European attractiveness survey

EY's attractiveness survey

Europe 2014An extract on emerging markets

Playing catch-up

EY’s attractiveness surveyPlaying catch-up

EY’s 2014 European attractiveness survey: back in the game is the latest survey in EY’s attractiveness program, which has now been running for over a decade. The study follows a two-step methodology: it analyzes both the reality of foreign direct investment (FDI) in Europe, and the international investor community’s perception of the continent’s attractiveness.

The findings are based on EY’s European Investment Monitor (EIM) — which tracks FDI projects that have created new facilities and new jobs — and on the views of over 800 business leaders from across the globe.

In Playing catch-up, we take a close look at the role that emerging markets have played in Europe’s FDI story. We compare data from before and after the crisis — up to the past year — on both the reality of investment and the perceived attractiveness of Europe’s emerging markets. We also examine how rapidly growing economies are evolving into strong investors themselves, which represents an important shift in the global investment landscape.

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Contents

02 — 03 Foreword Marc Lhermitte and Rajiv Memani

04 — 05Executive summary

EY's attractiveness survey — Europe 2014 An extract on emerging markets

A mixed picture

Emerging investors

06 — 19 A mixed picture07 — The global backdrop08 — Crisis reshapes Europe’s FDI maps09 — CEE bears the brunt of the crisis10 — Shifts and new hot spots12 — Poland ahead on attractiveness14 — The emergence of Eastern Europe’s new powerhouses18 — Eastern Europe’s cities lag behind

20 — 25 Emerging investors 21 — Investment from the BRICs at an all-time high, although

uneven25 — Emerging market companies rush to capitalize on Europe’s

R&D strength

1

www.ey.com/attractiveness

EY’s attractiveness survey Europe 2014 An extract on emerging markets Playing catch-up

New European powerhouses

Welcome to Playing catch-up, an extract from our 2014 European attractiveness survey.

EY's attractiveness surveys look into the changing dynamics of global FDI. They aim to update business leaders on structural changes in FDI patterns and to equip them to make key investment decisions.

The shift in the balance of power from the developed world to the developing world is not new, and FDI inflows have mirrored this broad economic change. In 2012, developing economies, for the first time, received greater levels of FDI than the developed world. This trend continued in 2013, when developing economies received more than half of global FDI inflows.

However, when looking more closely at the reality of the FDI situation within Europe, we find that the economic downturn has resulted in some changes in the investment appeal of the continent’s emerging investment destinations. At varying levels of maturity in terms of investment and reform, in this extract we focus primarily on the countries in Central and Eastern Europe (CEE) within the EU, as well as Russia, Ukraine and Turkey.

Marc Lhermitte Partner, Global Lead — Attractiveness and Competitiveness, EY

Rajiv Memani, Chairman of the Global Emerging Markets Committee, EY

2 EY’s attractiveness survey Europe 2014 An extract on emerging markets Playing catch-up

Foreword

Countries in CEE that emerged as FDI hot spots in the early 2000s — such as Poland and the Czech Republic — fell behind their Western European counterparts after the crisis. In 2013, high exposure to Western European countries and a weak banking sector made CEE economies vulnerable to changes in FDI flows, resulting in a slowdown in FDI activity.

The changing landscape also led to the emergence of new powerhouses in Eastern Europe. For example, Turkey became the 10th most attractive FDI destination in Europe, and it developed into a manufacturing hot spot, particularly for the automotive sector. The survey also highlights how Russia has grown into a leading FDI destination. However, it must be pointed out that the survey was conducted before the current geopolitical tensions

had arisen from the situation in Ukraine. The outcome of these events and their impact on Russia’s attractiveness are yet to be seen.

The report highlights the stark difference between the perception and reality of FDI. When questioned about the most attractive global regions in which to establish operations, the majority of the respondents to our 2014 European attractiveness survey voted for Western Europe, followed by CEE and North America.

The report also highlights the fact that rapid-growth economies — particularly the BRICs — are producing many fast-growing multinationals. And many of these companies are extensively expanding their footprint in European markets.

In 2014, global events have continued to shape the economic landscape. The changing economic situation in CEE is particularly notable. We have found that, for these as well as other countries, regulatory reforms and other government initiatives are vital for improving the business environment. Such improvement will help CEE countries attract further FDI and so move toward a path of sustainable growth.

We invite you to explore this extract, in the hope that it provides insight for companies' investment plans, particularly directed toward Europe's emerging markets.

3



Executive summary

CEE countries bear the brunt of the crisisThe crisis had a significant impact on the FDI map of Europe. Following the crisis, the number of FDI projects in CEE declined by 12% — this compares with a 19% increase in Western Europe for the same period. This slowdown in FDI activity can be attributed to CEE’s high exposure to European countries, a fragile banking sector and heavy dependence on consumer credit.

The extract's scope In this extract, we discuss Europe’s emerging investment destinations, particularly the CEE countries within the EU, as well as Russia, Ukraine and Turkey. Europe’s emerging markets are at different maturity levels in terms of investment and reforms. But their success in attracting FDI has primarily mirrored their economic growth.

Europe’s investor profile has also changed. FDI activity from the BRIC countries into Europe has continuously increased, reaching an all-time high in 2013. Companies from these markets represent the next “big” set of investors for the continent, so this is an important development.

FDI projects

WE* 12,164 14,299 +17.6%

CEE 4,774 4,208 -11.9%

FDI job creation**

WE 449.0 401.7 -10.5%

CEE 526.1 364.8 -30.7%

2004–08 2009–13 Change

Change2004–08 2009–13

* Western Europe**in thousands. Source: EY's European Investment Monitor (EIM) 2014.

Differences in the impact of the crisisThe impact of the crisis on FDI was felt more in the CEE region

China

Russia

India

Turkey

Ukraine

CEE (EU)

Brazil

BRICs

BRICs

BRICs

BRICs


Note: CEE (EU) includes Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia.

Rising interest from BRIC investors In 2013, BRIC investment in Europe reached an all-time high — with 313 projects creating a total of 16,900 jobs. The majority of these investments were concentrated in the UK and Germany. BRIC investors are expanding their presence in the continent through a number of different routes, including: • Making greenfield investments • Conducting M&A • Establishing new headquarters or R&D centers

China, the leading BRIC investor, has been the source of a wide range of acquisitions made with the aim of gaining access to European consumer brands and technology.

New powerhouses in Eastern EuropeTurkey and Russia are growing into preferred destinations for FDI in CEE, owing to their enormous market potential, skilled workforces and improving business conditions. Between 2009 and 2013, the number of projects in Turkey increased by 129%, and this was accompanied by a 162% increase in job creation. However, the survey was conducted before the current geopolitical tensions had arisen from the situation in Ukraine. The outcome of these events and their impact on Russia’s attractiveness are yet to be seen.

2009–132004–08

FDI projects by countriesThe crisis changed the FDI landscape of Europe’s emerging markets

Source: EY's EIM 2014.Note: for Europe's full FDI landcape by number of projects, please go to p.10.

DifferenceRussia 596 743 +147

Poland 802 622 –180

Turkey 180 418 +238

Czech Republic 512 321 –191

Romania 612 311 –301

Hungary 597 308 –289

Serbia 164 284 +120

Slovakia 305 201 –104

Bulgaria 287 148 –139

Low attractiveness scores for CEEThere has been a divergence in the perceived attractiveness of individual countries within CEE. Although Poland and the Czech Republic were voted the most attractive CEE countries, their overall attractiveness scores declined by six and four percentage points respectively. They are losing out to economies further east, such as Turkey (which is up four points) and Romania (up two points).

Most attractive locations for establishing operations in CEE 2014 survey share of responses (excluding Russia)

Change from2013*

Change from2013*

* “pts” = % points.Source: EY’s 2014 European attractiveness survey (total respondents: 808).

–1 pt+4 pts

+3 pts+2 pts–6 pts –4 pts

+2 pts +1 pt

Poland

31%

Ukraine

7%Turkey

6%Latvia

3%Slovakia

2%

Czech Republic

11%Romania

9%Hungary

8%

BRICs footprint in Europe

Source: EY’s EIM 2014.

153 projects

India

China

Brazil

103 projects

13 projects

Russia44 projects

5



A mixed picture


The global backdropSince 2008, FDI trends have echoed the broader economic shift toward developing and transition economies. In 2012, developing Asia overtook Europe for the first time, and became the world’s leading FDI destination.

In 2013, while developed economies attracted a historically low 39% (€426b) share of global investment, emerging

markets pulled in 54% (€586b) of inflows. The United Nations Conference on Trade and Development (UNCTAD) remains optimistic about FDI prospects and estimates that global FDI inflows will reach €1.2t in 2014 and €1.3t in 2015.

At a regional level, developing Asia attracted the highest volume of FDI inflows in 2013. However, its share in global FDI inflows was slightly below its 2012 level. Latin America and the Caribbean registered a sharp rise of 14.1% in FDI inflows during 2013.

When it comes to individual countries, in 2013, the US (€141.2b) and China (€93.4b) continued to be the largest recipients of FDI inflows.1

In terms of perceived attractiveness, developing markets, excluding China, witnessed a decline, compared with last year, while developed markets were viewed as more attractive, as a result of their low-risk profiles.

For the first time since 2009, Western Europe (45%) overtook China (44%) as the world’s most attractive FDI destination in our

1. World Investment Report 2014, UNCTAD, 11 June 2014; “Currency converter,” Oanda website, www.oanda.com, accessed 24 September 2014, exchange rate used US$1 = €0.7532 as per weekly average for 2013. And, for the first time ever, Russia became the third most attractive destination for FDI, receiving inflows of €59.7b, up 56.6% from 2012.

respondents’ perceptions — albeit only by a small margin. CEE continued to rank fourth (31%), but its rating rose for the second year in a row (+1 percentage point this year and +7 points in 2013).

In this year’s survey, the cumulative attractiveness score of the BRIC countries declined by 15 percentage points. However, a 13-point decline in Brazil was largely responsible for this steep fall. A look at the two-year picture provides a more realistic view. Since our 2012 European attractiveness survey, Brazil and India’s perceived attractiveness score is down by five points and four points respectively; China and Russia’s scores remain intact. Rapid economic growth in the BRICs in the previous few years overshadowed some of their structural imbalances. Capital flight, depreciating currencies and financial implosion are immediate concerns in these economies. If the markets continue to be lukewarm, growth prospects could diminish further.

Emerging markets pulled in

54% of inflows in 2013.

Source: EY’s 2014 European attractiveness survey (total respondents: 808).

The world’s most attractive regions to establish operations

Western Europe 68% 38% 45%

CEE 52% 24% 29%

North America 48% 22% 31%

India 18% 22% 17%

China 41% 39% 44%

Brazil 5% 12% 13%

Russia 5% 14% 19%

2010 20142006

Developing Asia 31% 29%

Europe 16% 17%

Latin America and the Caribbean 19% 20%

North America 15% 17%

Africa 4% 4%

Transition economies 6% 7%

Others 9% 6%

2013

Source: UNCTAD.

2012

FDI inflows by region Share of global FDI inflows

7



Crisis reshapes Europe’s FDI maps

The FDI maps of Europe before and after the downturn of the last five years are very different. The impact of the economic and financial turmoil on FDI was most severe in CEE, where FDI projects declined by 12%, compared with a 19% increase in Western Europe. The divergence is all the more apparent in job creation, which fell by 30% in CEE, compared with a decline of 13% in Western Europe.

There are two reasons for this decline. First, the crisis exposed the weaknesses in the economic fundamentals of CEE, which was heavily dependent on consumption and its banking system. CEE countries were characterized by a higher level of consumer credit, and the stock of consumer loans was growing at double the pace of the stock of savings. Second, between 2004 and 2008, approximately 75% of the FDI projects in the CEE region originated from Europe itself. As a result, when the crisis hit, FDI

projects declined substantially, hitting a record low in 2009. While Western European countries were also mired in crisis, some of the economies were relatively safe, others were too big to ignore, and others managed to implement the right reforms at the right time.

Between 2004 and 2008, approximately 75% of the FDI projects in CEE originated from Europe itself.

FDI projects

WE 12,164 14,299 +17.6%

CEE 4,774 4,208 -11.9%

FDI job creation*

WE 449.0 401.7 -10.5%

CEE 526.1 364.8 -30.7%

2004–08 2009–13 Change

Change2004–08 2009–13

* in thousands. Source: EY's EIM 2014.

Differences in the impact of the crisisThe impact of the crisis on FDI was felt more in the CEE region


CEE bears the brunt of the crisis

In the early 2000s, many CEE countries emerged as solid growth stories, anchored by an affordable and skilled labor force, a favorable business environment, an advantageous location on the periphery of Europe, and the promise of EU accession. This led to a flood of foreign investments in the region, which increased steadily throughout the pre-crisis period. However, as the crisis spread and underlying weaknesses in some CEE countries came

to the fore, the momentum of FDI slowed in some countries, including Poland, the Czech Republic, Hungary, Slovakia, Romania and Bulgaria. For instance, with a 22% drop in FDI projects during the crisis years, Poland lost its leading position among Europe's emerging investment destinations to Russia and slipped to fifth position in terms of FDI job creation in Europe between 2009 and 2013. This trend was all the more surprising given that, until 2013, Poland was the only EU Member State to witness positive growth during the crisis. Similarly, the Czech Republic, another key economy in the region, saw a marked decline of 37% in inward investment projects between 2009 and 2013.

Poland saw a 22% drop in FDI projects during the crisis years.

2009–132004–08

FDI projects by countriesThe crisis changed Europe’s FDI landscape

Source: EY's EIM 2014.

DifferenceUnited Kingdom 3,206 3,524 +318

Germany 1,326 2,851 +1525

France 2,656 2,499 –157

Spain 947 1,111 +164

Belgium 817 808 –9

Russia 596 743 +147

Netherlands 472 709 +237

Poland 802 622 –180

Ireland 405 535 +130

Turkey 180 418 +238

Italy 321 395 +74

Switzerland 522 394 –128

Sweden 471 323 –148

Czech Republic 512 321 –191

Romania 612 311 –301

Hungary 597 308 –289

Serbia 164 284 +120

Denmark 297 225 –72

Slovakia 305 201 –104

Bulgaria 287 148 –139

Note:UNCTAD data in EY's 2014 European attractiveness survey is based on the January 2014 edition of UNCTAD’s Global Investment Trends Monitor, January 2014 edition. The data in this extract has been updated to reflect the UNCTAD World Investment Report 2014, published in June 2014.

9



Shifts and new hot spots

Suffering from sluggish growth and unstable economic conditions, many of CEE’s leading FDI destinations saw a decline in 2013. On the whole, FDI projects in CEE declined by nearly 5%, while job creation fell by 4%. The CEE region witnessed a decline in its key investment engine, the automotive sector, losing nearly 8% of its market share in 2013. Yet overall, manufacturing projects retained their prime position in CEE with 410 projects (+3% compared with 2012). The region also recorded a 55% increase in R&D operations, confirming a slow shift up the global value chain.

Turkey was a clear exception to this decline. The country had a successful year, with 98 projects started (up from 95 in 2012). Affirming itself as Europe’s new hot spot for large manufacturing projects, the country drew several large investments in the automotive sector. The US and Germany remain the two largest investors in Turkey, accounting for 24% and 16% respectively.

Russia received 114 FDI projects, down 11% from the previous year. Still, it managed to regain its position as the top emerging destination in the CEE region, after falling behind Poland in 2012, which saw an even steeper decline this year. Although the total number of projects fell, Russia attracted several key investment projects in the automotive and heavy industry sectors, such as chemicals and large transport equipment. In terms of its clients, Russia saw a 17% decline in investments originating in the US. Japanese companies, by contrast, invested in 14 projects during 2013, up from just 9 in 2012.

However, the geopolitical tensions arising from the situation in Ukraine will affect Russia’s attractiveness. The exact outcome of these events and their impact are yet to be seen.

The top two Central European destinations for FDI are Poland and the Czech Republic. Poland attracted 107 projects in 2013, making for a year-on-year decline of 28%. FDI job creation, however, increased by 6%. More than a half of the projects were manufacturing operations, with automotive and plastics and rubber as leading sectors. Poland was also the number one destination in the CEE region in terms of R&D projects, driven essentially by international software companies. In the Czech Republic, FDI projects were down 6% from 2012, while job creation remained stable (2%). Driven by geographic proximity, German companies were the largest investor in the Czech Republic, accounting for over a third of investment projects. With 23 projects altogether, automotive and other transport equipment industries remain key drivers of FDI.

CEE vs. WE

FDI projects

CEE 835 796

WE 2,962 3,159

FDI job creation

CEE 85,634 82,181

WE 84,800 84,162

2012 2013

2012 2013


Top 15 countries by FDI projects

2012 2013 Share (2013)

Change

United Kingdom 697 799 20% 15%

Germany 624 701 18% 12%

France 471 514 13% 9%

Spain 274 221 6% -19%

Belgium 169 175 4% 4%

Netherlands 161 161 4% 0%

Russia 128 114 3% -11%

Ireland 123 111 3% -10%

Finland 75 108 3% 44%

Poland 148 107 3% -28%

Turkey 95 98 2% 3%

Switzerland 61 76 2% 25%

Serbia 78 63 2% -19%

Czech Republic 64 60 2% -6%

Denmark 57 58 1% 2%

Others 572 589 15% 3%

Total 3,797 3,955 100% 4%



A mixed picture

Shoring or reshoring — a tricky balance Over the past few decades, the offshoring of production has been an important supply chain strategy for manufacturers in the West. However, some of the conditions that made offshore supply chains attractive — such as the level of flexibility, risk and cost benefit — appear to have become less favorable.

The wage gap between advanced economies and China — the country that accounts for the majority of manufacturing outsourcing — is rapidly closing. This is reducing some of the cost advantages of offshoring there. And, for some companies, advances in labor-saving technologies, such as robotics, are reducing the share that wages make up of total costs. This means that, when looking at costs, differences in wage levels do not make such a difference.

Over the last decade, oil prices have risen dramatically. This has reversed some of the earlier reductions in transport costs. Companies now are also more cautious. They are paying more attention to factors such as market proximity, quality control and supply-chain management. And as governments increasingly recognize the value of having a strong manufacturing base, the policy environment in the West has become more favorable to industry.

As a result, industry is experiencing a fundamental shift across the globe: the reshoring of manufacturing. An increasing number of companies are planning to carry out reshoring. If this trend continues to gather pace over the coming decade, it will provide a substantial boost to Western manufacturing.

However, the importance of production in emerging markets cannot be overstated. Wages in emerging economies are still far lower than those in advanced economies. And emerging market demand for final products is also rising considerably.

Location strategy, therefore, will become trickier for companies. To be successful, they will need to strike the right balance between offshoring and reshoring, optimizing their production footprint to best serve different markets. And to achieve this, they will have to re-evaluate their global supply chains continually.

Look out for EY's Reshoring manufacturing: myth or reality? report - Release date: January 2015.

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Poland ahead on attractiveness In CEE (excluding Russia) divergence in the perception of individual countries is evident. Poland was again voted the most attractive CEE country, by 31% of the respondents this year. The Czech Republic is a distant second with 11% of votes. The overall attractiveness score of both the countries has declined by six and four percentage points respectively. These “mature” countries are losing out to economies in the East, with the main winners being Turkey (+4 points) and Romania (+2 points).

Most attractive locations for establishing operations in CEE (Excluding Russia)

CEE

Poland 31%

Czech Republic 11%

Romania 9%

Hungary 8%

Ukraine 7%

Turkey 6%

Latvia 3%

Slovakia 2%

2014Change from2013*–6 pts

–4 pts

+2 pts

+3 pts

+2 pts

+4 pts

+1 pt

–1 pt

* “pts” = % points.Source: EY’s 2014 European attractiveness survey (total respondents: 808).


On the ground

Case study

Poland technology and telecom

Poland has become an important European technology and IT hub. The IT industry in Poland has grown quickly, thanks to the country’s robust supply of well-qualified professionals — particularly IT engineers — and its competitiveness on costs.2 Between 2009 and 2013, 50 FDI projects were initiated in Poland’s software and telecommunications sector. Companies from the US and the UK were the main investors.

Poland has also increasingly been attracting investments in the R&D sector. Some of the world’s leading organizations have established R&D centers in the country, leveraging its scientific and engineering workforce.3

2. “Do IT with Poland — Polish IT sector is gradually improving,” The Polish Agency for Enterprise Development website, www.web.gov.pl/en, accessed 15 September 2014; “IT/ICT sector in Poland — it’s good and it’s going to get even better,” Ministry of Treasury Republic of Poland website, www.msp.gov.pl/en, accessed 15 September 2014.3. The Global Competitiveness Report 2013–2014, World Economic Forum, p. 317; “The EU Structural Funds in Poland for R&D in 2014–2020,” European Commission website, www.erawatch.jrc.ec.europa.eu/, accessed 15 September 2014.

In October 2013, South Korea’s Samsung Electronics announced the opening of its fourth Polish R&D center in Krakow. The other three are located in Warsaw, Lodz and Poznan. The work at this new R&D center will focus on developing software and technology for mobile operators across Europe, with the aim of strengthening Samsung’s European telecommunication networks business.4

In April 2013, Deutsche Telekom, a German-based telecommunications company, opened a new innovation center in Krakow. The center provides support to start-ups from Poland and other countries in Southern and Central Europe. This

4. “Samsung R&D Institute Poland opens a new office in Cracow, Poland,” Samsung website, www.samsung.com, 31 October 2013.

support includes seed-funding, co-working space, mentoring services and access to Deutsche Telekom’s customer base. Deutsche Telekom plans to collaborate with these start-ups in order to drive innovation.5

In February 2013, UK-based Delcam, a supplier of software for the manufacturing industry, opened a new sales office in Bydgoszcz.6 In 2013, other UK software companies that expanded their presence in Poland included Kainos Software and Innovation Group. US-based corporations similarly expanding their Polish presence included Boost Software and JDA Software Group.7

5. “hub:raum goes east: Deutsche Telekom is opening innovation hub for southern and central Europe,” Deutsche Telekom website, www.telekom.com, accessed 15 September 2014.6. “Delcam opens new office in Bydgoszcz, Poland,” MarketLine (a Datamonitor Company), Company News, 20 February 2013, via Dow Jones Factiva © 2013 MarketLine — an Informa plc business.7. EY's EIM 2014.

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The emergence of Eastern Europe’s new powerhouses

Over the last five years, Turkey and Russia have become highly attractive destinations for FDI. With their significant market potential, skilled workforces and improving business conditions, they have drawn significant numbers of new projects. Turkey did not appear in the top 15 FDI destinations in

Europe prior to the crisis. However, between 2009 and 2013, it saw FDI projects surge by 129%, accompanied by a 162% increase in job creation, making it the 10th most attractive destination for FDI in Europe.

Meanwhile, Russia took the leading position for FDI projects among non-Western European destinations during the crisis years. The automotive sector stood out as a star performer, due to its potential for expansion in the country. For the same reasons, food, chemicals, and machinery and equipment were also at the top of the FDI rankings. However, continued FDI growth in both Turkey and Russia remains fragile and contingent on limiting political risk, particularly in the case of Russia.

The survey was conducted before the current geopolitical tensions had arisen from the situation in Ukraine. The outcome of these events and their impact on Russia’s attractiveness are yet to be seen.

Turkey becomes the 10th most attractive destination for FDI in Europe.

Changes in FDI patterns Between 2009–2013:

• While job creation in countries such as Poland, Romania and the Czech Republic fell by more than 50%, it increased in Turkey and Serbia by 143% and 157% respectively.

• FDI projects in the business services sector more than doubled in Russia, and increased by more than three times in Turkey, albeit from a low base.

• CEE economies, including Hungary, the Czech Republic, Romania and Bulgaria, saw a steep decline in ICT projects.

• Poland, Romania and the Czech Republic recorded a substantial decline in automotive sector projects.

• Russia and Turkey in CEE have been the key recipients of FDI projects in the automotive sector.

• If we extract Russia and Turkey, job creation in the automotive sectors of CEE countries has seen a decline of 30%.


A mixed picture

On the ground

Case study

Turkey automotive

Thanks, in part, to its proximity to the EU, Turkey has become a prominent manufacturing hub for global automakers. And rising per capita income and a low car density both promise prospective growth for automotive companies in Turkey itself. Companies are drawn by the availability of a skilled workforce, low labor costs and a highly developed technological infrastructure, including technology parks and organized industrial zones.8

Between 2009 and 2013, Turkey attracted 41 automotive FDI projects. Automotive companies have established manufacturing facilities and assembly plants in Turkey in order to serve both the domestic and export markets (in 2013, over 70% of total automotive production in the country was exported). And the Government’s special incentive schemes, which offer tax and duties exemptions for investments in R&D, have helped establish Turkey as a promising location for new R&D centers.9

8. “The Central and Eastern European automotive market: Turkey,” EY website, www.ey.com, accessed 11 September 2014.9. Automotive Industry Monthly Report, Automotive Manufacturers Association, Turkey, 2013; Ernst & Young’s 2013 Turkey attractiveness survey: the shift, the growth and the promise, May 2013; “The Central and Eastern European automotive market: Turkey,” EY website, www.ey.com, accessed 11 September 2014; “Turkey's Investment Incentives System,” Invest in Turkey website, www.invest.gov.tr, accessed 15 September 2014

Ford Otosan, a joint venture between Ford Motor Company of the US and Turkey-based Koç Holding A.Ş., is one of the largest players in the country’s automotive market.10 In July 2013, the company established an auto engineering research center in Istanbul. Built with an initial investment of US$28m (€20m), the new center will employ 1,300 engineers.

In the last five years, Ford Otosan has invested close to US$1.3b (€0.9b) in R&D spending in Turkey. In 2014, the company also opened a new US$511m (€375m) facility in Yenikoy, Turkey, which has the capacity to build 110,000 vehicles per year.11

10. Ernst & Young’s 2013 Turkey attractiveness survey: the shift, the growth and the promise, May 2013.11. “Currency converter,” Oanda website, www.oanda.com, accessed 12 September 2014, exchange rate used US$1 = €0.7348 and TRY1 = US$0.4636 as per average for 2014YTD (January 2014 — September 2014); Ernst & Young’s 2013 Turkey attractiveness survey: the shift, the growth and the promise, May 2013; “Turkey's chances of auto expansion,” The Economist Intelligence Unit website, www.eiu.com, accessed 11 September 2014; “Ford Otosan opens new $511 million facility in Yenikoy, Turkey,” MarketLine (a Datamonitor Company), 26 May 2014, via Dow Jones Factiva, ©2014 MarketLine — an Informa plc business; “Ford Otosan Breaks Ground On New Engineering Centre,” Ford Online website, www.at.ford.com, accessed 12 September 2014.

Hyundai Assan Otomotiv Sanayi (HAOS), a subsidiary of Korean automaker Hyundai Motor Company, was formed as a joint venture with Turkey’s Kibar Holding A.Ş. HAOS’s assembly plant in Izmit was established in 1997. It currently manufactures a number of different small cars, including Hyundai’s i10 and i20 models, mainly for the European market. In July 2013, HAOS made a further US$609m (€447m) investment in the plant, which created approximately 2,800 new jobs and doubled the facility’s annual production capacity to 200,000 units.12

12. “Turkey auto module manufacturing plant in full operation,” Hyundai Mobis website, www.mobis.co.kr, accessed 12 September 2014; “Hyundai Motor Manufacturing Plant in Turkey Prepares to Boost Economy with New Investment,” Hyundai Motors website, www.hyundai.com, 24 May 2013; “Hyundai Mobis completes construction of manufacturing unit in Turkey,” IHS Global Insight Daily Analysis, 10 September 2013, via Dow Jones Factiva, © 2013, IHS Global Insight Limited.

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Sales are recovering in CEE

After the recession in 2012, the Central European car market bottomed out in mid-2013, and sales then grew during the fourth quarter. In Eastern Europe, sentiment is improving, and so are sales: light vehicle sales grew by 1.6% in 2013.

Some European countries still face weak consumer spending and record levels of unemployment. However, over the next few years, Europe is expected to witness higher production growth than in the years 2009 to 2013. Production growth of 2% per year is forecast for Central Europe and 5% for Eastern Europe.

The recent market decline forced producers to operate at sub-optimal utilization levels. This put a strain on cost structures, which led to some plant closures. And it also had a direct impact on suppliers. However, in the past decade, automakers have shifted three million units of production capacity to Eastern Europe and Turkey in order to gain a cost advantage.

Patches of growth in a difficult Russian market

Russia is the second-largest car market in Europe. In 2012, sales peaked in Russia at 2.9 million cars and light commercial vehicles. This compares with 3.2 million sales in Germany for the same period.

After steady growth between 2009 and 2012, car sales in Russia started to contract as a result of a slowdown in the Russian economy, which recorded negative growth of -5.5% in 2013. The further deterioration of consumer confidence and the depreciation of the ruble (12% for the first eight months of 2014) meant the decline in sales continued into 2014.

Despite this decline, sales of premium brands, Chinese brands, SUVs and pickups (both budget and premium models) are continuing to grow.

How soon exactly growth in car sales will return will depend on the amount and efficiency of government support measures. We expect that sales growth may restart after 2015.

Help from the Russian Government

The Government has launched a US$260m scrappage scheme. This scheme could lead to the replacement of 170,000 cars, light commercial vehicles and commercial

Andrey TomyshevHead of the Automotive Group in the CIS

EY viewpoint

Despite the challenges, FDI can drive automotive growth


vehicles in 2014. Such a figure would be equivalent to 6% of the total sales for 2013.

The Government has discussed a number of possible further measures for 2015 and 2016, to help the automotive sector, including: • Introducing an age limit for cars • Replacing vehicle tax with an ecological

tax • Encouraging government-controlled

companies to buy locally produced vehicles

As the cost of car ownership in Russia is higher than that in many developed countries, the Government should also consider the following measures to encourage demand:• Reduce taxes and fees, including the

utilization fee, fines and parking fees• Encourage the manufacture of more fuel-

efficient vehicles• Subsidize financing for car purchases (car

loan interest rates)• Develop scrappage facilities • Provide incentives to encourage the

manufacturing of spare parts from recycled materials

Opportunities in Russia for foreign automakers

Many automotive companies believe that there is considerable market potential in

Russia. They expect long-term growth to come from: • The rise of the middle class• The replacement of outdated vehicles

(the average age of cars in the country is about 12 years)

• An increase in car density in the country • The development of transport

infrastructure

During the downturn, many major automotive players avoided cutting principal development or localization programs. And more recently, a number of automotive companies and suppliers have announced their intentions to expand capacity and build new plants in Russia. Chinese automotive companies, in particular, are looking to expand.

For automakers trying to develop their business in Russia, the biggest challenge is sourcing capable lower-tier local component suppliers. The majority of local suppliers do not meet global quality, cost or delivery standards. Given the time it will take for Russian companies to meet relevant quality standards, foreign automakers should consider localizing their existing suppliers. This is something that should be considered, in particular, by Chinese companies, because they currently have low localization levels in Russia. Localization is also a crucial strategy for hedging against currency risk.

Auto companies considering a move into the Russian market should consider focusing on the business segment, because it is less subject to market fluctuations; and on the used-car sector, which is demonstrating steady growth.

New producers should enter into partnerships with several large dealership networks. And automakers will need to establish stringent dealer review and monitoring systems in order to manage dealer insolvency risks.

We forecast car sales growth in Russia of around 5% annually from 2016.

Russian suppliers must improve

To become attractive prospective partners for foreign manufacturers, Russian suppliers need both to improve their performance and to consolidate capacities to reach necessary economies of scale. To do this, they will need the Government to support them by: • Providing financial support for

modernization and training programs • Making land available and improving

infrastructure• Enabling a dialogue between global and

local companies, to identify possible areas for capacity consolidation

“Auto companies considering a move into the Russian market should consider focusing on the business segment, because it is less subject to market fluctuations; and on the used-car sector, which is demonstrating steady growth.”

Andrey Tomyshev, head of the Automotive Group in the CIS

17



Eastern Europe’s cities lag behind

As with country attractiveness, the perceived attractiveness of many cities in the CEE region has fallen. When asked to name the three most attractive cities in Europe, only 17% of respondents named CEE cities. This compares with 82% who named a city in Western Europe and 19% who named a city in Southern Europe.

In line with previous years’ results, investors chose London, Paris, Berlin, Frankfurt and Munich as the top five investment destinations in Europe. Moscow slipped from 8th to 10th on the list. Prague and Warsaw have dropped to 12th and 14th places respectively.

The next GoogleCities in the US and Asia continued to be the top choices of investors, when asked from which cities it is most likely that “the next Google” will emerge. Seven emerging market cities in total — Shanghai, Beijing, Mumbai, New Delhi, Bangalore, Hong Kong and Moscow — made the top 15. San Francisco and Silicon Valley 26%

Shanghai 22%

New York 18%

Beijing 16%

London 12%

Mumbai 7%

Los Angeles 7%

Tokyo 6%

New Delhi 6%

Singapore 6%

Berlin 5%

Bangalore 5%

Hong Kong 5%

Moscow 4%

Paris 4%

2014

Next GoogleWhich three cities in the world offer the best chance of producingthe next Google?

Source: EY’s 2014 European attractiveness survey (total respondents: 808).


On the ground

Case study

Russia’s services sector

As Russia tries to move away from its economic reliance on the oil and gas sector, its services sector has come to the fore. A number of factors have driven FDI in this sector: • Russia’s accession to the World Trade

Organization • The conclusion of bilateral agreements

for increasing market access in services • Accelerated business activity in the

country • Russia’s skilled workforce

In the years 2009 to 2013, Russia drew 60 projects in the business services sector and 45 projects in the technology sector, primarily from the US and the UK. The majority of these projects involved foreign companies setting up sales and marketing offices in the country. However, there is currently some slowdown and loss of investor confidence in Russia’s services sector due to the effects of the geopolitical tensions from the situation in Ukraine.13

13. “Russia Service Sector Shrinkage Heralds Imminent Recession,” The Moscow Times website, www.themoscowtimes.com, accessed 15 September 2014.

US-based global e-commerce player Digital River was among the major investors in Russia’s business services sector in 2013. The company has been serving the Russian software market since 1998. It opened a new sales and marketing office in Moscow in 2013.14 By increasing its presence in Russia and its local client support, Digital River aims to improve online sales and risk management support for its multinational clients. The company expects its new office to support the growth of the Russian e-commerce industry, which is expected to triple by 2015. 15

14. “Digital River Opens Office in Moscow, Russia,” Digital River, Inc. website, www.digitalriver.com/company/newsroom, 28 May 2013. 15. “DIGITAL RIVER PREPARES FOR RUSSIAN ECOMMERCE GROWTH,” 29 May 2013, PYMNTS.com website, www.pymnts.com, accessed 15 September 2014; “Digital River Opens Office in Moscow, Russia,” Business Wire website, www.businesswire.com/news, 28 May 2013.

Similarly, in 2013, Israeli-based global broadcasting solutions provider RRsat Global Communications Network opened a local marketing office in Moscow. This office was set up to serve the company’s expanding customer base in Russia and the Commonwealth of Independent States (CIS). RRsat has also assembled a supporting infrastructure there — including premium platforms and strategic partnerships and alliances — and it has recruited a local team, so that it can provide end-to-end broadcasting solutions to its clients.16

16. “RRsat expands globally, creates local presence in Russia,” World Teleport Association website, www.worldteleport.org/news, 25 June 2014.

19



Emerging investors


Investment from the BRICs at an all-time high, although uneven

In 2013, Europe attracted 313 projects from companies based in the BRICs, up 28% from 245 projects in 2012. The job creation from BRIC companies also increased by 37%, to reach 16,900 jobs.

As a result, investment (both FDI projects and jobs creation) from these countries reached an all-time high in 2013. Rapid-growth economies generate an increasing number of fast-growing multinationals. As a result, the investment-promotion agencies of many European countries have increased their efforts to pull in investments from these companies.

China is a clear leader among BRIC investors, with 153 FDI projects (49%) creating 7,135 jobs. In 2013, FDI projects from China increased by 25%, while job creation was up by 55%. India ranked second, with 103 projects (33%) creating nearly 7,000 jobs. FDI projects from India increased by 39% and job creation by 8%.

However, the increase in BRIC investments in Europe has not been evenly spread across the continent. Investment from BRICs remains highly concentrated in the UK and Germany, which together capture 62% of all investment from these countries.


FDI projects

FDI from the BRICs into Europe

20132004 2007 2008 2009 2010 2011 2012

156114

218 217257 266 245

313

Job creation

20132004 2007 2008 2009 2010 2011 2012

5,1066,885

9,124

12,232

8,672 9,38512,309

16,900


BRICs footprint in Europe

153 projects

India

China

Brazil

103 projects

13 projects

Russia44 projects

21



In 2013, FDI projects in Europe from China increased by 25%. What are your expectations for future Chinese investment in Europe?

The momentum of China’s outbound investment growth is likely to continue and even accelerate, driven by China’s reinforced “go global” strategy under President Xi. China is transforming its economy. It is changing from the world’s biggest factory to the world’s largest consumer market. This has brought about a significant shift. A number of Chinese megacompanies are looking outward, particularly to Europe, for growth opportunities. In 2013, Chinese outbound acquisitions by privately owned enterprises (POEs) doubled in Europe, compared with 2012. This trend of increasing investment in Europe should gain further momentum in the years to come. For the middle market segment in particular, investment will be dictated by China’s internal market needs.

Which sectors attract the most attention from Chinese businesses that are looking to invest in Europe?

• Financial services: banking, insurance and asset management

• Agri-food: ranging from animal feeding and seeding technologies to food processing and packaging, food safety and security control procedures to consumer products such as dairy, processed meats, precooked dishes, frozen foods

• Clean tech and energy conservation technologies

• Pharmaceuticals and health services• Advanced manufacturing technology• Consumer products and services related

to lifestyle

In the past couple of years, we have seen Chinese banks spread across Europe. Financial services overall may see a lift, following the accelerated building up of the renminbi, overseas settlement and clearing platforms in major European countries.

Chinese buyers are moving up the value chain and a second wave of Chinese people is migrating to Europe, seeking to escape pollution and high-pressure jobs. As a result, interest is also growing in real estate and tourism, especially luxury residence complexes, commercial centers, high-end office buildings and 4–5 star hotels.

The burgeoning Chinese middle class will continue to grow and consume. Therefore, demand for lifestyle and luxury-related

Loletta ChowGlobal Leader, China Overseas Investment Network

EY viewpoint

Investment incentive: how Europe can capitalize on change in China

By Qinghua Xu-pionchon, Partner, Head of EMEIA Chinese Business Service-China Overseas Investment Network


products and services will only accelerate. By 2020, Chinese tourists worldwide are expected to amount to 200 million, compared with 100 million in 2013. This growth will bring a range of opportunities for potential investors.

We have also seen Chinese technology companies take leading positions in new technologies, including telecoms and IT-related services, new technology IP, e-commerce, mobile communications, social media and e-platforms.

How can emerging economies in Europe make themselves more attractive to investors?

Many of the emerging markets in Eastern Europe are transforming from planned economies to market economies. This creates opportunities for investors, such as privatization, particularly in the power, utilities, infrastructure and renewable energy sectors. For the Chinese investor with the strategic goal to move into new markets, such opportunities are a great draw. Government policies to help facilitate investment, such as tax breaks and other incentives, can enhance the appeal of these countries.

My advice for emerging economies in Europe is to do their research, find out what Chinese investors are seeking, explore their needs and connect at a government-to-government level to discuss how best to cater for these

needs and offer relevant incentives. And to partner with people who have local insight, connections and experience.

How do you think emerging economies in Europe can increase awareness about their FDI appeal?

I believe that they should focus on the particular appeal of their countries or cities. In Bulgaria, for example, we have seen Chinese businesses looking to invest into solar energy and wind farm projects. Hungary and Poland provide grounds for a logistics and manufacturing hub in Europe.

The more fundamental question is how to create “sustained and positive awareness.” This requires them to have their house in order. Increased transparency, an improved regulatory environment and a strong legal framework can set a welcoming tone to draw in investment.

What barriers do Chinese companies face when they invest in Europe?

In Europe’s developed markets, the Chinese do not face many barriers. Over the past three years, these European countries have competed to attract investors from China.

Chinese companies may struggle with Europe’s management culture. When companies from an emerging market such as China invest in a developed market, Chinese investors tend to be in an apprenticeship

during the early years following a merger or an acquisition. It is not easy, and there are no straightforward solutions. My advice would be to focus heavily on attracting and retaining key talent.

What advice would you give to Chinese investors considering CEE as an investment destination?

I would advise investors to be ready to grasp the opportunity, but also do to their homework. They should seek the help of a trusted advisor, who is able to provide local insight, raise awareness on processes and options, prioritize advantages, and provide a solid assessment and mitigation of risks.

When bidding to invest in an asset that is being privatized, Chinese investors need to understand the auction process fully, and adapt their internal processes accordingly.

Moving a step further, after an acquisition by a state-owned Chinese company, the key questions are how to continue to incentivize and empower people, and how to deliver sustainable growth. A key task here is to create an appropriate management structure, with the right talent in place. Securing top talent and tapping in to these countries’ educated workforces should be a top priority for Chinese investors who embark on projects in CEE.

“Many of the emerging markets in Eastern Europe are transforming from planned economies to market economies. This creates opportunities for investors, such as privatization, particularly in the power, utilities, infrastructure and renewable energy sectors.”

Loletta Chow, Global Leader, China Overseas Investment Network

23



On the ground

Case study

Major Indian investment in Europe

Indian companies are actively seeking investment opportunities in Europe. They are doing so in order to access new technology and to diversify their investments beyond Asian countries. In the last five years (2009 to 2013), Indian companies invested in 419 FDI projects in Europe. The technology, automotive and business services sectors have received the majority of Indian investment into Europe. And the UK, Germany and France have been the top investment destinations.

The Tata group is by far the largest Indian investor in Europe. Its first investment in Europe dates back to 1907, when it established Tata Limited in the UK. Since then, the group has expanded across sectors. It currently operates through more than 19 companies, and employs around 60,000 people across Europe.17 In 2013 alone, it invested in 12 projects in the UK, Germany, France and the Netherlands, mostly through its subsidiaries Jaguar Land Rover and Tata Consultancy Services (TCS).

Jaguar Land Rover is creating a state-of-the-art engine manufacturing center in Wolverhampton in the UK, which is expected to be fully operational by 2015. The center will manufacture advanced low-emission diesel and petrol engines, for exclusive use in the company’s future

17. Tata in Europe: November 2013, Tata Limited, 19 November 2013, p.2.

vehicles.18 The center will use cutting-edge heating and lighting systems to minimize energy requirements. The site is being built with a total investment of more than US$836m (£500m).19 When it reaches full capacity, the center is expected to employ around 1,400 people.20

Tata’s IT services subsidiary TCS opened a delivery center in Liverpool in 2013. This center will provide services to the Home Office in support of the UK’s Disclosure and Barring Service (DBS), which allows employers to check the suitability of applicants for work with children or vulnerable adults. Through this new facility, TCS will help to transform the DBS by introducing electronic applications and online services. This new facility will create more than 300 jobs.21

18. “Jaguar Land Rover create 700 jobs at Wolverhampton factory,” The Independent website, www.independent.co.uk/news, accessed 9 September 2014.19. “Currency converter,” Oanda website, www.oanda.com, accessed 12 September 2014, exchange rate used US$1 = £1.6715 as per average for 2014YTD (January 2014 — September 2014).20. “Jaguar Land Rover Installs The UK’s Largest Rooftop Solar Panel Array At Its Engine Manufacturing Centre,” The official Media Centre for Jaguar Land Rover website, www.newsroom.jaguarlandrover.com/en-in/jlr-corp/news, 3 April 2014.21. “TCS expands UK operations in Liverpool,” Tata Consultancy Services website, www.tcs.com/news_events, 18 February 2013.


Emerging investors

Emerging market companies rush to capitalize on Europe’s R&D strength

In 2013, R&D was one of the hottest areas for foreign investment in Europe. FDI projects in the R&D function increased by a solid 23%. Investors see Europe as a center for their research and innovation activities: 45% of respondents to our survey think R&D will drive Europe’s FDI activities in the coming years.

Companies from emerging markets are increasingly investing in Europe to exploit the continent’s strength in scientific development. R&D-oriented FDI projects in Europe from India and China more than doubled in 2013, reaching 13 and 20 projects respectively. China’s Huawei Technologies was one of the largest investors in R&D in Europe overall.

Preferred European gatewaysBRIC investors and entrepreneurs are showing extensive interest in European markets. Their preferred European gateways are the UK, Germany and France. And the majority of their investment has gone to the manufacturing, finance and business services sectors.

Rapidly growing BRIC multinationals — especially those from China and India — are taking a range of different approaches to entering and expanding operations in Europe.

A number of Chinese investors are using M&A to obtain undervalued assets and to gain access to European consumer brands and technology.22

Recent Chinese investments in Europe include Bright Food’s acquisition of Italian olive oil company Salov Group, and China Haidian Holdings Limited’s acquisition of watch company Dreyfuss Group.23 These deals will help Chinese brands to differentiate

22. “Chinese investors surged into EU at height of debt crisis,” The Financial Times website, www.ft.com, accessed 14 October 2014. 23. “China’s Bright Food Buys Majority Stake in Italian Olive Oil Maker Salov,” The Wall Street Journal website, www.online.wsj.com, accessed 14 October 2014; “China Haidian Acquires UK Watch Company Dreyfuss,” ACN newswire website, www.en.acnnewswire.com/press-release, 14 April 2014.

themselves from domestic competition and to enhance their appeal to increasingly urbanized Chinese consumers. Such deals will also allow them to improve their manufacturing capabilities by getting access to advanced technology.

A number of BRIC investors are setting up European headquarters in order to meet the demands of the continent’s large market better. And many are investing in R&D centers in Europe to leverage its technological strength. In 2013, Brazil-based investment bank Itau Unibanco expanded its European headquarters in London.24 Indian companies such as Infosys and Dr. Reddy’s have also recently expanded their European presence.25

24. EY's EIM 2014.25. “Dr Reddy’s to buy Dutch firm OctoPlus,” The Hindu business line website, www.thehindubusinessline.com, accessed 17 October 14.

25



2014 Kazakhstan attractiveness survey Kazakhstan’s brand is at its strongest. Among both established and non-established investors, awareness of Kazakhstan has increased. And the global investment community’s confidence in the country’s potential is at an all-time high. Kazakhstan’s international integration, innovation agenda and focus on green energy are poised to enhance its appeal among investors and enable growth. Find out more in EY’s 2014 Kazakhstan

attractiveness survey: the brand paves the way at emergingmarkets.ey.com.

Differentiating for success: securing top talent in the BRICs

The lack of critical skills in emerging markets has resulted in a significant human capital problem, which is negatively affecting firms’ competitiveness and strategic growth. In this report, we seek solutions through the five strategies for talent attraction and retention, based on a survey of over 1,000 professionals in the BRIC countries. Download the report at emergingmarkets.ey.com.

Publications2014 European attractiveness survey

EY’s European attractiveness survey, published in May 2014, shows that Europe is still the top global foreign direct investment location. Despite tough economic conditions, the continent’s appeal has increased. Europe set an FDI record in 2013. Foreign investment decisions reached an all-time high of 3,955 projects, up 4% from the previous year and 17% from the pre-economic crisis average. Furthermore, business leaders are

more optimistic than last year. At the same time, they are realistic. The majority believe it will take between three and five years for Europe to overcome the crisis completely. Investors understand that recovery is not an invitation to be complacent. They stress that competitiveness remains the key to sustainable growth and a more attractive investment climate for Europe.

2014 Africa attractiveness surveyDespite a decline in the number of new FDI projects into Africa in 2013, largely caused by a significant decline in North Africa, the continent’s share of global FDI projects reached the highest level in a decade, with the number of new projects in sub-Saharan Africa continuing to grow. Africa’s perceived attractiveness relative to other regions has also exhibited remarkable progress, showcasing how the image of Africa has begun

to change. To go beyond the headlines, read EY’s 2014 Africa attractiveness survey: executing growth at emergingmarkets.ey.com.

EY Rapid-Growth Markets Forecast — July 2014 Over the medium term, fast-growing populations and increasing productivity will lift growth in rapid-growth markets to close to 5.5%.

Cities will be the powerhouses of this growth, with Asia dominating the global landscape. Read EY’s latest Rapid-Growth Markets Forecast to explore the opportunities created by urbanization in the emerging world.

2014 India attractiveness surveyEven through headwinds, India remains one of the top global destinations for FDI, on account of its solid domestic market, educated workforce and competitive labor costs. New business partners, particularly from the Middle East and Southeast Asia, are ramping up efforts to tap the country’s underlying potential, while international investors are expecting a significant spike in infrastructure opportunities in the near future. To go

beyond the headlines, read EY’s 2014 India attractiveness survey: enabling the prospects at emergingmarkets.ey.com.


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European attractiveness survey