1 Central & Eastern European Automotive Industry

The Central and
Eastern European
automotive market
Industry overview
Contents
Introduction 4
Executive summary 6
The Central and Eastern European automotive industry overview 14
Country profiles 22
Bulgaria 22
Czech Republic 26
Hungary 30
Poland 34
Romania 38
Russia 44
Slovakia 50
Slovenia 54
Turkey 58
Ukraine 64
Other emerging markets directly connected to Central and Eastern Europe 68

Other areas of the Middle East 68
Iran 70
Global interest in advanced powertrain technology:

how are Central and Eastern Europe seizing opportunities? 76
Russia compared to other emerging markets 84
About Ernst & Young’s Global Automotive Center 86
Ernst & Young automotive industry leaders 87
Ernst & Young automotive publications 88
Ernst & Young contacts in the Central and Eastern European regions 90
The Central and Eastern European automotive market 3

Introduction
There is increased movement in Central and Eastern Europe (CEE). This region has seen The following individuals from
significant market growth in the past and, at the same time, has been the recipient of major Ernst & Young, supported by the
investments, both to serve local markets and to establish a low-cost base for export to automotive network contacts listed on
Western Europe (WE). Market growth in CEE, and especially in Russia, is expected to the inside back cover, contributed to
accelerate when the current economic crisis abates. However, the region is complex, and this report:
some CEE countries have been more affected by the downturn than others, depending on
their economic stability. Peter Fuß
Global Automotive Center,
The previous release of our CEE automotive market overview received very Partner, Stuttgart
positive feedback, particularly regarding its compactness. We are determined to create
additional value with this report, both for newcomers to the market and for established Eric Wallbank
players who want to expand their businesses in CEE. Thus the structure of the report Global Automotive Center,
remains unchanged while including country profiles for those markets we believe to be the Director, London
most promising for further development and growth. We also discuss for the first time
other emerging regions directly linked to CEE and which appear promising. Jean-François Tremblay
In addition to the country overviews, this year’s update includes two new chapters. Senior Manager, Detroit
One explores how CEE is seizing opportunities arising from global interest in advanced
powertrain technology. The other new chapter compares the giant Russian market to other Kerstin Happrich
emerging markets — this should give you a deeper insight into Russia’s characteristics, and Global Automotive Center,
its positives and negatives. Automotive Business Developer/Marketing,
Stuttgart
We hope that the facts, figures and points of view presented in this publication provide
insights for further discussion. We welcome your perspectives on these promising markets. Christian Hainz
Automotive Analyst, Stuttgart
Peter Fuß Mike Hanley

Partner, Global Automotive Center Global Automotive Industry Leader
Stuttgart Detroit
4 The Central and Eastern European automotive market

Scope Abbreviations Kia Kia Motors Corporation
Audi Audi AG Koc Koc Holding
Avtodiesel Avtodiesel OJSC Leoni Leoni AG
The aim of this report is to provide Avtoframos OAO Avtoframos LuAZ Luts’kyi Avtomobil’nyi Zavod VAT
quantitative and qualitative insight into AvtoKrAZ AvtoKrAZ Holding Company Madara Madara JSCo
CEE as a whole and into each of the key AvtoVAZ JSC AvtoVAZ Magna Magna International Inc.
BMW Bayerische Motoren Werke AG MAN MAN AG
countries, drawing on reliable data sources, Bosch Robert Bosch GmbH Mph miles per hour
Ernst & Young’s own network of industry BRIC Brazil Russia India China Nissan Nissan Motor Co. Ltd.
professionals across the region and key CEE Central and Eastern Europe(an) OAO Open joint stock company
ČEZ ČEZ a.s. OEM Original equipment manufacturer
industry executives. The countries chosen Cherkasy OJSC Cherkasy Opel Adam Opel GmbH
are geographically in CEE, with the addition Chery Chery Automobile Co. Ltd. Otosan Ford Otosan Otomobil Sanayi AS
of selected neighboring countries with CIS Commonwealth of Independent States PHEV Plug-in hybrid
CJSC Closed joint stock company PREH Preh GmbH
strong positions in the automotive sector. CKD Completely knocked down PIDF Pars Industrial Development Foundation
The 10 CEE countries we discuss are: CNG Compressed natural gas PSA PSA Peugeot Citroen S.A.
Conti Continental AG R&D Research and development
ContiTech ContiTech AG Renault Renault S.A.
• Bulgaria • Russia CV Commercial vehicles Roman S.C. Roman S.A. Brasov
• Czech Republic • Slovakia Daimler Daimler AG RWE RWE AG
Denso Denso Corporation SAIPA Societe Annonyme Iranienne de
• Hungary • Slovenia E Estimate Production Automobile Corporation
• Poland • Turkey EE Eastern Europe Scania ScaniaGroup
• Romania • Ukraine EIB European Investment Bank SEZ Special economic zones
Electro Elektro Celje Škoda ŠKODA AUTO a.s.
EU European Union Solaris Solaris Bus & Coach S.A.
Selected emerging markets directly EV Electric vehicle Suzuki Suzuki Motor Corporation
connected to CEE are Iran and other areas F Forecast Takata-Petri Takata Corporation
of the Middle East. FDI Foreign direct investment TAM Tovarna avtomobilov in motorjev
Fiat Fiat Automobiles SpA Tofaş Türk Otomobil Fabrikası A.S.
Ford Ford Motor Company Toyota Toyota Motor Corporation
This report is not aimed at advising on FSO Fabryka Samochodów Osobowych TPCA Toyota-PSA Peugeot Citroen
which country to invest in or which to avoid. GAZ Gorkovsky Avtomobilny Zavod Group UkrAVTO Ukrainian Automobile Corporation JSC
OAO USP Unique selling proposition
Rather, it is designed to help shape your Gazprom OAO Gazprom VAT Value-added tax
understanding and provide insight on the GDP Gross domestic product VMG Vítkovice Machinery a.s.
state of the automotive sector in CEE. The Geely Geely International Corporation VW Volkswagen AG
GM General Motors Corporation WE Western Europe
report focuses on the passenger car Grammer Grammer AG WTO World Trade Organisation
market, including SUVs and MPVs, but it Great Wall Great Wall Motor company y/y Year-on-year
excludes LCVs and HCVs except where Hella Hella KGaA Hueck & Co. ZAZ CJSC Zaporizhskyi avtomobilnyi zavod
HEV Hybrid-electric vehicles
otherwise specified. Honda Honda Motor Co. Ltd.
Hoyo SHK Hoyo Group Definition of passenger car segments
Hyundai Hyundai Motor Company A Entry
IAT Impact Automotive Technologies B Small
Sp. z o.o. C Lower medium and medium
IMV Industrija motornih vozil D Upper medium and executive
IMF International Monetary Fund E Large and luxury
Izhavto OAO Izhavto F Super luxury
IKCO Iran Khodro Diesel Co. HCV Heavy commercial vehicle
INA Schaeffler Schaeffler Technologies LCV Light commercial vehicle
GmbH & Co. KG MPV Multipurpose vehicle
KAMAZ Kama Automobile Zavod OAO SUV Sport utility vehicle

Executive summary
• Russia, the largest market for passenger cars in CEE, has been hit particularly hard by
the economic downturn. However, the fundamentals for growth remain and the market
could come back strongly.
• Russia is taking the next steps to redevelop its indigenous automotive industry,
increasingly partnering with established global vehicle manufacturers.
• There has been strong demand for small, low-cost cars produced in the CEE accession
states by OEMs, fueled by increased demand for these cars in WE, itself boosted by
scrappage schemes, a governmental subsidy to encourage citizens to scrap their obsolete
car and purchase a new one. The largest of these producers, Czech Republic, defied the
trend in the rest of Europe by increasing output.
• The boom in new car plant investment in the accession states seems to be over as cost
differentials erode.
• There is a concern that the CEE region will miss out on the current round of powertrain
innovation in hybrid and electric vehicles as:
– Customers focus on mobility rather than the environment
– There is limited regulatory “push”
– OEMs with plants in the region carry out R&D elsewhere
– There are few signs of emerging electric vehicle producers, unlike in almost all other
regions
• As a result of cost erosion and the lack of new technology innovation, it is clear the
region needs other differentiators to avoid becoming vulnerable to decisions made by
OEMs regarding which plants they need to develop and retain.

The global market for passenger vehicles is characterized as being split between the mature
markets, such as WE, and the emerging markets, such as CEE. The economic downturn has
affected each region differently. While almost all the mature markets are down, economic
and automotive sector-specific stimulus has meant that WE is not as badly affected as the
other mature markets such as North America and Japan. This is important, as WE is the WE is the major destination for most cars
major destination for most cars made in CEE. Russia has been hit hard by the downturn, made in CEE.
whereas other large emerging markets (notably China and India) have continued to grow.
However, Russia is forecast to recover and become a major automotive market, while other
parts of CEE will benefit from economic development via funding from the EU, and others
will grow through general regional development. While the recent boom of investment in
vehicle production capacity is over in many parts of CEE, Russia has the potential to Russia has the potential to develop its own
develop its industry and become not only a large market but an exporter of domestic-brand industry.
vehicles, many of them leveraging WE technology and partnerships.
CEE: A set of very different countries

The economic downturn has had a significant effect on CEE, both because key countries in
the region have experienced a dramatic economic slowdown and because the major
markets for exports from the region have been affected by the downturn. The individual
countries in the region have been affected differently and will find themselves in different
positions in the industry longer term, for example as net exporters or net importers. In
addition, investments in new production capacity — most of it committed before the
downturn — will move some countries into a more significant position in the industry.
Global player: Russia

The Russian economy has been especially affected by the downturn. Coupled with a
recurrence of concerns about the banking system, this has had the effect of reducing sales
of passenger vehicles by 51% in 2009 from 2008, worse than the global average reduction
of 3.8% and a considerably different trend from that of two of the other large, emerging
markets, China and India, which posted gains in sales on prior years. This has meant that
Russia, predicted by some to become the largest market for passenger cars in Europe as a
whole, has repositioned itself in the middle of the pack as the fifth largest market in the
region. However, the fundamentals for growth in car sales remain, based on a forecast Russia still has relatively low car
return to GDP growth coupled with relatively low car ownership rates. Just as important, ownership rates, so it has significant
the local industry — which had failed to gain sales during the recent years of market growth — growth potential.
has recognized the need for outside help in modernization of its industry, as illustrated by
the alliance between AvtoVAZ and Renault. Russia now has stated its intent to become a
net exporter of vehicles, although it is currently forecast to remain a net importer.
Meanwhile, some of the capacity-expansion plans by inbound carmakers have been put on
hold in the face of lower demand. However, with the completion of committed investments
in plants in the country, we will increasingly see the build-up of an industry with critical
mass in vehicle production and in the components supply sector.

Major production centers (the Czech Republic, Slovakia and Hungary)
New capacity committed before the downturn, has, in many cases, hit full production.
As a result a number of CEE countries — notably Czech Republic and Slovakia — are now In these production hubs, domestic
exporters of large numbers of vehicles, while their domestic markets remain small by markets remain small by comparison with
comparison. These two countries produce more than five times their levels of domestic production volumes.
demand. Therefore, plants in these countries operate almost entirely independently of the
local market, relying on strong demand in the destination countries in WE.
Hungary is also becoming a significant net exporter, with production running at more than
twice domestic sales, and that will increase when the planned Mercedes-Benz plant comes
online in 2012.
Most of the plants in these countries have been less affected than those in WE. The vehicles The vehicles produced in the new plants
produced in CEE are mainly small cars — a segment that, across Europe has not shrunk in in these production hubs are mainly small
the downturn due to the high customer incentives provided by the different scrappage cars for export to WE.
programs of many European Governments. Many of these plants belong to brands growing
in the European market as a whole, and these new plants are among the most efficient in
Europe. Despite this structural advantage, light vehicle production declined by over 25% in Production across these CEE hubs was
2009 compared to 2008’s record production levels. The Central and Eastern European light barely affected by the downturn.
vehicle production is expected to surpass 2008 output level by 2012.
However, different manufacturers are taking different strategies, and some are now
deciding to produce their small, low-cost vehicles in even lower-cost locations such as India
and, in at least one case, North Africa. It may be that no other CEE countries besides Czech
Republic, Slovakia and Hungary achieved the same position as producers in this category.
Strong domestic markets and significant net exporters (Poland, Turkey and Romania)
These countries’ vehicle production industries are dependent on both local demand and These important countries in the industry
export markets. The downturn has resulted in negative GDP growth in Turkey and Romania, are dependent on both, local demand and
leading to reduced demand for vehicles; export market demand has also dropped. The on export markets.
net result is a drop in vehicle production in Turkey and Poland in 2009 of 2% to 21%, while
Romania, benefitting from growth by Dacia, saw an increase of 2%. Romania’s position in
the industry could grow, depending on the success of Ford (with its acquisition of an
existing plant) and the continued growth of Dacia.

Smaller players (Bulgaria, Slovenia, Ukraine)
The remaining countries in the region are neither large markets nor significant producers
of vehicles. Some of these are being scrutinized for potential investment by global vehicle Some additional countries in the region are
manufacturers looking for a low-cost European production base in a region not currently being explored by manufacturers looking
featured in the industry. There are examples of suppliers considering relocating people- for a low-cost European production base.
intensive production from better-developed and more-expensive CEE areas such as
Czech Republic to lower-cost areas such as Bulgaria, or out of CEE altogether to North
Africa, for example.
Overall production capacity: expansion versus contraction

Looking at Europe as a whole, while vehicle demand is down and overcapacity is high,
there have been no plant closures anywhere in Europe. Only recently, almost as markets
recover, have GM and Fiat indicated that they will close or dispose of plants as they balance
production with demand for the medium to long term. In general, where manufacturers
have reduced output, they have done so through reduced shift patterns and extended
shutdown periods. Little if any structural cost has come out of the industry across the
whole of Europe.
The CEE region is benefiting from investment in new plants committed some years ago.
While that burst of activity has subsided, there is still capacity being added in CEE, at a Capacity is still being added in CEE, as
lower level. The most notable new plant is the Mercedes-Benz small car plant in Hungary plants committed before the downturn
due to start production in 2012. In addition, Ford will start producing vehicles in its come online, and as some OEMS look for
acquired Romanian plant in 2011. There has been some interest in whether WE lower-cost production locations.
manufacturers have brought work back to their home countries from CEE operations, for
example, Renault’s Slovenian plant. However, there is little evidence. Instead, decisions to
produce in WE have been made because CEE plants are busy. Overall, CEE’s light vehicle
production declined to approximately 4.7 million vehicles in 2009, down from 6.3 million in
2008 and is forecast to surpass 8 million units by 2014. However, it’s unlikely that capacity However, it is likely that little further
will be added in many CEE countries, with Russia and Turkey still probable capacity- capacity will be committed for future
expansion candidates in the medium to long term. plants across much of the region.
Size of CEE market

The latest forecasts suggest the CEE market will account for approximately 5 million light
vehicles by 2012, compared to WE at 15 million. While the overall CEE market will continue CEE production will rely on recovery in
to be small compared to WE, it will return to being the engine for growth in the region once Western Europe as the engine for growth.
European economies recover from the downturn and as the accession states benefit from
EU investment. In many countries, particularly CEE, the levels of car ownership suggest The CEE region overall still has relatively
considerable opportunities for growth. By comparison, WE will recover only slowly. The low levels of car ownership.
passenger car market is forecast to shrink in 2010 as scrappage programs run their course,
and it may never return to pre-downturn levels.

Market changes: segment shifts, market winners and losers
Market segment shifts are a key feature of the overall European market, with small
entry-level vehicles the only growth segment in WE. In CEE, there have also been market Market requirements and segment shifts
segment shifts, but these have been inconsistent across the region. For example, in across the region are inconsistent.
Romania, the C segment was the largest part of the market in 2004; sales in this segment
have remained static, while B-segment sales have increased by a factor of more than four
and now outsell the C segment by more than 2 to 1. However, in Poland, the C segment has
grown to equal the B segment, growing 50% since 2004, and A-segment sales have
dropped. In many countries, the segment breakdown remains fairly static.
Much consumer behavior is driven by local producers, who in many cases dominate the Much consumer behavior is driven by local
local market. For example, Dacia leads the Romanian market with close to 25% of new producers.
car sales. Lada still leads the Russian market (though its position is under threat from
global brands); and Škoda has 29.5% of its local Czech market. In addition, many
manufacturers benefit from “first mover” status in CEE markets. For example, Suzuki in Many OEMS benefit from a “first mover”
Hungary has a leading market position after being the first global player to produce there, status in specific CEE markets.
starting in 1990.
Varying emission standards hinder trade

Emissions standards required by passenger cars vary within the region, with many
countries moving more slowly than the EU to adopt more stringent standards. For countries
with more relaxed emission standards, such as Turkey and Russia, this means that vehicles
have to be produced to local standards for local consumption and to different technical Different technical standards are often
standards for export to WE. required for export to WE.
One of the factors hindering the adoption of tighter emissions rules is that they require
improved standards of fuel, particularly making available low-sulfur diesel. This means that Vehicles produced to EU standards
many vehicles produced to EU standards cannot be exported to these regions, as they cannot be exported to countries in the
cannot cope with the local fuels in the market. This hinders industry development, in CEE region.
particular cross-border trade. For example, Russia is delaying the introduction of new
standards and so the export potential is hindered.
With low emissions increasingly a requirement for — vehicle producers, there is likely
to be increasing need for CEE producers to leverage technologies already well in place in
WE. Some CEE countries such as Czech Republic already subsidize R&D initiatives in
preference to production projects in order to stay connected to the changes brought about
by new technologies.

Will CEE capitalize on the developments in new powertrain technologies?
With CEE emissions standards lagging other regions, and with most CEE production
made by global players, key technology developments in new powertrain technologies
are likely to be driven from outside the region. While there are large engine plants in CEE,
even if these are to produce engines with new technologies, the innovation in these
engines invariably comes from the parent company outside the CEE region. For example,
Kia has announced it will produce engines with stop-start technology at its engine plant in
Slovakia, with R&D carried out at its technical center in Germany. But some vehicle
manufacturers are reluctant to take new technology outside of their home countries in
order to ensure their hard-won intellectual property is not at risk. For example, the
Japanese manufacturers of hybrid vehicles have largely kept production of this technology
in Japan.
Looking beyond current engine technologies and hybrids to EVs, other emerging markets
around the world are innovating in this area (notably India and China), along with most of
the mature markets in the industry. There are few signs of the development of EVs (by
existing or new car manufacturers), or of their key technologies, in the CEE region. This
increases the likelihood that new technologies, and new players in these technologies, will
need to be brought into the region rather than emerge from the indigenous industry,
increasing the dependence on decisions made by multinationals headquartered elsewhere
who may be reticent to move new technologies outside of their home territories.
Currency fluctuations
One of the factors that has compounded the volatility facing the sector over the last two
years, in addition to the economic downturn, has been significant changes in exchange
rates within Europe as a whole and between European and other global currencies.
These shifts in exchange rates are causing vehicle manufacturers to move vehicle
manufacturing away from currencies that have strengthened. For example, a number of
Japanese manufacturers have moved production away from Japan. For some producers, Some OEMs are increasingly producing
there is an increasing trend to produce within a region where the vehicles will be sold in within the region where the vehicles will
order to reduce the effects of exchange rates or for other reasons such as reduced shipping be sold.
costs and to better tailor vehicles to the local market requirements. This trend could benefit
CEE as companies localize manufacturing for vehicles aimed at these markets. Countries
that remain outside the EU might be disadvantaged as they introduce the additional Volatility of exchange rate movement may
volatility of exchange rate movement. Adopting the euro will stabilize this for some affect investment decisions for countries
countries. outside the Eurozone.

CEE as aftermarket location? An emerging location opportunity
The long-term growth in new car sales in the region, coupled with significant imports of
used cars from WE into the new accession states, is leading to a significant growth in the
car population. This in turn creates growth in the aftermarket sector. This is important as Aftermarket growth will be driven by
the margins throughout the value chain in the aftermarket are higher than those for significant growth in the vehicle population
original equipment supply, leading to opportunities for higher-margin growth for through new car sales and significant
component suppliers, vehicle manufacturers (through supply of ”original fit” parts), imports of used cars.
franchised dealers and other aftermarket service providers.
In WE, the aftermarket sector varies in market structure between countries, with different
segments of the end market taking stronger positions in one country than in another.
For example, in Germany, the franchised dealer channel dominates; in the UK, there are
strong ”fast-fit” chains (which focus on a limited range of common services such as
replacing tires, batteries and exhausts); France and Spain have good ”auto center”
chains; and Italy has many small independent operators. It is unclear which channels will
predominate in each CEE country, and there may be opportunities for WE players to expand Potential aftermarket growth opportunities
their aftermarket networks. For example, the aftermarket in Poland shows growth potential for WE players exist.
but is still dominated by domestic companies.
Vehicle OEMs’ different strategies

When we last published our CEE review in November 2007, most OEMs were net exporters
from the CEE region, with the exception of Ford, which was a net importer. Now, Ford
sources the model Ka from the Fiat plant in Poland and has acquired a plant in Romania
that will start producing LCVs in 2010. This means that all the major OEMs with significant All the major OEMs with significant sales
sales in CEE will also be net exporters from the region. in CEE will also be net exporters from the
region.
New dynamics
New plants in the accession states, committed during the investment wave following the
states’ membership in the EU, have now come online, resulting in the former Eastern Bloc
states becoming significant producers and exporters of vehicles. However, the investment
in new capacity in the region was trailing off before the economic downturn, and we have
seen additional global capacity plans by OEMs curtailed as global demand has dropped and
OEMs need to reduce their capital investment programs in the face of falling global revenues.
Where there are new investments in the new accession states, this is from OEMs not currently
in the region — Mercedes-Benz, with its plant in Hungary, and Ford in Romania — in late moves
to gain the cost advantage and market penetration of the accession states.
However, despite the existing overcapacity in the region and globally, there are OEMs that Some OEMs still feel the need to add
are growing and succeeding and still feel the need to add capacity in Europe to serve capacity in the CEE region.
European markets, such as Asian players that enter Europe for the first time. As mentioned
above, an OEM can generate local market success if it is the first, or only, producer in that

country. Perhaps for this reason, and perhaps because there is some “overheating” of the There are still potential advantages from
job market in the new production centers in the region, OEMs are looking at new countries an OEM being the first to produce in a CEE
for possible location of new production plants (e.g., China’s Great Wall has plans to start country.
production in Bulgaria in 2011).
This additional investment in the accession states is occurring despite the rising cost base in
these countries and changes in WE labor markets designed to improve WE’s competitiveness.
In addition to the accession states, we have seen a number of manufacturers building plants
in Russia, on the back of rapid market growth up to mid-2008. Some of these plants have yet
to come online. When they do, they will add to overcapacity across Europe, as many of these
plants will be producing vehicles currently imported into Russia from existing plants, mainly in
WE. It is unclear how manufacturers will manage this exacerbation of overcapacity. It is also
unclear which other OEMs will commit to building plants in Russia — additional investment
there might be on hold pending recovery in demand in the local market.
Looking forward
While CEE has been affected by the global downturn, the fundamental factors for The fundamental factors for medium- to
medium- to long-term growth in the region remain. The overall population of the region long-term growth in the region remain.
is roughly equivalent to that of WE, at around 400 million, but with lower levels of car
ownership, average car population and new car sales. Forecasts for economic growth in the
region show the upside potential for the region. Income levels, for example GDP per capita,
are still far behind WE, showing there is still a long way to go for CEE to catch up to WE.
However, as potential customers’ income levels grow, CEE is expected to grow as a market
for passenger cars in the medium to long term.
We have taken a long-term view of CEE to assess the markets that have the potential for
sizeable opportunities.
Russia is the most promising single market in the region. Despite recent setbacks, the Russia is the most promising single market
Russian market clearly has the potential to catch up to some of WE’s largest markets, such in the CEE region.
as Italy, France and potentially Germany. For many years, growth in the Russian market was
underestimated; however, the scale of the recent market shrinkage was also underestimated
by most observers and forecasters. Market volatility — a factor in most growth markets — is
likely to remain a feature of the market. But the fundamentals in Russia remain: its large The fundamentals in Russia remain strong.
population, growth of the wealthier middle class, and the rapid growth of urban cities (such
as Moscow and St. Petersburg), where consumers’ incomes enable them to buy a car.
After Russia, the largest countries in the region (by population) — Ukraine, Poland and
Turkey — represent the next most-attractive market potential, with the Ukraine starting
from a relatively low base in terms of market size compared to population. All have
long-term growth potential as their economies develop and income levels rise.

The Central and Eastern European
automotive industry overview
Central and Eastern continues to be a growth area for vehicle Whichever brands may emerge out of this
Europe in the global production, with some OEMs still investing region as true leaders, passenger car
automotive market in production capacities. However, this production will generally be of smaller
additional capacity will still lag behind the vehicles from the A and B segments, for the
Since the early 1990s, the countries of established production centers of North following reasons:
CEE have experienced substantial changes. America, WE and especially players in the • These products are highly cost sensitive,
The depth and level of accuracy with which Asia-Pacific region such as China. so OEMs are looking for the production
structural reforms have been implemented cost advantage of the CEE countries.
has allowed some countries not only to join In the years to come, CEE vehicle • These are typically the products that
the EU, but also to rapidly become key production will be dominated by vehicle dominate the CEE markets, even in
players in global industry operations. Many manufacturers from outside the region, countries with higher average GDP per
countries purposely chose to focus on the which will establish plants mainly to take capita.
automotive industry. advantage of lower costs and market
presence. It remains to be seen whether
Passenger car production in CEE market demand and trends in the region will
compared to other major regions lead to the further creation of new global
Compared to the almost static production brands (like Škoda).
forecasts currently available about WE, CEE
Figure 1: Light vehicle production by region (in units), 2007–14

2007 2008 2009 2010F 2011F 2012F 2013F 2014F
Asia 27,889,116 28,333,805 28,846,146 31,794,698 34,210,699 36,526,521 38,172,449 39,561,154

North America 15,023,617 12,583,613 8,525,754 10,595,746 12,280,019 13,927,633 14,759,061 15,468,553
Western Europe 16,109,678 14,582,725 11,946,822 11,892,659 12,179,938 12,501,940 14,072,976 14,897,378
Central and 5,978,025 6,367,050 4,739,247 5,269,842 5,769,352 6,497,232 7,314,985 8,009,410
Eastern Europe
South America 3,581,641 3,759,796 3,673,142 4,092,846 4,437,041 4,775,147 5,163,485 5,500,447
Middle East 1,126,521 1,183,087 1,343,704 1,395,552 1,602,405 1,779,340 1,953,593 2,076,379
Africa 559,785 565,535 397,493 503,400 590,832 717,859 785,450 813,835
Other 155,796 196,000 198,000 552,000 940,000 967,000 996,000 786,000
Grand total 70,424,179 67,571,611 59,670,308 66,096,743 72,010,286 77,692,672 83,217,999 87,113,156
F = projected
Source: J.D. Power and Associates

Figure 2: Light vehicle sales by region (in units), 2007–14
2007 2008 2009 2010F 2011F 2012F 2013F 2014F
Asia 19,282,303 19,771,322 23,912,856 25,939,674 27,549,325 29,542,685 31,137,280 32,365,108
North America 18,861,804 15,864,500 12,615,676 14,103,643 16,300,092 17,818,283 18,722,680 19,213,329
Western Europe 16,853,381 15,379,461 14,967,656 13,659,763 13,766,849 15,009,892 15,980,015 16,754,005
South America 3,995,993 4,220,373 4,178,826 4,792,196 5,330,526 5,806,119 6,179,024 6,436,653
Central and 5,342,490 5,643,736 3,299,354 3,332,591 3,808,663 4,479,892 5,275,932 6,106,662
Eastern Europe
Other 4,068,648 3,223,000 2,978,000 3,020,000 3,102,000 3,164,000 3,206,000 3,232,000
Middle East 1,297,260 1,371,905 1,545,542 1,619,269 1,849,513 2,051,770 2,251,674 2,399,862
Africa 646,245 514,071 276,665 415,821 467,297 545,355 623,216 681,575
Grand total 70,348,124 65,988,368 63,774,575 66,882,957 72,174,265 78,417,996 83,375,821 87,189,194
F = projected
Passenger car sales in CEE versus other CEE sales versus WE sales of vehicles are sold. Currently, in all
major regions For OEMs that sell mainly in WE, CEE offers CEE countries, more than 30% of the
Passenger car sales in CEE were affected an obvious geographic opportunity based market is dominated by a few brands with
by the global downturn as nearly on proximity and local access to lower-cost large market share (Figure 3). Leading
everywhere else in the world. Russia, production. Moreover, as CEE countries’ brands — often domestic or foreign
Romania and Hungary were most affected, economies mature, they will increasingly companies with local plants — risk
whereas Czech Republic and Slovakia become more comparable to those of continually losing market share to other,
recorded an increase in sales. In the long established markets where a broader range global brands.
run, passenger car sales in CEE are
expected to grow again, in line with
increasing disposable incomes and as Figure 3: New passenger car sales — 2009 market share of top three selling brands and leading brand
broader economic development extends
beyond capital cities. Russia promises to 29.5%
Škoda
Czech Republic
grow in even higher dimensions. But overall 46.7%
consumer growth will only stimulate 25.3%
production growth in a limited number of Ukraine Lada
45.6%
countries. As a result, CEE is clearly to
Dacia 29.8%
remain a net exporter of vehicles and, for Romania
45.3%
some countries, exports will dominate in
Lada 26.1%
relation to domestic consumption. This will Russia
43.3%
bring specific challenges to exporting
Hyundai 16.4%
economies, such as currency dependency, Turkey
41.3%
transport costs and, probably above all, a
17.3%
dependency on the availability of export Hungary Suzuki
36.4%
markets in countries whose economies and
focus on vehicle production might evolve. Škoda 15.9%
Slovakia
35.4%
Renault 16.8%
Slovenia
35.2%
Škoda 11.8%
Poland
30.5%
Hyundai 12.7%
Bulgaria
30.2%
Volkswagen 11.6%
Western Europe
28.1%
Leading brand market share Market share of top three brands
Source: J.D. Power and Associates; Ernst & Young

Figure 4: Passenger car production by country, 2008 and 2014
2,500,000
2008 2014F
2,000,000
Passenger cars
1,500,000
1,000,000
500,000
0
ssia public vakia urkey oland nia ary raine ia
ven ulga
ria
Ru e Slo T P ma Hung Uk Slo
hR Ro B
e c
Cz
LCV production – which has a major impact in certain countries, such as Turkey – not included.
F = projected
CEE passenger car sales Figure 5: Car population per 1,000 people compared by country (2009)
and production overview 1,200
985
Production: now and forecast 1,000
Across CEE, the emergence of major 800
Car density
exporting countries is already taking shape, 607 601 577 616 632
600 511 511
such as Czech Republic and Slovakia,
which could become almost entirely 400 360 357
277
225 198
dependent on global-brand vehicle exports 200 128
when maximum production capacity levels
0
are reached. Some of these countries are ia m ny ance land tates ublic gary ria kia ussia ania raine rkey
ven gdo erma Fr Po ed S n lga Slova Tu
already showing higher labor-cost levels Slo d Kin G i t h Rep Hu Bu R Ro
m Uk
ite U n ze c
U n C
due to their position in the production
chain. Source: J.D. Power and Associates
Sales: now and forecast

The CEE countries represent a wide range
of domestic market sizes. And the CEE Figure 6: Passenger car sales by country, 2008 and 2014
market is not homogeneous: while different
3,500,000
brands have succeeded in different areas,
the popularity of the various passenger car 3,000,000
2008 2014F
segments differs from region to region.
2,500,000
Passenger cars
Sales growth forecasts vary. Some

countries already have levels of car 2,000,000
ownership approaching those of some WE 1,500,000

countries, while others have significant
1,000,000
growth potential.
500,000
0
ssia key oland raine nia ic y ia ia ria
Ru Tur ma ubl ungar lovak loven lga
P Uk Ro h Rep H S S Bu
c
Cze
LCV sales figures – which have a major impact on certain markets, such as Turkey – not included.
F = projected

Several global players in the component segment moved to locate in CEE over the last years in order to follow their customers and
to benefit from cost advantages in production.
Figure 7: CEE industry landscape — global suppliers

Suppliers Bulgaria Czech Hungary Poland Romania Russia Slovakia Slovenia Turkey Ukraine
Republic
Aisin Seiki
ArvinMeritor
Bridgestone
Bosch
Continental
Dana
Delphi
Denso
Faurecia
Federal Mogul
Hankook Tire
Johnson Controls
Lear
Magna
Toyota Boshoku
TRW
Valeo
Visteon
Yazaki
ZF Friedrichshafen
Please note: this table shows existing Tier 1 supplier plants, but it excludes those announced but not yet operational.
Source: company information

In the following overview (Figure 8) you get an impression of the number of OEMs that have located in CEE up to this point.
Figure 8: CEE industry landscape — major light vehicle plants and assembly facilities (including joint ventures)
OEMs Czech Hungary Poland Romania Russia Slovakia Slovenia Turkey Ukraine
Republic
Andoria Mot
ARO
Avotor
AvtoVAZ
Bogdan
Fiat
Ford
GAZ
Geely
GM
Honda
Hyundai
Karsan
Krasz
Mitsubishi
Nissan
PSA
Renault
Sollers OJSC
Suzuki
TAGAZ
Tofas
Toyota
UkrAVTO
Volkswagen
Source: European Automobile Manufacturers’ Association, Ernst & Young

Locations of major suppliers
and OEMs in CEE
Izhevsk
St. Petersburg RUSSIA

Naberezhnie Chelny
Nizhny Novgorod Ulyanovsk
Moscow
Togliatti
Kaluga
Kaliningrad
Poznan Warsaw
Lubin POLAND Kyiv

Lutsk Cherkasy
Vrchlábi Gliwice Kremenchug
Mladá Boleslav Kolin
Katowice
Tychy
UKRAINE Taganrog
Prague
Ostrava Zaporoizhie
CZECH REPUBLIC Zilina
Bratislava Trnava
Esztergom Zakarpattya
SLOVAKIA Györ Budapest Illyichevsk
Ljubljana Pecs
ROMANIA
SLOVENIA Novo Mesto Timisoara Pitesti
HUNGARY Bucharest
Craiova
BULGARIA Varna
Burgas
Sofia Istanbul
Izmit Ankara
Bursa TURKEY
Please note: This chart shows existing OEM locations, but it excludes those announced but not yet operational.
Source: Ernst & Young

Foreign direct investment (FDI) inflow types of FDI. A growing market, existing things changed in 2008 as Poland took the
Over the last 13 years, the center of engineering skills and lower-cost production lead from Czech Republic in the number of
cross-border investment in the European adjacent to the mature market of WE have investments as the country is one of the
automotive industry has shifted east, and proved attractive propositions for a number leading economies of CEE, while Russia
the scale of investment has been huge. of major automotive manufacturers. dropped behind. But in 2009, Russia took
Automotive supplier projects typically In 2007, the winners in new automotive the lead again, despite the heavy impact of
involve high capital spend and a larger supplier investments were Czech Republic, the economic downturn.
average number of employees than other Romania and especially, Russia. However,
Figure 9: Number of FDI investments in new automotive supplier plants, 1997—2009
Grand
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
total
Russia 11 12 5 6 8 9 6 12 10 12 17 12 14 134
Romania 3 2 2 4 7 7 5 18 11 22 21 16 9 127
Czech Republic 11 12 15 19 21 30 32 27 27 21 19 20 8 262
Slovakia 2 2 4 8 3 6 8 21 20 9 16 15 7 121
Turkey 6 5 2 1 5 11 6 8 4 2 6 7 7 70
Poland 29 26 15 17 14 16 8 34 30 19 15 26 6 255
Hungary 23 17 16 16 11 18 22 21 13 17 16 13 5 208
Slovenia 4 1 1 4 1 3 5 1 3 23
Serbia 1 1 2 4 6 6 2 22
Ukraine 3 1 6 3 1 1 1 2 18
Bulgaria 1 2 1 2 2 3 3 2 1 8 1 26
Lithuania 2 1 1 2 2 1 2 1 12
Moldova 1 2 1 1 5
Estonia 2 1 1 1 3 2 3 1 14
Bosnia and Herzegovina 1 1 2 1 2 1 2 10
Latvia 1 1 3 1 1 1 1 9
Croatia 1 1 1 1 1 1 1 7
Belarus 2 1 1 4
FYRO Macedonia 1 1
Grand total 98 84 63 77 75 110 101 161 125 115 126 127 66 1,328
Source: Ernst & Young’s European Investment Monitor 2009

Figure 10: Key macroeconomic data of selected CEE economies 2009
Romania
Hungary
Republic
Slovenia
Slovakia
Bulgaria
Ukraine
Poland
Russia
Turkey
Czech
Population (in millions) 7.2 10.2 9.9 38.5 22.2 140.0 5.5 2.0 76.8 45.7
Nominal GDP per capita (US$) 12,600 25,100 18,800 17,800 11,500 15,200 21,100 28,200 11,200 6,400
Unemployment rate (%) 9.1 9.3 11.0 11.0 7.6 8.9 11.8 9.4 14.5 4.8
Consumer price inflation (%) 1.6 1.1 4.3 3.4 5.0 11.9 1.6 0.8 6.5 16.5
Car parc (in millions) 3.9 4.5 3.0 16.7 4.2 33.1 1.6 1.1 7.1 7.8
Passenger cars / 1,000 people 632 511 360 511 225 277 357 607 128 198
New passenger car sales (‘000s) 26 162 79 320 130 1,357 75 56 370 163
Source: J.D. Power and Associates; World Factbook, CIA.gov
Figure 11: Key macroeconomic data of major non-CEE economies 2009

Germany
France
Brazil
China
India
UK
US
Population (in millions) 198.7 1.338.6 64.0 82.3 1.156.8 61.1 307.2
Nominal GDP per capita (US$) 10,200 6,500 32,800 34,200 3,100 35,400 46.400
Unemployment rate (%) 7.4 4.3 9.7 8.2 10.7 8.0 9.4
Consumer price inflation (%) 4.2 -0.8 0.1 0.0 10.7 2.1 -0.7
Car parc (in millions) 26.4 38.1 31.0 41.0 27.7 31.0 141.6
Passenger cars / 1,000 people 145 35 616 577 35 601 985
New passenger car sales (‘000s) 2,520 8,721 2,269 3,807 1,685 1,995 5.479
Source: J.D. Power and Associates; World Factbook. CIA.gov

Country profiles
Bulgaria
Introduction In the past Bulgaria has been unsuccessful

sustaining viable economic relationships
In the past, two local commercial vehicle with foreign passenger car producers.
manufacturers were active in Bulgaria —
Madara JSCo (Madara) in Shoumen and Great Wall Motors from China is expected Great Wall Motors will become
Chavdar in Botevgrad, producing trucks to become the first car manufacturer the first OEM in Bulgaria.
and buses respectively. Former truck in Bulgaria after forming a joint venture
manufacturer Madara remains operational, with local Litex Motor Corporation. The
now mainly focused on axle and spare part investment project is estimated at
production for commercial vehicles. In 90–100 million euro. A plant is already
2008 it was announced that its long-time under construction and is planned to
major client Kama Automobile Zavod OAO become fully operational by 2011. Initially,
Group (KAMAZ), the Russian truck Great Wall Motors wants to focus the
manufacturer, plans to set up a joint manufacturing efforts on four types of
venture with Madara in order to use the vehicles — two types of sedan, a SUV and a
Bulgarian company as an entry into the EU pickup.
market.
Bulgaria at a glance
USP A low-cost base for labor intensive production Further characteristics
• Hungry for industry investment Commercial vehicle history

• No car production implemented yet
Features • Not influenced by a dominant automotive player Certain component supplier base but
No car production yet
• Chinese producer Great Wall Motors intends to few global players
implement production in 2011
Small population No distinctive purchase power
Challenge To attract OEMs in order to establish automotive industry
Export activity of component industry No distinctive import activities
Potential Low-cost advantage
No premium car production No volume car production
Note: USP means Unique Selling Proposition
Availability of personnel, IT hardware/
People with engineering background
electronic experience
EU member since 2007 No euro adaption
Neighboring Turkey, Black Sea, Greek

Strong impact of economic downturn on and Romania
light vehicles sales in 2009 (- 48.1%)
Infrastructure is lagging behind
Note: Distinctive features of the country are marked in yellow

Varna
Burgas
Sofia
Bulgaria hosts a number of small to Figure 12: Sales and production (in units), compared between 2008 and 2012
mid-sized component manufacturers
with export-driven production activities. 60,000
Following the entrance of Great Wall Motors

Light vehicle sales
in Bulgaria, the local component sector is 45,000
expected to gain momentum, possibly

30,000
attracting other foreign investors to the
market and easily sustaining the 7%–9%
15,000
annual growth registered during the last
couple of years in this segment.
0
0 15,000 30,000 45,000 60,000
2008 2012F Light vehicle production
F = projected
Figure 13: Light vehicle sales compared (in units), 2006-09
60,000
50,000
Light vehicle sales
40,000
30,000
20,000
10,000
0
2006 2007 2008 2009
Sales

Your contact for automotive initiatives in Bulgaria:
Diana Nikolaeva | Partner | Transaction

Ernst & Young Bulgaria EOOD
Business Park Sofia, Building 10, Sofia 1766, Bulgaria
Office: +359 2 81 77 161 | Mobile: +359 0889 632035 | Email: diana.nikolaeva@bg.ey.com
“Recently, Bulgaria has shown not only significant

growth but also economic resilience in the current global
economic crisis. We remain positive about the potential
of our economy and the growth opportunities in many
sectors, including automotive.” (Diana Nikolaeva, Transaction Partner)
Market demand Figure 14: Light vehicle sales by brand (in units), 2007 and 2009
With a population of 7.6 million, Bulgaria is 1,710

Hyundai
3,329
one of the smaller CEE countries. It is
5,813
characterized by a relatively high rate of Toyota
2,820
passenger car ownership of 632 per 1,000 4,384
Peugeot
inhabitants, similar to the car penetration 2,263
densities of Poland and Czech Republic. Volkswagen 3,880
Nevertheless, the vehicle population in 2,251
Bulgaria is quite aged, significantly

2007
exceeding EU averages. Source: J.D. Power and Associates 2009
There is significant demand for second-

hand cars, fueled primarily by the low
purchasing power of the population (the
average income in Bulgaria equaling 33% of Automotive player economic growth during recent years. In
the EU average) and the lack of import light of the crisis, FDI in Bulgaria in 2009
barriers for older vehicles. In contrast, the Chinese manufacturer Great Wall Motors dropped by almost half, down to 3,212
new passenger car market is relatively will start local production in the town of million euro. A strong rebound in FDI is vital
small, though new car sales enjoyed robust Lovech by 2011. The entry of Great Wall for the economic recovery of the country.
growth between 2004 and 2008, mainly Motors is expected to be the cornerstone
driven by the abundance of financing for Bulgaria in establishing a competitive Bulgaria is an attractive business
opportunities. As a result of the global domestic automotive industry. destination with respect to labor costs.
economic crisis, Bulgarian consumers Amid the current challenging economic
dramatically withdrew discretionary environment, the relatively low cost of
spending. The contraction in the new car In the downturn human capital is a strong argument for
sales market was overwhelming as new companies to relocate their facilities to the
vehicles sold fell to approximately 29,000 Similar to other countries, the global crisis country, even from other low-cost CEE
units in 2009 from around 56,000 units in has led to fading consumer confidence and regions. In response to the ongoing
2008. decreased sales in most industries in slowdown in the automotive sector,
Bulgaria. Grammer AG, passenger seating and car
In 2009, Hyundai was the leading brand in interior fittings supplier, decided to relocate
the country in terms of car unit sales, The effects of the global financial meltdown its sewing activities from Czech Republic,
followed by Toyota, Peugeot and put an abrupt halt to the robust economic Slovenia and Poland to Bulgaria and Serbia
Volkswagen. growth in the country as real GDP in 2009.
decreased by 5% in 2009.
Thus, the country is dependent on FDI,

which was the main engine behind the high

National Assembly in Sofia (Bulgarian: Narodno Sabranie) is the unicameral parliament and legislative body of
the Republic of Bulgaria.
Risks and opportunities Slow reform processes since EU accession in • Bulgaria can potentially capitalize on the
2007 and certain non-transparent business cost pressure in the automotive industry
Risks practices to absorb some of the labor-intensive
• Bulgaria has been criticized for lack manufacturing activities from Turkey, its
Underdeveloped road infrastructure of transparency in certain business neighbor to the south. Turkish companies
• The network of roads and highways in the practices. More open governance and might consider outsourcing operations to
country remains largely underdeveloped. increased accountability, especially in the Bulgaria in view of the potential labor-
According to the statistics of the field of public procurement, will stimulate cost efficiencies and Bulgaria’s proximity
International Road Federation, only 70% foreign investments in the sector to existing operations in the Bursa region
of Bulgaria’s highways, 51% of its national significantly. of Turkey.
roads and 28% of its secondary roads are • As a result of Bulgaria’s accession to • Bulgaria’s workforce includes a large
in good condition. Bulgaria has some 480 the EU, the appropriateness of those number of educated and skilled people.
kilometers of operational highway practices has come under closer scrutiny A high percentage of the workforce has
infrastructure but none of the six than in the past. Anticorruption measures completed some form of secondary,
highways are entirely complete and firm regulatory policies are still to be technical or vocational education. Many
(729 planned kilometers are awaiting implemented in many areas. Bulgarians have strong backgrounds in
construction). Because the successful engineering and science. The skilled
implementation of future highway and Opportunities workforce is a considerable incentive for
road construction projects is subject to foreign companies to invest in Bulgaria.
adequate EU funding and strong political Low human capital costs attract labor-
will, the newly elected Government has intensive manufacturing operations, while Tax system has been reformed
listed highway construction among its top the geographical proximity to Turkey and its • The tax system has recently been
priorities. However, bringing the road developing industry offers upside potential reformed. To attract foreign investment
network up to Western standards is • Current wage levels in Bulgaria are below and stimulate domestic entrepreneurship,
expected to be a long and arduous the averages of other CEE members of the Bulgarian Government has adopted
process. the EU. The difference in labor costs is one of the lowest corporate income tax
quite significant even between Bulgaria rates in Europe, a 10% flat rate.
and its neighbors to the south and north.
The labor cost advantage has become
even more attractive to foreign investors
since Bulgaria joined the EU in 2007.

Czech Republic
Introduction As a result of its automotive past and

long-time competence in machine
Czech Republic has a singular position in construction, Czech Republic has been
Eastern Europe, gifted with a long-time able to garner a large volume of FDI, about
automotive tradition through the 70 billion euro, since 1998. Beyond its
manufacturer Škoda. mechanical skills, the country also benefits
from bordering WE.
Škoda has unfolded into a global player
with the aim of conquering the emerging Altogether, the country is home to three The country is home to three global
markets. In its home country, the global manufacturers. Second to Škoda, the manufacturers − Škoda, Toyota-PSA and
manufacturer continues to dominate the Toyota-PSA joint venture (TPCA) entered Hyundai.
market with a new passenger car market Czech Republic after the country joined the
share of 29.5% in 2009. Škoda ranks first in EU in 2004. Shortly thereafter, Hyundai
used car sales, though the advantage of established a strategic base for its European
homegrown manufacturing is slowly operations in Czech Republic and started
dissipating. production in 2008.
Czech Republic at a glance
USP Beneficiary of scrappage programs Further characteristics
• Settled as production base for small car segment Strong car history (Škoda)
• Hosting strong emerging market brand (Škoda)
• Over 100 year old automotive tradition — own car brand Three global OEMs (Škoda, Toyota PSA,
Robust supplier base
Features (Škoda) Hyundai)
• Highly integrated into European automotive value chain
Small population Purchase power
• Neighboring Western Europe — an advantage of time and
logistics
Strongly export oriented No distinctive import activities
New competitive advantage has to be found as low-cost
Challenge No premium car production Volume car production
advantage melts
Potential Small car production base; investment into R&D People with engineering background Availability of personnel limited
Note: USP means Unique Selling Proposition EU member since 2004 No euro adaption
Modest impact of the economic downturn Neighboring Germany and Poland

on light vehicles (-11.1% sales/+10.8%
production in 2009) Infrastructure is distinctive

Vrchlábi
Mladá Boleslav
Kolin
Prague Ostrava
International suppliers followed the global Figure 15: Sales and production (in units) compared between 2008 and 2012
clients into the country. Through the
1,500,000
combination of its foundation in machinery,
a skilled workforce and foreign investment, 1,250,000
Czech Republic developed an attractive

1,000,000
supplier portfolio which is anchored in the
Sales
750,000
global automotive value chain. With the
country’s technology competence, the 500,000
component sector not only supplies 250,000

resident enterprises but is mainly active
0
in foreign trade business.
0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000
2008 2012F Production
F = projected
Figure 16: Light vehicle sales and production compared (in units), 2006–09
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Czech Republic:
Milan Kocka | Partner | Assurance

Ernst & Young Audit, s.r.o.
Karlovo nám. 10 | 120 00 Prague | Czech Republic
Office: +420 225 335 349 | Mobile: +420 731 627 221 | Email: milan.kocka@cz.ey.com
“The focus of Czech manufacturers on the A and B

segments and the recent massive investments into the latest
technology puts them into a noticeably better situation compared to
the rest of Europe. The relatively positive outlook when considering
the current market situation is supported by the fact that 1 million
passenger cars are produced per year.” (Milan Kocka, Assurance Partner)
Market demand and overall exports. The ratio of domestic TPCA owns a car plant in Kolin, near
production to domestic sales of light Prague, with a capacity of 300,000 units
With 10.2 million inhabitants, Czech vehicles was 5:1 in 2009. This fact per year. The partners — Toyota, Citroen
Republic is a small CEE member, underlines the position of the country as and Peugeot — share a common platform
and the car density, with 505 cars per an export nation. for their A segment models.
1,000 people, already equals WE levels.
However, the Czech vehicle population is The Korean carmaker Hyundai built its plant
14 years old on average, and the speed of Automotive players in Nošovice in the eastern part of the
replacement is relatively slow. This can be country, with a capacity of 300,000 units
linked to the fact that used car imports have In 1992, Škoda began its prosperous for three different models, and began
been a strong competitor since import global success story when Volkswagen production in November 2008. The
barriers dropped. started to invest into the Czech automotive company stated that it located a plant on
manufacturer. Today, Škoda is one of the the European continent in order to produce
With entry into the EU, the country largest economic groups in Czech Republic, close to the market. The Nošovice location
experienced significant GDP growth, with its main operations based in Mladá was chosen to be near the Slovakian-
but since 2008, growth has slowed. Boleslav, a city located 50 kilometers affiliated Kia facility, in order to share
Accordingly, new light vehicle sales grew from Prague. The smallest model, Fabia, components.
over the last five years but showed a accounts for the largest share of the total
reversal in 2009 as household demand production volume. A new technology
declined in the last quarter of 2008 due center was established last year to prepare In the downturn
to the downturn and a rise in consumer for the future. Further, a 60 million euro
prices. expansion of the transmission facility allows As Czech Republic’s economy is strongly
it to supply city cars. And going forward, cross-border, with more than 80% export
From a production perspective, the the Czech manufacturer will develop share in GDP relating to industrial
automotive sector represents about 20% components for VW. production, the weak market conditions that
of Czech Republic’s industry revenues
Figure 17: Light vehicle sales by brand (in units), 2007 and 2009 Figure 18: Light vehicle production by brand (in units), 2007 and 2009
64,306 581,636
Škoda Škoda
50,492 492,873
14,672 104,551
Ford Peugeot
18,520 115,923
13,730 98,547
Volkswagen Citroen
14,248 115,989
11,889 0
Renault Hyundai
12,055 112,396
2007 2007
Source: J.D. Power and Associates 2009 Source: J.D. Power and Associates 2009

The Charles Bridge in Prague (Czech: Karlův Most) is a historical bridge that crosses the Vltara River.
permeated WE affected even Czech Republic Risks and opportunities currency exchange, the majority of the
which is one of the best performers in inhabitants await Czech Republic’s
Eastern Europe. Risks integration into the European monetary
union to gain more stability. However,
The variations in currency exchange rates Skill shortage and increasing wages are experts do not expect the currency
do not help the situation as this was one of currently a reduced risk adoption before 2013 or 2014.
the reasons why VW located its news • While the country’s overall unemployment
production facility (for the “Up!” model) in rate stood at a moderate 5.4% in 2008, it Opportunities
Slovakia rather than in the Czech city of rose to 9.3% in 2009.
Vrchlábi. • Some time ago, there was a shortage of Good infrastructure and a large base of local
skilled labor. In the middle of 2008, suppliers attract investment
However, the automotive sector in Czech Hyundai noted the absence of specialists • Czech Republic has a long tradition of
Republic is still much less affected by the for quality control and for its paint shop. automotive engineering and production.
credit crunch than other CEE countries. Škoda even looked for labor in Vietnam at Škoda celebrated its 100th anniversary in
After a shrinking demand for company cars, the end of 2007, since Polish and 2005, and other automotive brands, such
a government measure contributed to Slovakian guest workers preferred to as truck makers Tatra and Avia, also have
growth in new car sales in the first five work in WE countries. However, due to a long history in the country.
months of 2009. The initiative allows the economic downturn, companies • More than any other CEE country,
companies to write off the value-added tax began to lay off workers. Czech Republic is characterized by a
(VAT) on new or used cars purchased or strong automotive supplier capability.
leased after 1 April 2009. Government intention to reduce • The investment and business
dependency on the manufacturing industry depelopment agency CzechInvest claims
The Czech automotive sector increasingly • Some politicians have started to question that more than half of the largest global
benefits from focusing on the A and B whether the country’s dependency on the automotive suppliers have operations in
segments. Thanks to WE scrappage manufacturing industry, in particular the the country. This large portfolio of
incentive programs, Škoda was able to automotive sector, could become a risk. suppliers allows access to an almost
increase the production of its former The automotive sector contributed 8% to complete local supply chain, providing
backbone model, Fabia, in 2009. GDP and 19% to exports in 2008. In significant cost advantages.
response, the Czech Government • Czech Republic benefits from its
Despite the economic crisis, Hyundai published a new investment regulation at geographical position in the middle of
announced its intention to invest to expand the beginning of 2009. It stipulates that Europe. Global companies located in
capacity of transmission output to produce only R&D and shared service center Czech Republic function mainly as export
500,000 units between now and 2012. operations are subsidized in the future. bases to Western countries. The close
proximity assures time and logistical
In the following months, a decline in Strong currency/variation in exchange rates savings.
production is expected due to the end of • Changes in currency exchange rates • Further stimulus for the country is
scrap subsidy programs in most of the EU make business activities complicated, expected from EU subsidies of 27 billion
countries. especially given the strong Czech koruna euro for infrastructure projects up to
in 2008 and 2009. Due to the strong 2013.

Hungary
Introduction themselves in the country. With Suzuki,

Opel, Audi and the associated component
Before 1990, Hungary was involved in suppliers, the automotive industry became
significant truck and bus production with the main pillar of Hungarian manufacturing.
domestic brands Ikarus and Rába However, since then, Opel has shifted its
Automotive. Today, Rába supplies its three activities to powertrain production.
strategic markets (the EU, the US and the
Commonwealth of Independent States Hungary has not lost its attractiveness, as Daimler has decided to open a plant
[CIS]) mainly with axles and chassis as well Daimler AG (Daimler) has decided to open in Hungary.
as other components. a plant in Kecskemét, 86 kilometers from
Budapest, to manufacture new compact
After the dissolution of the Eastern Bloc, models in the near future.
three global car manufacturers established
Hungary at a glance
USP Established as supplier of powertrain Further characteristics
• Won new investor: Mercedes-Benz A and B class Commercial vehicle history

Features production
• Hosts both premium and volume brand production Three global OEMs (Suzuki, Opel, Audi) Robust supplier base
Follow-up to new powertrain technologies, especially as
Challenge Small population Purchase power
producer of powertrains
Hosting four established OEMs, and expansion of small car Export oriented No distinctive import activities
Potential
production
Premium car production Volume car production
People with engineering background Availability of personnel limited
Neighboring Austria and Slovakia
Strong impact of the economic downturn on light vehicles

(-50.5% sales/ -34.5% production in 2009)

Esztergom
Györ
Budapest
Pecs
In terms of parts production, Hungary is Figure 19: Sales and production (in units) compared between 2008 and 2012
focused mainly on building engines. Both
GM and Audi have established major 500,000
factories with the same focus, and Suzuki 400,000

Light vehicle sales
has announced similar plans. Beyond that,

a supplier base for other relevant parts is 300,000
present, and mainly driven by the existence
200,000
of the global vehicle manufacturers.
100,000
Historically, Hungary served as a base for
0
component production for delivery to the
0 100,000 200,000 300,000 400,000 500,000
domestic commercial vehicle industry, but
also to the Russian producer AvtoVAZ.
F = projected
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Hungary:
Robert Heinczinger | Partner | Tax

Ernst & Young
1132 Budapest Váci út 20| Budapest| Hungary
Office: +36 1 451 8262 | Mobile: +36 30 919 3814 | Email: robert.heinczinger@hu.ey.com
“Suzuki’s and Mercedes-Benz’s focus on small cars,

and Audi’s focus on environment-friendly engines,
do fit very well in the new trends, and lay a strong
foundation for future growth of the industry in Hungary.
These key players will pull the entire component
manufacturer segment that creates a positive outlook
for the entire industry.” (Robert Heinczinger, Tax Partner)
Market demand infrastructure and industry traditions that other VW brands both within Hungary and
the country offers. in other countries. Moreover, the premium
As a domestic producer with a market models, the TT Coupé and the Roadster,
share of 28% in 2009, Suzuki benefits from have been assembled in Gyor since 1998. In
producing locally. It also benefits from its Automotive players 2007, the A3 Cabriolet, which is based on
focus on small cars, as the Hungarian the same platform, was added to the
population tends to buy affordable cars like As a producer of affordable cars, Suzuki assembly portfolio. Lately, Audi announced
those produced by Suzuki. However, with held the dominant market share for the plans to increase investment in its engine
only 9.9 million inhabitants, Hungary past 11 years. The Japanese carmaker R&D facility.
cannot offer the sales opportunities that committed itself to various cooperative
several other CEE countries can. ventures with other companies in Hungary The GM powertrain facility in Szentgotthárd
to extend its capacities. In 2003, the supplies different GM brands in Europe.
With Hungarians’ cars having an average company decided jointly with Fiat to build Daimler will start production of the new
age of more than 11 years, more than SUVs for both brands that would be generation of Mercedes-Benz A and B class
3 million people could potentially replace identical in construction, namely the Suzuki models in Hungary in 2012. This decision
their vehicles within the upcoming years. SX4 and the Fiat Sedici. In addition, Suzuki was influenced by, among other things,
Moreover, with a car density of 360 vehicles began assembling the Opel Agila and the labor cost advantage, a suitable portfolio
per 1,000 people, the demand for cars has producing the Suzuki Splash in 2008. These of suppliers and a convenient logistical
become obvious as new car sales increased two are also based on an identical platform. infrastructure. The compact model production
continuously between 1996 and 2006. But is very important to Daimler, which is
after 2006, the population’s spending Audi Hungaria owns one of the biggest attempting to match the tastes of potential
power was severely affected by a political engine production facilities in the world, Eastern European customers. These
crisis. Further, Hungary’s attractiveness for which is located in Györ. In 2008, the customers tend to prefer the B and C1
manufacturers in the automotive industry is Hungarian plant produced almost 2 million segments. Daimler is also focused on
not the domestic car market but rather the engines to supply all Audi models as well as strengthening these segments across Europe.
32,273 193,610
Suzuki Suzuki
13,607 119,319
22,479 588
Ford Opel
9,833 49,481
17,867 56,982
Volkswagen Audi
8,535 43,959
21,695 38,338
Opel Fiat
8,176 11,006
2007 2007

In the downturn Risks and opportunities
Hungary began economic reforms in Risks
reaction to the downturn at a relatively
early stage and thereupon enjoyed a flow Currency risks and volatility
of FDIs. • Like the other new EU-member states, it
will maintain its local currency for a
Nevertheless, Hungary faced economic conversion period before introducing the
conflicts even before the current recession. euro and participating in the European
The Government managed to provide Monetary Union.
stabilization by requesting financial support • At the beginning of the financial crisis,
from the International Monetary Fund the forint depreciated heavily, but it has
(IMF) at the end of 2008. However, the been steadily gaining value in recent
global downturn then knocked Hungary months.
back again and left the financial system and • The devaluation of the forint against the
the currency with significant concerns. The euro has made Hungary relatively cheap
high level of external debt as well as the for euro-based economies. This proves to
overall economic vulnerability have forced be a strong competitive edge against
the Government to carry out cost-cutting Slovakia, where the car industry is also Megyeri Bridge (Hungarian: Megyeri Híd) spans the
measures during 2009. This will have a strong. River Danube between Buda and Pest.
negative effect on the already slowing

domestic demand. Financial vulnerability
• The relatively high level of external debts Hungary is geographically well-placed
Until 2006, Hungary was the recipient of and the strong export-orientation of the to benefit from EU enlargement in the
nearly 33% of the entire FDI flowing into quite small market make Hungary fragile, Adriatics
CEE. Now the Government is making an particularly when facing the global • Hungary is likely to benefit from
effort to enhance Hungary’s attractiveness downturn and the alteration in exchange becoming more central in the EU area.
for foreign investment again by shifting the rates. The Adriatic region, which borders
tax burden from corporate taxes to VATs. • However, Hungary managed to get Hungary to the south, is less developed,
financial support of around 20 billion and Hungarian businesses might have a
Regarding automotive output in particular, euro from international organizations in competitive advantage in their proximity
Audi suffers more as one of the main order to secure the international liquidity to this and other emerging neighboring
Hungarian exporters, due to its role as and stability of the financial system. This markets.
premium carmaker and as an engine supplier should contribute to the trust of
to the crisis-affected regions of Europe. investors. That being said, reforms still Labor cost advantage and a qualified
must be implemented to cut the budget workforce
On the other side, as a beneficiary of deficit. • Compared to Poland and Czech Republic,
foreign scrappage programs, Suzuki for example, Hungary still offers relatively
absorbed some of the negative effects Opportunities low wages on all hierarchy levels,
on the sector. However, even Suzuki, a particularly in the blue-collar sectors.
manufacturer with high output volumes, The Hungarian economy is quite mature • There are Eastern European countries
has faced difficulties and suffered from compared to other CEE countries; its legal that can offer lower labor costs, such as
decreasing outputs. system follows Western standards, providing Romania, but according to Eurostat, labor
strong protection for investors productivity is higher in Hungary.
Moving to supplier investments, Apollo, • Hungary is among the most developed • Hungary has also been praised for the
a tire manufacturer from India, recently former Eastern Bloc countries. Its qualification level of its work force. This
reversed its intention to establish a new economy is more mature and is becoming was one of the factors that Daimler
plant in Gyongyos. Nevertheless, Hankook more settled as the emerging-market mentioned regarding its decision of
Tire, a South Korean supplier, will increase phase runs its course. Hungary as its production base.
investment in its only European plant, in • Privatization and efforts to attract FDI, • In 2010, the labor tax has been
Hungary, with the intention of increasing its combined with Hungary’s historical and streamlined so that employer
capacity and market share in the tire sector cultural links to the old monarchy, helped contributions will be reduced by 5% in
in Europe by 2011. the country grow quickly after the order to improve the employment rate
Eastern Bloc countries became and labor costs
democratic in the 1990s.
• Hungary reformed its legal system in
preparation for EU membership and is
compliant with Western standards in
almost all material respects.

Poland
Introduction As resident VW decided to limit its

production portfolio to LCVs, Daewoo,
Since Poland is one of the three biggest the first to market, backed out of car
nations in Eastern Europe and has steadily production due to insolvency. Today, former
evolved economically, large amounts of FDI Daewoo subsidiary FSO and GM jointly
flowed in during the 1990s when four produce low-budget Chevrolet models. The
global automotive manufacturers settled in dominating car producer, however, is Fiat, Poland hosts Fiat’s largest base of
the country. with its largest operation base outside Italy operations after Italy and Brazil.
and Brazil in Tychy, Poland.
Poland at a glance
Currently hosts largest Fiat plant outside Italy and Brazil. Further characteristics
USP
Thereby, Poland is a significant small car producer.
Two global OEMs (Fiat, GM) Robust supplier base
• One of the most successful CEE reformers
• Third biggest nation in CEE
Midsized population Purchase power
• Poland is the largest beneficiary of EU subsidies
Features
• Neighboring Western Europe — an advantage of time and Strongly export oriented No distinctive import activities
logistics
• Highly integrated into European automotive value chain No premium car production Volume car production
New car sales, new competitive advantage has to be found
Challenge People with engineering background Availability of personnel is limited
as low-cost advantage melts
Small car production accords the trend to economic cars, EU member since 2004 No euro adaption
Potential
population of 38 million
Neighboring Czech Republic, Germany, Slovakia and Ukraine
Strong after sales business potential Major portion of used cars
Modest impact of the economic downturn on light vehicles

(- 4.5% sales / -2.0 % production in 2009)
Note: Distinctive features of the country are marked in yellow.

Poznan Warsaw
Lubin
Gliwice
Katowice
Tychy
Apart from vehicle production, Poland is Figure 23: Sales and production (in units) compared between 2008 and 2012
well positioned as a component supplier,
both inside and outside the country. Overall, 1,000,000
more than half of Poland’s automotive

Light vehicle sales
revenue is generated through component 750,000
sales. And in spite of the current economic

500,000
downturn, tire manufacturer Bridgestone
opened another facility, driven by its
250,000
long-term strategy for Europe. Overall,
Poland is strongly export driven.
0
0 250,000 500,000 750,000 1,000,000
F = projected
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Poland:
Leszek Lerch | Partner | Assurance

Ernst & Young
Chorzowska 50 | 40 – 121 Katowice | Poland
Office: +48 32 760 7740 | Mobile: +48 50 510 3050 | Email: leszek.lerch@pl.ey.com
“Poland is doing its best to be a stable country offering

good and transparent investment opportunities. EU funds are helping
to improve infrastructure at a visible pace. The workforce costs are
still much more attractive than in any WE countries, while the skill and
technology levels available are comparable. The automotive clusters
developed over the last 10 years are also attracting investors, even in
this difficult time.” (Leszek Lerch, Assurance Partner)
Market demand Automotive players In 2008, Toyota opened a new transmission

manufacturing facility and BMW setup a
Poland is viewed as one of the most The largest producer, Fiat, is based in Tychy, new logistics and spare parts warehousing
successful Eastern European reformers, a city in southern Poland. In 2005, Fiat and centre.
producing annual growth figures averaging Ford entered a cooperation agreement to
over 4.8% GDP in the past. And with a develop small cars, the Fiat 500 and the Poland also covers bus production through
population of 38.5 million, Poland accounts new Ford Ka, with the intention of reducing MAN, AB Volvo, Scania and Solaris.
for a relevant portion of all car sales in CEE. production costs. Thus, Tychy became one
of the biggest assembly facilities in Eastern Next to small and cheap passenger car
Although demand for new vehicles has been Europe, with a capacity of 600,000 units production, future-oriented technology
growing steadily, there is still a market for annually. has also found its way into the country.
three times as many new car sales. This BorgWarner, a leading supplier of
can be attributed to the low import barriers Under GM leadership, the family car Opel turbochargers, opened a new plant in Mielec
triggered by accession to the EU. As a Zafira is produced in Gliwice, and 95% are to supply Fiat, which produces the smallest
consequence, the country is flooded with sold in WE. In August 2009, the production engine in Europe, for a future city car.
cheaper used car imports. Only every of the new Opel Astra was started. In
eighth passenger car is less than five years addition, GM established the Chevrolet, one
old, and the vehicle population averages of the fastest-growing brands in Europe, in In the downturn
12–14 years old. cooperation with FSO, a Polish vehicle
manufacturer and former subsidiary of The effect on car sales and production
Daewoo. Volkswagen in Poznań stopped its has been less harsh in Poland than in most
passenger car assembly in Poland to focus other CEE countries, as Poland continued to
on LCVs, the T5 and the Caddy. benefit from the strong export of locally
38,300 361,787
Fiat Fiat
41,907 492,957
33,210 167,037
Škoda Volkswagen
38,305 138,193
27,402 0
Volkswagen Ford
32,640 112,840
25,960 186,362
Ford Opel
30,298 94,484
2007 2007

produced cars. The automotive sales market • With EU membership and the opening of
shrank approximately 4.5% in 2009 in total. WE labor markets, Poles — especially the
young and well-skilled — are increasingly
The main issue in Poland is the restrictive working in WE to earn higher salaries.
behavior of the credit institutions. However, • Engineers and skilled industrial labor are
the Government has made sure to improve being absorbed by the industry in the
fleet sales by exempting company boom areas (also by quickly developing
purchasers from VAT on utility vehicles. R&D centers), so mid-sized, less well-
known enterprises may have difficulty
In terms of investment activities, Bosch and finding the talent they need. However,
DENSO decided to terminate their joint rising wages may subside due to the
venture for cordierite ceramic diesel current crisis.
particulate filters due to the slowing
economy and overcapacities in Europe. Opportunities
But Poland might benefit from the more The 38.5 million Poles represent a large
robust demand for small cars. The Polish local market
passenger car industry saw some revival • Poland, with a population of
in export demand during 2009 from approximately 38.5 million, is the sixth The Holy Cross Bridge (Polish: Świętokrzyski Most)
scrappage incentives in WE countries. Fiat largest country in the EU after Germany, in Warsaw is a bridge over the Vistula River linking
Powísle neighborhood with Praga Północ district.
in Tychy was one of the main beneficiaries. the UK, France, Italy and Spain.
Fiat Auto increased production capacities • Currently, new car sales are limited due to
thanks to the success of Panda and Fiat 500. the popularity of used car imports. But • Poland also lost a few foreign investments
this situation may change with the trend to its neighbors Czech Republic and
to more environmentally friendly cars. Slovakia.
Risk and opportunity • In particular, aftermarket sales in Poland • However, Poland is still considered a
offers promise due to the predominance trustworthy and reliable partner for
Risks of used cars. international business. The investment
incentive system in Poland is compliant
Road infrastructure is a key challenge Poland is the largest beneficiary of EU with the requirements of the European
• The quality of public transportation subsidies Community.
infrastructure — including highways, • The process of EU integration created a • To improve the investment environment,
roads and railways — is not yet at the huge opportunity for Poland to obtain the Polish Government is considering
desired level. financial support from the EU. Polish introducing an integrated 15% flat tax on
• The Polish Government has launched companies and local Governments alike companies and individuals in 2011.
programs targeting improvement, but are beneficiaries of an EU budget until Authorities streamlined the personal
implementation is slow. In fact, the 2013. In this period, Poland will be able income tax law in 2008 to two brackets,
infrastructure programs are delayed for to obtain support of more than 67 billion 18% and 32%.
the 2012 European Football euro for various types of improvement.
Championship, which will be co-hosted by This includes infrastructure modernization,
Poland. employee training and R&D to support for
• Progress can be seen in fast-growing new investments. This will, of course,
regions such as Wrocław, Poznań, have a significant impact on the
Katowice and Kraków, where highways development of infrastructure in Poland.
already connect to Germany and WE.
Warsaw still lacks this facility. Special Economic Zones offer extraordinary
incentives for FDI
Legal regulations and the talent market • The Polish Government has defined
• Laws are frequently amended to meet EU 17 Special Economic Zones (SEZ)
requirements. However, the amendments outside the fast-growing areas to support
can produce optimization opportunities economic development.
for foreign investors. • Beyond the EU funding schemes available
• Unemployment is high, but skilled young to investors, FDI in those areas is
talent is sometimes difficult to hire and supported by generous tax incentives.
retain. The countrywide unemployment These might reach up to 70% of capital
rate in Poland stood at a rather high 11% expenditure for newly established
in 2009 and may still increase due to the manufacturing operations. However,
global economic slowdown. following EU membership, a majority of
SEZ incentive schemes will most likely
expire by 2020.

Romania
Introduction Romania, however, symbolizes the Romania’s automotive industry symbolizes

transition to a new dimension of low-budget the transition to low-budget cars.
The domestic company Roman has cars under 7,000 euro. The Dacia Logan
produced trucks in Braşov since the 1950s. together with its derivate the Sandero
The company was established on the hatchback, produced by Renault in Pitesti,
ground of the former Romloc automotive are the cheapest cars in Europe. By its focus
factory, which was built in 1921. However, on this market, the Romanian automotive
the truck maker was sold to a Malaysian industry is in the comfortable position of
company in 2003 and its production volume having the right product to aim at two
is currently at a low level. growing target segments: the unsaturated
emerging markets and the growing WE
client group with a preference for affordable
cars.
Romania at a glance
Low-budget car base — the cheapest European car, Further characteristics

USP
Dacia Logan, is produced here
Commercial vehicle production history
• Third most important automotive market in CEE
• Strategic base for innovation-oriented French
Two global OEMs (Renault, Ford) Supplier industry vertically integrated
manufacturer Renault, which also is building an R&D
Features center in Romania Midsize population No distinctive purchase power
• Chinese Chery vehicle manufacturer has ambitions for
Romania in order to enter Europe Development to an exporter No distinctive import activities
• Low-cost advantage
No premium car production Volume car production
Challenge Follow-up to new technologies
With a low-budget car, which is unique, there is not much People with engineering background Availability of personnel
Potential
risk in future sales
Neighboring Bulgaria and Ukraine
No. 2 FDI investment location for

Major portion of used cars
automotive suppliers in CEE in 2009
Strong impact of the economic downturn on light vehicles sales
(-53.3% sales). However, production recorded a growth of 20.9% in 2009

Timisoara Pitesti
Bucharest
Craiova
The domestic component industry is (like Figure 27: Sales and production (in units) compared between 2008 and 2012
the Russian structure) highly vertically
integrated. Beyond that, international parts 500,000
makers locate in Romania for the cost 400,000

Light vehicle sales
advantages for labor-intensive work and for

the investment-friendly tax breaks. 300,000
Romania’s parts makers segment is mostly
200,000
dominated by Continental, Michelin,
Takata-Petri and Dacia. Romania seems 100,000
to be the most viable location for parts
0
makers, thanks to its geographical location
0 100,000 200,000 300,000 400,000 500,000
and highly qualified employees (due to the
proximity of technical universities).
F = projected
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2006 2007 2008 2009
Light vehicle sales Light vehicle production

Your contact for automotive initiatives in Romania:
Anca Ionescu | Partner | Tax Advisory & Compliance Services

Ernst & Young SRL
Premium Plaza Building, 3rd Floor, 63-69 Dr. Iacob Felix Street | 011033, Bucharest | Romania
Office: +40 21 402 4000 | Mobile: +40 744 758 274 | Email: anca.ionescu@ro.ey.com
Market demand Automotive players of its largest R&D center outside France in
Titu, to further develop automotive
The country has 22.2 million people, and The liaison between Renault and the concepts for emerging markets. The
is one of the larger CEE countries in terms Romanian brand Dacia started in the company’s representatives stressed that
of the population. Moreover, the rate of car 1960s. First established as supplier factory they have the full support of the Romanian
ownership is one of the lowest in CEE — with for truck maker Roman, the plant in Pitesti authorities and expect subsidies from the
247 cars per 1,000 people — thus demand was converted into a production base for Romanian state. Thus, Romania became a
for cars has been boosted by an enduring the Dacia model, enabled through a Renault strategic base for Renault’s international
scrappage program, good credit availability license. Since 1999, activities have been expansion plans.
and an economically good growth upgraded and the plant modernized due to
performance. In 2007, the peak of new car the majority takeover by Renault. Ford acquired a majority stake in Automobile
sales was reached with 315,621 units but Craiova in 2008, the former Daewoo-owned
came under pressure in the following year, The assimilation became a success story in production unit, in order to solve its
when it reached only 270,901 units. Used 2004 when Dacia Logan and variants went European capacity problems. The US firm
car sales grew rapidly after the Government into production. Today, Renault produces by invested in an upgrade of the facility and the
imposed an environmentally friendly fee on far the largest portion of passenger cars in production of the Ford Transit Connect
car imports in July 2008. Overall, more Romania. The budget car concept is started in September 2009. The light
than 50% of the Romanian vehicle tremendously successful and more and commercial vehicle will be followed in 2010
population does not conform to the more vehicle producers have tried to adopt by a new model with the working title
European emission standards. the idea. Renault also started the build up “B-Max,” a small passenger car.
101,799 222,686
Dacia Dacia
41,862 296,010
13,000 0
Hyundai Ford
10,982 300
26,112 Chevrolet/ 0 18,861
Volkswagen
10,916 Daewoo 0
21,730
Ford
10,499
2007 2007

“The Romanian automotive industry still remains attractive to investors
due to a long experience in car manufacturing and highly qualified and
dedicated personnel. With the two main car producers operating in the
country and the vicinity of parts makers, which have located production
units close to their customers, the Romanian automotive industry has
succeeded during this difficult period due to appropriate measures
meant to maintain production and sales and significant state aids from
the Government. Romania was the fastest-growing automotive market
among the new EU members until 2008.” (Anca Ionescu, Tax Partner)
German automotive component supplier In the downturn Newcomer Ford also gains state aid until
Continental has a broad presence in 2012. Moreover, the Government has
Romania, both through its ContiTech Romania’s international automotive guaranteed loans from the EIB in order to
subsidiary and a Continental-branded tire production base has been hit hard by support Ford with its new investment in
plant. ContiTech Romania produces drive the global credit crunch, with rising Romania.
belts at a 6 million euro plant in Timisoara. unemployment and a slump in consumer
The Continental tire plant is also based in confidence. This has caused a tremendous The Government itself is trying to secure
Timisoara. The company has a daily increase in second-hand car sales, as limited another loan from international facilities
production capacity of 24,000 tires. access to credit prevents customers from such as the EU and the IMF as the country
buying new vehicles. Car sales dropped over fights large deficits in the state budget and
Truck producer Roman, located in the 50% in 2009. Before 2008, Romania had balance of payments.
Braşov region, has struggled with potential been the fastest-growing automotive
insolvency for several years, with a market among the new EU members in Several automotive players continue with
privatization attempt in 2003 failing to CEE in vehicle sales their investment plans, based on their
revive its fortunes. Malaysian commercial long-term strategies:
vehicle manufacturer Pesaka Astana For the past few years the Romanian
acquired a majority stake in the company in Government had been trying to stimulate Renault boosted annual production capacity
order to establish an industrial park on the new car sales with the aid of a scrappage at Pitesti from 350,000 units in 2008 to
ground of the Roman factory. Thus, truck program, and this was successful until 400,000 units in 2009 and aimed to build
production of Roman will be reduced. 2008. another 400,000 complete knock down kits
(CKD)* for assembly in Brazil, Colombia,
To support the domestic automotive India, Iran, Morocco, Russia and South
industry, the Government is very interested Africa. Three new Logan models have been
in pleasing the country’s two essential added to the range by the end of 2009. The
vehicle manufacturers Renault and Ford increase in production volumes at Pitesti,
with incentives and credits. along with a move to increase local content
from 65% to 80% within two years, will lead
At the end of 2008, Renault and major to a large increase in demand from local
suppliers gained financial support from the automotive suppliers. According to Dacia,
state and a loan commitment from the EIB. suppliers will open up more than 20 plants
Still, Renault has cut the investment sum to cope with the increased capacity at
for its location in Romania, which is partly Pitesti.
intended for the development of the Dacia
Logan SUV.
* A vehicle that is stripped fully disassembled to foreign

subsidiaries in order to reduce freight charges.

Chery Automobile intends to develop Risks and opportunities
markets outside China. Hence the company
plans to import passenger cars into Risks
Romania and invest in a local sales network.
The Chinese car manufacturer already had Bureaucracy and slow reform activities
ambitions for Romania in 2007, when it bid • At the administrative level, various
for the Daewoo plant in Craiova. However, processes, formalities and certifications
Ford finally acquired that plant. are still considered too bureaucratic.
• The practical interpretation and
Automotive supplier Takata-Petri has application of the fiscal legislation may
moved production of steering wheels for lead to contradictory solutions, although,
Mercedes-Benz and Honda to Arad, after in this respect, significant changes in
closing the plant in Walbrzych, Poland, at legislation have taken place during the
the end of August 2009. Over the last four last years. Corruption is a problem as
years, Takata’s Romanian business has well.
recorded a steady two-digit rise. According
to Takata representatives, the decision to General lack of infrastructure, requiring
move production from Poland to Romania strong commitment from the Government
was made as part of a global operations • The current condition of roads is poor, as
restructuring program. 65% of Romania’s total infrastructure is in
need of improvement. This is why most
INA Schaeffler completed an investment in business activities focus on Bucharest,
Braşov in 2009, and Honsel is sticking to since most of the weak infrastructure is
its plan to invest in a production plant for outside of the capital. The lack of
aluminum casting in Slatina. significant infrastructure investment is a
major impediment to economic
The supplier Preh started to establish a development. But modernization up to EU
facility in Braşov in September 2009. Preh’s standards has become one of the main
stated reasons are the inexpensive national priorities for the period 2007–
Romanian cost structure and Brasov’s 13. Three main highways are currently
tradition as an industry and university base. under construction, crossing the country
from east to west, and are expected to be
Chinese tractor producer HOYO will start to finished between 2010 and 2013. Due to
assemble tractors, in Răsnov, which is in its inadequate infrastructure, Romania
Brasov county (northwest of Bucharest). lost a potential Daimler investment to
Hungary.

National Theatre Bucharest (Romanian: Teatrul Naţional “Ion Luca Caragiale” Bucureşti) became a national
institution in 1864.
Opportunities Large economy and favorable geographical

location
Investment conditions • Romania’s attractiveness as a destination
• Romania’s fiscal legislation has been for FDI is often attributed to the large
reformed both to fit EU rules and to domestic market with a population of
become more attractive to investors who 22.2 million and its geographical location
increasingly view Romania as a good as a connection between the Black,
place to invest. Caspian and Mediterranean Seas.
• Romania offers flexible time schedules • In 2006, GDP growth was 7.8%, one of
and advantageous tax incentives. Since the highest rates in Europe, and even in
the beginning of 2009, the tax on 2008 still reached 7.1%. A downward
dividends distributed within the EU has trend occurred in 2009, but a slow
decreased from 16% to 10%. However, recovery is expected from 2010 on.
taxes have been abolished on reinvested
profit in the second quarter of 2009.
• Low labor cost is the main reason for
most investors to settle in Romania. Its
labor costs are still lower than in Czech
Republic, Hungary, Slovakia and Poland.
• The country has a large manufacturing
base and has historically been less
focused on agriculture than have some
other Eastern European countries.
Romania employed more than 100,000
workers in the automotive sector, though
many lost their jobs during the transition
to a market economy. Many of these
workers are now employed by the foreign
automotive companies that entered the
country in recent years.
• Investors can expect difficulties in finding
skilled labor due to a significant
concentration of industrial operations in
big industrial areas.

Russia
Introduction Russia’s main OEMs originated in the

former Soviet Union. Today, AvtoVAZ, the
Russia is the most promising automotive Russia, with its population of approximately biggest carmaker in Russia and Eastern
market in all of Europe. 140 million, is seen as the most promising Europe, still holds a dominant market share.
automotive market in all of Europe because However, AvtoVAZ has slowly been ceding
it has yet to reach its saturation point. The share to foreign competitors since the early
significant economic growth during the last 2000s. Consequently, the growth in new
several years led Russia to nearly catch car sales has lately been driven by foreign
Germany in 2008 in terms of new car sales brands: the volume of foreign cars sold in
in Europe (2.76 million cars versus Russia increased significantly between
Germany’s 3.1 million). However, in 2009 2006 and 2008.
new car sales dropped by nearly 50%.
Russia at a glance
Momentarily the market is down — however, Russia is the Further characteristics

USP
most sales-promising country in Europe
Commercial vehicle production history
•Sfiales potential of 5-6 million cars
• Nearly overtook Germany in 2008 in new car sales Several global OEMs, domestic player
Features volume Supplier industry vertically integrated
AvtoVAZ
•Lfiess integrated with WE
• State-owned automotive players Huge population Purchasing power
Dependence on raw materials; Russian domestic No distinctive export activities Import activities
Challenge automotive industry has to catch up in terms of
technological competence Low premium car production Volume car production
A population of 140 million people with a desire for
Potential People with engineering background Availability of personnel is limited
premium products but also a need for low-cost products
Note: USP means Unique Selling Proposition No EU member No euro adoption
Bordering China and Scandinavia
By far No. 1 FDI investment location for

High import barriers
automotive suppliers in CEE in 2009
Severe impact of the economic downturn on light vehicles

Izhevsk
St. Petersburg
Naberezhnie Chelny
Nizhny Novgorod Ulyanovsk
Moscow
Togliatti
Kaluga
Kaliningrad
Taganrog
However, the country wants to ensure the Figure 31: Sales and production (in units) compared between 2008 and 2012
survival of its domestic industry by
3,500,000
cooperating with WE players. One of the
main issues is the shortage of high-tech 3,000,000
Light vehicle sales
components, as outdated parts production 2,500,000
is highly integrated into the operations of 2,000,000
the national manufacturers. 1,500,000
1,000,000
For this reason, Russia adopted legislation
500,000
to attract foreign investment with the
0
long-term objective of making Russia a net
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000
exporter of vehicles. As a result, production
facilities with a maximum capacity greater
than 1 million units have been developed by F = projected
Source: Avtostat, AEB, ASM-Holding, Ernst & Young estimates
foreign brands over the past several years.
Figure 32 : Light vehicle sales and production compared (in units), 2006–09
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Russia:
Ivan Bonchev | Associate Director, CIS Automotive Head | Transactions, M&A

Ernst & Young (CIS) B.V.
Sadovnicheskaya Nab. 77, bld. 1 | 115035 Moscow | Russia, CIS
Office: +7 495 755 9817 | Mobile: +7 916 330 2292 | Email: ivan.bonchev@ru.ey.com
Market demand Unlike the new EU members in Eastern In addition, Renault’s recent involvement is
Europe, Russia does not have to fight a expected to make the company competitive
Russia’s new car market grew at an average flood of used car imports. The country and profitable in the mid- to long term.
annual rate of 21% over the past five years maintains import barriers for used and new Renault started a strategic partnership with
to reach 2.76 million before the downturn car imports, and may do so until it enters AvtoVAZ in 2008. This agreement gives
and was the fastest growing European the WTO. Renault access to more production capacity,
automotive market. High-yield earnings from whereas the Russian partner wants to
oil and gas, growing purchasing power and benefit from access to modern technology.
easy access to affordable credit contributed Automotive players
to the fruitful development. And there still KAMAZ, Russia’s major commercial vehicle
exists a strong potential, given that 45.9% of The Russian output of light vehicles in 2009 producer, is located in Naberezhnye Chelny.
the 31 million-unit vehicle population is accounted for about 595,807 vehicles, The state’s share of both AvtoVAZ and
10 years, or older. down from 1,469,898 in 2008. KAMAZ were consolidated in the newly
established Avtoinvest holding, an arm of
During the growth phase, consumers began AvtoVAZ has its main facility in Togliatti Russian Technologies, the state
to switch their allegiance to foreign brands, and sells the most popular brand, Lada. corporation.
and their preferences shifted to a higher Recently, the company has experienced
price range. In the current economic liquidity issues brought on by a sharp GAZ, located in Nizhny Novgorod, is Russia’s
slowdown, this trend has been reversed, decline in demand. However, the recent second-largest vehicle manufacturer,
with negative effects on mid-priced cars. scrapping incentives program has affected focused on light commercial vehicles. GAZ
The luxury segment remained relatively the company’s sales and production also exports vehicles into such CIS markets
unaffected. dynamics in a positive way. as Ukraine, Kazakhstan, Azerbaijan and
683,817 757,805
Lada Lada
354,306 299,700
282,884 69,241
Chevrolet Dacia
158,451 49,650
175,643 104,516
Ford Chevrolet
82,083 47,966
147,843 207,532
Hyundai GAZ
74,607 46,928
2007 2007

“Despite the current market slump, Russia, being far from
saturated, remains one of the key strategic automotive markets
in a global context. The current market environment offers an
unprecedented window of opportunity to establish a quick and
easier entry or expansion in order to become a significant player
in the mid- to long term.” (Ivan Bonchev, Transaction Partner)
Armenia. Avtodiesel in Yaroslavl, Russia’s In the downturn 2009 to subsidize automotive consumer
leading diesel engine manufacturer, belongs finance for the purchase of locally produced
to GAZ as well. The Russian economy has been hit hardest budget vehicles. However, the measure did
among CEE countries by the downturn, with not help to restore consumer confidence. In
Today, 11 foreign carmakers have a negative GDP growth of 7.9% in 2009. The May 2009, the Government widened the
production operations or are constructing worldwide slowdown disclosed structural price bracket to include a broader range of
plants in Russia. Ford became the first problems in the Russian banking system and locally produced cars. With the measure
investor back in 1998. In 2003, GM began other economic challenges. The resulting having proved effective in boosting sales in
to produce a locally developed SUV under lack of financing led to a sharp cutback in 2009, the state has announced plans to
the Chevrolet brand in a joint venture with capital investment. Moreover, oil and gas allocate money to banks to subsidize low
AvtoVAZ. Nissan opened its plant in St. revenues shrank and unemployment interest rates on car loans: RUB1 billion in
Petersburg in May 2009 and, PSA and increased. This, in conjunction with lower 2010, RUB1.75 billion in 2011, RUB1
Mitsubishi joined operations in Kaluga in consumer confidence and scarce credit, had billion in 2012 and RUB0.5 billion — in
April 2010. Volkswagen has developed its a very negative effect on the passenger car 2013. In addition to the credit subsidies,
assembly facility in Kaluga into a fully market: passenger car sales declined by 50% the Government initiated a scrappage
fledged manufacturing operation step by in 2009. In 2010 a sales growth of 8%–9% is program for vehicles older than 10 years in
step, and Toyota opened its new plant in St. expected, with higher growth rates from March 2010, with RUB50,000 or close to
Petersburg in 2007. In addition, Toyota was 2011 on. US$2,000 given to the owner of an older
the first automaker to establish its own car in exchange for a purchase of a
financial arm in Russia, followed by the In 2009, the production of foreign models domestically produced car. This measure is
captive banks of Daimler and BMW. Also nearly reached the level of domestic cars, targeting the replacement of approximately
South Korean manufacturer Hyundai is in gaining further share from AvtoVAZ. 200,000 units of Russia’s old passenger
the process of establishing a plant in Russia However, most of the foreign producers also vehicles fleet. As of 14 April 2010,
for the production of its Verna model in have to reduce production. about 29% the total planned scrappage
2011. Last, but not least China’s largest CV certificates, 57,395, had already been
manufacturer Beiqi Foton Motor and At the beginning of the downturn, the issued.
Chinese passenger car manufacturer Great Russian Government initiated some
Wall Motor have production plans in Russia. measures to stimulate automotive sales. In Moreover, as of 2009, the Government
particular, the Government allocated increased import customs duties to 30% in
US$63 million (RUB2 billion) in February order to stimulate local manufacturing.

To support the ailing national automakers, St. Petersburg after the plant had been
the Government also provided state shut down for two months. Other OEMs
guarantees and financial aid to AvtoVAZ, such as Avtoframos, a subsidiary of
GAZ and KAMAZ to help restructure their Renault, which produces cars in Moscow
debts and prevent massive lay-offs. In and Ford vehicles near St. Petersburg, also
addition, AvtoVAZ intends to renew its had temporary shutdowns. Daimler
obsolete product portfolio. increased its 10% share in KAMAZ and
recently announced further joint projects
In spite of the measures taken, the Russian with the Russian truck manufacturer.
vehicle contract manufacturer IzhAvto
announced its bankruptcy (IzhAvto used to The prospect of a quick recovery of the
assemble the Lada and Kia brands). Russian economy and passenger car market
is highly unlikely. GDP declined by about
Suzuki has been the lone foreign automaker 7.9% in 2009, and purchasing power,
to put its investment plans on hold, halting together with consumer spending, will
its efforts to build a plant in St. Petersburg. follow the same trend. However, as Russia
However, the majority of foreign automotive remains the largest unsaturated market in
investors’ plans remain unchanged. GM CEE, it will inevitably return to accelerated
began to manufacture the Chevrolet Cruze levels of sales and production as soon as
in September 2009 in economic conditions improve.

The Picturesque Bridge (Russian: Zhivopisniy Bridge) spans the Moskva River in north western Moscow.
Risks and opportunities Opportunities • There is access to other CIS markets

when localized thanks to trade incentives.
Risks Although the market suffered significantly • An old car fleet and relatively low car
during the credit crunch and immediate density as compared to developed
High dependence on commodity prices and recovery is not expected, the Russian automotive markets provide a basis for
increased protectionist measures make market is far from saturated and represents future car market growth.
imports less attractive. a considerable prospect for further growth • The Government has adopted a 10-year
• The Russian economy is likely to lose for global players. automotive industry strategy.
growth momentum in 2010-2012, which • The Government has selected a long-term • Resuming of the state program of
will lead to a slow revitalization of the strategy of partnerships with foreign preferential subsidized car lending in
passenger car market largely dependent producers of passenger cars that implies February 2010 will further support
on overall customer spending. no further increase of import duties as an demand.
• The general economic downturn, despite optimal industry development scenario. • A number of international car and auto
yet nearly stable petrol prices will • There is a strong consumer preference component manufacturers have
incentivize people to drive less and for foreign brands. announced plans to open production
postpone buying new cars. • Local OEMs are not in a position to facilities in Russia or to increase their
• Increased import duties have put a compete on quality and operations existing capacities.
significant dent in foreign-brand car sales. excellence terms and are still burdened • Pent-up demand is likely to drive
• The benefits of a state support program, with a high level of leverage, integration passenger car sales growth in the long
as well as a scrappage program that and non-core and social assets. term.
began on 8 March 2010, have been • Russia is still a major net importer of
mainly absorbed by domestic brands. vehicles.

Slovakia
Introduction However, much more impressive is the fact

that Slovakia has the highest per capita car Slovakia has the highest per capita car
When VW acquired a small production production in the world. Once PSA and the production in the world.
plant from BAZ in Bratislava in 1991, the Hyundai subsidiary Kia joined VW in
Slovak automotive industry embarked on Slovakia, car production almost doubled.
its accelerated success story. Slovakia Hence, despite its small size, Slovakia is,
was proud to develop a production base after Czech Republic and Poland, the
predominantly for high-end SUVs. third-largest car producer among the new
EU members.
Slovakia at a glance
Premium brand manufacturing (SUV) and beneficiary Further characteristics

USP
through euro adoption
No significant vehicle production experience
• Third-largest car producer in CEE despite the small
population
Three global OEMs (VW, Kia and PSA) Supplier base
Features • One of the best EU performers
• Won new investment of an OEM, thanks to the euro Small population Purchase power
adoption
Massive export activities No distinctive import activities
Challenge Premium SUV production
Premium car production Volume car production
Potential Production of the new small car family of VW
People with engineering background Availability of personnel is limited
EU member since 2004 Euro adoption since 2007
Bordering Poland, Czech Republic,

Economic stability
Austria, Ukraine and Hungary

Zilina
Bratislava Trnava
As the automotive industry became Figure 35: Sales and production (in units) compared between 2008 and 2012
established as a main pillar of Slovak
production, this was rewarded with an 800,000
investment-friendly environment through

Light vehicle sales
the creation of industrial parks, tax breaks 600,000
and governmental subsidies to attract

400,000
suppliers.
200,000
0
0 200,000 400,000 600,000 800,000
F = projected
600,000
500,000
400,000
300,000
200,000
100,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Slovakia:
Sean McSweeney | Partner | Assurance

Ernst & Young Slovakia, spol. s.r.o.
Hodžovo námestie 1A | 811 06 Bratislava | Slovak Republic
Office: +421 2 3333 9668| Mobile: +421 910 820 028 | Email: sean.mcsweeney@sk.ey.com
“Slovakia remains an attractive location for the

automotive sector and existing major players have
already committed further investments to enhance
their local operations. We see considerable growth in
the sector in the medium to long term as new projects
come to fruition.” (Sean McSweeney, Assurance Partner)
Market demand The Czech brand Skoda, long familiar to set up an assembly line in the western
Slovakians, is the leader in terms of new car Slovak town of Trnava, where it builds the
Slovakia, with a population of 5.4 million, sales. Peugeot 207, one of the most popular
is one of the two smallest Central European small cars in Europe, and the efficiency-
new EU members but is one of the best oriented compact van Citroen C3 Picasso.
performers. Following reforms, the economy Automotive players If required, Slovakia could increase car
and consumption have experienced production to a maximum annual capacity
prosperous growth in the past five years. Overall, 488,021 passenger cars were of approximately 900,000 units.
produced in Slovak plants in 2008, up from
However, Slovak car ownership is relatively 178,000 in 2005, as a result of increasing The circle of passenger car manufacturers
low compared to the rest of Europe and, as establishment of foreign production may be enlarged as the Chinese Jianghuai
in the other new EU countries, used car capacities. Domestic light vehicle Automobile Company is in negotiations with
imports are a significant factor. Imports production declined by 19% in 2009. the Slovakian Government about the
account for one out of every two car establishment of a manufacturing facility
purchases, and the average vehicle age, In 2011, VW will begin production of the there.
while decreasing, is 13 years. Imports of new small family car “Up!” near Bratislava,
vehicles more than 10 years old are not perpetuating the current trend toward
permitted, and a certificate of compliance small and efficient cars. The production site In the downturn
with EU norms is a requirement. builds the Škoda Octavia and the VW
Touareg, Audi Q7 and Porsche Cayenne. Before the slowdown, Slovakia was one of
In 2008, new car sales reached a peak of the most rapidly growing of all European
97,000, an increase of 16.4%, thanks to the Both Kia and PSA began their investments economies. The country enjoyed
strong development of the Slovak economy in Slovakia in 2006. Kia builds vehicles near prosperous economic development with a
in recent years and the adoption of the Žilina, 200 kilometers from Bratislava. Its nominal GDP increase in 2008 of 36% on
euro. In 2009, new car sales dropped to facility produces the compact SUV Sportage 2005 levels.
90,400. and the compact family car Cee’d. PSA has
17,963 130,459
Škoda Kia
15,140 119,038
4,585 177,236
Renault Peugeot
9,642 112,403
6,061 0
Peugeot Citroen
7,024 91,329
4,699 126,427
Kia Volkswagen
6,349 29,576
2007 2007

The New Bridge (Slovakian: Nový Most)
in Bratislava runs over the Danube River.
Like other European countries, Slovakia Nevertheless, PSA has even increased its Opportunities
has had to deal with layoffs in the current output of the Citroen C3 Picasso in Trnava
crisis, but it has not, been as severely due to strong demand. And Kia Motors has Favorable environment for automotive
affected as some other markets. expanded capacity in its engine production manufacturing and investment
Nevertheless, GDP fell substantially in plant in order to supply its affiliate, • The Slovak Government has been
2009. Hyundai, which has a plant in the proactive in its dealings with large
neighboring Czech Republic. Further investors such as VW, PSA and Kia,
The Slovak automotive sector has been investment initiatives were also announced offering tailored infrastructure solutions
known for producing large gas-guzzling by, Getrag and Continental, at the end of and attractive incentives. This approach,
vehicles. But Slovakia’s adoption of the euro 2008. linked with persuasive reforms such as a
has led to new investment in the production flat tax and a user-friendly corporate tax
of economy cars, starting with the VW “Up!” system, has helped to secure these
The gains in economy car production might Risks and opportunities prestigious projects.
offset the losses associated with the • The country’s economy demonstrates a
downturn in the premium SUV segment. Risk clear focus on developing industrial
manufacturing activities. The country’s
Confronted with the slowdown, the Activity in the sector is largely concentrated dependence on the manufacturing sector,
Government reacted quickly by in the Bratislava and Trnava areas; hiring and the automotive industry in particular,
implementing different measures, as and retaining skilled labor is becoming affords a reasonable basis for assuming
the automotive industry accounts for increasingly challenging in this region that operations in Slovakia will enjoy a
approximately 33% of GDP. Slovakia was one • VW’s entry into the Bratislava region was favorable environment for many years to
of the first Eastern European economies to followed by that of a number of suppliers, come. But the Government may start to
follow the example of Germany and France which boosted the capital’s regional promote service- and R&D-oriented
in offering subsidies to citizens who wanted economy. VW employs about 10,000 projects in the future in order to reduce
to trade in their old cars and buy new ones. people at this facility. High demand for dependence on manufacturing.
Accordingly, sales of private cars grew, and workers to staff the manufacturing
Škoda retained its leading position. However, operations at the plant and the supplier Economic stability
the subsidy did little to support the domestic, parks has created a daily workforce • Slovakia adopted the euro in January
largely high-end, production. On the migration from up to 100 kilometers 2009, after meeting the economic
production side, the Government guaranteed away. criteria. This will bring stability to the
the possibility of short-time work and was • The operations of PSA in Trnava high-grade export activities and preclude
prepared to subsidize every workplace until (50 kilometers north of Bratislava) and losses triggered by currency fluctuations.
2010. Kia in Zilina (200 kilometers northeast The euro adoption was one of the main
of Bratislava) are likely to exert further reasons that VW chose Slovakia as a
An overview of investment activities reveals pressure on labor availability, resulting in production site for its new “Up!” family
that no plans have been canceled to date, higher wages and more difficult conditions model.
because investors still regard Slovakia as a for smaller component manufacturers • Slovakia’s debt ratio is below the EU
favorable location. But some implementation establishing new operations. average, which makes its financial system
dates have been postponed, given the quite robust in comparison with other EU
current economic situation. members in Eastern Europe.

Slovenia
Introduction Yugoslavia in the early 1990s. The sole Renault is the sole automotive
remaining automotive plant was a facility in manufacturer in Slovenia.
Slovenia was home to its own automotive Novo Mesto owned by Revoz, a former joint
industry when it was part of Yugoslavia. venture between Renault and the domestic
vehicle manufacturer IMV. Revoz became a
However, the Slovenian commercial vehicle wholly owned subsidiary of Renault in
producer TAM had to file for bankruptcy 2004; it is still the only automotive
when its market size shrank to 2 million manufacturer in Slovenia.
inhabitants after the dissolution of
Slovenia at a glance
USP The Switzerland of CEE Further characteristics
One of the smallest and wealthiest CEE state; nearly Commercial vehicle production history
Features
Western standards
Sole OEM (Renault) Limited supplier base
No low-cost advantage; only home to one vehicle
Challenge manufacturer, which already relocated part of production
Small population Purchase power
to home-country
Infrastructure; euro adoption and stability; governmental Exporter No distinctive import activities
Potential
incentives for R&D
EU member since 2004 Euro adoption since 2007
Neighboring Italy, Austria, Hungary and Croatia
Solid infrastructure and economic

In the past less investment friendly
stability
(-21.0% sales/ + 7.4% production in 2009)

Ljubljana
Novo Mesto
The supplier sector is rather limited. The Figure 39: Sales and production (in units) compared between 2008 and 2012
domestic players remained from formerly
supplying Zastava Automobiles, a Fiat joint 250,000
venture established in neighboring Serbia

200,000
Light vehicle sales
in the 1950s. National component

manufacturer Cimos, for example, supplies 150,000
carmakers in WE with brake systems. Only
100,000
a few foreign suppliers entered — such as
Goodyear, by acquiring a domestic tire 50,000
producer.
0
0 50,000 100,000 150,000 200,000 100,000
F = projected
Figure 40: Light vehicle sales and production compared (in units) 2006–09
250,000
200,000
150,000
100,000
50,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Slovenia:
Stephen Fish | Partner | Assurance

Ernst & Young d.o.o.
Dunajska cesta 111 | 1000 Ljubljana | Slovenia
Office: +386 1 5831 722 | Mobile: +386 31 616 725 | Email: stephen.fish@si.ey.com
“Slovenia is strongly oriented toward Western economies

and leans on Germany in many aspects, including automotive culture
and preferences. The work force is highly skilled and mostly multilingual,
as people tend to speak Croatian/Serbian, German and English. The
country offers good infrastructure and is a member of the Schengen
and euro currency area. Various investment incentives are available,
especially for activities with higher added value.” (Stephen Fish, Assurance Partner)
Market demand consumers in Slovenia purchase a In the downturn
passenger car in the smaller B and C1
The Slovenian market does not offer the segment, as in neighboring Eastern As an export-dependent nation, Slovenia
growth opportunities of the other emerging countries. This trend might arise due to is suffering from the consequences of the
markets in CEE, as the population of high barriers for cheaper used car imports. downturn. In 2009, the GDP noted a
2 million is one of the smallest in the whole negative growth of 7.8%.
of Europe. However, Slovenia is the
wealthiest state among the new EU Automotive players Slovenia benefits from its stable and
members, with the highest GNP per capita. liberal political environment and a business-
Hence, the level of backlog demand IMV was founded in 1954 and opened a friendly infrastructure. In addition, the
(prevalent in some countries due to having production site in Novo Mesto in order to financial system is quite robust, as foreign
access to a limited range of cars in the produce British Austin passenger cars by influence has been limited in this sector
past) is low. The average age of a car in license. Then the alliance with Renault was over the years. Slovenia became the first
Slovenia is 6 years, which is similar to WE, established. new EU-member to be admitted to the
and car ownership amounts to 600 cars per monetary EU community, in 2007.
1,000 people. Since the takeover, Renault has extended its
production massively for export purposes. In The Government concentrates rather on
Demand for new cars reached 80,000 units 2008, Renault reached a production level of measures to equip the industry for the future
in 1999 and was not affected by noticeable 198,094 units and in 2009 over 212,000 than boosting short-term sales through
fluctuations anymore. In 2009, new car units. The production portfolio consists of scrappage incentive programs. A second
sales accounted for 54,999 units. Renault Renault Clio and Renault Twingo II. The Government financial support package was
held dominant leadership position in terms A segment model Twingo is built exclusively announced for the development of new
of car sales with 29% in 2009. However, in Slovenia. Both models are mainly intended technologies in the automotive sector and
despite the higher income level, most for other, larger European markets. others with the aim to position Slovenia as
14,390 200,164
Renault Renault
10,580 212,680
8,291
Volkswagen
6,345
6,335
Citroen
5,155
6,640
Opel
4,752
2007 2007

Old city centre of Ljubljana (Slovenian: Stara Ljublijana), the capital and largest city of Slovenia.
a location for mechatronics. Meaning Risks and opportunities • Slovenia has concentrated on attracting
research activities and the creation of businesses in service areas that require
higher added value becomes more in focus, Risks more highly skilled employees, as
supported by the strong interactivity opposed to relying on cheaper labor for
between industry and universities. Established business practices, combined more traditional manufacturing
with prevailing socialist traditions, may operations. Slovenia is about to catch up
A shift of the industry focus seems create challenges for foreign investors with WE economically, with Slovenian
necessary due to the relatively high cost of • Slovenia has a long-standing socialist GDP per capita approaching that of
labor. Head and armrest producer Grammer political tradition. The privatization Portugal. Labor costs are following this
lately relocated sewing activities from process for some former state-owned trend closely: they are now well above the
Czech Republic, Spain, Poland and Slovenia enterprises in banking and telecoms, as average of the EU’s other new member
to Serbia and Bulgaria. Only through well as other sectors, has been rather states, with high personal income tax
increasing technology competence can the restrictive, aimed at protecting the rates and high social security costs.
Slovenian automotive industry set itself “crown jewels” of the country. When
apart from the neighboring low-cost privatization has taken place, the Opportunities
countries. Government has retained a substantial
stake in many of the businesses. A solid road infrastructure, proximity
The Government passed an economic • For companies considering a greenfield to WE markets and the relationship to
stimulus package to provide companies with investment, the legal system allows a its neighbors in the former Yugoslavia
liquidity and prevent layoffs by facilitating fully owned investment, but companies represent some of the country’s strengths
short-time work. In addition, it has cut entering the Slovenian market find it • The road and highway infrastructure is
taxes: VAT has been lowered to 8.5% from beneficial to involve local authorities in well developed, and the condition of
20% on approximately 3,000 products until the overall investment strategy. these roads is better than that of the
the end of 2010. • Although the tax system has been aligned roads in many other Eastern European
with WE pre-accession standards, taxes countries. This infrastructure, together
Renault, the supporting pillar of Slovenia’s are an uncertain area for investors. This with the geographical proximity to WE
automotive industry, announced in Spring has stemmed from a perceived countries, offers logistical advantages.
2009 that it would relocate the production inconsistent application of rules and The Port of Koper is also used
of the Clio II back to France. Renault said it interpretations among the various extensively, particularly by Asian
would compensate by raising the Twingo regional tax authorities in the country. In automotive manufacturers.
production due to the demand triggered by 2007, a tax reform aimed at reducing • Traditionally, due primarily to its location,
scrappage initiatives in other countries. In personal and corporate tax rates was Slovenia has represented the trading hub
May 2009, Renault announced plans to add introduced. In 2009, the corporate tax for the former Yugoslavia. This has made
the production of a new small model with rate was reduced to 21%. And tax Slovenia an attractive gateway for
the working title “X33.” For this investment, holidays can be utilized in SEZs. business in the other former Yugoslav
the Slovenian Government provided a grant countries, although it now faces increased
to Revoz. competition from Serbia in this regard.

Turkey
Introduction conglomerate Koc Holding, which therewith

controls nearly 50% of car production
For decades, Turkey has been a production countrywide. The biggest single producer, The biggest single car producer in Turkey
base for buses and trucks. MAN as well as however, is Renault Oyak. After reforms in is Renault Oyak.
Mercedes-Benz entered the country in the 2001, Turkey was able to attract further
1960s to begin bus production. Then foreign automotive players, especially
Mercedes-Benz added truck manufacturing thanks to the country’s free trade access to
in 1986. Nevertheless, Turkey also has a the EU. This factor contributed significantly
history in car manufacturing through to the development of Turkey as an export
entering alliances with Western producers hub. Moreover, Turkey earned the image of
at an early stage. Two of the three biggest a low-cost, high-quality location, bridging
joint ventures, Fiat Tofaş and Ford Otosan, Europe and Asia.
are partly in the hands of the Turkish
Turkey at a glance
USP Bridge to the Middle East and Asia Further characteristics
•Lş ow-cost advantage Commercial vehicle production history

Features • Bursa is the automotive heart of Turkey
•Pş referred location for Asian vehicle manufacturers Local producers cooperate with foreign
Solid supplier base
OEMs
Vulnerable economic situation, which hampers a
Challenge
continuous development Large population No distinctive purchase power
Sales potential due to population size; bridge to emerging
Potential Export activities No distinctive import activities
markets
Note: USP means Unique Selling Proposition No premium car production Volume car production
EU entry negotiation since 2005 No euro adoption
Bordering Iraq and other countries

(+12.8% sales/ -21.0% production in 2009)

Istanbul
Izmit Ankara
Bursa
The component sector did not take long to Figure 43: Projected sales and production (in units) compared
between 2008 and 2012
prosper after the arrival of global vehicle
1,200,000
manufacturers. In addition to domestic
suppliers, several domestic-foreign 1,000,000
Light vehicle sales
partnerships have been established.

800,000
Moreover, Turkey also plays a major role in
producing components, the majority of 600,000
which are for export. In 2007, for the first 400,000
time, the Turkish automotive industry even

200,000
overtook the domestic textile industry as
0
biggest exporter.
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000
F = projected
Figure 44: Projected sales and production (in units) compared

1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Turkey:
Mustafa Camlica | Partner | Tax

Ernst & Young Kuzey Y.M.M A.S.
Büyükdere Cad. Beytem Plaza, Kat 1-3-8-9-10 | 34381 Istanbul | Turkey
Office: +90 212 368 52 33 | Mobile: +90 533 815 59 98 | Email: mustafa.camlica@tr.ey.com
”We share the belief that the Turkish automotive

industry, albeit with delays caused by the global economic
crisis, will achieve production of 1.1 million units, and
600,000 employments by 2012. The automotive industry
will dominate in the years ahead and be the engine of
Turkish exports.” (Mustafa Camlica, Tax Partner)
Market demand Automotive players license in 1971. Since 2001, however, the
factory has produced only Fiat-branded cars
Apart from Russia, Turkey offers the Nearly 1.1 million,198 light vehicles were such as the Doblo, the Linea and the Palio.
biggest growth potential in CEE, with a produced in Turkey in 2008, but domestic
population greater than 76 million, the production dropped by more than 20% in In 2005, PSA and Fiat agreed to jointly
lowest car density in Europe and an average 2009. Oyak Renault, a joint venture since develop a common platform for vans to be
car age of 16 years. However, the market 1969 between Renault and the Turkish sold throughout Europe under the Fiat,
potential has not had the chance to unfold Army Pension Fund, manufactures the Peugeot and Citroen brands.
in its entirety, due to the ups and downs of Renault Megane, Clio, Fluence and from
Turkey’s volatile economy. New passenger 2011 E-Fluence passenger cars as well as Asian manufacturers established plants in
car sales peaked with 678,000 vehicles in powertrain components in Bursa, about Turkey as well. The İzmit factory, founded in
the period between 2003 and 2004, due to 90 kilometers south of Istanbul. 1997, was Hyundai’s first overseas
a scrappage program. In 2008, the production plant. Toyota and Honda entered
domestic car sales fell 17% to 494,569 In the 1960s, Otosan (Otomobil Sanayi) the market in the 1990s. From China: Chery
units, but rose nearly 13% to over 557,000 began car manufacturing in alliance Automobile will start operations in Turkey in
vehicles in 2009. with Ford in the province Kocaeli. Today, the the second half of 2011.
joint venture produces the Ford Transit
Connect van and plays a significant role in As noted earlier, Turkey is also home to bus
Ford’s supply chain. The domestic and truck manufacturers such as Mercedes-
automaker, Tofas, began producing and Benz, MAN, Isuzu and Iveco.
promoting re-branded Fiat cars under
77,077 263,656
Fiat Renault
84,820 277,572
101,678 192,164
Ford Fiat
84,725 178,626
82,694 279,922
Renault Ford
72,055 171,732
38,787 161,516
Hyundai Toyota
64,947 72,264
2007 2007

Maiden’s Tower (Turkish: Kiz Kulesi) in Istanbul sits on a small islet located in
the Bosphorus strait off the coast of Üsküdar.
In the downturn In terms of light vehicle and car production, • In October 2008, Lamborghini opened its
Turkey also has benefited from the first showroom in Istanbul. The brand
The Turkish automotive industry has European scrappage programs. However, considers Turkey an important part of its
expanded rapidly over the past couple of some Turkish exporters are approaching the development strategy, due to the
years as it has become more integrated into Middle East as an alternative automotive country’s strategic location between
the European automotive value chain. market to the slowing European market. Europe and Asia.
Eighty percent of the country’s automotive
production is for export, and the industry Turkey’s solid industrial base and its efforts In contrast to the investment plans of
accounted for 30% of overall Turkish export to converge with EU standards have made it others, Honda intends to delay the
sales in 2008. an attractive place to invest for automobile expansion of its Turkish facility, which was
manufacturers: supposed to supply the now crisis-affected
Accordingly, the global downturn had • Hyundai decided to relocate parts of its Russian market.
a significant impact as it reversed the i20 production to Turkey from India due
economic improvement brought on by a to local labor conflicts in India and in
disciplined monetary policy for the purpose order to produce closer to the European
of securing stabilization. An agreement with market.
the IMF might be an option in order to • The Chinese automotive manufacturer
secure financial resources and attract Chery announced plans in March 2009 to
further investment. The downturn also establish a factory in Turkey for the
revealed other issues, such as a weak purpose of supplying Turkey and Eastern
currency and high debt. Europe, and Chinese player Dongfeng
Motor intends to invest into its new
To boost domestic demand for passenger passenger car manufacturing unit.
cars, the Government initiated a • Hella, supplier of head lamps and
consumption tax break in Spring 2009 for automotive electronics, acquired 49% of a
three months , which resulted in a 10% Turkish vehicle parts trading company in
increase in passenger car sales for the year. January 2009 in Istanbul with the
intention of participating in the significant
aftermarket business.

Risks and opportunities • As other CEE countries closer to WE Tax regulations
markets increase their production, Turkey • After the tax reform that began in 2005,
Risks could face fierce competition due to its the current corporate tax code (with a
greater distance from these markets. On flat tax rate of 20%) enables taxpayers to
Challenging macroeconomic expectations the other hand, Turkey offers unparalleled have more clarity in respect of their tax
• From a macroeconomic standpoint, proximity to the Middle East and northern applications, which will promote the
Turkey faces serious challenges ahead Africa. investment environment (e.g., thin
and could have difficulty meeting targets • In recent years, growth in domestic sales capitalization, transfer pricing, foreign tax
from the IMF. has been slow, despite credit offers that credit, participation exemption).
• While long-term interest rates (over 60% have made it easier for Turkish customers
in 2001) still exceed 20%, the current to buy a car.
account balance remains negative, which
should be an additional obstacle to Opportunities
reducing foreign debts.
• Despite continuous growth figures Low car density combined with strong
combined with an inflation rate, Turkey population growth
needs to manage its vulnerability to • Turkey’s comparatively small car fleet
economic shocks by implementing (7.1 million passenger cars) and large
structural changes. Turkey’s economy is population present a strong combination
very much dependent on large capital for prospective growth.
inflows. • A well-established foreign automotive
• Although the inflation rate has been industry and structural reforms make it
reduced significantly, inflation is an easier for foreign OEMs to enter the
ongoing issue and requires tight market and expand production.
monetary policy. • With about 15 foreign OEM projects and
more than 700 foreign suppliers involved,
The country’s geographical position might it can be considered a mature industry
put exports to some countries at risk sector that affords easy access for
• Higher energy prices have led to establishing new facilities.
increasing transport prices around the • Turkey has a low labor costs compared to
globe. This has had a direct influence on many European countries, a skilled
vehicle transportation costs. workforce and a highly developed
• 90% of exports go to WE; direct neighbors technological infrastructure.
import little of Turkey’s vehicle output.

Ukraine
Introduction stabilization of the economical and political

situation could drive foreign investment.
For decades, Ukraine has had an automotive
industry of its own, though recently its auto In contrast to other CEE automotive Most vehicle produced in Ukraine are
companies have worked predominantly as countries, most vehicles produced in intended for domestic sales.
contract manufacturers for foreign Ukraine, which is the third-largest
carmakers. As the country does not have automotive market in CEE after Russia and
any significant global manufacturers of its Turkey in terms of population, are intended
own, the Government hopes that the for domestic sales.
Ukraine at a glance
USP Bridge to the Middle East and Asia Further characteristics
• After Russia, second-biggest country in Europe Vehicle production history

Features • Joined WTO in 2008
• Low-cost advantage Own production, no significant presence Supplier base available, but few global
of global vehicle manufacturers players
Dependence on Russia; rather sealed off from the rest of
Challenge
the EU Rather large population Purchasing power
Potential Sales potential due to population No distinctive export activities Import activities
Note: USP means Unique Selling Proposition No premium car production Volume car production
Looking for EU membership No euro adoption
Bordering Russia, Poland, Slovakia and Hungary
Import barriers Russia is most important trade partner
Severe impact of the economic downturn on light vehicles


Kyiv
Lutsk Cherkassy
Kremenchug
Zaporizhie
Zakarpattya
Ilyichevsk
ZAZ, a closed joint stock company, is Figure 47: Sales and production development (in units) compared
Ukraine’s largest car producer and the
market leader. The company, which was 800,000
founded in 1863 as a producer of

Light vehicle sales
agricultural machines, began producing 600,000
cars under its own label in the 1960s. After

400,000
the collapse of the Soviet Union, the
company entered a joint venture with
200,000
Daewoo. However, the Korean automotive
manufacturer went bankrupt in 2000, and
0
since then, ZAZ has predominantly
0 200,000 400,000 600,000 800,000
manufactured a variety of foreign brands
under license; its major agreement involves
producing Chevrolets for GM. Since 2002, F = projected
ZAZ has been controlled by UkrAVTO,
which is involved in many facets of the
automotive business. Overall, the supplier
base counts more than 450 players, Figure 48: Light vehicle sales and production compared (in units), 2006–09
approximately 50 of which are of foreign
origin. Most of the components produced in 700,000
Ukraine by international suppliers are 600,000
exported. 500,000
400,000
300,000
200,000
100,000
0
2006 2007 2008 2009
Sales Production

Your contact for automotive initiatives in Ukraine:
Oleg Svetleuschyi | Partner | Assurance

Ernst & Young Audit Services LLC
Khreschatyk Street 19A | 01001 Kyiv | Ukraine
Office: +380 44 490 3031 | Mobile: +380 67 507 7377 | Email: Oleg.Svetleuschyi@ua.ey.com
“Despite the current challenges, the Ukrainian

automotive market has great potential.
Capitalizing on the large population, skilled
labor and demand for quality cars, Ukraine has
a good chance to be a key player in the European
automotive market.” (Oleg Svetleuschyi, Assurance Partner)
Market demand Upon joining the WTO in 2008, Ukraine cut About 20 companies have been
vehicle import duties and removed import established under Bogdan Corporation,
With a population of over 45 million, one of restrictions on vehicles more than eight which was founded in 2005 to expand
the lowest car ownership densities and an years old. However, due to the economic Ukraine’s engagement in the automotive
obsolete vehicle population, Ukraine’s crisis, the customs duty for import cars was sector.
automotive market has grown continuously raised in February 2009 to 23% again.
since 2003. At LuAZ, Hyundai and Lada vehicles are
assembled under license, whereas trucks
In 2008, light vehicle sales grew by 15% Automotive players are manufactured under the license of
and reached 623,252 new vehicle sales. Isuzu at OJSC Cherkasy Bus and Hyundai
During 2009, domestic light vehicle In 2009, light vehicle production in Ukraine vehicles at Hyundai Motors Ukraine.
demand dropped by over 70%. Russian fell by more than three-quarters to 84,192
AvtoVAZ Lada kept its dominant market units from 413,938 units in 2008. The Eurocar produces vehicles only for VW.
share, ahead of Daewoo and Hyundai. major passenger car producer ZAZ, located The company, located in Zakarpattya, was
in Zaporizhe, is the only company that established in 2002 and is mainly used
Foreign brands reached a leading position in offers complete car manufacturing for the assembly of Škoda vehicles.
2008, with cheap new cars enjoying operations. Under license, the company
increasing popularity. Used car sales, which assembles cars from the Chevrolet, Chery, AvtoKrAZ Holding Company, a former
had stagnated, revived during the credit Lada, Opel and, as of recently, Kia brands. Ukrainian-Russian joint venture founded
crunch. UkrAVTO also cooperates with Mercedes- in 1995 in Kremenchug produces of
Benz and Toyota in car distribution. heavy-duty vehicles, and the Lviv Bus
Factory manufactures LAZ buses in Lviv.
Figure 49: Light vehicle production by brand (in units), 2007 and 2009
In the downturn
Chevrolet/ 161,711
Daewoo 18,211
The global crisis had a severe impact on
46,532
ZAZ
14,199
Ukraine. Demand and prices for ferrous
metals — the main export commodity of
69,443
Lada Ukraine — collapsed. The resulting drop in
14,005
17,955 consumer confidence caused the
Kia
4,791 Ukrainian automotive market to shrink by
over 73% in 2009, the worst performance
2007
of any CEE country — this after Ukraine
Source: J.D. Power and Associates 2009
had been one of the fastest-growing
Note: Light vehicles sales data was not available markets in recent years. As the majority
of local production is intended for
domestic market, the output plummeted
by over 84% during 2009.

A view of Monastery Square (Ukrainian: Mykhailivska Square) in Kyiv, looking toward the golden-domed
St. Michael’s Monastery.
Despite the slump, the Government has not Risk and opportunity Bridge to Russia
implemented any scrappage programs. • Another competitive advantage is its
There do exist governmental efforts to Risks closeness to Russia, which is Ukraine’s
support car dealers in case they trade in most important foreign trade partner,
scrap cars in payment from end consumers, The absence of political and economic accounting for more than 22% of the total
but it has not been implemented. The stability volume of Ukrainian foreign trade.
dramatic production cuts are predominantly • High inflation, which is the result of the • The bilateral agreement on free trade
a result of the very weak domestic market. current negative account balance, leads between Ukraine and Russia allows lower,
UkrAVTO wants to push exports with a to a decrease in industrial production and even zero, import rates.
rebranded version of the Chevrolet Lanos, slow economic growth.
named “Chance,” intended for countries • Uncertainty in energy policy and constant Investment incentives and low wage level
such as Russia, Moldova and Kazakhstan. Government representations about the • In 2006, the Government released the
The car company also has decided to add possibility of moving away from Russia as Concept for Developing the Ukrainian
Kia vehicles to its production portfolio and Ukraine’s main energy supplier make the Automobile Industry and Regulating the
will take over the distribution, as it owns the task of energy cost prediction more Automotive Market Until 2015. It is
largest sales network in the country. difficult. believed that this will stimulate FDI in the
• Shortcomings in social policy in previous industry.
The KrAZ unit in Kremenschug plans to years could cause the state to divert • Some international parts makes have
establish another factory for the production budget resources intended for settled in Ukraine to benefit from labor
of small and compact cars with an annual infrastructure development or fulfillment costs that are 10 times less than WE
capacity of 250,000 units. Who its of investor commitments. levels and better than in Poland, Slovakia,
cooperation partner will be is not yet clear. Hungary or Romania.
Opportunities
Leoni AG (Leoni), the global supplier of
cable systems, and VW established a joint The second-largest economy and car market
venture for the manufacturing of wiring in the CIS
systems for automotive powertrains in Striy. • According to Ukraine Autos Report Q1
Leoni has a presence in Ukraine since 2002 2009, the ongoing untapped growth
and lately decided to relocate part of its potential due to low rates of car
production capacities from Poland to ownership should reach 1 million vehicles
Ukraine. In contrast, Bogdan Corporation by 2013.
has frozen the construction of its Russian
bus plant as car sales in Russia have fallen
significantly during 2009.

Other emerging markets directly connected
to Central and Eastern Europe
Other areas of the Middle East
An excerpt
Middle East: a region with strong sales
growth
In this section, we provide a brief overview
of the automotive role of the Middle East.
Because there are different kinds of regional
definitions available, we want to limit our
attention to the most relevant countries and
aspects. Thus, we give a brief overview of
the development of the automobile industry
in the Middle East and then go into more
detail when it comes to Iran. Turkey has
already been discussed in detail (please see
page 58), given its strong automotive
sector, which has long since been integrated
into the global automotive value chain.
Due to the regional economic effects of

the world’s increasing demand for oil in the
past several years, the Middle East has
developed a rapidly growing demand for
vehicles, particularly since 2001, with
record sales in 2008. Of course, the global
economic crisis has had an effect, but a
delayed and relatively moderate one,
because the region had accumulated a
financial surplus. Economic activity
decreased in 2009 but is expected to slowly
progress again (though Dubai was hit hard
by the real estate collapse).
Japanese automobile brands are dominant

in the Middle East, with Toyota being the
best-selling brand. The Camry, which is used
for taxi fleets in some countries, and the
Corolla are most successful models. Toyota
also benefits from its reputation for service
quality.
The Dubai International Financial Center (Arabian: Markaz Dubai Almali Alalami) with the “The Gate” building
in the center.

Turkey
Iran
Cairo
Egypt Damman
Riyadh
Saudi Arabia Dubai
Jeddah U.A.E.
• Saudi Arabia: most significant imported from the US, South Korea and • Egypt: seen as export hub for both the
automotive Gulf economy in terms of Malaysia. Middle East and Northern Africa.
sales
Keeping in view the spending power of Egypt is located on both the African
Saudi Arabia is the biggest oil exporter Saudis and strong economy, there is a and Asian continents, though it also
in the world, with a strong economy and niche market for sales of imported vehicles, belongs to the Middle East. In terms of
per capita income comparable to those of especially the luxury cars. For instance, sales, 174,835 new passenger cars have
Poland and Czech Republic. The Monarchy Saudia Arabia is important for BMW as the been registered in 2009, with the potential
is home to more than 28 million inhabitants. biggest importer of the BMW 7 series in for increasing volume in future years.
The aggressive fiscal policies of the Saudi the region. Moreover, there is a growing The population of more than 78 million
Government, which has emphasized capital market for used cars, which represent has a car penetration of 45 vehicles per
expenditure as well as more indirect fiscal approximately 25% of the total number of 1,000 people. Small-volume production
stimulus measures, have helped protect the vehicles in the Kingdom and approximately takes place in Egypt, although it is
Saudi economy from the impact of the 15% of the market. increasing. In 2009, approximately
global economic downturn. Further, a 107,000 units were assembled. Nissan
continuous rise in oil prices since the first The huge oil reserves, high business expanded its activities in the country in
quarter of 2009, is also boosting the Saudi confidence and increased spending 2004 to produce pick-up trucks for the
economy. It is expected that the economy power of the people provide a favorable Middle Eastern and Northern African
will grow by approximately 3% during 2010. background for the automotive sector. The markets. The link between Nissan and Egypt
introduction of some new regulations is also began in 1997, when the Seoudi Group
If we analyze the Middle East market, it is expected to contribute to boost the sale of located in Cairo, started to produce Nissan-
evident that Saudi Arabia is the biggest new cars in the Kingdom. The maximum branded models under license. Meanwhile,
importer of motor vehicles and their parts, age for import of light vehicles and buses other brands such as Lada, Peugeot,
which are then either sold domestically or has been fixed at five years by the Customs Suzuki, Iveco, Chevrolet and Chinese brands
re-exported to other nations in the Gulf Department of Saudi Arabia. The maximum are produced here as well, partly by
region. Currently, there is no production of age for heavy trucks has been restricted to Egyptian companies, partly in joint venture
vehicles in the Kingdom and only a small 10 years. The reduction in imported used formations.
number of commercial vehicles are vehicles due to the new regulations are
assembled locally. expected to positively stimulate the market.
Consumers in the Kingdom like to make
Japanese brands, being dominant in the cash purchases and thus are not as
region, account for approximately 66% of dependent on availability of consumer
the sales in the Kingdom. Toyota is the credit as in other markets. Cash
dominant player and its Camry, Corolla and transactions are expected to continue to
Hilux models are the most successful represent the majority of purchases in the
models. European brands, being the second immediate future.
best-selling brands in the Kingdom, account
for approximately 25% of the Saudi market.
The remaining share goes to brands

Iran
Introduction Paykan was the most popular middle-class

car in Iran, produced by Khodro from 1967
In 2009, Iran’s automotive sector was the until 2005. The vehicle was based on a
second-most active industry of the country, license of a UK brand whose rights were
after its oil and gas industry . The country sold to Iran in 1979. Today, the company
Iran is the largest production location has become the largest vehicle producer in produces primarily Peugeot variants in
in the region. the region, manufacturing 46% of all cars cooperation with PSA and a few self-
produced in the region and its neighboring developed brands.
countries.
In 1993, the Government implemented an
IKCO, founded in 1962 in Tehran, is the import tariff of 100%. Consequently, a
largest automotive manufacturer in Iran. growing number of global vehicle
The company is involved in both passenger manufacturers, such as Hyundai-Kia and
car and commercial vehicle production. Renault, formed ventures with state-owned
domestic manufacturers in order to develop
Together, IKCO and Societe Annonyme the market.
Iranienne de Production Automobile
Corporation (SAIPA) comprise 96% of
domestic car sales.
Iran at a glance
Vehicle production base for the Persian Gulf states and Further characteristics
USP
Central Asia
Vehicle production experience limited
Feature Export potential is expandable
State-owned license/jointly vehicle
Dependence on oil industry; political conflicts with Supplier base lacks of quality
Challenge production in cooperation with WE OEMs
Western countries
Large young population Purchase power is on a low level
Sales potential due to large young population of
Potential
73 million; old and uneconomical car parc Self-supply of vehicle demand with
International trade less distinctive
domestic production
Lack of people with engineering

Availability of personnel
background
No EU member No euro adaption
Neighboring Turkey and further states in Asia
Infrastructure is lagging behind High car import barrier
Efforts to gain WTO membership

Tehran
However, the Government lifted the Figure 50: Sales and production development(in units) compared
10-year ban on car imports in 2003 and
2,000,000
gradually lowered the high import tariff.
This was an effort to strengthen the
Light vehicle sales
1,500,000
domestic automotive sector as well as
support technology transfer.
1,000,000
The international economic sanctions

500,000
arising from Iran’s controversial nuclear
power program do not make business
0
activities easier.
0 500,000 1,000,000 1,500,000 2,000,000

Along with vehicle production, the
component industry has also developed F = projected
over the years, as high customs duties are
claimed for the import of complete vehicles.
The Government wants companies to raise
their local content and therefore lures them Figure 51: Light vehicle sales and production compared (in units) 2006–09
with tax breaks and other incentives. Still,
foreign manufacturers import components 1,600,000
for vehicle production due to quality issues. 1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
2006 2007 2008 2009
Sales Production

Market demand in recent years. In 2007, the rate of car import tariff levels to 90% (for lightweight
ownership was estimated to be 107 per vehicles), and since then, a huge influx of
With a relatively youthful population of 1,000 people, and the vehicle population imported vehicles has been witnessed in the
approximately 66 million, Iran is a growth is quite small but over-aged. country. The tariff level for import of heavy
market with a strong demand for vehicles (buses) is even lower, at 20%, due
vehicles. The increase in car demand is Because of the high import tariffs, the to low levels of local production and high
also attributed to population growth, demand on cars is mainly met by domestic demand.
urbanization and the growing number of production. This looks different for
women among purchasers. lightweight and commercial vehicles. Since The three dominant brands, Peugeot, Kia
domestic production operates on a low and IKCO, capture 87% of the market share
Accordingly, the sale of passenger cars level in these categories, the tariffs are in the passenger car market.
has grown steadily and the market has lower, particularly for trucks. In 2006,
absorbed more than 1 million cars annually the Government lowered the automotive
Figure 52: Light vehicle sales by brand (in units) 2007 and 2009 Figure 53: Light vehicle production by brand (in units) 2007 and 2009
456,303 456,303
Kia Kia
454,886 545,886
350,422 350,422
Peugeot Peugeot
431,613 431,613
94,722 94,722
Paykan Paykan
116,709 116,709
88,859 88,859
IKCO IKCO
105,141 105,141
2007 2007

Automotive players Another major national passenger car To reduce pollution and ease the effects of
manufacturer is SAIPA. Next to its own heavy traffic on urban infrastructure, the
Over 1 million passenger cars have been products, the company produces vehicles in Government has implemented several
produced in Iran in 2009. IKCO, with its cooperation with global manufacturers, measures. One of them was the
joint ventures, accounts for the majority of such as Citroen, Nissan and Kia. At SAIPA introduction in 2008 of a scrappage
the nation’s automotive output. Kia was the Diesel, Volvo trucks are produced, whereas program. Nevertheless, the tool did not
most-produced brand ahead of Peugeot and the subsidiary Zamad focuses on busses. receive the desired response.
IKCO. Several global manufacturers In 2006, Renault started to produce the
established capacities in Iran, most of them low-budget car Tondar 90 in a joint venture Triggered by the unfavorable economic
located in Tehran. They assemble cars in with the Iranian consortium AID. The car is circumstances, Iranian automotive
cooperation with domestic, state-owned based on the Renault Logan and was manufacturers are trying to expand their
manufacturers. designed particularly for emerging markets. businesses into regions outside Iran.
The assembly takes place at the plants of
IKCO, the most successful Iranian car IKCO and PIDF. For example, IKCO remains active and put the
producer, owns a joint venture with PSA country’s biggest car production plant into
which produces Peugeot vehicles next to its Nissan vehicles are produced by SAIPA and operation in summer 2008. It also invested
own car, Samand. The company recently PIDF but the company is in negotiations to into its Syrian plant in May 2009 in order to
launched a micro-hybrid version of Samand invest in Iran. develop the location as an export base for its
and the Runna model has been launched in Samand model into the Middle East.
2009 which appear to be based on the Mercedes-Benz, Toyota, BMW, Hyundai and
Peugeot 206. Mitsubishi have secured the necessary In December 2008, the Malaysian vehicle
permits to import cars to Iran. manufacturer Proton decided to assemble
IKCO is also involved in export activities to cars in Iran by partnering with IKCO.
other countries of the Middle East by Iran’s component industry consists of
means of the Peugeot 206, a car which approximately 1,200 companies. The national producer Ardebil Sabalan
has been designed in cooperation with Khodrow-Maywan and bus producer
the French partner. The company also Daewoo from South Korea signed a letter of
established operations in Syria in 2004 and In the downturn agreement in May 2009 with the intention
other countries in order to expand business. to establish a joint venture in the middle of
Moreover, the national manufacturer is The Iranian automotive industry has been the downturn.
involved in the partial assembly of Hyundai heavily impacted by the credit crunch and
and Renault vehicles. Khodro Diesel economic downturn, which only added to And Russian commercial vehicle producer
produces primarily trucks and busses but the strain on Iran’s business activities from KAMAZ expanded its capacity in Iran in July
also established a joint venture with Daimler the United Nations sanctions. And the 2008 due to a rising demand for trucks.
in order to assemble the Mercedes-Benz pressure is even greater on the local
E-class. IKCO also opened a plant in Syria producers, which are focused on the
and established a new plant in Turkey in domestic market without having many
2008. alternatives yet.

Risks and opportunities Opportunities • The Government strives toward foreign
investment and therefore introduced
Risks Geographic and demographic facts some measures to attract investors over
• Apart from the current market stagnation time. For example, the investment
Economic sanctions triggered by external factors, there is still protection law was updated in 2006 to
• The economic sanctions hamper the a clear demand for cars, as the car improve legal procedures and attract
import and export activities of the density is lower than in CEE markets and foreign investment. Furthermore, there
country through the limitation in trade the vehicle population is over-aged. has been tax reform and the unification
and in credit availability. The sanctions • Demographically, other than Iran’s youth of currency exchange rates. As the
from 2006 were tightened in March 2008 factor (70% of the population is under private sector in Iran lacks access to
and now prohibit the trade of goods that the age of 30), there is a re-emergence capital, foreign investors can acquire
can be used for both civil and military of a wealthy upper class and a growing companies being privatized in Iran after
purposes. Moreover, all countries were niche of middle-class entrepreneurs. June 2008. However, they are allowed to
asked to be reluctant in their payment • The foreign companies which are control only a partial stake.
transactions with Iranian banks. currently active in Iran not only take
advantage of the growing market and low
Influence of Government and protectionism cost production opportunities, but they
• The economy of Iran, including the also use Iran as an export base for the
automotive industry, is mainly controlled Persian Gulf states and Central Asia.
by the Government. The auto sector is
subject to a five-year plan, and the overall Efforts to take part in economic business
privatization process is very slow. What activities and to increase foreign investment
comes quickly are the import barriers • Several new automotive manufacturing
which reduce the import of cars. companies have been established as a
result of the Iranian Government’s
Dependence on oil and gas demand protective policies being eased.
• In 2008, Iran’s net oil export revenues • Since 1995, Iran has made efforts to gain
amounted to approximately USD$73 membership in the WTO and is a member
billion and decreased to USD$49 billion in of the Economic Cooperation
2009. Oil exports provide approximately Organization (ECO), a regional economic
50% of Iran’s Government revenues, while association of middle-Asian states such as
crude oil and its derivatives account for Turkey and Uzbekistan.
nearly 80% of Iran’s total exports. The
dependence on these resources will
become awkward if the demand for oil
decreases.

Global interest in advanced powertrain technology:
how is Central and Eastern Europe seizing opportunities?
Despite the global financial turmoil traditional internal combustion engine. support in various countries, substantial
impacting business throughout 2009, The scope of activity around advanced improvements are also being implemented
several vehicle manufacturers, as well as powertrains is broad and highly diversified, to increase the efficiency of traditional fuel
new entrants worldwide, have been as pictured in the diagram below. However, and diesel engines, but also to improve
focusing on making major advances in while vehicle electrification has received a overall vehicle weight, drivers’ behavior, and
developing alternative solutions to the lot of media attention and government other areas.
Figure 54: Technology overview of powertrain architectures
Type of vehicle Natural Natural gas Conventional Hybrid electric Hybrid electric Plug-in hybrid Pure electric Fuel cell electric
gas vehicle vehicle bivalent engine vehicle vehicle (serial) vehicle vehicle vehicle
monovalent (parallel)
Description Vehicle with a Vehicle with a Vehicle with a Vehicle with a Vehicle with a Access to the Vehicle with a Vehicle with a
natural gas tank natural gas and gasoline tank battery and a battery and a grid to recharge battery only fuel cell only
only a gasoline tank only gasoline tank gasoline tank — battery
— powered by powered only by
combustion electric motor
engine and
electric motor
p
Powertain Combustion Combustion

Combustion Combustion
Combustion Combustion engine
architecture engine
engine engine
engine engine
Regenerative Regenerative Regenerative Regenerative Regenerative

breaking breaking breaking breaking breaking
Control unit for natural

gas and petrol drive
Electric Generator Electric
Electric motor Electric motor
Pressure Electric
motor motor Batteries
navigator with motor
pressure sensor Pressure
navigator with
pressure sensor
and shut of
valve Batteries
Fuel cell stack
Batteries
Batteries
Gasoline Gasoline tank Gasoline Gasoline H2 Tank

Natural gas tank Gasoline
Batteries
Natural gas tank
Propulsion Combustion Combustion Combustion Combustion Combustion Combustion Electric Fuel cell +
Technology engine engine engine engine + electric engine + electric engine + electric electric motor
motor motor motor
Energy Carrier Fuel Fuel Fuel Fuel and Fuel and Fuel and Electricity Hydrogen
electricity electricity electricity
Natural
Gasoline
Battery
Hydrogen
Note: Each shadow area demonstrates applicability of different energy source across the various powertrain architectures.
Source: Ernst & Young internal analysis

The pathway leading to an increased focus • Large component manufacturers see
on advanced powertrains is involving new vehicle electrification as an opportunity
companies currently outside the existing to create plug-in hybrid (PHEV) and
automotive industry value chain as well as electric vehicle (EV) models and hence
significant stakeholders in other industries enter the world of manufacturers.
that increasingly see the car as a converged
mean through which their core businesses One doesn’t change an industry as vital and
can flourish. Here are a few examples: embedded in the global economy as the
automotive industry overnight, and many
• Telecom companies see the car of the questions remain about the exact course
future as a data-gathering platform which that this evolving chapter in motoring will
will require advanced roaming take. More than ever, collaboration in the
technologies as it gets connected to the early stages is required to accelerate
grid but also as safety technologies technological progress and materialize new
increases, connecting vehicles to police business models — both essential to support
stations, hospitals, etc. the industry transformation. The new
• Renewable energy companies recognize stakeholders in the evolving automotive
passenger cars as a great means to value chain can be regrouped in clusters
increased demand for their energy highlighted on following page.
sources.
• Utility companies see in the electric car
a new way to manage energy peak
demand: charging vehicles at night could
reduce energy demand during peak hours
in high-demand months.

While several examples of convergence witnessed in Asia, North America and WE, technologies. In Figure 55 are a few
between the new stakeholders in the CEE countries are also trying to embrace examples of current powertrain initiatives
alternative drive landscape can be innovations toward new vehicle across CEE:
Figure 55: Advanced powertrain initiatives in CEE:
CEE country, date Initiative Details
Russia, January 2010 EV production plans are under discussion • Mikhail Prokhorov, a Russian entrepreneur who owns industrial truck
in Russia. manufacturer CJSC YAROVIT Motors, is seeking to begin mass production of pure
EVs.
• The four-seater vehicle will run on both a conventional engine and battery-
powered electricity, and will be capable of up to 75 miles per hour (mph) and
250 miles per charge.
Russia, December 2009 Renault and AvtoVAZ consider cooperating • Following its re-organization, Russian manufacturer AvtoVAZ has discussed with
on EVs. French manufacturer Renault jointly developing EV models.
• Renault, which owns 25% of AvtoVAZ, plans to begin rolling out EVs in 2011.
Poland, November 2009 RWE launches an electric vehicle pilot. • As part of a broader EV program called “E-mobility Berlin,” German energy group
RWE AG opens an EV charging station in Warsaw, Poland.
• The installation of the charging station is one of 130 similar points as part of a
research program supported by the EU.
• The Warsaw city Government is using EVs under this pilot research program,
which may expand in other parts of the region.
Poland, November 2009 Impact Automotive • Pruszków-based IAT is manufacturing a three-wheeled EV called the RE-Volt.
Technologies Sp. z o.o. (IAT) produces a • IAT is a Polish contract manufacturer for the automotive industry.
three-wheeled EV.
Turkey, November 2009 Renault plans to build an EV in Turkey. • Renault plans to produce a spacious family EV, the Fluence ZE, at the OYAK-
Renault Bursa plant starting in the first half of 2011.
Czech Republic, June 2009 ČEZ a.s. is investing in EV charging stations • ČEZ, the largest electricity producer in Czech Republic, is investing at least 500
in Czech Republic. million koruna through 2013 into the rollout of EV charging stations in Czech
Republic.
• Through 2020, ČEZ is planning to invest around 50 billion koruna into
environmentally friendly technology.
Czech Republic, May 2009 Škoda Electric produces a triple-hybrid • Škoda Electric collaborated with Proton Motor (a fuel cell producer) and UJV
fuel-cell passenger bus. Nuclear Research Institute (a Czech research institution) to create the bus. Škoda
provided the bus itself and its electric drive system; Proton Motor supplied the
triple hybrid fuel cell propulsion system; and the project was coordinated by UJV.
Slovakia, January 2009 Kia’s Idle Stop & Go (ISG) technology makes • Kia’s eco-friendly Idle Stop & Go system cuts fuel consumption by 15% by
initial appearance on six models. switching the engine off while the vehicle is stopped and instantly restarting the
engine upon driver command.
• Kia’s plant in Žilina, Slovakia, will produce six new models of its small family car
“cee’d” with the ISG technology.
Czech Republic, Tatra is in the beginning stages of planning • Czech truck manufacturer Tatra has begun research and testing into hybrid and
December 2008 hybrid and electric-powered vehicles. electric-powered vehicles.
Czech Republic, Vítkovice Machinery Group (VMG) is investing • VMG is installing CNG filling stations and producing components that will allow the
October 2008 in compressed natural gas (CNG) technology. conversion of vehicles to run on CNG.
• VMG is also forming a future fuels development research team.

Slow adoption
The examples in Figure 55 provide evidence
that CEE is striving to capture advanced
powertrain opportunities. However, the
pace of project adoption as well as the
depth and long-term impact on local
businesses are probably inadequate if the
region is to keep up with the pace of
evolution in other geographies. This
relatively slow pace is due to the following:
• CEE has historically been viewed as a

low-cost production hub and an area that
provides more exports than domestic
sales. Unlike WE, the US and China, the
region does not have the capabilities or
government support to be a start-up
environment. The localization of “normal”
supplier business is already a challenge in
CEE, and therefore, key automotive
industry players are not investing in the
area for advanced powertrain.
• The majority of people in CEE do not have
the purchasing power for EVs, which are
more expensive than fuel-based cars.
Unlike in the US or in WE, there is little
demand for owning a second vehicle.

Table 56: Stakeholders in the evolving automotive industry value chain
Strengths to support development Inhibitors to growth Example of possible initiatives within
CEE to support the evolution of
advanced powertrains
Government • Governments are often the appropriate • Governments can set expectation levels • Together with OEM and supplier
• Elected officials outlet for community-wide measures to too low or establish infrastructure too collaboration, regional governments
• Regional and city administrators support infrastructure development. slowly, which may not motivate the could implement comprehensive R&D
• Regulators • Governments and regulators can act as industry community to accelerate the programs to stimulate the localization
• Vehicle and energy associations industry catalysts while supporting pace of improvement. of alternative drive manufacturing
• Research institutes consensus and clarity of • Due to macroeconomic and other activities in their respective automotive
standardization. factors, some Governments postpone hubs.
• City administrations can create demand the implementation of low emission • City administrations could replicate
supporting start-up projects. standards. successful incentive schemes
stimulating consumption of more
environmentally friendly vehicles.
Scrappage initiatives, such as the one
implemented in Russia supporting sales
of small-engine vehicles, could be
replicated in neighboring CIS markets.
Infrastructure • The infrastructure facilitating grid • Ownership questions related to • CEE Governments and city
• Charging stations connection is a new segment playing a infrastructure are not clear. For administrators could incentivize PHEV
• Connection to the grid key role in the evolution of vehicle example, who pays for the installation and EV testing while supporting utilities
• Digital infrastructure electrification. of charging stations? Who should own to embrace renewables as alternative
• Connecting vehicles to the grid opens the digital architecture for billing? energy resources.
up a wide array of high-tech • Potentially attractive public-private • City administrations need to support
opportunities, revving up the industry. partnerships are difficult to launch due charging-station initiatives. Some
to a lack of dialogue and understanding already under way include:
of priorities. • Czech power company ČEZ, a.s., is
rolling out charging stations in
Czech Republic. The first charging
station will be in Prague with the
ultimate goal of having multiple
charging stations open by 2013.
• Power distributor Elektro Celje has set
up the first public battery-charging
station for electric cars in Slovenia
near the northern border with
Austria. Additional stations are
planned.
• German energy group RWE AG is
opening an EV charging station in
Warsaw, Poland.
Market opportunities Although there is not a clear path for Projects can be witnessed among selected
the future development of advanced companies, but alternative-drive R&D does
The new automotive value chain to technologies, what is evident is that not seem to be prioritized in this geography.
support these changes is still coalescing; more players will need to be involved in This leaves major opportunity areas open to
success will require extensive interaction determining the course of the automotive leverage talent and resources in the near
and cooperation between the existing industry over the next few decades. Key future.
automotive industry stakeholders, stakeholders in the evolving automotive
Governments, other industries, new industry value chain include Governments, To promote the use of EVs, countries such
technology innovators and the public at infrastructure and utility companies, vehicle as the US, Japan and China as well as WE
large. This is complicated by the fact that and battery manufacturers and start-up have introduced specific tax incentives and
vehicle electrification is only one aspect of companies, which play a distinct role in the regulations. North America has made the
the industry’s efforts to mitigate climate transformation process of the industry. highest contribution to the HEV market,
change, and society’s overall commitment and consistent demand has led to a high
to the effort remains uncertain. Business as usual is over, and is becoming consumption of HEV batteries. The
more complicated each day. The question Asia-Pacific region, however, remains the
Moving forward, manufacturers will be able for CEE will soon be: how is this region hotbed of activity, with significant prospects
to leverage their advanced powertrain responding to the business transformation for both the HEV and EV battery markets
technologies in CEE. EV development will and opportunities ahead? Below are and a presence of major battery
likely come first through the mainstream examples of how the stakeholders in the manufacturers.
manufacturers, especially those with a CEE evolving automotive industry value chain
presence. The localization of R&D efforts can contribute to and also impede advanced
will also become important for the powertrain initiatives, with a particular
development of new technologies in this focus on what could be done in CEE.
region.

Table 56 continued: Stakeholders in the evolving automotive industry value chain
Strengths to support development Inhibitors to growth Example of possible initiatives within
CEE to support the evolution of
advanced powertrains
Utilities • Major utilities may support renewable • A strongly regulated environment may • Several markets in CEE, such as
• Traditional energy companies owning energy projects by sharing their impede innovations needed to bridge Czech Republic, Slovenia and Poland,
and maintaining the grid experiences with other companies on the gap between the energy world and present favorable testing conditions for
• Oil and gas companies entering the the grid impact of electric vehicle automotive business. EVs. Smart grid testing in conjunction
advanced powertrain industry testing, as well as smart grid initiatives • Utilities producing energy from fossil with EV simulation could trigger new
and testing. fuels may need to shift to cleaner types of R&D activities.
• Several oil and gas companies have the sources to establish credibility with • Vast natural gas resources in Russia
capacity to support strong R&D, regulators and consumers. could supply vehicle initiatives in the
promoting major changes in the • Energy grids in some countries may CIS and surrounding countries. This
industry. become strained by the demand for EV includes the commercial liquefied
power. natural gas projects in Poland and the
Nord Stream joint venture between
Russia’s energy company OAO Gazprom
(51%), Germany’s BASF/Wintershall
Holding (20%), Germany’s E.ON
Ruhrgas AG (20%) and the NV
Nederlandse Gasunie (9%), which aim
to construct a pipeline that will
transport natural gas from Russia to
Germany under the Baltic Sea.
• Poland appears to be a very proactive
country in regard to natural gas vehicle
expansion.
Vehicle manufacturers • Several OEMs can capitalize on car • Several manufacturers are still • Among the few OEMs headquartered in
• Car and truck producers design and production know-how uncommitted to developing EVs, which CEE, no major announcements have
• Major suppliers through access to archived electric sends discouraging signals to the public been made supporting PHEVs or EVs in
manufacturing experience. and to battery manufacturers, which the years to come.
• Major suppliers have the ability to need high-volume expectations to • Suppliers tend to follow developments
support OEMs to accelerate EV launch. justify significant capital investments. taking place in their more immediate
• Several suppliers are currently key regions. OEMs in the CEE would need to
stakeholders of OEMs in regard to send a stronger commitment to
alternative drive solutions. alternative drive, which could motivate
suppliers to increase R&D focus in this
specific area.
• Suppliers with activities in CEE may find
it challenging to focus on alternative-
drive R&D that does not support
regional needs, since most major
projects in this arena are conducted at
headquarters levels.
Battery manufacturers • Battery manufacturers are becoming • Lack of communication on • Battery manufacturers are already
• Joint venture between chemical and even more important than other Tier 1 standardization at the cell level may established or expanding production in
electro-engineering companies suppliers as the need grows to bridge delay further improvement. Asia and North America. However, most
• Electric divisions of global Tier 1* different industries: automotive, • Lack of strong financial planning may of them have concluded partnership
suppliers* utilities, telecommunications, etc. cause bankruptcies. agreements with OEMs with operations
• Smaller players owning key • The possibilities around second life of • Greater standardization, for instance on in CEE.
technologies used battery for storage purposes common cell size, would help accelerate
combined with leasing alternatives are further developments.
transforming the industry.
Start-ups • Entrepreneurship and vision, which • Untested business plans and short-term • CEE could become an important hub
• Small-scale electric manufacturing often come from start-up companies, ROI expectations may jeopardize supporting start-up companies
ventures are essential drivers in the journey to innovative projects. searching for an alternative market to
• Renewable energy providers (solar, vehicle electrification. their home countries in which more
wind) affordable conditions could allow the
• Engineering companies with fleet testing and launching of initiatives more
conversion support easily and rapidly.
• CEE Governments could proactively
support selected companies looking for
“quick wins” in order to receive larger
loans in their respective home
countries.
* A Tier 1 supplier is a company who makes componets directly for a specific OEM.

Table 57: Planned PHEVs and PEVs — traditional manufacturers and start-ups
Type of Range per Planned

Car brand Model name technology charge Vehicle type Plant location launch year
(PEV or PHEV) (miles)¹
Audi e-tron PEV 155 Compact car TBD 2012
BMW Mini E PEV 150 Compact sedan Oxford, UK TBD
Spartanburg, South
BMW Concept ActiveE PEV 100 Coupe TBD
Carolina, US
Light commercial
Bright Automotive IDEA PHEV 40 Anderson, Indiana, US 2012
vehicle
BYD Auto E6 EV PEV 205 Crossover Shenzhen, China 2010
BYD Auto F6 (F6DM) PHEV 60 Compact sedan Shenzhen, China 2011
BYD Auto F3 (F3DM) PHEV 62 Compact sedan Shenzhen, China TBD
Cadillac Converj EREV PEV 40 Coupe TBD TBD
Chery Automobile S18 EV PHEV 94 Compact sedan Shanghai, China 2009
Dodge Circuit
Chrysler PEV 150–200 Coupe TBD 2011
(concept)
Citroen C-Zero PEV 80 Four-door hatchback TBD 2010
CODA Automotive EV sedan PEV 90–120 Four-door sedan Tianjin, China 2010
Compact sedan/
Fiat Electric Fiat 500 N/A N/A Toluca, Mexico TBD
hatchback
Four-door sedan and/
Ford Focus EV PEV 100 Wayne, Michigan, US Late 2011
or 5-door hatchback
Detroit-Hamtramck,
GM Chevrolet Volt PHEV 40 Five-seat hatchback Late 2010
Michigan, US
Orion Township-
GM Chevrolet Spark PEV 186 Compact car 2010
Pontiac, Michigan, US
Four-seat sedan No plans for
Hyundai Blue-Will PHEV 40 TBD
concept production version
Mitsubishi iMiEV PHEV 100 Four-door hatchback Mizushima, Japan 2010
Nissan LEAF PEV 100 Four-door hatchback Smyrna, Georgia, US 2010
Opel Ampera PHEV 40 Five-seat hatchback Rüsselsheim, Germany Early 2011
Five-seat urban Cape Town/Port

Optimal Energy Joule PEV 248 2012
passenger vehicle Elizabeth South Africa
Peugeot iOn EV PEV 81 Compact sedan TBD 2010
Sochaux, France/
Peugeot 3008 Hybrid4 PHEV N/A Compact sedan 2011
Mulhouse, France
Fluence Z.E.
Renault PEV 99 Compact sedan Bursa, Turkey 2011
(concept)
Renault Kangoo ZE (concept) PEV 99 Compact sedan Maubeuge, France 2011
Renault Twizy ZE (concept) PEV 99 Compact car Valladolid, Spain 2012
Renault Z.O.E. ZE (concept) PEV 99 Compact car Fins, France 2012
Reva REVAi PEV 50 Compact car Bangalore, India 2008
Reva REVA L-ion PEV 75 Compact car Bangalore, India 2009
Reva NXR PEV 100 Four-seat hatchback Bangalore, India 2011
Smart ForTwo EV PEV 72 Compact car Hambach, France 2009
Subaru Stella PEV 55 Compact car Gunma, Japan 2009
Tazzari Zero PEV 87 Two-seat roadster Imola, Italy 2009
CEE initiatives
Start-up companies

Table 57 continued: Planned PHEVs and PEVs — traditional manufacturers and start-ups
Type of Range per Planned

Car brand Model name technology charge Vehicle type Plant location launch year
(PEV or PHEV) (miles)¹
Hethel, UK (chassis
assembly); Menlo
Tesla Roadster EV PEV 244 Two-seat roadster Park, California, US 2009
(battery and
powertrain assembly)
Uusikaupunki, Finland;
2009 (Europe);
Th!nk Global Th!nk City PEV 112 Compact sedan Elkhart County,
2011 (US)
Indiana, US
Venturi Fetish PEV 155 Two-seat roadster Principality of Monaco 2006
Contract with existing

Visionary Vehicles Bricklin PHEV 100 Luxury sedan 2011
manufacturers
Volvo C30 PEV 93 Compact sedan Ghent, Belgium 2011-13
Volkswagen E-Up PEV 80 Compact car Bratislava, Slovakia 2013
Volkswagen Up! Lite PHEV 70 Compact car TBD TBD
¹ For PHEV, the range corresponds to the mileage capacity of the battery without engine recharge.
CEE initiatives
Start-up companies

Russia compared to other emerging markets
Challenging the BRIC Since 2004, analysts have focused on African countries but never to the point
acronym — Russia is going grouping the major rapid-growth markets of potentially making Russia an export
its own way under the now well-known acronym BRIC hub.
(Brazil, Russia, India and China). On their • Brazil and China are among the very few
own, these four countries were predicted to countries that allowed automotive
In recent decades, most major vehicle represent a significant portion of the global companies to report positive numbers in
manufacturers’ strategies have relied on GDP while becoming substantial players in 2009.
strong growth in emerging markets. In the automotive industry. • Brazil is a unique market for flex-fuel
the past several years, carmakers have vehicles (which can run on ethanol,
come a long way in entering new markets, But 2009 has led to some distancing of the gasoline or the two combined), which
pioneering manufacturing activities or four countries in terms of prospective now account for more than 90% of new
setting up partnerships with local players economic growth and overall appetite for vehicles sold in the country.
while adjusting to unique, indigenous new cars sales, focus on export, and so on. • Brazil’s focus on ethanol-powered engines
market needs. Before the global financial In fact, a closer look at the BRIC countries reaches back to the early 1980s. Flex-fuel
crisis which began in the fall of 2008, reveals that beyond strong growth vehicles began in 2003, which makes
Russia was one of the most promising prospects, the four countries have very Brazil one of the first countries to focus
growth markets, certainly deserving strong little in common, particularly in regard to on alternative energy sources to supply
board-member attention by any global the automotive industry. Not only have car the transportation industry.
suppliers not yet present there. Most car output and export taken different paths • Sales patterns in Brazil are not yet back
sales predictions in mid-2008 were for across the BRIC countries, but more than to quarter three 2008 levels, but demand
Russia to reach 5 million units a year by ever it seems that there is neither a “BRIC for flex-fuel vehicles, which enjoy better
2010. In fact, market forecasts were car” nor a “BRIC automotive strategy.” tax rates than conventional-fuel vehicles,
predicting Russia would become one of the has increased compared to pre-crisis
strongest growth markets in the world, Following are some illustrative examples, levels.
along with China and India. which also show Russia’s distinctive path:
Russia
The global financial downturn, however, Brazil • Russia is probably the most distanced
has affected the automotive industry in • Brazil and India have become strong country from the others by the crisis in
emerging markets, and Russia’s industry exporting markets. The significant terms of how it was affected by and
was clearly hit in a very distinctive way. improvement of Brazil’s economic reacted to the crisis. Car sales and
Access to credit and volatile purchasing fundamentals has created a stable market production in Russia fell strongly, as in
power of consumers have always been including favorable exporting conditions. most markets, but now appear to be
sensitive issues since Russia adopted Although export suffered severely affected for several years to come as
capitalism, and both were severely following the global financial crisis, it is access to credit and consumer cautions
jeopardized as the financial crisis began to set to strongly resume in the next two are still lowering demand across the
spread out globally. The crisis brings to light years and confirm the country’s strong country.
that Russia’s economy remains fragile and export potential within both South • While most emerging markets (except,
undiversified while its manufacturing America and Europe. In comparison, for instance, Iran and Malaysia) first
footprint has not evolved appreciably in the Russia’s export strategy for cars has developed their automotive industry with
last decade. remained modest in recent years, mainly strong participation from foreign
driven by export to neighboring CIS and carmakers, Russia had its own industry.

Across both the passenger and • Russia was more severely hit by the China
commercial segments, Russia’s entry into global financial crisis than the other • Chinese consumers were relatively quick
capitalism inherited a strong indigenous BRIC countries and will need time to to get back to pre-crisis car purchasing
automotive industry across all segments adjust. From an automotive standpoint, patterns, but nowadays they prefer
except the two-wheeler industry: Russia may need three or four years to smaller vehicles with lower emissions
passengers cars, commercial trucks of get back to pre-crisis demand levels. But (mainly due to newly introduced
all sizes as well as busses have been an important question that is still incentives).
produced in Russia since the early 1930s. unanswered is: where will the Russian • China is currently home to an
• Despite this unique characteristic, in automotive industry stand technologically unprecedented surge of R&D and
Russia, not only are lower-tier component among the BRIC economies once it innovation in the automotive industry.
manufacturers generally unable to satisfy emerges from the current crisis? If the For some international OEMs, China has
foreign quality standards, but also raw remaining BRIC countries continue to become the main location of all
materials such as metal are not processed progress technologically, it will prove international operations outside the
using standards satisfactory to difficult for Russia to catch up. headquarters country. And the country
accommodate larger volumes. has a culture of its own which makes it a
• Despite restructuring activities in recent India unique case for several players.
years, Russia’s indigenous automotive • India is now witnessing a strong rise in car • Several global automotive players are
manufacturing industry remains strongly sales, in fact stronger than before the localizing key business activities in China.
vertically integrated. crisis. Exports continued to grow during • Demand in China has created separate
• Russia has by far the smallest amount of 2009 across most segments. The country needs in Southeast Asian countries:
foreign component manufacturer plants was quick to escape lethargic sales and is companies initially aiming at supplying
among the BRIC countries. Suppliers now back to focusing on growth Southeast Asia from China now need to
currently manufacturing parts in Russia management rather than incentive consider localizing facilities in markets
find it very challenging to localize their implementation. such as Indonesia, Thailand and Vietnam
production with the support of indigenous • India is home to companies leading new due to high demand in China, which
players. areas of development in the automotive creates a surge of interest in those
• Environment-related issues do not seem industry, such as electric vehicles (with, neighboring markets.
to be a priority in Russia, which makes it for instance, REVA) and ultra-low-cost • In China, active Government involvement
difficult for the country to become an cars (Tata). in the automotive industry has lately
important platform for alternative drive • New emerging markets are gaining become an essential reality in the
vehicles such as electric and natural gas popularity and attention among vehicle business landscape, providing incentives
vehicles. and component manufacturers: Vietnam, needed to support consumption of more
• The Russian Government has deployed Thailand and countries in North Africa environment-friendly vehicles and
resources to support nanotechnology and the Middle East have witnessed motivating players to intensify
developments across various industry investments and are likely to gain more development in electric cars. This support
sectors, including automotive. It remains attention in the years to come. has had a strong impact on R&D
to be seen whether this initiative will developments and allowed some
position Russia as an exporter of passenger car manufacturers such as
advanced vehicle technologies with BYD to rapidly expand their leadership
regard to vehicle consumption and weight footprints in the electric vehicle industry
efficiency in the future. segment.

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Gauging interest for plug-in hybrid European automotive survey 2009

and electric vehicles in select Even in times of crisis, Germany can call
markets itself the world’s leading automotive
In this powertrain survey location according to automotive
Ernst & Young measured the managers from the rest of Europe, and
understanding of and interest in takes the top spot in the list of world’s
plug-in hybrid and electric vehicles most attractive automotive locations.
in the US, China, Japan and Europe. These are some of the findings of the
European Automotive Survey 2009
conducted by Ernst & Young.

Revving up! Indian Automotive UK car dealerships — lessons from the
industry — a perspective last recession
This report encompasses the entire value UK car dealerships: lessons from the last
chain of the automotive industry and recession provides a perspective on the
also covers component suppliers, vehicle current and future trends in the UK
manufacturers and trends in vehicle automotive retail market and highlights the
retailing in India. different effects on the sector between this
economic slowdown and that of the 1990s.
The study reveals a total of 24 dealer
insolvencies up to the end of August of
2009 compared to 12 for the same period
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Destination ahead: the automotive

industry in the era of climate change and
sustainability — Asia spotlight edition
In this report, we get to the heart of the
issues that are changing the face of the
industry: the evolving regulatory landscape,
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and alternative fuels. We also have a special
segment on how the Chinese automotive
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and its impact on the automotive industry.

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1 Central &amp; Eastern European Automotive Industry

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1 Central &amp; Eastern European Automotive Industry

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The Central and

The Central and Eastern European automotive industry overview 14

Other emerging markets directly connected to Central and Eastern Europe 68

Global interest in advanced powertrain technology:

Russia compared to other emerging markets 84

About Ernst & Young’s Global Automotive Center 86

Ernst & Young automotive industry leaders 87

Ernst & Young automotive publications 88

The Central and Eastern European automotive market 3

Peter Fuß Mike Hanley

4 The Central and Eastern European automotive market

The Central and Eastern European automotive market 5

6 The Central and Eastern European automotive market

CEE: A set of very different countries

Global player: Russia

The Central and Eastern European automotive market 7

8 The Central and Eastern European automotive market

Overall production capacity: expansion versus contraction

Size of CEE market

The Central and Eastern European automotive market 9

Varying emission standards hinder trade

10 The Central and Eastern European automotive market

The Central and Eastern European automotive market 11

Vehicle OEMs’ different strategies

12 The Central and Eastern European automotive market

The Central and Eastern European automotive market 13

Figure 1: Light vehicle production by region (in units), 2007–14

Asia 27,889,116 28,333,805 28,846,146 31,794,698 34,210,699 36,526,521 38,172,449 39,561,154

14 The Central and Eastern European automotive market

Leading brand market share Market share of top three brands

Source: J.D. Power and Associates; Ernst & Young

The Central and Eastern European automotive market 15

Sales: now and forecast

Sales growth forecasts vary. Some

ownership approaching those of some WE 1,500,000

16 The Central and Eastern European automotive market

Figure 7: CEE industry landscape — global suppliers

The Central and Eastern European automotive market 17

Source: European Automobile Manufacturers’ Association, Ernst & Young

18 The Central and Eastern European automotive market

St. Petersburg RUSSIA

Nizhny Novgorod Ulyanovsk

Lubin POLAND Kyiv

The Central and Eastern European automotive market 19

Figure 9: Number of FDI investments in new automotive supplier plants, 1997—2009

Czech Republic 11 12 15 19 21 30 32 27 27 21 19 20 8 262

Bosnia and Herzegovina 1 1 2 1 2 1 2 10

Source: Ernst & Young’s European Investment Monitor 2009

20 The Central and Eastern European automotive market

Figure 11: Key macroeconomic data of major non-CEE economies 2009

The Central and Eastern European automotive market 21

Introduction In the past Bulgaria has been unsuccessful

USP A low-cost base for labor intensive production Further characteristics

• Hungry for industry investment Commercial vehicle history

EU member since 2007 No euro adaption

Neighboring Turkey, Black Sea, Greek

Note: Distinctive features of the country are marked in yellow

22 The Central and Eastern European automotive market

Following the entrance of Great Wall Motors

in Bulgaria, the local component sector is 45,000

expected to gain momentum, possibly

Figure 13: Light vehicle sales compared (in units), 2006-09

Source: J.D. Power and Associates

1 Central & Eastern European Automotive Industry

1 Central & Eastern European Automotive Industry