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Why are manufacturing companies entering Poland despite COVID-19 and the war in Ukraine?

Commentary by Jan Kamoji-Czapiński, Director, Business Consulting, Strategic Advisory CEE, Colliers

Why are manufacturing companies entering Poland despite COVID-19 and the war in Ukraine?

The relatively high availability of skilled workers, proximity to Western markets or the considerably quick process of obtaining various types of permits are the factors that today determine the inflow of direct investment into Poland. In the last month alone, the launch of two independent projects worth hundreds of millions of euros was announced: the Japanese Daikin will build a heat pump factory near Łódź, and the German Viessmann plans to open a plant in Legnica in Lower Silesia. Why are we seeing a sustained inflow of investment despite the unstable geopolitical situation in the region?

Investment processes take a long time, which is why we have been seeing the effects of decisions made while the SARS-CoV-2 pandemic was still at its peak in Poland since the end of last year. Broken supply chains have caused companies to plan to locate their factories in Central and Eastern European countries, moving away from China or other Asian countries. Moreover, it seems that this is only the beginning of large-scale investments in our region, as the selection processes for numerous of them are still ongoing.

War as a driving factor?

While on the surface it might seem that the war in Ukraine will deter foreign companies from investing in Poland, it is actually an additional factor driving an increasing number of projects. It is a risk that investors take into account, but the confirmation of NATO’s strong presence in Poland makes them, after a short period of suspension, not perceive the situation as a risk that prevents them from starting operations.

At the same time, for several months we have been observing interest in our market from international companies that are considering relocating from Russia, from other sanctioned areas, as well as from Ukraine. They are unable to operate due to sanctions, among other reasons, and are looking for the nearest place where they can efficiently locate investments. It seems that just as investment is currently driven by the impact of the COVID-19 pandemic, companies pulling out of Russia may prove to be the driver in this area of activity in the next year. As a result, we expect growth in the heavy industry and automotive sectors, which have so far been thriving in sanctioned territories. And while the shift of these investments to CEE does not necessarily mean that they will be relocated or located in Poland, several factors can be identified that make our country attractive to foreign investors compared to other countries in the CEE region – as the example of the two most recent investments in heat pump plants shows.

How does Poland compare to the CEE region?

One of the main factors affecting the inflow of direct investment into Poland is the availability of skilled workers, reinforced by the influx of migrants from Ukraine – mostly women. Many of them are likely to find employment in sectors currently locating their plants in Poland.

Proximity to markets in Western Europe is also of significant importance. Particularly in the case of manufacturing investments and large and heavy units, such as heat pumps manufactured by Daikin or Viessman, for example, where every kilometer saved counts. Competing with other Central and Eastern European countries, especially Balkan countries such as Romania, Bulgaria and Serbia, which have recently been quite successful in attracting foreign investors, Poland has an advantage in this regard.

Although at first glance it seems that obtaining permits in Poland is lengthy, from the point of view of foreign investors our country is also attractive in this respect. The processes for obtaining construction permits, environmental decisions and other necessary administrative approvals are faster than in other countries in the region or even across our western border. Given the schedules assumed for industrial investment – tight especially for renewable energy projects, which are in gigantic demand due to the energy crisis in Europe – this factor becomes important in terms of the speed of construction of production plants.

In addition, Poland has a fairly attractive system of investment incentives. Income tax exemptions under the Polish Investment Zone, the government grants program and property tax exemptions are the three main tools used by foreign investors locating their plants.

More foreign direct investment “in sight”

Daikin’s and Viessmann’s industrial plants, the construction of which was recently announced, will produce end products, i.e. ones that do not undergo further processing. However, they need hundreds of components for production. And here again comes the question of logistics. Two investments by such major players in the Polish market, joining Toshiba Carrier Air‑Conditioning’s heat pump plant opened last year near Gniezno, mean that we can expect an inflow of investment from their sub-suppliers. They are likely to locate their plants between end-product factories, in a triangle along the S5, S8 and A2 roads.

Going green... about the potential of RES investments in Poland

Although moving away from coal and gas and betting on renewable energy sources (RES) has been one of the European Commission’s main goals for some time, the process will be accelerated by the war in Ukraine and Russia’s energy blackmail. In this context, we are seeing the development of area wind power and wind-related investments. We anticipate that the Baltic region may see investments from the area wind turbine component industry in the coming months.

The production of batteries for electric vehicles can be pointed out as a continuous trend. More factories are being opened, and the production capacity of existing plants in Poland and Europe is being strengthened rapidly. Given the shutting down of production of internal combustion cars and the announcement by successive automobile corporations of planned dates for the end of production of vehicles of this type, in the coming years this factor will have a positive impact on the employment of workers currently associated with the manufacture of components for internal combustion cars – engine parts or catalytic converters. We can expect them to find employment in a related industry once internal combustion car production is shut down.

The competition between Poland and Hungary for attracting investment from this industry is shaping up interestingly. Both countries have broken out into the lead in Europe in terms of attracting companies producing lithium-ion batteries and their components. This is confirmed by battery export data, according to which Poland is the second largest exporter of batteries after China, and Hungary the fifth. Poland has managed to attract several investments from LG Energy Solution in recent years, as well as battery component manufacturing plants from SK Group companies and Umicore and many other sub-suppliers. Hungary, meanwhile, has been selected by SK Innovation and Samsung SDI, among others, as the location for battery factories. All of the aforementioned projects have received exceptionally high levels of state aid, unprecedented even in the case of so desirable passenger car factories to date. We are still waiting for official location decisions from China’s largest battery manufacturers, namely CATL and BYD, as well as announced investments in the region from the VW Group.

The wider use of lithium-ion batteries for energy storage and related investments may also prove to be a breakthrough. Hopefully, based on the experience of investors who have already entered Central and Eastern Europe, our region will be able to attract more companies in this industry after the Northvolt plant in Gdańsk.