On 1 May 2004 ten countries joined the European Union, bringing its total number of member states to 25. For the food industry, this expansion has brought a wealth of opportunity, not least the potential for increased cross-border trade, as Alan Osborn reports.
In due course the food manufacturing industries of all 25 member countries should profit from the enlargement of the European Union (EU) which took place on 1 May this year but the gains could take quite a long time to materialise in the ten new member states.
Talking to just-food.com food industry experts in the EU institutions, the main food associations and food trade consultants suggest that food processing in the new member countries still falls a long way short of the competitiveness and sophistication taken for granted in the west. A lot of money, and not a little imagination, will be needed to correct that. On the other side of the coin it will be a lot easier for the big western companies to expand in central and eastern Europe, though one would assume they have seen the enlargement coming for some years now.
One of the most striking examples is the control taken by the French company Danone of markets in Poland where it accounts for one third of yoghurt sales and enjoys market leadership in bottled water and biscuits. This did not happen overnight – as the company says, it “wins by being first past the post” – but grew out of the company taking an interest 15 years ago when Poland was still in the grip of communist rule.
Brian Gardner, agricultural policy consultant and expert adviser to Britain’s House of Lords select committees, notes that “so far, the trade has been nearly all one way – from the original 15 to the new ten – principally because of EU health and safety regulations, which have prevented exports from the new countries”.
The ability of the new members to compete should not be under-estimated, he says, “but they’ve got to go through a number of hurdles before they do so”. New plants are being set up which generally meet EU standards, “but it takes time”.
It is worth mentioning here that food safety was one of the stickiest problems in the accession negotiations. Food processing in the EU-15 has been the subject of rigorous legislation in recent years and it would clearly have been unfair to let the newcomers sell food in the enlarged EU without imposing the same on them. But the newcomers start from a long way behind and they have been given some help, both financially and in terms of a “breathing space”.
Meeting EU standards
Under the terms of accession, just over 1,000 food processing establishments (out of 12,000 in all) in the Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia have been granted transition periods from three months to one year to allow them to bring their plants up to EU standards (Cyprus and Estonia have not needed the extra time). During this time they will be allowed to sell in their home market but not in other EU countries.
“But they’ve still got to compete, they’ve got to be up to the same standard as the processors in the west to have a market, never mind what the regulations say,” says Gardner. At the moment the balance of trade in processed food is very much in favour of the EU-15. “Gradually that will change because a great deal of domestic and foreign capital is being invested in the food industry in the new member states. They will be able to compete because their costs are lower – at the moment anyway,” he said.
The most obvious areas where the incoming countries will challenge successfully are in processed fruit and vegetables “because they always did have a good trade in selling processed fruit and vegetables from east to west, even in communist days,” added Gardner. “It’s an area where they do have considerable expertise but it’s also possible in meat – in poultry meat and pigmeat and pigmeat products.”
Dairy products are not so much in contention, argues Gardner, because milk production in the EU-ten is severely limited by quotas under the entry terms. “They can only produce effectively up to domestic consumption so they’re going to have a job to expand their markets,” he commented.
Opportunities and challenges
Paul Bowden, head of products and food practice at the leading legal firm of Freshfields Bruckhaus Deringer, says there is “no question that EU enlargement poses both significant opportunities and challenges in the new accession states.”
“We’re talking about countries with very substantial primary agricultural activity and really very considerable export potential for enlarged exports into the EU, ” he says. In terms of economic opportunities, “food is probably one of the half dozen key questions, especially for Poland and Hungary.”
But one of the challenges will be in the costs of actually meeting standards and regulatory compliance. In the economies of Hungary and Poland for instance, “those aspects of the food industry from primary to manufacturing to distribution have been built up over a period during which of course there was an entirely different economic model.”
“You need capital expenditure to achieve the standards of the enlarged EU because standards are not just management systems and education, standards are also plant and equipment and it takes money to buy that,” Bowden said, adding that he believes that the capital will be there.
“I think there are some significant opportunities for western investment. But part of the difficulty is putting together an effective business case to justify the scale of investment that’s going to be required. It’s going to have to be run governmentally and there’s an education programme in selling the process that governments are going to have to engage in to attract that investment,” he told just-food.com.
A spokesman for the European Commission’s competition office in Brussels said that food processing in the new EU states was largely in the hands of small under-capitalised firms and there had been little consolidation so far. Mergers were likely but would be small-scale to begin with and would be assessed by national authorities rather than the Commission itself. However all players would be subject to the same rules on subsidies. No cases under either heading had come to the attention of Brussels so far. In short there seems little to stop investment in the food processing industries in the new member states on antitrust grounds though the sheer scale of capital required seems likely to make it a fairly long drawn-out process.