German-Speaking Markets: The New Scandinavia for Estonia’s Wood Processing Industry?

Estonia’s wood processing industry is a vital component of the country's economy, contributing significantly to employment, regional development, and export revenues. A recent socioeconomic impact analysis conducted by Ernst & Young on behalf of the Estonian Forestry and Wood Industries Association provides detailed insights into the sector's current state and its contributions. Regarding the sector’s future potential, Birgit Linnamäe’s PhD research offers insights into how to enter the value chains of German-speaking countries and beyond.

Key findings from the Ernst & Young report cover economic, regional, and strategic perspectives. This article discusses these in combination with the internationalization of value chains, the utilization of smart technology integration, and the role of alliances, as areas of academic research at the Estonian Business School.

Economic Contribution and Employment

The wood processing sector in Estonia comprises approximately 3,900 companies, with half engaged in forestry. In 2021, these companies represented 3% of all active businesses in Estonia. The sector directly employed 29,183 people, accounting for 6.3% of the national workforce, highlighting its role as a major employer, especially outside urban centers. In terms of economic output, the sector generated €2.8 billion in gross value added (GVA) in 2021, which is about 14.7% of the total GVA in Estonia. This includes direct, indirect, and induced impacts. The mechanical wood processing industry contributes the largest share of this GVA, indicating its pivotal role within the sector.

Regional Impact

The wood processing industry is crucial for rural areas in Estonia. In regions like Central and Southern Estonia, the sector contributed 24.4% and 27.5%, respectively, to the regional GVA. In terms of employment, the sector supports a significant portion of jobs in these rural regions, further emphasizing its importance in regional economic stability.

Sustainability and Efficiency

The sector has shown increasing efficiency and technological advancement. Despite a reduction in logging volumes, the value added by wood processing has increased, showcasing improved productivity and sustainable practices. For instance, processing 1 million cubic meters of wood now generates €264.7 million in GVA, a 37% increase from 2019, reflecting the sector’s enhanced efficiency and value creation capabilities.

Strategic Importance

Estonia’s wood processing industry plays a crucial role in international trade, with a significant portion of exports historically going to Scandinavia. However, this focus may be changing as the DACH region (Germany, Austria, Switzerland), Benelux, and South Korea—a long-known partner in the export of profiled value-added timber—are now emerging as partial substitutes for the Scandinavian markets. Successful entry into these new market value chains, exemplified by some Estonian firms, underscores the sector’s competitiveness and strategic importance. The sector's ability to adapt and meet the operational standards of international markets, especially through strategic alliances and smart technology integration, is vital for enhancing its competitive stance globally.

Technological Integration

The integration of smart technologies is enhancing efficiency and innovation in the sector. Digital process management in manufacturing, AI, and digitized cross-border operations, such as purchasing, are crucial areas where the industry is making significant strides. These advancements not only improve productivity but also facilitate better integration into global value chains, making Estonian firms more competitive internationally and providing new sourcing opportunities for international firms.

Future Outlook

The Ernst & Young report underscores the potential for further growth and development within Estonia’s wood processing industry. Key areas for future focus include building strategic alliances both domestically and internationally to enhance market reach and competitive advantage. The resourcefulness of alliances in the context of soft and hard networks may be under-utilized among Estonian companies. Continued investment in smart technologies is necessary to drive efficiency and innovation. Maintaining a balance between economic growth and sustainable resource management is crucial to ensure long-term viability.

In sum, Estonia’s wood processing industry is a cornerstone of the national economy with significant contributions to employment, regional development, and international trade. The sector’s ongoing evolution into international value chains, driven by technological advancements and strategic market integration, promises a competitive and sustainable future, realizing previously underutilized potential. It is equally important that companies in the new markets, including German-speaking ones, are already opening up with curiosity to explore ways of value chain collaboration.

Birgit Linnamäe is a PhD researcher at Estonian Business School and a strategy & growth consultantSocial media photo by AI 

The full report of E&Y Baltic can be viewed here:

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