The Central and Eastern European Aut omotive Marketcn.gasgoo.com/Upload/Define/200873093451Upfile.pdf · The Central and Eastern European Aut omotive Market Industry Overview. Introduction

NOV E M B E R 2007

GLOBAL AUTOMOTIVE CENTER

The Central and Eastern European Automotive MarketIndustry Overview

Introduction 2

Executive Summary 4

The CEE Region Automotive Industry Overview 10

Country Profiles 22

Bulgaria 22

Czech Republic 26

Hungary 30

Poland 34

Romania 38

Russia 42

Slovakia 46

Slovenia 50

Turkey 54

Ukraine 58

A Holistic View of the CEE Passenger Car Market 62

Key Characteristics of the Region 62

Automotive Diversity 62

Differing Positions in the Automotive Landscape 63

CEE Region developing fast 65

Main Risks and Rewards Across the Region 65

Consolidated View of the Market in the CEE region 67

Sales 67

Production 70

Production to Consolidate in the CEE region in Light of New Dynamics 74

View Through the Rear Mirror 74

New Dynamics – The Times Are Changing … 75

… Challenges Require Adjustment to Approach 79

Growth Potential Seen in Russia and Other CEE countries in the Long Term 84

Global Automotive Center 88

EY Publications on CEE Region 89

The Ernst & Young Approach 90

EY Contacts in the CEE Region 91

Table of Contents

TH E CE N T R A L A N D EA S T E R N EU R O P E A N AU TO M O T I V E MA R K E T2

Much has been written about the key growth markets for the automotive sector, including

coverage of Central and Eastern European (CEE) countries. This region has seen

significant market growth and, at the same time, has been the recipient of major inward

investments, both to serve local markets and to establish a low-cost base for export to

Western Europe. And market growth in the CEE region, and Russia in particular, is

expected to continue. Last year we have published the CEE Automotive Market overview

for the first time and based on feedback we got, we believe this industry overview

has been well received. Hence we are keeping the structure of the brochure including

country profiles for those markets that we believe to be the most promising areas for

further development and growth. On top of the country overviews, this year’s update

includes a “holistic overview” that targets a CEE overview by reviewing sales and

production activity across the entire region. And this overview provides some interesting

observations around speed of development, fluctuations in market shares and basic

strategies applied by Vehicle Manufacturers (VMs) across the CEE region.

We hope that the facts, figures, and points of view presented in this publication provide

insights for further discussion. We welcome your perspectives on this promising market.

Enjoy reading!

Peter Fuß

Automotive Industry Leader Central and Eastern Europe

Introduction

IN T R O D U C T I O N

3

The following individuals from

Ernst & Young, supported by the

automotive network contacts listed on

the inside back cover, contributed to this

report:

Peter Fuß

Automotive Industry Leader

Central Europe, Stuttgart

Stefan Schulze

Global Automotive Center Stuttgart

Director, Automotive, Stuttgart

Eric Wallbank

Director, Automotive, London

Jean-François Tremblay

Manager, Global Automotive Center,

Detroit

Christian Hainz


Automotive Analyst, Stuttgart

Kerstin Läpple


Automotive Business Developer,

Stuttgart

Data source and forecasts, unless stated

otherwise, are from Global Insight.

Abbreviations

BMW Bayerische Motoren Werke AG

CEE Central and Eastern European countries

CIS Commonwealth of Independent States

CKD Completely Knocked Down

CV Commercial Vehicles

Daimler Daimler AG

EU European Union

FDI Foreign Direct Investment

Fiat Fiat Automobiles SpA

Ford Ford Motor Company

FSO Fabryka Samochodów Osobowych

GDP Gross Domestic Product

GM General Motors Corporation

Honda Honda Motor Co.Ltd.

Hyundai Hyundai Motor Company

Kia Kia Motors Corporation

LCV Light Commercial vehicles

Magna Magna International Inc.

MPV Multi Purpose Vehicle

Nissan Nissan Motor Co. Ltd.

OEM Original Equipment Manufacturer

Opel Adam Opel GmbH

PSA Peugeot S.A. (Peugeot and Citroën)

Renault Renault S.A.

SEZ Special Economic Zones

Škoda ŠKODA AUTO a.s.

SUV Sport Utility Vehicle

Suzuki Suzuki Motor Corporation

Toyota Toyota Motor Corporation

VAT Value-Added Tax

VM Vehicle Manufacturer

VW Volkswagen AG

WTO World Trade Organisation

Automotive cluster

(Section: Country Profiles)

Scope

The aim of this report is to provide

quantitative and qualitative insight into

Central and Eastern Europe (CEE) as a

whole, and into each of the key countries,

drawing on reliable data sources,

Ernst & Young’s own network of industry

professionals across the region, and key

industry executives. The 10 countries

chosen are geographically in the Central

and Eastern Europe region, with the

addition of selected neighboring countries

with strong positions in the automotive

sector:

• Bulgaria • Russia

• Czech Republic • Slovakia

• Hungary • Slovenia

• Poland • Turkey

• Romania • Ukraine

This report is not aimed at advising which

country to invest in or which to avoid.

Rather, it is designed to help shape your

understanding and provide insight on the

state of the automotive sector in the CEE

region. The report focuses on the passenger

car market, including sport utility vehicles

(SUVs) and multi-purpose vehicles

(MPVs), but excludes light commercial

vehicles (LCVs) and heavy commercial

vehicles (HCVs) unless specified

otherwise.


Executive SummaryThe global automotive industry today is

split between two extremes. On one side,

Ernst & Young sees dynamic and attractive

growth in a number of regions, driven by

increasing economic wealth and

consumers’ ability to afford personal

mobility. On the other side, we see broadly

static markets in North America, Western

Europe, and Japan. The Central and

Eastern European region (the CEE region)

represents dynamic economic growth and

stability. Additionally, the CEE region’s

proximity to established Western European

markets presents a unique opportunity for

manufacturers and suppliers looking for

sales growth or lower-cost production

close to a major market region.

CEE – A Group of Very Distinct

Countries

While sometimes regarded as a single

region, the individual countries of the CEE

region possess distinctive characteristics.

For example:

• Global Player: Russia. With an expected

market of more than 2,0 million

vehicles by 2011, Russia is alone among

the CEE countries in having a market

potential to match those of some of the

larger markets in Western Europe.

• Major Production Centers: Czech

Republic and Slovakia. These countries

have been the recipients of major

investments in new car manufacturing

plants. The Czech Republic and

Slovakia could become significant

exporters of vehicles, with more than

75% of their production estimated to be

exported. This fact places these

countries in a unique position in the

global industry with respect to the level

of the region’s reliance on exports. The

EX E C U T I V E SU M M A RY

5

CEE region could become a major

export hub, feeding local and Western

European markets, and a major center

for production by suppliers. However,

labor markets already show signs of

potential overheating. New plants have

been announced, but are not yet

operational.

• Strong Domestic Markets, Significant

Net Exporters: Poland, Turkey, and

Romania. These countries have the

potential to develop domestic markets

of more than 350,000 units within five

years, and are projected to have

production capacity well in excess of

this in the same time frame. Hence,

Poland, Turkey, and Romania could

become major export hubs. In addition

to its passenger car production, Turkey

is also becoming a regional center for

large commercial vehicle (LCV)

production. Ford Motor Corporation

(Ford) recently announced their

acquisition of the former Daewoo plant

in Craiova, Romania and plans to invest

close to one billion euros to modernize

the plant to increase production to

300,000 cars per year. Upon completion

of this project, Romania could become a

significant net exporter of vehicles.

• Smaller Players: Bulgaria, Hungary,

Slovenia, and Ukraine. The remaining

countries in the region are expected

neither to have large domestic markets

nor significant export capability in the

foreseeable future.

Size of the CEE region market

It is expected that the entire CEE region

will account for approximately 5,5 million

passenger cars sold by 2012. Compared to

the 15,3 million passenger cars expected

to be sold in Western Europe, the CEE

region market might initially be perceived

as a comparatively small market. However,

the reflection that it needs 22 full-fledged

and fully utilized car manufacturing plants

with the capacity to build 250,000 units

each tells a different story. Looking at the

sales side of the business, the increase of

3,3 million cars to be sold in the region by

2012 represents the need for an estimated

9,500 additional new dealerships across

the region to sell these cars to customers,

assuming each dealership sells about 350

cars per year. These reflections, which try

to translate the number of cars sold into

either manufacturing plants or automotive

dealerships, begin to explain the magnitude

of investment going into the region, as well

as the level of business activity, including

employment, that is connected to the boom

of the automotive industry in the CEE

region as a whole.

Market Share Fluctuations

When comparing the number of cars sold

by brand between 2002 and 2006, market

share fluctuations emerge. The market-

leading brands in 2002 did not sustain the

leading sales ranking in 2006. For example,

while Lada continues to be the top-selling

brand across the CEE region with a

historically strong position in its home

market Russia, Lada does not participate in

the growth of the market, and therefore lost


market share. Skoda, which was the second

best-selling brand across the CEE region

in 2002, achieved a slight increase in

absolute terms but lost significant market

share compared to other brands. In contrast

Western brands such as Ford, Toyota,

Chevrolet, and Hyundai moved up in their

market shares quite significantly, as these

brands captured above-average growth. In

addition, Renault defended its third place

position among top-selling brands across

the region.

Ernst & Young believes a few root causes

drive this market share fluctuation

across the CEE region. First, compared

to Western Europe, customers across

the CEE region seem to have less brand

loyalty. As many customers in the CEE

region buy their first vehicles and many

new brands approach the CEE region

markets, one may realistically theorize

that brand loyalty simply has had little

chance to develop. Sales statistics seem to

support this theory. Second, new entrants

to the CEE region markets, such as the

Korean Hyundai brand, enjoyed significant

volume and market share growth in the

CEE region in the five-year review period.

Chevrolet, as well, enjoyed extraordinary

success. However, it remains unclear as

to whether the brand’s growth may be

attributed to organic growth, to capturing

customers from the former Daewoo brand

which General Motors (GM) acquired in

2001 and started to re-badge to Chevrolet

in 2003, or a combination of the two.

VMs Apply Different Strategies

The view of projected sales and production

activity by Vehicle Manufacturer (VM)

groups as of 2008 tells a story about

basic strategies applied by OEMs for

the CEE region.

• Net Importers: Based on the sales and

production volumes forecasted by

Global Insight as of July 2007, Ford

will sell about 370,000 vehicles in the

CEE region while local production is

forecasted close to 170,000 units. Thus,

Ford is forecasted to sell about 200,000

vehicles more across the CEE region

than are produced locally in the region,

which makes Ford a net importer of

vehicles in the region. These forecasts

might be adjusted since, at press time,

Ford had just announced plans to

acquire the former Daewoo plant in

Romania and to modernize the plant

to reach a capacity of 300,000 units

per year. Once these plans materialize,

Ford’s position, as a net importer,

might change considerably. Forecasted

numbers for Toyota Motor Corporation

(Toyota) suggest that Toyota, as well, is

a net importer of vehicles into the CEE

region as sales in the region are clearly

in excess of local production.

• Balanced Sales and Production: For

a number of brands, namely Lada,

GM, and Hyundai, forecasted sales

and production volumes suggest a

balance between sales across the CEE

region and local production. All these

brands show a difference between

projected sales and production in the

CEE region that is less than 20% of

forecasted sales in 2008. We believe it

is remarkable that OEMs like GM and


7

Hyundai Motor Corporation (Hyundai)

with forecasted sales of about 510,000

and 450,000 units, respectively (across

all brands), are expected to produce

these vehicles locally in the region.

• Net Exporters: For Volkswagen

AG (VW), Renault SA (Renault),

FIAT group (Fiat), PSA (Peugeot

and Citroen), and Suzuki Motor

Corporation (Suzuki), the forecasted

sales and production figures for the

CEE region suggest that these OEMs

use the region predominantly as a

low-cost production base in close

proximity to Western Europe. While

Suzuki maintains its one and only

European production site in Hungary,

it seems quite natural that this OEM

exports vehicles produced in the CEE

region for sale in Western Europe.

VW, Renault, FIAT, and PSA all

being well-known volume brands

in Western Europe have established

vehicle manufacturing sites across

the CEE region. These sites produce

significantly more vehicles in the CEE

region than are expected to be sold by

these OEM groups there (as of 2008),

which make them net exporters.

New Dynamics – Times Are Changing …

The CEE region has seen a second wave

of foreign direct investment (FDI) by

international vehicle manufacturers

following the enlargement of the European

Union (EU) by several CEE countries

joining it in 2004. As some of the plants

which have been built in the CEE region in

2004 and 2005 are not yet operational or

have not yet reached full capacity,

production volume across the region is

expected to grow further in 2007 and 2008

before leveling off in 2009. Since 2005,

when Hyundai decided to put a plant into

Noˇ sovice (the Eastern part of the Czech

Republic close to Ostrava), no further

decision by a vehicle manufacturer has

been made to build a production plant in

the CEE region – except for Russia.

Investment activity by vehicle

manufacturers and suppliers in the

CEE region has stimulated economic

growth and improved employment in

the manufacturing sectors in most of the

countries across the region. Recently

some of the smaller economies in the

region are showing signs of overheating.

Labor markets are tightening in many

regions and in automotive clusters

in particular. Companies are facing

significant problems staffing their newly

built manufacturing operations. These

companies have to spend significant

amounts of money to train new

employees, create benefit schemes to

retain a skilled workforce, and keep up

with wage levels that are spiraling-up

quickly. Furthermore, incentive schemes

are becoming less attractive in many

countries, and companies must consider

new locations in CEE countries when

setting up new manufacturing operations.


In recent years, Western European

countries modernized labor laws to allow

for more flexibility. Companies capitalized

on the climate within these economies that

suffered from relocation of manufacturing

jobs from Western into Eastern Europe by

bargaining with workers councils to reduce

benefit schemes and/or increase weekly

working hours without compensating for

these additional hours. By these measures,

Western Europe improved its competitive

position to the CEE region.

Taking all of the above into account, times

are changing now in the CEE region.

“Once-in-a lifetime” conditions for

investment in the manufacturing sector in

the CEE region – availability of skilled

labor at low-cost, extraordinary incentive

packages, and tax privileges offered by

CEE countries – are disappearing as

economic climates are overheating.

Western Europe has trimmed labor laws

and improved its competitive position

relative to the CEE region. As such,

relocation of manufacturing operations

from Western Europe to the CEE region are

much more difficult to justify in light of the

imbalance of risks associated and the benefits

that might be expected with such a move.

Challenges Require Adjustment to

Approach

Automotive production in the CEE

region is anticipated to level off from

2009, except for Russia. Factors such as

overheating labor markets, and Western

Europe’s increased competitiveness

impose new challenges to companies

both considering new investments and

to those operating already in the CEE

region. Currently, the business case

behind the decision to move an industrial

manufacturing plant from an existing

site in Western Europe into the CEE

region is much more difficult to justify.

The feasibility and the expected payback

periods of such projects have become

marginal, more risky, and require new

models to become attractive. For those

operations that have already been moved

into the region, the new challenges impose

risks that management must address to

sustain the competitive advantage, prove

the projected business case, and deliver

expected returns.

Companies facing these new challenges

must adjust their approach to be successful.

Ernst & Young observes companies

building their strategies for projects in the

CEE region by:

• Considering new markets

• Choosing new locations

• Localizing production

• Reengineering the supply chain

• Partnering with local players

• Winning new customers to achieve

critical mass

Taking a Long-Term View – Russia to

Become a “Global Player”

In contrast to the pressing challenges of

establishing manufacturing operations in

certain areas across the CEE region, the

long-term outlook for vehicle sales into the

CEE region, Russia in particular, remains

positive.


9

Acknowledging that it will take time for

the market to develop, it is important to

note that the entire CEE region offers

roughly the same magnitude of potential

customers as Western Europe. Both

regions are comprised of about 400 million

potential customers. Comparing the CEE

region to Western Europe by population,

car parc, average car density, and new car

sales, shows the upside potential for the

CEE region in the long term. Income

levels, measured by Gross Domestic

Product (GDP) per capita, clearly show

that there is still a long way to go for the

CEE region to catch up with Western

Europe. However, as potential customers’

income levels grow in the years to come,

the CEE region is expected to grow

significantly in the long run.

Ernst & Young has also taken a long-term

view of certain markets across the CEE

region for which we believe the market

potential translates into sizeable and

tangible opportunities. Russia is the most

promising single market within the CEE

region by far. The Russian market clearly

has the potential to catch up with some of

Western Europe’s largest single markets

such as Italy, France, and potentially

Germany. Russia is also a very promising

market to look at in terms of the time it

requires to develop. Growth for passenger

car sales in Russia has continuously been

underestimated in the past. Actual sales

this year will double volumes that were

forecasted five years ago, thanks to Russia’s

fast-growing urban middle class in cities

such as Moscow and St. Petersburg, where

customers’ incomes allowed them to afford

buying cars. Interestingly enough, these

new potential customers have aspirations

that exceed entry-level vehicles. Market

statistics for Russia show that cars in

price ranges well above entry levels show

significant growth, which indicates some of

the attractiveness of that local market.

Other countries like Ukraine, Poland, and

Turkey represent single country markets

that carry significant long-term potential

due to the size of their populations.

Ukraine itself showed an impressive 40%

growth in new car registrations bringing

the market demand up to 370,000 units last

year. The market in Poland is still suffering

from harmonizing import duties and has

not reached levels seen in the past. Sales

in Turkey are coming down from the peak

in 2004 following a depreciation of the

turkish lira and an increase in interest rates.

However, Poland and Turkey have good

growth potential in the long run.


Central and Eastern Europein the Global Automotive Market

Since the early 1990s, the countries of Central and Eastern Europe have experienced

substantial changes. The depth and level of accuracy with which structural reforms have

been implemented has allowed some countries not only to join the European Union, but

also to rapidly become key players in global industry operations. Many countries purposely

chose to focus on the automotive industry – with impressive results – and more to come.

Passenger Car Production in the CEE Region Compared to Other Major Regions

Compared to the almost static production forecasts currently available on Western Europe,

countries of the CEE region represent a major growth area for vehicle production in the

near future. However, this additional production capacity will still lag behind the well-

established production centers of Western Europe, North America, and Japan. China,

India, South Korea, and other players in the ‘Asia-Pacific’ region will also experience major

production growth.

In the years to come, vehicle production in the CEE region will be dominated by vehicle

manufacturers from outside the region, which will establish plants mainly to take advantage

of lower costs and market presence. It remains to be seen whether market demand and

trends in the region will generate the creation of global brands other than those already in

existence, such as Skoda, which are subsidiaries of larger VMs.

The CEE RegionAutomotive IndustryOverview

TH E CEE RE G I O N AU TO M O T I V E IN D U S T RY OV E RW I E W

11

Whichever brands may emerge out of

this region as true leaders, passenger car

production will largely comprise smaller

vehicles from the A and B segments, mainly

for the following reasons:

• These products are highly cost sensitive,

so VMs are looking for the production

cost advantage of the CEE countries.

• These are typically the products that

dominate the CEE markets, even in

countries with higher average GDP per

capita.

Passenger Car Sales in the CEE Region

Compared to Other Major Regions

Passenger car sales in the CEE region

are expected to grow, in line with

increasing disposable incomes and as

broader economic development extends

outside capital cities. But consumer

growth will only stimulate production

growth in a limited number of countries.

As a result, the CEE region is clearly to

remain a net exporter of vehicles and, for

some countries, exports will dominate

in relation to domestic consumption.

This will bring specific challenges to

exporting economies, such as currency

dependency, transport costs, and

probably above all, a dependency on the

availability of export markets in countries

whose economies and focus on vehicle

production might evolve.

Figure 1: Passenger Car Production by Region Compared (in ,000 units)

Production 2002 2006 2012*% Change

2002–2012North America 6,387.8 5,708.9 5,441.5 -14.8%Asia-Pacific 14,159.8 20,221.8 28,375.4 100.4%Western Europe 14,820.7 13,970.2 15,071.5 1.7%Central and Eastern Europe 2,538.1 4,393.3 6,447.6 154.0%Central and South America 2,549.8 3,405.4 4,440.9 74.2%Middle East and Africa 789.9 1,319.6 1,897.8 140.3%Total 41,246.0 49,019.1 61,674.6 49.5%

* Projected

Source: Global Insight


The CEE Region Sales Growth vs.

Western European Static Sales

For VMs with a particular strength in

Western Europe (i.e., those without

significant sales outside the region), the

CEE region offers an obvious geographic

opportunity based on proximity and local

access to lower-cost production.

Moreover, as the economies of the CEE

countries mature, they will increasingly

become more comparable to those of

established markets where a broader

range of vehicles are sold. Currently, in

several CEE countries, the top 40% of

the market is dominated by a few brands

with large market share, Figure 3. Single

brands (often domestic brands or those

with local plants) risk losing market

share, even though sales volumes are

likely to be supported by overall market

growth.


Figure 2: Passenger Car Sales by Region Compared (in ,000 units)

Sales 2002 2006 2012*% Change

2002–2012North America 9,040.0 8,596.8 9,288.2 2.7%Asia-Pacific 9,195.1 12,966.1 20,082.9 118.4%Western Europe 14,430.5 14,772.4 15,227.2 5.5%Central and Eastern Europe 2,124.8 3,779.6 5,402.7 154,3%Central and South America 3,153.1 3,981.1 4,888.4 55.0%Middle East and Africa 1,280.8 2,417.1 3,294.5 157.2%Total 39,224.4 46,513.1 58,183.9 48.3%

* Projected


13

Figure 3: New Car Sales – Market Share of top Three Selling Brands and Market Share for the Market Leader

21.7%

28.5%

38.9%

30.5%

42.3%

37.5%

42.0%

43.1%

52.6%

54.0%

54.6%

54.8%Dacia

Skoda

Lada

Lada

Skoda

Renault

10.9%

12.0%

15.8%

17.1%

29.7%

34.1%

35.1%

39.7%

Renault

Suzuki

Skoda

Peugeot

Market share of top Three brandsLeading brand market share

Bulgaria

Poland

Turkey

Hungary

Slovenia

Slovakia

Russia

Ukraine

Czech Republic

Romania

Source: Global Insight, Ernst & Young

The market concentration of each of

the CEE markets is greater than that of

Western Europe – where the top three

brands have a combined market share of

27%, compared with the range up to 54%

in the CEE countries – and VW is the

leading brand in Western Europe, with a

11% share, which corresponds with the

lowest market share of a leading brand

among the CEE countries.



The CEE Area – PassengerCar Sales and ProductionOverviewProduction – Now and Forecast

Across the CEE region, the emergence

of major exporting countries is already

taking shape, such as the Czech Republic

and Slovakia, which could become

almost entirely dependent on global-

brand vehicle exports when maximum

production capacity levels are reached.

Some of these countries are already

showing signs of stress in the availability

of appropriately skilled workers, as new

foreign VMs implement production

plants in close proximity to established

ones. These issues will become more

challenging as new facilities are built.

Figure 4: Passenger Car Production by Country Compared

20062012

* LCV production – which has a major impact in certain countries, such as Turkey – not included.

Source: Global Insight, July 2007

Russia

Czech RepublicPoland

Turkey*Ukraine

RomaniaSlovenia

SlovakiaHungary

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2,000,000

1,800,000

1,600,000

Sales – Now and Forecast

The CEE countries represent a wide range

of domestic market sizes. Besides, the CEE

market is not homogeneous: while different

brands have succeeded in different areas,

the degree of popularity of the multiple

passenger car segments differ from region

to region.

Sales growth forecasts vary. Some

countries already have levels of car

ownership approaching those of some

Western European countries, while others

have significant growth potential Figure 6: Passenger Car Sales by Country Compared

20062012

* LCV sales figures – which have a major impact on certain markets, such as Turkey – not included. Source: Global Insight July 2007

Russia

Czech RepublicPoland

Turkey*Ukraine

SloveniaSlovakia

BulgariaRomania

Hungary0

500,000

1,500,000

1,000,000

2,500,000

2,000,000

3,500,000

3,000,000

Figure 5: Car Density per 1,000 People by Country Compared (2006)


0

100

200

300

400

500

600

515

United Kingdom

511

Germany

476

France

474

Slovenia

451

United States

404

Czech Republic

353

Bulgaria

338

Poland

189

Russia

76

Turkey

15

SE C T I O N O R CH A P T E R TI T L E


CEE Industry Landscape

BulgariaVM Plants: None

Major Supplier: Bosch

Czech RepublicVM Plants: Skoda, TPCA (Toyota/Peugeot/Citroen)

Major Suppliers: Aisin Seiki, ArvinMeritor, Bosch,

Continental, Dana, Denso, Delphi, Faurecia, Johnson

Controls, Lear, Magna, Siemens VDO, TRW, Valeo,

Visteon

HungaryVM Plants: Audi, Suzuki

Major Suppliers: ArvinMeritor, Bosch, Continental,

Delphi, Denso, Faurecia, Johnson Controls, Lear,

Magna, ThyssenKrupp Automotive, Valeo, Visteon, ZF

Friedrichshafen

PolandVM Plants: Fiat, FSO Daewoo, Opel, Volkswagen

Major Suppliers: Bosch, Delphi, Denso, Faurecia,

Johnson Controls, Lear, Magna, Siemens VDO,

ThyssenKrupp Automotive, Toyota Boshoku, TRW, Valeo,

Visteon

RomaniaVM Plants: Dacia, Daewoo

Major Suppliers: Bosch, Continental, Delphi, Faurecia,

Johnson Controls, Lear, Siemens VDO, ThyssenKrupp

Automotive, TRW, Valeo, Yazaki

RussiaVM Plants: Avtotor, AvtoVAZ, Ford, GAZ, GM-AvtoVAZ,

IZH-Avto, Renault-Avtoframos, TagAZ, UAZ-Severstal,

ZMA

Major Suppliers: Bosch, Faurecia, Johnson Controls, Lear,

Siemens VDO, ZF Friedrichshafen, Magna, Delphi, Federal

Mogul

SlovakiaVM Plants: Kia, Peugeot, Volkswagen

Major Suppliers: Bosch, Continental, Dana, Delphi,

Faurecia, Johnson Controls, Lear, Magna, Toyota

Boshoku, Valeo, Yazaki,

ZF Friedrichshafen

SloveniaVM Plants: Renault

Major Suppliers: Bosch, Faurecia, Johnson Controls

TurkeyVM Plants: Fiat, Ford, Honda, Hyundai, Peugeot, Otokar,

Oyak Renault, Toyota

Major Suppliers: Aisin Seiki, ArvinMeritor, Bosch,

Continental, Delphi, Denso, Faurecia, Lear, Magna,

Siemens VDO, Toyota Boshoku, TRW, Valeo, Yazaki, ZF

Friedrichshafen

UkraineVM Plants: AvtoVAZ, Eurocar, Ukravto

Major Suppliers: Bosch

Please note: This chart shows existing OEM plants, but excludes those announced but not yet operational

Source: Automotive News Europe, Ernst & Young

17

Map of the Central and Eastern European Area with Overview of Major VMs and of Top 20 Suppliers Presence

RUSSIA

HUNGARY

ROMANIA

BULGARIA

POLAND

UKRAINE

CH REPUBLIC

SLOVAKIA

TURKEY

SLOVENIA

Sofia

Varna

Burgas

LjubljanaNovo Mesto

KievCherkask

Illiyichevsk

Lutsk

Zaporozhye

Zakarpattya

Kremenchug

Moscow

St. Petersburg

Togliatti

Taganrog

Kalinigrad

Kaluga Nizhny Novgorod

Prague Ostrava

Mladá BoleslavVrchlabi

Kolin

Warsaw

KatowiceGliwice

Lubin

Poznan

Tychy

Ankara

Bursa

Izmit

Istanbul

BratislavaZilina

Trnava

BucharestCraiova

PitestiTimisoara

Budapest

Pecs

GyörEsztergom

Please note: This includes existing plants, but excludes those announced but not yet operational.

Source: Automotive News Europe, Ernst & Young



Foreign Direct Investment Inflow

Over the last 10 years, the center of

cross-border investment in the European

automotive industry has shifted east, and

the scale of investment has been huge.

Automotive supplier projects typically

involve high capital spend and a larger

average number of employees than other

types of foreign direct investments. A

growing market, existing engineering skills

and lower cost production adjacent to the

mature market of Western Europe have

proved attractive propositions for a number

of major automotive manufacturers.

In 2005, the clear winners in new

automotive supplier investments were

Poland and the Czech Republic, and an

increasing amount of activity is now

taking place in Slovakia. For 2006 the

total number of projects came down and

Romania has gained the largest number

of investments.

19

Figure 7: Number of Investments in New Automotive Supplier Plants

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total

Czech Republic 4 3 8 14 11 19 23 13 20 12 127

Slovakia 1 2 0 5 2 2 7 17 18 6 60

Poland 10 12 9 5 6 7 4 12 17 8 90

United Kingdom 30 12 16 10 6 8 6 6 9 5 108

France 15 1 5 10 5 9 10 21 7 6 88

Romania 1 2 0 3 4 2 4 10 7 13 46

Hungary 11 5 4 7 6 4 10 6 6 5 64

Russia 1 3 1 2 1 0 3 2 3 3 19

Turkey 2 1 0 1 0 3 1 4 0 0 12

Lithuania 0 0 0 0 0 0 0 1 0 0 1

Latvia 0 0 0 0 0 0 0 2 0 1 3

Slovenia 0 1 0 0 0 0 0 2 1 1 4

Source: Ernst & Young’s European Investment Monitor, 2006


Bulg

aria

Czec

h Re

publ

ic

Hung

ary

Pola

nd

Rom

ania

Russ

ia

Slov

akia

Slov

enia

Turk

ey

Ukra

ine

Population (in millions) 7.7 10.3 10.1 38.1 21.6 142.2 5.4 2.0 74.2 46.7

Nominal GDP per Capita (US$) 4,107 13,845 11,120 8,943 5,636 6,925 10,215 18,642 5,178 2,261

Real GDP per Capita (PPP, US$) 9,766 21,220 14,639 13,122 7,477 15,224 18,165 22,362 8,730 8,314

Unemployment rate (%) 9.6 7.2 7.5 14.9 5.2 7.1 10.4 9.4 9.9 7.4

Inflation (%) 7.3 2.5 4.1 1.2 6.6 9.7 4.5 2.5 9.6 9.1

Car Park (in millions) 2.7 4.1 3.1 13.0 3.5 26.6 1.3 0.9 5.5 5.5

Vehicles / 1,000 People 353 404 316 338 163 189 243 474 76 115

New Passenger cars sales (‘000s) 27 121 182 239 256 1,849 59 59 373 371

Figure 8: Key Macro-Economic Data of Selected Eastern European Economies

*Average

Source: Source: Global Insight. Information of 2006, except **


21

Braz

il

Chin

a

Fran

ce

Germ

any

Indi

a

UK U.S.

Population (in millions) 186.8 1,314.5 61.3 82.4 1,111.8 60.5 300.1

Nominal GDP per Capita (US$) 5,717 1,998 36,729 35,227 819,1 39,553 44,136

Real GDP per Capita (PPP, US$) 10,482 6,473 26,861 25,782 3,989 28,103 38,093

Unemployment rate 9.9 4.2 9.0 10.8 12.2 5.5 4.6

Inflation (%) 4.2 1.5 1.7 1.7 5.8 2.3 3.2

Car Park (in millions) 18.8 15.9 30.4 46.6 8.8 30.9 135.1

Vehicles / 1,000 People 102 12 476 511 8 515 451

New Passenger cars sales (‘000s) 1,513 4,350 2,001 3,468 1,101 2,345 7,748

Figure 9: Key Macro-Economic Data of Selected Economies

Source: Global Insight. Information as of 2006


At present, no major vehicle manufacturer has committed to building an assembly

plant in Bulgaria, which provides an almost unique opportunity for a “pioneer” market

advantage. While Bulgaria is currently a relatively small market, there is strong market

growth potential, as its GDP per capita continues to rise with its membership in the EU

from 2007 ownwards. The market offers relatively low labor and other costs, which are

expected to rise more slowly than in states that have earlier joined the EU.

A population of 7.7 million makes Bulgaria one of the mid-sized countries among the

states that have joined the EU since 2004. When Bulgaria joined the EU in January 2007

with an average GDP per capita of US $3,454, the country is one of the less-developed

nations in the EU. GDP per capita will stand at 9.2% of EU15 average, and it can be

expected that GDP levels will increase in the years to come.

In contrast to the current level of GDP, car density in Bulgaria stands at 353 cars

per 1,000 people. But the registered vehicles on the roads are rather aged – there are

estimates that the average age is around 19 years, while some statistics claim that the

median age of used cars is 19 to 25 years.

Bulgaria

CO U N T RY PRO F I L E S — BU L G A R I A

Sofia

Varna

Burgas

National Theatre – Sofia

23

Sales and Production Overview

Production by Brand

Neither a local nor a foreign manufacturer has established

automotive production operations in Bulgaria yet. The country has

seen the first investments in the automotive supplier segment in

the last couple of years, but the sector is still lacking the speed of

development found in other countries.

Sales by Brand

The local passenger car market, with around 28,000 new car

purchases in 2006, is small but rapidly and consistently growing.

Bulgarians have historically focused primarily on buying imported

used cars. On average, in recent years, for each new vehicle sold

in Bulgaria, five used cars were imported. The most popular price

range is quoted to fall in the 1,500 to 2,500 Euro range. The sales of

used cars could be expected to slowly decline in the years to come,

caused by a combined effect of the increasing purchasing power of

the population and the implementation of the Euro-4 Regulation, to

be adopted in 2007.

Passenger Car Sales

Sales

0

5,000

10,000

15,000

20,000

25,000

30,000

2002 2003 2004 2005 2006


0 2,500 5,000

Sales by Brand

20022006

Peugeot

Toyota

Ford

Opel

Skoda



The top-selling brands in Bulgaria in 2006 were Peugeot, followed

by Toyota, Ford, and Opel. Automotive financing and leasing

arrangements have been made available to customers and have

gained popularity in the last few years. Instruments such as auto

financing and car loans will definitely help to grow the number of

new car sales in the years to come. But before these changes are

introduced tangibly, Bulgaria is still likely to have relatively high

revenues related to car maintenance and spare parts.

OutlookRisk

Underdeveloped road infrastructure and business practices that

sometimes lack transparency are some of the challenges that

need to be addressed

• The network of roads and highways in the country is still well

beneath a stage that could be characterized as fully developed.

According to the statistics of the International Road Federation,

70% of Bulgaria’s highways, 51% of its national roads and 28%

of its secondary roads are in good condition. There is currently

only one almost-complete highway, which connects the country’s

capital, Sofia, with the Black Sea city of Bourgas. There are 19

large highway and road construction projects planned that will

likely get funded by the EU funds once Bulgaria is a member

state. However, it will take time to change the conditions and the

quality of the road network to comply with standards of Western

Europe.

• Bulgaria is sometimes criticized for business practices that lack

transparency. Improving transparency and public procurement

will ease the way and speed up the processes to get local

authority approvals and permissions and thus stimulate foreign

investments in the sector. In connection with the EU accession,

these practices have come under more scrutiny than in the past.

CO U N T RY PRO F I L E S — BU L G A R I A

25

Opportunities and Rewards

Low labor costs attract labor-intensive manufacturing opera-

tions, and the proximity to Turkey and its developing industry

offers potential

• Current wage levels in Bulgaria are below the average in

other Eastern European EU-accession countries. There is even

differential in labor cost between Bulgaria and its neighbors

to the south and north. The labor cost advantage will be even

more attractive to foreign investors once Bulgaria joins the EU

in 2007. With harmonized customs procedures, the import and

export of components will ease so that the country will likely

attract more foreign direct investment than in the past.

• Bulgaria can potentially capitalize on the unforgiving cost

pressure in the automotive industry to absorb some of the labor-

intensive manufacturing activities from Turkey, its neighbor to

the south. With a rapidly developing automotive industry, Turkey

might consider Bulgaria as a “workbench,” given the labor cost

differential and Bulgaria’s proximity to existing operations in the

Bursa region of Turkey.

• Bulgaria’s workforce includes a large number (around

3.4 million) of well-educated and skilled men and women. A

high percentage of the workforce has completed some form of

secondary, technical or vocational education. Many Bulgarians

have strong backgrounds in engineering and sciences. The

skilled workforce is a considerable incentive for foreign

companies investing in Bulgaria


CO U N T RY PRO F I L E S — CZ E C H RE P U B L I C

Among the CEE countries, the Czech Republic is in a relatively unique position, having a

local manufacturer, Skoda, that has developed into a successful international brand. Among

the oldest vehicle

manufacturers globally,

Skoda has rendered its

heritage into being a

market leader of new

car sales in the Czech

Republic (market share

36% including combi

passanger cars which

are broadly registered

as LCVs due to recent

legislative changes),

as well as exporting

quality cars to other

countries in the CEE region and many other countries globally. In 2006, Skoda sold

560 thousand cars worldwide, most of which were produced in the Czech Republic.

Due to the countries’ history in engineering and industrial manufacturing, the Czech

Republic was able to attract a large volume of FDI in the sector both from vehicle

manufacturers and suppliers alike. Besides Volkswagen investing into Skoda for many

years, recently the consortium of Toyota, the PSA group (Peugeot and Citroen), and

Hyundai have been building assembly plants in the country. A large number of suppliers

have also established themselves within the Czech Republic, making it a hub for

automotive and automotive component manufacturing in the CEE region, heavily

focused on exporting these products into Western Europe.

Czech Republic

Import vs. Export

Source: Global Insight 2006

1,000,000

1,000,000

Import

Export

ProductionSale

s

Prague Ostrava

Mladá Boleslav

Vrchlabi

Kolin

Castle complex – Prague

27

Sales and Production Compared

Production by Brand

Fueled by FDI and a rising export of automotive products, the Czech

Republic has enjoyed significant growth in GDP both in absolute

terms and in per capita levels. The growing levels of income in the

Czech Republic are, in turn, fostering car sales. In spite of this, the

Czech Republic’s market is still comparably small; with only 10.3

million inhabitants, it is one of the mid-sized countries that joined

the EU in 2004. In addition, new car sales are in competition with

used car imports from Western Europe that play a significant role in

the local market, thanks to less restrictive vehicle age regulations.

Car density is above the region’s average with 404 cars per 1,000

people, but the majority of cars are aged with an average Czech car

in use for more than 13 years.


Production by Brand

Skoda, being the countries’ largest industrial company, has pro-

duced cars in the Mlada Boleslav region, 60 kilometers north of

Prague, for many years. Fueled by investments from VW Group,

Skoda increased output from 187,000 cars produced in 1990 to

556,000 cars in 2006, making it a globally recognized brand in the

VW Group’s portfolio. Skoda is currently expanding capacity in

Mlada Boleslav, Vrchlabi, and Kvasiny from 550 to 620 thousand

units per year.

Production by Brand

Skoda

Toyota

Peugeot

Citröen

20022006

0 300,00050,000 600,000


Sales Production800,000

700,000

600,000

500,000

400,000

300,000

100,000

200,000

2002 2003 2004 2005 2006




In 2005, a consortium known as TPCA, comprised of Toyota

and the French PSA Group, built a full-fledged assembly plant

in Kolin, 40 kilometers east of Prague. The plant produces the

Toyota Aygo, Peugeot 107, and Citroën C1 models and reached an

output of almost 300 thousand units last year.

Furthermore, Hyundai has announced its intention to build a

plant in the eastern part of the country, near Ostrava. With this

facility planned to be in full operation in 2011, the country

will have the capacity to produce over 1.2 million passenger

cars per year. Production would then represent 7.6 times the

current market for new car sales in the country, establishing the

Czech Republic’s position as a predominantly manufacturing

base for the automotive industry with a strong focus on export.

In addition to vehicle manufacturers, the country has attracted

a large number of automotive suppliers in recent years. Large

international Tier 1 suppliers have plants that supply Skoda, and

more recently TPCA which are also exporting to major global

VMs abroad.

More importantly, a number of mid-sized component suppliers

and tool manufacturers now form a well-established network,

laying the groundwork for a comprehensive local supply chain

for the industry. This supply network is predominantly located in

the Mlada Boleslav (Skoda) and Kolin (TPCA) regions, the main

automotive clusters of the country.

Sales by Brand

Skoda produced the first car in Central Europe in 1897 and since

then has maintained its position as a large industrial company and

employer in the country that still dominates the automotive landscape

in the Czech Republic. Both used and newly registered cars are still

dominated by the Skoda brand, with a 42% market share in 2006.

Renault ranks second, but very far behind, with a market share of

only 6.6%, closely followed by the German brand VW.

Sales by Brand

20022006

Skoda

Renault

VW

Hyundai

Peugeot

0 40,00010,000 80,000


CO U N T RY PRO F I L E S — CZ E C H RE P U B L I C

29

OutlookRisks

Labor shortage and increasing wages become a more pressing

issue

• While the countries’ overall unemployment rate stands at around

6.4% (current), areas such as Prague and central Bohemia face

a very low 2.0% to 4.5%, which poses significant challenges for

those looking to hire new staff in this region.

• TPCA experienced difficulties in staffing its new plant in Kolin.

The consortium recruited workers from Poland, Slovakia, and

Ukraine to fill the gaps.

• Hyundai decided to locate its new plant in Ostrava, partly to

have better access to skilled labor (e.g., from Poland).

• The tight labor market for skilled workers and engineers is likely

to fuel wage and salary increases.

The country’s capacity is being stretched

• Some politicians have started to question whether the countries’

dependency on the automotive industry could turn into a risk, with

the industry representing 16.3% of GDP and 19.7% of export

in 2005. Such concerns are already starting to impact incentive

packages offered to suppliers that want to follow Hyundai.

• CzechInvest (www.czechinvest.org), the countries’ investment

agency, is directing attention to attract high value-added services

such as research and development (e.g., biotechnology) and

shared service center operations.

The density of heavy traffic on the Czech Republic’s motorways is

increasing, caused to some extent by the automotive just-in-time

production logistics. As a result, the government implemented a

toll systems for motorway access by 2007.


Stability, good infrastructure and a large base of local suppli-

ers attract investment in the sector

• The Czech Republic has a long tradition of automotive

engineering and production. Skoda recently celebrated its 100th

anniversary, and other automotive brands, such as truck makers

Tatra and Avia, also have a long history.

• More than any other Eastern European country, the Czech

Republic is characterized by a strong automotive supplier

capability.

• CzechInvest claims that more than half of the largest global

automotive suppliers have operations in the country. This large

portfolio of suppliers allows access to an almost complete local

supply chain, providing significant cost advantages.

• The countries’ skilled industrial labor force, together with its

proximity to Germany and other Western European markets,

secured by a stable political and economic environment, is

helping the Czech Republic become a new center for the

European automotive industry.


The Hungarian market for new car registrations has been dominated for the last 10 years

by Suzuki, which has had a production plant in the country since 1991. Suzuki enjoys a

local market share of 17%, which is considerably above their European average of less

than 1% market share. Local production of about 180,000 cars in 2006 almost matches

the volume of cars that is absorbed by the local market. Besides assembly, Hungary is also

a significant production center of power trains and engines thanks to the GM and Audi

facilities producing mainly for export markets. Audi, which started production in Hungary

in 1997, has meanwhile developed into the biggest foreign investor in the country.

Hungary

Import vs. Export


500,000

500,000

Import

Export

ProductionSale

s

CO U N T RY PRO F I L E S — HU N G A RY

Budapest

Pecs

GyörEsztergom

Heros’ Square – Budapest

31

Production by Brand

Suzuki

Fiat

Audi

20022006Subaru

0 70,000 140,000


Sales Production

2002 2003 2004 2005 2006



0

50,000

100,000

150,000

200,000

250,000


Hungary’s market for new passenger car sales has grown steadily,

surpassing 200,000 units in 2003 and 2004. EU accession in 2004,

however, triggered a downward trend starting in 2005 caused by

governmental measures which affected the spending power of

people. In addition, the car pool has a current average age of 11.5

years, and with 316 cars per 1,000 people, their potential lies idle.

Until 2006, imported used cars did not play such a significant

role due to government legislation requiring Euro 3-Emission

Standard compatibility as well as charging extra taxes on used cars

from abroad. The importance of used cars imported into Hungary,

however, might change due to the reversion of import limitations

in 2007. Amidst this, cars older than 10 years will now be allowed

to be brought into the country. Eight other brands enjoy market

shares above 5%, which shows a diverse, maturing market.


Production by Brand

Hungary was able to capitalize on the countries’ tradition in engi-

neering and industrial manufacturing by attracting the Japanese

VM Suzuki (1991), General Motors (1991), and Audi (1993) to

invest in significant car assembly and power train component

manufacturing operations in the country. Suzuki is producing the

Ignis, New Swift, SX4, Subaru G3Xjusty and Fiat Sedici models

and reached annual output of 164 thousand vehicles last year.

Audi and General Motors were producing 1,88 mio. power units

and 500,000 power trains in Hungary respectively. In addition to

concentrating diesel engine production in Györ, Audi assembles

the TT Roadster and plans to produce the A3 at this plant. Many

component suppliers have come to Hungary as well and helped

establish an extensive local supply chain in the country.


CO U N T RY PRO F I L E S — HU N G A RY

Suzuki

Opel

Ford

Skoda

VW

Sales by Brand

20022006

0 20,000 40,000


Sales by Brand

For many years, the Japanese manufacturer Suzuki enjoyed the

valuable position as top-selling brand in Hungary. With market

shares coming under pressure in recent years, Suzuki still maintains

the top rating of best-selling brand, with a market share of 17% in

2006. The company has been successful in translating its position

as one of the largest industrial employers in the country into

popularity and customer preference. Opel, with an 11.8% market

share, and Ford, with a 10.8% market share, follow as distant

second and third in comparison to Suzuki. Skoda, VW, Toyota,

and other imported brands round out the top sellers in Hungary.

In line with neighboring countries, the Hungarian market for new

car registrations is geared towards cars in the B-and C- segments

(compact- and middle class cars) .

OutlookRisks

Currency Risks and Volatility

• Hungary became a member state of the EU in 2004. Like the

other new member states, it will maintain its local currency for a

conversion period before introducing the euro and taking part in

the European Monetary Union.

• The Hungarian currency, the forint, is floating against the euro in

a +/- 15% band, the foreign exchange rates against the euro have

been volatile in recent years, though it has stayed at the strong

end of the band.

33

• This volatility has created issues for the Hungarian economy,

impacting imports and exports. In 2003, the forint strengthened

against the US dollar; combined with higher wages, this resulted

in a 23% increase in unit labor costs. This put significant

pressure on companies producing in Hungary to export to US-

currency markets.

• The same currency swing has caused import prices to fall,

improving profitability for importers such as the sales

companies of the large VMs. In 2006, however, the forint came

under pressure against the euro, resulting in the exact opposite

scenario. Going forward, budgetary imbalances and a recurring

deficit in the external current account create uncertainty and

could result in a downturn in the value of the forint.


Compared to other CEE countries, the Hungarian economy is

rather mature. Its legal system follows Western standards, pro-

viding strong protection for investors.

• Hungary is among the most developed former Eastern Bloc

countries. Its economy is more mature, becoming more settled

as the emerging-markets phase runs its course.

• Privatization and efforts to attract FDI, combined with Hungary’s

historical and cultural links to the old monarchy, helped the

country grow quickly after the Eastern Bloc countries became

democratic in the 1990s.

• Hungary has reformed its legal system in preparation for EU

membership, so that it is compliant with Western standards in

almost all material respects.

• This legal system provides a good and reliable framework that

helps protect the rights of investors.

Hungary is geographically well-placed to benefit from EU

enlargement to Romania and Bulgaria.

• Hungary is likely to benefit from becoming more central in the

EU area, and there is optimism that the established automotive

industry and other businesses may see growth opportunities

stemming from these new markets.

• Romania, which neighbours Hungary to the east, is much less

developed, and Hungarian businesses might have a competitive

advantage in its proximity to these emerging markets.


Poland has attracted significant FDI from the automotive sector in recent years. As labor

markets are getting tighter in surrounding countries, and as Poland is designated to receive

substantial funding from the EU in the years to come, this trend is likely to continue.

While not yet attracting one of the large-size projects from VMs in the passenger car

sector, Poland has recently attracted a large number of mid-sized suppliers to set up

manufacturing operations in the country.

Vehicle manufacturers like Fiat, Opel, and VW decided to invest in Poland in the early

1990s and built significant vehicle manufacturing operations in the country. A local

producer, FSO, has been acquired by a Ukranian investor and is expected to continue to

produce cars in the country. More recently, Toyota established a power train manufacturing

unit, and the truck manufacturer MAN is investing in a plant in Poland that is scheduled to

start production next year.

Poland

CO U N T RY PRO F I L E S — PO L A N D

Import vs. Export


1,000,000

1,000,000

Import

Export

ProductionSale

s

Warsaw

KatowiceGliwice

Lubin

Poznan

Tychy

The Palace of Culture and Science – Warsaw

35


Based on its population of 38 million inhabitants, Poland is the larg-

est country that joined the EU in 2004 and ranks as the sixth country

in the EU by size of population. As car density rates stand at 338

cars per 1,000 people, there is potential for further growth. Before

joining the EU, the country saw an impressive upward trend in new

car registrations, which surpassed 400,000 units in 2003. However,

following EU accession, the number of used cars imported into the

country was rising sharply as excise duties imposed on the import

of used vehicles have been cancelled to comply with EU customs

standards. The number of used cars imported into Poland sky-rock-

eted from less than 50,000 vehicles in 2003 to 877,000 in 2004.

Customer demand in Poland is obviously in favor of well-equipped,

mid-sized used cars from abroad, rather than buying a new car in the

small car segment that falls into a similar price range.


Production by Brand

The majority of passenger cars produced in Poland are Western

brands. Fiat, GM, and VW all established their operations in the

early 1990s. While Fiat acquired a local manufacturer (FSM)

and modernized and expanded the existing plant, GM, and VW

decided to invest into a greenfield project. The Fiat plant near

Tychy produces Panda, Seicento and Fiat 500, and GM is produc-

ing the Astra and Zafira models in their plant in Gliwice. VW,

located in Poznan in the western part of the country, has central-

ized its production of the Caddy and T5 platform in Poland.

FSO, another local brand existing in Poland was acquired in 2005 by

AvtoZAZ from Ukraine and is currently preparing for the assembly of

Chevrolet models for GM,which plans to acquire a 40 percent stake

in FSO from the Polish Government.

Sales Production

2002 2003 2004 2005 2006



0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Production by Brand

20022006

Fiat

Opel

VW

FSO

0 150,000 300,000



Furthermore, Toyota has built a component manufacturing plant in

Walbrzych that produces power train components. A trophy project

of FDI in the country is the plant currently under construction by

MAN, the German truck manufacturing group, that is scheduled to

start producing trucks in 2008.

Economic activity is focused on areas around Warsaw, Wroclaw,

Poznan and Katowice, as well as Kraków, while rural areas are

growing much more slowly.

Sales by Brand

The market for new car sales in recent years has shown significant

fluctuations. Skoda ranked first in the market, with nearly 12%

of sales market share in 2006, and its assembly operations in the

Czech Republic are only 120 km away from the Polish border.

Fiat is still one of the top five selling brands in Poland. The

company benefits from a renewed model lineup and a product

range that focuses on the mini and small segments, which are

generally popular among consumers, and holds on to more than

40% of the market share in those two segments.

OutlookRisks

Road infrastructure is progressing only slowly

• The quality of public transport infrastructure – including

highways, roads, and railways – is not yet at desired levels.

• The Polish Government has launched programs targeting

improvement, but implementation is slow.

• Progress can be seen in fast-growing regions such as Wroclaw,

Poznan, Katowice, and Krakow, where highways already

connect to Germany and Western Europe. Warsaw still lacks this

facility.

Sales by Brand

20022006

Skoda

Toyota

Opel

Fiat

Ford

0 40,000 80,000


CO U N T RY PRO F I L E S — PO L A N D

37

Unemployment is high, but skilled young talent is sometimes

difficult to hire and retain

• The country-wide unemployment rate in Poland stands at a rather

high 12.4%.

• With EU membership and the opening of Western labor markets,

Poles – especially the young and well-skilled – are increasingly

working in Western Europe to earn higher incomes.

• Engineers and skilled industrial labor are being absorbed by

the industry in the boom areas (also by quickly developing

R&D centers), so mid-sized, less well-known enterprises may

experience difficulties in finding the talent they need.


38 million Poles represent a large local market

• Poland, with a population of approximately 38.1 million, is the

sixth-largest country in the EU after Germany, the UK, France,

Italy, and Spain.

• It is expected that private consumption in Poland will rise with

a growing economy and increasing living standards, making

the local Polish market very attractive. This is likely to have an

impact on the automotive market in the near future.

• The process of EU integration created a great possibility

for Poland to obtain financial support from the EU. Polish

companies and local governments alike have been beneficiaries

in this process. The year 2007 sees the start of the new EU

financing perspective in connection with the new EU budget for

2007-2013. In this period Poland will be able to obtain support

of over EUR 67 billion euros for various types of undertaking,

from infrastructure modernization, employee training, research,

and development, to support for new investments. This will,

of course, have a significant impact on the development of

infrastructure in Poland.

Special Economic Zones offer extraordinary incentives for FDI.

• The Polish Government has defined 14 Special Economic Zones

(SEZ) outside the fast-growing areas to support economic

development.

• Beyond the EU funding schemes available to investors, FDI in

those areas is supported by generous tax incentives. These might

reach up to 70% of capital expenditure for newly established

manufacturing operations.

• However, following EU membership, a majority of SEZ

incentive schemes will most likely expire by 2017.


CO U N T RY PRO F I L E S — RO M A N I A

With Dacia producing cars under licence from Renault for many years, Romania has a

long tradition in car production. After being acquired by Renault in 1999, Dacia became

the low-cost brand in the Renault portfolio focusing on the production of the Logan

model, which has been a great success showing an increase in production volume from

almost nothing to close to 180 thousand vehicles produced last year. As Renault was

pushing to localize component manufacturing in the country, the supplier industry was

absorbing many of the former Dacia workers that lost their employment following the

acquisition and restructuring of the company by Renault.

Furthermore, Daewoo maintained an assembly plant in Craiova that was acquired by the

Romanian Government following the collapse of the Korean company back in 2001. The

government, meanwhile, is currently seeking to sell this plant to an industrial investor

that commits investments to secure the future of this plant. Low wages continue to be a

significant advantage for the country to attract further investments in the sector.

Import vs. Export


500,000

500,000

Import

Export

ProductionSale

s

Romania

BucharestCraiova

PitestiTimisoara

Ateneul Roman – Bukarest

39


Romania, with a population of 22 million inhabitants, ranks the

country as the second largest new EU member state behind Poland.

The country has seen substantial increase in business activity

resulting in an increase of GDP stimulated by rising private con-

sumption. However, GDP per capita in the country is still among

the lowest in Europe. Hence, it is not surprising that there is not a

large car pool existing in the country. The limited road infrastruc-

ture together with income levels do not allow the car density to

surpass a level of 163 cars per 1,000 people, which is at the lower

end of the range in the CEE region. The countries’ roads are in

poor repair and a sizeable portion of the road infrastructure is not

surfaced.

Attracted by low labor costs, several international component

suppliers like Continental, Dräxlmaier, and ThyssenKrupp have

placed manufacturing plants in the Western part of the country

in recent years designated to ship production through Hungary

towards the Western European markets for exports.


Production by Brand

Automotive manufacturing in Romania is concentrated on

two brands: Dacia, in the Pitesti region 120 kilometers west of

Bucharest, and the former Daewoo plant in Craiova. Thanks to

the success of the Logan, the output of the Dacia plant has shown

a sharp increase in recent years, reaching 177 thousand units in

2006. Adding a station wagon version of the Logan in 2007 will

likely add to the production volume. The former Daewoo plant

was assembling car kits delivered by GM-DAT out of Korea. The


200,000

150,000

100,000

50,000

02002 2003 2004 2005 2006



Production by Brand

Dacia

Daewoo20022006

0 90,000 180,000



capacity of the plant has been quoted to be about 200,000 units

per year but actual volumes have been much lower recently. The

government is exploring for quite some time to find an industrial

investor willing to commit further investment to keep this

operation viable for employment in the future. Close to completion

of this document it was announced that Ford acquires the former

Daewoo plant in Craiova. Much of the production of both plants is

designated for shipment in markets outside Romania for exports.

Sales by Brand

Sales of new cars in Romania have risen considerably in recent

years, peaking at 256,000 units in 2006. The clear market leader

has been Dacia for many years now, claiming a market share of

more than 43% last year. Renault and Daewoo significantly fall

behind Dacia, with 10.1% and 9.5% of the market share, respec-

tively. Market demand is concentrating heavily on compact cars

followed by minis and small cars. With car leasing and financing

schemes available in Romania, new car sales could expand further.

Used car imports have been climbing in 2005 and could increase

further as Romania, heading towards WTO (World Trade

Organisation) accession, had to drop their policy on imported

used cars and had to comply with Euro 3 -Emission Standards, of

imports more than five years old.

OutlookRisk

Bureaucracy

At the administrative level various processes, formalities and

certifications are still considered too bureaucratic.

The practical interpretation and application of the fiscal legislation

may lead to contradictory solutions, although, in this respect,

significant changes have taken place during the last years.

Sales by Brand

20022006

Dacia

Daewoo

Renault

Skoda

VW

0 50,000 100,000


CO U N T RY PRO F I L E S — RO M A N I A

41

General lack of infrastructure has required strong commitment from the government

The current condition of roads is rather poor as 65% of Romania’s

total infrastructure needs to be improved. The lack of significant

investments in this sector represents a major impediment in the

economic development. The modernisation of the infrastructure

to achieve the EU standards has become one of the main national

priorities for the period 2007-2013. Three main highways are

currently under construction, crossing the country from east to

west, and are expected to be finished between 2010-2013.


Investment conditions

The fiscal legislation has been reformed both to fit EU rules and

to become more attractive to investors who increasingly view

Romania as a safe place to invest.

Labor costs and high qualification

• Romania’s low labor cost and very well trained and qualified

workforce have clearly attracted a number of automotive

component manufacturers.

• The country has a large manufacturing base and has historically

been less focused on agriculture compared to some other

Eastern European countries. Romania employed more than

100,000 workers in the automotive sector, lots of those having

lost their jobs upon transition to market economy. Many of them

are now employed by foreign automotive companies which

entered the country in recent years.

• Unemployment in Romania was at 4.5% in April 2007, which

is a very low level compared to other middle-sized or large

European countries such as Poland, France, Germany, and Spain.

• However, investors may expect difficulties in finding skilled

labor due to significant concentration of industrial investments

in big industrial areas. As an alternative, investors contemplate

investing in other areas with higher unemployment levels that at

the same time are located close to technical university centres.

Large economy and favourable geographical location

• Romania’s attractiveness as a destination for FDI is often

attributed to the large domestic market with a 22 million

population and its geographical location as a connection

between the Black, Caspian, and Mediterranean Seas.

• During the first quarter of 2007, Romania GDP amounted to

euro 21.4 million, as communicated by the Romanian Statistics

Office.

• In 2006, GDP growth was recorded at 7.7%, one of the highest

rates in Europe.

• Labor costs in Romania are still lower than in the Czech

Republic, Hungary, Slovakia, and Poland and are among the

lowest in the CEE countries. The average net salary is euro 285

per month.


In 2006, Russia defended its position as the largest single market for new car sales in the

CEE region. Almost 1.8 million new cars have been sold in Russia, up 23% from the prior

year and there is much growth potential for the future.

In line with prior years, it is expected that international brands continue to benefit

from that growth, taking further market share away from local producers. AvtoVAZ in

particular, with its well-established Lada brand, still ranks at first, claiming 38.9% of the

market share but could not capture on the growing market in the last three years.

The trend of international brands being the winners from market growth is likely to

sustain. Significant investments by international vehicle manufacturers going into Russia

will consequently expand production capacity in Russia, as these projects have and will

likely continue to

raise the profile

of international

brands with

Russian customers.

Import vs. Export


2,000,000

1,000,000

2,000,0001,000,000

Import

Export

ProductionSale

s

Russia

CO U N T RY PRO F I L E S — RU S S I A

Moscow

St. Petersburg

Togliatti

Taganrog

Kalinigrad

Kaluga

St. Basils Cathedral – Moscow

43

With more production capacity being installed in Russia by

international manufacturers, the local automotive industry

is getting even more pressure to restructure. Russian vehicle

manufacturers and suppliers are looking out for international

players to partner with in order to gain access to up-to-date

technology and manufacturing know-how. International players

alike are looking for Russian targets and partners to increase local

sourcing, targeting to achieve local content requirements being

established with investment programs.


Beyond market expectations, the Russian economy has recovered

fast and substantially from the countries’ financial crisis in 1998.

Driven by both accelerated demand for raw materials and from

robust growing local consumption, Russia’s GDP has more than

tripled from US$ 264 billion (1998) to US$ 985 billion in 2006.

Car density stands at about 189 per 1,000 people, which is con-

siderably lower than in other countries, and underlines the growth

potential of the Russian market. With increasing GDP per capita,

purchasing power is developing and may also drive modernization

of the existing car pool in the country, which is estimated to have

an average age of more than 10 years.

Sales Production

2002 2003 2004 2005 2006



0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,800,000

1,600,000

Production by Brand

20022006

Lada

Chevrolet

Ford

GAZ

Renault

0 100,000 850,000




Production by Brand

In the 1950s, Russia started its own mass car production in order

to supply the Russian population, isolated from the international

market. Hence, the majority of cars today in Russia are still very

much dominated by traditional local brands. However, international

companies started car-assembling activities by entering into contract-

assembly arrangements with local manufacturers or by establishing

their own production facilities. By 2008, about 20 foreign car makers

are expected to build up production plants in Russia. Many of these

foreign manufacturers are aiming to increase their local content

through component sourcing from either the Russian suppliers or

international suppliers investing in Russia. Most of the Russian

supplier industry is still highly integrated into the Russian OEMs and

cannot fulfil the requirements of Western standards, thus, they are

looking for Western partners in order to catch up.

Sales by Brand

The market shift within new passenger car sales over recent years

from local branded cars to international brands is expected to

continue. Whereas Russian brands had a market share of 58% three

years ago, this ratio declined to 37% in 2006. Russian consumers are

looking for safety and comfort features that local brands currently

do not offer in their models and emission regulation standards might

further strengthening the preference for international makes. The sale

of imported used cars with 288,800 units in 2006 is still significant

but expected to go down further.

CO U N T RY PRO F I L E S — RU S S I A

Sales by Brand

20022006

Lada

Ford

Chevrolet

Toyota

Hyundai

0 100,000 800,000


45

OutlookRisks

Red tape is still hindering the timely opening of new businesses.

• High administrative barriers slow investment in and development

of newly constructed production facilities.

• Russia’s tax, legal, and financial systems are much more

attractive to foreign direct investors, but the lack of transparency

requires extra efforts for governance, organization, and control.

• There is still a problem with obtaining licenses and permissions.

During the launch phase, investors could face additional costs

connected with the necessity of gathering various documents

from many institutions.

Production costs are rising from year to year and are approaching

those of other developing countries. So the advantages of

locating foreign production in Russia are becoming less clear.

• To reduce labor costs, foreign companies are starting to look for

new production sites in the Russian regions, but this placement

policy requires further measures to develop and adapt the

necessary infrastructure.

• Pricing on raw materials on the domestic market does not always

follow market principles. For this reason, not all companies are

presented with the same opportunities in the marketplace.

• Some basic industries are still under reconstruction (energy,

transportation,and utilities). Hence, the business plan should

consider possible changes in corresponding costs.


The current dynamic of economic development and the acti-

vation of deferred demand on many commodities makes

the Russian market one of the most attractive in Europe for

investment.

• Domestic passenger car manufacturing is lagging behind current

production technologies. It is inferior to foreign producers both

in quality and costs. However, at the moment, foreign producers

cannot meet the existing demand.

• The growth of consumer incomes and the extension of credit

services are boosting the demand for higher-class vehicles,

which means a preference for foreign brands.


CO U N T RY PRO F I L E S — SL OVA K I A

SlovakiaSlovakia has been very successful in attracting FDI in the automotive sector, which will

turn the country into one of the main production hubs in the CEE region. Back in 1991,

VW established an automotive assembly plant near Bratislava, and has expanded this

successful operation several times. The plant is described as very effective and currently

operates at a capacity of 250,000 units employing 7,400 people at this site. In recent years,

the French PSA Group decided to build a plant in Trnava that started production in 2006.

Kia’s plant in Zilina is scheduled to be finished later in 2007. Taking the capacity of these

plants together, Slovakia will have a production capacity that exceeds 12 times the sales of

new cars in the country. This characterizes Slovakia as a production hub for vehicles being

built for exports, predominantly to Western Europe. This dependency on car exports is

unparalleled in the industry globally.

Import vs. Export


500,000

500,000

Import

Export

ProductionSale

s

BratislavaZilina

Trnava

Bratislava Castle – Bratislava

47


Slovakia is one of the smaller countries that joined the EU in

2004. With 5.4 million inhabitants, Slovakia is about half the

size of the Czech Republic, from which the country separated

in 1993. It ranks the country 8th among the new member states

joining the EU in 2004. With nominal GDP per capita standing

at 29,5% of EU average, Slovakia ranks fifth among Eastern

European countries.

The countries’ development varies significantly among each

region. While the western part of the country, around its capital

Bratislava, saw significant industrial development in recent

years. The eastern part of the country, having deep roots in

agriculture, is lacking similar progress. Car density stands at

243 cars per 1,000 people, which indicates a growth potential

that will materialize with income levels rising further in the

years to come.

Production by Brand

The new era in automobile manufacturing in Slovakia started

with VW in Bratislava, where the German vehicle manufacturer

decided to build its first own plant in the CEE region in 1991.

Based on its success, VW expanded the plant several times and

currently produces the Golf, Polo, Touareg, and Audi Q7 models

in Bratislava. The landmark decision of French PSA group to build

a plant in Trnava, 50 kilometers north-east of Bratislava, produced

a second wave of automotive investments into the country. This

plant started production in 2006 and is focusing on producing the

Peugeot 207. The Korean vehicle manufacturer Kia selected Zilina,

200 kilometers north-east of Bratislava, to build a full-fledged

vehicle production facility expected to be operational in 2007.


250,000

200,000

150,000

100,000

50,000

02002 2003 2004 2005 2006



Production by Brand

VW

Audi

20022006

Peugeot

Kia

0 150,000 300,000



Based on these three large-scale automotive plants, a large number

of international suppliers followed their VM customers and set up

operations in the country as well.

Sales by Brand

The number of new car registrations in Slovakia, about 70,000

units per year, is still small within the number of total number

registrations. Consumers in Slovakia still have a preference to

buy used cars imported into the country as opposed to buying

new cars. For many years, the sales charts for new cars have been

dominated by Skoda. In light of the countries’ history, as a former

part of Czechoslovakia before the country split into two separate

states in 1993, the Slovakians still perceive Skoda as their ’home

brand‘. With wide distance, VW, Peugeot, and Renault follow

Skoda in the ranking of best-selling cars in Slovakia.

OutlookRisks

The sector activity is currently highly concentrated in the

Bratislava and Trnava area; hiring and retaining skilled labor

is becoming increasingly challenging.

• VW’s entry in the Bratislava region was followed by a number of

suppliers, which boosted the capital’s regional economy.

• VW employs about 10,000 people at this facility. High demand

for workers to staff manufacturing operations at the plant and

surrounding centers created a daily workforce migration from

up to 100 kilometers away.

• Operations of PSA in Trnava (50 kilometers north of Bratislava)

and Kia in Zilina (200 kilometers north-east of Bratislava) are

likely to tighten the labor availability conditions, which will

result in higher wages and more difficult conditions for smaller

component manufacturers establishing new operations.Sales by Brand

20022006

Skoda

VW

Peugeot

Renault

Suzuki

0 25,000 50,000


CO U N T RY PRO F I L E S — SL OVA K I A

49


Favorable environment for automotive manufacturing and

investment

• The Slovak Government has been very proactive toward large

investors like PSA and Kia in offering tailored infrastructure

solutions and attractive incentives.

• This approach, linked with persuasive reforms such as a flat tax

and user-friendly corporate tax system, helped to secure these

prestigious projects.

• The country’s economy shows a clear focus on developing

industrial manufacturing activities.

The country’s dependence on the manufacturing sector, and

the automotive industry in particular, provides a reasonable

basis to assume that operations in Slovakia will see a favorable

environment for many years to come.


Slovenia is one of the smallest countries in the EU, but surprisingly hosts a well-

established automotive industry. Almost 30 years ago, Renault invested in the Slovenian

plant, Novo Mesto, owned by Revoz, which is now producing about 170,000 vehicles

per year. The Novo Mesto plant has supported the development of a remarkable supplier

industry that produces components for the Renault production but also for exports into

Western Europe.

As wage levels have climbed, seeing levels considerably higher than in neighboring

countries, the investment activity in the automotive sector of Slovenia has slowed down in

recent years.

CO U N T RY PRO F I L E S — SL OV E N I A

Slovenia

Import vs. Export


500,000

500,000

Import

Export

ProductionSale

s

Ljubljana

Novo Mesto

Preseren monument and the Franciscan Church of

Annunciation in the back

51


Slovenia, with its two million inhabitants, is sometimes described

as a ’Mini Switzerland’, acknowledging the stage of the country’s

development and GDP per capita levels, compared with its

neighbors in Central and Eastern Europe. With a GDP per capita

comparable to Portugal and a car density standing at 474 cars per

1,000 people, Slovenia is one of the wealthiest countries and most

mature markets that has joined the EU since 2004.

The market for new car registrations in the country, with approxi-

mately 60,000 units sold per year, is rather as can be expected

given the total population of the country.


Production by Brand

Revoz is fully owned by Renault and is the one and only car

manufacturer that maintains a production site in Slovenia. This

year, Renault decided to expand its investment in Slovenia and

launched the production of their new model of the Twingo city

car in addition to the Clio model. Renault used approximately US

$546 million to modernize the plant in Novo Mesto, where cars of

the Renault brand have been produced since 1955. Revoz is one

Sales Production

2002 2003 2004 2005 2006



020,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Production by Brand

Renault

20022006

0 90,000 180,000



of the largest industrial companies in Slovenia and continues to be

one of the largest employers in the country. Cars produced at the

plant in Novo Mesto are designated for export and will be shipped

to Western European markets.With respect to the component

industry, Slovenia houses some domestic suppliers who developed

in former times when producing components on license from

international suppliers. In addition, several foreign component

suppliers, such as Faurecia, Hella, and Johnson Controls, built

component manufacturing plants in the country.

Sales by Brand

Considering that the country has approximately two million

inhabitants, the market for new car registrations is small. Renault,

in addition to VW, Opel, Citroen, Peugeot, Ford, and Hyundai

meet the demand for middle-class cars in the B- and C1-segments

(compact and lower middle clas. These companies represent a

combined market share of 60%, showing primary preference

of the Slovenian customers. Capitalizing on the popularity of

Renault being the brand produced locally, the Renault Clio is the

bestselling car in the market.

With the harmonization of VAT and duty schemes for EU

accession, some of the local market’s growth potential moved

to imported used cars in 2004 and 2005. In 2005, the number of

imported used cars reached 17,288 units, compared to 8,102 in

2004.

Sales by Brand

20022006

Renault

VW

Opel

Citroën

Peugeot

0 7,500 15,000


CO U N T RY PRO F I L E S — SL OV E N I A

53

OutlookRisks

Established business practices, combined with prevailing

socialist traditions, may create challenges for foreign investors

• Slovenia has a long-standing tradition in socialist political

culture. This can be seen by a rather restrictive privatization

process for some former state-owned enterprises in the banking,

telecom, and other sectors, aiming to protect the ’crown

jewels‘ of the country. Where privatization has taken place,

the government has retained a substantial stake in many of the

businesses.

• For companies considering a greenfield investment, the legal

system allows a fully owned investment, but companies

entering the Slovenian market find it beneficial to involve local

authorities in the overall investment strategy.

• Although the tax system has been aligned with Western European

pre-accession standards, taxes are an area that bear some level

of uncertainty for investors. This uncertainty has stemmed from

a perceived inconsistent application of rules and interpretations

among the various regional tax authorities in the country.

• Slovenia has therefore concentrated on attracting business in

the service arena that requires more highly skilled employees,

as opposed to relying on cheaper labor for more traditional

manufacturing operations.

Slovenia is about to catch up with Western Europe economi-

cally, and labor costs are following this trend closely

With Slovenian GDP per capita approaching the level of Portugal,

labor costs are well above the average of the EU’s other new

member states, with high personal income tax rates and social

security costs. However, personal income tax rates have been

significantly reduced in 2007.


A solid road infrastructure, proximity to Western European

markets, and the relationship to former Yugoslav neighbors

constitute some of the country’s attractiveness

• The road and highway infrastructure is well developed in

Slovenia, and the condition of these roads is better than that

of the roads in many other Eastern European countries. This

infrastructure, together with the geographical proximity to

Western countries, provides logistical advantage. The port of

Koper is also used extensively, particularly by Asian automotive

manufacturers.

• Traditionally, due primarily to its location, Slovenia has

represented the trading hub for the former Yugoslavia, whereas

Serbia, Croatia, and Montenegro have been areas where

manufacturing took place. This has made Slovenia an attractive

gateway for business into the other former Yugoslav countries,

although it now has increased competition from Serbia in this

regard.


The automotive industry has shown significant development in Turkey in recent years.

Based on a long-standing history of vehicle manufacturing and benefiting from a free

trade agreement with the EU allowing customs-free exports to Western Europe, Turkey

saw significant growth in vehicle manufacturing and sales of new cars over the last five

years. The industry in the country shows a remarkable focus on large commercial vehicle

(LCV) production with plants operated by international manufacturers among which

Ford, Fiat, PSA, and Honda are the largest. The country has capitalized on its talented

workforce and experience in industrial manufacturing, and has also taken advantage

of low labor costs in the country. Turkey also boasts an excellent geographical location

that allows shipment of vehicles over the Mediterranean Sea to large markets in France,

Italy, and Spain. Given the size of the countries’ growing population, combined with its

relatively small car volume, Turkey offers significant potential for further growth in the

local market.

CO U N T RY PRO F I L E S — TU R K E Y

Turkey

Import vs. Export


1,000,000

1,000,000

Import

Export

ProductionSale

s

Ankara

Bursa

Izmit

55


Turkey has taken significant steps in reforming the country in

recent years. After the financial crisis in 2001, the government

successfully reduced structural inflation, tamed previously out-

of-control budget deficits, and reduced public debt. The country

is now discussing to become a member of the EU in the future.

However, difficulties in meeting expectations of an International

Monetary Fund (IMF) agreement signed in 2005 might cause a

sudden change in overall investor sentiments.

The success in transforming the countries’ economy is under-

lined by Turkey’s increasing income levels, where GDP per capita

increased from US$2,981 to US$3,412 in the 10-year period from

1993 to 2003.

Following Russia and Germany, Turkey has the third largest

population among European countries, with more than 70 million

inhabitants. The size of car volume in the country, estimated at

76 vehicles per 1,000 people, is by far the lowest in Europe and

signals significant growth potential in the future.

The countries’ free trade agreement allows direct access and

customs-free exports to Western European markets. That fact, in

addition to the countries’ reputation of being a low-cost, high-

quality production base has certainly helped to attract FDI by the

automotive sector into Turkey.

The first auto assembly plants in the country were built in 1929,

marking the start of the automotive industry, which is now

centralized in the Bursa region, approximately 200 kilometers

Sales Production

2002 2003 2004 2005 2006



0

100,000

200,000

300,000

400,000

500,000

600,000

0 125,000 250,000

Production by Brand

20022006

Renault

Toyota

Fiat

Hyundai

Honda



south of Istanbul. The automotive industry is a key element and

contributor of Turkey’s economic and GDP growth. Currently

the industry has 17 automotive assembly plants, of which 13

manufacture LCVs. Due to the numerous vehicle manufacturers in

the country, many suppliers have also come to Turkey. Currently,

more than 700 suppliers form an excellent automotive local supply

chain that exports and delivers components to the assembly plants

in the country.


Sales by Brand

Following a dip caused by the financial crisis in 2001, the market

for new car registrations has soared in recent years. The number of

new cars sold in the country more than tripled from 120,000 units

in 2001 to more than 450,000 units in 2006. The local Turkish

market shows a clear preference for models in the small and lower

medium segments, making the country a key market for LCV sales

in Europe. Currently, those manufacturers with local production in

Turkey and a clear strength in the small and compact segments are

enjoying the top ranks in the sales statistics.

Turkey is currently seeing fluctuations in the economy that has

had an impact on new car sales. New registrations decreased to

370,000 units last year versus 450,000 units in 2004.

OutlookRisks

Challenging macroeconomic expectations

• From a macro-economic standpoint, Turkey faces serious

challenges ahead and could have difficulty meeting targets from

the IMF.

• While long-term interest rates (over 60% in 2001) are still over

20% in 2007, the current account balance remains negative,

which should be an additional obstacle to diminish foreign

debts, currently at over 47.3% of GDP.

Sales by Brand

20022006

Renault

Ford

Hyundai

Fiat

Toyota

0 30,000 60,000


CO U N T RY PRO F I L E S — TU R K E Y

57

• Despite continuous growth figures combined with an inflation

rate of around 10% for the last three years, Turkey needs

to manage its vulnerability against economic shocks by

implementing structural changes. In particular, the economy’s

dependence on large capital inflows exposes Turkey to investor

sentiment.

• Although the inflation rate has been reduced significantly,

inflation well above target continues to require tight monetary

policy.

The country’s geographical position might put exports to some

countries at stake

• Higher energy prices have led to increasing transport prices

around the globe. This has had a direct influence on vehicle

transportation costs.

• Most exports go to Western Europe; direct neighbors import

few of Turkey’s vehicle output. This is also applying to the first

five months of 2007, where 57.4% of total exports were to EU

countries.

• As other CEE countries closer to Western European markets

increase their production, Turkey could face fierce competition

due to its greater distance from these markets. On the other

hand, Turkey offers unprecedented proximity to Middle Eastern

and Northern African countries.

• In recent years, the growth in domestic market sales has been

slow. Despite the credit offerings that enable easier purchase of

automobiles for Turkish customers, the demand for vehicles has

dropped. The number of vehicles sold in the first five months of

2007 has shown a 31.5% decrease compared to the same term in

last year, whereby the car sales in total has dropped by 34.8%.


Low car density combined with strong population growth

• Turkey’s comparatively small car fleet (5.5 million passenger

cars) and large population, combined with more accessible

credit offerings, present a strong combination of factors for

significant prospective growth.

A well-established foreign automotive industry and structural

reforms ease market entry of foreign VMs and production

expansion.

• With more than 20 foreign VM projects and more than 700

foreign suppliers involved, it can be considered a mature

industry sector that gives easy access to establish new facilities.

• Lower cost of employment compared with other European

countries, skilled labor force and a highly developed

technological infrastructure.

• A newly implemented corporate tax code (introducing a flat

tax rate at 20%) with new provisions that enable the taxpayers

to have more clearance in respect of their tax applications will

promote the investment environment (e.g., thin capitalization,

transfer pricing, foreign tax credit, participation exemption,

CFC).


CO U N T RY PRO F I L E S — UK R A I N E

UkraineFollowing the countries’ economic turnaround since 2002, Ukraine’s automotive industry

has shown considerable development in recent years. The number of new cars sold in

the country rose from 60,000 units in 2001 to more than 250,000 units in 2005. Growth

in 2006 has been spectacular and reached an extraordinary level of 40%, bringing new

registrations up to 370,715. While growing steadily, the local automotive industry in

Ukraine has not been able to serve the local demand, and the country has had an import-

based market for quite some time. The economy of Ukraine historically shows significant

integration with Russia, so there is no surprise that the largest producer of vehicles for

the country is the Russian AvtoVAZ group, that also claims the position of the top-selling

brand in the market. The Ukrainian Government is supporting further growth of the sector

in the years to come; a mid-term plan is aiming to attract further investment and expand

existing plants to grow output up to 500,000 units per year.

Import vs. Export


500,000

500,000

Import

Export

ProductionSale

s

KievCherkask

Illiyichevsk

Lutsk

Zaporozhye

Zakarpattya

Kremenchug

Domes of Pochaeyvska Lavra Church

59


Ukraine has begun taking significant steps in reforming the coun-

try over the last three to four years. Measures taken by the govern-

ment were aimed to address structural inflation, budget deficits,

and public debt. Private consumption is increasing, stimulated by

higher income levels. To sustain this economic development and to

encourage stronger investment, further reforms need to be put in

place. High on the list of priorities are the enactment of corporate

law, renewal of the land code, and improvement of intellectual

property protection. These additional reforms will be key pre-req-

uisites for more Western investors to consider Ukraine as a com-

petitive market for FDI in the CEE region.

With 47 million inhabitants, Ukraine is the seventh-largest coun-

try in Europe, ranking third after Russia and Turkey in Eastern

Europe. With a car volume estimated at 115 cars per 1,000 people,

the country shows high growth potential for car ownership in the

future.


Production by Brand

Ukraine has a long tradition of vehicle production, with AvtoZAZ

being the indigenous car maker of the country, producing the

Tavria and Slavuta models. The company has increased its

output almost tenfold since 2001 and has produced close to

52,000 units last year. Next to their own models, AvtoZAZ also

assembles models from foreign manufacturers such as AvtoVAZ,

GM, Chevrolet and Chery. Based on AvtoZAZ’s development,

production in Ukraine reached 192,000 units in 2005.

Furthermore, there are other local manufacturers like Eurocar and

LuAZ producing in Ukraine. Eurocar, located in the Uzhgorod

district in the western part of the country, is licensed to assemble

models from Skoda and VW, whereas LuAZ is producing


300,000

200,000

100,000

02002 2003 2004 2005 2006




vehicles for Hyundai and Kia. In order to improve competitiveness

and eventually become export-oriented, local production requires

more presence from foreign suppliers in the country.

Sales by Brand

New passenger car sales reached 370,000 units in 2006, up

from 65,000 units five years ago, more than tripling new car

registrations since 2001. While Ukrainians tend to spend most

of their disposable income on consumer goods, increasingly

affordable car credit helped car sales to grow with speed.

Used cars imported from outside the country still take up a

significant part of the automotive market. Although, in preparation

of WTO entry, the Ukrainian Government abandoned the import

ban on used vehicles more than five years old and increased

import duties from 20% to 25%, the number of used cars still

increased to more than 100,000 units last year.

Sales by Brand

20022006

Lada

Daewoo

Chevrolet

ZAZ

Skoda

0 55,000 110,000


CO U N T RY PRO F I L E S — UK R A I N E

Production by Brand

20022006

Lada

Chevrolet

ZAZ

Daewoo

Skoda

0 40,000 80,000


61

OutlookRisks

The absence of political and economic stability

• High level of inflation, which is the result of current negative

account balance, may lead to a decrease in industrial production

and slow down economic growth.

• Uncertainty in energy policy; constant government

representations about the possibility of moving away from

Russia as Ukraine’s main energy supplier make the task of

energy costs prediction more difficult.

• Defaults in social policy in previous years could cause the

state to divert budget resources intended for infrastructure

development or fulfilment of investor commitments.


The second largest economy and car market in the CIS

• Current annual growth of passenger car segment is about 40%,

which suggests the market will double in size by 2010.

• Last year, The Concept for Developing the Ukrainian

Automobile Industry and Regulating the Automotive Market

Until 2015, was released. It is believed that this will stimulate

FDI in the industry.

• The government is also developing a set of initiatives aimed

at extending the localization of foreign manufacturing inside

Ukraine; among these initiatives is the organization of a SEZ

near Uzhgorod (providing preferential terms of taxation for

component producers).


The Country Profile section of this

document provides an industry overview

of the local automotive markets for the

10 countries selected in the CEE region.

With an understanding of the sales and

production activity in these countries, as

well as the risks and rewards associated

with these markets, we can begin to look

at the region at a deeper level. In the

following section we want to take a more

holistic view on the CEE market by:

• Summarizing some of the key

characteristics of the region.

• Offering a consolidated view on sales

and production for the entire region.

• Discussing new challenges for

companies operating in, or moving into,

the region.

While CEE investment decisions require a

selection of a particular location in one of

the countries, corporate decision-makers

should consider the CEE area as a whole.

Key Characteristicsof the Region

Automotive Diversity

The CEE area is not a homogeneous

block, but a rather diversified economy.

With the exception of Turkey, the

countries analyzed in this report have

a common historical background as

satellite countries of the former Soviet

Union. Since the opening of the CEE

economies in the early 1990s, the paths

these countries have taken to modernize

their economies have varied significantly.

The countries differ widely in:

A Holistic View ofthe CEE PassengerCar Market

A HO L I S T I C VI E W O F T H E CEE PA S S E N G E R CA R MAR K E T

Digging deeper into

the CEE region.

63

• Geographic Breadth – The CEE

region spans from the German border to

the Iranian frontier and from the

Mediterranean Sea to the Arctic Circle.

• Development – GDP per capita

development varies by a factor of nearly

10 between the lowest and the highest.

• Population – Population sizes vary by a

factor of over 70.

• Automotive Investment – Recent

automotive inward investment ranges

from the highest in Europe to almost

none.

• Foreign Investment – Diverse attitudes

toward foreign investment range from

incentive friendly to protectionist.

• Relationship with the European Union

– The individual countries’ relationships

with the European Union vary from full

membership to simply trading.

• Importance of the Automotive

Industry – The importance of the sector

to the individual countries’ economies

differ widely from exporting over 75% of

production to complete import.

• Ownership – Car ownership levels vary

by a factor of five between the least and

the most developed.

Additionally, the tradition of the

automotive industry varies from

longstanding indigenous brands to no

tradition at all.

Differing Positions in the Automotive

Landscape

A closer look at the countries investigated

in this report reveals that CEE countries

can be classified into one of four distinct

positions in the global automotive

landscape. While some countries have

deployed an industrial strategy leading

to a strong presence of the automotive

industry in the domestic economy, others

are currently positioning themselves in the

sector.

As Figure 12 shows, each of the clusters

raises its own set of issues.

Global Player – While the region could

become a net exporter of vehicles, will the

largest market, Russia, buck the forecast

and avoid being a net importer?

Major Production Centers – How will the

local labor markets cope with the demand

for the wide range of skills needed to run

the plants? Will this push labor costs up,

thus negating one of the key reasons for

producing in the region?

Strong Market, Significant Net

Exporters – Will these countries balance

local demand with export potential?

Smaller Players – Do some of these

markets have growth potential, and are

any still open to a pioneer advantage for a

vehicle manufacturer willing to invest in

production?



2011 data

-200,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

-200,000 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

production

sales

Bulgaria Hungary Romania Slovakia Turkey Czech Republic Poland Russia Slovenia Ukraine

Global Player - Russia

Major production centres –

Czech R, Slovakia

Strong market, significant net

exporter – Turkey, Poland

Smaller players

Net exporters

Net Importers

sales

-

–

–

Net exporters

Net Importers

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Sale

s

Production

1,400,000

1,600,000

1,800,000

00 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

2,000,000

0,000

200 00 0 000

Net Importe

rs

Net Exporters

Figure 10: Passenger Car Production vs. Sales Compared

* LCV production – which has a major impact on certain markets, such as Turkey – not included.

Source: Ernst & Young (Based on 2011 forecast data from Global Insight as of July 2006)

: Shows developement compared to prior year projections

Major production

centers

Strong market, significant

net exporter

Smaller players

Global Player

Bulgaria

Czech Republic

Hungary

Poland

Romania

Russia

Slovakia

Slovenia

Turkey

Ukraine

U

HRo

Sn

PT

SkCZ

Ru

U

H

Ro

Sk

P

T

Sn

CZ

Ru

B

B

65

CEE region developing fast

The automotive market in the CEE region

is developing fast. In last year’s brochure

we had summarized the each country’s

position by applying sales and production

volumes forecasted by Global Insight for

2011 as show in figure 12. Considering

recent movements, this projected scenario

needs to be further adjusted as indicated by

the arrows added to last year’s chart:

• Russia is getting more and more into the

focus of global manufacturers. There is a

long list of VMs that announced to build

plants in the country. Beyond American,

European, Japanese and Korean

manufacturers most recently Chinese

and Indian VMs have announced their

plans to enter this market.

• Ukraine has seen spectacular market

growth in 2006. The market reached

370,000 units which is almost the

quantity that has been forecasted a year

ago for the Ukraine in 2011.

Consequently Ernst & Young expects

this market to grow even bigger as is

indicated by the upward arrow in the

above chart.

• Polands production activity is already

heavily benefiting from expansions of

existing plants in line with new models

being produced in the country by Fiat

(Fiat 500 and Ford Ka), GM (Opel

Astra) and FSO (Chevrolet models).

Production output may exceed 700,000

units in 2008 or 2009 which means that

Poland could surpass Turkey in terms of

numbers of vehicles produced locally.

• Romania might see a jump in

production volume following Ford’s

acquisition of a former Daewoo plant in

Craiova. Based on recent announcements

Ford plans to invest into the plant to

prepare for production of up to 300.000

units which could bring Romania’s

output to 500,000 units by 2009.

Main Risks and Rewards Across the

Region

In addition to presenting widely different

opportunities, each of the CEE countries

provides variable business environments

with a different emphasis on the key risks

to be considered.

Figure 13 shows a summary of the main

risks and rewards identified by Ernst &

Young’s local automotive leaders as

current issues of attention among our

clients and the business community.



Figure 11: Risk and Reward Overview by Country Compared*

Risk Country Reward

Business practices lack transparency

Underdeveloped infrastructureBulgaria

Attractive labor costs

Production base to supply components

Labor shortages: increasing wages

Reaching production and sales capacity limitsCzech Republic

Investment climate: stability and predictability

Large supplier base

Labor shortages, increasing wages

Heavy bureaucracyHungary

Advantageous export position to Romania and Bulgaria

Well-developed investment climate

Slowly progressing infrastructure

Unemployment: talent leaves to Western EuropePoland

Large local market

Special Economic Zones offer attractive incentives

Increasing labor costs due to surcharges

Heavy bureaucracyRomania

Large local market

Advantageous geographical location as EU expands eastward

Heavy bureaucracy

Fast-growing production costsRussia

Outstanding growth potential: large market

Tangible demand for quality and reliable cars

Implemented incentives are difficult to obtain

Labor availabilitySlovakia

Proactive government is implementing attractive investment conditions

Strong industrial focus on automotive manufacturing issues

Tax inconsistencies

High labor costsSlovenia

Excellent infrastructure

Advantageous geographic location

Volatile market

Geographical location – exportsTurkey

Outstanding growth potential – large market

Well-established automotive industry

Unstable Political Climate

Volatile marketUkraine

Qualified workforce at attractive costs

Growth potential: significant automotive market

* Please note: this list is not exhaustive.

Source: Ernst & Young

67

Consolidated View of theMarket in the CEE Region

Sales

The automotive market throughout the

CEE region has shown substantial growth

over the last five years and this trend is

expected to continue. The market for new

car registrations in the region is expected

to more than double throughout the ten

years between 2001 and 2012. Looking at

absolute figures confirms that the increase

is substantial. Almost 2.5 million vehicles

are expected to be added to the annual

sales volume, which will almost definitely

translate into substantial expansions of

dealer networks in the CEE region.

Assuming an average Western European

dealership sells approximately 350 cars per

year, this expected increase would translate

into adding more than 700 dealerships

each year for the 10 years between

2002 and 2012. Unlike the stagnating

Western European or North American

markets where automotive dealerships

are consolidating and many operations

are dealing with cost-cutting and other

measures to survive in an environment

characterized by tough competitive

pressures, the automotive market in the

CEE region is booming.

Who is taking advantage of this growth?

The charts (on pages 68 and 70) show a

consolidated look at the CEE market by

showing sales of new cars by brand across

the region:

Car sales in the CEE

region are booming –

unlike other stagnant regions

around the world.



Figure 12: New Car sales per brand across the CEE region in 2006 compared to 2002

Passenger cars soldMarket ShareDacia

Hyundai

Skoda

Chevrolet

Toyota

Renault

Ford

Lada

VW

Daewoo

Opel

20022006

0040% 150,00050,000 800,000300,000

Source: Ernst & Young, Global Insight

5%10%

69

From the charts above, several observations

can be made:

• Lada is, by far, the top-selling brand

across the region. The brand capitalized

on their strength in the Russian market,

which is the biggest single market in

the region. However, Lada is currently

not able to participate in market growth,

volumes remain largely unchanged

but market share has been decreasing

considerably.

• Ford, Renault, and Toyota significantly

lag behind Lada, but each company has

sold more than 200,000 new cars per

year in 2006. Compared to their sales

ranking in Western Europe, all three

brands have achieved a higher market

share in the CEE region.

• Among the other manufacturers,

Chevrolet, Hyundai, Daewoo, and

Nissan represent products of Asian

manufacturers which are predominantly

designed in Asia and to a significant

extent imported into the region. The

respective sales of VW, PSA, and Opel

in the CEE region rank much lower

compared to the Western Europe sales.

• As indigenous brands from the CEE

region, although under ownership of

global vehicle manufacturers, Skoda and

Dacia have market shares in the CEE

region that are much higher than they

have in Western Europe.

Additional insight into the consolidated

CEE market provides an analysis of

what type of cars are being sold in the

region. Such analysis confirms that the

average car buyer in the CEE region has

a clear preference for the mini and small

car segments, which also confirms the

expectation that car buyers are particularly

looking for “affordable” cars. The Renault/

Dacia Logan is probably the best example

of the typical affordable car. In 2006, the

Logan sold almost 120,000 units claiming

a 3.1% market share for the brand. Among

the top 10 sellers, Chevrolet, Hyundai

and Daewoo (all Korean makes) are three

other brands representing the “budget” car

segment. It is important to note that the

majority of vehicles sold by the ‘top selling’

Lada brand fall into the same category,

based on the pricing of its vehicles.

Who is taking advantage of this

market growth?

Lada is the top-selling brand in the region. Ford, Renault, and Toyota have higher sales in CEE than in Western Europe.


Production

Vehicle manufacturing activity in the CEE

region shows the same robust upward trend,

posting continual volume growth through-

out the 10 years between 2001 and 2012.

Total volume is expected to double which

confirms that the increase is substantial.

Adding an expected 3.2 million vehicles to

the volume of vehicles being produced will

translate into adding a fully utilized car plant

producing more than 250,000 units annually

in each year of the reference period. This

provides for a ripe business climate, com-

pared with the stagnating Western European

or North American markets, where compa-

nies are dealing with cost-cutting or restruc-

turing their operations.

The graphic below shows a consolidated

picture of the production activity in the

region with an overview of the companies’

installing capacity in the CEE region.


The CEE business

climate is ripe with

production activity.

Figure 13: Vehicle Production per VM group across CEE region 2008 compared to 2002

Change in Production 2002 – 2008Production volume 2008

Ford

Hyundai

Fiat

GM

AvtoVAZ

Renault

VW

Suzuki

Toyota

PSA

001,200,000 200,000 400,000-200,000 600,000

Source: Ernst & Young, Global Insight July 2007

200,000400,000600,000800,0001,000,000

71

VW is expected to overtake the Russian

AvtoVAZ group with the Lada brand as

the largest producer in the CEE region by

adding around 300,000 units to reach more

than a million units production volume

by 2008. The most aggressive expansion

of production capacity in the CEE region

in the years analyzed in the above chart

is targeted by the French Renault group,

which plans to more than double the

number of vehicles produced to more

than 800,000 units by 2008. Aggressive

expansion plans are also pursued by the

Korean Hyundai group, GM, and PSA by

adding more than or close to 400,000 units

each in the CEE region. Fiat and Toyota are

also expanding their production capacity

substantially but with some distance to the

others. Ford, being the third largest brand

in Western Europe, is not yet keeping

pace with its rivals by only increasing

local production by an estimated 240,000

vehicles in that period.

However, these forecasts may need to

be adjusted. Close to completion of our

report, Ford announced their acquisition

of the former Daewoo plant in Romania

and their plans to modernize the plant

to reach a capacity of 300,000 units per

year. Once these plans materialize, Ford’s

current expected position needs to be

adjusted upwards closer to the positions of

PSA, Hyundai and GM. When looking at

the capacity additions by vehicle segment

other interesting details come to surface. In

line with expectations, the majority of the

produced vehicles fall into the mini, small,

and subcompact segments.

Comparing production activity with sales

volumes in the region over time, the CEE

region has developed from a market of a

net importer to a net exporter of vehicles.

Last year, there were approximately

300,000 more vehicles produced than sold

in the region. This excess of production

over sales is expected to grow to reach

a surplus of 1,1 million units by the

year 2012. This means that the capacity

additions being laid down right now will

add to the existing overcapacity of units

in the Western European market. Is this a

basic concept underlying the CEE markets

or should vehicle manufacturers apply

different approaches to the market?

VW to bypass AvtoVAZ

as largest producer in CEE

Renault to add 500,000 units

in CEE, Hyundai and

GM following

Exporters to Western Europe

are experiencing a low-cost

production base. Importers into

CEE are capturing growth

in the region.


Analyzing the forecasted production

and sales activity for 2008 across the

CEE region by vehicle manufacturing

group brings to surface the following

observations:

• The Ford Group is expected to sell

about 200,000 more vehicles to the CEE

region than units being produced locally,

making Ford the largest net importer

among vehicle manufacturers to the

region. It looks as if Ford is targeting

to utilize their vehicle manufacturing

capacities best across all of Europe as

opposed to bringing sales and production

in balance for the CEE region. That

impression changed recently due to

Ford’s announcement to acquire a former

Daewoo plant in Craiova, Romania.

Ford is considering investing close to a

billion euros to modernize this plant and

prepare for production of 300,000 units

annually. Once these plans materialize,

the observed position of Ford seen as a

net importer of vehicles into the region

will change considerably.

• The market leader across the CEE

region, the Russian AvtoVAZ Group,

is struggling to participate in the

projected market growth. Global

Insight forecasts that AvtoVAZ will

sell slightly less cars compared to their

approximate 800,000 units sold in 2006.


Figure 14: Net Imports into CEE (Positive) vs. Exports into Western Europe (Negative)

Ford

Daewoo

Hyundai

Suzuki

PSA

Fiat Group

Renault

VW Group

Toyota

AvtoVAZ

GM

400,000-800,000

Source: Ernst & Young, Global Insight, July 2007

200,0000-200,000-400,000-600,000

Ford’s new plans in

Romania will change

their import/export

position considerably.

73

As the Group historically focused on the

Commonwealth of Independent States

(CIS) markets, there is no surprise that

the company shows a balance between

sales and production activity for the

CEE region.

• The 2008 projections suggest a rather

balanced situation for a number of

manufacturers. The projected production

volumes in the CEE region for GM,

Toyota, and Hyundai are close to the

level of expected sales, allowing for a

relatively small window of 20% above

or below the number of units produced.

While AvtoVAZ is not expected to

export significant volumes to countries

outside the region, the above-referenced

international manufacturer groups seem

to strike for such balance.

• In light of the press coverage GM

gets around its restructuring efforts in

Europe, it is remarkable that GM does

not opt for larger imports into Western

Europe from manufacturing bases in the

CEE region.

• For the Korean Hyundai Group

(including KIA), it is expected that the

majority of the vehicles being produced

in the CEE region are expected to be

sold in that marketplace, as opposed to

exporting large volumes into Western

Europe from Korea. For the Korean

Hyundai Group, this observation might

be backed by the Group’s goal to offset

the foreign currency risk attached to

importing vehicles produced in Korea

into Europe.

• In contrast, VW Group, Renault, FIAT,

PSA, and Suzuki individually show

significant imbalances between local

production and sales forecasted for 2008.

All of these vehicle manufacturers are

expected to have significant excess of

production volume over sales, which

indicate that these manufacturers are

using production capacity established in

Eastern Europe for exports into Western

Europe.

Looking at the projected volume of

exports from the CEE region into Western

Europe over time, the current forecasts

seem to support the observation that the

noted imbalance is not expected to rise

further in the years to come. The current

boom of investments into production

capacity has peaked in 2006 and 2007,

with approximately 700,000 vehicles

being produced in addition to prior years’

volumes. The increase for 2008 is expected

to only 500,000 units and current forecasts

suggest that this number will flatten out

after that.

There is good reason to expect that this

rapid growth in automotive manufacturing

in the CEE region is expected to level

off. This and other new challenges are

discussed further in the next section.


Production to Consolidatein the CEE Region in Light ofNew DynamicsView Through the Rear MirrorOver the last 15 years, the CEE region has

seen substantial growth and development

in many sectors – and in the automotive

industry in particular. Fueled by the

harmonization of laws and regulations

in preparation for the EU enlargement

in 2004, the region got another push for

further economic development.

In the early 1990s, Poland, Hungary,

and the Czech and Slovak Republics

attracted major FDI by Western vehicle

manufacturers starting to build assembly

plants on the ground in Eastern Europe.

Following the EU accession of the Czech

and Slovak Republics, these countries

absorbed the prestige and large-size

investment projects of the next wave

initiated by the TPCA Consortium of

Toyota with the French PSA group, KIA,

and Hyundai that added capacity of

approximately 750,000 units annually.

As was the case with earlier waves of FDI

flows initiated by vehicle manufacturers,

many suppliers were launching projects

to follow their vehicle manufacturer

customers to their new locations

establishing manufacturing operations in

these countries. The new EU member states

have raised their profile with the industry

through governmental changes suggesting

more political stability. They have also

aligned their tax and legal systems, as

well as regulatory standards and business

practices, with those accepted standards

of the “Old Europe”. In particular, EU

membership granted these countries direct

market access to the highly developed

European markets by cutting away customs

and excise duties that were hindering prior

cross-border trade.

Based on their new EU membership, these

countries were offered an extraordinary

“package” for foreign investors establishing

plants in these countries, which included:


1st wave of FDI in

the early ‘90s fueled

major development.

75

• Skilled labor at low wages

• Significant government investment

incentives stimulating FDI

• Direct market access for imports into

the highly developed markets in Western

Europe.

Large multinational suppliers followed by

many mid-size businesses took advantage

of these ’once in a lifetime‘ conditions,

following their OEM customers and

deciding to shift industrial manufacturing

from the Western European countries

to these new “low-cost” destinations in

Central and Eastern Europe. The labor cost

differential between Western and Eastern

Europe alone suggested significant savings,

if not “windfall” profits. Government

incentives attracting FDI helped these

companies sweeten the business case and

allowed for parts of the one-time capital

expenditures associated with such a move

to be financed. This environment created a

rush into the CEE region, especially for the

automotive industry, that was breathtaking.

But these ’once in a lifetime’ conditions for

investments in the region are disappearing.

Standard models, such as closing a factory

in Western Europe and transferring the

assembly operations to a new plant in

Eastern Europe (where you hire people,

get the production up and running, fix and

stabilize quality, and begin shipping newly

manufactured products to Western Europe),

are proving to be less attractive with longer

payback periods. While the criteria for

making such ‘relocation decisions’ remains

generally valid, their individual weight, and

the assessments and the scoring models

used to support ‘decision making’, need to

be adjusted considerably.

New Dynamics – The Times Are ChangingSome of the changing dynamics that have

developed into challenges for companies

with business plans in the CEE region are

driven by the region itself – others are a

reflection of measures taken by Western

European countries to improve their

competitive position by becoming more

flexible or by cutting back on benefits.

Availability and Cost of Labor

As many of the Central and Eastern

European countries have smaller

economies, these countries are starting to

see their capacity limits in many aspects.

One of the most prevalent factors that

make investments in the CEE region more

challenging is the fact that the number of

skilled laborers continues to decrease in

many locations.

The investments currently laid down in

the region have already started to absorb

the workforce available in those regional

clusters around the new large vehicle

manufacturing operations. As many


suppliers decided to locate their plants in

the same area, it is not a surprise that the

supply of local workforce is being stretched

by the demand from these companies.

Labor availability has developed into a

serious concern for many companies and

therefore has become a significant factor

that needs to be considered before making a

decision about where to locate new projects

or extensions of existing plants. Labor

shortages in the region have resulted in big

hurdles for companies that had to staff their

newly built facilities.

However, a tighter labor market is also

posing difficulties for the companies that

have been operating plants for several years.

As the skilled and talented workforce has

been absorbed early on, companies have

to take on workers that require significant

training to develop the skills required to

work in the new environment and to get

accustomed to the defined requirements.

Training efforts are an issue that companies

have underestimated in the past, in terms of

the hours and level of training needed. Often

this advanced training requires professionals

from the company’s home-base in Western

Europe or overseas to come to the region

to manage the training process effectively,

or taking the new staff to established

operations, which adds additional costs. In

those areas, where even semi-skilled labor

is no longer available, companies are taking

measures to attract workers from the wider

surrounding areas to commute to the new

automotive clusters to fill the vacancies.

For instance, there are many workers from

southern Poland or even Ukraine that

commute on a weekly basis to their new jobs

in the Czech or Slovak Republics. But it is

already foreseeable, that those workers who

have to travel to another country to work

may be the first ones that decide to leave

one company for another in an area closer

to their home, once the development in the

region makes that option available.

Companies experiencing difficulties in

staffing their operations also tend to get

more aggressive in hiring workers currently

employed at other factories. As these

workers have been trained by their current

and former employers, there is a good, albeit


77

short-sighted, argument that savings on

training can be used to pay a premium/

bonus on top of the current wage level to

motivate people to terminate their current

employment in order to take a better paying

offer.

Companies are also increasingly

challenged by the inability to retain

qualified employees, as employees in the

CEE region tend to show a lower level of

loyalty to their employers, compared to

levels in Western Europe. Turnover levels

have continued to climb over the years for

many companies in the CEE region – and

there is no sign of this trend decreasing in

any significant way in the future.

All these factors are fueling major wage

increases in the CEE region. There are

locations that have seen wage increases

of 20% or more each year for the past

few years. Such increases have not been

factored into many business cases or

projects in the region and have therefore

created challenges for those investing and

make the market entry difficult for those

that consider such investments.

Incentive Schemes Are Becoming Less

Attractive

For many companies building plants in

the CEE region over the last few years,

incentive schemes available in those

countries have substantially helped finance

and have sweetened (if not made) the

business case for their investment projects.

Incentive packages offered to investors are

often comprised of European Funds, state

and regional government aids, direct tax

exemptions, and/or other privileges.

European Funds have covered direct

investment subsidies to capital expenditures

involved, as well as backing up expected

training costs incurred by investors. As the

EU is effectively entering 2008 into their

new program cycle for funding of projects, a

new allocation of funds among the member

states will likely effect incentive schemes

available for FDI in the CEE region.

Many of the smaller countries that joined

the EU in 2004 have already benefited from

their membership through substantial

development delivering increases in GDP

and in income levels (GDP per capita).

These smaller countries have been assessed

as areas that need lower incentives to

continue on this path. Therefore, countries

like the Czech and Slovak Republics,

Hungary, and others will see lower funding

levels available for foreign investors. Poland

will continue to receive substantial

contribution by the European Cohesion Fund

available to be offered for FDI projects in

the sector. Overall, Ernst & Young believes

that the reduction in grants for investments

in the region will have an impact on the

investment activity from the automotive

sector in certain parts of the CEE region in

the years to come.

Incentive packages in CEE usually combine

European and local country funding

opportunities. Together with tax privileges

offered to investors the portfolio of incentives

available is huge and hence in-transparent for

many companies. My advice for companies.

„apply due-diligence in drafting the investment

agreement. Initial standards properly defined

in the investment agreement could preserve

benefits beyond initial investments“.

Stephan Naumann, Global Incentives

Advisor, Hamburg, EY Germany


Foreign Exchange Rates

For some companies, foreign exchange

rates are adding significant pressure to

their operations in the CEE region. To the

extent the economies among EU member

states have been successful, local currency

tends to appreciate relative to the euro. For

instance, the value of the Slovakian Koruna

against the euro climbed about 24% since

the country became an EU Member State on

May 1st, 2004.

Other currencies show significant

fluctuation against the euro. For operations

focusing on producing components for

export into Western Europe, the foreign

exchange rate against the euro has a

significant impact on profitability and

hence bears significant risk to the business.

The rising foreign exchange rate of the

Slovakian Koruna against the euro results

in higher costs for materials imported

into Western Europe from Slovakia. Wage

increases in Slovakia are topping 20%

a year and the appreciation of the local

Koruna currency against the euro elevates

the cost of that wage increase up to 45%

when measured in euros. Such increases

put a lot of pressure on the profitability

of manufacturing operations in the region

and may make further relocations more

difficult, if not unattractive.

At least, the foreign exchange rate issue

adds additional risks to operations in the

CEE region, as currency fluctuations occur

frequently. As many of the new member

states have comparably small economies,

fluctuations of the local currencies against

the euro are likely to continue. And as

countries, like the Slovak Republic,

are likely to continue posting excess

exports over imports, the demand for the

Slovakian Koruna could result in a further

strengthening against the euro.

Western Europe – Increasing Innovation

to Improve Competitiveness

The relocation boom from Western to

Eastern Europe in recent years has driven

companies in Western Europe to institute

corrective measures to improve their

competitiveness relative to Eastern Europe.

For instance, companies in Germany

have been quite successful in reaching

concession agreements with their

workforce, which have allowed them to

increase their competitiveness. Projects

targeting the relocation of manufacturing

jobs from Germany to Eastern Europe,

which were taking place in various

industry sectors, were getting a great

deal of attention and media coverage. To

regain or sustain competitiveness, workers

and workers’ councils started to realize

that concessions were necessary to avoid

additional manufacturing jobs being

transferred elsewhere.

Despite this fluctuating environment,

companies have been able to negotiate and

agree to concessions with their employees.

Frequently such concessions included an

increase in weekly working hours without

a pay increase, longer working hours

for the plant, or additional work shifts

on weekends. All of these concessions

contributed to improving flexibility and

bringing unit costs down in German

factories.


79

In light of these changes, the environment

for further relocations from Western

Europe to Eastern Europe has become

more complex and a slowdown of the

related activity is expected to continue.

New Challenges Require a RefinedApproachAs companies determine how to take

the next step in pushing their businesses

forward in the CEE region, managers too

face all these new challenges – which

impact both new projects and established

plants.

Currently, the business case behind

choosing to move an industrial

manufacturing plant from an existing

site in Western Europe into the CEE

region is much more difficult to justify.

The feasibility and the expected payback

periods of such projects have become

marginal, more risky, and require new

models to become attractive. For those

operations that have already been moved

into the region, the new challenges impose

risks that management must address to

sustain the competitive advantage, prove

the projected business case, and deliver

expected returns.

Vehicle manufacturers and suppliers

considering additional steps in moving

manufacturing out of Western Europe into

the CEE region must devise new ways to

design these projects tailored to the new

challenges. Ernst & Young has observed

the following actions that might guide the

way forward, but they still have to prove

their viability in the years to come:

Considering New Markets

Vehicle manufacturers are turning to

countries like Ukraine, Kazakhstan,

or Uzbekistan as new prospects for

developing markets to sell into. Suppliers

as well are considering these countries as

their destinations of choice in CIS. In order

to find skilled workers at affordable costs,

companies are continuing to have to look

beyond EU countries when considering

new investments in Eastern Europe. While

these countries still offer skilled labor at

low cost, there are other obstacles that need

to be considered. Besides a lower level of

political stability, countries like Ukraine,

Kazakhstan, or Uzbekistan are not part of

the EU customs and trade zone and hence

do not qualify for customs-free export of

components back to EU markets. However,

these markets may qualify for customs-

free export of components into other CIS

markets, such as Russia.

Selecting Different Locations

New projects being placed in the region

have to consider locations beyond existing

clusters as a response to the new challenges.

For instance, it has been frequently reported

that Hyundai chose Noˇ sovice, in the

Eastern part of the Czech Republic, as the

site to build their new vehicle assembly

plant in light of the shortage in skilled

labor in the Western part of the country.

Considering the tight labor markets in

many of the CEE countries, suppliers also

have to make location selection decisions

to avoid or at least mitigate the risk of

having difficulties staffing manufacturing

operations. There is not a straightforward

answer to this problem; however, it is quite

clear that locating a manufacturing site in

one of the clusters already existing will

result in the challenges described above.


Smart location selection is also required

when new research and development

(R&D) centers are placed into the CEE

region. Companies in search of engineering

talent are increasingly targeting locations

that offer access to regional technical

universities. Krakow, in southern Poland,

is known for its excellence in producing

engineers, and has developed into a center

of gravity attracting companies from all

sectors establishing R&D centers in the

region. As is the case for manufacturing

operations, these “hot spots” are getting

crowded, and again, only the early movers

are capturing the benefits.

Low-cost manufacturing capability and

efficient supply chain management is

critical for success, given the pricing

pressures exerted on the industry by

automakers. Many suppliers are shifting

labor-intensive production activities to

locations in Mexico, Eastern Europe,

and Asia, or are outsourcing parts and

components to smaller suppliers. Jan

Siemons recommends: „Wage levels being

a significant parameter for decision making

vary greatly among regions, industries

and required skill level. Due-diligence in

the process upfront pays off by avoiding

risks and materializing expected benefits.

In general, successful location selection

decisions involve complexities that require

a multi-disciplinary approach. Leveraging

a worldwide network of tax and real estate

advisors, supply chain management experts

and strategic location advisors is an option

to fill lacks of expertise in-house“

Jan Siemons,

International Location Advisory

Services, Amsterdam, EY Netherlands

Localize Production and Reengineer the

Supply Chain

Many companies transferring production

from Western into Eastern Europe are

targeting the labor cost differential on

assembly operations between Western and

Eastern Europe. However, considering

both the new challenges in some of the

CEE countries and the measures that

can still be taken in Western Europe, the

benefits associated with moving are no

longer outweighing the risks. To achieve

substantial savings on a relocation project

to justify the move, companies have to

adjust their approach.

It is no longer enough to shift production

from location A to location B using the

same suppliers that delivered components

for the production subject to relocation.

Changes to the supply chain, targeting

cost savings beyond assembly operations,

are offering the extra potential needed

to cut costs in these types of projects.

However, adjustments to an existing

supply chain involve difficult challenges

such as:


81

• How to determine which components

or products should be considered for

localization.

• How to find and evaluate capabilities of

local suppliers.

• How to establish trust with and

overcome uncertainties for the supplier.

• How to coach the supplier to improve

and achieve quality and reliability.

Customs is an area that is frequently not

considered appropriately in decision

making around relocating manufacturing

operations into Eastern Europe, Global

Sourcing programs or changes to the

supply chain and acquisitions in the CEE

region. Not considering the customs

implications has resulted in big problems

for Companies. “Appropriately considering

the customs implications in purchasing and

supply chain decision making avoids or at

least mitigates risks and deploying customs

planning techniques can help drive costs

out of the supply chain for OEMs and

suppliers.” says

John Kay, Customs and indirect Tax,

Moscow, EY Russia.

Many automotive companies, vehicle

manufacturers and suppliers alike, are

setting aggressive targets to increase their

purchasing volumes from low cost country

sources. Ernst & Young is seeing many

of these companies falling short against

these self-established targets. A lack in

methodolgy, experience and foremost

resources in purchasing organisations are

the most pressing that hinder companies

to achieve those tagets on top of getting

their daily business running. Given

the potential for cost savings in these

programs, companies should consider

using specialised consultants to move fast

on these strategic programs without risking

to cut short in purchasing operations, says

Wilhelm Schreiner, Supply Chain

Advisory, Frankfurt, EY Germany.

Moving into Eastern Europe for a

manufacturing operation is always tied

into making decisions to adjust the

existing supply chain. “Identifying and

developing local suppliers is a challenge

and represents an investment. Securing

those investments is an exercise that has

to consider the financial & managerial

stability of the new partner – a factor that

is frequently not handled sufficiently ”

says Michael Weimar, Restructuring,

Frankfurt, EY Germany.


Partnering with Local Players

An option more and more companies are

considering in accessing new markets is

forging a partnership with a local player.

There are many benefits and pitfalls

associated with partnerships. Some of the

most important factors that could make

a partnership a valid option comprise

the local partner’s ability to: a) share

financial risk; b) manage administrative

and licensing issues; c) bring local market

knowledge; and/or d) provide access to

existing customers and offering an existing

distribution channel. A local player might

lack technological capabilities but might

offer a partner company market access

or skilled labor at affordable wages in

exchange for the partner’s technological

capabilities.

There are several options on how to liaise

with a partner in the local market. For

instance, Magna and AvtoVAZ are going

to pool their business interests in a joint

project designed to develop and potentially

manufacture car models for sale in the CIS

countries. It has been frequently reported

that the big picture driving this new

alliance was the aim to combine Magna’s

access to up-to-date automotive technology

with AvtoVAZ’s need to renew its vehicle

line-up to meet customer preferences.

A different model has been applied by a

number of vehicle manufacturers trying

to establish manufacturing operations

in Ukraine. GM, VW, and a number

of Chinese manufacturers have been

teaming up with Ukrainian manufacturers

by entering into contract assembly

relationships. Under this concept, the

manufacturer is supplying completely

knocked down (CKD) kits into the

assembly operation of the local player, who

is responsible for the assembly of these

kits. This model offers a ‚fast track’ in

getting assembly operations up and running

by utilizing the equipment and staff of the

local player and therefore avoiding having

to obtain permissions and build a new

operation on its own – a venture that can

take a long time from thought to finish.

Acquisitions and Partnerships in Central

and Eastern Europe bear the typical risk

profile observed in Emerging Markets

“Partnerships require a sufficient level of

mutual trust in the beginning and a robust

Joint Venture Agreement that protects value

& provides incentives for both partners

to drive benefits in the long.term” says

Wolfgang Taudte, Partner Transaction

Services, Frankfurt, EY Germany.

Win New Customers to Achieve Critical

Mass

For many suppliers, a major challenge

is securing the necessary volume of

production in a new location to make the

business case work. Many of the vehicle

manufacturers are reluctant to guarantee

specified volumes of components to be

purchased from the suppliers in light of

the volatility of many of these markets.

However, for many components, a local

production requires significant volume to

achieve economies of scale that turn the

business case profitable. In light of these

mechanics, many suppliers are targeting

to win new customers, in order to secure


83

the volumes needed to justify the move.

Being a challenge on its own, winning new

customers in some of these rapidly growing

markets is essential for certain suppliers to

start production of specified components.

For instance, glass manufacturing

operations for windshields, given their

massive process technology and equipment

requirements, require a minimum output of

several hundred thousand units per year to

make the investment case work. As these

quantities will not be reached by most of

the vehicle manufacturers on their own,

this type of component manufacturing

investment will rely on the ability of the

suppliers to win a number of manufacturers

they can supply.

Measures to Recruit and Retain

Labor shortages in the CEE region impose

challenges for companies in recruiting and

retaining staff. While many companies

seek to attract staff to their plant by offer

premiums on wage levels paid in the

region, this practice fuels the spiral of wage

increases throughout the region. Although

quick results might be realized, it is a key

threat for the entire manufacturing sector

in the region as wages move up, as they

are unlikely to develop downwards in the

future and hence will impose additional

challenges for all players in the market.

A more valuable approach in recruiting and

retaining people can be seen in offering

incentives that build over time. Offering

health insurance or ‘postretirement’

benefits might be incentives for potential

recruits to choose a future employer. These

offerings do not link the incentives to

higher wages in the short term but rather

create stimulus to keep the employment

with the company chosen for a longer

period of time. Structured successfully,

such incentives might help to shift

preferences away from hourly rates into

measures where benefits are tied to the

duration of employment with the company.

Consider a Higher Degree of

Automation

In light of the shortages in skilled labor

and following significant increases in wage

levels in the many locations across the

CEE region, companies have to consider

changes to the degree of automation in

Establishing manufacturing operations

in the CEE region currently implies more

and more challenges to attract new staff at

a new site in the region. Many companies

tend to try to solve their problems by

offering higher wages. “Companies should

consider smarter ways to increase their

attractiveness to new hires by tailoring

benefit schemes where benefits are tied

to the length of service with the company.

Such an approach helps to secure training

investments, reduces fluctuation and avoids

fueling the wage spiral creating additional

pressures for all” recommends

Ulrike Hasbargen, Human Capital

Services, Munich, Germany.

their factories to successfully cope with

these challenges. As was the case in

Western Europe for decades, significant

rises in wage levels sooner rather than

later raise the question to which extent

labor (manual tasks) should be replaced by

capital equipment to keep the equation or

make the business case work.


Growth Potential Seenin Russia and Other CEECountries in the Long TermAs mentioned earlier, the CEE region

shows substantial growth in sales of

passenger cars. In the 10-year time span

between 2002 and 2012, it is expected that

the number of vehicles sold in the region

will more than double from 2,1 to 5,4

million units annually.

But the question remains: Will this trend

continue beyond 2012 and what might be

the potential in the long run?

In our analysis, aimed to give an indication

of an answer to this question, we have

taken a look into some statistics that are

summarized below:

Perhaps it is a balance you would not

necessarily expect upfront, but the number

of potential customers in Eastern Europe

is roughly the same as in Western Europe

- approximately 400 million.


Western Europe Central and Eastern Europe

Country Population Country Population

Germany 82.4 Russia 142.2

France 61.3 Turkey 74.2

United Kingdom 60.5 Ukraine 46.7

Italy 59.0 Poland 38.1

Spain 43.8 Romania 21.6

Netherlands 16.3 Czech Republic 10.3

Greece 11.3 Hungary 10.1

Portugal 10.5 Belarus 9.7

Belgium 10.4 Bulgaria 7.7

Sweden 9.1 Serbia 7.4

Austria 8.3 Slovakia 5.4

Others 29.0 Others 23.2

Total Western Europe 401.9 Total CEE region 396.6

Norminal GDP/capita (US$) 30.339 13.290

Car Parc (million) 201 61

Car Density (vehicles/1.000 capita)

514 186

New car sales (million) 14.8 3.8


Figure 15: Comparison of Population and Statistics for Western Europe and CEE

85

The comparison of key metrics describing

the size of the market between Western

and Eastern Europe indicates that there is

huge growth potential for the CEE market

in the long term. The speed of growth of

the automotive market in the CEE region

will be significantly driven – as is the case

in other emerging markets – by consumer

“affordability” to buy cars.

Consumer vehicle affordability itself is

driven by two major factors – the first

being the level of disposable income

available to consumers and the second

being the price of vehicles being offered by

vehicle manufacturers.

No doubt, it will take a long time before

disposable income levels rise in the

CEE countries on a broad level. But the

development in Russia over recent years

proves that in urban and metropolitan

areas, the number of new “middle-

class” households that can afford to buy

new vehicles is rising fast. The speed

of development in Russia caused many

companies to underestimate the growth

potential in the short term.

Some of them acknowledge that the actual

growth of their automotive business

in Russia increased twice as much as

forecasted in the last five years. In

addition, increasingly available automotive

financing credit or leasing schemes to end-

customers in CEE countries may speed up

the development further.

In general, vehicle affordability is a theme

for Emerging Markets – as it is for the

CEE region. A macroeconomic indicator

that frequently tends to provide a first

impression about a market’s ability to

purchase cars is the GDP per capita. As

there are, of course, many other factors to

consider, GDP per capita directly correlates

to the number of cars sold in a particular

country. There is convincing data that with

rising disposable income levels people

buy cars, once their demand for daily

consumables and housing are satisfied.

Using this concept, Ernst & Young can

infer that a high-level view of the current

Western European automotive market may

correlate to the potential growth for the

CEE market in the future, as seen in the

charts on page 84 above.

To the extent that vehicle affordability is

impacted by the price of cars sold in the

region, the development of low-cost cars is

getting more and more attention by various

vehicle manufacturers. The first, and up to

now most tangible, step into that direction

was Renault’s move to develop the Logan

model, which is produced in Romania

and Russia. The design of the Logan has

refocused on the essential functionality

of a passenger car achieving a level of

manufacturing cost that allows for the

sale of the car in defined markets for a

price well below the previously existing

price ranges offered by competitors. The

principle behind Renault’s new Logan

model was an ‘out-of the-box’ approach to

leveraging design and development costs

by using existing technology, (which also

allowed an increase in the use of common

parts from existing platforms) and by

reducing the investment into manufacturing

equipment as the production process was

geared to leverage low labor costs in the

Romanian market. The Logan model is

sold in various markets in the CEE region

(and elsewhere) at a price range starting at

5,000 euros for the base model – which is


significantly below the previously existing

price range of competitors.

Other manufacturers seem to explore their

own ways to move down from existing

market levels to expand their model range

into this new ‘low-cost’ car segment. Chinese

manufacturers, like Chery, Geely, and

others, are already assembling vehicles in

Russia, and they are expected to compete

on price against other players in the market.

The Indian Tata Motors Group even went a

step further when it launched their program

to develop an ‘ultra low-cost’ car that is

targeted for sale in the range of US$ 2,500.

While it is unclear today whether Tata will

be successful in delivering on their promise

to build such an “ultra low-cost car” it is

also unclear about the magnitude of impact

such a car will have on the CEE market. As

this car will not match all safety standards

required by the EU, the car might not be sold

in many of the EU countries. For markets

such as Russia and other CIS countries that

currently do not have to comply with these

standards, such type of car might have a

bigger impact.

On the other hand, it must be noted that

consumer preferences are developing from

current levels that have been influenced

by past experience. Viewed from that

angle, the Russian market might be

considerably different from other markets.

The development of the Russian market

in recent years has showed a significant

expansion in segments that are well above

the price brackets quoted for ‘low-cost’

cars. In summary, our analysis comes to

the conclusion that the growth potential

for the automotive market in the CEE

region is substantial. When, and to what

extent, the CEE markets will catch up

with Western Europe remains unclear – as

the contributing factors that will drive

vehicle affordability are clearly seen, but

the impact of the speed of development is

not predictable. However, Ernst & Young

believes the growth potential for the CEE

region will continue beyond 2012 and

will reach levels considerably above the

six million vehicles forecasted by Global

Insight for 2012.

Digging a bit deeper into the CEE region,

the key markets that have substantial

growth potential are Russia, Ukraine,

Poland, and Turkey, based on the size of

their population.

Russia is the most promising single market

within the CEE region by far. The Russian

market clearly has the potential to catch

up with some of the largest single markets

in Western Europe such as Italy, UK, and

potentially Germany. Russia is also a very

promising market to look at in terms of

the time it requires to develop. Growth

for passenger car sales in the country has

continuously been underestimated. Actual

sales this year will double volumes that

were forecasted five years ago. Russia is

doing extremely well thanks to its fast-

growing urban middle-class living in

Moscow, St. Petersburg, and a few other

cities that reached income levels that

allow consumers to afford buying cars.

Interestingly enough, these new potential

customers have aspirations that exceed

entry-level vehicles. Market statistics for

Russia show that price ranges well above

entry levels show significant growth which

indicates some of the attractiveness of that

local market.


87

The automotive market in Ukraine derives

its long term potential in particular from

the size of the country’s population. With

approximately 48 million inhabitants and

a comparatively low car density standing

at 115 vehicles per 1,000 people there

is considerable growth potential in the

long run. In recent years the local market

has seen spectacular growth – new car

registrations grew 40% in 2006 over prior

year. With 370,000 vehicles sold in 2006,

the market achieved a volume that Global

Insight in 2005 was forecasting for 2011.

This move underlines the speed of the

development of this market. However, there

is significant political instability in Ukraine

which will impact future development of

this market and might result in volatility in

the years to come.

Poland has seen much higher volumes in

new car sales a couple of years ago, where

the country was seen as the largest single

market in Central Europe for most of

the 1990s. In preparing for the country’s

accession to the EU, import tariffs were

aligned to EU standards which resulted

in a boom for used car imports. With

imported used cars soaring from 30,000

units in 2003 to 870,000 units in 2005,

new car registrations where pushed down

considerably. In the long term Poland will

likely see substantial growth. The speed of

development will depend on higher income

levels and customer preferences alike.

In recent years, Polish consumers were

clearly in favour of buying well equipped

used mid-size cars as opposed to first hand

vehicles of a smaller segment.

Turkey is another country where we see

substantial long term growth potential

for new car sales. 78 million inhabitants

combined with the lowest vehicle density

among the countries reviewed in this

document translate in significant market

potential for Turkey in the long run. The

country’s market is known as one of the

most volatile markets. Currently, new

registrations are seeing a dip coming down

more than 20% from the peak in 2004.

A recent depreciation of the Turkish Lira

against the Euro together with higher

interest rates reduced vehicle affordability

for the Turkish consumer and resulted in

lower volumes. We expect Turkey to find

back and to continue the long term growth

trend.

Russia

Poland

Turkey

Ukraine

Germany

France

UK

ItalyIT

G

P

T

U

UK

Fr

Ru

Source: Global Insight, July 2007

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Figure 16: Long term market Potetial for countries selected

Ru

P TU

G

FrUK IT


For automotive companies, every day is a race to pull ahead

of the competition by improving global operations, optimizing

investments, and mitigating financial risk – all while keeping an

eye towards the key business issues on the horizon.

The Ernst & Young Global Automotive Center can help automotive

companies address challenges by drawing on the insights and

practices of an international network of member firms. The Center

acts as the focal point for our automotive professionals, facilitating

the collaboration and knowledge sharing required to develop

approaches to complex industry issues. Ernst & Young is working

to establish automotive centers in the major automotive markets

– all of them linked and focused on the issues that are driving

massive transition in the industry worldwide.

Please visit our website, www.ey.com/automotive,

for more information.

Global Automotive Center

Detroit:

Mike Hanley

Global Automotive

Industry Leader

United States

[email protected]

Stuttgart:

Peter Fuß


Central Europe

Germany

[email protected]

Beijing:

Bik Hok Choi


Far East

China

[email protected]

Tokyo:

Mitsumasa Ueno


Japan

Japan

[email protected]

GL O B A L AU TO M O T I V E CE N T E R

89

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Investment in Eastern Europe

EY Thought Leadership on CEE

The Ernst & Young Approach – You want to enter the CEE–market?

Strategic aspects

Which CEE-location is best for myproduction facility?

• Feasibility study• International location advisory services• Real Estate appraisal• Development of a business plan• Business and real estate valuation• Analysis of business environment in

country specific region

Who is the right partner for me? How to benefit of the local tax system

incentives?

• Partner search (acquisition strategy)• Background check• Partner fit criteria• Partner screening and selection• Financial and commercial due diligence• IFRS and/or U.S. GAAP audit• Transaction structuring (tax&legal)

Ernst & Young Approach:• Tax-optimized planning for selecting the

legal form of business• Tax-efficient planning for shareholder

contributions, financing and transfer pricingof the new business

• Tax, customs and VAT review planning• Tax incentive planning• Incentive application support• Strategic analyses of key competetive

advantages and weaknesses

Operational aspects

How to start my business?

• Assistance in applying for relevantpermissions

• Assistance getting connected to local authorities

• Outsource back-office infrastructure

How to start the integration process?

(people- technology-processes)How to assess my investment/risks?

• Roll-out to local market• Human Capital• Business process alignment• IT Due Diligence• System localisation to the key competence

areas• Advisory on corporate information system

Ernst & Young Approach:• Business strategic valuation and real estate

valuation• Financial modelling• Scenario analysis• Real estate project management

(pre-construction and construction)• Project Monitoring• Enterprise Risk Management Services

BulgariaDiana NikolaevaSofiaPhone: +359 2 81 77 [email protected]

Czech RepublicPetr KnapPraguePhone: +420 225 335 [email protected]

HungaryRobert HeinczingerBudapestPhone: +36 (1) 451 [email protected]

PolandLeszek LerchKatowicePhone: +48 32 760 77 [email protected]

RomaniaAnca IonescuBucharestPhone: +40 21 402 40 [email protected]

RussiaIvan BonchevMoscowPhone: +7 495 755 [email protected]

SlovakiaStanley JakubekBratislavaPhone: +421 (259) 229 [email protected]

SloveniaStephen FishLjubljanaPhone: +386 1 568 [email protected]

TurkeyMustafa CamlicaIstanbulPhone: +90 212 368 [email protected]

UkraineOleg SvetleuschyiKyivPhone: + 380 (44) 490 [email protected]

Ernst & Young Contacts in the CEE region:

Automotive Country Leaders for countries covered in this brochure.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

The foregoing does not constitute formal advice. Ernst & Young AG does not guarantee the accuracy, adequacy or completeness of any information and shall not be liable in any manner for any error or omission of the results obtained from use of this material. No part of this report may be reproduced or used in any form (graphic, electronic or mechanical, including photocopying, recording, typing or information storage and retrieval systems) without the prior permission of Ernst & Young AG. For permission, please contact the Automotive Group at Ernst & Young AG, Germany.

Documents

The Central and Eastern European Aut omotive Marketcn.gasgoo.com/Upload/Define/200873093451Upfile.pdf · The Central and Eastern European Aut omotive Market Industry Overview. Introduction