CEE Countries: International Competitiveness and Sector Performance Vienna, 17 January 2007 UniCredit New Europe Research Network

2 2  Together with China, CEE countries are among the best performers in world trade and among those gaining most in terms of presence in the EU15 market in the last decade  Both CEE and China are increasingly considered as the production arms of the EU15. Still there is not full competition between the two – as they tend to follow different specialisation patterns  CEE countries are gaining market shares particularly in some medium-high tech sectors. They already experienced a clear change in their international specialisation and production structure during the last decade  CEE countries have attracted and continue to attract significant amounts of FDIs, which have a strong positive impact on their export performance  Strengthening overall competitiveness, out from a low – labour cost specialisation model, is the key opportunity / challenge for the future. Growing relevance in terms of dimension of the local market, proximity to the EU, opportunity to build pan European production centres, educated and dynamic workforce and business friendly operating environments represent the real driving forces for future CEE growth. Preserving such dynamism is the real challenge.  Our sectoral outlook for shows the strongest perspectives for medium-high tech sectors. Service sectors are also likely to record favourable growth, as well as construction. Executive Summary

3 3 Agenda  Foreign Direct Investments and CEE Attractiveness Factors  Sectoral Outlook : Best and Worst  CEE International Competitiveness and Sectoral Specialisation

4 4 China and CEE gaining the most in terms of export market shares in the last decade at world level … Source: UniCredit New Europe Research Network on IMF-DOTS 1 CEE is including Poland, Hungary, Czech Rep., Slovakia, Slovenia, Turkey, Bulgaria, Romania, Croatia and the Baltics 2 Emerging Asia includes India, Thailand, Indonesia, Malaysia, Singapore, Philippines, South Korea Increasing relevance in world trade (export country i on world import, normalised 1995=100) Market share in world trade in 2005 China CEE 1 2

5 5 … and at the EU15 level Source: UniCredit New Europe Research Network on IMF-DOTS 1 CEE is including Poland, Hungary, Czech Rep., Slovakia, Slovenia, Turkey, Bulgaria, Romania, Croatia and the Baltics 2 Emerging Asia includes India, Thailand, Indonesia, Malaysia, Singapore, Philippines, South Korea Increasing relevance in European trade (export country i on EU-15 import, normalised 1995=100) Market share in EU15 import in 2005 China CEE 1 2

6 6 China, some energy producers and most CEE countries are the clear “winners” in EU15 markets Top ten winners* in some EU15 markets: gain in EU15 import 1 market share in in pp. points 1 EU 15 imports means the sum of imports of each EU15 member country – intra EU 15 trade is included Source: UniCredit New Europe Research Network on IMF-DOTS (current prices) *countries that gained the most in terms of market shares in import in the period

7 7 Transport Equip. Electrical Equip. Machinery Equip. Basic metals and metal pr. Oth. non-metallic mineral pr. Rubber and plastic Chemicals Coke, refined petroleum pr. Furniture Paper & publishing Wood Leather Textiles Food -15% -10% -5% 0% 5%10%15% Increasing role ofCEE andChina as suppliers to the EU15 (change of CEE and China market share in EU15 imports, 2000-'06) Decreasing role of EU-15 intra trade (change of EU-15 intra trade market share, 2000-'06) Both CEE and China are gradually being considered the new production arm of the “old” Europe  Increasing role of CEE 1 and China on European 15 imports (2000-’06) 1 CEE is the sum of Poland, Hungary, Czech Rep., Slovakia, Turkey, Bulgaria, Romania, the Baltics Source: UniCredit New Europe Research Network on Global Insight data

8 8 Transport Equip. Electrical Equip. Machinery and Equip. Basic metals and metal pr. Oth. non-metallic mineral pr. Rubber plastic Chemicals Furniture Paper & publishing Wood Leather Textiles Food, beverages 0% 5% 10% 0%1%2%3%4%5% Increasing relevance of CEE in EU15 imports (change of CEE market share in EU 15 imports, 2000-'06) Increasing relevance of China in EU15 imports (change of Chinese market share in EU15 imports, 2000-'06) There are some clear complementarities among the two – CEE and China follow different specialisation patterns  Increasing relevance of CEE 1 and China on European imports: 1 CEE is the sum of Poland, Hungary, Czech Rep., Slovakia, Turkey, Bulgaria, Romania, the Baltics; Source: UniCredit New Europe Research Network on Global Insight data

9 9 CEE 1 countries are gaining market shares, especially in some medium-high tech sectors 1 CEE is the sum of Poland, Hungary, Czech Rep., Slovakia, Turkey, Bulgaria, Romania, the Baltics; Source: UniCredit New Europe Research Network on Global Insight data 0% 1% 2% 3% 4% 5% 6% Food, beverages Textiles Leather Wood Paper & publishing Furniture Coke, refined petroleum pr. Chemicals Rubber and plastic Oth. non-metallic mineral pr. Basic metals and metal pr. Machinery and Equip. Electrical Equip. Transport Equip. Change in export share of CEE countries on EU-15 imports (change in % points, 2000-’06) :

10 Agenda  CEE International Competitiveness and Sectoral Specialisation Investments and CEE Attractiveness Factors  Sectoral Outlook : Best and Worst  Foreign Direct Investments and CEE Attractiveness Factors

11 CEE countries attract huge amounts of FDIs Source: UniCredit New Europe Research Network, based on wiiw FDI flows in CEE:  Not only privatisation related, but significant greenfield projects  CEE countries are also becoming a relevant market of destination, hence attracting FDI in the service sector, retail trade, communication  An increasing contribution, in terms of FDI in the region, by Romania, Bulgaria, Turkey in the most recent years, and by the Western Balkans for the future Finance, Real Estate, Construction (32%) Transport & Communication (13%) Wholesale and retail Trade (14%) Electricity, gas, water (4%) Manufacturing (37%) Consumer Goods (26%) Intermediate Goods (39%) Investment Goods (35%) 22bn 23bn 24bn 26bn 18bn 37bn 48bn FDI in CEE by sector 2005

12 Transport Equip. Electrical Equip. Machinery and Equip. Basic metals and metal pr. Oth. non-metallic mineral pr. Rubber and plastic Furniture Paper & publishing Wood Leather Textiles 1% 2% 3% 4% 5% 0%50%100%150% Sectoral FDI attractiveness (relevance of the sector in total FDIs normalised by the relevance of the sector in total production) CEE success in export performance (Change % of CEE market share in EU-15 imports, 2000-'06) A clear positive relation between FDI attractiveness and success in export performance Source: UniCredit New Europe Research Network, on Global Insight and wiiw data *the index is calculated as the weight of the sector on total FDI/weight of the sector on production *

13 Each country with different factors of attractiveness Factors of attractiveness (2005): Source: UniCredit New Europe Research Network, on Eurostat, EBRD 1 Monthly labour cost is as of 2004 for Hungary, Bulgaria and EU, as of 2003 for Slovenia 2 CEE-8 is the weighted average of the countries that are EU members since

14 Strengthening overall competitiveness is the key opportunity for the future …  size of the local market  proximity to the EU  opportunity of building pan European production centres  dynamic workforce  flexible and business friendly operating environment Preserving such dynamism is the key challenge for the future!  Key FDI attractiveness factors to leverage on for the future:

15 … while further opportunities in new emerging areas arise Local market potential Competitive labour market, skilled personnel next to the EU Important steel producer FDI stock: EUR 112 bn FDI stock: EUR 14.5 bn Convergence to EU standards Well-qualified labour force Lower costs Pending structural reforms with upcoming privatizations in the banking, telecom, food processing, textile, utilities and oil sectors Target for SME Convergence to EU standards Transforming economic base, with dynamic growth and opportunities both for production and services Ongoing privatisation process with opportunities mainly in banking, telecom and utilities Target for SME FDI stock: EUR 2.3 bn FDI stock: EUR 4.8 bn Bosnia-Herzegovina Serbia Russia Ukraine Role of energy supplier and geo-strategic relevance Huge local market Dynamic growth

16 Agenda  CEE International Competitiveness and Sectoral Specialisation  Foreign Direct Investments and CEE Attractiveness Factors  Sectoral Outlook : Best and Worst

17 PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO =Romania, TK = Turkey Source: UniCredit Group - New Europe Research Network : a bright outlook for medium-high tech sectors, less positive perspectives for labour intensive industries BESTSTABLEWORST Agriculture, Hunting, Forestry, Fishing PL, CZ, SK, HR, BG, RO, TKHU Mining & Quarrying HR, BG, TKPL, CZ, SK, HU, RO Manufacturing Food products; beverages and tobacco PL, CZ, SK, HR, BG, RO, TKHU Textiles and textile products SK, BGPL, CZ, HU, HR, RO, TK Leather and leather products CZ, BGPL, SK, HU, HR, RO, TK Wood and wood products RO, TKPL, CZ, SK, HR, BGHU Pulp, paper & paper products; publishing & printing PL, HRCZ, SK, HU, BG, RO, TK Coke, refined petroleum products & nuclear fuel PL, CZ, SK, HU, HR, BG, RO, TK Chemicals, chemical products and man-made fibres PL, CZ, SK, HU, HR, BG, RO, TK Rubber and plastic products PL, CZ, SK, HUHR, BG, RO, TK Other non-metallic mineral products PL, HR, BG, RO, TKCZ, SK, HU Basic metals and fabricated metal products SK, BGPL, CZ, HU, HR, RO, TK Machinery and equipment n.e.c. PL, CZ, SK, HU, TKHR, BG, RO Electrical and optical equipment PL, CZ, SK, HU, HR, BG, RO, TK Transport equipment PL, CZ, SK, HU, BG, RO, TKHR Manufacturing n.e.c. SK, HR, BG, RO, TKPL, CZ, HU Electricity, Gas & Water PL, CZ, SK, HU, HR, BG, RO, TK Construction PL, SK, HR, BG, RO, TKCZ, HU Wholesale & Retail Trade, Hotels & Restaurants Wholesale & Retail Trade BG, ROPL, CZ, SK, HU, HR, TK Hotels & Restaurants HRPL, SK, HU, BG, RO, TKCZ Transportation & Communications HRCZ, TK Transportation & Storage PL, SK, HU, BG, RO Communications BG, ROPL, SK, HU Finance, Insurance, Real Estate & Bus. Services BG Financial Institutions & Insurance PL, HU, HR, ROCZ, SK, TK Real Estate, Dwellings & Business Services CZ, HR, ROPL, SK, HU, TK Community, Social & Personal Services PL, SK, HU, HR, RO, TK CZ, BG

18 Transport equipment (automotive and related components, ships, boats, locomotives, etc.): a very positive outlook, with full exploitation of new FDI related production capacity Note 1: PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO=Romania, TK = Turkey Note 2: CAGR = Cumulative Aggregate Growth Rate; GVA = Gross Value Added Note 3: Growth rates are in terms of Industrial Production in CZ, HR, PL, RO, TK Source: UniCredit Group - New Europe Research Network Main characteristics:  Among the best performing sectors in almost all the countries, representing a significant share of total manufacturing production in CZ, HU, SK, RM, PL and TK and a significant driver for other economic sectors  With Fiat in PL, VW in PL and SK, Audi in HU, Skoda, Toyota PSA and Hyundai in the CR and Kia and PSA Peugeot Citroen in SK, Central European countries have gradually become a quite significant production centre for this sector at the whole European level  The sector is developing fast also in BG - despite the still low relevance for the economy – thanks to new foreign entry in car spare-parts production  In HR, Transport Equipment mainly means shipbuilding BEST PERFORMER Central Europe SEE

19 Electrical & optical equipment (electric motors, radio/ television eq., optical and medical instruments, computers, etc.): strong performance for an increasingly relevant mid-high technology sector Main characteristics:  The sector is classified as best in all the countries, with the strongest growth recorded in Central Europe  The sector is attractive for FDI and highly export oriented, despite increasing competition from the Far East. Still, growth prospects are associated to the strong foreign and domestic demand  PL and SK are becoming production centres at the EU level for TV-sets, LCD screens, while the CR is the only country of the region with a significant computer production specialisation  Possible impact from raw materials price-increase and from the EU directive about restriction of hazardous substances BEST PERFORMER Note 1: PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO= Romania, TK = Turkey Note 2: CAGR = Cumulative Aggregate Growth Rate; GVA = Gross Value Added Note 3: Growth rates are in terms of Industrial Production in CZ, HR, PL, RO, TK Source: UniCredit Group - New Europe Research Network Central Europe SEE

20 Machinery & equipment (industrial machinery and households appliances): quite positive dynamics, supported by widespread investment demand Main characteristics:  One of the long lasting traditional industries, classified as Best in Central Europe and TK - where a substantial shift towards higher engineering productions already occurred  Widely export oriented – the sector is gaining export shares on the international markets. Still, the sector is also characterized by high imports (with strong domestic investments in new production capacities)  The sector looks attractive for FDI  Manufactures of household appliances is the most accelerating segment, together with production of machinery and engines, supporting the investment activity  In HR, BG and RM, the sector still needs further modernisation and restructuring BEST PERFORMER Note 1: PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO= Romania, TK = Turkey Note 2: CAGR = Cumulative Aggregate Growth Rate; GVA = Gross Value Added Note 3: Growth rates are in terms of Industrial Production in CZ, HR, PL, RO, TK Source: UniCredit Group - New Europe Research Network Central Europe SEE

21 Construction: still very good prospects, mainly driven by infrastructural projects Main characteristics:  Generally a fast developing sector all over the region, considered Best everywhere apart from HU and CZ  Main drivers of growth: widespread investment activity in infrastructural projects, other than residential and corporate building  EU countries benefiting also from inflows of EU funds, but in CZ and HU, fiscal concerns and lack of public funds dampen the sector activity BEST PERFORMER Note 1: PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO= Romania, TK = Turkey Note 2: CAGR = Cumulative Aggregate Growth Rate; GVA = Gross Value Added Source: UniCredit Group - New Europe Research Network Central Europe SEE

22 Textiles & textile products: negative outlook on increasing labour costs Main characteristics:  The industry is very relevant in RM, BG, and especially TK, where a long lasting tradition is present  Generally we see a negative outlook all over the region, based on increasingly strong competition from the Far East and consequent relocation of production  Still, in BG foreign companies in the short to medium term are managing to remain competitive  In SK, the automotive boom seems to support a temporary recovery, though we remain cautious on the long term WORST PERFORMER Note 1: PL = Poland, CZ = Czech Republic, SK = Slovakia, HU = Hungary, HR = Croatia, BG = Bulgaria, RO= Romania, TK = Turkey Note 2: CAGR = Cumulative Aggregate Growth Rate; GVA = Gross Value Added Note 3: Growth rates are in terms of Industrial Production in CZ, HR, PL, RO, TK Source: UniCredit Group - New Europe Research Network Central Europe SEE

CEE Countries: International Competitiveness and Sector Performance Vienna, 17 January 2007 UniCredit New Europe Research Network