Processing industry

The most important branch among processing industries in Estonia is mechanical industry (about 25% of manufacturing production); timber and paper industry are next in importance (20%; see Forestry), then the food industry (15%; see Agriculture), the chemical industry (about 10%), the metal industry (13%) and light industry (less than 5%). There have been rapid changes in manufacturing: a little more than ten years ago, the timber and paper industries were the leading sectors. For more than ten years, the mechanical and metal industries have seen extensive growth. At the same time, light industry is producing less and less. The electronics industry has increased eightfold in a couple of years. The labor force is becoming more expensive, but increased skills and investments are some of the reasons for the changes.

Food industry
Food industry that has undergone huge changes during the recent years, offers quite varied products. Estonians love locally produced food, considering it to be purer, of a higher quality and more tasty. For instance, in the early 1990s the majority of the ice-cream on the market was imported as virtually no ice-cream was produced in Estonia, but presently the share of imported product has fallen to 16%. Such change has been fostered by production methods that have quickly become more modern and more varied. Because of bargain prices and the economic crisis, in the last couple of years many import products have acquired a better position in the Estonian market. Many manufacturers sell their products in different countries of the European Union. There is heavy competition between Estonian, Latvian and Lithuanian manufacturers and producers, especially in milk production and general industry.

Consumer preference for domestic and imported products in shops*   

Mainly domestic products
Mainly imported
Over 80%
Potatoes, sausage, ham, yoghurt, cheese
 
Over 70%
Mayonnaise, flour, groats, poultry, ice-cream
Fresh fruit, pasta 
Over 50%

Cookies, cakes, fresh vegetables, jam, cooking oil, juice, beer

Vodka, sweets, chocolate, fish products

*Vegetables sold on markets are predominantly domestically grown

Estonian milk and meat industries are made up of a large number of very different enterprises — bigger and smaller. Some enterprises belong to commercial associations, but private ownership is most widespread. Estonians' favourite sweets are made by Kalev, a company whose predecessor was founded in 1921, but where recipes dating even earlier are used (there is a legend saying that marzipan was first made in Tallinn). The larger producers of beer are Saku near Tallinn and A’le Coq in Tartu — companies with traditions more than a hundred years long.

Light industry
In the 1990s the majority of Estonian sewing and textile enterprises worked for foreign companies, providing cheap labour for those through subcontracting. Experience and skills gradually accumulated and today the situation has radically changed. Estonian companies have subcontractors in Ukraine, Belarus, Russia and China. Estonia's trade-marks have proved successful abroad (e.g Baltika, Silvano, Ilves). However, recent years have not been easy for the textile and sewing industry as it is increasingly difficult to compete with cheap producers from outside the European Union – Estonian market is also being gradually flooded by cheap goods from China, India and Turkey.

Engineering
Mechanical engineering and motor vehicle industry have experienced a rapid development during the recent years, although the branch became nearly extinct in the early 1990s after the collapse of the Soviet military industry. The local business climate has been revived thanks to the opening of the plant of the international electronics company Elcoteq in 2000, which increased the interest of other foreign engineering companies in Estonian products and production possibilities.

The mechanical and equipment industry is one of the branches that has emerged from the crisis most quickly: in a couple of years, output has increased eightfold in the electronics industry and more than twofold in vehicle production.

Production in the mechanical and equipment industry has become more and more complicated and mechanized. Different electronic products, computers, cables, laboratory equipment, turbines, hoisting machines, boats, car parts and many more things are produced in Estonia. Also, the production of precision mechanics and optical products has increased, with very few manufacturers in the world. In Estonia, the mechanical industry is mostly dominated by small companies that collaborate with various foreign businesses, but there are also some factories that belong to big corporations that account for a large part of Estonian export and industrial production.

Metalworks industry
During the last decade, production has thrived in the metalworks industry, too. After joining the European Union, Estonian manufacturers had easier access to the European market. Meanwhile, good contacts with Russian and Ukrainian providers of raw products and long-term experience make it possible to deliver varied and high-grade output. Foreign investments have played their part, but some enterprises with local capital are extremely successful, too. For instance, BLRT is the biggest shipbuilder, with factories not only in Estonia but also in Lithuania and Finland. Products made of both ferrous and non-ferrous metal are exported from Estonia.

Chemical industry
The economic changes of the 1990s had an especially severe effect on the chemical industry as many of the enterprises were oriented to the Soviet military industry and their products became unnecessary after Estonia regained its independence. In the economic chaos that ruled in Russia, old contacts with Russian enterprises were lost. Several large-scale enterprises of the chemical industry are located in the industrial area of the North-Eastern Estonia and have by now been largely restored, having found new partners and markets as well as new products. The largest factories include Nitrofert, Viru Keemia and Velsicol in Kohtla-Järve and Silmet in Sillamäe. Nitrofert produces fertilizers and chemicals (ammonia, nitrogen etc). Velsicol is one of the world's few producers of bensoic acid, Viru Keemia makes different oil shale products (e.g. oil shale oil). Silmet is one of Europa's largest producers of precious and precious earth metals. The production process which originally used local raw material has now entirely switched to Russian raw material.

Many Estonian companies produce paints and other building chemicals (including spray foams), mostly for export. Target markets include the other Baltic countries, Latvia and Lithuania, but also more distant countries (e.g. in South America).

The plastics industry is quite significant, mostly represented by small companies that produce all kinds of packages, switches, wires, foil etc. Many ventures in the plastics industry are located in Hiiumaa, the second biggest Estonian island, where the plastics industry accounts for four-fifths of all industrial production.

Energy
The energy industry is based on a local, unique natural resource – oil shale. About 85% of electrical energy is produced by burning oil shale and it is widely used for producing heat energy. Also, natural gas is used for energy production, as are many other local resources (mostly wood in the rural areas). In recent years, using different renewable resources for producing electrical energy, mostly wind and wood, is quickly becoming more popular. Of wood products, mostly the waste of the lumber industry and low-grade and industrially useless timber is used.

​After the closing down of the atomic energy plant in Ignalina, Lithuania, Estonia has started to export more electrical energy to Latvia and Lithuania, because local production is insufficient to meet needs. In 2007 export and import of electrical energy with Finland began, because the first linkage (Estlink) between the Baltic countries and the electrical network of the Nordic countries was built. Today, Estonia exports about a third of all its electrical energy. To deal with environmental requirements, Eesti Energia will make major investments in production machinery in the years to come, also expanding production of electrical energy in ways more environmentally sustainable (e.g. using wind farms). At the same time, another stationary electrical connection is planned to connect with Finland and the Nordic countries.

​The production of heating oil from shale has been growing rapidly lately, and the investments that have been made indicate that output will grow in the future, too. It’s possible that one day Estonia will start to increase production of fuel (again). Until then, all petroleum and natural gas that is needed is imported from Lithuania and Scandinavia.

Subcontracting and own production
​As economic changes had only started, Estonian enterprises engaged in subcontracting for foreign companies. Subcontracting was especially widespread in the light industry, where local companies worked for Finnish and Swedish enterprises. Subcontracting was popular also in timber, metalwork, engineering and chemical industries. The rapid development of the electronics industry began in subcontracting as well.

The reason why subcontracting was so widespread was local relatively cheap and qualified workforce, transport costs that were significantly lower compared, for ecample, to South-Eastern Asia. The importance of subcontracting in Estonian economy has gradually decreased — it has fallen even in the electronics sector. The nature of subcontracted work has changed too: there is more and more output with higher added value, and the time of making cheap products is over. The increase in mostly salaries, but other expenses too, has caused this change in Estonia. The second reason is the development of the skills and quality of the employees. As for accumulating experience and knowledge as well as establishing business contacts the prominent position of subcontracting in the economy of the 1990s was highly useful for the Estonian economic development.

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