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The Automotive sector in CEE - What's next

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					                                                                                                      DECEMBER 2007




                      The Automotive sector
                        in CEE: What’s next?




                                                                                                         Russia




                                                    Poland



                                 Czech
                                Republic
                                                Slovakia


                                                    Hungary

                               Slovenia                              Romania
                                          Croatia




                                                                          Bulgaria



                                                                                                         Turkey




A N A LY S I S   BY   T H E   U N I C R E D I T               G R O U P     N E W    E U R O P E   R E S EA R C H   N E T WO R K
    Imprint
    Published by UniCredit Group / Bank Austria Creditanstalt Aktiengesellschaft
    http://www.unicreditgroup.eu
    http://www.ba-ca.com

    Authors: Andrzej Halesiak, Krzysztof Mrowczynski, Matteo Ferrazzi, Andrea Orame

    Edited by CEE Economics Department
    (neweuroperesearch@unicreditgroup.eu)
    Bernhard Sinhuber, Tel. + 43 (0)50505-41964

    Produced by Produced by BA-CA Communications Austria (pub@ba-ca.com), Tel. + 43 (0)50505-56141

    Printed by Gutenberg
    Layout: Horvath Grafik Design



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2   The Automotive sector in CEE, December 2007
Contents

I. The global automotive industry ...............................................................................................................................................................6

II. The automotive industry in Central Eastern Europe – its size, structure and growth ..........................................................................11

III. CEE’s growing integration with the global automotive industry – role of foreign trade ....................................................................17

IV. FDIs as a key driver of the automotive industry’s development in Central Eastern Europe...............................................................23

V. The role of local demand in the CEE automotive industry ...................................................................................................................29

VI. Prospects for the Central Eastern European automotive industry.......................................................................................................36

VII. Country profiles ...................................................................................................................................................................................38

VIII. Annex..................................................................................................................................................................................................48

UniCredit Group CEE banking network ......................................................................................................................................................50




                                                                                                                                                    The Automotive sector in CEE, December 2007                   3
    Summary




    Summary
    • Central Eastern Europe has become an important part of the                                 Eastern Europe), and this share doubled since 2002. Its role is
      world’s automotive industry, which is a highly consolidated and                            especially significant in the production of small, economical
      globalised     business1.     In 2006 total production of motor vehi-                      cars where cost savings are essential. This tendency is also no-
      cles reached 69 million units and was dominated by three                                   table in bus manufacturing, which is the most labour-intensive
      traditional automotive regions (North America and Japan,                                   automotive business. Fast growth in local vehicle production is
      which are the first and second largest world producers, and                                also reflected by the expanding supplier segment, which ac-
      Western Europe) although the contribution of emerging                                      counts for more than half of the industry’s value in many of the
      economies in car manufacturing is greatly increasing (with                                 CEE countries.
      China already being the third largest producer in the world).
      Currently the global automotive business is experiencing deep                            • The Central Eastern European automotive industry is strongly
      structural problems (including weakening sales on traditional                              export-oriented. Regional export sales have almost tripled
      markets, rising material and R&D costs and increasing oil prices)                          since 2000 with Western Europe becoming the main export
      that have put some leading players on the verge of no longer                               market. In some CEE countries (especially those in Central Eu-
      being profitable (which is particulary evident in the case of                              rope) the contribution of domestic car production to total ex-
      American companies). In response to these negative tenden-                                 ports is extremely high. On the other hand, the CEE countries
      cies, global automotive companies are undertaking complex                                  are not only a relevant production base, but they are constantly
      restructuring measures that aim at healing their businesses.                               increasing their share in the global automotive import market,
      They include strategic alliances focused on single projects, lean                          which has doubled since the beginning of the decade. Never-
      manufacturing, increasing pressure on suppliers and, most of                               theless, the CEE region is increasingly becoming a net exporter
      all, relocation to low-cost areas.                                                         of automotive products.


    • Central Eastern European countries are among the main ben-                               • Rapid development of the automotive industry in Central
      eficiaries of these circumstances. The local transport equip-                              Eastern Europe would not be possible without huge support
      ment sector2 is developing at a very dynamic pace (ca. 20 %                                from foreign investments, which have already reached a total
      annually in terms of value added). It is almost a EUR 20 bn
      industry in terms of value added, generating almost 10 % of
      the manufacturing value added in the region. Some relatively
                                                                                               Passenger cars in Central Eastern Europe and Russia:
      small countries (like Czech Rep., Hungary, Slovakia) are consid-
                                                                                               production and sales
      erably above average in terms of the percentage of value
                                                                                               in thousands
      added coming from automotive manufacturing. With 4 million
      passenger cars produced last year in CEE and Russia (4.7 mil-
                                                                                               4,000
      lion including light vehicles) the area is becoming an important
                                                                                               3,500
      production base for the EU market. Even without including Rus-
                                                                                               3,000
      sia, CEE now represents almost 16 % of passenger cars pro-
                                                                                               2,500
      duced in Europe (including production in both Western and
                                                                                               2,000
    1) The following report covers an analysis of the automotive industry in Central Eastern   1,500
    Europe. It concentrates on the automotive business in 9 countries in the region inclu-
    ding its two main areas: Central Europe (Poland, Czech Republic, Slovakia and Hungary)     1,000
    and South Eastern Europe (Slovenia, Croatia, Bulgaria, Romania and Turkey). In some                    2003                2004            2005    2006
    cross-country comparisons data for Russia were also quoted (especially regarding the
    role of local demand) as its importance for the whole region is especially high.                Passenger car production
    2) Please note in the report we often refer to the Transport Equipment sector, while in
                                                                                                    Passenger car sales
    other cases we refer to the subsegment Automotive (depending on data availability).
                                                                                                    Passenger car sales (excl. Russia)
    The whole Transport equipment sector (DM according to NACE classification) includes
    the automotive sector (DM34, including parts) and other transport equipment (DM35,
    motorcycles, railway, ships, aircrafts).                                                   Source: UniCredit New Europe Research Network




4   The Automotive sector in CEE, December 2007
  value of over EUR 20 bn. This FDI inflow has rapidly accelerat-     mere cost advantages. The large potential of the local markets,
  ed since the beginning of the new century as regional ties with     the proximity of Western European markets and improving infra-
  the EU have become much closer. The CEE region has attracted        structure, the growing possibilities of building pan-European pro-
  in recent years all of the leading global manufacturers from        duction centres and the regional openess to foreign investments,
  Europe, US and Asia, including Volkswagen, Renault, Peu-            together with the fast improvement in the quality of the labour
  geot-Citroen, Fiat, GM, Ford, Toyota, Hyundai-KIA, Suzuki and       force, represent important assets to leverage. The local auto sup-
  many others. The region mainly lures investors with significant     ply industry has promising prospects as well.
  cost advantages but also with a business environment that is
  improving quickly.                                                  Overall, we expect that within the next years the transport equip-
                                                                      ment sector will outperform that of GDP growth in most of the
• The high level of attractiveness of the CEE region also results     CEE countries. The highest growth ratio is expected to be record-
  from its large market potential, which is a combination of its      ed in Slovakia (which will benefit the most from recent invest-
  population size, fast growing incomes and under-penetration         ments from KIA and Toyota-PSA), as well as in Romania and Bul-
  in terms of vehicles in use. The total number of registered cars    garia, which became an especially attractive relocation target
  in CEE has already reached 45 million (75 million including Rus-    after their EU accession.
  sia). New car sales were 1.3 million in 2006 (3 million including
  Russia). Car penetration in CEE is much lower than in Western
  Europe (less than 20 cars per 100 inhabitants in Russia, Turkey
  and Romania, for instance, versus almost 60 cars per 100 inhab-
  itants in Italy and Germany). The expected rapid increase in in-    Location of car assembly plants in CEE
  come will be a major driver of the gradual reduction of this gap.   Red countries under analysis

  Many global producers locate their car facilities in the region
  counting on the fast development of local sales in the future.
  However, the dynamics of new car sales in the region do not al-
                                                                                                                                      Russia
  ways meet these high expectations. Especially in the new EU
  member states, figures on car sales are strongly distorted by the
  import of second-hand vehicles that can be freely imported
  under EU law and the markets are very price competitive
  against new cars. Apart from this, some CEE markets (especially
                                                                                    Poland
  Russia, Turkey and Romania) exhibit significant growth potential,
  as their converging economies will be able to absorb an increas-                                                     Ukraine
  ing amount of new cars.                                                Czech Rep.
                                                                                             Slovakia


We think the Central European cluster will remain, or even ex-                       Hungary
                                                                       Slovenia
pand, as one of the most important centres of automotive pro-                                            Romania
                                                                                  Croatia
duction in the future. CEE countries will likely receive additional
investments, while some lower value-added activities will be                                    Serbia
                                                                                                            Bulgaria
moved to other destinations, in Eastern Europe (Moldova,
Ukraine, Belarus in the future) or Asia.                                                                                                       Turkey


It is however also clear that the competitive position of the CEE         local ownership                 foreign ownership

automotive industry will have to be based on factors other than       Source: UniCredit New Europe Research Network




                                                                                                              The Automotive sector in CEE, December 2007   5
    The global automotive industry




    I. The global automotive industry

    I.1            The automotive industry is a global,                                             sive growth, it has already outnumbered Germany as the third
                   highly consolidated business …                                                   largest car manufacturer in the world (around 10 % of global out-
    In 2006, the world’s production of mechanic vehicles exceed-                                    put).
    ed 69 mn units, which was a record figure in its history of over
    one hundred years and was 4 % higher than the previous year.                                    The industry’s growth has been accompanied by increasing globali-
    During the last decade, the average production growth rate was                                  sation and consolidation. Right now, the top 5 automotive groups
    3 % annually, mainly due to the rising output of emerging coun-                                 – each operating globally – control over 50% of the industry in
    tries. However, the three traditional regions of automotive pro-                                terms of production volume (figure 2), with significant differences
    duction (North America, Japan and Western Europe) remain                                        at the regional level. Western Europe is an illustrative example of a
    leading areas of OEMs’ activity3 with global market shares                                      fairly competitive market with 15 brands having at least a 2% mar-
    amounting to 22.9 %, 16.6 %, and 23.4 % respectively (figure 1).                                ket share, whereas the top three American OEMs still control about
    China is emerging as their main competitor: thanks to its impres-                               50% of their domestic market. Nevertheless, even American buy-

    3) OEM is the Acronym of “Original Equipment Manufacturer”




    Main regions of global automotive production                                                                                                                 (figure 1)
     Vehicle production volume (2006, passenger cars and commercial vehicles, in million units)




                                                                                                               Central Eastern Europe*   5.1
                                                                              Western Europe 16.2
                         North America 15.9                                   Germany         5.8
                         USA           11.3                                   France          3.2
                         Canada         2.6                                   Spain           2.8
                         Mexico         2.0                                   UK              1.6
                                                                              Italy           1.2



                                                                                                                                         Asia and Oceania 28.2
                                                                                                                                         Japan            11.5
                                                                                                                                         China             7.2
                                                                                              Africa 0.6                                 South Korea       3.8
                                                                                                                                         India             1.9




                                              South America 3.2




    *) includes all countries in the region, also those not included in the analysis.
    Source: OICA, UniCredit New Europe Research Network




6   The Automotive sector in CEE, December 2007
ers have become more and more open to manufacturers from                                        I.2          … where external factors as well as
other continents in recent years (especially Japanese ones), which                                           industry-specific factors lead to fierce
is a clear sign of further globalisation trends in the sector. A similar                                     competition
trend has taken place in the supplier industry: tightening coopera-                             The global automotive industry is evolving dynamically due to
tion between OEMs and their main part deliverers has led to the                                 the changing business environment which intensifies existing
emergence of many auto supplier groups that operate world-                                      challenges and forces car manufacturers take measures to heal
wide. Such so-called Tier 1 suppliers were originally linked to sin-                            their businesses. Among all external factors affecting the indus-
gle automotive producers (domestic ones in the majority of cases).                              try one may distinguish:
At present, they usually directly serve several distinct car manufac-                           • Weakening demand in traditional markets (especially in the
turers, which makes the scale of their activity (in terms of rev-                                 USA and Western Europe), that are already saturated and no
enues) comparable with some of their clients. Among the largest                                   longer offer significant growth prospects.
automotive suppliers, one can distinguish Germany’s Bosch, Denso                                • Rising material costs. Over the last two years prices of some
and Aisin Seiki from Japan, Delphi, Johnson Controls, Lear and Vis-                               automotive-related commodities (such as steel, aluminium,
teon from the USA, Magna from Canada and Faurecia from France.                                    copper and plastics) have remained at a painfully high level,
However, in comparison to car manufacturers, the auto supplier in-                                and have also been rather volatile, reducing the possibility of
dustry remains highly fragmented with a large number of Tier 2,                                   effective cost planning and hedging against unexpected price
Tier 3, etc. operators that deliver individual parts to larger suppliers.                         changes.
                                                                                                • Growing oil prices that make customers change their prefer-
                                                                                                  ences towards more fuel-efficient vehicles and set the course
                                                                                                  for some more demanding technological improvements.

World’s top vehicle manufacturers                                                  (figure 2)   The current situation of global automotive companies is also par-
 Unit of measure: production volume in mn units (2006)                                          tially a result of some typical internal issues:
                                                                                                • As cyclicality is a common feature of this industry, there are
                        Production (mn units)                                Global share
                                                                                                  high amplitudes in sales observed over consecutive years.
       Total world
        production
                        69.13                                                                     However, cycles may vary in different regions, enabling car
   General Motors                                                                                 producers to protect against changing market conditions.
                          8.9                                                        12.9%
            (USA)
                                                                                                • Another structural attribute of the automotive industry is its
            Toyota        8.0
            (Japan)
                                                                                     11.6%        overcapacity, which often comes in at about 20 % of overall
               Ford                                                                               capacity. A combination of factors have led to this negative
                          6.3                                                         9.1%
              (USA)
                                                                                                  phenomenon including: the tendency of OEMs to invest in
  Renault-Nissan*         5.7                                                         8.3%
   (France/Japan)                                                                                 quickly developing regions where sales are expected to grow
Volkswagen Group                                                                                  only in the future, the industry’s cyclicality and investment
                          5.7                                                         8.2%
       (Germany)
                                                                                                  strategies that influence OEMs to accept extremely optimistic
  DaimlerChrysler         4.6                                                         6.6%
       (Germany)                                                                                  sales forecasts during capacity planning. For all intents and
       Hyundai-Kia        3.8
                                                                                                  purposes, a problem of overcapacity does not exist in the sup-
                                                                                      5.6%
     (South Korea)
                                                                                                  plier industry, where assets are much more transferable.
            Honda         3.7                                                         5.3%
            (Japan)                                                                             • Growing competition from large low-cost countries, such as
               PSA        3.4                                                         4.9%
                                                                                                  China or India, which is especially visible in the supplier seg-
           (France)
                                                                                                  ment. As Asian suppliers gain experience not only in producing
                 Fiat     2.3                                                         3.4%
              (Italy)                                                                             commodity parts but also in even more sophisticated modules,
                                                                                                  the economics of the business simply cannot remain the
*) Alliance. Renault’s sales 2.4 million units, Nissan’s sales 3.7 million units                  same.
Source: Companies’ annual reports, OICA

                                                                                                The phenomena described above strongly influence the indus-
                                                                                                try’s condition, which is characterised by fierce competition al-




                                                                                                                             The Automotive sector in CEE, December 2007   7
    The global automotive industry




    ready present on automotive markets all over the world. The              commitment. Consolidation will be even more significant in the
    strategy of the OEMs has become focused on protecting old mar-           parts industry, that are forced to follow OEMs’ relocation moves
    ket shares rather than conquering new markets and they are all           which entail new investments in capacity.
    suffering from the consequences of a global price war. The lat-        • The relocation of facilities towards low-cost areas has be-
    ter seems to be unavoidable. In such a capital-intensive busi-           come an important element of every OEM’s strategy (figure 3).
    ness, car manufacturers are forced to maximise their sales (in           There are two main incentives for such an action: first, produc-
    order to optimise capacity utilisation), which usually entails con-      ers are establishing plants in the countries which show promis-
    siderable price discounts. Moreover, car manufacturers try to            ing growth prospects in terms of being able to market the cars
    outdo one another with technological novelties, which results in         locally. Secondly, it enables the reduction of operational costs,
    the growth of R&D costs, an increase in the importance of                which especially pertains to labour-intensive production (e.g.
    electronic and IT solutions, constant improvements in engine             buses) or the manufacturing of small cars, where margins are
    efficiency and a vehicle lifecycle that is becoming shorter and          usually minimal. As mentioned before, suppliers tend to follow
    shorter.                                                                 OEMs in this process as they need to operate close to their
                                                                             customers. Although relocation usually turns out to be a good
    There are also some greater consequences of the issues men-              strategic move, it entails substantial capital expenditures and
    tioned. First of all, the majority of car manufacturers are current-     higher investment risk.
    ly struggling with declining profitability. Rising investment re-      • OEMs are forced to shift more attention to proper marketing
    quirements result in many projects that are not able to return           strategies and constantly maintain their market appearance.
    the cost of capital. The combination of these factors is causing       • At the same time, they strive for operational excellence, intro-
    the automotive business to become less attractive for potential          ducing lean manufacturing, which results in the shift of value
    shareholders, which is especially seen in the U.S., for instance.        added and production burden towards their direct suppliers.
                                                                             These suppliers then become the coordinators of the whole
    OEMs’ suppliers are afflicted by similar troubles. Nevertheless,         process. This process helps to simplify the business and to
    Tier 1 suppliers are generally able to earn higher profit margins        keep costs relatively low. They also try to compensate for de-
    despite tremendous pressure from the upper and lower seg-                clining profitability by putting intense pressure on suppliers to
    ments of the value chain. This is possible because of the nature
    of their activity, which entails the generation of a relatively high
    level of value added in comparison to car manufacturers. Howev-
    er the situation of automotive suppliers is very diverse and de-
    pends on the respective scale of operations and business model.
                                                                           Changes in the world’s production
    I.3        The industry is responding with cost                        of passenger cars                                                                (figure 3)

               reductions, a shift towards lean                            Thousand units
                                                                                                                                             809      124     49,887
               operation and closer vertical and                                                                           887
                                                                                                                                    1,397
                                                                                                                 1,499
               horizontal cooperation                                                                   6,305

    Automotive companies are undertaking various steps against the          41,216

    progressive deterioration of profitability:                                      – 1,518
                                                                                               – 832
    • Further consolidation, which, in the case of the OEM sector, can
      assume different forms. Whereas basic mergers and acquisitions
      were common over the last two decades, leading to the domi-
      nance of large automotive groups like GM or Volkswagen,
      strategic alliances and joint-ventures aimed at single projects      Production Δ          Δ         Δ        Δ        Δ        Δ        Δ        Δ Production
                                                                              2000 NAFTA*      EU-15      Asia   Eastern S. Korea   Japan    South    Africa 2006
      (e.g. common platforms, engines) are much more prevalent                                          (without Europe                     America
                                                                                                       Japan and
      today. The latter has become a convenient solution for car man-                                    Korea)

      ufacturers as they help to share R&D costs and operational risk,
                                                                           *) USA, Canada and Mexico
      not binding partners involved in such initiatives to a long-term     Source: OICA, UniCredit New Europe Research Network




8   The Automotive sector in CEE, December 2007
  lower their margins and increase innovation and global expan-                                 petitive position on their own territory. The main factors of
  sion. For further cost reductions, they even outsource (off-                                  their success are a perfectly organised production process,
  shore) supporting functions such as accounting or human re-                                   proper product positioning and excellent intuition about up-
  sources.                                                                                      coming trends (e.g. Toyota succeeding with its hybrid-engine
• In order to bring the business back on course, automotive                                     cars).
  companies are implementing even more restructuring mea-                                    • On the contrary, American OEMs, mainly positioned on the
  sures including the reduction of the number of direct suppli-                                 domestic market, are experiencing extremely hard times.
  ers and downsizing programs.                                                                  They are much too vulnerable to cyclical downturns on the do-
                                                                                                mestic market. Moreover, they are consistently losing market
All the processes mentioned above are redefining mutual rela-                                   share to expanding Japanese firms. The recent failures of
tions inside the industry, which is illustrated in figure 4.                                    American producers were caused mainly by their chronic in-
                                                                                                flexibility towards changing market trends. An excessive vari-
I.4          Japanese producers are the industry’s                                              ety of brands which causes a loss of brand awareness and the
             winners, with emerging countries                                                   over concentration of big fuel-demanding cars have led some
             becoming increasingly important                                                    of their clients to choose more attractive solutions offered by
Not all car makers are successful and the situation of the various                              competitors. Another typical problem for American OEMs is the
global automotive groups is rather distinct:                                                    enormous legacy costs they have to bear in connection with
• Japanese and other Asian manufacturers are undoubtedly                                        various pension and healthcare programs. These costs often
  among the best performers. While all regional leaders arose                                   pull their financial results under the profitability line.
  from their respective domestic markets, the Japanese were the                              • European car manufacturers are generally faced with similar
  first to effectively adapt to increasing global competition. They                             problems. Sales have remained stagnant for many years and
  are expanding on both fronts: constantly growing in the U.S.                                  the expansion of Asian brands makes competition on the local
  and Western European markets and maintaining a strong com-                                    market even more intense. However, European companies




Mutual links between car manufacturers and their suppliers                                                                                                                   (figure 4)




                          OEMs                                                                                 Alliances
                         Engines                                                                            Joint ventures
                     Bodies (design)                                   OEM                                                                                         OEM
                      Car assembly                                                                               M&A
                    Sales (marketing)                                                                        Capital links

   Shifting value
   added                          Rising input in a form of
   Squeezing                      technological know-how
   to cut costs

                 Tier 1 suppliers                                                        Consolidation                                   Consolidation
               Automotive systems                                      Tier 1                                      Tier 1                                         Tier 1
              (e.g. interior, steering)
   Shifting value
   added                          Bottom-up pressure
   Squeezing                      resulting from rising
   to cut costs                   material costs

              Tier 2, 3, … suppliers
                  Individual parts                            Tier 2            Tier 2                    Tier 2            Tier 2                       Tier 2            Tier 2
                   and modules




Source: UniCredit New Europe Research Network




                                                                                                                                     The Automotive sector in CEE, December 2007          9
     The global automotive industry




       are generally able to perform better than their American                                      able. As cost effectiveness is becoming a key issue, car manu-
       counterparts. They are more used to operating in fiercely com-                                facturers will tend to form more and more alliances focused
       petitive conditions, which means that some of their businesses                                on single projects. Automotive suppliers will most likely play
       have already been restructured or are in the latter phases of                                 an unprecedented role in such partnerships as they take over
       this process. Moreover, the local industry does not experience                                much of the production burden and utilise their clear advan-
       legacy problems like U.S. companies do. Finally, Western Eu-                                  tages of know-how.
       rope is not a uniform market but instead consists of several                                • Constant improvements in fuel efficiency are expected to be
       smaller markets that have different specificities and cycles.                                 a leading trend in coming years. Apart from further expansion
       This helps local players to hedge against sudden downturns.                                   of diesel engines, which is already taking place in Europe, all
                                                                                                     of the manufacturers will bet on the development of alterna-
     As a result of these factors, Japanese OEMs considerably outper-                                tive fuel technologies including hybrid engines. This process
     form their European and American competitors in terms of sales                                  will be stimulated by the customers’ increasing desire to min-
     dynamics (figure 5). Increasing economies of scale together with                                imise fuel costs as oil becomes increasingly scarce.
     the organisation of the production process lead to outstanding                                • There will be a growing role for economy-class cars (repre-
     business profitability.                                                                         sented by e.g. Dacia Logan, Chery, Tata) observed as emerging
                                                                                                     markets gain in power. OEMs are already making huge efforts
     I.5            The future will bring even more cost                                             to offer cars that are affordable for a wide range of customers.
                    restructuring, including relocation,
                    which is a great opportunity for some                                          CEE countries, similar to other emerging economies, seem to be
                    Central Eastern European countries                                             one of the main beneficiaries of the industry’s transformation.
     The trends currently observed in the automotive industry should                               Their proximity to the Western European market makes them an
     continue in the coming years:                                                                 attractive investment destination which lures not only traditional
     • Existing problems will force OEMs and their suppliers to inten-                             European manufacturers but also Asian companies looking to
       sify their restructuring efforts. The closing of non-efficient                              build their production bases for the region.
       facilities and further relocation programmes appear unavoid-




     American, European and Japanese OEMs’ performance                                                                                                                 (figure 5)
     2000 – 2006
     Unit sales                                                                                    EBIT magin*
     2000=100

     150                                                                                          10%

     140                                                                                            6%
     130
                                                                                                    2%
     120                                                                                            0%
                                                                                                   –2%
     110

     100                                                                                           –6%

      90                                                                                         –10%
             2000       2001        2002       2003        2004        2005        2006                    2000        2001        2002        2003      2004   2005       2006

           Top 3 Japanese OEMs (including Toyota, Honda and Nissan)
           Top 6 European OEMs (including VW Group, PSA, Renault, Fiat, DaimlerChrysler’s Mercedes and BMW)
           Top 3 American OEMs (including General Motors, Ford and Chrysler)

     *) Only results of automotive divisions excluding profits from financial activity / Source: annual reports, UniCredit New Europe Research Network




10   The Automotive sector in CEE, December 2007
II. The automotive industry
in Central and Eastern Europe –
its size, structure and growth

II.1             The automotive industry generates an                                                   In recent years, CEE’s automotive value added has been grow-
                 important part of the manufacturing value                                              ing at a rapid pace (about 20 % annually) and has more than
                 added of Central Eastern Europe economies                                              doubled the figures from 2000 (figure 7). The sector’s growing
In most of the CEE countries the manufacture of motor vehicles,                                         importance in the region is reflected by its increasing contribu-
trailers and semi-trailers represents a major part of the produc-                                       tion to total manufacturing value added (from 5.8 % in 2000 to
tion of the wider transportation equipment sector (figure 6). The                                       7.3 % in 2005 and almost 10 % now). It already represents one
only exception is represented by the countries that have not de-                                        of the largest manufacturing sectors in CEE.
veloped motor vehicle production (Bulgaria, Croatia) being con-
centrated on the manufacturing of other transport equipment                                             In some CEE countries in particular (especially in small ones like
(e.g. shipbuilding). On the other hand, automotive production                                           the Czech Republic, Hungary or Slovakia), the auto industry is
plays a crucial role in the states of Central Eastern Europe that                                       relatively well developed and generates 10 – 12 % of total manu-
have no sea access (Hungary, Czech Rep. and Slovakia).                                                  facturing value added (figure 8).




Structure of transportation equipment                                                                   Development of the Central Eastern European
manufacturing in the CEE countries, 2005                                                   (figure 6)   automotive industry, 2000 – 2005                                      (figure 7)
Gross value added (current prices, EUR bn)                                                              Gross value added EUR bn (constant 2005 exchange rates)

100 % = 0.1          0.2      5.3      3.4         1.6        0.3          3.0       1.9        0.8
                                                                                                                        CAGR=19%                                                    13.1
                                                                            8         8          8                                                                     11.9
                                        25         23         18
            84        73       29
                                                                                                                                                             9.7
                                                                                                                                                   7.9
                                                                           92         92         92                                   6.3
                                        75         77         82                                                           5.6
                               71


                      27
            16

                                                                                                                          2000       2001         2002      2003      2004      2005
                                                                        p.
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                                                                                                        automotive in
       Other transport equipment                                                                        manufacturing
                                                                                                        GVA              5.8 %      5.8 %         6.3 %     6.7 %     7.1 %     7.3 %
       Manufacture of motor vehicles, trailers and semi-trailers (automotive)
Source: UniCredit New Europe Research Network analysis based on data from                               Source: UniCredit New Europe Research Network analysis based on data from
Eurostat and statistical offices                                                                        Eurostat and statistical offices




                                                                                                                                            The Automotive sector in CEE, December 2007    11
     The automotive industry in Central and Eastern Europe – its size, structure and growth




     In larger states like Poland, Turkey or Romania its impact is gen-                          A breakdown by country (figure 9) reveals the domination of
     erally smaller (with the contribution to manufacturing value                                three players (Turkey, Czech Republic and Poland) as the main
     added ranging between 6 and 8 %). In Bulgaria4 and Croatia,                                 local automotive producers. They generate almost 70 % of auto-
     where there are actually no car production facilities, it plays only                        motive value added among the analysed countries.
     a marginal role and is limited to some parts producers.
                                                                                                 II.2           Almost 3 million passenger cars
     The rapid development of the automotive sector observed in                                                 (4 million including Russia) were
     some Central Eastern European countries is proving to be a real                                            produced last year in the region and its
     flywheel for their economies. This positive phenomenon is also                                             volume is growing fast
     found in the industry’s contribution to total value added. It was es-                       Both production of passenger cars (+ 17 % on average from 2002
     pecially impressive in Slovakia and Romania but also fairly signifi-                        to 2006) and other vehicles (+ 31 %) is growing fast (figure 10).
     cant in some other countries like the Czech Republic and Poland.
     4) Bulgaria is also one of the candidate locations for the auto production facilities       The beginning of the century was actually quite a hard time for
     planned to be built in the region by GM and other American and Asian car producers          local car manufacturers. In the years 2001 – 02 production of pas-
     (in addition to the clear advantages of lowest cost and tax treatment factors, the pos-
     sibilities to conveniently and simultaneously serve neighbouring markets with signifi-      senger cars recorded a slight drop. There was a combination of
     cant potential for growth like Turkey, Romania and Serbia are considered particularly
     favorable). There are also indications of increased interest in building new auto parts     various factors that led to this deterioration:
     production facilities in Bulgaria. Expected investments of three multinational compa-
     nies are estimated at around EUR 120 mn, and plans scheduled for the next two to
     three years add up to around EUR 210 mn. There may also be additional investments
     planned by Turkish suppliers.




                                                                                                 Role of different countries in the
     Role of automotive industry in the CEE countries                              (figure 8)    CEE automotive sector                                                  (figure 9)
                                                                                                 Gross value added, EUR bn, %

     Automotive share in the Gross Value Added of each country, 2005

                                                3.1                                                                    Share in automotive GVA of CEE (2005)
     Czech Rep.
                                                                                          11.8
                                          2.3
                                                                                                                                 100%=EUR 13.1 bn
     Hungary
                                                                                  10.2
                                                                                                  Other 1% (Croatia, Bulgaria)
                                          2.2
     Slovakia                                                                                     Slovenia 2%
                                                                            9.5
                                    1.7
                                                                                                  Slovakia 6%
     Romania                                                                                                                                                            Turkey 28%
                                                                   7.6                            Romania 9%
                              1.2
     Poland                                                  6.5
                               1.3                                                                Hungary 13%
     Turkey                                                 6.3
                              1.1
     Slovenia
                                                      4.3
                                                                                                                                                                 Czech Republic 21%
                      0.2
     Croatia                                                                                      Poland 20%
                              1.2
                      0.1
     Bulgaria           0.4



          Total GVA                 Manufacturing GVA

     *) in 2004 – 2005 period / Source: UniCredit New Europe Research Network analysis           Source: UniCredit New Europe Research Network analysis based on data from Eurostat
     based on data from Eurostat and statistical offices                                         and statistical offices




12   The Automotive sector in CEE, December 2007
• A general economic downturn in some countries of the region                                 the enlargement of the European Union in 2004. As already
  (Poland, Czech Republic, Turkey) that also entailed shrinking                               mentioned in the first chapter, CEE countries are now one of the
  local car sales                                                                             main beneficiaries of the relocation process observed in the pro-
• Changing strategy of foreign investors – many global auto                                   duction of vehicles. It is especially prevalent in the production
  manufacturers have been present in CEE since as early as the                                of small cars, where contribution of labour costs to the total
  early 90s, but some of the facilities were not really producing                             value of a vehicle is higher. Many of the local facilities only
  cars but just assembling them from the imported sets. This                                  manufacture economy class cars. There are many examples,
  production model was introduced mainly in order to avoid tar-                               such as the Fiat Panda in Poland, Toyota Aygo, Citroen C1, or
  iffs. As tariffs were lowered and finally lifted in trade among                             Peugeot 106 in Czech Republic, Renault Twingo in Slovenia, Re-
  EU countries, this kind of incentive ceased to play any impor-                              nault Clio in Turkey, the Logan in Romania and several others.
  tant role, which caused some disinvestments in the region                                   This trend is being pushed even further by other producers like
• Financial problems and, finally, the bankruptcy of Daewoo,                                  General Motors, which is developing a new low-cost model, and
  which was an important investor in Poland as well as in Roma-                               Indian Tata Motors, which is producing the cheapest car in the
  nia.                                                                                        world by far at EUR 1,850. These developments, together with
                                                                                              the general stagnant European, American and Japanese markets,
Since that time the local automotive industry has been enjoy-                                 are encouraging carmakers to take advantage of the faster eco-
ing spectacular growth, which was even more intensified by                                    nomic growth in Central Eastern Europe, producing affordable




Volume of motor vehicle production in CEE-9,                                                  Production of passenger cars by country,
2000 – 2006                                                                   (figure 10)     2000 – 2006                                                           (figure 11)
Th. of units                                                                                  Th. of units, %

                                                                                                                                                                  CAGR , %
Passenger cars                                   Other*                                                                                                   2000 – 2002 2002 – 2006

                                    2,804                                                     100 % = 1,762 1,518 1,499 1,653 1,965 2,259 2,804               –8          17
                               7%                                                             Romania
                            =1                                                                            4     5      4       5      5      8      7          2          33
                         GR                                                                   Slovenia    7     8      8       7      6             4          2          –2
     CAGR
          =–           CA                                                                                                                    6
               8%          1,965                                                              Hungary     8                    7      6             7          2           8
                                                                                                                9      9                     7
  1,762
                                                                                              Slovakia    10                         11             11        12          7
               1,499                                                                                            12     15     17            10

                                                                                 %            Turkey      17                                        19       – 17         28
                                                                            = 31                                12                   23     20
                                                                       CAGR                                            14     18
                                                      CAGR=0%                         600
                                                                          502
                                                     202       204                            Czech Rep. 24
                                                                                                                29                   23             30
                                                                                                                       29                   26                 2          18
                                                                                                                              26
  2000         2002        2004      2006           2000       2002      2004        2006
  10.1%        8.7%       11.6%     15.5%           7.3%        7.9%    16.7%        18.6 %   Poland      30
                                                                                                                25                   26
                               share in Pan-European production                                                        21     20            23      22       – 25         20


                                                                                                         2000 2001 2002 2003 2004 2005 2006




*) LCVs, Heavy trucks and buses
Source: UniCredit New Europe Research Network, OICA, local sources                            Source: UniCredit New Europe Research Network, OICA, local sources




                                                                                                                                The Automotive sector in CEE, December 2007         13
     The automotive industry in Central and Eastern Europe – its size, structure and growth




     cars in transition countries. Carmakers are hoping to draw in                                 ternational level. This is a simple consequence of the decreasing
     first-time buyers now and keep them as they trade up to more                                  product life cycle which limits the popularity of certain car mod-
     expensive cars. The relocation of car facilities helped CEE coun-                             els to a fairly short period of time and forces car manufacturers
     tries to nearly double the 2002 figures for the volume of pas-                                to exchange them more and more often. It is also due to the
     senger cars manufactured in the region. At the same time,                                     fact that decisions about the type of production carried out at
     they have succeeded in building up their share in pan-Euro-                                   local facilities and the size of local facilities are made centrally
     pean production to a solid level of 15.5 % (compared to just                                  by the owners of global corporations.
     8.7 % in 2002). In regard to the production of other motor vehi-
     cles, it is already three times as high as it was in 2002. The re-                            II.4          Turkey is responsible for over 70 % of
     gion’s share in European production of LCVs, heavy trucks and                                               the regional manufacturing of motor
     buses now amounts to 18.6 %.                                                                                vehicles other than passenger cars
                                                                                                   As mentioned, growth in the production of other vehicles6 was
     Vehicle production in Russia, although comparable in size with                                even more substantial. It was especially visible in the manu-
     about 1.5 million vehicles produced in 2006, was not able to                                  facturing of light commercial vehicles7 which has increased
     achieve the dynamic growth which was observed in the other                                    320 % since 2000. This was partially a side effect of the growth
     analysed CEE countries. Having not yet been penetrated by for-
     eign companies, the industry developed at an average pace of
     3 – 4 % annually and was strongly concentrated on the domestic
     market.

     II.3          Excluding Russia, the Czech Republic is
                   currently the leader in the manufacturing                                      Production of “other vehicles”*,
                                                                                                  2006 versus 2000                                                          (figure 12)
                   of passenger cars, but production in Slova-
                                                                                                   Th. of units, %
                   kia will increase even more rapidly
     The Czech Republic has already become the top of passenger car
     producers in CEE (figure 11). In 2006 the plants in the Czech                                  By country                                    By type
                                                                                                    100 % =            202           600          100 % =           202           600
     Republic manufactured around 850,000 cars, which represents                                    Slovenia            0                         Buses &
                                                                                                    Hungary             2                                            4             4
     30 % of CEE’s total production. It has developed especially in-                                Romania             7
                                                                                                                                      6
                                                                                                                                           1
                                                                                                                                                  coaches
                                                                                                                                                                                   7
                                                                                                                                      2
     tensively in the past two years, when the new facility built by                                Poland              12
                                                                                                                                      18
                                                                                                                                                  Heavy trucks       24

     PSA and Toyota (TPCA5) started to operate on a full basis. Other                               Czech Rep.          13                 1

     leaders are Poland with over 600,000 units in 2006 (22 % of
     total CEE’s production) and Turkey, which manufactured about
                                                                                                                                                                                   89
     550,000 cars (19 %) last year. From 2002 to 2006, Romania was                                                                    72          LCVs
                                                                                                    Turkey              66                                           72
     the fastest growing car producer (growing over 30 % annually),
     although it started at a relatively low level. In the near future,
     Slovakia will become a regional tiger as it has recently received
     huge foreign investments (PSA, Kia).                                                                             2000          2006                           2000          2006



     Fluctuations in production volume in individual years (which may
     be observed in each country apart from the general growth                                    *) LCVs, Heavy trucks and buses
     trend) are a typical feature of the automotive industry at an in-                            Source: UniCredit New Europe Research Network, OICA, local sources




     5) TPCA is a joint-venture company established by Toyota and PSA. Its plant located in Kolin (Czech Republic) produces around 300,000 small cars annually (models 107, C1 and
     Aygo)
     6) There is no homogeneous definition for “other vehicles” and its main groups, like LCVs, heavy trucks, buses, etc. The given numbers are based on the classification used by OICA
     (International Organisation of Motor Vehicle Manufacturers)
     7) up to 3.5 tons




14   The Automotive sector in CEE, December 2007
in passenger car production as some LCVs are made by the same                         some signs of increasing interest in the region, which is driven
producers (e.g. Volkswagen and Fiat in Poland, Hyundai and Fiat                       by booming local demand as a result of a general economic up-
in Turkey). The manufacture of buses and coaches, which has                           turn. Production of heavy trucks in Central Eastern Europe is
almost tripled since the beginning of the decade, is another                          going to grow soon because a large investment by the Ger-
rapidly expanding production segment. The CEE region seems                            man company MAN in its new plant. The plant will have a ca-
to be very attractive for global bus manufacturers, as a relatively                   pacity of 15,000 units and will be located near Krakow (Poland).
small production scale and the inability to fully automate the
production process make lower labour costs an essential incen-                        Production of commercial vehicles is generally dominated by
tive for potential investors. In contrast, the production of heavy                    Turkey (figure 12). In 2006, 3 out of 4 commercial vehicles made in
trucks has dropped slightly between 2000 and 2006 resulting                           the region came from Turkey. The country produces over 350,000
in the only production area where the relocation process was                          LCVs and 30,000 heavy trucks annually. Poland is also quite an im-
not so relevant. With human factors not being so important in                         portant player which accounts for almost 20% of the regional pro-
this case, the drop was based more on the attractiveness of the                       duction. It is already one of the major European bus producers, with
local markets, which were quite sluggish. However, there are                          MAN, Volvo and Scania having plants there (figure 13).




Type of automotive production by country                                                                                                          (figure 13)



                                                                                                                       Russia


                                                            Poland




                                Czech Rep.


                                                                     Slovakia


                                                                     Hungary
                                             Slovenia                           Romania


                                                        Croatia



               Passenger cars
                                                                                  Bulgaria
               LCVs
                                                                                                                        Turkey
               Heavy trucks

               Buses




Source: UniCredit New Europe Research Network




                                                                                                                  The Automotive sector in CEE, December 2007   15
     The automotive industry in Central and Eastern Europe – its size, structure and growth




     II.5          The manufacturing of automotive parts                              In the current decade the CEE’s automotive parts business has
                   is developing dynamically to fulfil local                          developed very intensively. In many countries it already repre-
                   and global needs                                                   sents over 50 % of local automotive industries, especially when
     OEMs were historically the first to invest in plants in CEE. Howev-              we include engines (production of which is still controlled by
     er, automotive suppliers are following their lead on a massive                   OEMs, hence classified as the manufacture of vehicles), not to
     scale. Practically all of the world’s top Tier 1 suppliers have lo-              mention other products that are actually auto parts but are treat-
     calised their production in the region (see table 1). Auto sup-                  ed in some cases as products of other industries (e.g. tyres, bat-
     pliers are constantly under pressure from OEMs to lower the                      teries, auto glass, wiring harnesses).
     prices of their products, and they are always searching for areas
     where it would be possible to save costs. In addition, rising effi-
     ciency requirements resulting from a just-in-time model of car
     production forces them to operate near the OEMs. These factors
     explain their growing interest in the CEE region.




     World’s top 10 automotive suppliers in Central Eastern Europe                                                                                     (table 1)
     Manufacturer           Local facilities       Production
     Bosch                  Czech Rep., Hungary,   gasoline systems, diesel systems, chassis systems brakes, chassis systems control, electrical drives,
     (Germany)              Poland, Romania,       starter motors and generators, car multimedia, automotive electronics, zf steering systems,
                            Turkey, Slovakia       automotive aftermarket
     Denso                  Czech Rep., Hungary,   automatic air conditioners, cool & hot boxes, air purifiers, gasoline engine management systems,
     (Japan)                Poland, Turkey         diesel engine fuel injection systems, engine electrical equipments, engine cooling systems, meters,
                                                   windshield wipers, windshield washers, horns, flashers
     Delphi                 Czech Rep., Hungary,   Delphi designs, engineers and manufactures a wide variety of components, integrated systems
     (USA)                  Poland, Slovakia,      and modules. It is one of the largest and most diversified suppliers of automotive parts.
                            Turkey
     Johnson Controls       Czech Rep., Hungary,   seating systems, instrument panels and cockpits, door systems, overhead systems, automotive
     (USA)                  Poland, Slovakia,      electronics and electronic energy-management system.
                            Slovenia
     Magna                  Czech Rep., Poland,    body systems, chassis systems, plastic body, lighting & exterior trim systems, closure interior mirror
     (Canada)               Slovakia, Turkey       seating and electronic systems, power train & drive train systems, roof systems, complete vehicle
                                                   engineering & assembly
     Aisin Seiki            Czech Rep., Turkey     automatic transmissions (ATS), manual transmissions (MTS), automated manual transmissions,
     (Japan)                                       continuously variable transmissions (CVTS), hybrid systems, clutch discs, clutch covers.
     Lear                   Czech Rep., Hungary,   seating systems, electronic products and electrical distribution systems
     (USA)                  Poland, Romania,
                            Slovakia, Turkey
     Visteon                Czech Rep., Hungary,   interiors, climate and electronics (including lighting), global aftermarket operations, engine induction,
     (USA)                  Poland, Slovakia,      power train controls, chassis and power train
                            Turkey
     Faurecia               Czech Rep., Poland,    seats, cockpits, door panels, acoustic packages, front ends and exhaust systems
     (France)               Romania, Slovakia,
                            Turkey
     TRW                    Czech Rep., Poland,    advanced active systems in braking, steering and suspension and sophisticated occupant safety systems
     (USA)                  Romania, Turkey        for inflatable restraints, seat belts and steering wheels
     Source: companies’ web sites




16   The Automotive sector in CEE, December 2007
III. CEE’s growing integration with the global
automotive industry – role of foreign trade

III.1         Export flows of CEE countries in the                                      has been particularly significant: CEE has managed to double
              automotive sector has almost tripled                                      its export share during the last decade to around 4 % of world
              since 2000, from about EUR 20 bn in                                       imports (7 % including Russia). Perhaps more interesting is the
              2000 to over EUR 60 bn in 2006                                            fact that CEE countries now deliver about 8 % of EU-15 imports
The export performance of the automotive sector has been                                (12 % including Russia), emerging as the main production arm
outstanding in CEE countries, increased by the trend in FDI                             for old Europe, and these achievements are even more pro-
flows to the region mentioned earlier, which spurred local pro-                         nounced in the case of the automotive sector. Indeed, export
duction and export possibilities. If we consider the whole manu-                        flows of automotive products from CEE countries are boom-
facturing sector, the contribution of CEE countries in world trade                      ing (figure 14) and they have accelerated even more since in-




Growth in automotive export of the CEE countries                                                                                                 (figure 14)
in % (current exchange rates in euro terms)


                                                           Growth of automotive export (current prices, %)

                                           300%

                                           250%

                                           200%

                                           150%

                                           100%

                                                50%

                                                0%
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                                                  2001–2003                2004–2006



                                                                   Share in CEE’s new export sales
                                  2001–2003                                                                       2004–2006

Slovenia 1%                                                Croatia+Bulgaria 0.2%      Slovenia 3%                                        Croatia+Bulgaria 0.2%
Romania 2%                                                                            Romania 5%
Hungary 11%
                                                                                      Slovakia 5%
                                                                    Turkey 25%                                                                    Poland 29%

Czech Republic 17%
                                                                                      Hungary 16%




Poland 20%                                                                                                                                 Czech Republic 23%
                                                                   Slovakia 24%       Turkey 19%



Source: UniCredit New Europe Research Network




                                                                                                                 The Automotive sector in CEE, December 2007     17
     CEE’s growing integration with the global automotive industry – role of foreign trade




     tegration with the EU. New member countries such as Roma-                             In parallel with the impressive increase in overall export flows
     nia starting from relatively low levels, have been able to in-                        during the last few years, Central Eastern European countries
     crease their flows of export in the sector at the highest rate.                       are becoming very relevant players in the automotive sector
     Even countries that under perform when compared to the rest                           at the global level: their share of overall world trade has con-
     of the region, like Croatia and Hungary, were able to double                          stantly increased since 2000, and it has more than doubled from
     their export flows in the current decade. On the other hand,                          3.7 % to around 8.7 % of total world import of transport equip-
     Turkey, Poland and the Czech Republic were the countries                              ment (figure 15).
     which, due to the relatively large scale of the business and
     high growth rates, had the largest increase in foreign sales.                         III.2            The CEE countries are increasingly
                                                                                                            specializing on the automotive sector
     Three fourths of CEE’s automotive export flows are now gener-                         The analysis of Revealed Comparative Advantages (RCA8) give
     ated by Central Europe (in 2006: Czech Rep. 22 %, Poland                              some interesting insights (figure 16). The trade patterns of
     25 %, Hungary 18 % and Slovakia 11 %), while the remaining                            many CEE countries show a heavy specialisation in the trans-
     exports originate in South Eastern Europe (SEE).                                      port equipment sector, thanks to the relatively recent FDI in-
                                                                                           flows from the big international producers.


                                                                                           The RCA index shows values significantly higher than 1 in Central
     Share of CEE export of transport equipment                                            Europe, and the index has been increasing during recent years,
     in world demand                                                         (figure 15)
     %                                                                                     8) The RCA index is calculated here as the role of Transport Equipment in each country
                                                                                           (in % of total flows) with respect to the role of Transport Equipment at the internatio-
     8                                                                         8.7         nal level (again in % of total flows). However, there are different methods for calcula-
                                                                                           ting “Revealed comparative advantages” (for instance, at the global level, at the re-
                                                                     7.3                   gional level, with bilateral trade between two countries or trading partners, etc.). Two
     6                                                   6.7                               main trade theories have highlighted the role of “comparative advantages,” one origi-
                                                                                           nally from Ricardo and the other from Heckscher-Ohlin (H-O). The former assumes
                                            5.4
                                                                                           that comparative advantage arises from differences in technology across countries;
     4                  4.3
                                  4.6                                                      instead, the H-O theory attributes comparative advantage to differences in factor en-
               3.7                                                                         dowments across countries (resulting in differences in costs across countries). Hence,
     2                                                                                     classical trade theories are based on the principle of comparative advantage which
                                                                                           derives from differences in relative prices across countries. And following the H-O
                                                                                           theory, a country’s comparative advantage is determined by its relative factor scarcity.
     0                                                                                     The difficulties to calculate these advantages were overcome by Balassa, suggesting
              2000     2001      2002      2003         2004        2005      2006         that comparative advantage is “revealed” by observed trade patterns. Thus, inferring
                                                                                           comparative advantage from observed data is called “revealed” comparative advan-
     Source: UniCredit New Europe Research Network and Global Insight                      tage (RCA).




     Revealed Comparative Advantages (RCA) in transportation equipment sector                                                                                          (figure 16)



     Central Europe                                                                        South Eastern Europe


     2.4                                                                                     2.4

     2.0                                                                                     2.0

     1.6                                                                                     1.6

     1.2                                                                                     1.2

     0.8                                                                                     0.8

     0.4                                                                                     0.4

         0                                                                                     0
               2000     2001      2002       2003            2004     2005     2006                  2000       2001        2002       2003        2004        2005        2006

             Hungary      Czech Republic          Slovakia          Poland                         Turkey        Slovenia          Romania          Croatia           Bulgaria

     Source: UniCredit New Europe Research Network and Global Insight




18   The Automotive sector in CEE, December 2007
with the exception of Slovakia, for which the index seems more                                 share (totally from 5.1 % in 2002 to 8.5 % in 2006) of the
volatile depending on the production scale of new plants9. The                                 world’s exports. This improvement concerns both areas: automo-
picture for South Eastern Europe is different (right side of figure                            tive parts (jumped from 4.2 % in 2002 to 7.5 % in 2006) as well
16): the specialisation pattern is evident only in Turkey and it                               as car engines and engine parts (where CEE’s share in global ex-
has been achieved just recently. Actually the Romanian index is                                port already exceeds 10 %).
around 1 (thanks to the booming exports of Dacia-Renault) and
Bulgaria and Croatia10 will probably remain the only Eastern Eu-                               Production of automotive parts is especially important for
ropean countries under analysis with a non-specialisation in the                               three countries of the region: Hungary, Poland and the Czech
transport equipment sector (and without producers of whole                                     Republic. They are all among the top low-cost exporters of
cars located in the country).                                                                  parts11 and have developed different specialisation areas (figure
                                                                                               18). Hungary is the regional leader in production of spark-ign
Specialisation takes place not only in car manufacturing but also                              engines (thanks to its Audi plant in Gyor) and the fourth largest
in automotive sourcing. The CEE area is starting to specialise in                              exporter of these products overall. Poland has the largest num-
the manufacturing of particular car modules, as the local plants                               ber of engine plants (owned by Toyota, Volkswagen, Fiat and
serve many OEMs in many countries. This trend can also be                                      Isuzu) and leads in regional production of diesel engines and is
seen in the quickly growing export sector, which now exceeds                                   world’s fifth largest exporter. The Czech Republic is the unchal-
EUR 24 bn a year (figure 17). Regional production is rising much                               lenged regional leader in the production of typical automotive
faster than in the global industry, and results in an increasing                               parts, specializing in many areas like bodies, brake and safety

9) Before 2000, the VW plant was the only producer of cars in Slovakia, reaching a peak in production in 2002 – 03. In 2003 it has started to produce the Seat Ibiza, shifting pro-
duction from Spain (around 20,000 cars per year). In 2005 the production of Seat was shifted back to Spain. PSA started to produce in Slovakia in June 2006, KIA in December 2006.
10) The specialisation shown by Croatia in transport equipment (figure 16) reflects the role of shipbuilding, and it is also related to the weakness of the manufacturing sector com-
pared with the strength of the service sector, especially tourism (RCA are calculated taking into account the role of transport equipment on total manufacturing). In contrast to all
the other countries, the cars entirely built in Croatia are almost non-existent in Croatia’s total automotive exports (while the same number is almost 80 % in Slovakia, for instance).
11) treated together with engines and engine parts




CEE export of automotive parts                                               (figure 17)       Top emerging auto parts exporters                                            (figure 18)
 2002 – 2006                                                                                    2006

Total CEE’s export*                                                                            Share in the world’s export*                               Main areas of specialisation
EUR bn
                                                                                24.4
                                              6%
                                     CAGR = 1               21.9
                                                                                               Mexico                                             4.6 %    Diesel and spark-ign engines,
                                                                                                                                                          safety systems, stering systems,
                                             18.7
                                                                                               China                                      3.1 %              transmission, road wheels
                          15.9
       13.6                                                                                                                              3.0 %
                                                                                               South Korea
                                                                                                                                                           Diesel engines, bodies, shock
                                                                                               Hungary                                  2.7 %              absorbers, steering systems,
                                                                                                                                                           safety systems, transmission,
                                                                                               Poland                                  2.5 %                electrical equipment, axles


                                                                                               Czech Republic                     2.0 %
       2002               2003               2004          2005                 2006                                                                        Bodies and their parts, axles,
                                                                                                                                                          shock absorbers, brake systems,
                                                                                               Brazil                            1.7 %                       lighting equipment, safety
                                                                                                                                                            systems, mufflers, radiators
CEE’s share in the world’s export                                                              Thailand                       1.1 %
in %


                                                                                               Romania (0.4 %), Slovakia (0.3 %), Turkey (0.2 %),
                                                                                               Slovenia (0.2 %), Croatia (0.1 %), Bulgaria (0.01 %)
                                    8.5
              5.1                         10.5                     Automotive parts
                    8.3             7.5
              4.2
                                                                   Engines and their parts
                                                                   Total share including
              2002                  2006                           both groups

*) Including automotive parts (CN 8708), engines and engine parts (CN 8407 – 09)               *) including engines and their parts
Source: UN Comtrade                                                                            Source: UN Comtrade




                                                                                                                                      The Automotive sector in CEE, December 2007            19
     CEE’s growing integration with the global automotive industry – role of foreign trade




     systems, shock absorbers and lighting equipment. In 2006,                            III.3          The CEE countries are not just a relevant
     Czech export of parts exceeded EUR 5 bn.                                                            production base, but they are increa-
                                                                                                         singly seen as important destination
     Even though other CEE countries do not play such a significant                                      markets
     role in global auto sourcing, they are expanding quickly, espe-                      The automotive imports of Central Eastern European countries
     cially in Romania and Slovakia.                                                      have already exceeded EUR 50 bn, up from 23 bn in 2000.
                                                                                          Thus, the region is becoming not only an important automotive
     The rapid development of the automotive sector is influencing                        producer but also a notable importer. As a result, the CEE coun-
     the sectoral specialisation of trade flows within each country as                    tries have almost doubled their share of global transport equip-
     other sectors (i.e. traditional sectors such as textile industries, for              ment imports since the beginning of the decade (figure 20). This
     instance) are not able to maintain the high growth pace generat-                     role is expected to increase quickly as income levels catch up
     ed by the automotive industry. Automotive export now repre-                          with the standards in other EU countries.
     sents a very relevant portion of total manufacturing exports (fig-
     ure 19), especially in Central Europe, where it accounts for more                    In absolute terms, the big importers are those with large local
     than 15 % of total manufacturing exports (and 20 % in Slovakia).                     markets (Turkey, Poland) or with relatively large production facil-
                                                                                          ities, as these countries import spare parts and goods to be as-
     In most of the CEE countries, the “dependence” on automotive                         sembled in the local plants (Czech Rep., Hungary, Slovakia).
     exports has constantly increased in the last few years, with the
     notable exception of Slovakia (the peak in 2003 –’04 was due to                      Rapid growth of local demand and a “consumption smoothing”
     the trend in VW plants mentioned above). Regarding SEE coun-                         process12, combined with good prospects regarding households’
     tries, the role of automotive exports in the total exports is rapid-                 disposable income, result in increasing imports in Central Eastern
     ly increasing in Turkey (which is experiencing a painful restruc-                    European countries. Automotive imports are no exception (they
     turing of the traditional sectors in favour of higher value added
     activities, which was forced by the real currency appreciation in                    12) Individuals seek to avoid abrupt changes in their standard of living during their
     recent years), and Romania (influenced by the activity of Re-                        lifetime. In CEE they are currently anticipating consumption (in some cases through
                                                                                          borrowing) with the expectation of higher income in the future. Consumption is in-
     nault-Dacia). The role of automotive exports in the total exports                    deed smoothed among predictable or expected fluctuations; for this reason, the basic
                                                                                          Life Cycle/Permanent Income Hypothesis also states that predictable changes in inco-
     in Croatia and Bulgaria, on the other hand, is marginal.                             me have no effect on the growth rate of consumption expenditures.




     Share of automotive industry                                                         Share of CEE import of transport equipment
     in total export of goods                                            (figure 19)      in world demand                                                          (figure 20)




                   Central Europe                         South East Europe
     25 %                                                                                 7
                                                                                                                                                                        6.9
                                                                                          6                                                     6.3         6.3
     20 %
                                                                                          5
                                                                                                                                    4.9
     15 %                                                                                 4
                                                                                                   3.9                   3.9
                                                                                          3                  3.5
     10 %
                                                                                          2
      5%
                                                                                          1
      0%                                                                                  0
                                                                                                  2000     2001        2002        2003        2004        2005        2006
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         2000        2001        2002        2003        2004       2005           2006

     Source: UniCredit New Europe Research Network                                        Source: UniCredit New Europe Research Network




20   The Automotive sector in CEE, December 2007
have been growing in all the analysed countries – figure 21),                                    III.4.         The CEE region is becoming a net
with cars considered among the most important durable                                                           exporter of automotive products
goods which improve the standard of living.                                                      The CEE region as a whole has transformed itself from a net
                                                                                                 importer in 2000 to an important net exporter (which is shown
In the new EU member states such as Romania and Bulgaria im-                                     in figure 23). As early as 2001, the regional automotive trade
ports are growing the most (because starting from low levels),                                   recorded a high positive balance, which was due to a deep
followed by Central European countries. For Turkey, the effects of                               slump in the Turkish economy that resulted in a reduction of cars
the economic crisis in 2001 (which came along with the depre-                                    imported to the region. From 2002 to 2004, the CEE trade posi-
ciation of the currency) are evident in the growth pattern of im-                                tion became more and more balanced. However, the recent FDI
ports. However, despite the crisis, the level of import increased                                influxes (especially to Central Europe), which have led to a sig-
by more than 50 % from 2000 to 2006.                                                             nificant capacity improvement, have caused this positive gap to
                                                                                                 increase within the last two years.
Individuals and companies in CEE devote a substantial part of
their earnings to buying cars and other transport equipment.                                     Although the region notes a significant surplus in its automo-
Hence, the contribution of automotive to total imports is con-                                   tive trade exchange, import still exceeds export in some coun-
siderable – more than 10 % for some of the countries – and in                                    tries (figure 24). When one looks at the analysis of trade flows,
some cases it is rapidly increasing (figure 22). It is fuelled by                                two distinct groups of countries emerge: Central European coun-
improved spending power for households and their growing                                         tries (Poland, Czech Republic, Slovakia and Hungary) are among
need for mobility, as well as by the buoyant local manufacturing                                 the biggest producers and net exporters, while the majority of
sector, which requires an increasing number of commercial vehi-                                  SEE countries (Romania, Bulgaria, Croatia and Turkey) are net im-
cles. Moreover, international and local car manufacturers import                                 porters (figure 24). The Czech Republic is the country with the
spare parts and completely-built cars from one country to anoth-                                 highest positive balance between exports and imports. Interest-
er: the disintegration of the production process across countries                                ingly, the SEE countries have a particularly buoyant local demand
is therefore inflating trade flows13.                                                            and run relatively large current account deficits, which is a gen-


13) This trend of “integration of trade and disintegration of production”, as indicated by Feenstra (1998), is also visible at the world level in other sectors, with the production of
electronic devices in Asian countries as an example.




                                                                                                 Share of automotive industry
Growth in automotive import of CEE countries*                                 (figure 21)        in total import of goods                                                     (figure 22)



Growth of automotive import (current prices, %)
                                                                                                                 Central Europe                             South East Europe
290 %                                                                                            16%
                                                                                                 14%
240 %
                                                                                                 12%
190 %                                                                                            10%
140 %                                                                                             8%
                                                                                                  6%
 90 %
                                                                                                  4%
 40 %                                                                                             2%
– 10 %                                                                                            0%
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    2001 – 2003                    2004 – 2006                                                        2000         2001          2002         2003         2004         2005          2006

                                                                                                 Source: UniCredit New Europe Research Network
*) not including Bulgaria / Source: UniCredit New Europe Research Network




                                                                                                                                        The Automotive sector in CEE, December 2007          21
     CEE’s growing integration with the global automotive industry – role of foreign trade




     eral feature of the local manufacturing sector (and is not only                              III.5.            The evolution of the role of CEE countries
     true for the automotive sector).                                                                               in the automotive industry is even more
                                                                                                                    pronounced if we take into consideration
     The importance of automotive trade for various Central Eastern                                                 trade flows with Europe
     European countries (measured in relation to GDP, figure 25) is                               Indeed, CEE’s export of transport equipment represents 8.2 %
     quite different. The Czech Republic, Hungary, and Slovakia are                               of EU-15 imports (the rest is mainly intra-trade, about 75 %, or
     the countries with the highest ratio of automotive trade com-                                imports from U.S. and Japan) and CEE imports represent 8.1 %
     pared to GDP. Slovakia has the highest ratio of automotive export                            of total EU-15 export in the sector (figure 26). The process of EU
     compared to the size of its economy, confirming the prominent                                enlargement has significantly contributed to increased trade
     role of the automotive industry in this country14. Even though                               with other EU countries. Again, considering only the flows with
     Poland is among the net exporters considering absolute volumes,                              the EU, CEE countries were net importers in 2000 and are now
     the role of automotive trade is less important in terms of GDP,                              net exporters although the balance with the EU is less pro-
     and comparable with other South Eastern European countries.                                  nounced (less positive) if compared with the position of CEE
                                                                                                  countries at the world level.
     14) These proportions should increase even more as recent investments in Slovakia
     made by Kia and PSA are not yet operating at full capacity




                                                                                                  Share of automotive industry in GDP
     CEE* international trade in automotive industry                                (figure 23)   in CEE countries (2006)                                                               (figure 25)
     EUR bn (constant, 2005 exchange rates)                                                       %

                                              Trade balance
                                                                                                  Export on GDP
     10                                                                                           18%
                                                                                                           Net exporters                                             Slovakia
      8                                                                                           15%
      6                                                                                                                   Czech Republic                  Hungary
                                                                                                  12%
      4
                                                                                                   9%                                      Slovenia
      2
                                                                                                   6%
      0                                                                                                                   Poland
                                                                                                   3%            Turkey
     –2                                                                                                                            Romania
                                                                                                                      Croatia                 Bulgaria*                           Net importers
     –4                                                                                            0%
             2000        2001          2002        2003       2004       2005          2006                      2%        4%        6%         8%         10%       12%        14%      16 %    18 %
                                                                                                                                                                                      Import on GDP
     *) Countries included in the analysis except Bulgaria
     Source: UniCredit New Europe Research                                                        *) 2005 data / Source: UniCredit New Europe Research Network


     Automotive export and import                                                                 Share of the CEE* countries in EU-15 export and import
     in the CEE countries (2006)                                                    (figure 24)   of transport equipment                            (figure 26)
     EUR bn

                    Central Europe                              South East Europe
     16                                                                                           10%
     14
     12                                                                                            9%
     10                                                                                            8%
      8
      6                                                                                            7%
      4
      2                                                                                            6%
      0                                                                                            5%
     –2
     –4                                                                                            4%
                                                                                                             2000         2001         2002           2003          2004        2005        2006
                                                                                  *
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                                                                                                           CEE share in EU-15 export
     Cz




                                                                                                           CEE share in EU-15 import
          Export              Import            Balance

     *) 2005 data / Source: UniCredit New Europe Research Network                                 *) excl. Croatia and Slovenia / Source: UniCredit New Europe Research Network




22   The Automotive sector in CEE, December 2007
IV. FDIs as a key driver of the automotive
industry’s development in Central Eastern
Europe
                                                                                 ly limited and the market under penetrated until then, success
IV.1           Since the early 1990s, the automotive                             was mostly assured to any Western European producer, resulting
               industry in CEE has attracted over                                in a new wave in investment. However, some enterprises were
               EUR 20 bn of FDI                                                  not really car factories but rather simple assembly plants used to
The automotive industry in CEE would not have developed to the                   avoid protective duties and quotas. They practically disappeared
extent that it has without huge investment efforts made by                       at the beginning of the new century.
Western companies after the break-up of communism (excluding
Turkey, where such a political transition did not take place).                   Nevertheless, as barriers to trade with the European Union
Some global automotive players discovered Central Eastern Eu-                    have fallen, other investment incentives have started to play a
rope’s potential and started buying existing car plants at the be-               leading role. Thanks to cheap skilled labour, improving infra-
ginning of the 1990s. Examples of such pioneering brownfield                     structure, a good macroeconomic environment, a relatively sta-
investments in the region include: Volkswagen in the Czecho-                     ble political and legal environment as well as its proximity to
slovakian Skoda, Renault in the Slovenian Revoz as well as                       Western Europe, the CEE region now seems to be a perfect low-
Fiat in Poland’s FSM. Skoda was especially valuable as a local                   cost production base for global OEMs and still attracts a wide au-
company maintaining its traditional brand and now producing                      dience of other potential investors.
additional car segments.
                                                                                 As a result, total foreign investments in the local automotive
The first foreign investments in the region aimed at the fast                    industry have already exceeded EUR 20 bn (figure 27) and in-
development of local markets formerly dominated by few do-                       tense expansion should continue in the coming years because
mestic car producers. As the models available had been serious-                  the relocation process is not yet completed. Moreover, the auto-




Foreign direct investments in the CEE’s transportation equipment sector                                                                               (figure 27)
2005

Cumulative FDIs in transportation equipment sector by countries                  FDIs in transportation equipment industry as a percentage of total countries’ FDIs
in %                                                                             in %
                              100%=EUR 21.58 bn
Turkes 24%                                                        Poland 23%
                                                                                 Hungary                                                                   10,4

                                                                                 Turkey                                                                   10.1

                                                                                 Czech Rep.                                                         9.2
Croatia <1%
                                                                                 Poland                                              6.5
Bulgaria <1%
                                                                                 Romania                                       5.8
Romania 5%
Slovenia 1%                                                                      Slovakia                                      5.1
                                                            Czech Republic 22%
                                                                                 Slovenia                                4.3
Hungary 22%                                                                      Croatia,         <0.1
                                                                  Slovakia 3%    Bulgaria

Source: UniCredit New Europe Research Network




                                                                                                                  The Automotive sector in CEE, December 2007         23
     FDIs as a key driver of the automotive industry’s development in Central Eastern Europe




     motive industry is entering in a new era, fuelled by Asian com-                                 ern European market, it is the safest production base for the Mid-
     panies, in which companies see CEE as an ideal place to locate                                  dle East, it offers especially easy access to a cheap skilled labour
     their production base for further expansion in the EU market.                                   force, its market of over 70 million people guarantees a high
                                                                                                     local demand and promising prospects for the future.
     As of the end of 2005, only four countries (Turkey, Poland, Hun-
     gary and the Czech Republic) received over 90% of the regional                                  IV.2           FDIs favour the emergence of local
     FDI in the transport equipment sector. In these economies, invest-                                             automotive clusters
     ments in the automotive sector are the most remarkable. In Turkey,                              Factors specific to the industry usually result in one successful
     Hungary and the Czech Republic every tenth euro of foreign capital                              investment attracting additional ones. And a single investment
     is spent on local automotive plants showing the car industry’s im-                              in a vehicle plant is usually only the tip of the iceberg. It usually
     portance in their overall economic growth. Contribution to growth                               precedes another wave of capital inflow made by automotive
     and technological spillovers suggest that the benefits of relocating                            suppliers hoping to have similar success (see chapter II.5). Pro-
     automotive production to the CEE region may be greater than the                                 ducers tend to gather in OEMs’ proximity in order to secure just-in-
     benefits in other industries. As already mentioned in the previous                              time deliveries. This leads to the creation of typical industrial
     chapters, things are rapidly evolving and the recent flow of invest-                            clusters like Lower and Upper Silesia in Poland, the Prague re-
     ments in Slovakia is just one of many examples.                                                 gion in the Czech Republic or Bursa in Turkey16. One may also
                                                                                                     notice a cross-border multi-cluster which has sprung up around
     Many investments in the automotive sector have taken place re-                                  the borders of Poland, the Czech Republic and Slovakia, and nearly
     cently. All the leading countries like Turkey, Poland, the Czech Re-                            extending to Hungary. This area is so given over the motor indus-
     public or Hungary were able to double or even triple their auto-                                try that has been called the “new Detroit” (the hub of world car
     motive FDI stock within the first five years of the decade (figure                              production, at least not so long ago). Some producers that spe-
     28). This helped local industries to develop at an unusual pace.                                cialise in specific car systems are also becoming leading exporters.
                                                                                                     As a result, in many CEE states, FDIs made by car manufacturers
     Turkey, which is not actually a European Union member15, bene-                                  are often overshadowed by those made by their suppliers.
     fits from some other factors which make it an excellent location
     for automotive production: free trade with the EU (thanks to the                                IV.3           The CEE region has already attracted a
     so-called “Ankara Protocol”) gives it unlimited access to the West-                                            diverse range of the main global vehicle
                                                                                                                    manufacturers
                                                                                                     Returning to car manufacturers, they are already represented
     Stock of FDI in transportation equipment sector                                                 in the region in large numbers (figure 29):
     (2000 vs. 2005)                                                              (figure 28)        • Turkey has attracted the highest number of OEMs’ invest-
     EUR bn                                                                                             ments (very often in joint venture with local companies), with a
                                                                                                        whole range of vehicles being produced. There are five global
     Turkey                                           Poland                                            producers of passenger cars operating in this country including
                        x 2.4     5.1                                     x 2.1      4.9
                                                                                                        Renault17, Toyota, Fiat, Hyundai and Honda. Ford is the country’s
                                                                    2.3
                  2.1                                                                                   largest manufacturer of LCVs18 followed by Fiat and Hyundai.
                 2000            2005                              2000             2005                Production of buses and heavy trucks is also represented by two
     Hungary                                          Czech Rep.                                        German global producers (Mercedes-Benz and MAN).
                        x 2.9     4.9                                     x 3.1      4.7
                                                                                                     • Poland is another country that has a broad range of vehicle
                  1.7                                               1.5                                 producers. Local passenger cars are produced by Fiat, Volkswa-
                 2000            2005                              2000             2005                gen and Opel. Warsaw’s plant, formerly owned by FSO-Daewoo,
     Source: UniCredit New Europe Research Network                                                      is now owned by AvtoZaz, a Ukrainian company cooperating with

     15) Turkey opened accession negotiations with the EU in 2005. In any case, Turkey will not be able to join the EU in less than a decade.
     16) A newly opened Toyota/PSA plant in Czech’s Kolin is also a perfect example, as 80 % of all parts used in production are made domestically.
     17) The company recently announced that it will significantly increase its production capacity in Turkey from 280,000 vehicles to 350,000. Renault’s Turklish facilities, situated in the
     cluster of Bursa, produce the models Clio (3 and SW), Symbol, Megane Sedan, and a second series of the Megane family will also be produced in the same facilities. The company
     is also buying a stake in the Russian Avtovaz (producing Lada) and Russia will replace Renault’s home country as its largest single market.
     18) It also produces some heavy trucks and small buses




24   The Automotive sector in CEE, December 2007
  GM. Poland’s LCV production is dominated by Volkswagen. Local                              • Hungarian car production is made up by the Volkswagen
  production of buses and coaches is a fast-developing production                               Group with its Audi plant in Gyor and by the Japanese
  segment, which makes Poland one of the European leaders. It                                   Suzuki, which was actually one of the first automotive green-
  includes global firms like MAN, Volvo and Scania. Poland will                                 field investments made in the post-communist countries.
  most likely dominate the production of heavy trucks in the region                          • In the Balkan region there is one indisputable leader: Renault,
  as soon as MAN’s new investment is completed.                                                 which owns two operations located in Slovenia and Romania. A
• The Czech Republic, currently a regional leader in the produc-                                state-owned plant in Craiova (Romania), which was formerly
  tion of passenger cars, is famous for its Skoda brand, which                                  owned by Daewoo, is currently waiting to be privatised again
  now belongs to Volkswagen Group. The local car industry has                                   (with Ford among the bidders).
  also recently benefited from large investments made by
  Hyundai in addition to Toyota and PSA’s new joint-venture                                  IV.4          Automotive producers are constantly sear-
  company TPCA. A local leader in bus production – Karosa – is                                             ching for even more potential cost savings
  now owned by the Italian Iveco.                                                            Global producers, having a strong need for potential cost sav-
• Slovakia is becoming a new regional production centre for                                  ings, desire to restructure (also by relocating) not only their
  passenger cars. Apart from Volkswagen’s plant in Bratislava,                               basic activities but also support functions. Apart from invest-
  which is the only place in Europe producing the SUVs Touareg                               ments in new production capacities, the CEE region is now
  and Audi     Q7 19,   there are brand new investments made by Kia                          emerging as a destination for locating such services. The grow-
  and PSA which will elevate Slovakia to the pinnacle of regional                            ing importance of CEE countries as a desired off-shoring loca-
  passenger car producers by the end of the decade.                                          tion20 results mainly from:


19) VW Slovakia also manufactures the Porsche Cayenne
20) CEE countries like Slovakia, the Czech Republic, Poland or, more recently, Bulgaria and Romania lead in many rankings of European off-shoring locations prepared by top consul-
ting companies



Top global vehicle manufacturers producing in the CEE region                                                                                                          (figure 29)


 Poland                                                                                                                                                                     Russia




 Czech Republic



                                                                                                                                                                         Romania


Slovakia




                                                                                                                                                                           Turkey
 Hungary




 Slovenia




*) including commercial vehicles, buses and coaches / Source: UniCredit New Europe Research Network




                                                                                                                                 The Automotive sector in CEE, December 2007          25
     FDIs as a key driver of the automotive industry’s development in Central Eastern Europe




     • labour force – the quality of which does not differ significantly                            This phenomenon is also occurring in the automotive industry,
       from its Western counterparts. Local graduates constantly im-                                which is marked by an emergence of numerous R&D centres
       prove their language skills and become more and more suit-                                   over the CEE region (see table 2). These centres support the
       able for working in a multinational environment                                              technological side of the car production process and share global
     • competitive labour costs, that are significantly lower than in                               responsibility for the industry’s innovativeness. As R&D becomes
       advanced economies                                                                           a crucial area of automotive activity, moving this kind of activity
     • both cultural and geographical proximity to Western European                                 to low-cost countries is often perceived as a very effective re-
       countries                                                                                    structuring measure. Automotive producers are searching for
                                                                                                    even more potential savings and they are also moving some
                                                                                                    other secondary functions like accounting, marketing and
                                                                                                    some other professional activities to CEE.




     Examples of BPO (Business Process Outsourcing) investments in the CEE’s automotive industry                                                                               (Table 2)
      Country                Sourcing area               Investors

     Poland                  R&D                         Delphi, Faurecia, TRW Automotive, Volvo, Remy Automotive, Valeo, Volkswagen
                             Finance/Accounting          Fiat, Volvo, MAN
     Czech Republic          R&D                         Bosch, Mercedes-Benz, TRW Automotive, Valeo, Visteon, Ricardo
                             Finance/Accounting          Johnson Controls
     Hungary                 R&D                         Audi, Bosch, Denso, Magna-Steyr, Visteon, Knorr-Bremse, Continental, Thyssen-Krupp
     Slovakia                R&D                         PSA, Volkswagen, Johnson Controls, Visteon
     Source: UniCredit New Europe Research Network




     Competitiveness* of CEE economies according to global surveys (in deciles**)                                                                                              (Table 3)
                                     Global                  Ease of Doing               Inward FDI                  Corruption                  Human                   Freedom of
                               Competitiveness               Business Rank                potential                  Perception              Development                  the Press
                                 Index (Rank)                                           Index (Rank)                Index (Rank)              Index (Rank)                 (Rank)
     Source                  World Economic Forum              World Bank             World Investment              Transparency           Human Development           Freedom House
                                                                                            Report                  International                Report
     Top three                     United States               Singapore                United States               New Zealand*                 Norway                     Finland*
                                    Switzerland               New Zealand                 Singapore                    Finland*                  Iceland                    Iceland*
                                     Denmark                  United States            United Kingdom                  Iceland*                 Australia                  Belgium**
     Germany                             1                           2                          1                          1                          2                         1
     Austria                             2                           2                          2                          1                          1                         2
     Czech R.                            3                           4                          3                          3                          2                         2
     Slovenia                            3                           4                          3                          2                          2                         2
     Slovakia                            4                           2                          4                          4                          3                         2
     Italy                               4                           3                          2                          3                          1                         4
     Hungary                             4                           3                          3                          3                          2                         2
     Poland                              4                           5                          4                          4                          3                         3
     Turkey                              5                           4                          5                          4                          6                         6
     Croatia                             5                           6                          4                          5                          3                         5
     Russia                              5                           6                          2                          8                          4                         9
     Romania                             6                           3                          6                          6                          4                         5
     Bulgaria                            7                           3                          5                          4                          4                         4
     *) Global Competitiveness Index (GCI): weighted average of different sub-indices covering infrastructure, technological readiness, higher education, etc. Ease of Doing Business:
     it considers, among many other factors, time and cost of opening a new business, strength of legal rights index, recovery rate in bankruptcy, etc. Inward FDI Potential: simple ave-
     rage of 12 variables including country risk, world share of service exports, R&D spending, etc. Corruption Perception Index: perception of corruption existing among public officials
     and politicians. Human Development Index (HDI): measures the well-being and the impact of economic policies on quality of life.
     **) the lower the value the more attractive the country (1 for the most attractive, 2 for the second most, etc.)
     Source: World Economic Forum, World Bank, UNCTAD, Transparency International, UNDP; UniCredit New Europe Research Network




26   The Automotive sector in CEE, December 2007
IV.5          The business environment in CEE countries                                            Table 4 considers some factors affecting the attractiveness of
              is increasingly conducive to manufacturing                                           each country. On the positive side, a cheap and educated work-
              activity, as confirmed by the large amount                                           force, low corporate taxation, and openness to foreign invest-
              of FDI received during recent years                                                  ments should be mentioned. On the negative side, relevant gaps
To understand why all the major European, US and Japanese car                                      in terms of labour productivity and R&D expenditure persist.
manufacturers and their suppliers decided to produce in Central                                    Those gaps are more evident for Romania and Bulgaria, which
Eastern Europe, the balance (or, better yet, the trade-off) be-                                    are lagging behind the Central European countries.
tween significant but decreasing cost advantages and “disad-
vantages” resulting from a riskier and more complex business                                       IV.6           Cost advantage is still among the main
environment (especially if compared with “old” European coun-                                                     causes of the CEE countries’ competiti-
tries) has to be considered.                                                                                      veness in the automotive sector
                                                                                                   The relative cost advantage compared to the “old” EU partially
The business environment in most of the CEE countries has im-                                      explains recent relocations by Western European producers to
proved significantly in the last few years and become very con-                                    CEE countries. The transfer of production from “old” to “new”
ducive to doing business. Additionally, local authorities put large                                Europe is particularly evident in some sectors, including the
efforts into attracting foreign companies also by special economic                                 automotive industry. In particular, this process has been more
zones. The most reliable international surveys regarding attrac-                                   extensive in the production of small cars.
tiveness of local business environment rate the CEE countries
quite positively21 (Table 3). There are substantial differences in                                 Labour costs in CEE are much lower than in Western Europe, and
how the leading countries of the region (Czech Republic, Slove-                                    in most of the CEE countries, the domination in this area is sig-
nia, Hungary, Slovakia, Poland) are perceived compared to the                                      nificant enough to compensate for lower labour productivity. As
other countries, though the “lower-ranked” countries compensate                                    a result, the wage-adjusted labour productivity in the best-per-
for some of their perceived shortcomings with cost advantages.                                     forming CEE countries even doubles the average for Western Eu-
                                                                                                   rope (figure 30).
21) The surveys do not take cost advantages into account.




Source of competitiveness* for the CEE economies (2006)                                                                                                                            (Table 4)
                                                    Poland Hungary             Czech Slovakia Slovenia                CEE-8 Romania Bulgaria              Croatia      Turkey        EU-15
                                                                                Rep.
Population                                            38.2         10.1        10.3           5.4          2.0        73.0         21.6           7.7         4.4        73.0       384.5
Average age, years                                      37           39          39           37           40           38           38           41          40           29          39
Youth education attainment level, %                     69           60          59           52           68           65           47           49          55           27          59
Science and technology graduates                        9.4          5.1         7.4          9.2          9.3          8.9          9.8          8.5         5.4          5.6       13.6
GDP per capita, €                                    7,110        8,848      11,011        8,151       14,807        8,227        4,501        3,268       7,704        4,365      27,700
Gross monthly average                                  636          642         713          503        1,213          637          245          181         906          812       3,513
Labour productivity per person
(EU-25=100)                                             61           75           69           69          82          64.5          37          34            62           42        106
R&D expenditure, % of GDP                               0.6          0.9          1.4          0.5         1.2          0.8          0.4         0.5           1.2         0.7        1.91
Corporate tax (%)                                       19           16           24           19          25           20           16          10            20           20          29
EBRD Infrastructure reform index                        3.3          3.7          3.3          3.0         3.0          3.3          3.3         3.0           3.0         n.a.        n.a.
FDI (in % of GDP, avg 2004 – 06)                        4.1          5.6          6.1          6.4         1.7          5.0          8.1        14.8           5.4         2.9         n.a.
*) Source: UniCredit New Europe Research Network, on Eurostat, EBRD; CEE-8 is the weighted average of the countries that have been EU members since 2004; Youth education: per-
centage of the population aged 20 to 24 having completed at least upper secondary education; Science and technology graduates are per 1000 members of the population aged 20–
29 years (data as of 2004). EBRD infrastructure reform index is lower for the countries that improved their infrastructure to a lesser degree during the transition (it scores from 1 to 4.3).
Source: World Economic Forum, World Bank, Unctad, Transparency International, UNDP; UniCredit New Europe Research Network




                                                                                                                                        The Automotive sector in CEE, December 2007              27
     FDIs as a key driver of the automotive industry’s development in Central Eastern Europe




     Labour cost and productivity in the transport equipment sector – Eastern vs. Western Europe                                                                         (figure 30)




                                    Labour productivity*
                                   EUR th. per person employed
                                                                                  58.0



        37.2


                  22.8      23.2                                    23.4
                                      20.3                                                                             Wage adjusted labour productivity
                                                                                                                                          %

                                                  5.6        7.2
                                                                                                  268.5
                                                                                                            239.8
                                                                                                                      220.1
     Hungary Poland       Czech    Slovakia Bulgaria Romania Slovenia            EU-25                                           199.7
                           Rep.
                                                                                                                                              151.5     148.6   147.9
                                                                                                                                                                              129
                                         Labour cost
                                   EUR th. per person employed

                                                                                  45.0

                                                                                                Hungary    Poland     Czech    Slovakia Bulgaria Romania Slovenia            EU-25
                                                                                                                       Rep.


                                                                   15.8
        13.8
                  9.5       10.5      10.1
                                                  3.7        4.8


     Hungary Poland       Czech    Slovakia Bulgaria Romania Slovenia            EU-25
                           Rep.


     *) Gross value added per person employed; WE – Western Europe (an average for 13 countries for which the data are available)
     Source: Eurostat




     Although the automotive sector is among the industries that                                they seem to have a great deal of potential in this area, which
     are automated to the largest degree, relatively low labour                                 should be a natural consequence of their economic develop-
     costs in CEE countries contribute to higher effectiveness in                               ment.
     comparison to their Western European counterparts (figure 31).
     As a result, many local plants outperform those in the EU-15                               Effectiveness of the CEE transport equipment industry
     area, encouraging global companies to increase their activity in                           in comparison to Western Europe                  (figure 31)
     the region, a process which often takes place at the expense of                             Gross operating surplus/turnover* (%)
     less-effective plants in the West.
                                                                                               14
                                                                                               12
     One should remember that the dynamic income convergence                                   10
     taking place in all CEE countries will gradually reduce the existing                        8
     advantages over developed Western economies. Salaries are                                   6
     growing very fast: they are now 2.5 times higher than they                                  4

     were in 2000 (in Euro terms) on average in CEE. For this reason,                            2
                                                                                                 0
     any improvements in labour productivity will be more than es-
                                                                                                     Poland Hungary Czech           Bulgaria Romania Slovenia Slovakia        EU-25
     sential to sustain the current competitiveness of the region. If                                                Rep.

     the CEE countries fail to become more innovative, they may lose
                                                                                                *) For each country last available data has been used
     ground to other quickly developing regions. On the other hand,                             Source: Eurostat




28   The Automotive sector in CEE, December 2007
V. The role of local demand
in the CEE automotive industry

The total number of registered cars and light vehicles in CEE                             V.1.       The CEE region seems very attractive in
already reached 45 millions (75 including Russia), and the CEE                                       terms of its future size, which should be
countries are increasingly being seen as very important desti-                                       guaranteed by a population of more
nation markets. This trend has some implications for the deci-                                       than 170 mn people (or almost double
sion of foreign companies to locate in a particular region as the                                    including Russia) and low saturation of
attractiveness of the local market is perceived as one of the                                        the market
main incentives for potential investors. Automotive companies                             As a correlation between population size and the number of ve-
prefer to locate their production bases in promising regions not                          hicles in use or sales volume is quite evident, the potential of
only for logistical reasons. Proximity of buyers implicates a bet-                        the CEE countries should not be underestimated by global OEMs.
ter knowledge of local market specificities, which always brings                          The CEE region (especially including Russia) represents a popula-
a significant advantage against competitors. The improving per-                           tion comparable with some developed markets like Western Eu-
ception of the region’s attractiveness for new car sales arises                           rope or the United States (figure 32). For this reason, the expect-
mainly from the following important factors:                                              ed income growth in the analysed countries could make the CEE
• large population potential together with a low saturation of                            region one of the main expansion areas for global automotive
   the car market                                                                         companies. Saturation of a given market (measured as the num-
• age structure of local vehicle users                                                    ber of registered cars per inhabitants) may determine a potential
• high economic growth and fast income convergence                                        demand for new vehicles. In this respect the CEE region seems
                                                                                          very promising as an average number of 20 cars per 100 in-
                                                                                          habitants is rather small when compared to over 50 in West-
                                                                                          ern Europe (especially in the case of Italy and Germany, which
                                                                                          are already oversaturated). The situation in each CEE country is
Population and new passenger car sales                                                    rather distinct. Apart from Poland, the largest markets (in terms
in given regions                                                          (figure 32)
                                                                                          of number of vehicles in use: Russia, Turkey, Romania) are
                                                                                          also those with the lowest market saturation per capita.
Population                                            Domestic sales of new               Therefore, 3.4 mn Romanian registered cars (excluding light ve-
Million                                               passenger cars
                                                      Million units                       hicles), 5.7 mn Turkish cars, and 23 mn Russian cars don’t seem
                                                                                          like so many in comparison with a population of 22, 73 and 143
EU-15
                                                                                          mn respectively, leaving a lot of room for future expansion.
United States*
                                                                                          When compared to the average market saturation of cars in
Japan + Korea                                                                             Western countries, the existing potential gaps account for about
                                                                                          7, 30 and 48 mn cars respectively. On the other hand, the poten-
CEE-9 + Russia                                                                            tial for new car sales in these countries resulting from low mar-
CEE-9                                                                                     ket saturation will be determined by some additional factors like
                                                                                          GDP growth, income distribution or local regulations which al-
                 0    100     200     300    400      0      3        6   9    12    15
                                                                                          ways affect the distribution of first-hand and second-hand cars.
                                                                                          These factors will affect the pace of the convergence process.
*) Sales of new passenger cars in the USA are relatively low due to the high popularity
of light trucks (mainly SUVs, vans and pick-ups), that are sold in a number of            To identify market potential from market saturation it is worth
ca. 7 million units anually
Source: UniCredit New Europe Research Network, IMF, national automotive associations      considering the population aged 19 – 65 years, to take into ac-




                                                                                                                     The Automotive sector in CEE, December 2007   29
     The role of local demand in the CEE automotive industry




     count only the group of more relevant potential buyers22 (figure                               that the “active” or “driving” population will decrease for most
     33). In Italy, for instance, there are around 58 cars for every 100                            of the CEE countries, and also at the average EU level. But this
     inhabitants, and 91 cars if considering only the population seg-                               demographic trend, negative for car sales, will, of course, be
     ment aged 19 – 65, providing a clear example of saturation. On                                 more than offset by the increasing saturation due to increasing
     the contrary, in Turkey and Russia there are 8 and 16 cars for                                 income levels24.
     every 100 inhabitants respectively, (or 15 and 26 if consider-
     ing the population segment aged 19 – 65). Twenty-two (33 for                                   Although the market potential resulting from the low market
     19 – 65 year-olds) cars in Slovakia and 16 (25) cars in Romania                                saturation for cars in CEE countries is generally visible, it does
     are also not so many, especially if compared with Poland (32,                                  not have to affect new car sales so strongly: the gap may be re-
     but almost 50 if considering only 19 – 65 year-olds). Czech Re-                                duced by an increased demand for used cars instead of new
     public, Slovenia and Bulgaria have the highest car saturation                                  ones.
     in Central Eastern Europe. Bulgaria’s figures are especially high:
     the high rate of car ownership is mainly due to second-hand                                    V.2.           Old age and the low quality of vehicles
     cars23.                                                                                                       in use in CEE countries may be a strong
                                                                                                                   determinant of massive car replacement
     The demographic trends point to a reduction of the population                                                 in the future
     aged between 19 and 65 years in most of CEE countries. If con-                                 It is worth mentioning that not only the number of vehicles in
     sidering the demographic forecasts made by Eurostat, Romania,                                  use – but also the quality of these vehicles – may be a strong
     Poland and Slovakia will be the only countries with more 19 – 65                               determinant of the future growth of new car sales in the re-
     year-old people in 2020 than they have now. This trend suggests                                gion. When looking at the age structure of vehicles in given CEE

     22) There are of course drivers older than 65. But the population aged 19 – 65 can give better insights for the future trends in car purchasing.
     23) In Bulgaria, the latest data show that during the first half of 2007, the y/y increase in second-hand car sales reached almost 50 %, but for new cars, the increase was signifi-
     cantly smaller, around 25 %. This is not only due to the low levels of spending power for households, but also the abolishment of VAT tax and the simpler import and registration
     procedures for vehicles imported within the EU since the beginning of 2007. Currently, the import of second-hand cars is free from any environmental restrictions, while the new
     cars must have the Euro-4 certificate before registration. With rising household income levels and the probable introduction of more stringent eco-standards on the import of se-
     cond-hand cars, new auto purchases should increase faster during the next several years, while second-hand import rates should decrease.
     24) See chapter V.3.




     Car saturation and population structure
     in CEE and WE countries                                                   (figure 33)          Age structure of vehicle fleet (2005)                                      (figure 34)
                                                                                                     in years, %

     100


      75
                                                                                                           EU-15
      50
                                                                                                          Italy
                                                                                                      Germany
      25                                                                                                    UK

       0                                                                                                Poland
                                                                                                    Czech Rep.
           ov .
                   p
                 nd
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                                                                                                                 0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

           Registered cars over 100 people
           Registered cars over 100 19–65 aged people                                                      0–2         3–5          6 –10         10+


                                                                                                    *) 2004 data
     Source: UniCredit New Europe Research Network, Eurostat                                        Source: ACEA, National Statistical Offices, Eurostat




30   The Automotive sector in CEE, December 2007
countries (figure 34), the figures are characterised by a high                    pared to GDP level, with Bulgaria (higher market saturation com-
number of old cars among the total number of registered cars. In                  pared to income level, mainly due to second-hand cars) being
addition to the expected income growth there should also be an                    the only exception to this phenomenon (figure 36). The correla-
increasing number of customers willing to upgrade their transport                 tion is even clearer when considering both Eastern and Western
means by purchasing a new car instead of a used one. The fig-                     countries, where some CEE countries (Turkey, Russia, Slovakia)
ures for the Czech Republic and Poland also show that relatively                  are again below the trend, hence having higher potential. Many
high market saturation does not necessarily imply lower attrac-                   EU countries, with a market saturation level of more than 50 %,
tiveness of a given market, as much of the local demand for new                   are by far more saturated, with Italy as a benchmark (in terms of
cars may be stimulated by this kind of “prosperity effect”.                       very high saturation), even taking into account their GDP levels.

V.3.          Dynamic growth of CEE economies and                                 As the relation between market saturation and GDP (i.e. in-
              expected income convergence, should be                              come levels) is quite strong, the expected growth of the latter
              decisive factors in the future develop-                             should result in the future increase in car sales. Due to lower
              ment of automotive sales in the region                              income levels, the CEE markets appear to have huge potential
The economies of Central Eastern Europe have been able to                         because a substantial part of local population does not yet own
grow dynamically in recent years and are being targeted by for-                   a car. In Central and Eastern Europe only around 50 % of the
eign companies as important destination markets mainly for this                   households own a car25.
reason. Central Eastern Europe is outperforming most other glob-
al regions in terms of GDP growth (figure 35).                                    An improvement in incomes also contributes to the “prosperity
                                                                                  effect”, which causes customers to upgrade their cars and to
Economic development of a given region is a sign that will most                   change them much more often than they have thus far. In ef-
likely produce more and more car sales in the close future: the
level of market saturation for cars is indeed directly correlated
                                                                                  25) EBRD “Life in Transition Survey”. The survey gives us other insights regarding the
with per capita GDP. The CEE countries are currently at different                 ownership of other consumer goods in CEE: almost 80 % of households own a mobile
                                                                                  phone, more than 40 % a computer, around 30 % have Internet access at home, and
stages of development in the level of market saturation com-                      around 10 % have a secondary residence.




Average real GDP growth by regions                                                GDP per capita vs. passenger car saturation
(2002 – 2006)                                                       (figure 35)   in CEE and WE countries                                                   (figure 36)
%                                                                                 2006



                                                                                  Car penetration
10                                                                                Units per 100 inhabitants
                                                                                                                 CEE
 8                                                                                 60                                                     IT
                                                                                                                                               DE
                                                                                                                                                  ATUK
                                                                                   50                                                ES        FR
 6                                                                                                                     SI                           FI SE
                                                                                                                                               BE    NL            IE
                                                                                   40          BG                CZ    PT     GR
                                                                                                         HR                                                       DK
 4                                                                                                  PL
                                                                                   30                       HU
                                                                                                          SK
 2                                                                                 20        RO     RU
                                                                                   10             TR
 0
       Euro area     Latin     Newly            Africa   Eastern   Developing       0
                      and   industrialized                Europe      Asia              0      5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
                   Southern     Asian                                                                                                                       GDP per capita
                    America economies                                                                                                                                 Euro




Source: UniCredit New Europe Research Network                                     Source: ACEA, UniCredit New Europe Research Network, Eurostat




                                                                                                                            The Automotive sector in CEE, December 2007      31
      The role of local demand in the CEE automotive industry




     fect, the correlation between GDP level and annual sales of new                                               their spending power remains very low (figure 38). In some
     cars (adjusted for population size) is even more significant than                                             cases (e.g. Bulgaria) spending power is even 10 times lower
     in the case of market saturation (figure 37), where Bulgaria is                                               than in the advanced economies of Western Europe. Car price
     not anymore an outlier.                                                                                       differentials between CEE and Western countries are small (it’s
                                                                                                                   difficult to discriminate among different markets) and are not
     On the other hand, in the short term the low incomes of Cen-                                                  adjusted for the strong disparity in income levels. Moreover, in
     tral and Eastern European households are still a serious obsta-                                               some CEE markets (e.g. Slovakia), local car prices are not differ-
     cle for a more rapid improvement in the sales of new cars as                                                  ent from, or even exceed, those in EU-15 countries, which repre-
                                                                                                                   sents an additional barrier for the development of new car sales.


                                                                                                                   However, the higher growth of CEE economies will increase their

     GDP per capita vs. new passenger car sales                                                                    purchasing power for new cars in the coming years (figure 39).
     in CEE and WE countries                                                             (figure 37)               Per capita GDPs are expected to increase by 30 % on average
      2006                                                                                                         between 2006 and 2009 in Central and Eastern Europe. Central
     Sales of new passenger cars                                                                                   European countries such as Slovakia, the Czech Republic, and
     units per 100 inhabitants
                                                                                                                   Hungary will have a GDP per capita between EUR 10,000 and
      50                                                                     BE
                                                                                                  IE
                                                                                                                   14,000 in 2009. Per capita GDP growth forecasts highlight a big
                                                                           DE
                                                                      IT
      40                                                         ES          AT UK                                 leap for Russian incomes, most likely approaching EUR 10,000
                                             SI                             FR NL SE
      30                                                                                       DK                  before the end of the decade. Romania and Turkey will have a
                                                         GR                       FI
      20                    HR      HU             PT
                          RU          CZ
                                                                                                                   GDP per capita around EUR 6,000 in 2009; at the moment, they
                    RO             SK
      10       BG                                                                                                  are among the countries with lower GDP per capita (together
                         TR   PL
       0                                                                                                           with Bulgaria). The speed of growth of the different economies
           0        5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
                                                                                         GDP per capita            will shape the convergence (in terms of market saturation) of
                                                                                                   Euro
                                                                                                                   the different local automotive markets26.
     Source: ACEA, UniCredit New Europe Research Network


     26) The relation between GDP per capita and market saturation can be thought of as a logistic “S” shaped function, which can take into account the different stages of the relation
     between GDP per capita and market saturation in a non-linear way: at the beginning of the “convergence process”, after having passed a “take-off” zone (around EUR 5,000), even
     a little differential of per capita GDP growth will increase the market saturation substantially. When GDP per capita is rising above EUR 20,000 – 25,000 per year, the market is nor-
     mally much more saturated. Looking at the income levels of CEE countries, they can mainly be seen as high growth countries in terms of car sales and far from saturated.




     Car affordability: car price in relation to monthly GDP per capita* in CEE and WE countries (2006)                                                                             (figure 38)



     Renault Clio (B segment)                                                          Opel Astra (C segment)                                 VW Passat (D segment)



     United Kingdom                 5.0                                                     6.3                                                    6.6
               Germany              5.2                                                     6.3                                                     8.2
                France              5.2                                                     6.6                                                    7.2
                     Italy          5.2                                                     6.9                                                     8.7
                    Spain            6.3                                                      7.9                                                    9.3


               Slovenia                8.3                                                        11.0                                                     14.1
      Czech Republic                       11.7                                                           18.1                                                    20.6
               Hungary                       13.1                                                         18.4                                                     23.9
               Slovakia                           16.8                                                           25.4                                                    27.4
                Poland                            17.6                                                           25.3                                                     29.8
               Romania                                    28.1                                                      29.9                                                         42.8
               Bulgaria                                           38.0                                                          51.8                                                      65.9

     *) Lower numbers indicate higher affordability / Source: European Commission, Eurostat




32    The Automotive sector in CEE, December 2007
All things considered, the CEE countries are very attractive for car                           side CEE) could be the winning strategy to capitalise on the po-
producers in terms of potential demand because of the increas-                                 tential of local demand in emerging economies.
ing number of people who will be able to afford to purchase a
new car. It could also have some implications for the strategy of                              Moreover, one should not forget about some secondary factors
car producers: the mature European markets, mainly based on                                    which may also affect the demand for new cars including pop-
car substitution or upgrade, need innovation from the supply side                              ulation density and alternative transport infrastructure. Popula-
(safety systems, electronic devices, design, etc.); on the other                               tion density and the prevalence of railway networks vary signifi-
hand, the focus on low-budget cars (both produced in CEE or out-                               cantly among the CEE countries (figure 40) and may also influ-
                                                                                               ence the potential of a given car market.


                                                                                               Countries with very low population density probably tend more
Expected GDP per capita in CEE countries                                   (figure 39)
                                                                                               towards private means of transportation; countries with higher
EUR
                                                                                               population density will probably count more on public transporta-
20,000                                                                                         tion (subways, buses, trams, especially in big cities) rather than
16,000                                                                                         private cars27.

12,000
                                                                                               Regarding local railway systems, they can be a source of compe-
 8,000
                                                                                               tition for cars and buses only in some countries. Some Central Eu-
 4,000                                                                                         ropean countries (particularly the Czech Republic, Hungary, Slova-
       0                                                                                       kia, which will also be more involved in infrastructure projects at
                                                                                               the EU level) have a railway density which is comparable with
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                                                                                               Western Europe, though its quality is still relatively low. Others
       Bu




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                                                                                               CEE states, like Turkey, must rely much more on private trans-
       2005           2009
                                                                                               portation means, which might be an additional source of future
Source: UniCredit New Europe Research Network                                                  demand for cars.

27) Population density could give useful information for understanding car density, but the empirical relation is not evident without controlling for other variables (higher populati-
on density is often associated with higher GDP levels).




Population and railway density in CEE and WE countries                                                                                                                     (figure 40)



Population density                                                                                Railway density
Persons per 1 km2                                                                                 meters per km2


250                                                                                              125

200                                                                                              100

150                                                                                                75

100                                                                                                50

 50                                                                                                25

   0                                                                                                0
                p.




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           ar




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         oa




          st




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                                                                                                                                     rm
        lg



        m




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                                                                                                                                      ov
       ov




                                                                                                                                     ov
      Au




                                                                                                                                    Au
        h




                                                                                                                                       h
       Tu




      Po




                                                                                                     Tu




                                                                                                                                    Po
      Cr




                                                                                                     Cr
     ec




                                                                                                                                   ec
           Bu




                                                                                                    Bu

                                                                                                    Ro




                                                                                                                                  Hu
                                                                                                                                   Sl
    Sl




                                                                                                                                  Sl
   Ge




Source: UniCredit New Europe Research Network, Eurostat




                                                                                                                                    The Automotive sector in CEE, December 2007           33
     The role of local demand in the CEE automotive industry




     Regional demand for cars should be also boosted by the growing                                Slovakia has a good structural outlook, with a high number of
     availability of loans for cars. While this process is to some extent                          people aged 19 – 65 expected, high GDP growth and low market
     enabled by falling interest rates, it is also the simple result of                            saturation. Slovakia is also considered one of the best locations
     the dynamic development of local banking sectors.                                             to produce cars internationally, while the weakness of the Slova-
                                                                                                   kian market is mainly related to its limited size. Poland and Bul-
     V.4           Turkey, Romania and Russia emerge                                               garia are in the intermediate positions of our rankings. The Pol-
                   as the most attractive CEE automotive                                           ish market is supported by its population (size and structure) and
                   markets                                                                         by the weak railway system, although the local market can be
     To sum up the main results of the above analysis, we consider                                 considered more saturated than others. The Bulgarian market is
     the most promising CEE markets in terms of the possible devel-                                also relatively saturated, but high economic growth in the econ-
     opment of new car sales. To create such a benchmark, some of                                  omy will maintain buoyant the local demand for passenger cars.
     the indicators mentioned above were used (table 5), with a mix                                On the one hand, the second-hand car market has been among
     of backward looking and forward looking indicators.                                           the main threats for new car sales in the past, much more so in
                                                                                                   Bulgaria and Poland than in other CEE countries. On the other
     Russia seems to be one of the best markets in terms of poten-                                 hand, the vast number of imported used vehicles make these
     tial car sales thanks to its large population and the high level of                           markets very promising because the likely necessity to replace
     growth expected for GDP per capita (even with a high income                                   old cars with new ones (even holding the level of saturation
     disparity). The ranking of Turkey is mainly due to the country                                constant). Hungary and the Czech Republic are not as attractive
     having the lowest level of market saturation, combined with                                   destination markets as other CEE markets, because they are
     the fact that there is very little competition from public trans-                             more saturated, although more stringent emission standards
     port. The strength of the economy should also ensure high                                     (the introduction of Euro3) will keep the demand for newly pro-
     growth rates for car sales. Romania is one of the most attrac-                                duced vehicles high. But these relatively richer countries will
     tive countries: it shows good performances in each indicator                                  have more room to upgrade the quality of vehicles in use in
     used in our analysis. Proximity to Europe and the recent EU ac-                               favour of more expensive models.
     cession represent important advantages.




     Attractiveness of the different CEE countries as markets of destination (rank, deciles)*                                                                                  (Table 5)
                                  Robustness      Population     Population          Future     Population        Railway         Market      Per capita           Cycle     Weighted
                                   of car sale      potential          size     population         density        density      saturation           GDP                          rank
                                                           for                    structure                                                   evolution
                                                   registered
                                                         cars
     Russia                                   2             1              1                              1                             3               1                           1.7
     Turkey                                   7             2              2                              5               1             1               5                           2.6
     Romania                                  1             3              4               2              4               3             2               3              2            2.7
     Slovakia                                 3             4              8               1              8               7             4               2              6            3.9
     Bulgaria                                 4             8              7               4              2               2             8               4              3            5.6
     Poland                                   9            10              3               3              9               6             7               6              1            6.0
     Croatia                                  8             5              9                              3               4             6               8                           6.2
     Czech Rep.                               6             9              5               6             10               9             8               7              5            7.2
     Hungary                                  5             7              6               7              7               8             5              10              7            7.2
     Slovenia                                               6             10               5              6               5            10               9              4            7.3
     *) For each indicator we ranked the 10 countries under analysis (1 very attractive, 10 less attractive). Robustness of car sales is obtained by looking at the sales of new passenger
     cars from 2000 to 2006. Population potential describes the gap between population and registered cars. Population size takes into consideration only the current population, while
     future population structure looks at the number of people aged 19 – 65 in 2009. Population density and railway density (1 stands for low density) are also considered. Market satu-
     ration and the evolution of GDP per capita are taken into account also. The cycle addresses the growth of car registration between 2006 and 2007. To obtain the overall rank,
     points 9 and 5 are weighted at 2 % each, 1 at 3 %, 6 at 6 %, the sum of 2, 3 and 4 at around 37 %, 7 at 23 % and 8 at 27 %.




34   The Automotive sector in CEE, December 2007
V.5.           In some CEE countries, the import of                           7.5 %. The economic slowdown in 2001 was also one of the
               second-hand cars has recently distorted                        causes for a serious drop in new car sales on the Polish market
               the structure of car sales. New car sales                      (the second largest one). The crisis was deepened by increasing
               in CEE are stagnating                                          competition from second-hand car imports from Western Europe,
Already knowing some crucial factors that may determine sales                 which rocketed after the EU accession. In contrast, the robust-
of new cars in the region, one should look more closely at re-                ness of Romanian growth is impressive, with an average com-
cent trends in the CEE automotive market. In 2006, over 1.3 mn                pounded growth rate of 19 % from 2000 – 06 (but even so, it still
new passenger cars were sold in the CEE area. If we include                   represents just 6 % of the regional market).
the Russian market, this number increases significantly, exceed-
ing 3.0 mn units: the Russian market almost doubled between                   Poland’s situation (figure 43) reveals a wider problem that con-
2000 and 2006 (figure 41).                                                    cerns all of the new EU members and may disturb the develop-
                                                                              ment of their car markets for several years. The EU expansion
Although the CEE market is already relatively important in                    activated a large wave of second-hand car imports from West-
terms of size and new car sales have increased in many coun-                  ern Europe and the existing gap in the number of vehicles in
tries since 2000, its overall growth dynamics are rather unsta-               use has been quickly filled with used vehicles. The increased
ble (figure 42). General stagnation of new car sales in the                   supply of used cars is one of the main causes of the rapid fall of
analysed region is especially visible when comparing it to the                new car values within the first two years of use, which addition-
Russian market, which has been booming since 2002 (with aver-                 ally discourages the purchase of brand new models. A consider-
age annual growth of 16.6 %). In 2005, it outperformed the                    able part of the local middle class now faces a dilemma: to pur-
whole CEE region in terms of sales volume.                                    chase a smaller new car (that they can already afford) or to
                                                                              choose a used but bigger and more comfortable one (importing
The trend in the analysed area is determined mainly by its                    it).
largest markets. Turkey (the largest market among the analysed
countries) has not been able to fully recover from the crisis of              Before the EU enlargement such imports were blocked by tax
2001, when the currency depreciated and GDP dropped by                        obstacles (excise duties), that made a purchase of imported cars




Structure of regional sales of new passenger cars                             New passenger car sales in CEE and Russia
(2006)                                                          (figure 41)   (2000 – 2006)                                                                 (figure 42)
Th. units, %                                                                   Th. units


                  100% =3,138                                                 CEE-8*                                          Russia

                                                                              1,800                                           1,800
                                                       Turkey           12%
                                                                              1,600                                           1,600
Russia 56%
                                                                              1,400                                           1,400
                                                                              1,200                                           1,200
                                          CEE-9* 44%   Poland           8%    1,000                                           1,000
                                                                                800                                             800
                                                       Romania          6%      600                                             600
                                                                                400                                             400
                                                       Hungary          6%      200                                             200
                                                       Czech Republic   4%        0                                               0
                                                       Croatia          3%                00   01   02    03   04   05   06            00   01   02   03   04   05   06
                                                       Slovenia         2%
                                                       Slovakia         2%
                                                       Bulgaria         1%           BG        SK        HR    CZ        HU
                                                                                     RO        PL        TK

*) countries included in the analysis
Source: UniCredit New Europe Research Network                                 Source: UniCredit New Europe Research Network




                                                                                                                     The Automotive sector in CEE, December 2007          35
     The role of local demand in the CEE automotive industry




     unattractive. After these taxes were abolished as a result of ac-          used vehicles becomes more saturated and the prosperity effect
     cession, the market for new vehicles in some CEE countries suf-            gains strength, the local society will probably appreciate the
     fered a deep crash (or at least stagnation) instead of the expect-         safety and reliability of a new car more than the price competi-
     ed growth related to economic development. Even more impor-                tiveness of imported second-hand cars. Thus, some CEE markets
     tantly, any attempts by local governments to protect their do-             will start to benefit from citizens upgrading their cars, as one
     mestic car market usually meet with strong resistance from EU              also observes on the developed markets of Western Europe. This
     bodies, which can make this problem even more persistent.                  notion seems to be confirmed by recent trends. Within the first
                                                                                months of 2007, the majority of car markets in new member
     On the other hand, the negative impact of second-hand car im-              states enjoyed high growth dynamics, which were backed by
     ports seems to be a short-term phenomenon. As the market for               strong improvement in the GDP level (figure 44).



     New car sales vs. second-hand car imports                                  Recent trends in new car sales (I – IX 2007 vs. I – IX 2006)
     (Poland’s case)                                              (figure 43)   on the CEE markets                                    (figure 44)
     Thousand units                                                             Percentage change




     1,200                                                                      30%
                                                                                25%
     1,000
                                                                                20%
      800                                                                       15%
      600                                                                       10%
                                                                                  5%
      400
                                                                                  0%
      200                                                                        –5%
         0                                                                      –10%
                2002           2003           2004         2005    2006
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                                           EU accession
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         Import of used cars
         Domestic sales of new cars


     Source: ACEA, UniCredit New Europe Research Network                        Source: ACEA, UniCredit New Europe Research Network




     VI. Prospects for the Central and
     Eastern European automotive industry

     So far, the CEE region is a success story in terms of international        ducing in CEE. Given these trends, and considering that profit
     competitiveness, with its specialization model increasingly shift-         margins will continue to be under pressure, it’s relevant to un-
     ing from a lower cost into more capital and technology-driven              derstand if the main automotive producers will move further
     advantages, and the increasing role of the automotive sectors is           East in the future, defining the CEE region as a mere step to-
     one of the main examples. The FDIs received from abroad, espe-             wards relocation to cheaper areas, or if CEE will become and
     cially from Western Europe, represent the key driver of this struc-        stay as the manufacturing arm of Western Europe for a long
     tural change: all the main international OEMs are currently pro-           period.




36   The Automotive sector in CEE, December 2007
First, we should consider that cost advantages within the EU          • the fast improvement of the quality of labour force, together
area will remain the CEE’s main strength for some years. The ex-        with improving education standards and learning-by-doing
isting gap in wages is gradually narrowing in result of income          processes, that can improve productivity
convergence, the CEE area shows a great potential of productivi-      • the openness to foreign investments and commitment to
ty improvement.                                                         maintain or improve an already favourable business environ-
                                                                        ment
The economies of the CEE countries (especially those that joined
the European Union) are becoming more stable and predictable,         The local auto supply industry has promising prospects as well.
which makes local investments not only cost attractive but also       As investments in the production of automotive parts are much
more and more secure. Their possible eurozone accession in the        less capital-intensive than car facilities, companies are more
future will eliminate an additional risk that is caused by the        flexible to relocate to CEE. This segment of the automotive chain
volatility of their currencies.                                       is also less automated, which makes potential savings in labour
                                                                      costs especially significant.
Moreover, competitive pressures (and consequently the need of
cost savings) will continue to speed up other relocation decisions.   Generally we expect that within the next years the performance
                                                                      of the transport equipment sector will be much better than
All in all, we think the Central European cluster (the new De-        GDP growth in most of the CEE countries (see Table 6, that re-
troit, well connected with some “old” EU countries such as            ports the forecasts made by the UniCredit New Europe Research
Germany) will remain, or even expand, as one of the most              Network for the Sectoral Analysis 2008 – 2009; the “Transport
important centres of automotive production in the future. Prob-       Equipment” sector is of course broader than the automotive,
ably CEE countries will receive additional investments from West-     and includes also the manufacturing of trains, planes, ships,
ern Europe, especially from OEMs, while some lower value-             etc). The highest growth ratio is expected to be recorded in Slo-
added activities will be moved towards other destinations, in         vakia (that will benefit the most from recent investments from
Eastern Europe (Moldova, Ukraine, Belarus in the future) or Asia.     KIA and Toyota-PSA, which are going to spur local car production
                                                                      in the coming years) as well as in Romania and Bulgaria, that
What is very clear in a mid-term perspective is that the competi-     became an especially attractive relocation target after their EU
tive position of the CEE automotive industry will have to be          accession. If we exclude Croatia (where the automotive sector is
based on factors other than mere cost advantages, which are           not relevant and the shipbuilding segment is suffering because
expected to be gradually eroded (as already happened in the           of a deep restructuring), in all the CEE countries the Transport
last years). Among these factors one should distinguish:              Equipment sector is expected to grow much faster than in West-
• the large potential of the local markets, which is due to fast      ern Europe.
  increasing incomes and the continued gap in vehicles in use.
  Examples of previous investments show that local manufactur-        Transport equipment and economic growth                            (Table 6)
                                                                      Avg. growth                 Transport Equip.                           GDP
  ers usually win a strong position on a particular market, which
                                                                      2007 –'09               Industrial production                       growth
  may be an additional incentive to relocate the production in
                                                                      Slovakia                                 21.3                           7.4
  the country (local demand is driving supply)                        Romania                                  14.7                           5.4
• the proximity of Western European markets as well as im-            Bulgaria                                 13.9                           6.1
  proving infrastructure, which are important to serve them in a      Hungary                                  13.4                           3.1
  timely and cost-effective manner. It also enables OEMs to take      Czech Rep.                               11.1                           5.1
                                                                      Russia                                   10.7                           6.7
  advantage of the positive spill-overs from affiliates, customers
                                                                      Poland                                    6.3                           5.4
  and suppliers, especially in some clusters
                                                                      Turkey                                    6.2                           5.8
• the growing possibilities of building pan-European production       Croatia                                   1.8                           4.9
  centres, with cross-border joint ventures and agreements            EU-15                                     2.6                           2.3
  among producers; most of the industrial activity in the sector      Source: UniCredit New Europe Research Network
                                                                      (Sectoral Analysis, Outlook 2008 – 2009)
  is located in Central Europe, with Poland, Czech Republic, Slo-
  vakia and Hungary holding the lion’s share




                                                                                                       The Automotive sector in CEE, December 2007   37
     Country profiles




     VII. Country profiles

     Poland*

     Gross Output and Gross Value Added                                                          Foreign Trade
     EUR mn                                                                                      EUR mn


     20,000                                                                                      20,000

     16,000                                                                                      16,000

     12,000                                                                                      12,000

      8,000                                                                                       8,000

      4,000                                                                                       4,000

           0                                                                                           0
                2000       2001       2002       2003       2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


          Gross Output            Gross Value Added                                                   Export             Import


     Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



     Production and Sale
     Thousands of units                                                                          Strengths and Weaknesses
                                                                                                 • Strong presence of automotive suppliers
       700                                                                                       • Solid GDP growth leading to a recovery in new car sales
       600
                                                                                                 • Existence of automotive clusters and a system of special incen-
       500
                                                                                                   tives for investors in the form of special economic zones
       400
       300
       200                                                                                       • Emerging wage pressure
       100                                                                                       • Considerable import of second-hand vehicles
          0                                                                                      • Low quality of road infrastructure
                2000       2001       2002       2003       2004       2005       2006
                                                                                                 • Relatively high market saturation
         Car production             New car sales

     Source: UniCredit New Europe Research Network



     *) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
     ger cars (thousands of units).




38   The Automotive sector in CEE, December 2007
Slovakia*

Gross Output and Gross Value Added                                                          Foreign Trade
EUR mn                                                                                      EUR mn


9,000                                                                                       8,000
8,000                                                                                       7,000
7,000                                                                                       6,000
6,000
                                                                                            5,000
5,000
                                                                                            4,000
4,000
                                                                                            3,000
3,000
2,000                                                                                       2,000
1,000                                                                                       1,000
    0                                                                                            0
           2000         2001       2002      2003      2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


    Gross Output               Gross Value Added                                                Export             Import

Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



Production and Sale
Thousands of units                                                                          Strengths and Weaknesses
                                                                                            • Strongly developed supply cluster
 350                                                                                        • Relatively high diversification of production – from lower class
 300
                                                                                              to luxury off-road vehicles
 250
                                                                                            • Tradition of engineering and relatively high quality of produc-
 200
                                                                                              tion
 150
 100
  50                                                                                        • Lack of qualified labour force after the opening of two new car
   0                                                                                          plants in Zilina and Trnava, with potential wage pressure
         2000       2001          2002      2003     2004       2005       2006
                                                                                            • Higher export dependency – almost all production is exported,
       Car production
                                                                                              while domestic demand is covered by imports
                                   New car sales

Source: UniCredit New Europe Research Network




*) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
ger cars (thousands of units).




                                                                                                                               The Automotive sector in CEE, December 2007          39
     Country profiles




     Hungary*

     Gross Output and Gross Value Added                                                          Foreign Trade
     EUR mn                                                                                      EUR mn


     14,000                                                                                      14,000
     12,000                                                                                      12,000
     10,000                                                                                      10,000
      8,000                                                                                       8,000
      6,000                                                                                       6,000
      4,000                                                                                       4,000
      2,000                                                                                       2,000
           0                                                                                           0
                 2000       2001       2002      2003       2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


           Gross Output            Gross Value Added                                                  Export             Import

     Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



     Production and Sale
     Thousands of units                                                                          Strengths and Weaknesses
                                                                                                 • Proximity to European markets and to the plants of the main
     250
                                                                                                   producers
     200                                                                                         • Audi and Suzuki plan to carry out huge capacity enlargements
     150                                                                                           in the near future; moreover, they are less exposed to eco-
                                                                                                   nomic downturn than the other countries
     100
                                                                                                 • Presence of large, prospering multinational spare-part manu-
      50
                                                                                                   facturers
       0                                                                                         • High productivity
               2000       2001       2002      2003      2004       2005       2006


           Car production            New car sales                                               • Inflexible labour market, with a shortage of skilled manual
                                                                                                   labour. Employment of Hungarian speaking foreign workers
     Source: UniCredit New Europe Research Network
                                                                                                   from Slovakia provides only a temporary solution. Education
                                                                                                   system cannot yet cope with challenges that the car industry
                                                                                                   presents

     *) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
     ger cars (thousands of units).




40   The Automotive sector in CEE, December 2007
Czech Republic*

Gross Output and Gross Value Added                                                          Foreign Trade
 EUR mn                                                                                      EUR mn


18,000                                                                                      16,000
16,000                                                                                      14,000
14,000                                                                                      12,000
12,000
                                                                                            10,000
10,000
                                                                                             8,000
 8,000
                                                                                             6,000
 6,000
 4,000                                                                                       4,000
 2,000                                                                                       2,000
     0                                                                                            0
            2000       2001       2002      2003       2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


      Gross Output            Gross Value Added                                                  Export             Import

Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



Production and Sale
 Thousands of units                                                                         Strengths and Weaknesses
                                                                                            • Geographical proximity to all major European markets
900
                                                                                            • Part of the production cluster (West Slovakia, Silesia, north
800
700                                                                                           Moravia)
600                                                                                         • Diversification, e.g. the strong position of accessories produc-
500
400                                                                                           tion within the Czech automotive industry
300
200
100                                                                                         • Strong and uncontrolled influx of imports of second-hand cars
  0                                                                                         • Gradually diminishing pool of skilled labour
         2000        2001       2002      2003      2004       2005       2006


      Car production            New car sales

Source: UniCredit New Europe Research Network




*) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
ger cars (thousands of units).




                                                                                                                               The Automotive sector in CEE, December 2007          41
     Country profiles




     Romania*

     Gross Output and Gross Value Added                                                          Foreign Trade
      EUR mn                                                                                      EUR mn


      4,500                                                                                       6,000
      4,000
                                                                                                  5,000
      3,500
      3,000                                                                                       4,000
      2,500
                                                                                                  3,000
      2,000
      1,500                                                                                       2,000
      1,000
                                                                                                  1,000
        500
          0                                                                                           0
                 2000        2001       2002      2003      2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


            Gross Output            Gross Value Added                                                 Export             Import

     Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



     Production and Sale
      Thousands of units                                                                         Strengths and Weaknesses
                                                                                                 • Low cost labour force
     250
                                                                                                 • Proximity to Western countries as most of the manufacturing
     200                                                                                           units are located in Transylvania region
     150                                                                                         • Re-privatisation of Daewoo Craiova (Ford is among the bidders)
                                                                                                   will boost the market suppliers
     100
                                                                                                 • Internal market is expanding fast
      50
                                                                                                 • bigger potential in the future.
        0
               2000        2001       2002      2003     2004       2005       2006
                                                                                                 • Shortage of qualified labour force, as workers are already em-
            Car production             New car sales                                               ployed in other economic sectors
                                                                                                 • Lack of significant automotive spare-parts retail dealers and
     Source: UniCredit New Europe Research Network
                                                                                                   lack of R&D centres
                                                                                                 • Quality and environmental protection management need to be
                                                                                                   further developed and implemented.


     *) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
     ger cars (thousands of units).




42   The Automotive sector in CEE, December 2007
Bulgaria

Gross Output and Gross Value Added                                                          Foreign Trade
EUR mn                                                                                      EUR mn


   300                                                                                       2,000
                                                                                             1,800
   250                                                                                       1,600
   200                                                                                       1,400
                                                                                             1,200
   150                                                                                       1,000
                                                                                               800
   100                                                                                         600
    50                                                                                         400
                                                                                               200
     0                                                                                           0
           2000       2001       2002       2003       2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


    Gross Output             Gross Value Added                                                  Export             Import


Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



Production and Sale
Thousands of units                                                                          Strengths and Weaknesses
                                                                                            • Close proximity to countries where auto production is expand-
    50
                                                                                              ing
    45
    40                                                                                      • Low labour costs (the lowest in the EU), with a skilled and in-
    35
    30                                                                                        expensive engineering pool available
    25                                                                                      • Consumers with increasing purchasing power
    20
    15                                                                                      • Flexible financing options (including leasing): around one-third
    10
     5
                                                                                              of new cars are bought on credit
     0
           2000       2001        2002      2003       2004       2005       2006
                                                                                            • No indigenous vehicle production industry (the local market
     Car production             New car sales                                                 relies on imports)
                                                                                            • Abolishment of tariffs for import of cars from the EU benefiting
Source: UniCredit New Europe Research Network
                                                                                              second-hand imports
                                                                                            • Low labour productivity




*) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
ger cars (thousands of units).




                                                                                                                               The Automotive sector in CEE, December 2007          43
     Country profiles




     Slovenia*

     Gross Output and Gross Value Added                                                          Foreign Trade
      EUR mn                                                                                      EUR mn


      2,500                                                                                      2,500

      2,000                                                                                      2,000

      1,500                                                                                      1,500

      1,000                                                                                      1,000

        500                                                                                        500

            0                                                                                         0
                  2000       2001       2002      2003      2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


            Gross Output            Gross Value Added                                                Export             Import


     Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



     Production and Sale
      Thousands of units                                                                         Strengths and Weaknesses
                                                                                                 • High level of income
     160
                                                                                                 • Proximity to European markets and to the plants of the main
     140
     120
                                                                                                   producers
     100                                                                                         • Only Renault has production facilities in the country
      80
      60
                                                                                                 • High level of market saturation
      40
      20                                                                                         • Shortage of skilled manual labour
        0
                2000       2001       2002      2003     2004       2005       2006


            Car production            New car sales

     Source: UniCredit New Europe Research Network




     *) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
     ger cars (thousands of units).




44   The Automotive sector in CEE, December 2007
Croatia

Gross Output and Gross Value Added                                                          Foreign Trade
EUR mn                                                                                      EUR mn


  500                                                                                        2,500
  450
  400                                                                                        2,000
  350
  300                                                                                        1,500
  250
  200                                                                                        1,000
  150
  100                                                                                         500
   50
    0                                                                                            0
           2000       2001       2002       2003       2004       2005       2006                      2000       2001       2002       2003       2004       2005       2006


    Gross Output             Gross Value Added                                                  Export             Import


Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



Production and Sale
Thousands of units                                                                          Strengths and Weaknesses
                                                                                            • Improving road conditions (new highways)
  90
                                                                                            • Growth in tourist arrivals will boost the car rental sector
  80
  70                                                                                        • Relatively high income levels and prospects of joining the EU
  60                                                                                          in the near future
  50
  40
  30                                                                                        • High dependence on imports
  20
  10                                                                                        • High restrictions on consumer credit and a recent hike in car
   0                                                                                          excise tax
         2000       2001        2002      2003       2004       2005       2006


        Car production            New car sales

Source: UniCredit New Europe Research Network




*) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
ger cars (thousands of units).




                                                                                                                               The Automotive sector in CEE, December 2007          45
     Country profiles




     Turkey

     Gross Output and Gross Value Added                                                          Foreign Trade
     EUR mn                                                                                      EUR mn


      6,000                                                                                     12,000

      5,000                                                                                     10,000

      4,000                                                                                      8,000

      3,000                                                                                      6,000

      2,000                                                                                      4,000

      1,000                                                                                      2,000

            0                                                                                         0
                  2000       2001      2002       2003       2004       2005       2006                    2000        2001       2002       2003       2004       2005       2006


         Gross Output           Gross Value Added                                                    Export             Import


     Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



     Production and Sale
     Thousands of units                                                                          Strengths and Weaknesses
                                                                                                 • Large population and low level of market saturation
      600
                                                                                                 • High growth potential in the economy
      500
                                                                                                 • Geographic proximity to both Europe and Asia
      400                                                                                        • Trade agreement with the EU
      300                                                                                        • Relatively well-trained workforce
      200                                                                                        • Bad railway system
      100

        0                                                                                        • Labour costs higher than in other countries in the region
                2000     2001       2002       2003       2004       2005       2006
                                                                                                 • Difficulty of establishing new businesses
            Car production           New car sales

     Source: UniCredit New Europe Research Network




     *) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
     ger cars (thousands of units).




46   The Automotive sector in CEE, December 2007
Russia

Gross Output and Gross Value Added                                                          Foreign Trade
 EUR mn                                                                                      EUR mn


   900
   800
                                                                                            Reg. Others 19%
   700
   600
   500
   400
   300
   200
   100                                                                                                                                                             Reg. Cars 81%
     0
           2000       2001       2002       2003       2004       2005       2006


     Gross Output            Gross Value Added


Source: UniCredit New Europe Research Network                                               Source: UniCredit New Europe Research Network



Production and Sale
 Thousands of units                                                                         Strengths and Weaknesses
                                                                                            • One of the best markets in terms of future potential
2,000
1,800
                                                                                            • Presence of a national manufacturer (in 2005 they represented
1,600                                                                                         around 45 % of the internal market)
1,400
1,200                                                                                       • Increase in import tariffs on completely built units would en-
1,000                                                                                         courage foreign manufacturers to set up shop in the country
  800
  600
  400
  200
                                                                                            • Potential competition from Asian locations
    0                                                                                       • The market relies heavily on a niche segment of society which
          2000        2001       2002      2003       2004       2005       2006
                                                                                              benefits from oil income
     Car production             New car sales

Source: UniCredit New Europe Research Network




*) Gross Output, Gross Value Added, Import and Export are in millions of euros for the transport equipment sector (NACE DM). Production and Sale (new) is related only to passen-
ger cars (thousands of units).




                                                                                                                               The Automotive sector in CEE, December 2007          47
     Annex




     VIII. Annex

     Top25 Mergers & Aquisitions in CEE in the last 10 years (auto, auto parts and auto equipments manufacturer sector)
     Deal Type                Announce Date        Target Name                          Acquirer Name
     Acquisition              5/22/00              SKODA AUTO AS                        VOLKSWAGEN
     Divestiture              7/14/07              JC AUTO SA                           INTER CARS
     Acquisition              12/17/98             AUTOMOBILE DACIA PITESTI             RENAULT
     Divestiture              4/8/03               STOMIL OLSZTYN S.A.                  MICHELIN (CGDE)-B
     Acquisition              2/9/07               HEADQUARTER BUILDING/ISTANBUL        LANDMARKK INSAAT & TURIZM
     Acquisition              8/30/06              TOYOTA & LEXUS RETAIL BUSINESS       INCHCAPE
     Joint Venture            1/23/06              EXBUS ASSET MANAGEMENT PLC           HOMERICA INVESTMENTS
     Divestiture              10/25/02             ISUZU MOTORS GERMANY                 GENERAL MOTORS
     Acquisition              10/25/02             ISUZU MOTORS POLSKA                  GENERAL MOTORS
     Joint Venture            7/14/00              AUTOMOBILE DACIA PITESTI             RENAULT
     Acquisition              4/7/04               SAVA TIRES DOO                       GOODYEAR TIRE & RUBBER
     Acquisition              4/7/04               AUDI & PEUGEOT RETAIL BUSINESS       INCHCAPE
     Acquisition              10/28/04             AVTOFRAMOS OAO                       RENAULT
     Divestiture              8/24/04              WESLIN INDUSTRIES INC                WESCAST INDUSTRIES INC-CL A
     Joint Venture            3/26/07              RUSSIAN ACCUMULATORS                 POWER INTERNATIONAL
     Acquisition              5/6/02               SAVA TIRES DOO                       GOODYEAR TIRE & RUBBER
     Acquisition              7/19/06              CZECH LCV                            ASHOK LEYLAND
     Divestiture              4/24/06              SAVA TRADE                           MERKUR
     Divestiture              2/12/01              THOMAS WALTER LTD                    DDI CORP
     Acquisition              6/29/01              TATRA AS                             SDC INTERNATIONAL
     Divestiture              7/28/06              TATRA AS                             KBC GROEP
     Divestiture              1/10/07              PEKM KABELTECHNIK SRO                COMMERCIAL VEHICLE GROUP
     Divestiture              8/3/07               ZMZ-BEARINGS OOO                     DAIDO METAL CO
     Divestiture              3/15/01              GLIWICE MFG FACILITY                 TENNECO
     Divestiture              3/28/01              WSK GORZYCE SA                       FEDERAL-MOGUL
     Source: Bloomberg




48   The Automotive sector in CEE, December 2007
Seller Name                Announced Total Value (mln US $)   Deal Status        Country
CZECH REPUBLIC                                       300,5    Complete           Czech Rep.
                                                     127,8    Pending            Poland
                                                     82,74    Complete           Romania
                                                     82,68    Complete           Poland
RENAULT SA                                            73,1    Complete           Turkey
OLIMP GROUP                                          72,29    Pending            Russia
                                                     67,46    Pending            Hungary
ISUZU MOTORS LTD                                      60,6    Complete           Poland
ISUZU MOTORS LTD                                      60,6    Complete           Poland
                                                     56,99    Complete           Romania
                                                     52,32    Complete           Slovenia
OLIMP GROUP                                             43    Complete           Russia
                                                     42,24    Pending            Russia
LINAMAR CORP                                         41,16    Pending            Hungary
METROPOL GROUP OF COS                                   40    Pending            Russia
SAVA                                                 38,72    Complete           Slovenia
AVIA AS                                                 35    Complete           Czech Rep.
SAVA                                                 34,66    Complete           Slovenia
GARDNER (L) GROUP PLC                                29,75    Complete           Poland
                                                     28,81    Complete           Czech Rep.
TEREX CORP                                            26,2    Complete           Czech Rep.
PRETTL INDUSTRIE BETEILIGUNG                          21,1    Complete           Czech Rep.
SEVERSTAL-AVTO                                          20    Pending            Russia
                                                        20    Complete           Poland
                                                        18    Complete           Poland




                                                                            The Automotive sector in CEE, December 2007   49
     UniCredit Group CEE banking network




     UniCredit Group CEE banking network
     The Baltics                                   Hungary                             Russia
     UniCredit Bank Estonia Branch                 UniCredit Bank                      Bank Siberia
     Liivalaia Street 13/15, EST-10118 Tallinn     Szabadság place 5 – 6,              11, Pevtsov Str.
     Phone: +372 668 8300                                                              644099 Omsk
                                                   H-1054 Budapest,                    Phone: +7 3812 24-49-19, 28-98-80
     www.unicreditbank.ee                          Phone: +36 1 269 0812               E-Mail: gu@omsk.cbr.ru
                                                   E-Mail: info@unicreditbank.hu
     UniCredit Bank Lithuania Branch               www.unicreditbank.hu                International Moscow Bank
     Vilniaus Gatve 35/3, LT-01119 Vilnius                                             Prechistenskaya emb. 9,
     Phone: +370 5 2745 300                                                            RF-19034 Moscow
                                                   Kazakhstan
     www.unicreditbank.lt                                                              Phone: +7 095 258 7200
                                                   ATFBank                             E-Mail: imbank@imbank.ru
     UniCredit Bank (Latvia)                       100, Furmanov Str.                  www.imb.ru
     Elizabetes Iela 63, LV-1050 Riga              050000 Almaty
     Phone: +371 708 5500                          E-Mail: info@atfbank.kz             Yapi Kredi Moscow
                                                   Phone: +7 (727) 2 583 111           Goncharnaya emb. 2,
     www.unicreditbank.lv                                                              RF-115172 Moscow
                                                   www.atfbank.kz
                                                                                       Phone: +7 495 234 9889
     Bosnia and Herzegovina                                                            E-Mail: yap@online.ru
     UniCredit Zagrebacka banka                    Kyrgyzstan                          www.ykb.ru
     Kardinala Stepinca b.b.,                      ATFBank Kyrgyzstan
     BH-88000 Mostar                               493, Zhibek Zholu Ave.              Serbia
     Phone: +387 36 312112                         Bishkek                             UniCredit Bank
     E-Mail: unizaba@unizaba.ba                                                        Rajiceva 27 – 29, 11000 Belgrade
                                                   Phone: +7 312 67-00-47
     www.zaba.ba                                                                       Phone: +381 11 3204 500
                                                   E-Mail: bank@atfbank.kg             E-Mail: office@unicreditbank.co.yu
                                                   www.atfbank.kg                      www.unicreditbank.co.yu
     HVB Central Profit Banka
     Zelenih Beretki 24, BH-71000 Sarajevo         Macedonia                           Slovakia
     Phone: +387 33 533 688                                                            UniCredit Bank
                                                   BA-CA Representative Office
     E-Mail: info@hvb-cpb.ba                                                           Šancova 1/A, SK-813 33 Bratislava,
                                                   Dimitrie Cupovski 4 – 2/6,          Phone: +42 1 44 547 6870
     www.hvb-cpb.ba
                                                   MK-1000 Skopje                      www.unicreditbank.sk
     Nova Banjalucka Banka                         Phone: +389 2 3215 130
     Marije Bursac 7, BH-78000 Banja Luka          E-Mail: office@ba-ca.com.mk         Slovenia
                                                                                       UniCredit Bank
     Phone: +387 51 243344                                                             Šmartinska cesta 140, SI-1000 Ljubl-
     E-Mail: info@novablbanka.com                  Montenegro                          jana,
     www.novablbanka.com                           BA-CA Representative Office         Phone: +386 1 5876 600
                                                   Hercegovacka 13,                    E-Mail: info@unicreditbank.si
     Bulgaria                                      81000 Podgovica                     www.unicreditbank.si
     UniCredit Bulbank                             Phone: +382 81 66 7740
     Sveta Nedelya Sq. 7, BG-1000 Sofia            E-Mail: ba-ca@cg.yu                 Turkey
     Phone: +359 2 923 2111                                                            Yapi Kredi
     www.unicreditbulbank.bg                                                           Yapi Kredi Plaza D Blok, Levent,
                                                   Poland                              TR-80620 Istanbul,
                                                   Bank Pekao                          Phone: +90 212 339 70 00
     Croatia                                       ul. Grzybowska 53/57,               www.yapikredi.com.tr
     Zagrebacka banka                              PL-00-950 Warsaw
     Paromlinska 2, HR-10000 Zagreb                                                    Tajikistan
                                                   Phone: +48 42 6838 232
     Phone: +385 1 6305 250                                                            Sohibkorbank
                                                   www.pekao.com.pl                    165, Kamoli Hudzhandi Str.
     www.zaba.hr
                                                                                       735700 Hudzhand, Sogdian region
     Czech Republic                                Romania                             Phone: +8 10 99 23 4 22 6 30 65
     UniCredit Bank                                UniCredit Tiriac Bank               www.sohibkorbank.com
     Na Príkope 858/20                             Ghetarilor Street 23 – 25,
                                                   RO-014106 Bucharest 1,              Ukraine
     113 80 Praha 1                                                                    UniCredit Bank
     Phone: +420 221 112 111                       Phone: +40 21 200 2000              14, D. Galitskogo St., UA-43016 Lutsk,
     E-Mail: info@unicreditgroup.cz                E-Mail: office@unicredittiriac.ro   Phone: +380 332 776210
     www.unicreditbank.cz                          www.unicredit-tiriac.ro             www.unicredit.com.ua




50   The Automotive sector in CEE, December 2007
               This is a product of the New Europe Research Network. The New Europe Research Network involves
     all the research offices of the Group dealing with the CEE region, with the aim of providing a shared view in terms of
                              economic developments at the single country and at the regional level



Debora Revoltella
UniCredit Group, CEE Chief Economist
Network Coordinator
Neweuroperesearch@unicreditgroup.eu


UniCredit Group, CEE Economic Research                            UniCredit Tiriac Bank – Economic Research
Carmelina Carluzzo (CZ, PL, SK) – Matteo Ferrazzi (HR, LT, TR)    Rozalia Pal, Senior Economist
– Hans Holzhacker (EST, RUS, UA) – Fabio Mucci (BG, LV, RO)       Anca Mihaela Stoica
– Lisa Perrin – Bernhard Sinhuber – Gerd Stiglitz
                                                                  UniCredit Bank Slovakia –
UniCredit Bulbank – Planning and Control Division,                Macroeconomics & Market Analyses
Economic Research Unit                                            Viliam Patoprsty, Chief Analyst
Kristofor Pavlov, Chief Economist                                 Lubomir Korsnak
Elena Georgieva – Milen Kasabov – Katerina Topalova
                                                                  Yapi Kredi Bankası
Zagrebacka Banka – Macroeconomic Research                         Cevdet Akcay, Chief Economist
Goran Saravanja, Chief Economist                                  Ahmet Cimenoglu, Head, Strategic Planning and Research
Nenad Golac                                                       Yelda Yucel – Murat Can Aslak – Eren Ocakverdi –
                                                                  Cenk Tarhan – Muhammet Mercan
UniCredit Bank Czech Republic – Economic Research
Pavel Sobisek, Chief Economist                                    International Moscow Bank – Treasury
Patrik Rozumbersky – Vaclav Verner                                Sergei Kondrashov – Valery Inyushin –
                                                                  Dmitriy Marushkevich
Bank Pekao – Macroeconomic Research Office
Andrzej Bratkowski, Chief Economist                               UniCredit Bank Hungary
                                                                  Márta Szegö Biróné, Chief Economist
                                                                  Tibor Nagy, Tamás Nagy




                                                                                            The Automotive sector in CEE, December 2007   51

				
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