Tuesday 17 November 2015 ★ FINANCIAL TIMES 1

www.ft.com/reports | @ftreportsTuesday November 17 2015

Inside

Foreign investmentHow Slovakia overtookPoland in the race to winJLR’s eastern Europeanfactory contractPage 2

Moscow marketBelts tighten outside theoligarchy as buyers turnto budget modelsPage 3

Accessory salesoutstrip car productionSpare parts are now anessential component ofRomania’s economyPage 3

Shifting gear toluxury productionFlying cars show thereare no limits to theregion’s ambitionsPage 4

J aguar Land Rover’s decision toconsider Slovakia as a base forbuilding luxury sport utilityvehicles and four-wheel-drivecars may have raised eyebrows

on shop floors in the UK’s WestMidlands. But, if anything, what issurprising is that JLR was so late to theparty (see story on Page 2). After all,Porsche and Audi have been buildingtop-of-the-range cars in eastern Europeforyears.

Central and eastern Europe’s carindustry, once associated with buildingand selling unreliable clunkers, hasbecome an industrial byword for theregion’s wider economic rise. It hasreplaced the inefficiency and low stand-ards of Soviet-era manufacturing withsome of the most modern and produc-tiveplants inEurope.

Production was initially propped upby demand for local marques such asthe Czech Republic’s Skoda. It began torise with the arrival of non-Europeanbrands, including South Korea’s Kia andHyundai, which were seeking a cheaperEU location than countries such asGermany.

Established western brands such asFiat of Italy and France’s Peugeot Cit-roën followed suit, looking to lowertheir costs while maintaining qualitystandards and access to the single Euro-pean market. In the decade to 2010,European brands opened a third of all

their new automotive factories in cen-tral and eastern European countries, ahigher concentration than anywhereelse. In the past 15 years, it has been theonly large region apart from China to

increase its market share of car produc-tion. Additionally, since the financialcrisis in 2008, Slovakia, the CzechRepublic and Romania are the onlycountries in the EU, apart from the UK,

to have seen car production rise.This growth has been in large part

fuelled by the shift from low to mid-value production and by parts of thesupply chain moving from western

Carmakersdrive across frontiersInternational jostlingformanufacturing dealsgrowsmore competitive,writesHenry Foy

Europe, according to Karel Stransky, adirector at Colliers International, aproperty management firm. He adds:“This has been underpinned by factorssuch as low labour costs, governmentsupport and infrastructure improve-mentsacross theregion.”

It is the attitude of foreign investorsthat has changed dramatically since theregion established itself as an importantcar production hub. Before, companieswould carefully weigh up each country’snational attributes before decidingwhere to build a factory. Today, theyconsider the region as one joined-upsourcing, manufacturing and logisticsmarket.

“Now investors that come to centraland eastern Europe behave very differ-ently from five or seven years ago,” saysAndrzej Posniak, partner at the Polandoffices of CMS Cameron McKenna, a lawfirm. “From a business perspective,what matters now is hugely different.People do not think about nationalideas.Theyinvest intheregion.”

That approach was most obvious inJLR’s strategy for selecting the locationof its factory. The Indian-owned groupwas confident that Poland, Slovakia, theCzech Republic or Hungary coulddeliver the resources and benefits itwanted.

“Negotiations over location weremore about the financial and relatedbenefits, not necessarily the physicalattributes of each potential site, thoughof course they were considered,” says aperson involved in the JLR talks whoasked not to be named becausethe investment is not yet finalised.“The quality standards, supplier

Continuedonpage4

FT SPECIAL REPORT

Central & Eastern EuropeAutomotive & Manufacturing

Premium model: Land Rover’s Discovery Sport could be produced at JLR’s new eastern European plant — Robyn Beck/AFP

Taking the wheelMore middle-class Polesare opting to buy newvehicles as privateincomes improvePage 3

2 ★ FINANCIAL TIMES Tuesday 17 November 2015

CEE Automotive & Manufacturing

“We have lost the fight for the biggestautomotive investment of this decade,”screamed newspaper headlines when itemergedJaguarLandRoverwouldbuildits factory inSlovakiaandnot inPoland.

But Pawel Gos, the chief executive ofExact Systems, a Polish company that sorts, controls and reworks componentsin the car industry’s supply chain, didnotcrytoomuchoverthedecision.

“My company has a Slovakianbranch, and I really hope it will serveJaguar, so for me there is no loss,” saysMr Gos. His comments suggest thatsomePolishcompanies, especially thosethat produce automotive components,maystillbenefit, althoughthe lossof theJaguarLandRoverplant iskeenly felt.

Poland’sautomotivesectoraccountedfor 8 per cent of GDP in 2014, but theindustry has seen a big shift over thepast few years, as the making of partsand accessories has overtaken carproduction.

The manufacture of car parts nowr e p r e s e n t s a l m o s t 5 3 p e rcent of the sector’s total output, accord-ing to a report jointly produced byDeloitte, a consultancy, and DNBPoland,abank.

“Nature abhors a vacuum,” says RafalAntczak, board member of Deloitte in

the region and a report co-author. Hesays that because large regional car-making investments, like those madethis year by JLR’s owner, Tata Motors, orby Daimler in 2008, have bypassedPoland, the other part of the industryhas room to develop. “Polish firms arevery competitive. We do not have whatwe do not have, so we make do with ‘sec-ond best’.” And by second best he meanscarcomponentproduction.

Poland’s Automotive Industry Cata-logue 2015 lists more than 600 compa-nies making up a significant part of theindustrysupplychain.

These businesses are scatteredaround Poland, but a great many ofthem can be found close to car factories

— such as those of Opel, Fiat andVolkswagen — or in the special eco-nomic zones, areas set up by the govern-ment to boost inward investment byofferingadvantagessuchastaxbreaks.

One example of a district that busi-nesses specialising in the automotiveindustry have chosen to call home is theKostrzyn-Slubice zone, near the

German border and close to many for-eign carmakers. “Year by year, the com-panies in this sector increase their pro-duction and employment,” says RomanDziduch, thezone’svice-president.

Investors are attracted by tax exemp-tions, which are the biggest financialreliefavailable inPoland.

Mr Dziduch says that one importantfactor for investors is low productioncosts, although he adds: “The costs ofwages, especially, are low, which doesnotmakeusthathappy.”

The Kostrzyn-Slubice zone is home toa cross-section of automotive compa-nies, including a VW factory, as well asmany companies that produce carparts, including plastic components,engines, lampsandventilatingducts.

Some of these businesses are Polishbranches of international giants such asGermany’s Nord Drivesystems, Spain’s AlgontecandFrance’sFaurecia.

But there are also plenty of local,small, family-run companies that aretrying to attract attention and drum upbusiness. “Incomparisonwiththe facto-ries they work for, these are very smallbusinesses, which are still growing,”saysMrAntczak.

He adds: “But they are very flexibleand very efficient. Their production isalsoconstantlyexpanding.”

Alfred Franke, president of the Asso-ciationofAutomotivePartsDistributorsand Producers, a trade body, citesBudzyn, a small town of about 5,000people inwesternPoland,asanexampleof thisefficiencyandexpansion.

“There are two factories — typical

family enterprises, with Polish capital —that offer a very wide range of brakeparts and which are, without doubt,leaders in selling these car parts inPoland. Last year, one of thesefirms . . . built one of the most modernbrake part factories in central Europe,”MrFrankesays.

More than 76 per cent of Polish carparts are exported. Most of theseproducts are sold in Germany — eventhough the Deloitte-DNB report saysPoland’s German car part importsdeclined from 50 per cent 10 years agoto 29 per cent today. However, thisdecrease has been compensated for bythe rise of exports to other countries,such as the UK, Slovakia, Italy, Swedenand Belgium, which have increasinglyboughtPolishcarcomponents.

In these markets, Polish companiesare pushing out rivals from France,China and Turkey. “It is the best proofthat Polish companies are competitive,”saysMrAntczak.

Mr Gos says that, thanks to this com-petitiveness, Polish companies may alsobenefit from investments such as JLR’sin neighbouring countries: “Those thatare located in southern Poland will alsodotheirbest toworkfor Jaguar.”

However, as Mr Antczak adds: “Wedid not get everything we could have.We will not have a factory of a luxurybrand,northetransferof technology.”

“Every person who is hired in a carfactory means almost four others arehired in its supply system,” points outMr Gos. “Most of the people who will[benefit from]thiswillbeSlovakian.”

Country has to settle for ‘second best’ after losing dealSupply chain

Poles may still experiencesome benefit from the Jaguarplant, says Zosia Wasik

Assembly line: GM’s Adam Opel AG plant in Gliwice, Poland — Bartek Sadowski/Bloomberg

I n late July 2015, on a visit to the cityof Wroclaw, near Poland’ssouth-western border, JanuszPiechocinski, then the deputyprime minister, was trying to hide

his self-satisfaction. He was not doing averygoodjob.

“We are in talks with a major player inthe automotive sector, in terms of aninvestment worth £1.7bn,” he told theassembled journalists. “They will con-structapremiumcategorycar factory.”

Mr Piechocinski did not mention thename of the carmaker, but he did notneed to. Polish newspapers had beenwriting for weeks that Jaguar LandRover was going to build its first Euro-pean factory outside the UK in Poland.Mr Piechocinski made no attempt todampthespeculation.

The factory would cover 450 hec-tares, thebeamingministerproclaimed,andwouldcreate5,000jobs.

“On Monday we will sit down for thesixth round of negotiations,” Mr Pie-chocinski, who was also Poland’s econ-omy minister, added. “I am convincedthat theywill choosePoland.”

But if he was convinced, 1,000 milesaway in the English countryside, JLRexecutives were not. For months theyhad fastidiously told journalists no deci-sion had been made on the locationexcept itwouldbe ineasternEurope.

“We were being told what we werethinking, before we had thought it, bysomeminister inPoland,”saidanexecu-tive at JLR, who declined to be named.“Itwas funny . . . Andannoying.”

Two weeks later, JLR’s press office hadsomething to announce. What had beentalked up by Mr Piechocinski as thebiggest automotive investment inPoland’s history was not coming toPoland after all. JLR announced plans tobuild its factory in Slovakia in a £2bninvestment, snatched from underPoland’s nose by its eastern Europeanneighbour after a bidding war of incen-tives, national attributes and diplomacythat underscores how competitive theregion’scar industryhasbecome.

Project DarwinFor the past few years, Jaguar LandRover has been Europe’s fastest-grow-ing large carmaker. Chinese demandhas soared, a strong UK car market hashelped, and a suite of successful models,suchas theEvoque,hadstretched itsUKmanufacturingplants tothe limit.

More production facilities wereneeded, and fast. A first factory inChina, opened in October 2014, hadeased the pressure, and an assemblyplant in Brazil had been commissionedto start construction in early 2015. Butstillmorewouldbeneeded.

As the Chinese plant came online, JLRmade a decision to shelve plans to builda factory in Saudi Arabia, which offeredeasy access to the small but lucrativeMiddle Eastern market, cheap alumin-ium to build its new-generation models,and a host of financial sweeteners from

a government keen to trumpet thecarmaker as a cornerstone investor in anascent manufacturing industry. Butthe desert factory proposal ultimatelyfailed to pass muster, leaving JLR with achoice:EuropeorNorthAmerica?

Two plans were drawn up: ProjectOak, to investigate a site in North Amer-ica, a big market, and Project Darwin tolook into the prospect of a plant in east-ern Europe, where rivals Porsche, Audiand Mercedes were already churningoutcarsata lowercost thaninGermany.

Darwin quickly became the preferredoption. The plans first envisaged aclassic manufacturing operation, thenshifted to an assembly line building carsfrom kits made in the UK, before set-tlingonthe ideaof fullproduction.

In the spring of 2015, the focus hadnarrowed to three states: Poland, Hun-gary and the Czech Republic, accordingtotwopeople involvedintheprocess.

A month later, Hungary dropped offthe list and Poland emerged as thestrong favourite. It offered three poten-tial sites for the plant in and around thesouth-west, and boasted a big cluster ofautomotive suppliers, a large, skilledworkforce and a competitive tax andfinancialassistanceprogram.

JLR officials visited the preferred site,in Jawor, near Wroclaw, on multipleoccasions. In Warsaw, some officials atthe government’s PAIiIZ foreign invest-ment agency were briefing journaliststhat itwasasgoodasdecided.

Such arrogance and lack of discretionwent down very badly with JLR, accord-ing to many people who spoke to theFinancialTimesfor thisarticle.

And then the Slovaks came into thepicture. According to people involved in

the negotiations, Slovakia bid late buthard, throwing all of its foreign invest-ment clout at the deal in early June. Inthe space of a month it went from rankoutsider to joint favourite.

Realising it needed to offer more toforeign investors, thecountrypulledoutall the stops. It tweaked a law coveringso-called Investments of Significancethatwouldpermit it tooffermore incen-tives to win what its economy ministerdescribed as “the investment of the dec-ade”.

“The Slovak investment agency put acrackteamontheproject,”saidapersonbriefed on the negotiations. “They werethrowing ministers at it, making it a keypriority. Itwasveryslick.”

The Slovaks designated the 1,810 acresite in Nitra that it had offered to JLR asthe country’s first strategic industrialpark, allowing it to offer tax and otherfiscal incentives to the British carmakerand suppliers that would set up shopalongside them, according to a personinvolvedinthenegotiations.

Then, in late July,SlovakPrimeMinis-ter Robert Fico decided he wanted toshow just how serious the country’s gov-ernment was about landing the deal.Visiting the Grand Hotel River Park onthe banks of the Danube in Bratislava,where the visiting JLR executives werestaying, he held a morning meeting withthe team and left them his personalmobilephonenumber.

“He was not part of the official negoti-ation team,” said one of the peopleinvolved. “It was very relaxed. Hejust told them that if there was anythingthat they required, they only needed toaskhim.”

It was a critical intervention. “Poland

had very, very good benefits on thetable,” said a person from the JLRteam. “But [Poland’s] approach waswrong. Look at how competitive theSlovakswere.

“Jaguar Land Rover did not care toomuch about geographical location.They just wanted the best deal,” said theperson, who declined to be named aspeople involved were not permitted totalk to the media. “Prime Minister Ficosaid Slovakia wanted to be the mostcompetitivecountry . . . anditwas.”

According to those who spoke to theFT, Poland competed hard. But goodold-fashioned logistics also helpedswing the deal. Poland’s proposed loca-tions were all in the country’s south-west, meaning cars would have to besent by rail or road to Hamburg or Ant-werp to be shipped through the Strait ofGibraltar and the Suez Canal to Asia orthe Middle East. In contrast, Slovakia’slocation and transport links mean carscan enter the Mediterranean on theAdriatic Coast, knocking two weeks’ offthe journey from Poland, crucial to JLRgiven that rival BMW produces cars inSouth Africa that can reach key marketssuchasDubaiorChinaquickly.

Slovakia’s hosting of factories forother luxury car brands also gave JLRconfidence that the country had work-ers with the skills to make their cars,expected to be the Discovery Sport andnew Defender models, when the plantgetsupandrunning inthreeyears.

“You don’t need to tell [the Slovaks]how to produce a car in 2015,” said anexternaladviser to JLR.

Positive signsIn mid-August, the news was

announced: JLR would be entering intofinal talks with Slovakia for its factory.JLR,whichdeclinedtoanswerquestionson the process when asked by the FT,says the decision to build in Nitra, anhour’s drive east of Bratislava, could stillchange. The carmaker is expected tofullycommitbytheendof theyear.

In contrast to the tone adopted byWarsaw, officials in Bratislava havebeen told not to talk to the press aboutthedealuntil it is set instone.

But the signs are positive. A fortnightafter Slovakia was announced as thepreferred location, Mr Fico flew to theUK and was given a tour of thecarmaker’s Solihull factory by membersof theboardofdirectors.

JLR has appointed an executive tolead the project and Bratislava has beenconvinced enough by the carmaker thatearth movers are flattening the siteintended for the factory. Suppliers haveflownintoviewnearbyplots.

A few hundred miles north, in Poland,newspapers, business consultants andforeign investment agency wereshocked when the FT broke the newsthat the country would not win the deal.Mr Piechocinski, now aware that hislandmark investment had beenstolen by Bratislava, put on a brave face.“Today the situation of our economy issuchthatwedonot fight forevery inves-tor regardless of how high the price is.We affirm that the Polish automotivesector and the economy is so attractivethat we do not need to overpay,” MrPiechocinski told reporters, adding:“That is why we have decided wewill not be racing with our friendsfrom Slovakia to the next stage of thenegotiations.”

How Slovakia overtook Poland in factory raceForeign investmentHenry Foy andAndySharman get insidethe ‘deal of the decade’

And then the Slovaks cameinto the picture . . . In thespace of amonth, Slovakiawent from rank outsider tojoint favourite

FT graphic Source: FT research Photos: Bloomberg; Dreamstime; AFP/Getty Images

Timeline: Key moments in JLR's hunt for an eastern European base

Late Jul 2015Prime Minister Robert Fico (left) meets JLR executives at a Bratislava hotel

Jul 2015Having tweaked its foreign investment laws, Slovakia designates site outside city of Nitra (below) as an industrial park to allow it to offer incentives to JLR

May 2015Poland emerges as the strong favourite, with a site outside the south-western city of Wroclaw considered the company's best bet

Spring 2015With eastern Europe preferred, JLR officials a e attracted to Poland, the Czech Republic and Hungary for the company's first EU plant outside of the UK

Nov 2014With its UK factories running at full tilt, the carmaker commissions Project Oak to investigate a first North American factory, and Project Darwin to investigate a plant in Eastern Europe

Aug 2015JLR announces it intends to build its new factory in Slovakia, with anticipated investment of $2bn, t o build 300,000 cars per year, such as the Discovery Sport (below)Oct 2014

JLR executives, led by Ralf Speth, the chief executive (below), shelve plans for a plant in Saudi Arabia code named Project Fern

JULJUNMAYAPRMARFEBJAN

20152014

DECNOVOCT AUG SEP OCT

Wroclaw

Warsaw

Budapest

Nitra

Prague

Bratislava

POLAND

CZECH REPSLOVAKIA

HUNGARY

Contributors

Henry FoyCentral Europe correspondent

Andy SharmanMotor industry correspondent

Zosia WasikResearch Assistant, FT Warsaw

Kester EddyFreelance journalist in Hungary

Isabel GorstFreelance journalist in Moscow

Martin BriceSub-editor

Adam JezardCommissioning editor

Steven BirdDesigner

Andy Mears andEmily LewisPicture editors

For advertising details, contact:Jim Swarbrick +44 (0)20 7775 6220,jim.swarbrick@ft.com, or your usual FTrepresentative.

All editorial content in this report isproduced by the FT.

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‘The costs of wages,especially, are low,which does notmakeus that happy’

Tuesday 17 November 2015 ★ FINANCIAL TIMES 3

CEE Automotive & Manufacturing

G eneral Motors shut itsfactory in Saint Petersburgas car sales in Russiaplunged early this year,saying the local market,

which not long ago had promised tobecome the biggest in Europe, was toochallengingtomeritmore investment.

The Detroit-based company was thefirst western carmaker buildingvehicles in Russia to retreat — but it maynot be the last. Behind the scenes“there’s a constant review of businessstrategies going on”, says Tim Urquhart,a principal analyst at IHS Automotive,an industry consultancy. “The situationissobad.”

Russia’s automobile industry hasbeen among the sectors worst hit by theeconomic contraction caused by lowworld oil prices and western sanctionsimposedbecauseof theUkrainecrisis.

The rouble has shed more than a thirdof itsvalueagainst theUSdollarover thepast 12 months, driving a surge in infla-tion that has slammed the brakes onconsumerspending.

Demand for new cars that soaredthroughout the past decade — except fora short lull during the 2008-09global financial crisis — has evaporatedas Russians have pared back theirbudgets to focusonessentials.

After falling 10.3 per cent in 2014,sales of new passengers cars areexpected to drop by 37 per cent this yearto 1.57m units, according to the Associa-tion of European Businesses, a lobbygroup that tracks the Russian car

market. Western auto groups thatflocked to establish assembly venturesinRussiawhenthemarketwasboominghad agreed gradually to increaseproduction and the amount of localparts used at their factories in exchangefor immediate taxbreaks.

But, with the weakening rouble ham-mering sales and pushing up the cost ofimported parts and components, thesedealsno longer lookattractive.

GM decided to cut its losses in March,saying that Russian market conditionsdid not justify further large investmentsin localisation. Writing off $600m, thecompany mothballed its vast St Peters-burg assembly venture and began with-drawing the Opel and severalChevrolet models from Russian dealer-ships.

GM’s exit sent shockwaves throughthe market although other western car-makershaveyet to followsuit.

Indeed, Ford Sollers, the Ford MotorCompany’s Russian venture, is movingin the opposite direction. It opened a$275m engine manufacturing plant inthe Volga region last month, its biggestinvestmentyet.

Sitting next to the company’sassembly plant in the town of Elabuga,the factorywill equipat least30percentof Ford’s Russian-built cars, says Eliza-veta Novikova, vice-president of com-munications and public affairs at FordSollers. She adds: “Localising produc-tion helps cut costs and reduces expo-sure to currency fluctuations. It’s thebestwaytobeat thecrisis.”

Volkswagen and Renault have alsocommissioned engine plants in Russiathis year to honour their commitmentstothegovernment.

While investing in a falling marketmay be risky, carmakers with a highlevel of localisation are better able tooffer competitively priced products,according to Oleg Malyshev, head of thecorporate finance practice at PwC inRussia.

“Others may experience difficultiesand consider restructuring theirRussian businesses, cutting modelranges or significantly increasingprices,”MrMalyshevsays.

Imported vehicles have been disap-pearing from the Russian market,driven away by high customs duties andthe weak rouble, reinforcing the case forlocalproduction.

Seat, VW’s Spanish subsidiary, andSouth Korea’s Ssangyong Motors haveboth halted vehicle supplies to Russiathis year. Honda is also on the way out.Its plans to shut its Russian distributionnetwork next year amount to a “softexit”, according to Azat Timerkhanov,an analyst at Autostat, a Russian carconsultancy.

One bright spot is the luxury market,which is still too good for even GM toforsake.TheUScompanyhaspledgedtocontinue deliveries of US-madeCorvette and Camaro sports cars towealthy Russian clients, as well as itsChevroletTahoesportutilityvehicle.

UK luxury carmaker Bentley, ownedby VW, added a third outlet this year to

its dealership network in Moscow,where it is seeing strong interest in itsBentaygaSUV.

Porsche, meanwhile, boosted Russiansales by more than 30 per cent in thefirst threequartersof thisyear,andsalesofToyota’sLexusmodelsarealsoup.

Aside from the wealthy, however,Russians have been trading down as realincomes fall, favouring budget cars overmid-priced ones, says Mr Timerkhanov.

Avtovaz, a Russian automaker con-trolled by Renault-Nissan, is still by farthe biggest force, dominating a third ofthe total new car market, but it is facingstrong competition from cut-price,locally made South Korean brands inthe budget segment. For the first time inSeptember the Hyundai Solaris sedanovertook Avtovaz’s Lada Granta as thebest-sellingcar inRussia.

The Russian government forecaststhe economy will stage a mild recoveryin 2016 after contracting by 3.9 per centthisyear.

But real incomes, weighed down bywage arrears and double-digit inflation,are unlikely to rise. That bodes badly forcar sales, which could reach fresh lows,says Mr Timerkhanov. The Autostatconsultancy warns that a return to thegiddy peaks of 2012, when Russia for afew brief months overtook Germany tobecome the biggest car market inEurope, isunlikely inthenear future.

For western carmakers trying totough out the crisis, the road to recoverycould be as rough as Russia’s potholedstreets.

Belts tighten outside the eliteas buyers turn to budget modelsRussia Sanctions, the fall in oil prices and theweakening rouble have all taken their toll, writes Isabel Gorst

Romania may be one of the EU’s poorercountries — income per capita was justover half the Union average in 2014 —but that is not how it appears fromBogdan Cocian’s office. Outside his win-dow, the lines of modern, if generallymodest, carsparked inrowsattest to therelativewealthofhisemployees.

Mr Cocian is general manager of Elba,a specialised manufacturer of lightingequipment with a 95-year history in thecity of Timisoara, western Romania. Heexpects his spacious, spanking-newmanufacturing site to produce sales of€45m this year, the greater part fromheadlight and rear lamp assemblies forthe domestic and global auto sector.This is 7 per cent up on 2014, and wouldhave been better but for the “geopoliti-cal situation inRussia”,hesaystactfully.

Elba is part of Romania’s fast-expand-ing auto components sector, which,given the country’s appallingly

managed economy in the communistera, is arguably even more pivotal for itsdevelopment than for peer sectors intheVisegradFournationstothewest.

According to a report by the Associa-tion of Auto Manufacturers of Romania(Acarom), production of auto compo-nents expanded from €7.6bn in 2011 to€12.6bn in 2014, a 66 per cent increase,with the sector providing about 111,000jobs. The catalyst for this developmentwas the takeover of Dacia, Romania’spreviously state-owned flagshipmanufacturer, by Renault-Nissan, theFranco-Japanese carmaker, in 1999, andthe subsequent management decisiontosourceas locallyaspossible.

“Dacia now employs around 14,000people, represents the main growthengine of the industry and is Romania’slargest exporter,” says Radu Craciun,chief economist at Banca ComercialaRomana (BCR), the country’s largestbank. “It’s reported to have around1,000 suppliers in Romania, with anannual spending of around €2bn onautomotiveparts.”

Elba’s Mr Cocian credits the Renault-Nissan alliance not only for makingDacia an important demand source forlocally produced components, but also

for establishing an international distri-bution centre that sources and exportsparts to itsglobalcarplantnetwork.

“This is one of the real essential driv-ers of development for the Romanianautoparts industry,”hesays.

The renaissance at Dacia has helpedattract foreign suppliers, includingJohnson Controls of the US, which haseight plants in the country employingsome 4,200, and Leoni, a German-owned cable and wiring producer,which operates three plants providingabout16,000jobs.

While Dacia forms the bedrock ofdemand for the country’s auto suppli-ers, other foreign manufacturers — suchas Ford, which began building vehiclesat itsCraiovaplant in2008—havebeenattracted by low labour costs. Averag-ing €7,700 per employee a year, barelyhalf the €15,000 level in Hungary andSlovakia, BCR’s Mr Craciun says, thishas secured some high-profile, export-orientedmanufacturing investments.

These include Germany’s Continen-tal, which has invested some €1bnin seven production sites andthree research and developmentcentres across the country since 2000.It is set to employ about 16,000

more Romanians by the end of thisyear.

Another German-owned company,Star Transmission, a subsidiary ofDaimler, last year announced the crea-

tion of a third productionsite at Sebes in centralRomania, a €300minvestment, for the pro-

duction of its nine-speed9G-Tronic automatic trans-

mission.Such investments

destroy any notionthat Romania is

suitable only forl ow a d d e d -value, screw-driver assemblyplants, and illus-trate just how farand fast theRomanian autos e c t o r h a sevolved in the 25years since theoverthrow of com-

munism, says MrCraciun.“It’s very nice to hear

that such high-tech productsaremadehere,”hesays.

Yet , despite the headline-grabbing, high-tech investments, as theAcarom report notes, productivity inthe Romanian auto parts industrycompares badly with its peers incentral Europe. At just €12,100 peremployee per annum in 2013, the valueof output per worker was barely halfthat of neighbouring Hungary and lagsevenfurtherbehindtheCzechRepublic,the regional leader, which claims€28,100.

“It’s a major challenge,” says BogdanBelciu, a partner at PwC, a professionalservices company, in Bucharest. “Mov-ing into more complex, higher-valuemanufacturing, with more research anddevelopment activity, will require acomplex effort [involving] local autoproducers, local and national authori-tiesanduniversities.”

The importance of Romania’s auto-motive industry is clear. In 2014, 50companies in the sector accounted for40 per cent of Romania’s €52bn inexports, saysMrCraciun.

But the government needs to addressissues such as excessive bureaucracyand poor infrastructure, he says, andmust not assume further growth andeconomic developments will beautomatic.

Spare parts are now essential component of Romania’s economyAuto suppliers

The state has moved beyondscrewdriver assembly plants,writes Kester Eddy

The old joke about Poland’scar industry is that thecountry builds new cars butbuys used ones. It is a snideremark that — in the past —was partially rooted in truth.

But rising consumerconfidence and spendingpower in what has been theEU’s fastest-growing economyover the past decade hasclosed the gap betweenPoland’s car production andsales, even as exportscontinue to be the focus forthe country’s factories.

In a fully interconnected EUcar market, wheremanufacturing plants arespread across the continent,Poland still builds more newcars than it buys. It importsmore than $5bn of new andused vehicles each year to putits citizens on the road.

But long-term trendssuggest the domestic retailmarket could exceed the sizeof its production industrybefore the end of the decade,as Polish drivers with risingincomes shift to buying newvehicles.

“The Polish premiumautomotive market has beendeveloping well over the pastfew years. This is a clear signthat, with the economicdevelopment of the country,more people can affordpremium goods,” says Paul deCourtois, general manager ofBMW in Poland.

“And at the same timecustomers are moredemanding and seeking high-quality products. Therefore, inthe predictable future, we canexpect a continuation ofsustainable growth.”

With 258,240 cars sold inthe first nine months of theyear, Poland is the EU’seighth-largest retail carmarket. Since 2007, when itwas the region’s 13th largest,the country has become theEU’s fastest-growing vehiclemarket having expanded 19per cent in the interveningyears. It is also one of very fewbig markets to be larger thanit was before the financialcrisis.

That growth shouldcontinue, as long as theeconomy holds steady. “Theoutlook for the automotiveindustry is promising,” saysPiotr Michalczyk, partner andleader of automotive servicesat the Warsaw branch of PwC,the professional services firm.“The positive dynamic in thissector can be attributed toeconomic growth. Due to thisfact we can expect increasingdemand for upper-class cars.”

However, sales remainbelow that of 2000, whenPoles bought 600,000 newcars a year. This was in theperiod before the countryentered the EU trade zonethat allowed used cars to befreely imported.

The market also lagsbehind the potentialsuggested by its populationand economy, the union’ssixth largest. In Spain, forexample, where thepopulation is 20 per centlarger, more than twice as

many new cars were soldlast year.

One area of the market thathas helped boost new cardemand is the corporateleasing and long-term rentalsegment, driven mainly by theexpanding financial servicesindustry in Poland.

The long-term car rentalmarket rose by an annualised12.4 per cent in the secondquarter of 2015, as companycar demand grew.

According to the PolishVehicle Rental and LeasingAssociation, companiesbought more than 57,000 newcars in the three months tothe end of June, roughly halfthe total number of new carsales.

That trend has been helpedby a professionalisation of theservice offered by carmakersin Poland. As head of BMW,Mr de Courtois oversees notonly the sales and marketingarm of the German carmaker’soperations in Poland, but alsoits financing arm andAlphabet, its global leasingoperation.

But while premium cars aregaining in popularity,Volkswagen’s low-cost brandSkoda is still Poland’s mostpopular new car marque. It isfashionable among buyerswho, in the past, would havetypically bought second-handcars made by mid-rangeproducers such as VW, Toyotaor Ford in order to afford theluxury of a new model.

Smaller models of mid-range brands, such asRenault’s compact Clio modelor Toyota’s Yaris supermini,are also popular, alongsidecars made in Romania byDacia, Europe’s low-costchampion.

And vehicle pricing shows aconscious effort by carmakersto track the spending powerof Poland’s rising middle class.Since 2010, the averageshowroom prices of cars havenot followed the country’sheadline inflation rates, butalmost exactly mirroredcorporate wage growth,according to the Samar DNBVehicle Price Index, a localmonitoring service.

This suggests themanufacturers are marketingcars at prices they knowPolish people can afford.Henry Foy

Retail sector Poles opt to buy newvehicles as private incomes improve

Premium market:BMW’s Paul de Courtois

Wheel spinning: aworker in a Continentaltyre factory. Thecompany has investedmore than €1bn inRomania

Motoring on: despite hard times, wealthier Muscovites are still showing strong interest in vehicles at the luxury end of the market, such as Bentley’s Bentayga SUV —Krisztian Bocsi/Bloomberg

‘Localisingproductionhelps cutcosts andreducesexposure tocurrencyfluctuations’

4 ★ FINANCIAL TIMES Tuesday 17 November 2015

CEE Automotive & Manufacturing

I n the 1990s, central and easternEurope carmaking was known forthe cheap and cheerful SkodaFavorits, Fiat Seicentos and theDaewoo Tico. But two decades on

and the region is starting to show a moreupmarketaspect.

Poland makes the restyled Fiat 500, achic city car. Hungary makes Audi’ssleek TT roadster and the newMercedes-BenzCLAestate.

The Czech Republic still has Skoda,but the brand is turning out respectedupmarketmodels, suchastheSuperb.

And Slovakia, which made relativelyfew cars in the mid-1990s, now makes€70,000-plus Porsche Cayennes andbodies for the upcoming BentleyBentaygasportutilityvehicle.

“In1990, thesecountriesweresupply-ing just their own markets,” says CarolThomas,ananalystatLMCAutomotive,a consultancy. “Now, they’ve got plantsthatcancompete[globally].”

The region’s rise has been rapid. In 20

years, annual production by Poland,Hungary, Slovakia and the CzechRepublic — known as the Visegrad Four— has gone from just over 500,000 carsto almost 3m in 2014. More than 90 percent are exported beyond the region,saysMsThomas.

Although Dacia, the Renault-ownedbrand that has become Europe’s low-cost marque of choice, has brought suc-cess to neighbouring Romania, theregion’s reputation for making upmar-ket cars is likely only to increase. Thelatest development is that Jaguar LandRover, the upmarket British carmaker,has signed a letter of intent to build aplant in Slovakia. The 300,000 units thefactory could produce are likely toinclude the next-generation Land RoverDefender,aswellas theDiscoverySport.

Announcing the expansion, RalfSpeth, JLR chief executive, highlightedone factor: the region’s “established pre-miumautomotive industry”.

Carmakers of all stripes have beenlured to central and eastern Europe.Asian brands, such as Hyundai and Kia,like its proximity to western Europe.Low labour costs, improving infrastruc-ture and high productivity, at least inSlovakia, have attracted establishedEuropean names such as Volkswagen,

Peugeot Citroën and Opel, owned byGeneral Motors. But it is the region’ssuppliers, skilled workers and networkof technical universities that have givenconfidencetoupmarketmanufacturers.

“The region already had a pool of tal-ent . . . just waiting to be utilised,” saysMs Thomas. “The standard of technicaleducation isreallyoutstanding.”

Government aid has also handed anincentive to manufacturers looking tobuildstateof theart factories toproduce

modern, lightweight cars, and played apart in the JLR decision to choose Nitra,theSlovakiancity,asaproductionbase.

JLR will join another luxury-marketcompany in Nitra. AeroMobil is devel-oping what could be the first commer-cial flying car. People involved in theproject, and the Slovakian government,hope the vehicle will highlight theregion’s advanced engineering capabili-ties, although it lacks high-level autoresearch and development functions.The region remains largely a productionbaseratherthanaplacetodesigncars.

But AeroMobil offers a new perspec-tive on the region. “Making somethingthat’s both a great car and a great air-craft, that takes an enormous amount ofcreativity,” says Antony Sheriff, formerMcLaren Automotive chief executiveandanadviser toAeroMobil.

Thecompany,whichhas25staffbut isgrowing, is in the process of building avehicle that is part sports car, part lightaircraft. It benefits from having bothSlovak automotive suppliers and ultra-light aircraft makers, such as SharkAero,nearby.

Of the region Mr Sheriff says: “Whenyou put all the fundamentals together,it’s a really good place to build interest-ing and unusual cars.” However, ana-

lysts say two problems could limitfurtheradvances.Most immediate is thefallout from the VW emissions scandal,which disproportionately affects theVisegradFour.

The German company, whichadmitted in September to cheating onUS emissions tests, accounts for about athird of the region’s automotiveproduction. More than 60 per cent ofSlovakian car production since 1991has been for VW, according to PAConsulting.

There have been warnings fromsector analysts at the likes of Bank ofAmerica, and some in the industry, thatthe scandal could hit GDP in severalcentralandeasternEuropeancountries.

Another problem is competition forskills. The automotive industry needselectronics and IT knowledge but tech-nology companies SAP and Hewlett-Packard have bases in Slovakia. “Theyjust take all the IT guys from the univer-sities,” says Daniel Hirsch, manufactur-ing expert at PA and former chief oper-atingofficeratVWSlovakia.

Consumer electronics companiessuch as Foxconn and Samsung also havefactories in the country. “The marketfor engineers is very stretched at themoment,”MrHirschsays.

Flying cars the limit as region shifts upmarketLuxury productsIndustry faces scarcityof skills andVW fallout,reportsAndy Sharman

Pre-flight checks: the AeroMobil 3 ondisplay in a hangar in Nitra

networks and employees are all muchthe same around the region, so theywere lessconcernedaboutthosethings.”

Jostling between the region’s coun-tries to land big automotive deals islikely to become only more competitiveasgovernments lookto larger incentivesand financial assistance packages,including tax exemptions and access toeconomic zones, where certain leviescanbewaived.

“The important change from theproducers’ perspective is the extensionof economic zones, which is under con-sideration right now,” says Piotr Michal-czyk, a partner and leader of automo-tive services at the Poland offices ofPwC, the professional services firm.Referring to Warsaw’s own offering, headds: “A new tax relief on technologymay also have a significant impact. Itwill enable, more than currently, addi-tional reductions of part of eligible costsrelated to research and development.When that happens, it will be greatnews, especially for small and medium-sizedenterprises.”

Such steps are crucial. While invest-ment announcements concerning big

car factories such as JLR’s grab head-lines, much of the region’s automotivesuccess stems from the legions of localmanufacturers and producers of acces-sories and parts that have built a formi-dablesupplynetworkacross theregion.

This network was initially fostered byGerman automotive suppliers lookingfor lower-cost outsourcing options.Nowadays it not only employs vastlymore people than full car manufactur-ing, but also accounts for roughly 40 percent of the region’s total automotive-relatedexports.

Volkswagen sources billions of eurosworth of cars, engines and parts fromfactories across the region. The impor-tance of CEE manufacturers and suppli-ers to the global car industry was starklyunderlined by the eruption of the VWdiesel engine scandal this summer.

Continued frompage1

Fast-emerging countries to the eastare snapping at the heels of the region’straditional automotive producers ofPoland, Slovakia, Hungary and theCzechRepublic—theso-calledVisegradFour — even as they look to attract man-ufacturers away from developed west-ernmarkets.

One example is Romania, whichjoined the EU in 2007, three years afterthe Visegrad Four. It has grown rapidlyinto a big rival. Its local low-cost Daciabrand, owned by the Renault-NissanGroup, has become a runaway successamongcash-strappeddrivers inwesternEurope, driving up demand for partsand attracting international suppliers tosetupfactories inthecountry.

Romania’s automotive exports thisyear should be roughly in line with thevalue of Poland’s in 2012, and are grow-ingata fasterrate.

In contrast, investment has not onlydried ups but is retreating in Russia, amarket described by carmaking execu-tivesas theworld’smost frustrating.

Once talked of as the most promisingmarket in Europe, Russia’s latest slow-down is a result of the collapse of oilprices, and of western sanctionsimposed after the Russ ianinvasionofCrimea.

Both events sent the rouble tumblingand inflation soaring, jacking up theprices of imported cars, cutting Russianconsumers’ spending power and mak-ing it costly to run foreign factories thatarereliantonoverseasparts.Since2013,domestic car sales have fallen by morethan40percent.

That was a body blow to carmakersthat had invested heavily in the countryover the past decade and had been con-vinced that the market would finallyliveupto itsexpectations.

This year General Motors swallowed a$600m write-off and shut its St Peters-burg plant. While rivals are still plug-ging away, and some Chinese carmakersare moving in, it is a far cry from theexpectationsmanyhadfiveyearsago.

Carmakersdrive acrossEuropeanfrontiers

‘Whenyouput all thefundamentals together, it’s areally goodplace tobuildinteresting andunusual cars’

0 5 10 15 20 25

Bulgaria

Czech Rep

Germany

Hungary

Poland

Romania

Slovenia

Slovakia

Share of car/transport exports on GDP

Source: Citi

2014

Non-EU passenger carsEU other transport equipment

EU transport parts/accessoriesNon-EU transport parts and acc.Non-EU other transport equipment

EU passengers cars

‘Whatmatters now isdifferent. People do notthink about national ideas.They invest in the region’

Luxury end: the Discovery Sport