Foreign investors reconsider Balkans

AP News
Posted: Nov 25, 2011 3:58 AM
Foreign investors reconsider Balkans

Business was once so bad at Smederevo's steel plant that it idled production and grew mushrooms in its halls instead.

Then the Americans came in 2003 and turned things around.

Now fears are rampant that hard times are back.

The town is in a panic over a financial report released by Pittsburgh-based steel giant U.S. Steel that its plant in Smederevo, almost the sole source of income for its 100,000 people, is losing tens of millions of dollars.

"If U.S. Steel stops, the whole town will stop," Smederevo resident Biljana Andrejevic said as thick white smoke billowed from one of the plant's chimneys, and an American flag fluttered in its yard.

There are increasing signs that major foreign investors, previously attracted by central and eastern Europe's cheap labor and lower production costs, are thinking of quitting the region or scaling down production, as markets shrink in the global economic crisis and competition from Asia rises.

The region experienced a fivefold increase in direct foreign investments between 2003 and 2008, rising from $30 billion to $155 billion, according to the British-based consultancy PricewaterhouseCoopers. FDI plunged 50 percent in 2009, as the credit crunch set in, with only a modest recovery from 2010 onward.

"The region is no longer so attractive for foreign investors because it's no longer competitive," said prominent Serbian economic analyst Misa Brkic.

"If the Serbian steel plant was closer to China, they would not be think of closing."

U.S. Steel Serbia, which has steadily reduced production over the last eight years, employs over 5,400 people and accounts for nearly 10 percent of Serbian exports.

"We are not satisfied with our poor financial results in Serbia, and we are evaluating all options to improve our situation," John Surma, chairman and CEO of U.S. Steel, said this month.

He cited the anemic regional economy, high raw materials costs, pressure from imports, and Serbian customers who can't pay as the causes of the problem. The plant exports to 60 countries across the world.

"U.S. Steel Serbia results continue to reflect the difficult economic situation in Europe, particularly in southern Europe," the company said in a statement to The Associated Press.

Serbian officials are stunned by the possibility that the plant could shut down production due to operating losses that amounted to $73 million for the first nine months of this year, compared to a $6-million operating profit for the same period last year.

"The factory's production close would be a disaster," Smederevo Mayor Predrag Umicevic said _ "not only for our town, but for the whole country."

"The current situation in Greece and Italy has a major effect on the region as well as on U.S. Steel," Umicevic said, referring to the debt crises in the nearby eurozone states. "The plant's capacities are 10 times higher than the demand in Serbia, and it depends on exports."

He promised that local authorities will reduce pollution taxes and Danube river docking fees for the factory to reduce its production costs, and appealed to the government to cut steadily growing state income tax rates.

The fear of layoffs "is huge," said factory worker Milosav Ralevic, remembering the era in the '90s when mushrooms spouted in the plant's arching halls, before U.S. Steel bought it.

"U.S. Steel is about the only thing that worked here," he said.

Serbia is just one of several former communist states suffering as foreign investors struggle to make profits amid the financial crunch. Thousands of layoffs have been carried out over the past year due to foreign companies shutting down or scaling back operations in the region.

Croatia's Zeljezara Sisak started dismissing its 1,070 employees as the metal pipe maker plans closure by the end of the year. The factory's owner, Commercial Metals Co. of Irving, Texas, announced that it would shut down because of falling orders.

In Romania, Finnish cell phone maker Nokia said it will close a manufacturing plant in Cluj by the end of 2011, which will mean 2,200 job cuts, mostly at the plant, but including personnel in supply chain operations throughout Europe.

Germany's conglomerate Siemens AG closed its train production factory in the Czech Republic in 2009 to concentrate on its other plants in Europe. The Czech plant employed some 990 people.

Hungary has had success attracting investments from the automotive industry in recent years, with new factories or large expansions to existing ones being built by Mercedes-Benz, Audi and Opel.

In other sectors, like the textile industry, however, even Hungary's relatively cheap labor has proven too expensive and companies have moved their factories farther east, to China and other Asian destinations.

Citing falling demand in the midst of the recession, jeans maker Levi Strauss&Co. closed down its Hungarian plant _ opened in 1988 while still under communism _ in the town of Kiskunhalas in 2009, a loss of some 550 jobs.

Analysts believe that despite current difficulties, foreign investors, including U.S. Steel Serbia, will remain in the region once the global economic turmoil eases, and once governments realize that they need to create better financial climate for investors.

"I'm sure the Smederevo factory won't turn back to growing mushrooms," said analyst Brkic.


Associated Press writers Alison Mutler from Romania, Darko Bandic from Croatia, Karel Janicek from the Czech Republic and Pablo Gorondi from Hungary contributed to this report.