TORONTO, February 20, 2008 — An increasing number of automotive manufacturers are setting up shop in Central and Eastern Europe yet even with the best preparation there are serious challenges that only emerge once the move has actually taken place-namely fraud.
According to the fifth and final part of the Eastern Influx series, by PricewaterhouseCoopers (PwC), the due diligence process prior to the move usually exposes any instances of wrongdoing, but some frauds escape immediate detection or are simply too small to justify terminating a deal. Although acquiring a company that is currently, or even has previously, conducted business fraudulently can lead to a criminal conviction.
The recent PwC Global Economic Crime Survey found that 44% of automotive manufacturers had experienced some sort of fraud. One of the biggest problems is procurement fraud-where an employee conspires with an outside vendor to cheat their employer by commissioning products and services that are never delivered, manipulating contracts or signing inflated invoices. But many of the signs of this type of fraud are often indirect and not easy to spot.
"It's essential for a buyer to put proper operational and financial controls in place as soon as possible and keep a sharp eye on what is happening in the months following the move," says Mark Walters, PwC Tax Services Partner in the Canadian Automotive Industry Group.
The move to a new location also has a huge bearing on the manufacturer's supply chain. The first few months after an acquisition are the point when the weaknesses start to show through. Some suppliers may be unable to meet the acquiring company's standards, may have found new outlets for their products or services during the transition period or may even be working for direct competitors of the acquirer.
However, sourcing alternative suppliers can be challenging. Much of the supply base has already been captured by large Western carmakers and Tier 1 suppliers. There is some untapped capacity in Bulgaria but little remains in more established manufacturing locations like the Czech Republic or Poland.
Similarly there are severe skilled labour shortages in some areas of Central and Eastern Europe. If a manufacturer wants to capitalize on the key reason for moving East, reduced labour costs, it must work to ensure it successfully manages and retains its new workforce. It must think like the new employees, anticipate what information they will require, address any fears and manage expectations. It is also vital to identify key employees and incentives for them to stay.
"There are many compelling reasons for automotive manufacturers to migrate to Central and Eastern Europe. The simple fact remains that any company which fails to do its homework will struggle to realize its objectives but those that have made the transition have discovered that although the risks are higher, so, with proper management, are the returns," notes Walters.
For more information on the PricewaterhouseCoopers automotive practice and download all five parts of the Eastern Influx series go to www.pwc.com/auto.
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