Poland—A European Manufacturing Hub?
March 3, 2014
For the first time in history, Polish industry has a chance to establish a permanently strong competitive position in Europe and crowd out producers from other European countries on EU markets.
That is the conclusion of a report—compiled by DNB Bank Polska and consulting firm Deloitte—on the competitiveness of Polish producers and their prospects.
According to the report, entitled Directions 2014: Made in Poland, industry accounts for nearly 25 percent of the Polish economy. This figure is higher than the EU average (18.5 percent) and comparable to that in Germany (25.8 percent). Polish companies are competitive, chiefly due to their flexibility, productivity, product quality and effective cost control, including keeping labor costs at a reasonable level, the report says. These factors are behind the growing productivity of Polish companies. At the moment, industry in Poland is about 23 percent more productive than the economy as a whole. The positive picture of competitiveness in Polish industry is in part due to its high productivity in relation to capital expenditure.
Recent years have seen particularly strong increases in productivity in sectors that are heavily oriented at foreign markets, especially Germany. “The high potential of Polish industry can be particularly clearly seen in the case of the large and demanding German market. Companies from several Polish sectors today have an established position on this market and are so competitive that in many cases the dynamic expansion of China does not pose a risk to Polish producers,” said Rafa³ Antczak, member of the board at Deloitte Business Consulting.
The DNB Bank Polska and Deloitte report analyzed individual sectors and concluded that labor productivity is strongly diversified—due to the nature of production (varying degree of labor-intensiveness and capital-intensiveness) and the extent of restructuring and privatization in individual sectors since the beginning of political and economic reforms in Poland after the fall of communism, including restructuring and privatization processes carried out with the involvement of foreign capital. “Polish exports are largely dominated by producer supplies. Industries producing goods with higher value added play a relatively smaller role in German imports. An exception from this rule is the Polish automotive industry, which is extremely competitive,” says Antczak. Exports account for 77 percent of the total sales of the Polish automotive industry and Polish automotive exports are effectively crowding out products from developed European economies. The average prices of Polish goods are still almost 20 percent lower than in the EU as a whole, while wage growth is moderate, far slower than the increase in productivity.
In addition to the automotive industry, other competitive Polish industries include metal products, electrical equipment, textiles and furniture. At the other end of the spectrum, among the least competitive industries, are the leather industry, energy, water and printing. “We believe that Polish producers can maintain their competitiveness on the EU market in the coming years—provided they maintain productivity and keep tabs on their costs, including labor costs, and carefully calculate investment risk,” says Artur Tomaszewski, president of DNB Bank Polska. However, there are industries, such as mining and quarrying, and the manufacture of shoes and leather goods, where relative prices are already close to those in the EU, so in such cases, Polish manufacturers can only compete with non-price factors, such as timely delivery and quality.
This positive picture of Polish industry does not mean that there are only bright prospects and no risks involved. According to the report, in addition to constant cost control, especially keeping labor costs low, risks include the still existing barriers to doing business as well as education, and above all energy prices. Although Poland has recently advanced in the prestigious global 2014 Index of Economic Freedom, it still ranks a distant 50 and some components of the index are far from satisfying. While Poland is third globally in terms of the availability of credit for businesses, it is a distant 137th (among 187 countries) in terms of access to the power grid.
Education is a mixed bag as well. While the situation is not the worst at the primary and secondary level—Poland ranks 14th among 41 countries according to the OECD Programme for International Student Assessment (PISA)—at university level the country is not doing well. The Academic Ranking of World Universities, compiled since 2003 by researchers at the University of Shanghai and also known as the Shanghai Rankings, lists only two Polish universities, the University of Warsaw and the Jagiellonian University in Cracow, both of which failed to make it into the top 400.
According to DNB Bank Polska and Deloitte, the price and stability of energy supply will be of key importance to the development of Polish industry. The global energy market is now showing trends that are positive for Poland. The increased supply of crude oil from unconventional sources (mainly so-called tight oil) in the United States has a positive impact on forecasts for global oil prices, which are now falling. According to forecasts by the U.S. Energy Information Administration (EIA), in 2014-2017 oil prices are expected to fall to $90 per barrel. In 2017-2025 oil prices are projected to be about $20 lower than in 2013. The gas market adds up to a similar picture.
The Directions 2014: Made in Poland report ends with an optimistic conclusion: Polish industry is competitive and its products are crowding out products from other countries on the German market, which is the most competitive in the EU. And, importantly, Poland’s competitive advantages do not exclusively depend on low wages and a weaker exchange rate, but primarily result from an increase in productivity and quality. “In our opinion, companies should not be afraid of investing because investment efficiency in Poland is still high. Finally we believe that the future of industry in Poland depends mostly on sensible company and government policies,” Tomaszewski says.