Since the first years of the transition period, Central Europe started to emerge as a major manufacturing destination for Europe’s automotive industry, with the industrial towns of the Visegrad countries supplying West European companies and consumers. 

There was a clear logic to the move: Central Europe had a strong industrial and manufacturing base as a legacy from the communist era and even before. Czech Skoda has roots going back as long ago as 1895, starting out as a manufacturer of bicycles under the name Laurin & Klement. Poland’s state-owned PZInz factory started making “Polski Fiat” cars under licence from the Italian automaker in 1932. And Romania’s Dacia factory was set up in 1966, the year after the notorious communist dictator Nicolae Ceausescu came to power. 

^{Polski Fiat 125p 1300 cars at the XXX lat motoryzacji PRL exhibition at Bonarka City Center in Kraków. Source: Dawid Skwarczeński via Wikimedia Commons}

This meant that upon the fall of communism the Central European countries had a skilled workforce that was much cheaper than in countries immediately to the west, and it was right on the doorstep of Germany — both Czechoslovakia and Poland shared a border with Europe’s largest economy. Today, Slovakia makes more cars per capita than anywhere else in Europe, and other Central European countries are also among the continent’s top manufacturers. 

Source: ACEA

Not only did the auto-manufacturing plants of Central Europe become acquisition targets for the western auto giants — among the major deals VW Group swooped in to take over Skoda in 1991, and Renault bought Romania’s Dacia in 1999 — but a huge network of components manufacturers also sprang up across the region, both supplying local automakers and exporting to Western Europe. 

An industry in a state of change 

Three decades on from the collapse of communism, things are changing, both in Central Europe’s economic model and in the global automotive industry. 

A large part of the rationale for the shift eastwards in the auto industry was the relatively lower costs — chiefly wages but also, for example, for industrial land —in the Central and East European countries. That has changed dramatically in the last few years as economies across Central Europe start to run up against the constraint of labour shortages. Mass emigration, mainly to western EU countries, and low birthrates have caused the populations in the region to dwindle, which is only partly offset by the arrival of millions of temporary economic migrants mainly from Ukraine. This in turn is pushing wages up and forcing employers to be more creative about how their attract and retain their workers — but it has also led to media reports of companies rethinking investment decisions in the region as they can’t be sure of getting enough workers. 

The type of jobs on offer have also changed. Basic manufacturing is still there, but increasingly firms are also relocating R&D, engineering and other more sophisticated functions to the region. 

“Certainly we have observed the movement up the value chain. If you were to compare productivity at Volkswagen’s factories in Slovakia or Hungary and in Germany you wouldn’t see substantial differences,” says European Bank for Reconstruction and Development (EBRD) chief economist Beata Javorcik in an interview with bne IntelliNews. 

“However,” she adds, “what we see is that our countries are more reliant on imported content in the exports of the automotive sector. If we look at the EBRD countries, mostly Central Europe, Serbia, Turkey, Morocco, foreign value added accounts for about 40% of motor vehicles exports which is quite high by international standards. Perhaps more worrying, there was no change in this level between 2011 and 2015.” 

There is also the question of automation of production: CEE has lagged behind other major manufacturing centres in the adoption of robotics, but is rapidly catching up. And lower paid, lower skilled workers in the region are more likely to be replaced by robots than those in other countries. A 2018 OECD report says that Slovaks are the most likely nation to have their jobs replaced by robots in future. 

And in the medium-term CEE is vulnerable to the international slowdown in the automotive sector. "Global industrial production slowed, led by a contraction in the automotive sector. Given its deep integration in ‘factory Europe’ and the importance of the automotive industry for the regions’ economies, emerging Europe is highly vulnerable to weakness in the automotive sector and a further slowdown in Germany," said the EBRD's latest Regional Economic Prospects report published on November 6. 

The other side of the picture is the evolution of the global automotive industry, with arguably the biggest shift — the move from petrol and diesel to electric cars — being pushed urgently forward in response to the climate crisis. 

The US government’s Energy Information Administration (EIA) said in a report published this year that "electric mobility continues to grow rapidly”. According to its data, in 2018, the global electric car fleet passed the 5.1mn mark, up 2mn from the previous year, and the number of new electric car registrations almost doubled. China is still the world’s top market for electric cars, but increasingly large numbers are also on the roads in Europe and the US.

The EIA outlined two scenarios for electric vehicle adoption in its Global EV Outlook 2019. Under the New Policies Scenario, which aims to illustrate the impact of announced policy ambitions, it projects global EV sales will reach 23mn by 2030 and the stock of EVs will exceed 130mn (excluding two- and three-wheelers). The alternative EV30@30 Scenario takes into account the pledges of the Electric Vehicle Initiative’s EV30@30 Campaign to reach a 30% market share for EVs in all modes except two-wheelers by 2030; under this scenario EV sales and stock will nearly double by 2030 to 43mn and over 250mn respectively. 

It is a sign of how far this industry in Central Europe has advanced in the last 30 years that far from being a backwater when it comes to the shift to electric cars, it is now an important manufacturing destination for these emerging technologies. Central European countries may have been slower to buy electric cars than their western peers, but the region's factories are already making EVs and their components. 

There are still questions about how the fundamental changes afoot in the industry will affect the Central European economies. "The car industry is exploring more electric cars, moving away from diesel, so hopefully Central Europe will be able to capture some of that new business. On the other hand as automation is becoming more and more important the value of lower wages plays a smaller role. The big question is: can Central European countries get into these high value added activities such as design engineering and so on?” says Javorcik. 

Economists from the Vienna Institute for International Economic Studies (wiiw) said in a webinar on November 6 that the future involvement of Central European manufacturers in e-car production depends ultimately on "decisions made in Germany". "The decision of whether to upgrade or change the specialisations in these [Central European] countries depends on the car manufacturers that own factories in Visegrad or other countries."

Hungary’s electric future 

Hungary is still somewhat behind the other Central European countries in terms of cars produced, but it is home to all three premium German automakers — Audi, Daimler and BMW — and is also coming into its own when it comes to production of electric cars and batteries.

Audi, one of the largest investors in Hungary, with a total of €9bn spent over the past 25 years, launched production of electric motors at its Gyor plant in July 2018. “Last year we produced 9,453 electric motors, this year the proportion of the e-motors in our engine production will be much higher,” says a spokesperson for the company, in comments emailed to bne IntelliNews.

^{Audi's huge manufacturing plant at Gyor, Hungary. Source: Audi Hungaria.} 

In total, Audi AG intends to put more than 30 electrified models on the market by 2025, which constitutes a 40% share in sales. Audi Hungaria has launched a three-pillar E-Transformation project, as outlined to bne IntelliNews.

Audi Hungaria is playing a leading role in the area of electromobility within the Audi group, chairman Achim Heinfling said when announcing plans to expand the plant with an €126mn investment in July. The money will be used to expand vehicle manufacturing infrastructure, engine development centre and electric motor unit at Gyor. "The production of electric drivetrains systems at the Gyor plant will increase significantly, and the competencies and capacities of the technical development centre will be equipped by state-of-the-art workshop," Heinfling said at the time of the launch.

Gyor is already the Volkswagen Group's largest engine plant with an annual turnout of 2mn. Since the launch of production in 1993, the company had turned out 35.3mn engines as of mid 2019. The company manufactured around 100,000 cars last year, and 1.2mn since 1998. Vehicles produced at Gyor are shipped to more than 90 countries with Germany, the UK, the US and Canada being the largest markets.

And as confirmation that the days of viewing Central Europe solely as a source of low cost, low skilled workers are well and truly over, Audi has invested heavily into training and development of its Hungarian staff in connection to the launch of electric motor production at Gyor.

According to Audi, the company is not using a traditional conveyor-type assembly line, but has gone for “a new model of production stages in the factory of the future: modular production”. "To be able to operate algorithms and other previously unimagined features, all of our workers have participated in on- and off-the-job trainings at our technology centre, task-based high voltage specialisation and a great deal of IT-know-how,” the company spokesperson told bne IntelliNews. 

Fellow German premium automaker Daimler established its factory in the central Hungarian town in 2012 with an €800mn investment, which was the largest greenfield investment at the time. The plant has 4,000 workers and has produced 1mn cars since its launch, including 190,000 in 2018. Daimler has expanded production capacity, building a modern car body plant from a €580mn investment.

Daimler isn’t currently producing electric vehicles in Hungary, but it did pick the Kecskemet plant as one of five locations worldwide to produce the new Mercedes A-Class. “Since 2012 the Mercedes-Benz plant in Kecskemét (Hungary) has been successfully producing compact vehicles for the global market. The plant is running at high capacity, to serve the growing international demand for compact cars, and it is an important site within the production network of Mercedes-Benz Cars,” a Daimler representative told bne IntelliNews. 

Meanwhile, BMW plans to build a €1bn plant in Debrecen, eastern Hungary, its first production facility in Europe in 20 years, with a capacity to turn out 150,000 conventional and electric vehicles annually from 2023. The plant will employ more than 1,500 staff.

Last year the four operating vehicle makers, Audi, Daimler, Suzuki and Opel, turned out a total of 500,000 cars or some 2.8% of the 19mn cars manufactured in the EU. With the planned capacity expansion at Daimler and BMW’s new plant, Hungary's annual car production could rise as high as 800,000 by 2023. 

Hungary is also emerging as a hub for the production of batteries for electric vehicles. A series of investments by South Korean battery producers saw the East Asian nation replace Germany as the top investor into Hungary in the first half of this year.

South Korean firms invested HUF350bn (€1.1bn) in Hungary in the first four months of the year, local media reported in July. As the figures came out, Hungary’s investment promotion agency HIPA announced two new developments: Bumchun Precision said it will build a HUF13.3bn plant supplying parts for electric cars in Salgotarjan, north Hungary, while South Korea's Doosan broke ground for a HUF31bn plant to produce copper foil plant, an important input for electric vehicles. The investment could make Doosan the primary supplier of copper foil to the European market. 

Four South Korean e-car battery makers had already chosen Hungary for their production sites: Inzi Controls, SK Innovation, Samsung SDI and GS Yuasa. These investments could make Hungary one of the largest EV car battery producers in Europe after 2020. Samsung said recently it is expanding its plant with a €1.2bn investment. 

Skoda goes electric 

Looking beyond Hungary, two years ago, the Czech Republic’s homegrown automotive industry champion Skoda announced plans to produce all-electric vehicles from 2020, as part of its Skoda Strategy 2025. The company’s first electrified series model, the Skoda Superb, was launched earlier this year from the Kvasiny plant. Next year, Mladá Boleslav will start to manufacture the first purely battery electric model.

“Skoda’s future will be electric," said Skoda Auto CEO Bernhard Maier on announcing the plans. "By 2025, we plan to offer five purely electrically powered models in various segments. We are pleased that the first all-electric Skoda will be built in the Czech Republic. This decision underlines the group’s confidence in the Skoda workforce. This is an important step for the future of the Skoda brand and the Czech Republic as an automotive location.”

But Skoda is not the only Czech company advancing in this area. Independent MW Motors — named after its founder Maurice Ward — has launched the lightweight Luca EV, an electric vehicle that looks like it’s driven straight out of the 1940s.

And South Korean manufacturer Hyundai plans to start producing electric cars in the Hyundai Motor Manufacturing Czech (HMMC) plant in Nosovice in 2020, E15.cz reported in July. The full-electric Kona will be the first electric car to be manufactured by Hyundai outside Korea. Hyundai apparently wants to make Nosovice its overseas base for ecological cars.

In neighbouring Slovakia, Volkswagen’s Bratislava plant has been producing the electric e-Up! since 2013. There is also speculation, as reported by German business paper Handelsblatt in May, that VW will produce its latest small electric car in Bratislava rather than in Germany because labour costs are still lower in Slovakia. 

Peugeot has started producing its first electric cars in Trnava, Slovakia, and the company plans to assemble batteries for hybrid and electric cars in the Central European country too, as reported by Reuters in June. 

Despite these developments, the Slovak automakers association warned recently that Bratislava needs to take steps to ensure the industry keeps pace with global developments if it is to remain competitive. 

Meanwhile, Poland is looking to maintain its position in the sector, as new technologies come to the fore. Electromobility Poland, a joint venture set up by Polish state-owned energy companies, plans to build an electric vehicles factory. Industry sources put the cost of the project at around €1bn. Poland is already the site of the first large-scale automotive lithium battery production plant in Europe, built by South Korea’s LG Chem, which aims to turn the factory near Wroclaw into a “mecca of battery production for electric vehicles around the world”, UB Lee, the president of LG Chem’s Energy Solution Company, said on the launch of construction in 2017. The company is reportedly now planning a second plant in Poland, and further investments by other companies are in the pipeline. 

Self-driving cars

Along with the shift to electric vehicles, self-driving technology is seen as one of the big changes coming in the automotive industry. Back in 2016, McKinsey published a report confidently projecting “The driverless car is coming”. McKinsey predicted that up to 15% of new vehicles sold by 2030 could be fully autonomous.

The transition to fully automated driving is some way off and questions remain — not least acceptance by car owners — but it will have massive implications for road safety and sectors such as insurance. To some extent there is automation already, with driver assistance systems in cars made possible by already adopted technologies. And there are signs acceptance is growing; a 2019 study by Cap Gemini found that within five years 52% would prefer to be driven in a self-driving car than a normal one.

Within Central Europe, Hungary has been forging ahead when it comes to self-driving cars. The first phase of the ZalaZone test track for self-driving vehicles was opened in May. The HUF45bn (€138mn) government-funded project, which will be completed by 2020, is unique in the CEE region, as it has been specifically designed for testing autonomous, connected, and electric vehicles, from passenger cars to lorries weighing up to 40 tonnes. 

This article is part of bne IntelliNews’ series marking the 30th anniversary of the fall of the Berlin Wall. Find more articles from the series here: 

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“I was 30” commercial stirs controversy in Romania

The Czech Republic divided by freedom since 1989

Poland at a crossroads

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Gabor Szeles, a self-made Hungarian success story