Depending on whom you talk to, Eastern Europe is either a land of opportunity or one of exaggeration. A recent study by Holland International Distribution Council (HIDC) in conjunction with Buck Consultants, PricewaterhouseCoopers, and Ernst & Young, says that U.S. companies need to think about more than cheap labor before they rush into the region.

Next May, ten countries in Central and Eastern Europe are planning to join the EU: the Czech Republic; Estonia; Hungary; Latvia; Lithuania; Poland; Slovak Republic; Slovenia; Cyprus; and Malta. Meanwhile, Bulgaria and Romania have a target date of 2007 for becoming EU members.

Point: Eastern Europe isn't the next manufacturing nirvana

Rene Boerema, executive vice president with HIDC, says that while Scotland, Ireland, and Wales were the darling of foreign investors in the early and mid-1990s due to large amounts of cheap real estate and labor, he's now seeing a move toward Eastern Europe by companies who are seeking even cheaper labor. However, "while EU accession will add 80 million to the marketplace, the buying power will still be centered in Western Europe," he says.

Furthermore, Boerema says logistics costs could skyrocket, especially for inventory and transportation. He suggests that companies consider the following:

• Technology infrastructure. Eastern European countries are not currently suitably wired for broadband, which makes virtual inventory-a new and growing trend for logistics-impossible.

• Transportation infrastructure. Due to poor and unreliable transportation infrastructure, particularly roadways, in the majority of CEE (Central and Eastern Europe) countries, the combination of increased traffic coupled with slow administrative procedures at border crossings will cause additional delays and money.

• Access to customers. The majority of customers still reside in Western Europe, not CEE countries, therefore the time and costs associated with getting goods to the end consumer will greatly increase.

• Skilled labor. Necessary when conducting niche manufacturing or value added logistics-another rising trend.

Although Eastern Europe may attract companies for its cheap labor pool, Boerema says that sourcing and distribution must not be overlooked. "Sourcing is a major component of the manufacturing supply chain," he says. "And, a lot of sourcing still takes place elsewhere in the world-Asia and the U.S., for example." Moreover, the distribution of products is also a consideration. "Getting a truck over the border from Poland to German can sometimes take up to a day," he says, although, "that's likely to be reduced somewhat when Poland joins the EU next year."

Indeed, even Eastern Europe's cheap labor pool may be short-lived. "It may only take Eastern European countries two years to reach parity with the rest of Europe's labor rates. By contrast, companies enjoyed cheap labor in places like Ireland for three or four years." Boerema says companies are even getting discouraged with places like Hungary, which has experienced rapid increases in workers' wages in the past few quarters. "Many contract manufacturers are looking to Ukraine for cheap labor now," he says.

The best scenario for manufacturers, whose customers are in Western Europe, is to "source and manufacture your product in China, then use Western Europe as a distribution hub," Boerema advises. This formula is better than "sourcing in Asia, manufacturing in Eastern Europe, and using Western Europe as a distribution hub."

Customs clearance efficiencies are also going to be a problem, claims Boerema, especially for companies who use Eastern European countries as an entry point into the larger EU market. It makes more sense to clear customs in Western Europe, he says, so that the goods are in "free circulation" and move in and out of other European countries more quickly.

Another item that gives certain Western European countries an advantage is VAT deferment on imports. The Netherlands is one of a handful of countries that allow importers to pay the value added tax (VAT) on a periodic basis (usually monthly), rather than at time of import.

The companies that initially stand to benefit the most from new EU member countries in Eastern Europe are "Coca Cola and others who require production (and bottling) facilities inside that particular country," says Boerema, although he does acknowledge that Eastern Europeans will have more money to spend on consumer goods as their standard of living rises with EU accession.

Counterpoint: but there are still plenty of prospects

The downsides that are associated with doing business in newly emerging markets shouldn't overshadow other opportunities, say the experts. A number of sectors are poised for rapid expansion, including several types of technologies as well as transportation.

According to the U.S. Commerce Department's Central and Eastern Europe Business Information Center (CEEBIC), the need for more competitive and efficient means of production will create opportunities in the following areas:

• Manufacturing technology. Currently, many companies in CEE have a competitive advantage over their EU competitors because of their access to highly skilled, lower cost labor. However, with accession, labor costs are likely to rise over time and thus eliminate much of this advantage. Therefore, many managers are retooling their facilities in the belief that efficient, modern manufacturing will be key to retaining competitiveness. Some of the best prospects are general manufacturing technology; construction equipment; food processing machinery; heating and air-conditioning equipment; and power generation equipment.

• Information technology. There are many factors in CEE driving the demand for information technology. Two factors can, in part, be attributed to EU accession. First, companies must achieve technological parity with the EU to be competitive. Second, the governments of CEE have instituted policies to promote growth in domestic high-tech industries. Their goal is to promote economic growth and establish their countries as high-tech hubs that will service the European continent. The EU is striving to increase competition in this area and has adopted a legislative framework geared to encourage investment in information society applications, including e-commerce. The top export prospects include computer hardware; software; computer services; database design; network integration; and e-commerce.

• Financial services. As a prerequisite to accession, banking and financial services regulations must be harmonized with EU regulations and norms, particularly in the areas of transparency, standards, and sound financial systems. Consolidation of the financial services market is likely to impede the participation of small- and medium-sized U.S. companies. However, larger, well-established U.S. firms are expected to be major players in the market. American companies involved in the following will do well: banking and capital transactions; financial consulting; insurance; and credit card services.

• Environmental technology. CEE countries must introduce new, aggressive environmental policies to match those of the EU. To meet these new requirements, CEE needs environmental technologies to limit air, water, and industrial pollution, and to improve waste management. Europe as a whole is the U.S.'s largest export market for environmental technologies, thus, the U.S. is well poised to do business in CEE in the following sector-specific areas: air pollution; waste management; water pollution; industrial pollution; and nuclear safety and radiation protection.

• Health/Medical technology. As the population grows older, the need for more advanced medical treatment rises. For CEE, both improved access to and quality of healthcare is emphasized in the growing demand for improved tertiary-level equipment combined with increasing rural clinic networks. The U.S. is a world leader in medical technology and is likely to maintain its competitiveness especially in higher-end product areas.

• Transport. The transport sector is a major concern for the countries of CEE, as this sector girds development of the economy as a whole. The greatest challenges lie in the restructuring of rail lines and rolling stock, the expansion of cooperation among air carriers, and regulations on river and sea transport.

• Telecommunications. While cellular operations in CEE are largely similar to the EU's, much of the fixed-line industry in CEE is not, and requires adaptation to EU conditions. In general, the number of fixed-line telephone customers falls far below EU standards. There is great potential for U.S. investors to help CEE adapt this sector to match the EU's standards.

• Energy. As liberalization of the energy sector in the CEE countries occurs, as it must after accession, plentiful opportunities for U.S. companies will also open up. Power plants, combined heat-and-power plants, and gasworks must be adapted to EU standards, for example, in replacing coal with oil, and using natural sources of energy.