like handbags will always be done in China.
➎ Does the CEE region, which stretches out to Ukraine, vary widely in production potential?
The variability comes less from fundamental costs than government incentives, infrastructure, etc. Look at automobile production. It’s concentrated in a circle that covers four countries: southern Poland, the Czech Republic, Slovakia and Hungary. So, in the end, fundamentals prevail and production tends to cluster.
There are limitations. Today, Slovakia may be the country with the most automobiles produced per capita in the world. That means it may be reaching some sort of limit in terms of infrastructure and availability of labor compared to other countries.
➏ Speaking of limits, the Czech Republic has recently seen its jobless rate plummet. Are there enough workers to support any more manufacturing?
Definitely there are limits, both in unemployment and the mobility of labor, geographically and structurally — from industry to industry. You simply cannot come and build indefinite production capacity and think you will get enough workers quickly. There are limits. Whether we are close to these limits, I’m not sure.
➐ What do you think of changes the government made this year to limit incentives to high-tech or R&D-focused developments?
This is a long-term question: Is it good to be a backyard for manufacturing and assembly? Countries usually have ambitions to be something more. What if they want to be the brains of the world, not the hands? All the rapidly developing economies are trying to invest in education and universities. Everyone has the same recipe that the Czech Republic is following.
➑ Earlier this year, Škoda Auto’s workers secured sizable raises during a partial strike, closing on their German colleagues. Could rising wages limit interest in the country?
I’m sure the strike alerted companies to the risk of rising wages. Even if labor costs in the Czech Republic grow 7 percent a year versus 2 percent in Germany, we estimate that less than 1 percent of the cost advantage is erased every year.
➒ When investors look at a country, are they concerned about unions?
We looked at the share of unionized labor in this region and found that it sits at approximately 30 percent; it’s 25 percent in the Czech Republic. Labor unions represent perceived — and probably real — lower worker flexibility. That scares companies a bit when making investment decisions.
➓ As production moves farther east, is there an opportunity for Czech managers to act as a bridge between Western and Eastern Europe?
It’s not so simple. We’ve seen Czech and, to some extent, Polish managers working in Ukraine and Russia. The region is very heterogeneous. Some countries are more accepting of foreign managers. It’s not working well in the Balkan countries. And, while Czech or Slovak managers are accepted in Russia, in some areas Poles are not.
Want your manager to answer our 10 Questions? Send a message to Paul Voosen at pvoosen@praguepost.com


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