By Drew Wilson Courtesy of EE Times Europe (08/07/2008 5:26 AM EST)

BERLIN — Western firms still see Central and Eastern Europe as a choice site for factories despite rising domestic currencies and a slowdown in key export markets, according to a report from Reuters.

Despite a sharp jump in costs in Poland, Hungary, the Czech Republic and Slovakia, the region is still much cheaper than most of Western Europe when it comes to making goods.

Strong local currencies have cushioned the impact of higher commodity prices and Western European wages are rising more quickly than in the past due to accelerating inflation, the report said.

The report mentions Daimler's pledge in June to invest 800M euros ($1.2B) in a car factory in Hungary, the country's largest investment ever.

The proportion of manufacturing firms wanting to invest abroad rose to 35 percent in 2008 from 29 percent in 2007. Of those, 43 percent were eyeing Central and Eastern Europe, up from 36 percent last year, according to a German Chamber of Industry and Commerce (DIHK) survey quoted in the report.

"Average hourly labor costs in CEE are still less than a third of those in Germany, while fast transport within the tariff-free EU means savings on fuel and other costs compared with cheaper production sites in Asia," the report said.

J.P. Morgan estimates unit labor cost growth will exceed 20% in the Czech Republic and Poland this year. But even then, the overall hourly rate in manufacturing will stay much cheaper than Germany's, which was 33 euros last year.

"Labor costs remain low in comparison with Western Europe's," JP Morgan analyst Miroslav Plojhar wrote in a report.

"We estimate that labor costs (i.e. wages plus related expenses) rose to 30-35% of the level in Germany this year, from 23-27% two years ago."

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