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issue: November 2003 APPLIANCE European Edition

Guest Editorial: European Manufacturing
Manufacturing for Eastern Europe

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by Nedim Esgin

Eastern Europe, which is changing politically and economically at a speed we could not dream of 15 years ago, is becoming a new and important market for the appliance industry and, at the same time, a new manufacturing base for our industry.

This market, which started as a very closed system, is quickly moving toward a mature and developed market environment. This is happening at a time when Western Europe is setting challenging and competitive standards for appliances.

Unlike other traditional markets, the sudden opening of the Eastern European market represents an equal playing field for competition from Europe, the U.S. and the Far East. However, when dealing with the Eastern European market, there are still some specifics that need to be addressed.

With a political environment that seemed to change overnight, we observe an immediate imbalance and gap occurring in Eastern Europe, which is being balanced at varying speeds in different areas.

The new competitive environment generated a dramatic change in Eastern Europeans' behavior, with an increasing attraction toward comfort and consumption. Overnight, these markets were faced with better product offers, lower prices, and a new form of advertising. The standards of the products jumped from old-style, lower quality local production to Western European levels, with the same high-quality standards. This sudden jump is an advantage to the consumer and to the environment, but, at the same time, represents a great challenge and possible threat to local industry.

Other imbalances among Eastern and Western European consumers include purchasing power and lifestyle. These issues will take time to balance. Because Eastern European consumers tend to live more modestly, products that perform basic functions will most likely dominate this market. High-end product sales will remain limited in terms of market share.

The Eastern European retail chain is also catching up to Western standards. As more products are available, retail channels in big cities are quickly taking on Western European styles. The international retail chains, hypermarkets, and C&C are providing a wider range of services to consumers. Banking systems have adapted to this environment and have developed consumer credit systems, which has positively impacted appliance demand. However, the expectation from after-sales service areas is still lower than in Western European markets. It may take some time for customers to fully accept this new lifestyle, and the development of service operations will develop as such.

The Eastern European market environment can be summarized as already offering all of the multinational brands, with competitively priced models of good quality. The market growth has been steady, but slow.

Once the new product standards were introduced and modern, competitive products were widely available, the local white goods industries found themselves facing an impossible challenge. Only a few of them were able to stay competitive and survive independently. Many Eastern European companies have become part of international groups.

It is safe to say that the major white goods industries of these Eastern countries have responded and adapted to the changes very quickly, mostly through takeovers. Today, these companies are not only producing for Eastern markets, but have pulled the production volume of their groups from Western Europe. However, we are not seeing the same dynamics in the component supplier base of Eastern Europe due to the fragmented nature of this middle-sized industry. More time is needed for local suppliers to emerge.

On the other hand, the quick move of Foreign Direct Investments (FDIs) to some of the smaller countries has resulted in rising employment and labor costs. One could think that the industry will move further east to Romania, Ukraine, Russia, and Turkey. Romania, Ukraine, and Russia are slowly building their component supplier bases, and Turkey already has a well-developed supplier base established. This might make Eastern Europe an even more important appliance production environment.

Do non-local brand names or companies have a significant advantage in awareness, perception, or penetration in this new market? I would say no. The most well-known brands are the local names, although the market is still open to newcomers. These markets represent a unique situation since all international competition has started from the same position.

In my opinion, I see an intense competition between U.S., European, and Korean manufacturers in Eastern Europe - more than in any other market.

When taking into account Russia's position in the Eastern European market, there are significant differences compared to other markets. For example, Russia is more fragmented in terms of its low- and high-end markets, as well as custom duties, development of standards and regulations, travel distances, size of the market, climatic conditions, household sizes, and required product features.

Russia is a very independent and large economy compared to other Eastern European markets. Manufacturing for the Russian market will require the considerations such as logistics and appliance usage. The transport from a factory to the end consumer may cost more than the cost of manufacturing the product itself. Even so, with the potential it represents, Russia is the most important market of all.

Who will win? Who will adapt the fastest?

Successful appliance product lines will have to be high in quality, standards, function, and appeal, but also low in cost. There will have to be a different approach required in product development compared to designing products for mature Western markets. Climate and special transport conditions will have to be considered. Pricing, advertising, and customer relations will have to be adjusted to different market needs. Changes of regulations and applications will have to be followed and considered. Risk will have to be taken but managed. All of these issues need to be addressed - and at a fast rate - in order to beat out global competition.

About the Author
For 21 years, Nedim Esgin has held leadership positions in various companies owned by Koc Holding. In 2000, he was named CEO of Arcelik A.S., a leading Turkish appliance maker owned by Koc Holding. As of press time, Mr. Esgin announced his resignation from Arcelik to pursue other career opportunities.


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