European car industry looks east

Poland, Slovakia and the Czech Republic are attracting the highest levels of inward investment in the automotive components sector in Europe, a new Ernst & Young report reveals today.

According to the European Investment Monitor (EIM), the number of automotive component projects commissioned in the Czech Republic exceeds that of any other European country, increasing from only four in 1997 to 20 in 2005.

The Ernst & Young study also recorded Slovakia and Poland in second and third place, with 18 and 17 projects respectively, ahead of the UK with only nine - a tenth of the total number of projects.

Eric Wallbank, Automotive Director, Ernst & Young, said, "As the Central and Eastern European markets have opened up and increased in attractiveness, so a number of volume automotive manufacturers have placed new car plants in these lower-cost economies. The supply chain is naturally following."

The growth of the Slovakian share of investment projects demonstrates the most dramatic increase, from one project in 1997 to 17 in 2005.

"The success of the initial investments in Central and Eastern Europe has led to further plant investment so that over time the centre of the industry is shifting. A growing local market, existing engineering skills and lower cost production adjacent to the mature market of Western Europe has provided an attractive proposition for many major automotive manufacturers," Wallbank said.

The UK has experienced the opposite affect, leading the European inward investment league tables in the late 1990s with 30 projects per annum, but falling to nine in the last year. However, investments in component plants show signs of recovery.

Wallbank said, "Last year, there were more investments into component plants in the UK than at any time over the last five years. Despite recent bad news about UK car plants, there are a number of manufacturers continuing to invest in new products, and more capacity, into existing UK factories. Many suppliers need to be close to their customers’ assembly plants. When manufacturers launch a new model the new technology that brings also creates additional demands on the components industry.”

The UK automotive industry still receives a high number of inward investments in vehicle manufacturing, though these are re-investment in existing plants, with new plant investment going into the former Eastern bloc countries.

"The 2005 results display a very balanced picture of investment, with the UK still attracting its fair share. There are a more diverse set of manufacturers here than anywhere else in Europe, which reflects continued confidence of the UK as a manufacturer of vehicles," Wallbank said.

Wallbank added that those car companies still investing in the UK are those benefiting from growth of their market share, and so tend to need additional capacity in Europe rather than less.

With Western European markets flat, Eastern Europe has become a centre of attention for the car industry.

The strong market growth coupled with low costs and proximity to Western Europe has led to the surge of investment into the former Eastern Bloc countries. Even if the components can be bought more cheaply in countries such as China, the shipping logistics still encourage car companies to source many parts closer to where the car is assembled.

"Eastern Europe has benefited from the expansion of the EU and a lack of foreign activity from growth markets such as China, who are too busy concentrating on their rapidly expanding domestic market to have the capability to export parts. Additionally, they are also not well located to service Europe," Wallbank said.

The perceived risks of Eastern Europe that existed when the EIM was first established, such as language barriers and political instability, have diminished.

"However, all investment in the automotive sector is still fraught with risks. Every time a new car is developed, huge sums of money are invested, not just by the manufacturers but also by the supply industry. This risk for suppliers is increasing as manufacturers’ outsource more of the value of the vehicle. Managing these strategic and operational risks has become critical to the success of manufacturers and suppliers alike," Wallbank said.