Steinbeiser Jürgen Raizner advises companies on how to internationalize their business
In an increasingly connected and globalized world, businesses are confronted with the challenge of adapting to fast-changing geopolitical circumstances. Small and medium-sized enterprises (SMEs) in particular are having to rethink their production strategies in order to survive in the face of global competition. The question of foreign production is critical for SMEs that are strongly focused on exports, and their attitudes towards this issue are increasingly polarized. Some entrepreneurs are vehemently opposed to foreign production, mainly because of a well-meaning desire to keep the “Made in Germany” tradition alive. Others have already had production facilities in other countries for many years. Jürgen Raizner has been an Entrepreneur at the Steinbeis Transfer Center for East-West Joint Ventures for 30 years. At a time when the challenge for companies is to be sustainable as well as successful, he is a firm believer that foreign production makes businesses more resilient.
According to Jürgen Raizner, there are clear signs of a new trend emerging: “Since the beginning of the transformation in Central and Eastern Europe, low labor costs have always been the main reason to transfer production there. But the inquiries I’m receiving at the moment are telling me that customer proximity, sustainability and resource availability are becoming the new priority”. The reasons for this are complex. Businesses know that labor costs in Central and Eastern European manufacturing locations have risen and will continue to do so. Although choosing the right location can still bring cost benefits, basing this choice solely on low labor costs is a recipe for failure.
Customer proximity versus geopolitical risks
Some companies decided to go further east in search of cost benefits, jumping on the bandwagon of manufacturing in Southeast Asia. But now, the uncertainty caused by geopolitical tensions such as the conflict between China and Taiwan is having far-reaching impacts on the global business environment. Businesses are having to rethink their supply chains and production strategies in order to minimize the risks. The best way to implement the de-risking demanded by customers is by reshoring production to Europe. However, Germany is not currently regarded as a suitable destination for these investments.
At his Steinbeis Transfer Center, Jürgen Raizner is currently supporting several suppliers to the automotive industry. Customer proximity is a key success factor. “For companies that have production facilities in Hungary and Slovakia, like Mercedes, Audi, VW and BMW, it is not cost-effective, let alone sustainable, to supply these plants from Germany – this is not what they want anymore. As well as being urged to move their production facilities closer to their main customers, suppliers are also being asked to significantly reduce their carbon footprint”, explains Steinbeis Entrepreneur Raizner. This dual challenge calls for innovative solutions and a strategic realignment in order to meet both the economic and the environmental requirements.
It is not a question of whether foreign production is the right way to go, but rather of choosing the optimal location. This is where Jürgen Raizner and his team of Steinbeis experts can help. Having carried out projects in 24 countries, they know the pros and cons of different locations. The right choice is different for every company, depending on their specific business requirements and strategic objectives.
Raizner cites three investment examples to illustrate how investors can use the Steinbeis team’s outsourcing expertise to inform their international production strategies. Although the objectives of foreign production are the same for all three investors, there are significant differences in the form taken by their overseas investments:
- Project 1: The optimal choice of manufacturing location was critical for a company planning to create 600 jobs and establish a facility for mass-producing turned parts. A greenfield investment offered the customer the opportunity to build the facility to the highest standards and tailor it to their specific production requirements. It also allows them to make the most of local advantages such as the availability of skilled labor, logistics links and tax breaks.
- Project 2: Time was the critical factor in this project. The customer decided against building a new facility because they wanted to get production up and running in less than a year. Instead, they opted to use an existing factory building so they didn’t have to apply for new licenses. Although the availability of suitable industrial premises restricted the choice of location, the ability to start up production rapidly proved critical to the company’s success.
- Project 3: The third investor didn’t mind whether it was a greenfield or a brownfield investment, but they were adamant that they didn’t want to be the sole investor. This company had previously only manufactured in Germany, and was looking to partner with an established local industrial enterprise. The Steinbeis experts were tasked with finding an active company that could be wholly or partly taken over or that was willing to enter into a joint venture.
This mix of strategic planning and tailoring to individual requirements is the basis of a successful and stable rollout of foreign production. The three projects have a number of other things in common: The investors are all automotive suppliers that are well-established in Baden-Württemberg. Although they are at the larger end of the scale for SMEs, they are all family-owned businesses. They also all chose Romania as their manufacturing location.
While many large corporations are able to establish their own production facilities in different countries, SMEs have limited resources to work with. However, this also creates an opportunity. Through strategic cooperation, SMEs can join forces in order to operate more efficiently together. The Steinbeis Transfer Center helps SMEs form partnerships so they can extend their geographical footprint and become less reliant on individual locations.
The benefits of cooperative internationalization
Cooperative internationalization offers numerous benefits for SMEs:
- A wider geographical presence: Cooperating with other businesses allows SMEs to expand their manufacturing operations into several other countries, making them more resilient to local disruption. This strategy helps them respond rapidly to change and compensate effectively for drawbacks.
- Risk diversification: Spreading production across several locations reduces the risk associated with reliance on any single location. This is particularlyimportant at a time of geopolitical uncertainty, when flexibility and adaptability are critical.
- Positive synergies: The fact that the companies involved are often highly specialized makes any clashes of interests unlikely. On the contrary, positive synergies can arise that support their collective success. These synergies can give rise to new opportunities to innovate and increase efficiency both abroad and in Germany.
Global competition for international investment
Competition for the optimal locations in Central and Eastern Europe is growing. Investors from outside Europe have also identified this part of the continent as an attractive manufacturing location. Romania, for example, is seen as a gateway to Europe by China and increasingly also South Korea – some investments have already started, while others have been announced. These investors are on the lookout for real estate and skilled labor, heightening competition for the best locations. An additional danger is that they will produce goods for the European market and become even more competitive thanks to the advantages offered by their new manufacturing locations.
This trend effectively forces German industry to manufacture overseas. Businesses, especially SMEs, must face up to this reality if they are to remain competitive. Offshoring is no longer just an option, it is becoming a strategic imperative. The benefits of lower production costs, better logistics links and local customer access are too great to ignore. In a globalized economy where speed and adaptability are critical, foreign production is becoming an essential part of a company’s strategy.
Contact
Jürgen Raizner (author)
Steinbeis Entrepreneur
Steinbeis Transfer Center for East-West Joint Ventures (Deggingen)
www.stz-ost-west.de