Questions surround EU relocations

Millions of euros in EU subsidies have been allocated to companies relocating factories from western to eastern Europe despite specific rules designed to prevent taxpayer subsidies from going to corporations moving plants in search of cheaper labour.

The relocation of factories from wealthier members of the 27-nation European Union to poorer members, mostly in eastern Europe, has long been a sore point for labour unions. But it has become an even greater one amid the economic downturn and the rising unemployment rates that have come with it.

EU rules specifically forbid grants from its structural funds from going to subsidise the relocation of businesses. But a joint investigation by the Financial Times and the non-profit Bureau for Investigative Journalism found companies ranging from British tea maker Twinings to automotive company Valeo were at the very least receiving EU subsidies to help with the establishment of new factories, the extension of existing ones and the training of workers in their new homes.

While a direct link between the relocation of companies and the use of structural funds in destination countries is not always clear-cut, it does raise questions about whether the EU’s oversight of the use of grants is strong enough.

The European Commission relies on regional authorities to avoid funding relocations. But some are sceptical about whether the practice is effective. “It is not in their interest for countries such as Poland and Hungary to avoid it – they want to attract investments,” says Markus Pieper, a German member of the European parliament who fought to include rules regarding relocation in EU law. “If the automotive industry, for example goes to eastern Europe, the EU doesn’t have to deliver the cream on top.”

In order to find the companies, the Financial Times used a database of structural funds beneficiaries across the 27-member EU, which we built for this investigation in conjunction with the Bureau of Investigative Journalism. This was cross-referenced with news reports and data provided by Eurofound, an organisation that monitors company restructuring.

In the UK, the plan by Twinings, the tea company owned by Associated British Foods, to make nearly 400 workers redundant within the next year has caused outrage as it became apparent that it had been granted subsidies of about €12m through the European regional development fund in Poland, to where it is moving some of the work.

“To me, this Twinings affair has highlighted the need for independent parliamentary scrutiny of this issue”, says Keith Taylor, MEP for the UK’s south-east region.

Twinings denies the grant has anything to do with the relocation of the factory. It says the grant will be used for investment in innovative technologies for blending and packing premium quality tea.

The European Commission says it takes such cases seriously. Johannes Hahn, commissioner for regional policy, has sought assurances from Poland that subsidies are not used to help the Twinings relocation.

In Germany, French automotive manufacturer Valeo, has caused anger after it emerged that the company used EU funding to facilitate the consolidation of its operations. Nearly 300 employees lost their jobs after the company transferred their work from Neuses, Germany, to Chrzanów in Poland, where Valeo has been allocated about €5m ($6.6m) in public funding for a project – about 30 per cent of its total cost – through the European regional development fund. Valeo also received an extra €6m in public funding for two other projects in Poland.

Valeo said it had closed the Neuses site in 2009 as “as it was not profitable and had no critical size”. It said the EU funds received by its Polish subsidiary were related to research and development projects rather than the transfer of production.

Fears over EU funding of relocations sometimes materialise before any move happens.

Hennes & Mauritz, the Swedish fashion retailer, was granted up to €16.3m in public funds to support an €59m investment in a new logistics facility in Belgium, with 35 per cent of the cash coming from the EU and the rest from Belgian authorities.

The company, which ranks number three among the world’s biggest fashion retailers after Gap of the US and Inditex of Spain, also received a grant of up to €10.4m for a €35m investment in a Polish logistics facility, with 85 per cent of the money coming from the EU and the rest from local funds.

H&M, which generated net profits of SKr16.4bn ($2.3bn, €1.5bn) last year, says the investments involved fresh capacity as part of the company’s aggressive expansion across Europe. “The funding played a part in our decision to invest in Poland and Belgium but was not the only reason for investing in these locations,” a spokesman said.

But labour unions have voiced fear that the EU-backed investment in Belgium has threatened the future of an existing H&M warehouse in Le Bourget, France, with claims that work is being shifted away from the French facility. The company denies the allegation. It says the sites in France and Belgium play different roles in its supply chain. “We are not planning to close down our facility in France.”

Nokia Siemens Networks has cut hundreds of job across Europe over the past year – many of them in their high-cost home countries: Finland and Germany. Yet, the world’s second-largest mobile infrastructure company has received millions of euros in EU funds to subsidise investments in two of Europe’s lower-cost countries.

NSN, a joint-venture between Nokia, the Finnish mobile phone maker, and Siemens, the German engineering group, won €5.5m in grants to support expansion of its research and development operations in Poland and €918,000 for a network service facility in Portugal.

The company insists that neither project involved a direct replacement of jobs lost in other parts of the EU. The Portuguese site, which created 180 jobs, was a new facility providing support to mobile phone networks across Europe. The Polish investment, involving 400 fresh jobs, built on an existing R&D presence in the country.

However, the projects are part of a broader rebalancing of NSN’s workforce towards lower-cost countries – including some outside the EU – as the loss-making company battles against rising low-cost competition from China.

One of the arguments for giving structural funds to large companies could be that they help keep investment in the EU that might otherwise be lost to India, China or elsewhere.

But NSN indicated that EU support, while welcome, was rarely the decisive issue. “Access to structural funds is a positive factor for development in Europe when compared to potential sites elsewhere, but it is far from the most influential factor,” said an NSN spokesman.

Company relocations have also caused political division between regions within EU member states. Such was the case when Japanese car accessory manufacturer Takata Petri decided to close its factory in Fürth, Bavaria and instead invest €13m in a lower-cost eastern German operation in Freiberg, Sachsen.

The company was awarded two grants worth €7.3m through the EU’s structural funds scheme to extend the Freiberg factory, which produces gas generators for use in airbags. “Subsidies did not play a role at all in our decision to relocate,” says Jakob Lux, the company’s spokesman. But, he adds, “if you get subsidies, you’re not going to say no to them”.

The company is also transferring further work from western Germany to Romania, where the company has also applied for EU funds. According to a list of applicants provided by the Romanian ministry of economy and finance, the company has applied for more than €650,00 in structural funds there. “The competition in the automotive industry is bone-hard,” says Mr Lux. “Morally you can talk about it, but if you want to stay in business then you have to accept the rules of the market.”