Effects of Slovakia s Entry to EU (Including Adoption of Euro) on Slovakia s Car Industry. Zdenka P. Bartscht. Eastern Michigan University

Transcription

1 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 1 Effects of Slovakia s Entry to EU (Including Adoption of Euro) on Slovakia s Car Industry Zdenka P. Bartscht Eastern Michigan University 1

2 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 2 Abstract This research focuses on Slovakia, a fast developing Eastern European country, and a current member of the European Union. In recent years Slovakia has become a major attraction for foreign direct investment, in particular in the car manufacturing industry. It is important to understand the country s background, as well as its economic progress in order to be able to see the country s future potential. This research is set to prove a positive correlation between Slovakia s entry in the EU (as well as adoption of the common currency Euro) on the car manufacturing industry. The methods used to support this research include a literature review, as well as the historical and financial analysis of the three major car manufacturers in the country: Volkswagen Slovakia a.s., Kia Motors Slovakia, and PSA Peugeot Citroën. The analysis of the literature written on the subject, as well as the data collected during the research indicate that there is a positive relationship between Slovakia s entry to the EU and the amount of FDI; therefore there is a positive correlation between the entry to EU and the car manufacturing industry. The adoption of the common currency can t be positively linked to the amount of FDI in the car industry due to financial crises in Europe during the year following the adoption of the currency. Slovakia definitely remains on the radar of future investors due to its stable political and legal environment, attractive geographic location, and its continuous economic growth.

3 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 3 Introduction Slovakia, also known as a part of former Czechoslovakia is a very unique country. In the last two decades the country had undergone major political and social changes that have a significant impact on the country s economy. In 1989, after the fall of the communist regime, then Czechoslovakia, had gone from being a communist dictatorship to parliamentary democracy. This change had flung the doors open for tourism, as well as an influx of new ideas, a precursor of Foreign Direct Investment (FDI).Shortly after; in 1993 Slovakia split from Czech Republic and became an independent country. In 2004 Slovakia continued its progression to a free market economy by joining the EU, followed by the adoption of the common currency (Euro) in January Besides political stability, Moody s describes Slovakia as a country with Low wages, high educational attainment and close proximity to core Europe have made the country an attractive focus for foreign direct investment (Slovakia, Moody s). As it can be seen on the map below, Slovakia s geographical location can be seen as attractive to the investors interested in a fast market expansion. Hostels.net

4 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 4 One of the major factors that make Slovakia attractive to FDI is the fact that Slovakia has one of the fastest growing economies of the newly admitted EC countries. The graph below shows real GDP growth rate in % change from previous year. Between 2008 and 2009 Slovakia felt the aftershocks of the worldwide recession which resulted in reduced growth as well as negative growth in In 2010 Slovakia s growth rate had recovered from % in 2009 to 4.2% (Real GDP Growth Rate, Eurostat). Slovakia s fast recovery can be seen as a sign of its economic strength. Real GDP Growth Rate ( ) GDP % *Eurostat

5 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 5 GDP ,000 60,000 50,000 40,000 30,000 20,000 GDP in millions EU 10, *Statistical Office of the Slovak Republic (in million EUR) The statistical office of the Slovak Republic published revised GDP data for , and a preliminary data for 2010 at current prices. The graph shows a 9.2 % increase in GDP between 2004 and 2005, this change could be a result of Slovakia joining the EU in Once again the results of the 2008 recession can be seen in decline in Slovakia s GDP in 2009 (Revised GDP, Statistical Office of Slovak Republic).

6 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 6 GDP per Capita GDP per Capita *Eurostat (EU-27) = 100 According to Eurostat, Slovakia s GDP per capita has been continuously increasing, reaching its highest level of 74 in Eurostat measures the GDP per capita on a 100 point scale; numbers above 100 indicate GDP per capita higher than the GDP of the 27 countries of EU (GDP per Capita, Eurostat). Another significant economic factor that makes Slovakia worth doing business with is its tax system. Slovakia has 19% flat tax for corporations and individuals (Slovakia, CIA), this simple tax makes doing business in Slovakia easier, taking out maneuvering between different taxes codes for different industries. Besides taxes, Slovakia s pro-business policies and governmental incentives are a major attraction to any investor.

7 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 7 This research concentrates on Slovakia s booming car industry. According to CIA World Fact Book, vehicles account for 21% of Slovakia s total exports (Slovakia, CIA). An article from Industry Week states that Slovakia is expected to produce 630,000 by the end of In 2012 and the beginning of 2013 production is expected to reach between 800,000 and 900,000 cars (Slovakia, world s leading per-capita car maker, Agence France-Presse). The above mentioned production indicators represent the production estimates of the three automakers: Volkswagen, PSA Peugeot Citroën and Kia Motors. The focus of my research are the effects of Slovakia s entry to EU (including the change of currency), on the car industry in Slovakia. I am planning to compare Slovakia s car industry prior to Slovakia s admission to EU, as well as observe any changes related to Slovakia s adoption of the new currency (Euro) and its effects on the car manufacturing. I will also review each car maker s production records, including employment levels and financial records in order to better understand the progress in the industry as whole. Literature Review The boom of the car manufacturing in Central and Eastern Europe has been a topic of numerous studies. Some of the researchers consider FDI the major driving factor of the car industry; others draw conclusions based on the privatization and government incentives as well as geographically strategic location of the host countries. The effects of Slovakia s entry to EU and its currency change on the car industry have not been really explored and it would be interesting to see if a positive correlation can be supported.

8 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 8 According to Radosevic and Rozeik (2005) the restructuring of Central and Eastern European car manufacturing has been entirely foreign led. Both Czech Republic and Slovakia were able to attract large amounts of FDI among other factors by the quality of governmental support. According to the authors; in Slovakia, the program for development automotive industry was a result of the enforcement of government s resolution from Slovakian government had played an important role in attracting and retaining foreign investment. It is interesting that Radosevic and Rozeik (2005) also argue that the productivity in Slovakia and Hungary is 2 times above the manufacturing average, in comparison to the countries with no FDI present (Bulgaria, Latvia, and Lithuania). Radosevic and Rozenik touch in their conclusion briefly upon the fact that the internationalization in the countries mentioned above had been led through the expansions and extensions, which could be a positive result of their entry into the EU. The article Financial Setting for FDI Inflows into the Czech Republic and Slovakia, published by Jankovic and Yatrakis (2011) focuses on the relationship between the country s risk ratings, financial market variables, expected returns in the region and the FDI (Jankovic, et.al, 2011). Jankovic s and Yatrakis research does not support the positive relationship between Slovakia s entry to EU and the country s car industry. The article: Automotive industry in the Slovak Republic: Recent Developments and Impact on Growth analyses the positive environment for the entry of FDI, as well as concrete examples of two of the largest investors in automotive industry in Slovakia: PSA Peugeot and KIA (Jakubiak, et al., 2008). Among other important factors, the authors conclude:

9 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 9 Improved prospects for EU accession at the turn of the century, together with decisive progress in aligning domestic legislation with the acquis, helped anchor investor expectations about economic policy and future development. The authors also state the importance of other factors (some of them share similarities with Radosevic and Rozeik above) contributing to Slovakia s attractiveness to FDI, including political and legal reforms, the structure and level of education, Slovakia s geographical proximity to other EU markets, infrastructure, as well as large governmental incentives (Jakubiak et al., 2008). This article is a good source of information about the current automotive industry in Slovakia. The authors, among others, found a positive correlation between Slovakia s to EU and the inflow of FDI investment. An article that supports this research topic was published in 2006 by the National Bank of Slovakia. The article, Long Term Benefits of Euro Adoption in Slovakia. states that the adoption of Euro would decrease two major factors that would make mutual trade cheaper; it will lower the transaction cost, and it will lead to stabilization of exchange rate (Solanič & Tirpak, 2006). Based on this information one can conclude that the FDI levels would raise since the cost of doing business would be lower and the currency will be more stable. Solanič & Tirpak s theory is supported by the fact that there has been two car manufacturers (since the country s entry in EU) that had decided to invest in Slovakia. Vintrová (2006) in her research states that Slovak (as well as Czech) entry to EU had made both countries more attractive for FDI and had accelerated the economic growth in each country (Vintrová, 2009). GDP growth in Slovakia in 2000 to 2003 rose from 3.6 to 7.5%, and in the year 2007 up to 10%. Slovakia is a member of the Visegrad 4, which consist of Czech

10 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 10 Republic, Slovakia, Poland, and Hungary. According to Vintrová, Slovakia s GDP growth within the V4 was the fastest in the last 15 years (Vintrová, 2009). Once again, the research strongly suggests that the entry to EU have had a positive impact on FDI, which can be directly linked to the increase in the investments in automotive industry. The article International outsourcing over the business cycle: some intuition for Germany, the Czech Republic and Slovakia, analyses the effects of the economic crises on the sourcing practices of multinational companies, in this case, the author studies the impact of the crises in Germany (and EU) on businesses in Slovakia and Czech Republic (Levasseur, 2010). Levasseur concludes that the asymmetry in the international outsourcing seems to be at work across several different dimensions across the states of the economy, across the sectors and across the countries. The results vary for both Czech Republic and Slovakia based on their car manufacturing history, even based on the nationality of the foreign investors (different decision making practices). This article does not directly support the research topic since it studies the reactivity of Slovakia s manufacturing to negative economic changes in Germany/EU, on the other hand, the article can be useful for a foreign investor in choosing one country over the other based on their crises management. Car Manufacturing in Slovakia and Czech Republic has a long tradition, especially in Czech Republic, where the brand Škoda recently celebrated its 100 years anniversary (Tiusanen, 2006). According to Tisuanen, the car manufacturing in Czech Republic (mostly because of its car manufacturing history) was way ahead of Slovakia until 1991 when Volkswagen (as a first major investor) acquired a major part (30%) in Bratislava s Automobile Plant BAZ, a major supplier of Skoda during the communist period (Tiusanen, 2006). One can say that this was a

11 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 11 major turning point in Slovakia s car manufacturing. This article also points out the fact that the BAZ acquisition had major impact on the total amount of automotive supplies which increased from $.5bilion in 1997 to $2.5 billion in 2003 (Tiusanen, 2006). Tisuanen s research provides relevant information regarding the beginning of the car manufacturing in Slovakia. Research in the journal of Applied Economic addresses the topic of the employee management in Slovakia and Bulgaria. The author, Hideki Takei analyses surveys of Slovak and Bulgarian employees and their responses to different managerial styles and on job responsibilities and approaches. I found interesting that 90% Slovakian employees value the following factors the most: fairness and clear structure and rules, frequent and 2-way communication, disclosure, transparency, and information sharing (Takei, 2011). Even though the on job communication and preferences slightly vary between the two cultures, this information can be very useful to foreign investors trying to establish production in Slovakia. It would be interesting to see if the Slovakian work approach and preferences had changed after the establishment of foreign owned enterprises. Another research supporting Slovakia s position as a major FDI attraction is a comparison of Slovenia s versus Slovakia s FDI contributions as examined by Lokar and Bajzikova in World Transition Economy Research in Both authors compare cultural and economic background of both countries and their levels of FDI. Slovakia appears as the front runner with its FDI of $19.08 billion, in compare with Slovenia s $7.46 billion in 2006; the authors suggest that Slovakia in compare with Slovenia took a more aggressive approach towards the restructuring of its own industry, while Slovenia (economically more developed after the fall of communism) took a more careful approach in encouraging the FDI (Lokar, Bajzikova

12 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY ). This research analyses the approaches to FDI in two similar Eastern European countries, Slovakia and Slovenia; at the same time, this article supports multiple research papers written on this topic including Slovakia s government involvement in attracting relatively large amounts of FDI. Horvath and Rusnak s article (2009) focuses on the analysis of foreign shocks on a small open economy of Slovakia. The authors use numerous statistical analyses to determine the reaction of Slovakia s economy to the outside shocks. According to Horvath and Rusnak, foreign shocks explain the fluctuation of the Slovak price level; in fact authors conclude that external shocks explain nearly 80% of the variation in the aggregate Slovak price level in long run (Horvath, et al. 2009). This article does not directly support this research, but the effect of the outside shocks can be seen by looking at Slovakia s GDP following the recession of By analyzing the articles related to this research, one can conclude that there seem to be a positive correlation between Slovakia s entry to the EU and the increase in FDI, consequently resulting in an increase in FDI in automotive industry. Almost every article analyses the importance of FDI on Slovak economy as a whole. So far, there is not enough evidence (due to lack of information) to show a positive impact of adoption of Euro on car manufacturing as a whole. Volkswagen Slovakia a.s. According to Volkswagen s website, Volkswagen Slovakia was founded in 1991 as a joint venture between Volkswagen AG and joint-stock Car Company in Bratislava (History, Volkswagen).

13 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 13 *Volkswagen Slovakia a.s. Volkswagen is the 1 st FDI investor in the car manufacturing in Slovakia. Since 1991, the company had produced 2, 5 million vehicles, 5 million gear boxes and over 200 million car components for VW, Audi, Škoda and SEAT brands (News, Volkswagen). In compare with Peugeot and KIA, Volkswagen is a well-established company that has been in Slovakia for 21 years. Unfortunately, the company does not have a public archive of annual statements documenting its progress over the years; therefore observation of the effects of the Euro adoption on the company can t be made. According to Volkswagen s annual statement from 2010, Volkswagen employs 7000 people, which equals to the employment of KIA and Peugeot combined. Currently Peugeot is planning on investing 308 million EUR to expand its capacity to 400,000 and increase employment by 1500 people (Numbers & Facts, Volkswagen).

14 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 14 Analysis of Volkswagen s Financial Statements 2009 & 2010 Net Income million EUR Employment 6,500 7,000 Production 106, ,510 (cars) 379,000 (gearboxes) 31, 500,000 (components) *Annual Statement Volkswagen 2010 PSA Peugeot Citroën January 15, 2003 commemorate the start of Peugeot s 700 million euro investment in Slovakia (Peugeot, 2005). According to Peugeot s press kit, Slovakia was selected mostly because of its geographical location, great infrastructure and proximity to EU member states, growing economy, and not at last, Peugeot s expending market share in the region (Peugeot, 2005). Since Peugeot made its decision to invest prior to Slovakia s official entry to EU, one can argue that Slovakia s upcoming entry to EU could have a positive impact on Peugeot s decision. *psa-slovakia.sk

15 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 15 Analysis of Peugeot s Financial Statements Net Income n/a 9,788, 000 7, 697,000 59, 716* 49,475* SKK SKK EUR EUR Employment n/a 3,134 3,263 3,149 2,900 Production (cars per year) 51, , , , ,150 SKK Slovak Koruna, at the time of conversion to Euro (January 1 st 2009) 30, 1260 SKK = 1 Euro * Annual statements, PSA Peugeot Citroën * In millions Euro Based on Peugeot s annual statements between 2006 and 2010, Peugeot has been effected by the financial crises as well, in compare with Kia, Peugeot felt the crises aftershocks the worst in Based on Peugeot s annual statement from 2009, Peugeot considered the adoption of Euro in Slovakia to be a positive event; company believed that adoption of Euro would increase Peugeot s advantage while purchasing materials in EU countries, as well as doing business with non-eu countries. (Peugeot, 2009). Other than company s brief note of the expected impact of Euro, I can t conclude that the adoption of Euro had a measurable positive impact on PSA Peugeot Citroen in Slovakia. KIA Motors Slovakia On March 18 th, 2004, the chairman of the Hyundai-Kia Automotive Group Mong-Koo Chung and Slovak Prime Minister Mikulas Dzurinda signed the document starting the construction of KIA s manufacturing plant in Slovakia (KIA Annual Report, 2006). Since then,

16 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 16 KIA had continuously expanded their production towards their goal, a full capacity production (300,000 cars per year). Besides car manufacturing, KIA also produces engines for its partner company Hyundai Motor in Czech Republic. *Kia-World.net Kia s 1 billion euro investment (Factory Slovakia, KIA) in Slovakia, rather than in Poland was influenced by numerous factors. Many argue that the biggest factor might have been the amount of incentives that Slovakia offered. According to Beata Balogova (Slovak Spectator), Slovak government had offered KIA incentives worth of 218 million euro (Balogova, 2004). The amount of incentives was significant, but Slovakia s location, its membership in EU and steady growth might also swing the vote.

17 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 17 Analysis of Kia s Financial Statements Net Income (SKK, EU) *after taxes *SKK Slovak Koruna, at the time of conversion to Euro (January 1 st 2009) 30, 1260 SKK = 1 Euro * Annual statements, Kia Motor Slovakia *In millions Euro Based on the annual statements published between 2005 and 2010, KIA had continuously expanded its car production, except 2009 when the company suffered from the aftershocks of the financial crises. Since financial crises and the adoption of Euro were going hand in hand, it is impossible to show a positive correlation between Slovakia s adoption of EURO and Kia s financial performance ,519 SKK -310,778 SKK 888,308 SKK Conclusion 1, 504, 574 SKK 27,300 EUR* 25,300* EUR 42,920* EUR Employment n/a 1,600 2,700 2,700 2,800 2,963 Production (cars per year) n/a 4,715 (start of production) 145, , ,020 cars 243,973 engines 229,505 cars 859,699 engines Slovakia s car manufacturing is slowly recovering from the aftershocks of the world s financial crises of Each of the car manufactures (Volkswagen s financial data for 2008 were not available) has been affected by the decrease in demand for cars, as well as the financial turmoil of Since Volkswagen has been in Slovakia since 1991 one can safely say that the company did not based their investment decisions on Slovakia s entry to EU.

18 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 18 Kia and Peugeot had signed investment agreements with Slovak officials shortly before its entry to EU. Slovakia had officially joined EU on May 4 th, 2004 (Joining the EU, SlovakRepublic.org). Based on the previous research conducted on FDI, one can say that Slovakia s admission to EU had a positive impact on Slovakia s reputation of a fast growing economy with a pro-business legislature, skilled labor and geographically advantageous location. The analysis of the annual statements of both companies did not provided answers to the stated research questions. This is due to the fact that the first few years after the manufacturing facilities were constructed, both companies experienced annual losses which were due to imbalance of revenues (small production output) and expenses (investment). The main reason why the results of annual reports can t be used for the purpose of this research is the fact that the positive effects of the Euro adoption (January 1 st 2009) can t be measured against the negative effects of world s financial crises on the car manufacturing industry as a whole. Overall we can conclude that Slovakia s entry to EU had a somewhat positive effect on the car manufacturing in Slovakia, while the adoption of Euro and its effect on the car manufacturing can t be measured due to negative impact of the financial crises on the car manufacturing as whole.

19 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 19 Works Cited Balogova, Beata (2004). KIA May Not Come Easily, Slovak Spectator. April 5, Retrieved on November 11, 2011 from GDP per capita in Purchasing Power Standards. Eurostat. 11 Dec =tsieb010 Horvath, Roman and Rusnak, Marek (2009) "How Important Are Foreign Shocks in a Small Open Economy? The Case of Slovakia," Global Economy Journal: Vol. 9: Iss. 1, Article 5. DY0MTc4Nw==&access_ok_form=Continue Jakubiak, M., Kolesar, P., Izvorski, I., and Kurekova, L. (2008). The Automotive Industry in the Slovak Republic: Recent Developments and Impact on Growth. Working paper NO. 29. Comission on Growth and Development. Retrieved from Google Scholar website: Jankovic, E., & Yatrakis, P.. (2011). The Financial Setting for FDI Inflows into The Czech Republic and Slovakia. International Business Research, 4(3), Retrieved November 6, 2011, from ABI/INFORM Global. (Document ID: ). Joining the EU. Slovak Republic.org. Retrieved on 27 Nov Kia. Annual Reports. Retrieved from Kia s website. Dec Levasseur, S. (2010). International Outsourcing over the business cycle: some intuition for Germany, the Czech Republic and Slovakia. Eastern Journal of European Studies, 1 (2), 165. Retrieved from Google Scholar website: Lokar, A., Bajzikova B. (2008). FDI Contribution to Transition Development: Slovakia versus Slovenia. World Transition Economy Research. 15 (2), 251. Published online at Springer.com: Mood'ys affirms slovakia's a1 ratings, outlook stable. (2011). Retrieved from Mood'ys Investor Service. N.p., 17 May Web. 27 Nov _219153_link2

20 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 20 News. Volkswagen. Retrieved from Volkswagen s website. Dec Numbers and Facts. Volkswagen. Retrieved from Volkswagen s website. Dec PSA Peugeot Citroën in Slovakia. (2005). Press Kit. May 12, Retrieved 27 Nov PSA Peugeot Citroën in Slovakia. (2009). Press Kit. September Retrieved 27. Nov Radosevic, S. & Rozeik, A. (2005). Foreign Direct Investment and Restructuring in the Automotive Industry in Central and Eastern Europe. Working paper NO. 53. University College London. Retrieved from Google Scholar website: Real GDP Growth Rate-volume. Eurostat. 11 Dec =tsieb020 Revised data of GDP for the years and preliminary data for the year 2010 at current prices. Statistical Office of the Slovak Republic. 11 Dec Slovakia (2011). Retrieved from CIA-The World Fact Book website. 6 Nov Slovakia, world's leading per-capita car maker, back in topgear IndustryWeek, Agence France-Presse. (2011, June 15). Retrieved from Solanič, V. & Tirpák M. (2006). Long-Term Benefits of Euro Adoption in Slovakia. Biatec. 14 (7). Retrieved from Google Scholar website: Takei, Hideki. "Measuring success factors of local employee management in Slovakia and Bulgaria." Research in Applied Economics 3.1 (2011). Academic OneFile. Web. 6 Nov. 2011

21 EFFECTS OF SLOVAKIA S ENTRY TO EU ON ITS CAR INDUSTRY 21 m_emichu&it=r&p=gps&sw=w Tiusanen, T. (2006). Foreign Investors in Transitional Economies: Cases in Manufacturing and Services. Lappeenrata University of Technology. 27. Retrieved from Google Scholar Website: s_cases.pdf Vintrová, R. (2009). Lessons from the Czech and Slovak Economies Split. Prague Economi Papers. 1. Retrieved from Google Scholar.