The manufacturing and industry sector in Cyprus is looking to the future with a strong focus on digital transformation and better access to export markets. With the support of government-backed initiatives and new tax incentives to attract foreign direct investment, the country is determined to create a more high-tech economy.
Cyprus has a new vision to transform manufacturing and industry and to bring this sector on par with its other star-performers like tourism and professional services. The goal is to develop more high-value-added and innovative products and services that will contribute to the competitiveness of Cyprus – and increase productivity by strengthening the industrial ecosystem and investing in sustainability, innovation, digitalisation, infrastructure and skills. This ambitious new strategy is set to better connect traditional industry and manufacturing with other sectors and to transform Cyprus into a more tech-driven economy.
The country has a solid foundation on which to build on as it already has many comparative advantages in place. The island has one of the EU’s lowest corporate tax rates at 12.5%, double taxation treaties with 65 countries across the globe, a highly educated workforce and a sophisticated transport and logistics infrastructure. Cyprus is also an attractive and affordable base for manufacturers in Europe and beyond, providing high connectivity to supply existing and emerging markets. As the EU and eurozone’s most eastern member, Cyprus’ geostrategic location provides a competitive edge for producers in the Middle East, Africa and Asia to access the European Union’s 500 million consumers.
A New Vision
The backbone of the new industrial revolution Cyprus is embarking on is the gradual implementation of a new National Industrial Strategy Policy for 2019-2030. Together with the private sector, the Ministry of Energy, Commerce and Industry (MECI) has finalised the new strategy, which highlights digital transformation and envisions so-called smart factories increasingly powered by renewable energy producing high value-added and ‘green’ products – a principle already embraced by Cyprus’ leading manufacturers to compete globally. A key objective is also to improve access to finance and key export markets. There are already incentives in place for investments in fixed assets and industrial equipment, while innovation projects in manufacturing are supported by state funding to promote results-oriented research.
Other incentives to boost the sector include a fast-track visa programme for start-up entrepreneurs from outside the EU to establish ventures with high growth potential, which will be in force until 2021. The establishment of the Deputy Ministry of Research, Innovation and Digital Policy, which has underlined the government’s recognition of research and innovation as a fundamental pillar of a new model for growth, will also help cut government bureaucracy and attract foreign direct investment in high-tech and knowledge-based industries.
Although Cyprus’ new long-term vision for the sector is full of promise, there is no doubt the coronavirus pandemic has taken its toll on the industry both in Cyprus and globally. The considerable repercussions of the crisis on normally top-performing sectors like tourism, where revenues have plummeted in 2020, has had a significant knock-on effect on other sectors such as manufacturing and industry.
The manufacturing sector marked a decline of 19.6% in May 2020 compared to May 2019 and compared to an annual reduction of 32.6% in April. The contribution to GDP from manufacturing in Cyprus decreased to €223.85 million in the second quarter of 2020 from €240.43 million in the first quarter of 2020. The contribution to GDP from manufacturing in Cyprus averaged €243.65 million from 1995 until 2020.
Cyprus’ Industrial Turnover Index fell by almost 20% in May 2020 compared to May 2019, affected by measures to curb the spread of the pandemic. However, the index marked a steady improvement as containment measures were gradually lifted.
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.
Industrial production contracted sharply following the 2013 banking crisis, but the traditionally resilient sector recovered faster than the general economy. Some 30,000 people – about 6% 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%.
SMEs Leading the Way
The clear majority of Cyprus’ over 5,000 manufacturers are small and medium-sized enterprises (SMEs), mostly family-owned and run. This 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 policy 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. 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.
Homegrown Success Stories
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 Ltd, which invest heavily in research and innovation and spend significantly on continuously upskilling their workforces.
A prime example of the sector’s significant potential for growth and foreign investment was the €260 million acquisition of Remedica by South Africa’s Ascendis Health Ltd in 2016. The South African corporation wanted a strategic platform within the EU for expansion and growth in the generic pharmaceutical industry in both European and emerging markets. The alliance has given Remedica the funding to embark on a new phase of development and the benefit of synergies with Ascendis.
Medochemie, founded in 1976, develops, manufactures and distributes mostly generic pharmaceuticals and invests up to 7% of its turnover in research and innovation. The company has 13 state-of-the-art manufacturing sites, of which nine are in Cyprus, one in the Netherlands and three in Vietnam. Its Cyprus factory can produce and pack 1.5 billion tablets and 300 million capsules per year. The company has expanded from its Cyprus base into promising markets across the world – to the Middle East and Africa, Far East and the Americas – and now operates in 107 countries. Cyprus’ ideal location enables these two award-winning companies 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 that what they are buying has met rigorous testing standards.
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. The company has an annual capacity of two million tons of cement, more than twice the island’s domestic needs. Its international 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. The company has embraced renewable energy sources as part of operations, which garnered it a ‘Gold Environmental Protector Award’ in 2019 and a special honorary best performance distinction, and the Global CemFuels ‘Outstanding Alternative Fuels Project’ award in 2020. The company also launched an 8 MWp photovoltaic park in 2020.
Cyprus has a 4,500-year-old history of copper mining, and today’s production methods are of the highest standard. Substantial 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 just under 100 people, nearly a third of them university graduates, and some 50 contractors daily, providing welcome employment in the rural Solea district and contributing to the rehabilitation of remote areas. HCM exports 100% of its production to European destinations and its copper is classified among the top copper metal producers worldwide in terms of its purity (99.999% cu). Although currently the only operating mining company in Cyprus, 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, manufacturers have adopted an international outlook to achieve growth. A good example of this is Elysée, an award-winning Nicosia-based company that designs and develops irrigation and piping systems that are sold in 65 countries from Europe and the Middle East to South Africa, Japan, Australia and New Zealand. Equally ambitious 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, the over 60-year old company was a forerunner in the European aluminium industry and 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. In 2019, the electricity-intensive business set up 6,750 panels with 2.5 MW in total, constituting the biggest roof solar power system in the country, which will meet almost a third of the company’s demand.
Today, Muskita is one of the most technologically advanced firms in its industry worldwide and the largest, most progressive factory of its kind in Cyprus. The company’s systems have been tested and certified to withstand the severe rain and snow of Northern Europe, the pounding cyclones of the Indian Ocean and the searing heat of the Middle East. Its products are used internationally, a testament to the cutting-edge technology, engineering, quality and skilled workforce that have been paramount to the company’s success.
Opportunities and Challenges
Access to financing has been a serious concern for small manufacturers because financial institutions have set stricter lending conditions in the wake of Cyprus’ 2013 bailout – and now with the challenges brought about with the coronavirus pandemic. Although the economic climate has improved substantially, the financing environment remains difficult for SMEs which have limited collateral available and many companies also remain indebted. 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 soft loans, as well as funding opportunities for small start-up companies.
Climate change remains a big issue and to address the common complaint by manufacturers about the high cost of electricity, the strategy will incentivise greater use and development of renewable energy resources (RES). Installing new, clean energy-powered heating and cooling systems in factories will be a priority. With the island’s aims to become a hub for solar innovation, technology transfer and start-ups, the clean energy industry is ripe for foreign investment. The future exploitation of significant natural gas reserves in Cyprus’ waters could also facilitate growth in the manufacturing sector, with prospects of using the island’s own energy supply to lower production costs in the future. The national strategy is undertaking a techno-economic study for industrial sustainable management of waste and assessing the capacity to generate electricity from better waste management in industrial zones. In addition, the study will examine the possibility of installing treatment plants for wastewater from food and wastewater industries. The results of the study will eventually create new grant schemes and other incentives to industries and SMEs.
The new industrial strategy policy 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 stakeholders are working 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.
On another front, the new strategy has plans to boost competitiveness and productivity by ensuring that the sector’s labour force is continuously trained to capitalise on rapidly evolving technologies. This, together with further investment in modern tech solutions, will enable manufacturers to keep their advantage over competition from lower-wage producers in Eastern Europe.
Cyprus SMEs are increasingly following the pioneering lead of several large, innovative and export-oriented companies, and with renewed support and incentives in place, Cyprus will certainly see a revolution in this sector in the coming years. The foundations are there to further strengthen and expand a strong industrial base in Cyprus, and the island has a deep pool of well-educated human capital and a sophisticated infrastructure to help tackle future challenges. In addition, its strategic location with good connectivity makes it the ideal springboard for European manufacturers keen to expand into the markets of the East and vice versa. It may take a few years to see concrete results from the new industrial strategy policy, but Cyprus’ manufacturing and industrial sector is determined to realise its true potential. The guiding vision is to create a robust, flexible and technologically advanced industry with services that will substantially contribute to the development of the overall Cypriot economy.
For more information, contact Cyprus' investment promotion agency, Invest Cyprus.
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