In the last decade Slovakia has become much more than cheap beer, amazing nature, and grateful people. It is now hitting the top spots in the automotive industry. Hosting three world class car manufacturers and being about to open its doors to the forth one, Slovakia is now said to be the Detroit of Central Europe. The question is – Will it really follow the American model?
Volkswagen was the first automotive company to seize the opportunity to expand its production in Slovakia. Just after the fall of the communist regime in 1989, it acquired a significant stake in the former Czechoslovak car maker Skoda, investing a staggering amount of USD 5 bn in the company. Later on, in the early 1990, when full ownership was obtained, Skoda was to be run as a separate brand of VW. The investment in the Czech based company Skoda accelerated the growth of the automobile industry in the CEE. Just one year after, VW acquired BAZ (Bratislava automotive factory) triggering a subsequent investment from Opel and initiating a government subsidies program for infrastructure, building, and training in the country. Since then, Slovakia’s GDP has been growing on average by 4.5% on a yearly basis, making it one of Europe’s fastest growing economies.
Volkswagen, Kia, Peugeot and… Jaguar-Land Rover
Government funding and a cheap, productive and skilled workforce made Slovakia an attractive place to invest in. Consequently, the country soon opened its doors to two additional car manufacturers, Peugeot in 2003 and Kia in 2004, who both launched their car production in 2006.
In 2014, Kia Motors Slovakia, PSA Peugeot Citroën, and Volkswagen Slovakia, produced 973,370 cars in total making it the 15th country in car manufacturing worldwide and the first in terms of production per capita with a production of 183 cars per 1000 citizens. In addition, recent news revealed that the British Jaguar-Land Rover car manufacturer is willing to expand its production in Slovakia, with a potential output of 300,000 cars per year and an investment worth €1.5 bn to the Slovak economy.
Some statistics and worries
However, despite those appealing figures, worries have been rising after the VW’s scandal in September 2015. These worries must be taken seriously since VW accounted for almost 5% of the Slovak GDP in 2014 and about 12% of the national automotive industry. Many are thus speculating about whether the Slovak welfare could possibly be affected by this headwind.
It appears today that the Slovaks’ worry may be well founded, as, in the last week of September, VW recorded a €30 bn loss in market capitalization due to the sharp drop of its share price. According to Michael Hewson, chief market analyst at CMC Markets UK, the implications of the VW case could impact the aggregate European car market if the global trust for the industry is lost.
Latest statements fortunately showed that none of the models produced in the Slovak subsidiary were equipped with the software allegedly used to cheat emission tests. However, harm has been done and, the loss of trust in the VW brand could possibly impact the demand for “Das Auto” globally and lead to a serious downturn period for Slovak car models’ production and R&D investments. In particular, investments may be subject to a gradual decrease across all VW’s branches due to the fine the company is set to pay and the company’s liability to repair the affected models.
In July 2015, VW has announced its plans to build up its fourth largest plant in the Bratislava region. This plan should create about 400 jobs and, according to an estimate, it will cost the company around €240 million. Even though the project was accepted and is now ready to be rolled out, no heavy machinery can be seen in the fields where the new plant should stand. Most probably, plans were put on hold due to VW’s unexpected woes. Additionally, it will have to cover for the 11 million vehicles with the fraudulent emissions software. For that purpose, an incredible amount of EUR 6.5 bn has been set aside by VW from its profit and loss statement.
On the other hand, a recent study by Saxo bank, a Danish investment bank, displays a more favourable outlook. The analysis indicates that any fall in the stock market price resulting from a scandal can usually recover within weeks. Put simply, low price levels encourage new acquisitions, subsequently pushing the price up. In one trading day of August 2006, Standard Chartered, a British bank, lost 26% in share price because of evidence showing that the bank helped the Iranian government to launder $250 million coming from illegal transactions. A few weeks later, the institution and the American courts agreed for a $340 million fine. However, maybe surprisingly the price of Standard’s shares reached its new maximum by the end of 2012. According to Saxo Bank, VW is likely to follow the same scenario and experts say that re-acquisition of long term VW bonds is likely to stabilize the stocks value.
Slovakia, the next Detroit?
The question that naturally arises is whether the Slovak economic focus on its automotive industry will not prove it to be fatal for the country in times of crisis. Despite the recent scandals surrounding the automotive industry and VW in particular, the Slovak Government remains confident that the country`s economy will not suffer that much. Unlike Detroit, Slovakia benefits from a whole national ecosystem of mechanic and electric industries linked to car manufacturing that includes a net supply of goods and services from the construction, chemical and electromechanical sectors.
The industry’s multiplier, which is a ratio of the total population to those individuals working in the industrial sector, should fluctuate around 3.8 for the automotive industry, according to a global consensus. In practice, this means that one employee working in the automotive industry contributes to the creation of almost four jobs within the nation’s economy. In Slovakia, the multiplier is currently at 1.5.
Jaroslav Holecek, the Secretary General of Coalition of the Slovak automotive industries believes this is an opportunity and a challenge for Slovakia to create those positions, also by welcoming Jaguar-Land Rover from the UK. If Slovakia’s car producers succeed in keeping their competitive advantage, skilled workforce and modern technologies, Detroit’s destiny should be safe. Furthermore, focus on improving education and research and development is the key to sustainable growth.
Picture copyright 1: Aapo Haapanen, http://bit.ly/1LFJbhW
Picture copyright 2: Daniel Thorton, http://bit.ly/1KKm9N4