Automotive companies must think local when moving east

DATE:	11 April 2007
CONTACT:	Matt Pottle, partner, PricewaterhouseCoopers
	Tel: +421 2 59 350 402, email: matt.pottle@sk.pwc.com
	Kristina Blissett, PricewaterhouseCoopers LLP
	Tel: +44 20 7212 5133, email: kristina.blissett@uk.pwc.com

AUTOMOTIVE COMPANIES MUST THINK LOCAL WHEN MOVING EAST

It is not just a case of selecting the right country but of selecting the right place within that country, according to the second of a series of reports by PricewaterhouseCoopers on setting up automotive production facilities in the Central and Eastern European member states of the European Union. The latest part looks at how to choose the right location and finds that only by focusing on local, as well as national, issues and comparing specific cities in exhaustive detail can a company identify to what extent a location will meet its specific requirements.

Differences in features at a national level, such as employment laws and tax regimes, are relatively easy to identify. But comparing local characteristics such as the availability of skilled labour, planning regulations and quality of utilities is much harder, and it is these that can make or break a move. With US$6billion worth of automotive production being transferred to Central and Eastern Europe over the next five years this issue will be faced by a widespread number of companies in the industry.

One of the key challenges to migrating to Central and Eastern Europe is that understanding of the region remains relatively limited. Some of what passes for common knowledge is either incorrect or overstated; the political, economic and commercial climate is actually far more attractive than it is in many other parts of the world.

Matt Pottle, Central and Eastern Europe automotive leader, PricewaterhouseCoopers said:

The quality of the workforce across Central and Eastern Europe is generally very high and wages are currently a fraction of those in Western Europe. In the EU15, the average monthly labour cost is US$3,658. In Bulgaria it is just 6% and in Romania 11% of this sum. Even in Slovenia which has the highest wages in the region, the average monthly labour cost is still only 43% of the average level in the EU15. But the demand for skilled labour has already resulted in some major intra-national differentials in wage levels. The average gross monthly wage in Slovakia is now 25% higher in Bratislava than in the east of the country. The differences are even more pronounced in the Czech Republic; wages in Prague are 43% higher than in the southern and eastern regions of the country.

It is also important to consider issues such as the infrastructure. Most states that joined the EU in 2004 have good telecommunications and IT networks in all but the most remote locations. Three quarters of all enterprises in Slovenia have broadband access and it increased by 17% in the Czech Republic, 14% in Hungary and 13% in Slovakia in the 12 months to November 2006. Meanwhile Estonia became the first country in the world to introduce internet voting in political elections so all four states now score highly in e-readiness stakes.

However the quality of physical infrastructure in the region is more varied. The Czech Republic and the western part of Slovakia have reasonably good highway networks but the roads in Hungary, Poland and the Baltic States are largely ‘A’ roads. Congestion is also a major problem in some areas. Railway rolling stock is more than 20 years old in some regions and although most capital cities have good air links with Western European hubs, many of the smaller provincial cities do not have international airports.

The state of the road and rail network clearly has a direct bearing on the time and costs involved in shipping goods from one place to another, which in turn affects inventory levels and working capital requirements. However, other supply chain issues must also be considered. Checking the quality of local suppliers is vital but many companies pursue the lowest prices and perform only a swift inspection of the plant. It pays to consider the bigger picture and carry out a full inspection of the facilities as well as the finances of any potential suppliers.

Any company moving to one of the Central and Eastern European member states must therefore perform something of a balancing act. If it moves to a big city or centre of excellence, the infrastructure will be robust but real estate, labour and facilities will be more expensive. If it moves to a smaller city or town, the costs are likely to be lower and the competition for labour less intense, but the infrastructure will be weaker and the logistical challenges correspondingly greater. As well as this it is also important to take the investment activity of competitors and related companies into consideration.

Rafal Krasnodebski, partner, PricewaterhouseCoopers said:

The third in this series of reports will look at the issues involved in closing down an existing site in readiness for the move to a new location.

ENDS

Note to Editor:

1. For more information on PricewaterhouseCoopers Automotive practice, visit www.pwc.com/auto
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