SMEs looking to open up new European markets could be missing a trick if they head straight to the established western European economies. It may come as a surprise to many that, according to UKTI, countries to the east of Germany, in emerging Europe, are typically growing at twice the rate of their western counterparts.
These markets are benefiting from a young, well-educated workforce, low oil prices and heavy inward investment, including £170bn worth of structural and cohesion funds allocated to the region by the EU between 2014 and 2020. In fact, the region’s economies are so strong that the value of exports from the UK to the area has doubled over the past decade to £16bn and services have trebled, over the same period, to be worth £4bn per year.
The rising value of trade comes as no surprise to Rowan Crozier, CEO of Brandauer, which makes precision parts in the UK which are then put into consumer goods that are manufactured across emerging Europe, most notably in the Czech Republic, Hungary and Slovakia.
“The region’s been a comparatively low-wage area and so it’s had a strong manufacturing base for many years,” he says.
“Now, though, you’re finding that a lot of the companies are being run independently from their American or western European owners so you often end up dealing direct. All of this activity over the years has generated a lot of wealth so you’re finding local entrepreneurs are launching their own companies. So you have a combination of huge manufacturers and newer entrants which makes it a very exciting place to be.”
Pick very carefully
Nevertheless, emerging Europe has a long way to go until average incomes are on a par with western Europe. Hence, the advice from Una Driscoll, founder of Belt Up Kidz, is that SMEs need to do their homework thoroughly. Her company makes straps that prevent young children climbing out of prams and high chairs. The product has gone down well and after just three years she is exporting to seven countries, most recently adding Slovakia to the likes of Germany, the US and Australia.
“To grow you have to export but there’s no point trying to open up a new market where they can’t afford your product at the price you need to be selling it at,” she says.
“We’ve taken a long hard look at the area and have been really pleased with how things have gone with Slovakia. The people there love to work with the British because we have a good reputation for exporting and there’s no real language barrier. We’re definitely looking at opening up other markets nearby because the time zone is so convenient, it means we get answers from Slovakia far quicker than our distributors in Australia and the USA.”
Targeting a new middle class
Thorough research is the main piece of advice Laetitia Westerman, head of international at toys exporter Worlds Apart, would offer any SME considering entering these markets, as well as an open mind. She admits that she would probably have overlooked the opportunity that central and eastern Europe provides had she not put in the research to discover that although average wealth was below western European standards, there was still a business case for exporting to the region. It was a business case she had to develop very clearly, not just to convince her own board, but also the company’s biggest licensor, Disney.
“I guess a lot of us in western Europe don’t quite realise how much economic growth there has been in emerging Europe,” she says.
“The EU has put a lot of money into education and manufacturing has gone from strength to strength for many years, generating an economic boom and an emerging, new middle class. We were looking for markets where average income was high but, crucially, there is a young population with a high birth rate. Poland and Hungary stood out, so we entered those markets first and we’ve just opened up Romania too.”
Opening up in emerging Europe meant the company needed to have a Polish speaker in the office, says Westerman. Sales are going well, she reports, and price tags are close to those achieved on sales in western Europe. Distributors, she reveals, are adept at cutting overheads by selling online as well as in high street stores.
SME opportunities
The fact that SMEs are starting to spot the opportunities offered by emerging Europe is no surprise to Rob Phillips, managing director of battery manufacturer, Accutronics. It exports 95% of its output and so has noticed the region offers huge opportunities particularly, in its case, in Hungary, the Czech Republic, Slovenia and Poland. However, huge enterprises are not always well suited to take up the opportunity because they do not move as quick as an SME.
“The economies of scale achievable in larger European countries like Germany, France and Scandinavian states are not present on the fringes of Europe,” he says. “So, despite its recent economic growth, the region remains largely unfeasible for large multinational enterprises. As an SME, we have a first-mover advantage in fulfilling orders for lithium-ion batteries that countries such as north America find arduous, due to transportation rules on the shipping of dangerous goods.”
It is arguably SMEs, then, that stand to benefit most from growth in emerging Europe and get first-mover advantage that multinationals are not nimble enough to exploit. Clearly researching markets is a must to find countries that can sustain prices an exporter is comfortable with. The reward will be new markets growing faster than western Europe which are only a couple of hours away by air and, perhaps more importantly, operate just an hour ahead of London time.
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