About a year ago, Nokia announced plans to build a cell phone plant in Cluj, Romania, and to begin manufacturing later this year. Two months ago, Nokia announced it would close its plant in Bochum, Germany, and shift production to “lower cost regions.” The Germans are outraged, but more about that later.

There’s a good reason Nokia chose Romania. Its labor costs are not as low as China’s, but for European markets Romania is nearly the same as China on a total landed cost basis.

According to research by Technology Forecasters, Inc., Romania has the lowest labor costs of all European Union members. The results are in a Quarterly Forum Report, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” by Charles W. Wade, a TFI senior consultant. It also covers non-EU Russia and Ukraine. The report is available for download by TFI Quarterly Forum members.

According to the report, a skilled Romanian worker made about US$5,000 in 2005, compared to more than US$30,000 a year for a worker in Germany, which has the highest labor costs in the EU. Wade concluded: “In response to our interview question, besides the Ukraine, Romania was noted as the second most desirable location for a low-cost manufacturing operation in Eastern Europe.”

EMS companies in Romania include Celestica, Elcoteq, and Flextronics. Elcoteq has a plant in Arad, near the Hungarian border, acquired from a customer. It makes sub-systems and other components for base stations for that customer.

“You don’t go to Romania because it is so much better than Poland,” says Carsten Barth, Elcoteq director of marketing and communications. “You look at it from a customer’s point of view.” Arad is about 150 miles from Budapest, Hungary, where the sub-systems are assembled into base stations, Barth says.

More OEMs are seriously considering Romania. Thomson S.A. has studied the country as one option for making set-top boxes, says Francois Gauthier, general manager, worldwide operations for premises systems. “The factory I visited had made a product similar to ours in the past and they had experience,” he says. “We also did an audit and were satisfied with their processes.”

Like other nations reviewed in the TFI research report, Romania is a mix of positives and need-to-improves. It is cost competitive, but wages are rising and it has a skilled labor shortage. The government offers a friendly tax environment, but concerns persist over corruption and intellectual property protection. The infrastructure is inconsistent – better in the western part of the country but less solid in the east.

Marius Stefanescu, a dual Romanian and U.S. citizen, who recently returned to set up an electronic manufacturing consulting business in Timisoara, in western Romania, agrees with the general findings of the TFI research. Stefanescu, who spent a decade in the U.S. electronics industry, is candid about the obstacles, but optimistic about overcoming them.

“There’s always a flip side to cheap labor,” he says. “The ghosts of the past don’t want to go away.” Stefanescu, 34, says the Soviet-era worker mentality is “still prevalent among the 40-plus generation.”

He explains: “An engineer would have been paid more and had more respect in the old days, compared to a regular worker, but there was no incentive for professional development. Some older workers are bitter now. They didn’t realize the change had to come from within them.”

As the two newest EU members, Romania and Bulgaria are trying to avoid mistakes made by Poland and others when they joined, Stefanescu says. For example, he says the Romanian government has been more proactive in tackling the corruption found in these countries, including a TV and billboard ad campaign. “There is a huge incentive to get rid of corruption because there’s a lot of investment money in Western Europe waiting for this to happen.”

He cautions the business culture is based on personal relationships more than in the U.S. Several Romanian companies in the electronics supply chain made successful transitions from the Soviet system, but can be hard to locate. “They don’t put much emphasis on email or the Web,” Stefanescu says. “It is more about knowing someone or knowing someone who knows someone.”

In the end, the biggest problem with moving to Romania, especially if relocating from Western Europe, could be bad headlines like Nokia is getting. Branding Nokia’s move “caravan capitalism,” German union and government leaders have called for a nationwide boycott of Nokia products and for the EU to ban Nokia’s deal with Romania.

Says Stefanescu: “In my opinion, that can only delay but not kill the initiative. Nokia has already invested too much and, what’s more, developing rural Romania is also a clear interest of the EU.”

Posted by Bill Roberts, March 7th, 2008

Filed to Outsourcing

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