Poland leads Eastern Europe's nearshoring gains

"The war in Ukrainechanged everything," says Marcin Miecznikowski, managing director of Trans East West, an international logistics operator. 

Poland was already a key trade hub between Asia and Europe along the new Silk Road, but the war has pushed it to the forefront in the nearshoring process, he says.

Stung by the COVID pandemic-led supply chain disruptions and the war in Ukraine and concerned about rising geopolitical tensions between the West and China, EU companies are eager to relocate their operations closer to their target markets, a process known as nearshoring. Meanwhile, Poland and other Central and Eastern European (CEE) countries are also benefiting from the so-called friendshoring, wherein companies looking to minimize the risks of disruptions are opting to relocate operations to friendly countries from authoritarian states.

Pandemic changes the game

The impact of the COVID pandemic on supply chains, especially those emanating from China, was a shock to Western businesses, with delivery times shooting up to 12-15 months and the cost of shipping soaring to record levels.

"The pandemic served as a wake-up call for global corporations," says Marcin Fabianowicz, director of the Center for Strategic Investments at the Polish Investment and Trade Agency (PAIH). "They realized that the location of production could not solely rely on lower operating costs, as it can be very costly in the long run."

Poland's SSC/BPO sector (shared services centers and business process outsourcing) is seeing ever-more sophisticated business services being moved into the country, following the lead of the likes of Google, which opened its Google Campus co-working space in Warsaw in 2015. The country also hosts IT services firm Accenture in Warsaw, while IBM has offices in Krakow, Wroclaw and Katowice. US investment banks JP Morgan and Goldman Sachs are also betting on Poland.

"Looking at shared services/BPO, the lockdown proved that Poland could manage much better than other SSC/BPO hubs like India or the Philippines, where conditions for remote work were inadequate. This led to a new influx of FDI into Poland from the second half of 2020 onwards," Michael Dembinski, chief adviser to the British Polish Chamber of Commerce (BPCC).

Ukraine war accelerates investments

Then the Russian invasion of Ukraine changed Poland's role in trans-Eurasian freight transportation.

"Many Western firms in sectors such as automotive, construction materials, furniture, and agrifood have moved some or all of their production from Ukraine into the EU, with Poland being a beneficiary. IT firms have also relocated from Ukraine to Poland. Poland is seen as the best logistical gateway and springboard for the rebuilding of Ukraine going forward," says Dembinski.

Ukraine accounted for 45% of all the new foreign companies that set up shops in Poland in the first three quarters of 2022, according to a report by the Polish Economic Institute. 

The report said 3,600 companies with Ukrainian capital and 10,200 Ukrainian sole proprietorships were established between January and September of last year. There are now 24,100 companies with Ukrainian capital operating in Poland or 25% of all companies with foreign capital. 

Ukrainian IT firm Ciklum moved 2,000 of its 3,200 employees — 250 to Poland — following Russia's invasion of Ukraine. DXC Technology relocated many of its 4,000 workers in Ukraine out of the conflict zone to western Ukraine, Poland and Romania, while another Ukrainian IT company, Infopulse, moved 400 of its employees to Poland.

Romania also attracts FDI 

Romania is another shining star in the region, attracting 69 FDI projects in 2022, a jump of 86% compared to 2021, according to the EY European Investment Attractiveness survey.

"[Romania] is becoming a major player in Europe in terms of foreign investment in the semiconductor manufacturing sector...Romania demonstrates that it has become a mature economy with substantial future growth potential, ranking fourth in Europe in terms of new job creation with 239 jobs created per new project in 2022, after Serbia, Spain and Hungary," EY's Bogdan Ion said.

One of the latest foreign investments, announced in February, was that by Syn Trac, an Austrian company that plans to build a tractor factory in Arad county.

Other significant recent investments in the region include Swiss Toblerone shifting manufacturing of its iconic chocolates to Slovakia from the end of 2023. 

Samsung SDI, the battery manufacturing arm of Samsung, is planning to set up a new battery production facility in Hungary. The plant will produce batteries for BMW cars.

"The eternal friendship of China and Russia is an issue that Western businesses are aware of. I'd predict a slow but steady shift away from China - nothing sudden and radical, more like a deflating tire. Less new FDI into China, existing investments carrying on but without so much reinvestment/new money going in and CEE is one beneficiary of this trend, as will be other destinations in Southeast Asia," says Dembinski.

Edited by: Ashutosh Pandey