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June 26 2013

Central &Eastern EuropePart two: Automotive & Manufacturing

www.ft.com/centraleasterneurope

2 FINANCIAL TIMES WEDNESDAY JUNE 26 2013 FINANCIAL TIMES WEDNESDAY JUNE 26 2013 3

CONTENTS

INTRODUCTIONAuto production has fallen in westernEurope but risen dramatically in the eastRUSSIAN AUTOSA voracious appetite for cars and new wealthare encouraging increased investmentUKRAINE STEELThe sector is curing its addiction to oncecheap but now expensive Russian gasFIAT IN SERBIAThe group’s €1bn investment caused a stir inItaly. Eyebrows were raised elsewhere, tooSKODAWhile big brands report lower sales, Skodahas 4 per cent of the European marketVIDEOTONAuto parts make up 38 per cent of turnoverin this highly diversified groupSANMINAThe group’s Hungary operation has moved toproduce complex communications systemsGORENJEKitchen and appliances company stands outas Slovenia’s big homegrown exporterSAMSUNGQuality of Poland’s workforce persuaded thecompany to set up its R&D centre there

CONTRIBUTORSNeil Buckley is the FT’s Eastern EuropeeditorDavid Crouch is the FT’s deputy Europenews editorRoman Olearchyk is the FT’s UkrainecorrespondentJan Cienski is the FT’s Warsaw and PraguecorrespondentKester Eddy is a regular FT contributorbased in BudapestAndrew MacDowall is a freelance writerMichael Gartside is senior manager at PwCAutofacts

ILLUSTRATIONSFront page picture Skoda Autos AS plant inthe Czech Republic. Page 9 graphic ValentinaRomei and Russell Birkett

Special reports editor Michael SkapinkerEditor Hugo GreenhalghLead editor Stephanie GraySub editors David Scholefield,Elizabeth Durno, Richard GibsonPicture editor Andy MearsDesigner Steven BirdHead of project delivery Rachel HarrisHead of strategic sales Patrick CollinsHead of B2B & World Reports Robert GrangeAll editorial in this special report is produced bythe FT. Our advertisers have no influence over, orprior sight of, the articles or online material.

Central & Eastern Europe | Introduction Central & Eastern Europe | Introduction

lagged well behind western counterparts.But the system bequeathed a pool of relatively

cheap, skilled and well-trained workers onwestern Europe’s doorstep. West European, USand Asian groups, especially in sectors such asautomotive and electronics, quickly tookadvantage.

General Electric took a stake in Tungsram, theHungarian lighting producer, as early as 1989.Companies such as Philips of the Netherlands,Germany’s Siemens and South Korea’s Samsungwere soon expanding fast into Hungary, Polandand what was then still Czechoslovakia.

In the automotive sector, Volkswagen and Fiat,Ford and General Motors spearheaded the moveinto the same countries. VW not only openedplants in Slovakia and Poland in the early 1990sbut also took control of the Czech Republic’sailing Skoda carmaker, turning it into one ofVW’s most successful brands. Suzuki was anearly Japanese entrant in Hungary, followed byJapanese and Korean counterparts such asToyota, Kia and Hyundai, and a wave ofcompanies supplying components. Homegrowncomponent makers sprang up too.

The pace of investment rose as eight former

The region has learnt that investment can never be taken for granted. The next hurdle is to shift towards indigenous technology and innovation, writes Neil Buckley

Competition is fierce for slices of a smaller pie

More on FT.comCentral & EasternEurope, Part One isonline along with otherarticles and in-depthanalysiswww.ft.com/centraleasterneurope

IN GYOR IN HUNGARY, EXACTLYhalfway between Vienna and Budapest– and a stone’s throw from the borderwith Slovakia – stands one of thecountry’s biggest exporters. Earlierthis month, the ultra-modern Audiplant celebrated its 20th anniversaryas well as the opening of a complete

automotive production line, set to produce 125,000cars a year, alongside an existing engine plantand vehicle assembly line.

“Our engine plant in Gyor is the biggest in theworld, delivering nearly 2m units annually. Butit is not only the biggest, it is also especiallycomplex,” says Peter Lore of Audi Hungaria.“Engines from Gyor power cars in countries allover the world.”

Factories such as this symbolise the emergenceof central and eastern Europe as amanufacturing centre serving the wholecontinent, 20 years after communism collapsed.

Back then, with east Asia emerging as theworld’s new manufacturing powerhouse, thatmight have seemed a distant dream. When theBerlin Wall fell, technology and productionmethods in eastern Europe’s socialist economies

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communist central and eastern Europeancountries prepared to join the European Union in2004, and two more in 2007.

Though the extent to which manufacturingcapacity is owned by foreign groups canoccasionally be a sensitive issue, the investmenthas largely been welcomed as a wealthmultiplier. Audi Hungaria, for example, employsmore than 7,000 people and will create 2,100 morejobs in the long term with the expansion of itsGyor plant, supporting 15,000 more people in theregion directly or indirectly.

“The automotive sector has been both asuccessful and visible example of the transitionto market economies, and also of increasedcompetition, of expansion of the private sector, ofdissemination of quality standards, of skills, ofregional development, and, of course, creation ofjobs,” says Alain Pilloux, managing director forindustry, commerce and agribusiness at theEuropean Bank for Reconstruction andDevelopment. Auto production, he adds, has a“snowball” effect, attracting other investmentsnot just in components but in materials such assteel, glass and rubber.

Central Europe’s biggest attraction has been

access to the EU market of more than 500mpeople. Plants in the Czech Republic, Slovakiaand Hungary have been set up largely for export.Even if labour costs may be higher than in eastor south Asia, lower transport costs make centralEurope highly competitive.

SOME STARTLING SHIFTS HAVEresulted. While auto production hasdeclined sharply in the past decade incountries such as France and Spain, ithas increased three- or fourfold in the

Czech Republic and Slovakia. Those twocountries, with only 16m people between them,now produce more cars than France, with apopulation four times the size. Slovakia lastyear had the highest car production per capita inthe world.

Further east, Russia has also become animportant market for auto assembly, helped byimport tariffs that encouraged foreign groups tomanufacture inside the country. This is mostlynot for export but for a fast-growing domestic carmarket on course to overtake Germany’s.

Investments have slowed sharply, however,since the global downturn in 2008-09 and

The share of industry in overalleconomic activity is about30 per cent in CEE economies

eurozone debt crisis, which has hit demand hardin a core market.

Yet Birgit Niessner, chief CEE macro analystat Austria’s Erste Group Bank, notes that thoughall central European economies apart fromPoland have gone into recession at least oncesince 2008, industrial output has provedsurprisingly resilient.

The share of industry in overall economicactivity, says Ms Niessner, is about 30 per centin CEE economies, but only 19 per cent in theeurozone.

Looking ahead, central, eastern and southeastEurope divides broadly into two halves facingdifferent difficulties.

For the southern portion, the task is to try toemulate the transformation in central Europe inthe more recent EU entrants of Romania andBulgaria, which joined in 2007; in Croatia, whichjoins on July 1 this year; and in prospectiveentrants such as Serbia.

Some progress is already being made. ErsteGroup notes Romanian auto production, at326,000 cars last year, is close to overtakingItaly’s through investments such as that by Fordat Craiova in the southwest, and Renault’s 1999acquisition of the socialist-era Dacia. Dacia nowmakes the Renault-designed, low-cost Loganmodel, a top seller in eastern Europe.

Bulgaria has limited auto production, but hasattracted component suppliers from Germany,Japan and South Africa. Serbia landed asignificant investment in 2008 when Fiat acquiredthe old Zastava plant at Kragujevac, south ofBelgrade.

In the most developed markets of Poland,Hungary, Czech Republic and Slovakia, thechallenge is first to retain competitiveness as thewage gap with western Europe starts to narrow.

“You have had a fairly significant growth ofthe industry and, in some cases, there have beenwage cost issues,” says Michael Gartside of PwCAutofacts, a consultancy. Though salaries overallare still many years from catching up with thewest, he says, shortages of skilled workers insome areas have pushed wage costs up.

Central Europe has learnt that investments cannever be taken for granted. Nokia, the Finnishmobile phone maker, in 2008 closed its factory inBochum, Germany, transferring some of theproduction to a new factory in Cluj, Romania.Just three years later, Nokia shut the Cluj plantand shifted production to China.

So the second big challenge is to shift towards“knowledge” economies based more onindigenous technology and innovation.

“The ‘copy and paste’ model of industrialdevelopment for CEE countries has worked verywell but now they face the next step, and thatwill depend on investment in research anddevelopment, on improving the businessenvironment, on universities and education,”says Ms Niessner.

The EBRD’s Mr Pilloux says CEE countriesmay have scope to expand manufacturing insome less developed sectors, such as chemicals,as well as in agribusiness, but agrees thatnurturing innovation is the next step. Butcoming out of the crisis, he warns, countriesacross the region will have to compete hard forslices of a smaller investment pie.

“It is not easy these days to present aninvestment to a board of directors in westernEurope or the US,” he says. “Investments will gowhere the investment climate is the best.”

Walking the line:production at the newAudi manufacturingplant in Gyor, Hungary,which is set to make125,000 cars a year

Bloomberg


Central & Eastern Europe | Russian automotive

Around 2005, AnatolyArtamonov came across ashort article in a Moscownewspaper stating thatVolkswagen wanted to startmaking cars in Russia. Hewrote the company a letter.

“At first, Volkswagen waslooking at as many as eight regions in Russia,but we got through to the last two,” recalls MrArtamonov, the governor of the Kaluga region,which lies some 150km southwest of Moscow. “Itwas us against Yaroslavl – and VW chose us.”

With his introductory letter, the former farmboss started a process that would transform thecity of Kaluga into a thriving centre of carproduction.

“It was our dream to attract carmakersbecause they draw in a large number of othercompanies and a high level of technology andengineering,” he says.

Before VW had even made public its intentionto set up in Kaluga, Volvo Trucks had alsoselected the region as its main production basein Russia. Close on the Swedfish company’s heelscame a joint production venture, PCMA, betweenFrench group PSA Peugeot Citroën andMitsubishi Motors of Japan.

All were drawn to Russia’s fast-growing marketfor cars, which is poised to overtake Germany asEurope’s largest. Russians bought 2.9m cars in2012, up 11 per cent on the previous year.

The contrast with the eurozone could hardly begreater – sales last year in Italy and Francedropped 22 per cent and 12 per cent respectively.

The density of car ownership in Russia isabout half that in Germany or France, suggestingthere is plenty of potential for the market toexpand as Russians’ personal incomes continueto grow.

Despite the economic slump of 2009, the pace ofgrowth in Russia has been remarkable. The

500,000th Kaluga-produced VW left the plant inNovember 2012, only three years after the factoryreached full-cycle production. The “cluster” ofthree car plants and 25 suppliers has created12,000 jobs in a region where Soviet-era industryhad been almost wiped out.

Last year, PCMA hired 1,000 workers to takethe company’s total to 2,900, of whom fewer than10 per cent are French or Japanese.

The company will start output of four newmodels in the space of 12 months. In 2014 it willhit full production of 125,000 cars a year, up from80,000 this year.

“The first advantage of Kaluga is that the cityadministration is business-oriented. It is quiteAnglo-Saxon,” says Jean-Christophe Marchal,general manager of PCMA.

“When you meet them, you feel they arepeople you can trust. And Artamonov is a keyperson. It is very easy for me to have a meetingwith him and explain any problems. They reallywant to make a success story of Kaluga.”

L ast month, Volvo opened a new plantproducing excavators and, by the endof next year, it will start producingcabins for its trucks. There are usefulsynergies when a cluster of producers

is created in a region, says Peter Andersson,Volvo’s general director in Russia.

“The Kaluga administration is accustomed toautomotive [production] and we share a certainnumber of suppliers,” he says. “But also wewanted to be more centrally located.Communications are good with Moscow and wecan bring components in through Belarus.”

Clusters are the future of automotivemanufacturing, says Tim Urquhart, a senioranalyst in the automotive group at IHS, theconsultancy.

“If you look at it globally, this is the way itworks, with suppliers close to the manufacturingbase,” he says. “You get a critical mass of skilledworkers and the associated benefits of trainingand supply-chain infrastructure. You attract askill base.”

Similar factors have created a thriving clusterin St Petersburg, where Ford, Toyota, GeneralMotors, Scania, Nissan and Hyundai havefactories. At the end of last year, Avtotor, theRussian producer, and Magna, the Canadianparts maker, announced plans to invest almost

$3bn to create an ambitious automotive clusterin the western enclave of Kaliningrad to produce250,000 BMW, GM and Kia cars a year by 2018.

Western Russia’s clusters each have a longway to go to match the giants of the Russianauto scene – the Gaz and Avtovaz companies inthe industrial heartlands of Nizhny Novgorodand Tolyatti respectively.

At Gaz, GM and Russian tycoon OlegDeripaska are in partnership with VW andDaimler. Renault and Nissan will soon hold acontrolling stake in Avtovaz in a joint venturewith Russian Technologies.

Russia’s economy has started to slow and thefears are that the car market will cool along withit. Russian car sales fell 12 per cent year-on-yearin May after a decline of 8 per cent in theprevious month, according to a survey by theAssociation of European Businesses.

“The market in 2013 seems to be a little tougher,so we have to see,” PCMA’s Mr Marchal says.

A government ruling in 2010 that foreigncarmakers must produce 300,000 units a year by2015 to avoid tariff increases also hints at thepossibility of a looming glut, Mr Urquhart of IHSwarns. It is also apparently at variance with theterms of Russia’s recent accession to the WorldTrade Organization. But Russians’ voraciousappetite for cars combined with the country’s oiland gas wealth are encouraging producers tostep up investment.

This means intense competition to recruit andretain skilled workers. Kaluga’s regionalleadership is not just talking about creating jobs,but is also making it a more attractive andinteresting place to live. The dusty town still hasa Soviet feel to it, although that will soon changeif its ambitious development plans are fulfilled.

Governor Artamonov is relieved both that he isattracting investment from abroad and thatRussia’s oligarchs have yet to take an interest inhis region’s car industry. He is fiercely critical oftheir past behaviour, accusing them of buying upcompanies on the cheap, stripping their assetsand running them into the ground.

Other regions in Russia envy Kaluga’s successand are trying to follow its example, says JoergSchreiber, president and managing director ofMazda Motor Russia. “Mr Artamonov has areputation for welcoming foreign business andfor making Kaluga a special place – anexception.”

Governor’s drive to attract foreign carmakers to region has others trying to emulate it, says David Crouch

Kaluga creates cluster template

Ready to go: cars setfor distribution outsidethe VW plant in Kaluga

Bloomberg

Foreign groups have been drawnto Russia’s car market, whichis poised to overtakeGermany as Europe’s largest


Central & Eastern Europe | Ukraine steel industry

With cyclical peaks andtroughs, not leastbeing the 2009economic crisis, theglobal steel market isa difficult one for themost competitive ofmetallurgical

enterprises. The added weight of surging pricesfor fuel imported from Russia has made the pastseven years extra hard for Ukraine’s massivesteel industry.

Yet, while the country’s economy remainsheavily dependent on foreign fuel, its steel sectoris making headway in its efforts to break alongstanding addiction to once cheap, but nowexpensive, Russian natural gas.

It is doing so by switching from Soviet-builtsteel production technologies – such as gas-burning blast and open hearth furnaces – tomore efficient and environmentally friendlypulverised-coal injection and electric arc systems.

Blessed with some of the world’s largestreserves of ore and coal – and favourablelogistics for getting steel to domestic and foreignmarkets – Ukraine was identified by Soviet stateplanners as an ideal location to smelt, mould androll natural resources into various steel products.

In the decades that followed independence in1991, industrial behemoths rebounded fromeconomic collapse and crony capitalism, andgradually fell into private ownership.

Ukraine’s modern-day steel barons are thebillionaire oligarchs who greatly influence thecountry’s economy and politics.

A critical point in the industry’s fate wassealed after the 2004 Orange revolution. Relationssoured with Russia, now a competing steel-producing country and Ukraine’s former imperialmaster.

Kiev embarked on a steady course out ofMoscow’s orbit towards the European Union.Gazprom, the Kremlin-controlled gas companythat had fuelled Ukraine’s economy, increasedprices.

Today, Kiev pays what local officials describeas a “discriminatively” high price for Russiangas imports, more than $400 per 1,000 cubicmetres. That is higher than many Europeancountries pay, despite being farther fromGazprom’s production fields.

The price increases hit margins of energy-intensive Ukrainian businesses, includingproducers of steel, a top source of foreigncurrency. In response, domestic tycoons areinvesting heavily in energy efficiency.

Interpipe Steel is the nation’s first new steelmill to be built in 40 years. It is small butefficient and profitable.

Thanks to a $700m investment by industrialistVictor Pinchuk, its electric-arc furnacetechnology is poised to produce 1.3m tons a yearof higher quality steel for Mr Pinchuk’s Interpiperailway wheel and pipe-making conglomerate.

As if to anticipate brighter days ahead, the art-loving businessman-turned-philanthropist alsohad the steel mill designed to function as an artexhibit. Five large works designed by OlafurEliasson, the Danish-Icelandic artist known for

his grand-scale installation art projects, areintegrated into the mill’s interior and exterior.

Located on the mill’s territory in the industrialDnipropetrovsk region and formally called“Dnipropetrovsk Sunrise”, one of the displays isa massive yellow ball that lights up day andnight. At night it appears like a sun, or secondmoon, shining over the mill.

It’s a “metaphor of the industrial renaissanceof Ukraine”, Mr Pinchuk said when he openedthe mill late last year.

According to Dragon Capital, the Kiev-basedinvestment bank, Ukraine’s steel industry hascut gas consumption from 9.6bn cu m in 2005 to4.8bn cu m last year.

Steel production has fallen during this period,from 37.7m tons to 32.3m. Yet, for Ukraine, thebig challenge is not about churning out more,but to produce higher quality steel moreefficiently and profitably.

Interpipe decided to build its new mill afterRussia starting raising gas prices.

With the new plant, Interpipe says it has cutenergy costs by half, emissions of pollutants by60 per cent and gas consumption per tonne ofsteel by nearly 90 per cent. Productivity, it adds,has improved four fold. Dragon Capital describes

these developments as “very positive” for thecompany “and its debt profile”.

Interpipe is on track to improve its financialperformance in 2013 with earnings beforeinterest, tax, depreciation and amortisationexpected at $370m, up from $320m estimated for2012. Debt is expected to decrease to about $800mfrom $1bn as of end of 2012.

Market conditions are far from ideal, butUkraine’s steel industry can thank Gazprom forputting it on course for a solid future, forcing itto become as efficient and competitive as thebest of its European peers. Upgrades are inmotion at the country’s other 13-plus mills.

ArcelorMittal, the global steel company andUkraine’s largest investor, has pumped morethan $1bn into improving efficiency at thecountry’s largest mill, at Kryvyi Rih, centralUkraine, acquired in 2005 for $4.8bn.

Gas consumption rates at this factory havebeen cut from 43 to 35 cu m per tonne.Modernisation is “continuing, despite thechallenging global steel market situation”, thecompany says.

But the biggest impact is expected fromMetinvest, ranked 28th in the world in steelproduction and number one in theCommonwealth of Independent States.

Owned by Rinat Akhmetov, Ukraine’s richestman, the group controls half of national steeloutput, churning out more than 14m tonnes in2012 at four domestic mills. Steel is also rolled atits UK, Italian and Bulgarian plants.

Metinvest is closing open-hearth furnaces andintroducing the more energy-efficient techniqueof pulverised-coal injection. This, in turn, spellsfewer sales for Gazprom and more energyefficiency for Ukraine’s economy overall.

Gazprom measures lead to more efficientoutput, says Roman Olearchyk

Fuel price risecompels millsto change

New dawn: artist OlafurEliasson’s display has

been integrated intothe Interpipe mill

Ukraine’s steel barons arebillionaire oligarchs whogreatly influence the country’seconomy and politics


Central & Eastern Europe | Auto industry Central & Eastern Europe | Auto industry

Fiat Automobile Serbia€1bn investment signals vote of confidence

Where Nato’s bombs once fell, here now standsthe site of the largest industrial investment inSerbia’s history. Fiat’s €1bn plant in Kragujevacis a bold vote of confidence in Serbia from theItalian carmaker, and a landmark for a countrythat has had too little economic good news inrecent years.

Fiat reopened the factory in April 2012 afteroverhauling a site once occupied by Zastava, aCommunist-era state automotive group, whichhad a relationship with Fiat dating back to the1950s. As the Zastava complex also included amunitions factory, it was bombed during the 1999Kosovo war. In 2008, Fiat bought out thecompany, with the government retaining a 33 percent stake, and renamed it Fiat AutomobileSerbia, with a pledge to make it an export force.

After a €1bn overhaul that began in 2010, theplant has the capacity to turn out a new carevery two minutes. Production is expected toreach 110,000-150,000 units this year. Sales willdetermine how quickly output is stepped up tofull capacity of 186,000 units annually.

Only a tiny proportion of these will be soldwithin Serbia, where the new car market –already quite small – has taken a bashing fromthe economic crisis. In any case, the vehicles –three versions of the 500L mini people-carrier –are too expensive for most Serbs’ pockets.

Thus FAS is targeting about 100 exportmarkets, including Italy, the US, France,Germany and Spain. The decision to locate theonly global production centre for the 500L inSerbia inevitably caused a stir in Fiat’shomeland, though it was not just in Italy thateyebrows were raised This is a landlockedcountry, several difficult years away from EUmembership, with patchy infrastructure and acumbersome bureaucracy.

But Antonio Cesare Ferrara, the company’schief executive, points to a number ofcompetitive advantages that informed Fiat’sdecision.

“There is a skilled workforce in the localmechanical industry as well as existing localproduction and there was a greenfield site toestablish a supplier park,” he says. “The plant isclose to the [trans-European transport] corridor10 and just outside the EU. And Serbia has tradeagreements with a number of central and easternEuropean countries. Most of all, there areincentive schemes to support the development offoreign investment.”

In Fiat’s case, the government undertook tohasten the construction of roads aroundKragujevac as part of the investment agreement,while also offering tax breaks. To this can beadded low labour costs.

The presence of local suppliers was anotherincentive. About two-thirds of the parts for the500L are made in the country, with most of theremainder coming from Italy. Four big suppliershave factories on a former military base adjacentto the factory.

Fiat’s investment is a brightspot on the country’s landscape.Last year, the economy slippedback into recession, draggeddown by the eurozone crisis,and the government targetsgrowth of just 2 per centfor this year. With lowwages and unemploymentat more than 20 per cent,Serbs will be hoping thatmore foreign companiesdisplay Fiat’s confidence.

AndrewMacDowall

Post-communist talent, low costs and incentives have drawn foreign companies into the region

Skills provide magnet for investors

SkodaCompany hits sweet spot in a brutal world

The European car market is experiencing itsworst slump in decades, but that is not stoppingSkoda, Volkswagen’s Czech-based low-cost brand,from forecasting an increase in sales this year asit raises output in Europe and in emergingmarkets.

Data from the European AutomobileManufacturers Association show that this Maywas the worst for European car sales since 1993.But while many big brands such as Ford, Fiatand GM are reporting lower sales, Skoda issteadily growing, and now has about 4 per centof the European market.

Skoda, which is based in Mlada Boleslav, notfar from Prague, reported sales of 939,000 carslast year, a 6.8 per cent increase over 2011.Werner Eichhorn, the company’s board memberin charge of sales, expects that this year willproduce another gain, despite a slight slowdownin the early months because of the introductionof new models.

“With this model line-up, we remain confidentfor 2013, and once again sell more cars than theprevious year. Our long-term target is to sell atleast 1.5m cars a year by 2018,” he says in anemail exchange.

Skoda’s strength is that it is becoming lessdependent on the European market, which hasbeen dragged down by overcapacity and by theeurozone crisis. About 60 per cent of Skoda’sproduction is sold in Europe, but the goal is forthat to fall to 40 per cent in the next few years.

A sign of that shift is Skoda’s decision to openmanufacturing plants in China (now its largestmarket), Russia (now the third most importantmarket after Germany) and in India.

“China is a key market for us,” says MrEichhorn. “Since 2010 it has been our strongestsingle market, with approximately one quarter ofall our deliveries going to Chinese customers,”he adds. “Our goal for China is to deliver morethan 500,000 cars to customers every year.”

Skoda has hit a sweet spot in the brutal worldof car manufacturing. It is dominant at the cheapend of the market, which has done better thanthe mid-market during the crisis as cash-strappedcustomers venture to lower cost brands. Othercarmakers such as Dacia, the entry-level brandfor Renault, as well as Korea’s Hyundai/Kia, aredoing well in the same segment.

Skoda is able to keep its costs down bymanufacturing in the Czech Republic – wherelabour is still significantly cheaper than inGermany – as well as in fast-growing emergingmarkets. Skoda tends to have short supplychains and is fierce about keeping costs low.

The company is able to take advantage oftechnological advances developed by Volkswagenand later incorporated into its other brands,allowing for lower research and developmentcosts while still producing cars with many high-end features. “It’s a brand with a vision, a brandthat is able to use technology from Volkswagento introduce more and more new models,” saysWojciech Drzewiecki, the head of Samar, aWarsaw-based automotive industry consultancy.

The rush of new models is expected toincrease. Mr Eichhorn says the company will bereleasing a new model every six months“throughout the next few years”.

Skoda’s success has raised fears that it couldcannibalise sales of more expensive Volkswagenbrands. However, Mr Eichhorn insists thatSkoda’s strategy does not imply this. “We have aclear positioning between the different brands:Skoda is positioned lower than Volkswagen,” hesays. “In line with this, we do not aim to becomea higher-end brand.”

Jan Cienski

VideotonFormer TV maker diversifies

Mention the word “Videoton” toHungarians who remember the latter yearsof communism, and the response ispredictable. “Televisions”, says ErzsebetLieber, a retired teacher in Budapest. Thesets dominated the living rooms of perhapshalf all Magyar homes in the 1980s.

Few Hungarians today are aware that thesame company, which employed more than20,000 people as democracy dawned in 1989,abandoned production of TVs in 1994, onestep in the process of transforming itselfinto the country’s largest domesticallyowned manufacturer. Last year, its 8,000employees generated revenues of €354m.

Videoton, headquartered inSzekesfehervar, 45 miles southwest ofBudapest, has always diversified. Evenunder communism it was engaged incomputers, information technology anddefence electronics.

Today, it produces “tens of thousands ofdifferent products”, from electronic controlunits for industry, to home appliances, saysPeter Lakatos, co-chief executive. But theauto components division accounts for thelargest slice of earnings, with turnover of€116m last year, 38 per cent of the total.

The layman might assume this relies onthe growing presence of carmakers – Audi,Mercedes and Suzuki – in the past 20 years.

Not so, says Mr Lakatos.Rather, Videoton supplies components to

primary or so-called “tier one” suppliers,which can be anywhere in Europe, or evenfurther afield.

“It’s the structure of the industry. If wehave customer X, it could be Bosch orValeo or Denso – one of these may buy anair-conditioning systems controller from us.They buy 1m pieces, and it goes to theirfactory in Poland, France or Hungary, andthere they make their whole range ofsubunits, for Mercedes, for BMW orwhoever. It’s all a web,” says Mr Lakatos.

He admits that, having establishedthemselves in Hungary, the automakers inturn typically attract a ring of tier-onesuppliers, which means that, when biddingfor their work “we have a slightly betterchance than a Czech company because weare nearer”, before cautioning that “this isonly the last millimetre [in thecompetition].”

With a strong order book, Mr Lakatos –one of three owners of Videoton who tookcontrol of the insolvent state-ownedcompany via a leveraged buyout in 1992 –says group revenues this year should be atleast €380m, a rise of 7 per cent on 2012.

Can a Hungary-headquartered, medium-sized parts maker stay competitive in theface of cut-price competition from Asia?The tables have turned since the turn ofthe millennium, when a government-mandated rise in the minimum wageexacerbated the trend to transfer Europeanproduction to Asia unthinkingly, argues MrLakatos.

“Today, managers think about more thanjust the factory price. A tool may cost €100from China, but if you have to fly therefour times, maybe it’s better to buy it for€150 from Hungary?” So can Videoton’sgrowth, which could yet top 10 per centthis year, continue into 2014?

“I don’t know – we never count. We onlymake a one-year plan. We

work from our owncapital, and have

enough machines todo what’s needed,”he says, “so whywaste the time of mygood people to make

Excel spreadsheets?”

Kester Eddy

CEE* vehicle exports forecast

Total exports (units, m) % to West Europe

Vehicle exports forecastsby country of origin

Units (’000)

2012 2017

2012 2013 2014 2015 2016 2017

CEE* vehicle productionTop brands, 2013 forecasts, units (’000)

Volkswagen HyundaiLada

KiaFiat

RenaultSkoda

FordDacia Peugeot

The great car chase: Who’s selling what to whom and where

482

493

498

595

622

661

448406

295

282

258

568

597

646

28

58

1

2

99

100

200

Kazakhstan

Bulgaria

Serbia

Ukraine

Uzbekistan

Slovenia

Russia

Hungary

Romania

Poland

Slovakia

Turkey

CzechRepublic

255

8

123

7

25

173

18

972

1,023

1,048

782

1,126

Source: IHS* Central and Eastern Europe

0

1

2

3

4

5

6

50

70

60

80

424

Ready to roll: Skoda models heading forexport (top); Fiat’s 500L Trekkingmodel (below) on show in GenevaBloomberg

FAS is targeting about100 export markets,including Italy, the US,France and Germany

Peter Lakatos,coCEO at Videoton


Central & Eastern Europe | Electrical goods Central & Eastern Europe | Opinion

GorenjeHomegrown group extends its reachThe factory showroom at Gorenje’ssprawling plant in northern Slovenia is apalace to modern consumerism: fittedkitchens and gleaming bathrooms aretucked in behind rows of washingmachines, kettles, vacuum cleaners,kitchen robots, toasters, bread makers, air-conditioning units, irons, kettles, hobs andovens.

Near the entrance stand designer fridgesstudded with Swarovski glass crystals,priced at €1,800. “We don’t sell many ofthose here,” a salesperson confides.

Gorenje is unusual in post-communisteastern and central Europe – anindigenous manufacturer of consumergoods that has both kept its pre-1990markets within the region (and in westernEurope) and expanded its reach, acquiringoperations in Scandinavia, the Netherlandsand the Czech Republic, while developingits subsidiaries in Serbia.

Gorenje employs 11,000people and is Slovenia’sbiggest exporter but, withjust 4.5 per cent of thehighly competitive Europeanwhite goods market, it hasnot been an easy ride.

Sales slipped to €1.26bnlast year, 1.2 per cent downon 2011, which itself was7.3 per cent down on 2010.Profits, meanwhile, tumbledto just €100,000 last year,down from €8.1m in 2011.

This was against abackground of restructuring,which included disposal ofnon-core businesses, movingmanufacturing from high-cost plants in Scandinaviato the Czech Republic andSlovenia, while shiftingproduction from Slovenia toSerbia.

Franjo Bobinac, president of

the management board, admittedafter announcing the 2012 results inMarch that sales had been weakerthan expected for the first ninemonths of last year, but “a hugeeffort in the final quarter boostedrevenues in our core business.”

This year, Gorenje would continuewith the strategic plan to“deleverage, raise sales in non-European markets, develop andintroduce new products and optimiseproduction locations”, he said.

The targets are ambitious.Arguing that sales in the matureEuropean countries wouldunderperform those of thedeveloping world, Gorenje believes itmust seek growth beyond Europe.Targeted areas include Russia andcentral Asia, the Middle East andAsia, including Australia, and Brazil.

By careful selection of its acquiredbrands – led by Atag (an upmarket

Netherlands-based kitchen goods

producer) and Asko (a Swedish homeappliance producer) – along with its own,Gorenje aims to cover all price segmentsin selected markets.

The target is to achieve revenues of€1.5bn by 2015, requiring growth of 3.8 percent a year.

It is but early days, but a company fromSlovenia, seeking to export to countries asfar away as Australia, might be consideredoverly optimistic.

Not necessarily, says Saso Stanovnik,head of research at Alta Invest, thebrokerage house, given that Gorenjegained a foothold in the antipodes when itacquired Asko, the Swedish group, in 2010.

“Without the acquisitions of Asko andAtag, this goal would have been very,very hard to achieve. With these brands itis hard, but possible, provided theyconcentrate on the high-end segments,where margins justify the high shippingcosts,” Ms Stanovik says.

Kester Eddy

SamsungFocus on research and developmentOne of the main driving forces behindPoland’s economic growth for the past20 years has been a cheap labour force.However, that is not what drew Korea’sSamsung into making Poland its largestEuropean location for manufacturing andresearch and development. Instead, theKorean company was much more interestedin the quality of the workforce.

Maciej Filipowski, a vice-president ofSamsung Poland, says about half of the1,000 or so research staff the company has,scattered in three locations around thecountry, are PhDs.

Samsung was also able to use the highquality of the production line at its Amicawhite goods subsidiary in the central cityof Lodz to shift from making cheaprefrigerators and washing machines – itsmain output when the plant was bought bySamsung in 2010 – into a highly efficientbuild-to-order maker of top-end white goods.

“Poland really isn’t a cheap country, anymore,” says Mr Filipowski. “What is neededis a qualified worker, not a cheap worker.”

The depth of Poland’s labour market hasalso helped make it an attractive locationfor companies such as Samsung. Othercentral European countries have muchthinner labour markets, with many fewerspecialists. That means that one of twolarge investors can suck up all theavailable talent – forcing up wages andcreating shortages.

For example, when Dell opened a largecentre in Bratislava, the Slovak capital, thecompany was quickly forced to start hiringCzechs and Hungarians to make up for thelack of local skilled labour.

But Poland’s large population of 38m,compared with 5m for Slovakia and 10m inthe Czech Republic, as well as the largenumber of secondary cities such as Lodz,Poznan, Gdansk and Krakow, give thePolish labour market more flexibility.

Samsung is already taking advantage ofthat. It opened its research anddevelopment centre – now its largest inEurope – in Warsaw in 2000. The originallocation was around the corner from theWarsaw’s University of Technology, one ofPoland’s premier IT schools. Since then,Samsung has spread to other locationsaround Warsaw. It also has offices in Lodzand Poznan

The research and development team isinvolved in making software for a broadrange of Samsung products, includingdigital televisions and mobile systems –about three-quarters of Samsung’s globalsmart TV applications are designed inPoland.

With salaries in the country competitivewith those of western Europe, the braindrain that had seen more than 1m Poleshead west in recent years is less of anissue for employers such as Samsung.

“The people we are hiring would be ableto work anywhere else in Europe,” says MrFilipowski. “We want to be the employer ofchoice.”

Samsung is also hiring at its Poznanwhite goods factories, which made about600,000 refrigerators and the same numberof washing machines last year. The goal isto more than double production by the endof 2013.

When the company bought the plants in2010 for $76m, the goal was to hire anadditional 250 employees. After investingmore than $300m in modernisation, it endedup hiring more than 1,000 new workers.The factories are now working two shifts,producing largely for export.

The company has plants elsewhere incentral Europe, with factories producingtelevisions in Slovakia and Hungary. Butwith its white goods facilities in Poland, inaddition to the research and developmentcentre, the country is at the heart ofSamsung’s European operations.

Jan Cienski

Gorenje istargetingRussiaandcentralAsia, theMiddleEast, Asiaand Brazil

SanminaHungary plays to electronic strengths

Using a facility the size of a small garden shed,final examination teams at the Sanmina plant inTatabanya, western Hungary, test high-frequencymobile telecommunication units under loadconditions while taking the temperature throughcycles ranging from -40C to +70C for several hoursat a time.

Such units will serve as point-to-pointcommunications systems for years, ideally withoutattention, hence the rigorous attention before theyleave the factory.

“Customers are always demanding betterreliability. Due to the nature of active electroniccomponents, a unit may work well for an hour, butthen fail. That’s why we test it to such lengths,”says Karoly Hoffman, vice-president and generalmanager of Sanmina Hungary.

The largest of three subsidiaries in Hungaryowned by Sanmina, the California-based globalcontract manufacturer, the site opened in 1997,with initial output focused on electronic consumeritems.

In recent years, production has shifted to farmore complex, advanced equipment for thetelecoms market, such as the units in the testingfacility, along with automotive electronicsequipment. Because of the quality of the productsand relatively low-cost workforce, employeenumbers tripled between 2010 and 2012, and nowstand at about 1,200. Approximately a third of themhold degrees.

“The most complex printed circuit boards contain4,500 components and are worth $2,000 each.Testing and debugging, to be able to root out anyfaults and operate the very high-end testers,requires deep knowledge of the latest technology,”Mr Hoffman says.

Sanmina is reluctant to divulge financial figuresregarding individual subsidiaries. Robert O’Rourke,senior vice-president of business development,Europe, says investment in Hungary totals “about€200m”, with revenues at the Tatabanya unit “over€200m”. “Probably a good 60-70 per cent of all ouropportunities that emerge for customers that wantto do production in Europe would be aimedtowards the Hungary facility,” says Mr O’Rourke.

In spite of this, pressure from customers toreduce prices, along with fierce competition fromrivals, means growth – now a “modest 5-10 percent” – cannot be taken for granted.

“Hungary is a lower cost country, but it is notthe lowest cost,” says Mr Hoffman, and while therehave been “good signs – some of the tax burdenhas been falling in past three or four years” –frequent tax changes, along with the sheer numberof levies mean devoting “an awful lot of resourcesin order to meet the requirements”.

While Hungary is “strong in electronics” andSanmina co-operates will with the country’suniversities and colleges, Mr Hoffman is notentirely happy with the results.

“It’s very difficult to teach the right things sincethe industry is changing so rapidly. They have toteach students the technical basics, but the majortask should be to teach them how to learn [futuretechnologies],”he says.

Overall, Sanmina appears satisfied. TheTatabanya plant is seeking to expand into medicalequipment manufacturing, and there are plans tobuild a new unit, if demand is forthcoming, MrO’Rourke says. Certainly there are no plans toexploit lower-cost environments further east, saysMr O’Rourke. “Hungary has three significantfacilities, that’s where we see ourselves staying,and growing on that platform rather than investingsomewhere else.”

Kester Eddy

assembly facilities, or entering into jointventures. Capacity is growing and PwC Autofactshas forecast an increase from 2m units in 2007to 3.9m units by 2015, and a rise in assemblyfrom 1.45m to an expected 2.6m units over thesame period.

Demand for new cars in Russia doubledbetween 2009 and 2012 to an all-time record of2.93m registrations. But in a slowing economy,the market is taking a breather, as evidenced bya fall in registrations by 4 per cent in the firstfive months of this year. Over the longer term,however, the country looks likely to overtakeGermany as Europe’s largest market, with salesof more than 3m a year.

In contrast, demand among central EuropeanEU members has been less positive. Romaniaand Hungary, in particular, have sufferedheavy falls as a result of the eurozone crisis.Romania, which was the largest market in thecentral Europe region in 2007, with 315,000registrations, saw a 74 per cent decline in 2012.Hungary experienced a 77 per cent fall between2006 and 2010 but has since recovered a little.

The Czech Republic, Poland and Slovakia havefared much better, and demand has been morestable, helped by a better economic performance.

Poland, however, saw a massive surge in usedcar imports from Germany after EU accession,which has undermined the new car market eversince. As a result, sales have failed to reachlevels seen prior to accession.

While this has suppressed new car demand, ithas led to an increase in car ownership. Polandhad 475 cars per 1,000 population in 2011,compared with 383 for the region as a whole, and524 in western Europe.

Although the short-term outlook for new carsremains weak in Poland, the longer-termprospects are positive. With relatively high levelsof ownership but low sales of new cars and anageing fleet, there should be potential once theeconomy gains strength, unemployment starts tofall and credit availability eases.

If policies are implemented to reduce vehicles’CO2 emissions, this could speed the replacementof older cars and stimulate demand for new ones.

While western Europe may never again matchthe numbers of new cars sold in 2007, it is likelythat central European EU members will exceedthe 1.2m sales of that year.

Maybe by then, people in those countries willstart buying more of the cars that they producethemselves.

Michael Gartside is a senior manager atPwC Autofacts

Central European members of the EUhave seen contrasting fortunes in theirautomotive sector over the pastdecade. The region – which includesBulgaria, the Czech Republic, Estonia,

Hungary, Latvia, Lithuania, Poland, Romania,Slovakia and Slovenia – has gained significantnew investment in vehicle assembly and partssupplies as companies seek to lower costs andtake advantage of attractive incentives. However,new car demand in some of them has been hithard by the economic crisis.

Two indigenous brands – Dacia, owned byRenault, and Skoda, owned by VW – have beenbig brand success stories, not just within Europebut globally as well. Six new plants have beenbuilt, with annual capacity of 1.4m units, andinvestment in existing facilities has added afurther 0.5m units.

Slovakia has been the greatest beneficiary,with two new plants – PSA at Trnava and Kia atZilina – and a sizeable expansion at the VWplant in Bratislava quadrupling capacity to morethan 1m units over the past seven years. As aresult, light vehicle output per 1,000 populationin 2012 was higher in Slovakia, at 155, thananywhere else in the world.

In the Czech Republic, combined investment byPSA and Toyota in the car plant at Kolin, andoutput from Hyundai’s factory in Nosovice havehelped to more than double capacity in recentyears. Together, they have contributed to raisinglight vehicle output to 105 per 1,000 population –the second highest in Europe.

Hungary is enjoying a resurgence. Daimler hasbuilt a new plant at Kecskemet for its new smallcar family and VW has upgraded its Audi plantat Gyor – both of which have greatly increasedthe country’s capacity.

Romania has been the beneficiary of Renault’sinvestment in Dacia and Ford’s in Craiova, forvehicle assembly and for its new EcoBoostengine. As a result, the region accounted formore than 20 per cent of EU light vehicle outputin 2012, compared with 10.5 per cent in 2005.

Although Poland was an early leader, it haslost out more recently. Strategic sourcingdecisions, the decline in western Europe – itsmain export market – and increased competitionfrom its neighbours have resulted in a fall in thecountry’s share of regional output from 38 percent in 2004 to a forecast 17 per cent in 2013.

The outlook overall, however, is mixed. Fiathas confirmed that Tychy will be the sole globalsource for the next Fiat 500. GM has announcedthat Gliwice will be one of only two plants forthe next Astra.

The Russian automotive sector is different.Only 5 per cent of its output is exported, incontrast to central Europe, which sends 95 percent elsewhere. To combat this, the governmenthas introduced policies aimed at encouraginginvestment in the industry. These, combinedwith the country’s potential to be the largestvehicle market in Europe, have resulted in bigforeign carmakers putting money into local

Some companies are looking further than the western Europeanexport market, which is a shadow of its former self

Location, salariesand education alladd to attractions

Testing: Sanmina’s plant in Tatabanya

Romania and Hungaryhave suffered heavyfalls as a result of theeurozone crisis

Michael Gartside Automotive fortunes are mixed

12 FINANCIAL TIMES WEDNESDAY JUNE 26 2013

june 26 2013 central&...

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