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Relocation of production: Where have German companies relocated to in the past, and what does the future hold?
The relocation of production is an important factor for the competitiveness and future viability of companies. The main issue is adapting the locations to the needs of the market, the customers, and the company's strategy. In the last 20 years, many German companies have relocated their production to other countries to benefit from lower labor costs, more favorable taxes, simpler regulations, or a larger sales market.
But which regions have proven attractive for German companies? What are the advantages, disadvantages, pitfalls, and opportunities of relocating production - especially to Central and Eastern Europe (CEE)? And where are German car manufacturers (OEMs) and suppliers currently relocating their production?
The following text addresses these questions. We also take a look at current trends in the automotive industry that can be decisive for relocations and give concrete examples of which companies have relocated to which countries recently.
What are important target countries for German companies?
The most important target countries for German production relocations in the last 20 years were China, India, Poland, the Czech Republic, Hungary, and Romania. These countries are characterized by high economic dynamism, a qualified and motivated workforce, good infrastructure - and in some cases, geographical proximity to Germany.
China is the largest sales market for German products and offers enormous growth potential. Poland, the Czech Republic, and Hungary are members of the European Union (EU) and benefit from a common internal market, a stable legal system, and political security. Romania is an emerging country with a large potential for low-cost labor and a high need for investment. We have dedicated a separate article to India as a production location, which you can read here.
But the region that has become increasingly important recently is Central and Eastern Europe (CEE). According to a study by the Cologne Institute for Economic Research (IW), German companies made around 14 percent of their foreign investments in CEE between 2010 and 2018.
The reasons for CEE's attractiveness are manifold. On the one hand, the region offers geographical proximity to Germany and good integration into the European value chain. On the other hand, German companies benefit from lower labor costs, a skilled workforce, tax incentives, and a growing domestic market. Moreover, many Central and Eastern European countries are members of or associated with the EU, which facilitates the legal framework and market access.
Focus: automotive industry
One example of an industry that has recently invested heavily in this region is the automotive industry. The German automotive industry is one of the country's most important sectors, playing a major role in both exports and the domestic market. In recent years, however, the industry has undergone a major transformation, driven by globalization, digitalization, and increasing environmental requirements, among other things. Good reasons for many companies to relocate their production. Both original equipment manufacturers (OEMs) and suppliers have set up or expanded numerous production facilities in countries such as Poland, the Czech Republic, Hungary, and Romania recently.
What are the advantages of relocating production abroad?
Relocating production offers companies advantages that are both strategic and economic. On the one hand, they can reduce their costs by benefiting from lower labor costs, lower energy prices, and tax incentives. On the other hand, they can strengthen their market position by being closer to their customers, responding faster to their needs, and optimizing their supply chains. They can also benefit from the innovations and know-how of local partners and tap into new business opportunities. This is because different target countries are suitable in each case, depending on the objective and strategic orientation. We will discuss this in more detail later in the text.
Relocating production also gives companies access to new markets and customers with high-growth potential in that region.
These companies have already relocated
If you look at the developments of recent years, you will see that the automotive industry is a prime example of the successful relocation of production - especially to Central and Eastern Europe. German OEMs like Volkswagen, BMW, and Daimler have opened or expanded numerous plants in Poland, the Czech Republic, Hungary, and Romania in recent years. In doing so, they have not only reduced their costs but also increased their market shares and their capacity for innovation. German suppliers such as Bosch, Continental, and ZF have also expanded their presence in CEE and offer their customers integrated solutions for the mobility of the future.
Some concrete examples of the relocation of production are:
- Volkswagen has invested more than 10 billion euros in its plants in Poland, the Czech Republic, Slovakia, and Hungary since 1991. The Polo, Passat, Golf, Skoda, and Seat models, among others, are produced there. The plant in Bratislava is the only one in Europe that produces six different brands under one roof.
- BMW announced a new plant in Debrecen (Hungary) in 2014, which is to produce 150,000 vehicles annually. The plant will primarily serve exports to Asia and America. BMW has also had a plant in Shenyang (China) since 2003, which is now the largest outside Germany.
- Daimler opened a new plant in Kecskemét (Hungary) in 2016 to produce the CLA and CLA Shooting Brake models. The plant is part of a global production network for compact vehicles that also includes plants in Germany, China, and Mexico. Daimler is also planning another plant in Romania for the production of transmissions.
- Renault has had a plant in Pitesti (Romania) since 1999, producing the Dacia brand. Dacia is one of the most successful low-cost brands in Europe and has made a name for itself, especially with the Logan model. Renault also has plants in Russia, Turkey, and Morocco.
To which countries is the automotive industry currently relocating?
The automotive industry is currently facing major challenges due to climate change, digitalization, and competition from Asia. To maintain and improve its competitiveness, it is therefore relocating production and research to specific regions of the world. Depending on the desired know-how, specific locations are often suitable for relocation:
One of the most important trends in the car industry is electromobility. The demand for e-cars is increasing worldwide, especially in China, the largest car market in the world. To benefit from this growth, many German and European carmakers are relocating their e-car production to China or building new factories there. For example, Volkswagen opened four new e-car production sites in China in 2020 and plans to produce around 1.5 million electric cars per year in the country by 2025. Other manufacturers such as BMW, Daimler, and Volvo have also expanded or announced their e-car production in China.
Another trend in the car industry is digitalization. Cars are becoming more and more connected, intelligent, and autonomous. To develop and integrate these technologies, the auto industry needs skilled workers in software, artificial intelligence, and data analytics. However, these employees are scarce and expensive in Europe. Therefore, many carmakers are moving their research and development in these areas to North America or Asia, where specialized expertise and more favorable conditions can often be found. For example, BMW opened a new research and development center for artificial intelligence in Beijing in 2019, which employs around 200 experts. Daimler also has a similar center in Beijing, as well as other digital innovation locations in Bangalore, Tel Aviv, and Seattle.
A third trend in the car industry is diversification. Car manufacturers no longer want to sell only cars but also offer mobility services such as car sharing, driving services, or charging infrastructure. To develop and market these services, carmakers are moving their activities to regions with high demand and simplified regulation. For example, in 2019 Volkswagen established a new subsidiary called Volkswagen Mobility Solutions Rwanda to offer car sharing, driving services, and charging infrastructure in the African country. Other manufacturers such as Toyota, Hyundai, or Renault have also launched or planned similar initiatives in Africa or South America.
In summary, the car industry currently prefers to relocate its production and research to regions that offer it access to new markets, technologies, and business models. This shift is a strategic adaptation to the changing needs of customers and the increasing demands for sustainability and innovation.
Long-term perspectives and location analyses
Relocation of production is thus a complex phenomenon that offers both opportunities and challenges for German companies. To be successful, companies should therefore conduct a careful location analysis that takes all relevant factors into account. They should also take a long-term perspective and adapt to the dynamic developments in the target regions.