Mattias Loov sought to cut costs for his clients at Stockholm-based H1 Communication AB after the global economic crisis hit the Nordic region. He found a solution 760 kilometers (475 miles) across the Baltic Sea.
H1 now has about 10 percent of its staff in Estonia, where the hourly labor cost is a fifth of Sweden’s. Loov is looking to add more workers to the call center and technical-support hub in the capital, Tallinn.
“Everyone’s looking after their overheads and trying to provide good services in a cost-effective way,” Loov, H1’s chief executive, said in a phone interview. He sees outsourcing to Baltic region, which also includes Latvia and Lithuania, as an emerging trend.
Searching for ways to boost profit margins as Europe’s debt crisis weighs on sales growth, companies have been lured to the Baltic countries by lower wages, geographical proximity and language skills. Unemployment in the three former Soviet nations remains more than double pre-crisis rates and the jobs are deterring some workers from seeking opportunities in countries such as Ireland and Finland.
After enduring the world’s deepest recessions following Lehman Brothers Inc.’s collapse, the Baltic region has boosted exports of non-transportation services by about 20 percent since 2009 as foreign companies set up back offices.
Among non-Nordic arrivals, Western Union Co. (WU) set up a regional operations center with 460 jobs in the Lithuanian capital, Vilnius, in 2011, while Samsung Electronics Co Ltd (005930) created a call center in Latvia’s capital, Riga, after Prime Minister Valdis Dombrovskis visited South Korea last June.
At 5.5 euros ($7.16) an hour, Lithuanian labor costs were the second-lowest in Europe last year behind Bulgaria, according to Eurostat. That’s eight times less than in Norway, Europe’s most expensive at 44.2 euros. Finnish rates were the lowest among the Nordic nations at 29.7 euros, while Estonia’s were the highest in the Baltic region at 8.1 euros.
Employment costs, excluding expenses related to running a remote office, such as business travel, can be from 50 percent to several times lower in Lithuania than in Scandinavia, said Donatas Ozelis, who manages an information-technology center in Vilnius for Danish engineering consultants Cowi A/S.
On the Doorstep
In addition, workers in the region of 6.6 million people often speak Nordic languages, hold strikes less often than those in other European nations and, while separated by the Baltic Sea, are close enough to integrate, according to Ivars Bergmanis, head of institutional markets at Estonia’s LHV Pank.
Baltic nations offer “highly skilled labor available on more flexible terms right on one’s doorstep,” he said by e-mail from Tallinn.
The yield on Lithuania’s 2022 dollar bond rose 0.02 percentage point today to 5.03 percent, the highest since May 2. The yield on Latvia’s 2021 dollar bond fell 0.07 percentage point to 5.14 percent. Estonia doesn’t have any outstanding bonds.
Estonia’s benchmark OMX stock index has gained 16.6 percent this year, while Lithuania’s is up 13.1 percent and Latvia’s has advanced 4 percent. That compares with a 3.9 percent decline for the Euro Stoxx 50.
Global Services Center
New Jersey-based Cytec Industries Inc. (CYT), the world’s second-biggest maker of carbon-fiber composites for airplanes, initially shifted some financial and human resources functions to Latvia in 2010. Now it employs 130 people in Riga, having found a university-educated workforce to handle accounts payable, financial analysis and procurement.
“We were looking for people with multilanguage skills, which we found readily available in Latvia,” said Cytec’s Chief Financial Officer David Drillock. “What started out as a shared-services center is quickly becoming a global business services center.”
The Baltic nations re-calibrated their economies after a debt-fueled property bubble burst, inflows of credit stopped and export markets closed, erasing as much as a fifth of gross domestic product. Exports now generate 75 percent of GDP in Estonia, 78 percent in Lithuania and 55 percent in Latvia.
Fastest EU Growth
Estonia’s economy outpaced the rest of the European Union last year, expanding 7.6 percent, while Lithuania’s grew 5.9 percent and Latvia’s advanced 5.4 percent. Still, jobless rates top 10 percent across the region, where governments cut spending and raised taxes by as much as 15 percent of economic output in 2009-2010.
That’s pushed people to search for work elsewhere amid the biggest wave of emigration since Soviet troops left 20 years ago.
At 23.7 people per 1,000, Lithuania’s emigration rate is the EU’s highest, according to Eurostat. About 80,000 Latvians departed in 2009 and 2010, according to estimates by Mihails Hazans, an economist at the University of Latvia. More than 14,350 Estonians sought new lives abroad from 2008 to 2010, statistics office data show.
Eighty-two percent of those who departed Lithuania in 2011 were unemployed for a year or more before leaving, according to the statistics office.
Stopping Workers Leaving
“It’s quite important for us to get jobs to get people to stay here,” Latvian Premier Dombrovskis said in a March 21 interview. “The fundamental factor is the economy.”
While the lure of employment by foreign companies may prevent qualified workers from leaving, more must be done to improve the IT and foreign-language capabilities of those who are less qualified, according to Rokas Bancevicius, a senior DnB Bank analyst in Vilnius.
“The majority of the unemployed in the Baltic states is unqualified,” Bancevicius said by e-mail. “It remains a strong responsibility for the governments to promote learning new skills.”
In the meantime, opportunities at foreign employers are continuing to swell.
Barclays Plc (BARC), which opened an IT unit in Vilnius in 2010, now employs 700 people in Lithuania, exceeding an initial plan to hire 250 people within three years.
Konecranes Oyj (KCR1V), the world’s biggest supplier of industrial cranes, will set up a financial-services center in Estonia in the second half of 2012, Mikael Wegmuller, a spokesman for the company, said by e-mail. Nordea Bank AB (NDA), the largest Nordic lender, plans to expand its Tallinn call center, Jane-Liina Liiv, the bank’s spokeswoman in Estonia, said by e-mail.
Projects like these may persuade some workers to stay at home, according to Cowi’s Ozelis.
“I know for sure we’ve hired a few people who were seriously considering leaving the country to look for a job,” he said. “These are young people that couldn’t find such opportunities in Lithuania.”
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