For such a large company ($636 million in sales for the four quarters ending in September) CTS flies somewhat under the radar. However, its EMS arm did $370.2 million in sales over that same period, which places it among the 25 largest contract assemblers in the world, and its main product mix includes computers (29%), defense, communications (14%), industrial (8%) and medical (5%).
While CTS's Ostrava, Czech Republic, site builds automotive products, as EMS companies look to Eastern Europe, it serves as a template for how to proceed. CTS Director of CTS European Automotive operations Ron Bell spoke with CIRCUITS ASSEMBLY'S Mike Buetow in December.
CA: How did CTS come to decide to locate in Eastern Europe?
RB: You need to test and understand your beliefs about why you feel the need to be in Eastern Europe: Is it fashion, or necessity? CTS concluded we needed a Central/Eastern European presence because of the currency stability, logistics requirements, customer pressure, and expansion and growth.
CA: What are some of the decisions that go into establishing a plant there?
RB: Companies need to decide what they want to do there. Will they transfer existing production, start a business, or use the site as a platform to attract new business? As with other expansions, they must decide how to expand into Eastern Europe, be it by acquisition, joint venture or greenfield. CTS ultimately took the "go it alone" greenfield route, with the underpinning desire to create a state-of-the-art manufacturing operation. In our case, our startup products were a combination of product transfers and incremental new business increases.
When you reach this juncture and are possibly wrestling with a ramp-up plan, you need to consider several factors: How much support can your current organization provide, as this will critically impact your ramp capability? What are the infrastructure, skills availability and support capability of the chosen area? And, in parallel to the previous work, obviously you need to decide which country and where.
Our main considerations were infrastructure, English capability, employment levels, skills availability, education level, costs/wages, national and local government support, and grant availability.
CA: Of the various Eastern European nations, which did CTS consider?
RB: After visiting most of the obvious countries--Slovakia, Slovenia, Hungary, Poland, Romania and the Ukraine, we chose Ostrava in the Czech Republic. The prime reasons for choosing Ostrava were the realization that the further East we looked, the greater the support resource would be needed; the Czech Republic's ability to meet CTS's specific needs, and the conclusion that the lowest labor-cost countries could very well end up not being the lowest overall cost option.
We developed a matrix for comparing all the countries we visited. For example, see the comparisons between the Czech Republic and Romania based on CTS's identified needs (Tables 1 and 2). Understand, however, there is no inference that one country is superior to another. Instead, it is each company's needs and reasons for going to Eastern Europe that tend to lead toward the location that is the best fit.
CA: What have been the initial results?
RB: Production commenced in April 2006, and we plan to ship more than $40 million worth of goods this year. And the quality of employees is very impressive.
CA: Have you encountered any problems?
RB: Some, not surprisingly. Western-style business practices are not widespread. Employees are not encouraged to think laterally. Also, corruption can vary from country to country. Land ownership can be an issue. Government bureaucracy can also be a problem.
Table 1. Investment Incentives General Criteria Czech Republic Romania Investment min. $9.45 million* $1 million Own capital min. $4.72 million* Equipment 40% of total investment investment Min. Condition Within 3 years Within 30 months fulfillment Others Maintain investment at Maintain investment for least 5 years at least 10 years Maintain no. of newly created jobs at least 5 years First owner of the long- term tangible assets in the CR Incentives Tax holiday Full tax relief for 10 Ratio of 20% deduction; years (newly-established investor thus pays no cos.) income tax or very small tax for several years Partial tax relief for 10 years (expanding cos.) Relief from For any new equipment and customs duties installations Other Accelerated depreciation (50% in first year). Not applicable to constructions Job creation Amount of grant depends on level of investment and no. of jobs; each project judged individually Retraining grant Up to 35% of training costs/person Grant per Up to $8,695 employee Incentive On state level management *Based on exchange rate of CZK21.1:$1. Table 2. Country Analysis Czech Republic Romania Labor cost $771 $299 Unemployment 9.5% 6.2% (+25%) Population (millions) 10.3 22.3 Infrastructure* 5 3 Like industry* 5 4 GDP (per capita) $6,740 $2,310 Inflation 2.8% 9.0% Exports (millions) SK 67.9 SK 22.5 Imports (millions) SK 68.5 SK 27.2 Balance (0.6) (4.7) *CTS scorecard rating