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Global Metropoles in a New Age
As the fog lifts from the global economy, new cities and structures form the basis for business and facilities to support them.

By Frederick Metz Shepperd

After September 11th, and the global economic slowdown, many companies scrapped any plans for expansion, any plans for strategic growth, any increase in investment in plant and equipment, at least until things got better. Many of these companies figuratively took the advice given to the American public during the state-of-emergency immediately following Sept. 11th and sealed themselves off from the world with a lot of plastic and duct tape. Some corporations are still effectively "sealed off" from their markets and customers. But they did so at their peril. And today corporations all over the globe are looking at globalization with a new eye. An eye toward newer markets and new opportunities in countries they may not have even considered 10 years ago.

There has been great deal of consolidation within industries and major restructuring of their locations in the world. The traditional industrial base of the Northeast and Midwest U.S. has probably been hit the hardest. As this region's manufacturing base continues to move south to Mexico and offshore to China and Eastern Europe, the cities that were once at the epicenter of industrial productivity find themselves left behind. It is like the days of the canals and development of canal towns in the U.S. Their rise in financial strength and power in the early 1800s is well documented in the history books. So too is their demise as the train radically altered transportation, modes of distribution and where those modes of distribution were located. Cities quickly passed into shadows of their former self. That is what is going on. That is the significance in the change of the economy since September 11th. The fog is lifting from the economic terrain and you'll notice there is a major difference in how and where companies are doing business.

What is important for global companies large and small is being close to the customer and providing logistic and technical support wherever they are in the world. As a result, U.S. cities like El Paso, TX and Omaha, NB, experience huge growth and importance in the minds of decision makers than the big cities of the past. In fact, recent reports show that over $1.2 billion was invested in the area around El Paso in the last five years. Over 200,000 jobs have been created in Juarez across the river, with about 35,000 direct and indirect jobs created just within El Paso alone.

The region now boasts with some degree of credibility as being a manufacturing center for North America. There are now approx. 25 tool and die operations in the El Paso area, 10 years ago, there was one. Another point to the growth is the existence of 145 trucking companies in El Paso. The region has developed a tremendous infrastructure with about $10 billion in new annual economic activity being carried out in an area that was truly only known for a university and a few military bases. El Paso is developing into a significant "Global Metropole." Omaha, NB is another major center of growth. It's infrastructure continues to grow during these difficult times. The city focused early on with the core competencies related to data processing, financial services, computer and software development and applications on the Internet.

Ironically, the model for success with Omaha is very similar to attempts in the former Soviet Union to create mega cities focused on certain industries. The difference is that Omaha grew from the bottom up. Global Metropoles, just like the process of globalization cannot be imposed from the top. It must be done from the bottom up and is very decentralized.

A Newly Expanded European Union

While the North American economy is still in slow motion, Europe is on the march. The "Old Europe" is still stuck in the mud with high social costs and a rigid system that is still in need of much restructuring. However, the expansion of Europe is creating a very interesting spark of activity. It is reshaping the face of Europe and every bit of its infrastructure for production and distribution. The expansion of the EU is creating new opportunity and its own list of "Global Metropoles." Roll out the map, because Europe is truly changing. Just look at the numbers. Currently, approximately 350 million people live in the 15 countries that compose the European Union. On May 1, 2004, 10 countries will join with an additional 70 million people. On May 1, 2004 the European Union (EU) is set to expand from 15 to 25 countries. The countries that are joining the EU include: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Three more countries with perhaps 50 million more people are on the list, waiting to join. These countries export 150 billion Euro worth of goods to Europe and buy 117 billion Euro in imports from Europe. The inclusion of these countries with a single currency, free trade and transportation, and flow of people within the region totally changes how a company can think and plan for Europe in the future. This will have far-reaching consequences raising key issues on competitiveness and cost, especially for multi-national companies with economic activities or interests in the accession countries. To understand the key impact on indirect taxes and supply chain in the accession lead-up and in the enlarged EU, it is worth setting out how the current trade environment has evolved in the accession countries, and how this will differ in the future.

Old centers of distribution in Europe and around the world are becoming irrelevant. Major cities considered to be "global" due to their enormous size, now risk becoming antiquated. This has a major impact on location planning. People and corporations are heading to cities that will soon be a part of the EU—places like Budapest, Bucharest, Belgrade, Brussels and Prague.

New centers of growth, and global commerce are emerging. Certain regions have taken the global economy, structured their regions along a global base, and are far outperforming other regions of the U.S. and the world. These are cities and regions that are not known, recognized, or even thought of by traditional site and location planners. They soon will be and location planners, business leaders, and politicians will have to take note of this development.

I like to refer to these cities of the global era as "Global Metropoles." These are cities and regions that have focused on their core competencies, with infrastructure designed for the 21st century, where innovative plans for future growth in the areas of the arts, music, and culture are pursued with as equal a zeal as roads, utilities and other traditional infrastructure improvements. They are the new nodes of commerce in the global era, where the large size of a city can be a detriment, where being close to major cities is less important than ever. Quite often, and with little surprise, these regions place a major focus on education and access of their youth to observe business and industry in action—directly, first hand.

Other centers of commerce are also quickly developing based on the difference of labor costs, industry regulation and infrastructural development. In fact, a "New Borderland" is under development along the line between the old and new Europe in ways just like the "Borderland" between the U.S. and Mexico was developed after NAFTA went into effect. In many locations, the workforce in Poland, literally across the river, is almost half the cost of the German workforce. The town of Goerlitz, Germany, near Dresden and about two hours away from Berlin, is in the midst of this change and positioned for the future. The city has lost many service and retail jobs, to Poland just 100 feet away on the Polish side of the Niesse river where the cheap labor and longer store hours create a natural magnet for German customers. The Honorable Dr. Rolf Karbaum, Mayor of Goerlitz, recently listed over 120 international newspapers that have visited the town to report on the changes taking place. However, very few have looked beyond the superficial changes to understand the growing importance for Goerlitz in the future. The media's presence in Goerlitz alone shows the economic importance developing in the region.

Goerlitz and the nearby town of Zittau, have another major advantage, being also close to the Czech border. Three countries, three languages, yet one location. It makes for a very strategic location and the chance to become a "Global Metropole" in years to come.

One can list the major cities in the expanded Europe like Prague, Budapest, and Bratislava, and it goes on and on. New markets, new transportion and distribution. New opportunity. Europe has changed. As big as it is becoming, there are new regional centers also experiencing growth. One such example of a region of Europe with its own dynamics is the Baltic Region with Sweden, and Finland, together with Estonia, Lithuania and Latvia. These are all countries that flourished in the Europe of the 1700s and 1800s. As the Cold War perceptions are transformed, Europe is finally developing into a more logical global entity.

What is Old Europe doing about the new dynamics? Locations like the Alsace Region of France still maintain their status as a central location for distribution, but the true center has now shifted a little to the east. Many residents in countries like Austria are concerned that the new cities of Europe will overshadow, or outpace their old European counterparts. However, that will be far from the case. In fact, it is much to the contrary and a number of commissions, associations and cross-border conferences have been established to support the transition to the Expanded EU. For example, exports from Austria to the "New EU" countries have quadrupled since 1989. In 2002, they reported a trade surplus of 2.2 billion Euros. Direct investment of Austian companies in the New Europe now represents 40% of the total investment of Austrian companies abroad. According to published statistics, the expansion eastward will add 0.7% a year to Austria's growth in this and coming years.

There will certainly be costs related to the expansion of the EU for infrastructure, etc. Currently it is estimated to exceed 40 billion Euros. However, on a per person base, the cost amounts to only 75 Euros per person in Austria.

To put it into a practical perspective, the growth in the east expansion will only help cities positioned like Vienna. In a brochure published to introduce European expansion to the public, Walter Nettig, President of the Vienna Chamber of Commerce states that the geographic location of Vienna brings with it great opportunities and challenges. It is the only major European city close to four of the countries in the expanded EU. However, there will also soon be a purchasing power of 400 million Euros poised on the doorstep to Vienna waiting to come and visit.

As Europe moves East, so will the infrastructure. Berlin and Vienna will only increase in importance as major economic centers, in addition to their present political position. New modes of transport, like in the days of the canal towns, will rapidly transform cities in the expanded Europe and along the "New Borderland."

The Effect on Site Selection

How does all this affect location decisions? Plenty. Don't make the mistake many European companies made with the creation of the EU in 1992. Hundreds of consultants, accountants, and attorneys hosted seminars on how to set up in each of the new countries. European companies that followed their examples quickly learned their mistake only a few years later. A lot of European businesses set up multiple warehouses and sales offices based on national population, or on the languages of the population. There were often three sales offices, and warehouses literally within a 100 miles of each other. A number of American companies took advantage of more global strategies, and often set up only one center stratigically placed to cover all of Europe. This placed many European companies in noncompetitive positions.

Look regionally, think strategically. Remember that low cost labor does not always mean lower production costs. Many a U.S. company walked away from Mexico, not understanding what it took to be successful. Also, remember that everything has its time. If you can't produce long-term in a region, it probably won't be profitable to invest in the short-term, regardless of the incentives. Finally, look at the geography, the culture and the history of the region of interest. The past tells a lot about a region's future. For most areas of the expanded Europe, that past is rich and full of tradition, craftsmanship and flourishing trade. Now there are new "Global Metropoles," with rich promise and a solid future. It is truly a new Europe with new opportunities that force a total rethinking of strategy for global production, distribution and service support.

A European Shift

Younger Optics, one of the largest privately owned optics companies in the world with 1,000 employees worldwide, recently opened its European headquarters in Prague-Pruhonice in the Czech Republic. Younger, based in California, produces several types of optical lenses for glasses for the healthcare industry. Its clients are chiefly optical laboratories.

Younger has sales representatives located throughout the United States. It has factories in California and in Guadalajara, Mexico and sales facilities/operations in Australia and Mexico, in addition to its new facility in Pruhonice-Cestlice, Czech Republic.

The European headquarters in the Business Park in Prague-Pruhonice currently includes client services and sales. So far 15 people work there, not including sales. An additional 15 employees will be hired. In addition, manufacturing is to be considered in the future in the Czech Republic. We recently interviewed Igor Loshak, Managing Director for Younger Optics' European Headquarters, to discover why the company chose a location in the Czech Republic.

What necessitated an expansion?

Younger has grown aggressively in the last 10 years. In fact, the company's growth has been in the double digits almost every year during the past decade. However, the growth has been mainly in the U.S. market, while its presence in Europe was almost zero. The company's products are quite unique and as the world is becoming smaller because of globalization, having a European location made sense.

What type of facility did you open?

The site was set up specifically as a high-quality warehousing facility and it incorporates sales and marketing and a customer service call center. What was your role on the site selection team? Who else in the company was part of the site selection team?

I made the final selection and the team consisted of three people, the CEO, the executive vice president, and the managing director.

What important criteria were set for selecting the new location?

The infrastructure was a very important criteria and the Czech Republic has very well-developed infrastructure. Also important was the quality and educational level of the workers. We had to have a multilingual customer service center and Prague is one of the best places for this. Here we were able to find workers who speak English, German, French, Spanish, Italian, and Russian.

Why was the Czech Republic the best choice for the new location?

For the logistics of it, the Czech Republic is the obvious choice if you are planning to reach all of Europe, not just the Western European countries

What other locations did you consider?

We considered the UK, the Netherlands, and Belgium. And they were all good locations, but they were much more costly than the Czech Republic and they are no longer really centrally located in Europe. The Benelux countries were traditionally always considered to be centrally located. But that was 10 years ago. Now with all of the new countries joining the European Union, when you look at the distance from the UK all the way to let's say Latvia, it's too long a distance for distribution.

How long did the site selection process take?

Three months.

What challenges or surprises came up during your location process? How did the economic developers in the Czech Republic help you overcome them? One small surprise was the difficulty we had in finding an actual building to lease. The real estate market is very tight around Prague.

Is there any advice you would give to someone doing site selection for a similar project?

Make sure you visit any country you're considering yourself. Most of the information that you can gather about European countries, especially the developing ones, is about 10 years old, so it's no longer accurate. So you must really do the process yourself by going there to see what the reality is now.

Stage 1: Strategic planning

Many organizations that stand back and consider accession from a more strategic perspective will look back to the evolution of their current model for supply into or out of the territories of the accession countries. Current decisions on sourcing of materials are likely based on landed cost comparison based on the current duty and preference assumptions, all of which will change on accession date. Manufacturing location or outsourced manufacturing decisions may have been based on the high-duty rates differentials (finished products or raw materials) or the need to achieve local added value for the purpose of benefiting from trade preferences.The sourcing decisions for finished products into key markets in the EU and elsewhere will need to be reviewed based on a reevaluation of landed cost of products from different sites. On review, it may be found that the fundamental assumptions or cost analysis underlying these important business decision have changed and other factors, not relevant when the supply chain was established, may now need to be taken into account. Any such decisions have obviously a very long lead time, and as such, must be examined as soon as possible. Other key issues that need to be considered in detail at this stage include existing contractual arrangements, existing special facilities and regimes in the accession countries, as well as key changes required to enterprise resource planning (ERP) systems.

Stage 2: Transitional period

Multinational companies located in accession countries must prepare to be in a position to comply with EU VAT and customs rules on accession. They need to look at those areas where current costs or resource requirements will be reduced and to identify where such costs and resources will necessarily increase (for example, the opportunity will exist to streamline VAT and excise compliance operations across up to 25 territories). Standardization of compliance documents (such as invoices) and processes across an organization can create long-term cost savings and free up headcount to concentrate on higher-value activities. However, the indirect tax compliance risks and challenges from enlargement issues should not be underestimated. A priority of all businesses must be accurate and timely payment of indirect tax and completion of domestic VAT returns and EU reports. The whole question of whether to enter or exit outsourcing arrangements or to set up shared service centres to meet the needs of multiple locations may be considered afresh in the new environment. Another example of a key issue in the run-up to accession is the question of taking advantage of one-off opportunities. Multinationals may be able to make choices about where to store raw materials or finished goods inventory in the lead up to accession to offset duty increases or take advantage of reducing rates. Customs procedures such as warehousing and inward processing also provide mechanisms that can be used to bring forward or delay the duty point or assessment basis selectively to maximize the benefit.

Stage 3: Immediate post-accession actions

The first day of May 2004 will be a very busy date for many multinational corporations (MNCs) operating in the accession countries. Key issues in the immediate post-accession period will be heavily focused on those issues which could prevent the business continuing to trade as well as identifying the practical application of the work done pre-accession. This could include:

  • reviewing key issues which would affect business operations on the first day;
  • reviewing compliance and systems to determine how the systems are operating in practice, how the document and goods flow processes are being handled by the systems and whether all is in compliance with the new requirements;
  • ensuring product flows and document flows are as predicted in practice, and that strategic changes to sourcing decisions that were made are being correctly implemented;
  • ensuring implementation of new customs regimes (this could include replacing existing inward processing reliefs in accession countries with bonded facilities, processing under customs control or releasing raw materials into free circulation immediately); and
  • monitoring the practical implementation of the new laws from this first day to determine likely problem areas (this could include anything from the practical use of new VAT registration numbers to possible incorrect application of new charges, which a country did not previously have—for example, reverse charge.

Stage 4: Ongoing issues

Once things have settled down after a few months, it will be time to take stock of the company's new position and determine what it needs to do going forward. Key issues arising in this period will include:
  • continuous review on a regular basis of all of the issues mentioned in the previous section;
  • post-accession strategic planning—this could be undertaken six months or a year after accession in order to determine what new opportunities have only come to light in that period;
  • examination of interpretation of key areas, such as place of supply for VAT (implementation in this area will be a key issue for all crossborder supplies of services of all types and will affect many MNCs, particular those in exempt businesses);
  • review of strategic sourcing decisions such as raw materials, finished products to benefit from the lessons learnt in the first six months;
  • review of product and document flows; and
  • review of ERP systems to determine how well they are coping with the new requirements.n

© 2003 Ernst & Young LLP. All rights reserved. Reprinted with permission of Ernst & Young LLP.

 

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