Europe: why offshore when you can nearshore?

In Europe, the main threat of job loss comes not from China or India, but Central and Eastern Europe, which has skilled but cheap labour - and most of it now within the European single market. in the past the main impact has been on manufacturing. But what about services? A new Deutsche Bank publication by Thomas Meyer, Offshoring to new shores: Nearshoring to Central and Eastern Europe (PDF), tells us quite a lot about this phenomenon. Here's the executive summmary:

Central and Eastern Europe (CEE) is an important region for services offshoring. The imports of IT-based services from Central and Eastern Europe into the EU-15 rose by an average of 13% per year between 1992 and 2004. Imports from India, by comparison, increased only slightly faster during the same period at 14% per year.

Close cultural and geographical ties make suppliers from CEE an attractive option. The close ties – in terms of culture, geography and partly language – between the CEE countries and the key Western European markets, the low wages, the high standard of education and stable macroeconomic and institutional environment constitute some of the strengths of the region.

However, CEE cannot boast any IT specialisation in exports or education. IT-based services account for less than 4% of total exports in CEE, whereas the share in India is 17% (see chart). Also, the share of graduates gaining information technology degrees – a key qualification for IT offshoring – is lower in CEE than the Western European and Indian averages. It is therefore unlikely that offshore production of standard IT services will become as important for CEE as is the case for India.

The comparative strength of CEE lies in more complex back-office processes. The cultural background shared by providers and their clients in CEE is particularly important for more complex business processes. Clients from outside English-speaking countries also appreciate the widespread language skills in CEE. Moreover, the lack of IT specialisation in CEE is less significant for typical back-office processes – such as bookkeeping.

Well worth dippping into for anyone seeking a better understanding of what's going on in Eastern Europe. The discussion on educational and science qualifications, for example, is an eye-opener. Who would have thought that the pool of suitable skilled engineers, mathematicians, statisticians and physicists in the CEE-3 (Czech Republic, Hungary and Poland) is on a par with Russia, which has far more scientists? (Figure 14).

Comments

[A. PERLA]

"It is therefore unlikely that offshore production of standard IT services will become as important for CEE as is the case for India."

This depends upon the nature of the services that are required.

French legislation, for instance, is the most advanced in terms of the protection of personal data. No application that employs personal data will ever be "offshored" to India for handling.

Frankly, I think that the EU should adapt uniformly a law such as France's that protects personal information from prying eyes. Should such be the case, then a sizeable chunk of customer-based applications, often mission-critical, will never get to India. (And, this despite the fact that a number of French banks are opening software development offices in India.)

But, to the Near East (EU), yes, quite probably. The new-EU (ex-Eastern Block) country specialists are very adept at data mining techniques as well as sophisticated software development. They certainly have the talent and skills to replace more expensive Old Europe personnel. And, these countries, being in Euro area, will benefit from their particular comparative advantage of skills alloyed with lower cost. In IT, this is a poweful combination - if they can combine it also with a solid competence in English.

They will also, quite possibly, be better importers of EU traded goods and services (i.e., tourism) than India. That too is better for Europe.

[Int]

The CEE Banking Market Is Growing Rapidly. Only In 2005 The Total Banking Assets In CEE-15 Countries (Russia, Ukraine, Belarus Excluded) Grew By 99 Billion EUR Or 22% Against 2004. Romania And Lithuania Were The Top Performing Banking Markets In CEE-15 With The Banking Assets Growth Exceeding 50%!

CEE Banks Are Highly Profitable - In 2005 Within The Top 200 Banks Sample The Average Return On Equity (ROAE) Was 16% And The Average Return On Assets (ROAA) Was 1,68%

The International Banking Groups As Unicredit, Erste, KBC Become Stronger On CEE Market. As Of 2005 The Share Of Top 10 International Banking Players On Combined CEE-15 Banking Market Exceeded 56%. The Major Player Unicredit Controlled Already Over 12% of Total Banking Assets In CEE-15

http://www.intelace.com/publications.html

The report: Top 200 Banks In CEE - 2006 Edition is providing an overview of the most recent development on the CEE banking markets. Report is providing information on the top international players active on the market as of 2005. Finally it contains a league table of top 200 banks in CEE-15 sorted by their total asset value as of 2005 (unconsolidated figures)

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