The Covid-19 pandemic has exposed chinks within global supply chains, triggering talks of supplier diversification and nearshoring to increase resilience to foreign supply shocks. Central and Eastern Europe (CEE) is one – often overlooked – region that could benefit from such measures as industrial production moves from the west to the east of the continent.

With average labour costs around one third of that in Western Europe, an educated and skilled workforce and relatively good infrastructure, post-pandemic relocation of supply chains could be an opportunity for the CEE region.

That is according to a new report, titled Post-pandemic production relocation: an opportunity for CEE countries, by French credit insurance provider Coface.

“While China is not expected to lose its position of global supplier, the aftermath of the pandemic could bring opportunities for Central and Eastern European countries in this diversification process, with a higher share in global supply chains,” the report reads.

The research highlights the automotive industry as one sector to have more of its future production in the CEE region. Indeed, the automotive industry has steadily been moving to the east of Europe in recent years, with Poland now home to 16 automobile and production plants, Czechia host to nine such plants, and several others scattered across Hungary, Slovakia and Belarus, according to the European Automobile Manufacturers Association. Nevertheless, this is considerably lower than some other European nations, including auto powerhouse Germany, which hosts 42 plants, as well as France and the UK, which have 31 and 30 respectively.

In recent shifts to CEE, BMW, which has European plants in Germany and Austria, in 2018 chose Debrecen, east Hungary as the location to build a billion-dollar plant, its first new European facility in 15 years. BMW said at the time that Debrecen was the “ideal” place for European expansion and was selected for its very good infrastructure, suitable logistics connections and proximity to the established supplier network, with the qualified personnel in the local area another key advantage. Construction of the plant was due to start this year but has been pushed back because of disruption caused by Covid-19. Elsewhere, Jaguar Land Rover has been moving production from its plant in the West Midlands, UK to Slovakia over the past few years.

However, not all auto companies are opting for Central and Eastern Europe and the gradual shift to electric cars may see firms choose more tech-savvy markets. US electric car company Tesla, which became the most valuable carmaker in the world when its stocks jumped earlier this month, chose Berlin to house its new battery-making gigafactory, currently under construction.

Although some CEE countries have already benefitted from supply chain moves by automotive manufacturers, the Coface report reveals that they could also attract the relocation of other industries, including electric and electronics equipment production as well machinery and chemicals, once the immediate effects of the pandemic have eased.

“In recent years, the CEE region has switched to an ‘assembly line’ for Western European companies, with the intention to avoid remaining in the lower value chain of production. The region could be well positioned in the after-crisis review of global value chains and their potential relocation,” reads the report.

The question remains, however, whether the region can deliver on what might be expected of it, should supply chains make their way east. While labour costs in CEE may be lower than in Western Europe, reduced labour productivity means that workers in the region are less efficient than their Western neighbours. There are also concerns about the amount of labour available as people migrate west in search of better pay, finds research by the Vienna Institute for International Economic Studies published in 2019. In fact, before the pandemic took hold, the lack of available labour meant that CEE countries had some of the lowest unemployment rates in Europe. In 2019, the EU27 average unemployment rate was 6.7%, with Czechia’s at 2%, Poland’s at 3.3%, Hungary’s at 3.4% and Slovakia’s unemployment rate slightly higher, at 5.8%.

As labour is stretched and industrial companies demand higher productivity, CEE countries are encouraging firms to focus on automation and robotics.

The International Federation of Robotics (IFR) anticipates that the stock of industrial robots in CEE countries will grow at a compounded annual growth rate (CAGR) of 22% from 2019-21, compared to only 5% in Germany.

This high growth is not due to CEE countries having a low number of industrial robots in the first place but rather the drive towards automation to counter labour shortages. According to the IFR, the world average robot density in manufacturing is 99 robots per 10,000 employees and for Europe the figure is 114, above the Americas and Asia. Slovenia has 174 robots per 10,000 workers, Slovakia has 165 and Czechia records 135, just below that of China at 140.

“The tightness of the labour market loosened in the wake of pandemic, but will return and again be a challenge for the CEE region, which is facing negative demographic trends. A higher usage of automation and wider robotisation would enhance productivity and enable continued manufacturing during lockdown periods, if they occur again in the future,” reads the Coface report.