| Author: |
Petr Hájek |
| Publication: |
Czech business weekly |
| Date: |
19. 3. 2007 |
Light vehicle manufacturing is expected to exceed 8.5 million units worldwide between 2005 and 2010, representing a 13.7 percent increase over the next four years. In fact, the PwC Automotive Institute, an internal unit of consultancy PricewaterhouseCoopers, forecasts doubledigit growth rates in all global regions except North America. The largest contribution to overall growth is expected to come from the Asia-Pacific region, which is predicted to account for more than 42 percent of this increase by the end of the decade.
Several developed markets are expected to grow over the next four years, including the U. S. (9.5 percent), France (5 percent) and Germany (2.9 percent), but the biggest surge will come from an emerging regional group often referred to as the BRIC countries (Brazil, Russia, India and China). To put their collective growth into context, BRIC countries will account for more than 40 percent of the sector increase over the 200510 period, while representing 52 percent of the global capacity expansion in that time period. This is why nearly all major global automakers are pursuing a BRIC strategy in some form as they attempt to gain competitive advantage by tapping the potential of these emerging automotive markets. This is also the case of Czech automaker Škoda Auto, which is active in Russia, India and China. At first glance this growth might seem good news for global automakers and their suppliers. On the other hand, the last few years have brought numerous reports of financial instability, corporate bankruptcies, restructuring efforts and plant closures. In fact, massive structural changes loom, and the situation will only heat up as the entire automotive industry struggles to adapt to new market realities. These include high raw material prices and razor-thin profit margins that put pressure on original equipment manufacturers (OEMs) and suppliers alike-all against a backdrop of dramatically increased global competition. The result is a sector in which the players aligned with global trends will prosper, but new competitive intensity will increase the cost of mistakes.
The Czech Republic still remains a favorite place for the automotive industry. Indeed, much of the growth in the sector will be driven by Central Europe and will be led by Slovakia, with 42 percent growth, and the Czech Republic, with 81 percent growth, which combined will contribute 41 percent of the expected growth in European light vehicle assembly. South Korea’s Hyundai Motor Company-whose factory in Nošovice, North Moravia, scheduled to start production in 2008 with an annual production capacity of 300,000 cars-should contribute the most to the growth in production volume in the Czech Republic in the near future.
Reflecting a shift toward lower costs in Central Europe, traditional Western European automotive assembly markets such as France and Spain are expected to see only moderate growth, at 3 and 5 percent respectively. Assembly in the U. K. is expected to decline by 16 percent by the end of the decade. Challenges that OEMs face include downward pressure on vehicle prices, supplier instability, a relentless drive to improve shareholder value, mounting legacy costs, and difficult labor relations. This is also true in the Czech Republic. Companies that maintain “business as usual,“ or those that wait too long to act, will find it very difficult to keep up as the competitive environment transforms around them. Automotive tax issues in 2006 It’s clear that companies in the automotive sector will have to find areas where they can do better than in the past. Many opportunities can be found in the area of taxes.
Almost all major automotive companies operating in the Czech Republic have been granted investment incentives. Some firms received support as early as 1998 based on a government resolution on investment incentives for foreign investors. Further investment incentives were provided beginning in 2000 based on the Act on Investment Incentives. The period for taking advantage of such incentives is coming to an end for many companies. One phenomena connected to this is that many companies aren’t able to fully utilize incentives. This is a result of the specific conditions of the tax nature connected with the provision of investment incentives. Therefore, part of the opportunity connected with the provision of investment incentives remains unused by many companies. Nevertheless, there are ways to maximize the utilization of investment incentives that can bring significant tax savings to automotive companies. Surprisingly, many companies aren’t enquiring about these opportunities.
Another case is the utilization of tax support for research and development (R&D) activities. According to information from the Czech Ministry of Finance (MF), in 2005 the new R&D tax allowance (the possibility to deduct the company’s R&D costs twice) was utilized by fewer companies than expected-meaning many companies missed another potential source of tax savings.
At the same time, companies often underestimate certain tax risks connected with their operations. One example is transfer pricing, which is now attracting the increased interest of the MF’s tax office. The risks associated with the transactions of related parties are thus increasing. This requires the preparation of adequate documentation tailored to each company’s specific situation that must be annually revised to find opportunities related to business developments in the ever-changing automotive industry.
The last trend worth mentioning is the increased focus of the MF’s financial office on large taxpayers. The possibility of tax inspections is often underestimated by companies, which increases the risk of high penalties and the cost of time spent dealing with past inadequacies that could have been avoided.
The tax area can bring significant savings or additional costs and will therefore become an important area for producers in the automotive industry, where, with respect to “razor-thin“ margins, any mistakes will create a significant competitive disadvantage. The approach to the tax area will become an increasingly interesting benchmark for companies in the automotive industry.
