Part I. Germany – EU largest economy

Contents

• Germany – EU largest economy needs 400,000 high-tech specialists
• Economic Recovery
• Lack of specialists
• Immigration – not welcomed
• Offshore Outsourcing? No, look closer!
• Why outsource? Why just don’t attract people from other EU member states?
• Nearshore Outsourcing. Win-Win solution

Preamble

“Nearshoring to Eastern Europe as solution to EU labor shortage”, is a study prepared by “Nearshoring Blog” to discuss the current issues of the EU largest economies associated with the lack of qualified hi-tech specialists as well as labor restrictions and multicultural issues that prevent countries from immigration of foreign work.

Another part of study updates the perspective of Eastern European countries for providing nearshore outsourcing services, and their possibilities to fill the gap in increasing labor shortage inside the European Union.

Germany – EU largest economy needs 400,000 high-tech specialists

In the first chapter of series we decided to start from Germany – the EU largest and most technological economy. The country which has been crying out for skilled hi-tech specialists and engineers for years, yet opposing to the idea of attracting foreign labor.

Economic Recovery

The country steadily emerges from the crisis and sees record growth of 3.3 percent. Booming demand for Germany cars and technologies from Asia, particularly China – world’s largest consumer market strengthen country’s export indicators.

The experts confirmed that Germany is one the raise. The third quarter of 2010 indicated a massive trade surplus, grew nearly 9 percent. German consumer confidence shows stabilization as well. The index is set to come in at high 4.9 points for November, which is almost in line with economists’ forecast of 5.2 points.

However, according to latest labor market surveys the EU largest economy and world’s major exporter is in desperate need for skilled specialists and engineers across sectors, with greatest need in hi-tech sphere with overall 400000 positions unfulfilled in the field.

A survey conducted for the sector WirtschaftsWoche magazine revealed that a high percentage of the 450 businesses questioned for the poll said they had declined contracts during the first half of 2010 because they did not have enough staff to take on the extra work.

“The lack of labour is developing into a dangerous brake on growth, particularly for small and medium-sized companies,” said Marie-Christine Ostermann, chairwoman of the employers’ association Young Businesses-BJU, which co-commissioned the survey.

Lack of specialists

Paradoxically enough, but despite such economy growth Germany is experiencing a real unemployment crisis. With 2.945 million unemployed Germany fell to an 18-year lowest rate in October.

What might seen as a clear economic indicator actually reflects a rather different trend – “German businesses cannot fill open jobs with suitable candidates” – surveys claims.

One survey conducted for the WirtschaftsWoche magazine showed 66% of the free positions did not attract qualified applicants, while in 26% of cases nobody at all applied.

For centuries, Germany led the world in technological prowess, from the motorcycle to the refrigerator. But over the past few years, young Germans have dramatically turned away from engineering – and now, the country in desperate lack of a colossal amount of engineers and hi-tech specialists.

“The image of engineers has never been so bad,” says Markus Roeser of Do Things, a coalition of 80 businesses, universities, and research institutes.

Marie-Christine Ostermann, said a growing lack of engineers, information technology experts and scientists could only be reversed by companies looking abroad for resources.

Immigration – not welcomed

Despite serious need of qualified labor there is a widespread opposition to the idea of highly-qualified foreigners coming to work in Germany. Of those questioned in the Tns Emnid poll for Focus magazine, 54 percent said they were against letting qualified foreigners immigrate, while 42 percent said they were in favour.

German Chancellor Angela Merkel added fuel to an already heated immigration debate in Germany when she said in a speech to her party’s on October that multiculturalism had “failed utterly.” Merkel also said that immigration was prejudicial to the German economy.

The country has been in a controversial discussion around immigration for last years. All major polls agree that majority of Germans is not exactly fond of 4 million resident Muslims (5% of the overall population). 35% believe the nation is “swamped by foreigners” and 10% want the return of an old authority with an “iron hand”.

In 2007 Germany, together with Austria and the United Kingdom opposed to the idea EU Blue-Card Fast-Track Immigration Scheme. Despite country’s business leaders claimed that the economy needs more workers to meet growing skills shortages, government hasn’t changed rigorous immigration and work permit rules for workers outside of the EU either.

Offshore Outsourcing? No, look closer!

With highly developed information and communication channels as well as high-speed transportation businesses around the globe exploring benefits of outsourcing bringing workers to their whereabouts rather than send jobs to workers locations. As the main driver still considered to be cost reduction, while developed countries has a strict labour policies, high payroll taxes and work permits outsourcing has become the proffered way of getting the work done for a broad range of manufacturing, technology and service business.

Over-capacity in trans-Pacific fiber-optic cables and cheap English-speaking labor in India led to the first call-centers and ultimately a vast industry in service sector employment emerging as an offshore outsourcing.

Apart for North America’s massive offshorization over last decade, there has been a long-lasting debate around outsourcing in the EU, with developed countries showed signs of reluctance towards globalization. Referencing to the difference in the world view, culture, language and the way of doing business conservative Europeans haven’t flooded Indian shores preferring to keep operations closer to home.

Instead of sending work to far East locations, they’ve developed practice of deploying operations in neighbouring East European countries. As an example Poland, Czech Republic and Romania have became a location of choice for Germany for handling over various business and customer-facing processes due to abundant pool of qualified workforce, good language and cultural affinity.

According to a 2006 Deutsche Bank Research imports of IT services from the Central and Eastern Europe to Western Europe increased an average of 13% per year between 1992 and 2004. This growth nearly comparable to the import of IT services from India, which averaged 14% per year over the same time period. Language and cultural affinity, vast pool of resources and low labour costs attracted German companies to explore the benefits of nearshore outsourcing.

Why outsource? Why just don’t attract people from other EU member states?

This is a rather reasonable question, as new member states offer a large pool of qualified labor, strong education and much lower than in the rest of EU labour costs, which undoubtedly can help to fill the gap in labour shortage.

However, transitional restrictions on labour mobility imposed in many of EU-15 members after the first EU enlargement, along with corporate taxes and infrastructure costs discourage Western European businesses from bringing qualified workers from new member states.

We can distinguish two stages of EU enlargement:

• 1st wave in 2004 with Malta, Cyprus, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Slovenia, Hungary
• 2nd wave in 2007 with Bulgaria and Romania

Those of the first wave of new member states very quickly became an outsourcing magnets for more developed EU members. With improved regulation, developed infrastructure, qualified resources and lower than in the rest of EU labour and operating costs countries like Poland, Slovakia, Czech Republic attracted EU15 businesses to capitalize on the EU expansion.

From other side, what might be seen as an opportunity to expand labor horizons for newcomers turned out differently from expected. The majority of the EU-15 countries have imposed immigration restrictions on new member states nationals, which effectively mean that the legislative barriers facing new member nationals wanting to work or take up residence in these countries are different following the enlargement of the EU in May 2004. Denmark, Ireland, Sweden and the UK are the only four countries that allowed new member workers to move relatively freely across national boundaries upon accession.

“In fact, the number of Polish nationals coming to Germany in the year followed the EU accession fell back by 35 thousand comparing to pre-EU period.”

Nowadays, even with Germany chancellor Angela Merkel recently expressed her plans to facilitate immigration, Germany still has one of the EU tightest immigration rules for working permits. With the highest payroll taxes, strict labour policy and restriction of ?65,000 minimum wage for foreign employee a year there is a set of hurdles for local businesses to attract specialists from abroad.

Nearshore Outsourcing. Win-Win solution

Labour restrictions, higher payroll taxes and infrastructure costs as well as majority of Germans oppose to the idea of work immigration the prospects of much-needed engineers come from Eastern Europe seems to be unrealistic in the near future.

Meanwhile, outsourcing and, especially nearshoring proved to be a viable alternative to complement existing resources with highly-qualified yet less expensive workforce. Most of Eastern European countries boast of strong education system and highly efficient school system which adds thousands of skilled labor every year. In countries like Ukraine there are 30.000 technology graduates each year and established engineering and science base allowing to accommodate needs of modern technologically enabled business and engineering.

Indeed, there is still some cost difference between nearshoring to Eastern Europe and offshoring to India, but many experts agree that overall value for German, Dutch, French and other West European countries is higher. Being closely integrated with the EU those Eastern European who has not yet joined the EU import a large variety of goods and services from Western Europe.

In addition to high economic growth, Eastern Europe represents vast consumer market attracting Western European businesses to enter the region. Through the partnership with local providers companies not only gain access to less expensive and developed labor market and skills, but also enhance local market knowledge and expertise.

Thereby, nearshoring to Eastern Europe is more than just sending work abroad – it’s actually a two-way game. With its closeness and cultural advantages nearshoring opens up perfect possibilities for various outsourcing models and approaches, from multi-sourcing to captive centers, for companies to own the physical operations, and staff employed by a third-party supplier. Offering the best of two worlds nearhsoring allows client to keep strategic control while supplier is better equipped to attract, develop and retain local talent.