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RISKS & OPPORTUNITIES
Focus Will Serbia and other Western Balkan countries benefit from the global trends of nearshoring?
Risks & Opportunities
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Many countries see their window of opportunity to bring more FDI home, as a result of the war in Ukraine and sanctions imposed against Russia, which have only further fuelled the existing trend of economic deglobalisation. The chances of Serbia becoming a hot destination for nearshoring depend on both high politics and the country’s ability to be a truly attractive spot for both foreign companies and workers fleeing conflict zones.
Following the Covid-19 pandemic, and in response to the outbreak of war in Ukraine, major companies have begun accelerating plans to shorten their global product chains and relocate production facilities closer to their home countries. Under the new circumstances of the increased regionalisation of FDI flows, will Serbia and other Western Balkan countries succeed in imposing themselves as locations that are geographically closer and that have a competitive advantage compared to traditional offshoring superpowers like China and India? Could Serbia simultaneously also benefit from the relocating of the production operations of both Russian and Ukrainian companies to the country? Our interlocutors highlight many nuances that determine the decisions of large companies that are seeking production spots that will guarantee uninterrupted production and productivity.
BRANIMIR JOVANOVIĆ
ECONOMIST, THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES
BALANCING BETWEEN EAST AND WEST COMES AT A COST
The war in Ukraine is likely to accelerate the nearshoring trend. One of the reasons nearshoring has been gaining momentum in recent years has been geopolitical tension (mainly related to China), and the war in Ukraine only adds to that. Our research has shown that the Western Balkan economies are among the first nearshoring options for German companies, due to their geographical proximity, availability of labour and low wages, but also for cultural reasons and due to the good reputation of Balkan workers. And Serbia has managed to establish itself as the region’s economic
leader, attracting more than half of all FDI in the region over the last 10 years, with average FDI inflows of around 7% of its GDP in recent years, even during the pandemic. So, taking all this into consideration, one could conclude that Serbia is indeed likely to benefit from the reshuffling of the global economy that is set to come in the years ahead.
However, Serbia is facing one major challenge that brings all of this into question. That challenge relates to its policy of balancing between East and West, which will be very difficult to maintain in the coming period. Serbia is among the very few European countries that haven’t imposed sanctions on Russia (together with Bosnia-Herzegovina, Turkey and Belarus). This is not viewed very favourably by the EU, because it undermines EU efforts to ensure Russia is made accountable for its actions. It seems that the EU is letting this go unpunished for now, but strong diplomatic pressure has been applied and it is highly likely that Serbia will soon be given an ‘us or them’ choice. If that happens and Serbia decides to turn its back on the EU and side with Russia, that will lead to significant economic losses for Serbia.
Yes, Russia is an important economic partner for Serbia – with four per cent of Serbian exports heading to Russia and seven per cent of Serbian FDI coming from Russia – and Serbia did indeed receive a favourable price for Russian gas several months ago, which saves the country around 300 million euros, according to President Vučić. However, this is dwarfed by what Serbia gains from the EU – with around two-thirds of Serbian exports heading to the EU and just as much FDI coming to Serbia from EU member states. And Serbia also received around €1.5 billion from the EU budget during the 2014-2020 period, via IPA II funds.
BOJAN STANIĆ
SECTOR FOR STRATEGIC ANALYSIS AND INTERNATIONALISATION AT THE CHAMBER OF COMMERCE & INDUSTRY OF SERBIA (CCIS)
WAR IS ALWAYS A BAD FRIEND
THE CONTINUATION OF THE CONFLICT IN UKRAINE COULD, OVER THE LONG RUN, IMPERIL THE RECOVERY OF THE WESTERN BALKANS. THAT’S WHY POLITICAL DE-ESCALATION IN EUROPE PROVIDES THE BASIS TO RESTORE RATES OF EXPANSIVE GROWTH AND SUSTAINABLE DEVELOPMENT TO THE SERBIAN ECONOMY
Despite the fact that the current crisis is a consequence of tragic events in Ukraine, new economic circumstances that bring both risks and opportunities are being created in Europe. Specifically, the current situation threatens to develop into a global conflict of interest, primarily in an economic sense. The International Monetary Fund noted in its latest report that we are seeing a kind of economic deglobalisation, or the leading economies turning towards cooperation within regional economic groups, which creates a kind of trade-off between more reliable supplies and economic efficiency.
Focus Will Serbia and other Western Balkan countries benefit from the global trends of nearshoring?
We already saw overburdening and stagnation emerging during the pandemic, leading to supply chain breakdown, and the current political crisis shows that such breakdowns don’t necessarily have to be caused by natural factors. Hence the re-emergence of the topic of shortening the supply chains of large European companies by moving operations closer to their home countries, while, on the other hand, many countries are now considering reducing their economic dependence on faraway and potentially rival markets.
Serbia and the other countries of the Western Balkan region have for years underutilised their economic potential and shown themselves to be extremely sensitive to external risks. Although recent advances have been recorded in terms of regional cooperation towards the establishing of a common regional market, joining the EU’s common market – and doing so in the most favourable and inclusive possible way – remains the main economic goal of the governments of the region. In that sense, there are indications of increased interest among foreign direct investors in transferring part of their operations from faraway markets to the region. The standout activities of interest in this regard include agribusiness, the auto industry and the IT
sector, all of which can provide a stronger impetus to the growth and development of Serbia and the region.
On the other hand, the political crisis that’s hit Eastern Europe has launched a wave of refugees and migrants who are seeking more promising places to live and work in many European countries, and are often opting for Serbia as a country with a similar culture, a good climate and more affordable living conditions. These are relatively young, highly-educated people who are mostly employed in the fields of IT, consulting services and trade. Considering their ability to quickly integrate into the local environment, the Serbian economy could benefit a lot in terms of bolstering labour market supply, but also improving its general demographic structure, given that European countries are generally maintaining their population levels through a positive migrant balance.
However, we should conclude by stressing that the continuation of conflict in Ukraine may, over the long run, imperil the recovery of the Western Balkans, and particularly other developing countries worldwide. That’s why political de-escalation in Europe provides the basis to restore the Serbian economy’s rates of expansive growth and sustainable development.
We are all witnessing the major impact of COVID-19 on the supply chain industry all over the world, in terms of slowing down or stopping flows of goods and services. Companies are reorganising their production operations to be more resilient to such shocks in the future. Although the pandemic hit many businesses, it also smoothed the way for new production alternatives. Global companies are seeking new production locations in Europe for at least some product areas, and the loca-
tions they’re looking for are attractively priced, able to meet the quality requirements and – last, but not least – able to make products available within shorter transport times.
As the German-Serbian Chamber of Commerce, one of our main goals is to accelerate cooperation between German buyers and potential Serbian suppliers. For this purpose, together with our colleagues from 10 other AHKs, we launched a joint initiative to create the largest supplier community in Europe. Our first milestone on that path was the creating of the AHK Industrial Suppliers Forum – a digital platform that we will use for business matchmaking. Additionally, we also introduced new working group for our members: Supply Chains in Serbia, where compa-
THE POLITICAL CRISIS THAT’S HIT EASTERN EUROPE HAS LAUNCHED A WAVE OF REFUGEES AND MIGRANTS WHO ARE SEEKING MORE PROMISING PLACES TO LIVE AND WORK IN MANY EUROPEAN COUNTRIES INCLUDING SERBIA, WHICH WOULD BE A POSITIVE DEVELOPMENT FOR OUR LABOUR MARKET
GERT RABBOW
EXECUTIVE DIRECTOR OF THE GERMAN-SERBIAN CHAMBER OF COMMERCE – AHK SERBIEN
SERBIA LIKELY TO BECOME FIRST CHOICE FOR GERMAN NEARSHORING
EVEN BEFORE THE OUTBREAK OF THE COVID-19 PANDEMIC AND THE START OF THE WAR IN UKRAINE, SERBIA HAD ALREADY PROVED ITSELF TO BE A GOOD INVESTMENT LOCATION. THE CURRENT SITUATION IN UKRAINE HAS ONLY ACCELERATED THE DRIVE TOWARDS NEARSHORING AND MADE SERBIA MORE VISIBLE AS A POTENTIAL LOCATION FOR THE RELOCATING OF PRODUCTION OPERATIONS
nies can tackle all potential issues and discuss important supply chain topics relevant to their businesses.
Even before the outbreak of the Covid-19 pandemic and the start of the war in Ukraine, Serbia had already proved itself to be a good investment location. The pandemic didn’t cause a slowdown in investments, at least those coming from Germany. Despite the current situation, major investors from Germany opened their factories or expanded their operations or facilities in Serbia: MTU, Boysen Abgassysteme, fischer automotive, SMP automotive, ZF Serbia, Brose, Continental, Hansgrohe, Bizerba etc. Serbia and other countries of the Western Balkan region have high potential to position themselves as first-choice locations and destinations for relocating production operations to serve countries in Europe. One of Serbia’s main strengths, and a competitive advantage that is enticing foreign investors, is certainly the educated workforce that also brings added value. By introducing the dual education system, companies offer their employees opportunities to develop their skills and qualifications. That’s why many companies invest in research and development while opening training centres near their facilities. Investors are coming here to stay.
The current situation in Ukraine has only accelerated the drive towards nearshoring and made Serbia more visible as a potential destination for the relocating of production operations. According to information from the Serbian Business Registers Agency, 294 new companies from Russia and Ukraine have been registered in Serbia. The main business focus of these companies are IT and consulting services. Given this fact, Serbia certainly has, and will benefit from, this competitive advantage.
RADOŠ GAZDIĆ
ACTING DIRECTOR OF THE DEVELOPMENT AGENCY OF SERBIA, RAS
INVESTORS VALUE STABILITY IN TURBULENT TIMES
SERBIA AND THE OTHER COUNTRIES OF THE WESTERN BALKANS ARE ATTRACTING THE ATTENTION OF FOREIGN INVESTORS THANKS TO THEIR FAVOURABLE GEOGRAPHICAL LOCATION AND GOOD CONNECTIVITY WITH KEY HUBS IN EUROPE AND BEYOND. HOWEVER, THIS NATURALLY DOESN’T MEAN THAT ALL PROJECTS AND COMPANIES WILL CHOOSE SERBIA SPECIFICALLY, BECAUSE THE COMPETITION FROM OTHER COUNTRIES IS VERY STRONG
It already became clear at the start of the crisis that the ways of functioning generally, including business operations, would have to change in some segments, and in some aspects irreversibly so. One of those segments is the perception of distance and the possibilities of easily transporting people, products and services that have – from the aspect of globalisation and comprehensive availability – been subjected to absolute re-examination, both during the pandemic and now with even greater intensification, due to the armed conflicts. It was very soon after the outbreak of the pandemic that global companies and manufacturers began considering directions to relocate their activities, capacities and production processes from the East (primarily from Asia) to points closer to Europe, in order to account for similar situations arising in the future and halting or hampering deliveries of products to European-based parent companies or primary customers. That has now proven itself to be even more relevant. It is highly likely that we are talking about a complete shift in the achievements of globalisation
that have enabled fast, easy and cheap availability, and movements of people, goods and services. And companies are anticipating this by creating multi-year plans to relocate operational activities to alternative and more favourable locations. In that sense, Serbia and the other countries of the Western Balkans have become even more significant to foreign investors, given that we enable them to take advantage of a very favourable geographical position that’s well connected to key hubs in Europe and beyond, with good infrastructure and human capacities, as well as competitive operational costs. However, this naturally doesn’t mean that all projects and companies will choose Serbia specifically, because all countries – at least in Europe – are now competing to attract investment projects, but we can certainly already see increased attention and inquiries from big names in industry. Serbia has a great advantage compared to all other countries in the region, due to the results it’s already achieved in terms of attracting FDI, the improvements made to various forms of infrastructure that are essential for large investments, and due to the fact that we already possess the knowhow and capacities required to implement such projects.
Unfortunately, or luckily, global circumstances always create opportunities for some parts of the world to have certain benefits, above all economic, and I think the circumstances are now favourable for us when it comes to attracting FDI. The same applies to the relocating and arrival of foreign companies from countries embroiled in conflict, though it is now only noticeable that certain foreign companies are relocating their representative offices from the countries caught up in the conflict to European countries like Czechia, Poland and Slovakia, while some companies and employees of international corporations see Serbia and the Balkan region as relocation options. Our country’s political and economic stability, along with all the other known optimal prerequisites for investing and doing business in Serbia, certainly place us on the world map and in the focus of foreign companies and investors during these turbulent times.
