Let’s begin with some numbers. 12.7 million people work in the automotive industry in the Europe. That means that 6.6% of the total workforce in the 27 countries of the European Union work, directly or indirectly, in the car manufacturing industry. This sector generates 7% of the GDP of the whole EU, and automotive companies alone paid over EUR 440 billion in taxes in the last year.
An important automotive industry in Europe
There are 194 automotive companies in Europe, 25% of which are located in Central Europe. The role of the automotive sector is much more crucial to the economy of many Three Seas Initiative countries than the EU average.
On average, around 8.5% of employees in European nations work in this sector. But this figure reaches 16% in Slovakia, 15% in Romania, 13.8% in Czechia, and 13.1% in Hungary. The automotive industry makes up 14% of Slovakia’s GDP, 10% of GDP in Slovenia, 9% of GDP in Czechia and Austria, and 8% GDP of in Poland. According to IHS Markit, among the ten biggest passenger car producers in the EU, four countries are in Central Europe: (Czechia, Slovakia, Hungary, and Romania).
These numbers precisely show how this industrial branch is essential to the economic prosperity of Central Europe. The rapid growth of Three Seas Initiative countries in recent years (the percentage of the EU’s GDP created by region went up from 15% in 2004 to 19% in 2018) was largely possible thanks to foreign direct investments, with the lion’s share of them in the automotive sector. But it looks like good days for the automotive industry in the region have gone with the wind.
Cascading problems in the European automotive market
Problems are mounting—and there are two primary challenges. First – issues linked with the geopolitical and social situation, and second – linked to those civilization changes. Both require the ability to adapt to changing environments.
The problems started with the pandemic. All measures taken to fight the coronavirus have lowered the number of cars sold in Europe. In 2020 the sale of passenger vehicles decreased by 24% in European Union countries. Central European automotive factories had to slow down their production. The more so because the pandemic created difficulties with subassemblies.
Supply chains between Europe and Pacific Asia became seriously damaged, and there were problems with many car parts, especially semiconductors. China and East Asia are responsible for 75% of global semiconductor production. When bottlenecks between Europe and Asia occurred (during the pandemic and when the cargo ship blocked the Suez Canal at the beginning of 2021), the production of vehicles slowed even more.
The next shock for the automotive market occurred with the start of the war in Ukraine, which significantly impacted oil prices and contributed to the significant rise of inflation in Europe. The reaction of Europeans to these events led to a substantial drop in new car sales. According to the European Automobile Manufacturers Association (ACEA), 844,147 vehicles were sold in March 2022. That is 20.5% less than in March 2021 and 51% less than in March 2019.
An uncertain future
This has strongly affected Central European countries. For instance, production fell by 14% year on year in Czechia. In Slovakia, the drop was slightly lower (7.3%). And it is challenging to predict what will happen in the near future. As the war is still unfolding and inflation is increasing, the future of the European automotive market looks murky.
The second challenge for the Central European automotive industry started with the “Green Deal” policy created by the European Union. The EU plans to reduce CO2 emissions to zero by 2050. One of the milestones helping to achieve this target is a ban on the sale of vehicles with combustion engines in EU countries by 2035. Though it is still not certain that this ban will go into effect as some countries (including automotive powerhouse Germany) oppose it.
Still, one thing is certain: the “Green Deal” will seriously affect the European automotive sector. It will have to change significantly in the coming years. And this change will strongly affect countries that count on this sector for a significant part of their GDP, something that many Central European states must consider.
“Never let a good crisis go to waste.” – Winston Churchill.
What should be the outcome of this reflection? First, the most obvious and universal one says that all these challenges should be treated as opportunities, not threats. Disruptions in supply chains in the last two years made businesses rethink their logistics. According to EY European Attractiveness Survey, 53% of business managers are considering “nearshoring” – understood as shorting their supply chains and moving production closer to markets. A year earlier, only 23% of respondents were pondering this option. 43% think even about “re-shoring,” which means bringing manufacturing to their domestic market (up from 20% a year earlier).
Disruptions in supply chains in the last two years made businesses rethink their logistics. Business managers are considering “nearshoring” – understood as shorting their supply chains and moving production closer to markets
Nearshoring is on the rise, thanks to rising energy prices, making production outside domestic markets increasingly less profitable. Asia-Pacific used to be a region where cheap and predictable manufacturing was guaranteed. Now, this is not necessarily the case – yet another consequence of the war in Ukraine and the pandemic.
It will also enormously affect the automotive industry, as many European producers rely on Asian-Pacific components. The countries of Central Europe – members of the EU and NATO, with high-skilled workers and lower labor costs – would be a natural place for such a “nearshoring.” Maybe not at once.
Central Europe – the perfect alternative
Proximity to Ukraine and Russia makes 3 Seas Initiative countries less attractive for new short-term investments. But in the long run, the advantages of Central Europe will take over. The region will become a very interesting alternative for companies looking to relocate their factories from Russia.
Another challenge that may become an opportunity: the rise of electromobility thanks to the “Green revolution” and EU policy toward the decarbonization of the automotive industry. In recent years, Central Europe has become a European leader in battery producers for electric vehicles. The region is constantly looking for possibilities of gaining a bigger part of the new EV cake.
In Hungary, a special race track was built for testing autonomous cars. In Poland, there are plans to build an entirely new electric car called Izera. In Czechia, Skoda started constructing the Enyaq IV, the brand’s first fully electric vehicle, in the Mlada Boleslav plant. Romania has new factories dedicated to manufacturing electric vehicles. Austria is opening a factory manufacturing next-generation electric powertrains, a EUR 1 bln investment, which should be finished by 2030.
“Business opportunities are like buses: there’s always another one coming,” said British entrepreneur Richard Branson. It is up to Central European countries how they will take advantage of future possibilities. But if they stay as flexible and dynamic as in recent years, the changes brought about by global turbulences could indeed turn into an opportunity.
If you are interested in the development of the EU, read also the article on R&D in Europe.