A new national industrial strategy incentivises digital transformation, with expectations that 'smart' factories making value-added goods will boost productivity and competitiveness.
Cyprus is launching an ambitious strategic plan to revolutionise its industrial sector that includes further incentives to attract innovative manufacturers seeking an ideally-located base for easy access to the world’s biggest markets. For producers in the Middle East, Africa and Asia, the island is the closest springboard to the European Union’s 500 million consumers, with its membership of the bloc and eurozone offering many benefits.
As the EU’s most easterly member, Cyprus is equally attractive to manufacturers in Europe and beyond, providing an affordable base with high connectivity to supply existing and emerging markets in the East. The island has one of the EU’s lowest corporate tax rates at 12.5%, double taxation treaties with 64 countries across the globe, a highly-educated workforce and a sophisticated transport and logistics infrastructure.
New Strategy for Growth and FDI
With tourism, professional services and construction booming, the government is now determined to breathe new life into manufacturing and industry. Incentives are already available for investments in fixed assets and industrial equipment, while innovation projects in the industry are supported by state funding to promote results-oriented research. Exemplifying the sector’s significant potential for growth and foreign investment, a South African corporation acquired Remedica Ltd, a leading Cypriot pharmaceuticals producer, for €260 million in 2016. South Africa’s Ascendis Health Ltd wanted a strategic platform within the EU for ‘expansion and growth in the generic pharmaceutical industry in both European and emerging markets’. The alliance gives Remedica the funding to embark on a new phase of development and the benefit of synergies with Ascendis.
In concert with the private sector’s representative bodies, the Ministry of Energy, Commerce, Industry and Tourism has now designed an ‘integrated national industrial strategy’. The aim is for the sector to account for 15% of GDP by 2030, doubling its current contribution. Echoing EU industrial policies that highlight digital transformation, the strategy envisages so-called smart factories increasingly powered by renewable energy churning out high value-added and ‘green’ products, a formula already embraced by Cyprus’ leading manufacturers to compete globally. Access to finance and export markets will be improved, along with new tax and other incentives to attract foreign direct investment in high-tech and knowledge-based industries.
Incentives already in place include a fast-track visa programme for start-up entrepreneurs from outside the EU to establish ventures with high growth potential. The expected establishment this year of an under-ministry for development will accelerate procedures for foreign investment and, addressing a perennial complaint by Cypriot manufacturers, cut government bureaucracy.
Cyprus embraced industrial development in the decade after independence in 1960, transforming the largely agricultural country into one where manufacturing accounted for 20% of GDP by the 1980s. An early success came in 1967 when a Cypriot company, Photos Photiades Breweries, secured a licence to brew Carlsberg, which is now done at a fully-automated brewery in Nicosia. It was the first time the Danish brewing giant allowed its famous beer to be produced outside Denmark. Further transformation produced an increasingly services-oriented economy. The once flourishing but protected textile, clothing and footwear industries faded after EU membership in 2004, giving rise to the manufacture of medium and high-technology products and semi-customised small-batch products.
The main growth areas have been in the ICT sector, manufacturing parts, instruments and electronics, as well as consumer products such as cosmetics. Production of pharmaceuticals, cement and fabricated metal items – all well-established export industries – is performing strongly. Record tourist arrivals are galvanising the food and beverages industry, which accounts for 32% of total manufacturing production. Halloumi cheese is a stellar export performer. Industrial production contracted sharply during the recent recession, but the traditionally resilient sector recovered faster than the general economy, with production increasing 8.1% year on year in October 2017. Some 30,000 people – about 9% of the workforce – are employed in manufacturing and industry. The main destination for Cypriot manufactured exports is the European Union, which constitutes over 50% of the market, while exports to the Middle East make up around 15%.
Research and Innovation Drive SMEs
The clear majority of Cyprus’ over 5,300 manufacturers are small and medium-sized enterprises (SMEs), mostly family-owned and run. is makes the sector flexible and open to innovation, offsetting difficulties with economies of scale which will also be addressed by plans for clustering and improving the industrial infrastructure. The new national industrial strategy will encourage more private investment in research and innovation and capitalise on robust spending in this area by Cyprus’ public universities by improving synergies between academia and industry.
Cyprus also ranks first per capita among EU members competing for funds from Europe’s largest research and innovation programme, Horizon 2020, securing almost €90 million so far to finance some 250 projects by academic and research centres and companies. Acquiring such funds has helped innovative Cypriot SMEs to become notable successes. One of these is Vitatrace Nutrition Ltd (VTN), which employs some 40 people at its Nicosia offices and factory, producing vitamin pre-mixes and pharmaceuticals for animal nutrition for export, particularly to the Middle East and Europe. Founded in 1978 and owned and operated by two families, it has won funding in cooperation with several British universities for the EU’s largest-ever research programme on animal nutrition.
Quality and affordability are the hallmarks of Cypriot-made pharmaceuticals, which are sold in over 100 countries across the globe. The industry is led by Medochemie Ltd and Remedica, which invest heavily in research and innovation and spend heavily on continuously upskilling their workforces. Cyprus’ ideal location enables these two award-winning companies in Limassol to distribute their products to markets in the region and far beyond. Their products bear ‘made in the EU’ labels – a badge of quality that assures consumers, whether in Australia or Austria, that what they are buying has met rigorous testing standards.
Medochemie Ltd, founded in 1976, invests up to 7% of its turnover in research and innovation while 62% of the 720 employees at its nine production plants in Cyprus are university graduates. The company, which develops, manufactures and distributes mostly generic pharmaceuticals, has a further 836 employees at its four facilities abroad.
Another major manufacturer and one of Cyprus’ biggest exporters is Vassiliko Cement Works, which boasts Europe’s largest single clinker production line and operates its own eponymous port. Founded in 1963, the company was floated on the Cyprus Stock Exchange (CSE) in 1996. A decade later, to satisfy growing demand, Vassiliko revamped its whole plant with an initial investment of €180 million. The company has an annual capacity of two million tons of cement, more than twice the island’s domestic needs. Abroad, its customers are mostly Cyprus’ neighbours in the eastern Mediterranean. Vassiliko has a variety of programmes to keep training and upgrading the skills of its 340-strong workforce, and a ‘talent academy’ that trains unemployed graduates for six months to a year, some of whom enter the workforce when vacancies arise.
A 4,500-year-old history gives copper mining in Cyprus a romantic allure, although its Bronze Age inhabitants, smart as they were at metallurgy, would have marvelled at today’s production methods. Heavy investment in research, innovation and the latest mining technology has enabled Hellenic Copper Mines (HCM) to commercially exploit ores depleted by millennia of extraction. HCM set a European first in 1996 by introducing hydrometallurgy, a cost-effective and environmentally friendly way of exploiting low-grade ores, and it is a pioneer in bio-leaching. The high price of gold has also made it worthwhile for HCM to begin processing ores bearing the precious metal that it amassed while mining copper and to extract new ones, along with silver-bearing ores. HCM employs 90 people, nearly a third of them university graduates, and some 50 contractors daily, providing welcome employment in the remote Skouriotisa area in north-western Cyprus, which is home to ancient mines. HCM, which exports all its production to European countries, is currently the only operating mining company in Cyprus, although some exploration companies are active because the island remains rich in low-grade mineral wealth. The mining of metals accounts for about 5% of Cyprus’ industrial exports, a figure which would be far higher if industrial minerals and cement were included.
Given the island’s small domestic market, the government is encouraging manufacturers to be more international in outlook, so they can grow. A good role model is Elysee, an award-winning Nicosia-based company with 182 employees that designs and develops irrigation and piping systems that are sold in 65 countries from Europe and the Middle East to South Africa, Japan and New Zealand.
Equally ambitious and innovative is Limassol-based Muskita Aluminium Industries Ltd, which designs and manufactures aluminium products and systems that are used across the globe in sectors ranging from aviation to agriculture. With 350 highly trained staff, it holds many design patents and pioneered the use of robotics in Cypriot industry, both in its warehousing and production, and prides itself on fostering green initiatives.
Opportunities and Challenges
The new national industrial strategy is designed to maximise the opportunities and address the challenges inherent in a sector where most enterprises are SMEs largely dependent on imported raw materials from distant markets. A major strength of the strategy is that it was formulated after lengthy consultations between the government and stakeholders, primarily the private sector’s two main representative and lobbying bodies, the Cyprus Chamber of Commerce and Industry (CCCI) and the Cyprus Employers and Industrialists Federation (OEB). All sides are pulling together to make the strategy work. Most SMEs are entrepreneurial and have the advantage of being agile, flexible and innovative, but face difficulty in keeping the cost of imported raw materials down by buying in bulk. Now plans for clustering units of similar producers that can join in bulk orders will reduce costs.
Access to financing has been a concern for small manufacturers because financial institutions have set stricter lending conditions in the wake of the 2013 bailout. Credit conditions are easing, but the financing environment remains difficult for SMEs which have limited collateral available and many companies also remain overindebted. In a bid to support SMEs, Cyprus is offering opportunities to make use of tax breaks for new export-oriented companies, access to training grants and so loans, as well as funding opportunities for small start-up companies. State-guaranteed loans from the European Investment Bank (EIB) are also enabling banks to extend credit to SMEs, with more than €260 million disbursed in 2017. For the same purpose, Hellenic Bank and the Cyprus Cooperative Bank signed deals with the EIB for €65 million at the beginning of 2018. The strategy will incentivise greater use and development of renewable energy resources (RES), addressing a common complaint by manufacturers about the high cost of electricity. Installing new, clean energy-powered heating and cooling systems in factories will be a priority. With the government committed to meeting 13% of Cyprus’ energy needs with RES by 2020, the clean energy industry is ripe for foreign investment. The island aims to become a hub for solar innovation, technology transfer and start-ups. Photovoltaic parks are a growth area ready for more investment.
The exploitation of recently discovered natural gas reserves in coming years will also facilitate growth in the manufacturing sector, with prospects of using the island’s own energy supply to lower production costs in the future. On another front, the new national industrial strategy has plans to boost competitiveness and productivity by ensuring that the labour force is continuously trained to capitalise on rapidly evolving technologies. This, together with further investment in modern technology, will enable manufacturers who often complain about labour costs – albeit much lower than in northern Europe – to keep their advantage over competition from lower-wage producers in eastern Europe.
Building on a Robust Industrial Base
Cyprus’ manufacturing and industrial sector is now set to realise its true potential. SMEs are increasingly following the pioneering lead of several large, innovative and export-oriented companies, and a new national strategy incentivises smart specialisation. The other cornerstones of a robust industrial base have long been in place. The island has a deep pool of well-educated human capital, a sophisticated infrastructure, and a strategic location with high connectivity that makes it the ideal springboard for European manufacturers keen to expand into the markets of the East and vice versa. It will take two to three years to see concrete results from the new industrial strategy – but like concrete they will be here to stay.
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