Low Cost Romania — But For How Long? (Demo)

By Clare Nuttall in Bucharest


Visit any of the major cities in central or western Romania — from Brașov to Arad — and the surrounding area is typically scattered with brand new big box factories and assembly plants. This is visible evidence of the way Romania has followed in the footsteps of its northern neighbours and become an important location for Foreign Direct Investment, including export oriented investment.

The migration of manufacturing operations eastwards started shortly after the collapse of communism, in countries like Poland and the Czech Republic at least. Now Central Europe is a major manufacturing hub, with auto assembly and components manufacture a particularly healthy industry, not least because of these countries’ proximity to the large German market while labour costs are still considerably lower than in Germany.



A similar trend happened in Romania, a little bit later. Romania didn’t just have even lower costs than Central Europe, there was also a legacy of high-tech manufacturing for example around the central town of Brasov, where Airbus supplier Premium AEROTEC has a plant. The country’s two car factories — Renault Dacia and Ford Craiova — also create a local market for auto-components, although manufacturers such as Continental, Draxlmeier and Daimler’s local subsidiaries mainly produce for export.

But things are changing. The last couple of years has seen unemployment fall to record lows in the Visegrad Four countries, and there has been heavy upward wage pressure. This has meant that investors have not only had to pay more, they also struggle to find workers at all, with some recruiting in Ukraine or other lower cost economies for their Central European operations.

This could be where Romania comes in. Despite the presence of major international investors, costs are still a lot lower than in Central Europe, and areas of high unemployment that would welcome a new investor are still possible to find even as labour markets in some cities start to tighten. Romania also has an advantage over its neighbours in Southeast Europe as it’s an EU member state with a large domestic market.



The downside in comparison to, for example, the Visegrad Four countries, is that labour productivity tends to be lower, which means that the savings on wages could be a false economy. The recent collapse of the third Romanian government within a year raises again the spectre of political instability. And infrastructure, one of the top bugbears of investors, just isn’t comparable to that in countries to the north. That’s why cities like Timisoara and Arad, located close to Romania’s border with Hungary, are popular with investors who can use Hungary’s much better road network to get their products to other markets.

The other question is whether, and for how long, Romania will continue to be a low cost investment destination. At the moment, it has the second-lowest GDP per capita in the EU. However, as in the CEE countries, unemployment is falling, and given the continuing high levels of emigration, as more investors arrive the pool of available labour — especially skilled labour — is also shrinking. Even if investors increasingly start to turn their attention to Europe’s southeast corner, Bucharest will need to ensure it provides a stable environment conducive to long-term commitments if it is to benefit from the tight labour markets in Central Europe.





Clare Nuttall is a Bucharest-based journalist specialising in Eastern Europe. Currently news editor at bne IntelliNews, she has been with the magazine since 2008, initially in Kazakhstan and more recently in Romania. Clare has also written for the Financial Times and the Economist Intelligence Unit.

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