ELECTRONICS DESIGN AND MANUFACTURING LOCATIONS IN CENTRAL AND EASTERN EUROPE - COMPETING REGION BENCHMARKING

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1 ELECTRONICS DESIGN AND MANUFACTURING LOCATIONS IN CENTRAL AND EASTERN EUROPE - COMPETING REGION BENCHMARKING MHM s recent Information Service Up-Date (published 05/03 see attached) viewing optimum locations for Central and East European Electronics Design and Manufacture views 12+ Central and East European countries - comparing and contrasting key inward investment criteria levels, including comparisons with non- European Global low cost bases such as China, India and Mexico. This analysis forms part of the 1200 page yearly subscription information programme. The Inward Investment Criteria Ranking, when combined with the sister report analysis viewing Electronics Production per market sector in Central and Eastern Europe (see second attachment) - and providing a 250 company Microsoft Access Database of Central and East European Electronics Manufacturing sites to help analyse Competitor Region s OEM/EMS production base - represents an invaluable tool which will help benchmark your region. Perhaps the most interesting conclusions concern the slipping of today s low cost bases - such as Czech Republic and Hungary - down the rankings, just squeezing into the top ten in Central and Eastern Europe. (Within the planning scenario of a new plant commissioned in 2003/4.) Other findings include: Optimum Locations - Bulgaria, Lithuania and Ukraine sit atop future rankings - Russia s economics keep it at the back of the pack - Clever positioning available near main inter-region motorway Investment Incentives - Expect to give up to ten year tax breaks, $1,500 per employee, infrastructure provision and 50% of capital spend Labour Cost and Availability - labour rates and salaries for 19 countries (split by job function) forecasts show significantly changing picture (continuing) Economics - e.g. high inflation in Romania, Bulgaria/Lithuania s high unemployment. - Big markets can be more profitable For low cost Central and East European Countries the opportunity of additional Electronics Design and Manufacture facilities is huge - with the one caveat that Chinese Competition brings. For EU Nation States the competitive situation is now significantly tougher - in both cases the benchmarking information provided will be very valuable. The blend of site location criteria information - combined with MHM s down to earth experience in site location studies will significantly help your benchmarking programme, leading to a potentially enhanced situation. To find out how the 1200 page/per annum Information Service will help improve competitiveness, please read through Additional Information Service Content below.

2 Additional MHM Information Service Content In MHM s Electronics Design and Manufacture dedicated Information and Consultancy Service range the Continuous Electronics Design and Manufacture Information Service is considered the entry level business development tool. Typical of MHM s Information Service content are analyses as follows: 30%+ growth in Eastern European/Chinese ODM - MHM analysis focuses firstly on East European Mobile Phone Handset ODM 30% + Growth in EMS/ODM in Bulgaria, Poland and Lithuania (Sub-contract in Ukraine & Belarus) 30% Growth in Chinese EMS - China by far the largest EMS Producer 30% Growth in East European EMS 23% Growth in European Medical EMS 22% Growth in European Automotive EMS 15% Growth in European EMS Significant Growth in - EU OEM Divestiture (Telecom/ Automotive/IIC/other) - Server Outsourcing - Kiosk Manufacture Plus coming soon: Internet based marketing channels for mobile phone handset, PDA, DVD and similar new growth FMCG products in to Europe About MHM MHM is a supplier of Off-the Shelf and Customised Information Services and Consultancy Services to the Global Electronics Design and Manufacture Sector. Most Globally important Electronics Manufacturers subscribe to MHM s off-the-shelf Information Services, many of these companies also place customised research and Consultancy projects with MHM, for example: Globalising North American CEM acquires European OEM facility following MHM Consultancy MHM arranges for OEM site divestiture and supply agreement. In both of these cases utilisation of MHM Consultancy Services helped retain employment at factories which otherwise would likely have closed. MHM clients also include Brand names, Government Organisations and investment bodies.

3 Your next step Please do not hesitate to contact me should you require subscription details for the information service, or have a project to discuss. Best regards. =================================== Michael Hannon MHM Programmes Manager and M&A Consultant Tel: Int (0) Fax: Int (0) mike@mhm.info Web: ==================================

4 COMPETING REGION COMPARISON: ELECTRONICS DESIGN AND MANUFACTURE LOCATIONS IN EASTERN EUROPE - CHINA/APAC AND MEXICO PERSPECTIVE By: Michael Hannon MHM 2a Boswell Park Ayr KA7 1NP TEL: FAX: mike@mhm.info WEB: Date: May 2003

5 1. INTRODUCTION, SCOPE AND METHODOLOGY

6 1. INTRODUCTION, SCOPE AND METHOLOGY MHM Analysis designed to allow regional comparisons according to weighted criteria Introduction The information contained in the analysis is designed to allow European Nation States to benchmark attractiveness vis-a-vis competing regions, and to enable the Electronics Designers and Manufacturers to evaluate the best region for new developments. The Inward Investor s Evaluation As location choice factors affect companies differently the first stage for the Inward Investors evaluation is normally to weight the various location choice factors according to the specific circumstances of the company in question. But Inward Investor must also consider entry route options and add the scores of the Regions to those of the best route per Region Development Corporation must take advantage of this... market closing/empty factories subcontractors, if used, must also be ranked Hence ranked regions and ranked partners lists are often required by inward investor Scope World s most attractive low cost bases emphasis on Eastern Europe and China When the various regions have been ranked, according to the customised weighted location choice factors, a shortlist of ranked countries is then created. Following this it is necessary to identify the best entry route, normally chosen from options such as: Acquire an operational company - perhaps with supply agreement Full Greenfield development - or acquire suitable building/facility and commission Subcontract - in the short or long term - perhaps, lower level assemblies to feed new plant Hence the situation can arise where a country is only ranked fourth on the regional shortlist but because it has by far the best entry route prospect - for example acquisition prospect - acquiring in this region transpires to be the best option (or vice versa). Development Corporations must take advantage of this. In addition, if a subcontractor is to be used, in the short or longer term, then an appropriate vendor appraisal ranking must be constructed by the Inward Investor. Hence, a site location analysis often has three sets of rankings covering 40+ factors. Scope The MHM analysis views the World s most attractive low cost bases with the emphasis on Eastern Europe and China. For example, other regions such as Mexico are covered in the comparative figures but do not have separate sections in the analysis. Of course, for limited cost, MHM would be pleased to add in regions not fully covered - regions such as Chile, Belarus or Indonesia.

7 viewing creation or acquisition of Electronics Manufacturing or Design Facilities The location choice criteria information is indispensable for most Electronics Assembly location choices such as PCBA, Box Build, Enclosure Fabrication or other manufacturing activity - it is also indispensable for Development Corporations looking to attract these companies.

8 CONTENTS: COMPETING REGION COMPARISON: ELECTRONICS DESIGN AND MANUFACTURE LOCATIONS IN EASTERN EUROPE - CHINA/APAC AND MEXICO PERSPECTIVE 1. INTRODUCTION 2. LOCATION CHOICE FACTOR - OVERVIEW 2.1 The Optimum Location - Customisation Process and Major Considerations - GLOBAL FDI INFLOWS ($BN) - BREAKDOWN OF FDI INTO EASTERN EUROPE - CENTRAL & EASTERN EUROPE REGIONAL RANKINGS CENTRAL & EASTERN EUROPE REGIONAL RANKINGS OPPORTUNITIES AND THREATS CENTRAL & EASTERN EUROPE REGIONAL RANKINGS... Bulgaria Lithuania Score assumes near motorway Ukraine 39.5 L'Viv = 41 Slovakia 39 Romania 39 Belarus 37 Brest scores higher Latvia 37 Poland 36 Krakow/Przesow 38 Hungary 36 Czech Republic 35 Russia 31 Estonia 29 Slovenia 19 Source: MHM

9 3. LOCATION CHOICE FACTORS 3.1 Economic Stability Inflation - Avoiding High Inflation, Romania for example - Consumer Price Inflation %CPI 2000, 2002, Exchange Rate - Mitigating Exchange Rate Volatility in Romania, Poland and Thailand - Exchange Rate Volatility Index 2000, 2002, Unemployment - Utilising Slovakia, Bulgaria and Lithuania s High Unemployment - Unemployment % 2001, 2002, Population - Big Markets More Profitable (Poland, Ukraine, China ) - Eastern Europe & Other Low Cost Bases populations (M) FDI Per Region - Where the Informed Money is Going 3.2 Labour Availability and Cost Cost Availability per Job Title - Labour Rates and Salaries for 19 Countries (Split by Job Function) and Forecasts. - Labour Costs, Average Monthly Wage, % Wage cost Inflation ( ), Forecast 5 year Labour Cost, Factory Manager, Engineer, Accountant - Growing Productivity (Annual Average Rate%) and Employment Protection Index Productivity Forecast for 30 Countries Employment Protection Index - UK Most Liberal! Eastern Europe Worse

10 LABOUR COST 2002 ASSEMBLER WELDER S H EET ACCOUNTANT ENGINEER FACTORY MANAGER FORECAST 5 YEAR LABOUR COST % WAGE COST INFLATION ( ) AVERAGE MONTHLY WAGE LABOUR COST /MO 2001/ I Ukraine 1 China 2 Bulgaria 3 II Romania 4 Russia 5 Brazil 6 Latvia 7 Mexico 8 Estonia 9 Lithuania 9= Slovakia 9= III Hungary 10 Czech Republic 11 Poland 10= Croatia 12 Portugal 13 IV Slovenia 14 EU Spain 15 NOTE: LABOUR COST: INCLUDES EMPLOYEES AND EMPLOYEES CONTRIBUTIONS

11 3.3 Skill Levels, Availability and Quality of Education Colleges/Universities - Concentrations of Skills Analysed Language Skills - % English Speakers per Country - % German Speakers per Country - Part of Basic School Education 3.4 Supply Chain Factors Duties and Tariffs - China is Different! Others are too - Importing and Exporting 3.5 Infra Structure Roads, Crossings, Airports/Ports - Cleverly positioned near main inter-region motorway? - Roads, EU Crossings and Airports - Motorway Links and Major EU Border Crossing - Airports, Number per Country - Road map of Central & Eastern Europe - Roadmaps of Northern Eastern Europe Telecoms - 30% of Romanian lines fail in any year, 20% in Thailand, 4% in Bulgaria - Faults per 100 main lines per year - Cellular Subscribers per 100 Inhabitants - Residential Main Lines per 100 Households 3.6 Risk Index - Poland/Bulgaria Low Risk, China/Romania Medium Risk and Indonesia Highest Risk - Political/Government; Macroeconomic - Legal and Regulatory; Financial, Tax - Foreign Trade/Payments; Labour - Infrastructure 3.7 Corruption Index - Estonia Good, Bulgaria Medium, Problems in China and Romania (in Lower Quartile) - Corruption Perception Index (2002) 3.8 Attractive City Index - Budapest Good, Kiev Difficult, Bucharest and Hanoi near Bottom - Expatriate Ease of Settling Index 3.9 Regional Evaluation Factors - FDI Confidence Index - FDI Confidence Index - China Number 1! Thailand behind Russia 3.10 Investment Incentives and Tax

12 - Expect 10 Year Tax Breaks, $1,500 per, Infrastructure Provision and 50% of Capital Spend in Selected Regions - Tax, job Creation, Training, Capex - Regional Evaluation Matrix - First New East European Plant: Market Size; Population. Economic; CPI, Exchange Volatility. Labour Costs; 2002, Specific to Region/Company; Language, Skills and Education, Incentives, Supply Chain, Location. Infra-structure Roads, Airports, EU Crossings, Telecoms. Other; Risk, Corruption, Attractive City, Total 2003, Total Employers Social Contribution: % of Gross Wages APPENDICES Appendix 1 - Employers Social Contributions; % of Gross Wages 2001 Appendix 2 - Nation State Development Corportion Contacts (Major FDI Players)

13 Methodology MHM currently conducting three projects.two in Eastern Europe and one in China The analysis represents many years of MHM s experience in visiting China, Eastern Europe and the America s. Currently MHM is conducting larger customised plant location analyses for: - Opto Electronics Manufacture in China, Eastern Europe or Mexico - Transfer of production from Germany to an East European country This experience, in conjunction with extensive research into Economic databases, Interviews with Inward Investors, labour cost analysis and tapping sources built up over the years, including Development Corporations, Funding Sources and Real Estate Agencies will ensure the optimum payback for the MHM subscribers.

14 REGIONAL EVALUATION RANKING MATRIX - FIRST NEW EAST EUROPEAN PLANT MKT SIZE ECONOMIC LABOUR COST SPECIFIC TO REGION/COMPANY INFRA- STRUCTURE OTHER TOTAL 2008 TOTAL 2003 ATTRACTIVE CITY CORRUPTION RISK TELECOMMS ROADS AIRPORTS EU CROSSINGS LOCATION SUPPLY CHAIN INCENTIVES SKILL/EDUCATI ON LANGUAGE UN- EMPLOYMENT EXCHANGE VOLATILITYt. CPI POPULATION WEIGHT BELARUS - Brest BULGARIA CZECH REP ESTONIA HUNGARY LATVIA LITHUANIA POLAND ROMANIA RUSSIA

15 OTHER ECONOMIC LABOUR COST SPECIFIC TO REGION/COMPANY INFRA- STRUCTURE MKT SIZE TOTAL 2008 TOTAL 2003 ATTRACTIVE CITY CORRUPTION RISK TELECOMMS ROADS AIRPORTS EU CROSSINGS LOCATION SUPPLY CHAIN INCENTIVES SKILL/EDUCATI ON LANGUAGE UN- EMPLOYMENT EXCHANGE VOLATILITYt. CPI POPULATION SLOVAKIA SLOVENIA UKRAINE Not attrattractive = 0 Less Attractive = 1 Attractive = 2 2= <= 20% Faults 1= >20%<30% Faults 0 30% F lt Good Motorway To Munich = 3 No Motorway = = = = = = = = = 0 3=_5 2= =>15 60M = 5 0 = 1 SCALE Q1 = 0 Q2 = 2/3 Q3 = 4/5 >58 = = = =3 From Munich 15%+= % = % =1 = < 5 = = = =1 FORECAST 2008 = < 200 = = = = = = = 8 NOTE: Following regional choice client company can allot scores for the four Specific to Region/Company items and make an enquiry with regard to Duties and Tariffs.