Eastern Europe's Auto Powerhouse

Eastern Europe's Auto Powerhouse

Why you should care

While some European economies are falling apart left and right, it’s important to look at the success stories. 

Nestled snug between the Little Carpathians mountain range and the Trnávka river is Trnava, a city known as Little Rome because of its smattering of churches and Roman Catholic allegiance. No one would call it a staple of the European tourist circuit, but French carmaker Peugeot calls it home. And that particular claim to fame is more than just trivia. It helps make Slovakia the auto-manufacturing capital of the world, and a frontline country in the tussle between the European Union and the U.S. over President Donald Trump’s threat to impose tariffs on cars imported from the E.U.

For sure, Slovakia makes far fewer cars in total than countries like China. But per person, no country in the world is remotely as prolific as the nation of 5.4 million. According to the nation’s Automotive Industry Association (AIA),

In 2017, Slovakia pumped out 188

cars per 1,000 people.

Compare that with the nations traditionally associated with four-wheeled domination. Japan produces less than half that figure, and the U.S. less than a quarter. Since German carmaker Volkswagen came to Slovakia two decades ago, companies from China to the Czech Republic are flocking to Slovakia, almost doubling production since 2007. Yeah, that Porsche Cayenne your creeper neighbor parades through your development? Made in Bratislava.

And Slovakia has been counting on the auto sector – which constitutes 44 percent of industrial prodution in the country – to drive its economy further. “In 2018 and 2019, new export capacities will support the growth [of the auto sector], reaching 4.1 and 4.6 per cent respectively,” the Institute for Financial Policy (IFP), a Slovak government think-tank, projected in a 2017 study.

The problem now? A U.S. tariff of 25 percent on these cars could Slovakia off nearly Euro 90 mn, according to the IFP.

That wouldn’t knock Slovakia of its pedestal as the Detroit of Central Europe (should we be apologizing for the slight to Slovaks) though. So how did it get there? Well, it’s a bit of a unicorn, says Ján Pribula, president of the AIA. Most of the Eastern European countries in its neighborhood, like Romania and Bulgaria, have been in pretty bad shape politically and economically since the fall of the Soviet Union. Whereas its friends to the north and west are simply too costly for auto manufacturers — read: Wages are too high. Then there’s geography — it’s smack dab in the middle of Europe, making transport to car-hungry markets like the U.K. a breeze.

It’s been a huge reason Slovakia has been spared the scoldings that German Chancellor Angela Merkel dishes out to Greece and other countries with failing economies. Since Slovakia joined the E.U. in 2004, the nation’s gross domestic product has almost doubled and unemployment has plummeted, giving it the nickname Tatra Tiger. Even the financial crisis left no major chinks in its armor.

Of course, it’s not all paved roads and beautiful scenery for this auto powerhouse. The country GDP per capita is still 25 percent lower than the rest of the European Union, and though it produces a ton of cars, all the companies are foreign. Meaning: As wages go up, companies could “absolutely” go somewhere else, says John Conybeare, professor of political economy at the University of Iowa.

Overreliance on one industry has meant trouble in the past. Before the collapse of communism, Slovakia was a big-time arms producer, leading to massive unemployment — up to 20 percent in some areas — come 1989. So maybe “Detroit of Central Europe” is truly a nickname to sidestep.

Comment

OZYAcumen

Numbers and factoids — fodder for your next cocktail party.