1 Central & Eastern European Automotive Industry

The Central and Eastern European automotive market Industry overview

3The Central and Eastern European automotive market

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

Introduction

The following individuals from Ernst & Young, supported by the automotive network contacts listed on the inside back cover, contributed to this report:

Peter FußGlobal Automotive Center, Partner, Stuttgart

Eric WallbankGlobal Automotive Center, Director, London

Jean-François TremblayGlobal Automotive Center, Senior Manager, Detroit

Kerstin HapprichGlobal Automotive Center, Automotive Business Developer/Marketing, Stuttgart

Christian HainzGlobal Automotive Center, Automotive Analyst, Stuttgart

There is increased movement in Central and Eastern Europe (CEE). This region has seen significant market growth in the past and, at the same time, has been the recipient of major investments, both to serve local markets and to establish a low-cost base for export to Western Europe (WE). Market growth in CEE, and especially in Russia, is expected to accelerate when the current economic crisis abates. However, the region is complex, and some CEE countries have been more affected by the downturn than others, depending on their economic stability.

The previous release of our CEE automotive market overview received very 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 players who want to expand their businesses in CEE. Thus the structure of the report remains unchanged while including country profiles for those markets we believe to be the 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.

In addition to the country overviews, this year’s update includes two new chapters. 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 emerging markets — this should give you a deeper insight into Russia’s characteristics, and its positives and negatives.

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.

Peter Fuß Mike HanleyPartner, Global Automotive Center Global Automotive Industry LeaderStuttgart Detroit

4 The Central and Eastern European automotive market

The aim of this report is to provide quantitative and qualitative insight into CEE as a whole and into each of the key countries, drawing on reliable data sources, Ernst & Young’s own network of industry professionals across the region and key industry executives. The countries chosen are geographically in CEE, with the addition of selected neighboring countries with strong positions in the automotive sector. The 10 CEE countries we discuss are:

• Bulgaria • Russia• Czech Republic • Slovakia• Hungary • Slovenia• Poland • Turkey• Romania • Ukraine

Selected emerging markets directly connected to CEE are Iran and other areas of the Middle East.

This report is not aimed at advising on which country to invest in or which to avoid. Rather, it is designed to help shape your understanding and provide insight on the state of the automotive sector in CEE. The report focuses on the passenger car market, including SUVs and MPVs, but it excludes LCVs and HCVs except where otherwise specified.

Scope AbbreviationsAudi Audi AGAvtodiesel Avtodiesel OJSCAvtoframos OAO AvtoframosAvtoKrAZ AvtoKrAZ Holding CompanyAvtoVAZ JSC AvtoVAZBMW Bayerische Motoren Werke AGBosch Robert Bosch GmbHBRIC Brazil Russia India ChinaCEE Central and Eastern Europe(an)ČEZ ČEZ a.s.Cherkasy OJSC CherkasyChery Chery Automobile Co. Ltd.CIS Commonwealth of Independent StatesCJSC Closed joint stock companyCKD Completely knocked downCNG Compressed natural gasConti Continental AG ContiTech ContiTech AGCV Commercial vehiclesDaimler Daimler AGDenso Denso CorporationE EstimateEE Eastern EuropeEIB European Investment BankElectro Elektro CeljeEU European UnionEV Electric vehicle F ForecastFDI Foreign direct investmentFiat Fiat Automobiles SpAFord Ford Motor CompanyFSO Fabryka Samochodów OsobowychGAZ Gorkovsky Avtomobilny Zavod Group OAOGazprom OAO GazpromGDP Gross domestic productGeely Geely International CorporationGM General Motors CorporationGrammer Grammer AGGreat Wall Great Wall Motor companyHella Hella KGaA Hueck & Co.HEV Hybrid-electric vehiclesHonda Honda Motor Co. Ltd.Hoyo SHK Hoyo GroupHyundai Hyundai Motor CompanyIAT Impact Automotive Technologies Sp. z o.o.IMV Industrija motornih vozil IMF International Monetary FundIzhavto OAO IzhavtoIKCO Iran Khodro Diesel Co.INA Schaeffler Schaeffler Technologies GmbH & Co. KGKAMAZ Kama Automobile Zavod OAO

Kia Kia Motors CorporationKoc Koc HoldingLeoni Leoni AGLuAZ Luts’kyi Avtomobil’nyi Zavod VATMadara Madara JSCoMagna Magna International Inc.MAN MAN AGMph miles per hourNissan Nissan Motor Co. Ltd.OAO Open joint stock companyOEM Original equipment manufacturerOpel Adam Opel GmbHOtosan Ford Otosan Otomobil Sanayi ASPHEV Plug-in hybridPREH Preh GmbHPIDF Pars Industrial Development FoundationPSA PSA Peugeot Citroen S.A. R&D Research and developmentRenault Renault S.A.Roman S.C. Roman S.A. BrasovRWE RWE AGSAIPA Societe Annonyme Iranienne de Production Automobile CorporationScania ScaniaGroupSEZ Special economic zonesŠkoda ŠKODA AUTO a.s.Solaris Solaris Bus & Coach S.A.Suzuki Suzuki Motor CorporationTakata-Petri Takata CorporationTAM Tovarna avtomobilov in motorjevTofaş Türk Otomobil Fabrikası A.S.Toyota Toyota Motor CorporationTPCA Toyota-PSA Peugeot CitroenUkrAVTO Ukrainian Automobile Corporation JSCUSP Unique selling propositionVAT Value-added taxVMG Vítkovice Machinery a.s.VW Volkswagen AGWE Western EuropeWTO World Trade Organisationy/y Year-on-year ZAZ CJSC Zaporizhskyi avtomobilnyi zavod

Definition of passenger car segmentsA Entry B SmallC Lower medium and mediumD Upper medium and executiveE Large and luxuryF Super luxuryHCV Heavy commercial vehicleLCV Light commercial vehicleMPV Multipurpose vehicleSUV 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 major destination for most cars made in CEE. Russia has been hit hard by the downturn, 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 develop its industry and become not only a large market but an exporter of domestic-brand vehicles, many of them leveraging WE technology and partnerships.

CEE: A set of very different countriesThe 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: RussiaThe 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 return to GDP growth coupled with relatively low car ownership rates. Just as important, the local industry — which had failed to gain sales during the recent years of market growth — 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.

WE is the major destination for most cars made in CEE.

Russia has the potential to develop its own industry.

Russia still has relatively low car ownership rates, so it has significant growth potential.


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 exporters of large numbers of vehicles, while their domestic markets remain small by comparison. These two countries produce more than five times their levels of domestic 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 produced in CEE are mainly small cars — a segment that, across Europe has not shrunk in the downturn due to the high customer incentives provided by the different scrappage 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 2009 compared to 2008’s record production levels. The Central and Eastern European light 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 export markets. The downturn has resulted in negative GDP growth in Turkey and Romania, leading to reduced demand for vehicles; export market demand has also dropped. The 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.

In these production hubs, domestic markets remain small by comparison with production volumes.

The vehicles produced in the new plants in these production hubs are mainly small cars for export to WE.

Production across these CEE hubs was barely affected by the downturn.

These important countries in the industry are dependent on both, local demand and on export markets.


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 manufacturers looking for a low-cost European production base in a region not currently featured in the industry. There are examples of suppliers considering relocating people-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 contractionLooking 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 lower level. The most notable new plant is the Mercedes-Benz small car plant in Hungary due to start production in 2012. In addition, Ford will start producing vehicles in its acquired Romanian plant in 2011. There has been some interest in whether WE 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 will be added in many CEE countries, with Russia and Turkey still probable capacity-expansion candidates in the medium to long term.

Size of CEE marketThe 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 to be small compared to WE, it will return to being the engine for growth in the region once 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 considerable opportunities for growth. By comparison, WE will recover only slowly. The passenger car market is forecast to shrink in 2010 as scrappage programs run their course, and it may never return to pre-downturn levels.

Some additional countries in the region are being explored by manufacturers looking for a low-cost European production base.

Capacity is still being added in CEE, as plants committed before the downturn come online, and as some OEMS look for lower-cost production locations.

However, it is likely that little further capacity will be committed for future plants across much of the region.

CEE production will rely on recovery in Western Europe as the engine for growth.

The CEE region overall still has relatively low levels of car ownership.


Market changes: segment shifts, market winners and losersMarket 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 segment shifts, but these have been inconsistent across the region. For example, in 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 local market. For example, Dacia leads the Romanian market with close to 25% of new 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 Hungary has a leading market position after being the first global player to produce there, starting in 1990.

Varying emission standards hinder tradeEmissions 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 standards 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 many vehicles produced to EU standards cannot be exported to these regions, as they cannot cope with the local fuels in the market. This hinders industry development, in 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.

Market requirements and segment shifts across the region are inconsistent.

Much consumer behavior is driven by local producers.

Many OEMS benefit from a “first mover” status in specific CEE markets.

Different technical standards are often required for export to WE.

Vehicles produced to EU standards cannot be exported to countries in the CEE region.


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 fluctuationsOne 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, there is an increasing trend to produce within a region where the vehicles will be sold in order to reduce the effects of exchange rates or for other reasons such as reduced shipping 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. Adopting the euro will stabilize this for some countries.

Some OEMs are increasingly producing within the region where the vehicles will be sold.

Volatility of exchange rate movement may affect investment decisions for countries outside the Eurozone.


CEE as aftermarket location? An emerging location opportunityThe 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 the margins throughout the value chain in the aftermarket are higher than those for original equipment supply, leading to opportunities for higher-margin growth for component suppliers, vehicle manufacturers (through supply of ”original fit” parts), 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 their aftermarket networks. For example, the aftermarket in Poland shows growth potential 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 sales 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 are growing and succeeding and still feel the need to add capacity in Europe to serve 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

Aftermarket growth will be driven by significant growth in the vehicle population through new car sales and significant imports of used cars.

Potential aftermarket growth opportunities for WE players exist.

All the major OEMs with significant sales in CEE will also be net exporters from the region.

Some OEMs still feel the need to add capacity in the CEE region.


country. Perhaps for this reason, and perhaps because there is some “overheating” of the job market in the new production centers in the region, OEMs are looking at new countries for possible location of new production plants (e.g., China’s Great Wall has plans to start 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 medium- to long-term growth in the region remain. The overall population of the region 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 Russian market clearly has the potential to catch up to some of WE’s largest markets, such 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 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.

There are still potential advantages from an OEM being the first to produce in a CEE country.

The fundamental factors for medium- to long-term growth in the region remain.

Russia is the most promising single market in the CEE region.

The fundamentals in Russia remain strong.


The Central and Eastern European automotive industry overview

Central and Eastern Europe in the global automotive marketSince the early 1990s, the countries of CEE have experienced substantial changes. The depth and level of accuracy with which structural reforms have been implemented has allowed some countries not only to join the EU, but also to rapidly become key players in global industry operations. Many countries purposely chose to focus on the automotive industry.

Passenger car production in CEE compared to other major regionsCompared to the almost static production forecasts currently available about WE, CEE

continues to be a growth area for vehicle production, with some OEMs still investing in production capacities. However, this additional capacity will still lag behind the established production centers of North America, WE and especially players in the Asia-Pacific region such as China.

In the years to come, CEE vehicle production will be dominated by vehicle manufacturers from outside the region, which will establish plants mainly to take advantage of lower costs and market presence. It remains to be seen whether market demand and trends in the region will lead to the further creation of new global brands (like Škoda).

Whichever brands may emerge out of this region as true leaders, passenger car production will generally be of smaller vehicles from the A and B segments, for the following reasons:• These products are highly cost sensitive,

so OEMs are looking for the production cost advantage of the CEE countries.

• These are typically the products that dominate the CEE markets, even in countries with higher average GDP per capita.

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 Eastern Europe

5,978,025 6,367,050 4,739,247 5,269,842 5,769,352 6,497,232 7,314,985 8,009,410

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 = projectedSource: J.D. Power and Associates


Passenger car sales in CEE versus other major regionsPassenger car sales in CEE were affected by the global downturn as nearly everywhere else in the world. Russia, Romania and Hungary were most affected, whereas Czech Republic and Slovakia recorded an increase in sales. In the long run, passenger car sales in CEE are expected to grow again, in line with increasing disposable incomes and as broader economic development extends beyond capital cities. Russia promises to grow in even higher dimensions. But overall consumer growth will only stimulate production growth in a limited number of countries. As a result, CEE is clearly to remain a net exporter of vehicles and, for some countries, exports will dominate in relation to domestic consumption. This will bring specific challenges to exporting economies, such as currency dependency, transport costs and, probably above all, a dependency on the availability of export markets in countries whose economies and focus on vehicle production might evolve.

Figure 3: New passenger car sales — 2009 market share of top three selling brands and leading brand

35.4%

41.3%

43.3%

45.3%

46.7%

45.6%

36.4%17.3%

16.4%

26.1%

29.8%

29.5%

25.3%

Škoda

Lada

Lada

Dacia

Hyundai

Suzuki

Škoda

Renault

12.7%

11.6%

11.8%

16.8%

15.9%

30.2%

28.1%

30.5%

35.2%

Škoda

Hyundai

Volkswagen

Czech Republic

Ukraine

Romania

Russia

Turkey

Hungary

Slovakia

Slovenia

Poland

Bulgaria

Western Europe

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

Leading brand market share Market share of top three brands

CEE sales versus WE salesFor OEMs that sell mainly in WE, CEE offers an obvious geographic opportunity based on proximity and local access to lower-cost production. Moreover, as CEE countries’ economies mature, they will increasingly become more comparable to those of established markets where a broader range

of vehicles are sold. Currently, in all CEE countries, more than 30% of the market is dominated by a few brands with large market share (Figure 3). Leading brands — often domestic or foreign companies with local plants — risk continually losing market share to other, global brands.

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 Eastern Europe

5,342,490 5,643,736 3,299,354 3,332,591 3,808,663 4,479,892 5,275,932 6,106,662

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



CEE passenger car sales and production overviewProduction: now and forecastAcross CEE, the emergence of major exporting countries is already taking shape, such as Czech Republic and Slovakia, which could become almost entirely dependent on global-brand vehicle exports when maximum production capacity levels are reached. Some of these countries are already showing higher labor-cost levels due to their position in the production chain.

Sales: now and forecastThe CEE countries represent a wide range of domestic market sizes. And the CEE market is not homogeneous: while different brands have succeeded in different areas, the popularity of the various passenger car segments differs from region to region. Sales growth forecasts vary. Some countries already have levels of car ownership approaching those of some WE countries, while others have significant growth potential.

2008

Pass

enge

r car

s

2014F

LCV production – which has a major impact in certain countries, such as Turkey – not included.F = projectedSource: J.D. Power and Associates

Russia

Czech RepublicSlovakia

PolandHungary

UkraineSlovenia

BulgariaTurkey

Romania0

2,500,000

2,000,000

1,500,000

1,000,000

500,000

Figure 4: Passenger car production by country, 2008 and 2014

Figure 5: Car population per 1,000 people compared by country (2009)

Source: J.D. Power and Associates

0

200

400

600

800

1,000

1,200

Car

dens

ity

Slovenia

United KingdomGermany

FrancePoland

United States

Czech RepublicHungary

BulgariaSlovakia

RussiaRomania

UkraineTurkey

607 601 577 616511

985

511

360

632

357277 225 198

128

Figure 6: Passenger car sales by country, 2008 and 2014

LCV sales figures – which have a major impact on certain markets, such as Turkey – not included.F = projectedSource: J.D. Power and Associates

RussiaHungary

UkraineTurkey

PolandSlovakia

SloveniaBulgaria

Romania

Czech Republic0

500,000

1,500,000

1,000,000

2,500,000

2,000,000

3,500,000

3,000,000

Pass

enge

r car

s

2008 2014F


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 Republic

Hungary Poland Romania Russia Slovakia Slovenia Turkey Ukraine

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 Republic

Hungary Poland Romania Russia Slovakia Slovenia Turkey Ukraine

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


Please note: This chart shows existing OEM locations, but it excludes those announced but not yet operational.Source: Ernst & Young

RUSSIA

HUNGARY

ROMANIA

BULGARIA

POLAND

UKRAINE

CZECH REPUBLIC

SLOVAKIA

TURKEY

SLOVENIA

Sofia

Varna

Burgas

LjubljanaNovo Mesto

KyivCherkasy

Illyichevsk

Lutsk

Zaporoizhie

Zakarpattya

Kremenchug

Moscow

St. Petersburg

Togliatti

Taganrog

Kaliningrad

Kaluga

Nizhny Novgorod Ulyanovsk

Naberezhnie Chelny

Izhevsk

Prague Ostrava

Mladá BoleslavVrchlábi

Kolin

Warsaw

KatowiceGliwice

Lubin

Poznan

Tychy

Ankara

Bursa

Izmit

Istanbul

BratislavaZilina

Trnava

BucharestCraiova

PitestiTimisoara

Budapest

Pecs

GyörEsztergom

Locations of major suppliers and OEMs in CEE


Foreign direct investment (FDI) inflowOver the last 13 years, the center of cross-border investment in the European automotive industry has shifted east, and the scale of investment has been huge. Automotive supplier projects typically involve high capital spend and a larger average number of employees than other

types of FDI. A growing market, existing engineering skills and lower-cost production adjacent to the mature market of WE have proved attractive propositions for a number of major automotive manufacturers.In 2007, the winners in new automotive supplier investments were Czech Republic, Romania and especially, Russia. However,

things changed in 2008 as Poland took the lead from Czech Republic in the number of investments as the country is one of the leading economies of CEE, while Russia dropped behind. But in 2009, Russia took the lead again, despite the heavy impact of the economic downturn.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Grand 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 9: Number of FDI investments in new automotive supplier plants, 1997—2009


Bra

zil

Chi

na

Fran

ce

Ger

man

y

Indi

a

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

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

Bul

gari

a

Czec

h R

epub

lic

Hun

gary

Pol

and

Rom

ania

Rus

sia

Slo

vaki

a

Slo

veni

a

Turk

ey

Ukr

aine

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 10: Key macroeconomic data of selected CEE economies 2009


Country profiles

Bulgaria

Introduction

In the past, two local commercial vehicle manufacturers were active in Bulgaria — Madara JSCo (Madara) in Shoumen and Chavdar in Botevgrad, producing trucks and buses respectively. Former truck manufacturer Madara remains operational, now mainly focused on axle and spare part production for commercial vehicles. In 2008 it was announced that its long-time major client Kama Automobile Zavod OAO Group (KAMAZ), the Russian truck manufacturer, plans to set up a joint venture with Madara in order to use the Bulgarian company as an entry into the EU market.

In the past Bulgaria has been unsuccessful sustaining viable economic relationships with foreign passenger car producers.

Great Wall Motors from China is expected to become the first car manufacturer in Bulgaria after forming a joint venture with local Litex Motor Corporation. The investment project is estimated at 90–100 million euro. A plant is already under construction and is planned to become fully operational by 2011. Initially, Great Wall Motors wants to focus the manufacturing efforts on four types of vehicles — two types of sedan, a SUV and a pickup.

Further characteristics

Commercial vehicle history

No car production yet Certain component supplier base but few global players

Small population No distinctive purchase power

Export activity of component industry No distinctive import activities

No premium car production No volume car production

People with engineering background Availability of personnel, IT hardware/electronic experience

EU member since 2007 No euro adaption

Strong impact of economic downturn on light vehicles sales in 2009 (- 48.1%)

Neighboring Turkey, Black Sea, Greek and Romania

Infrastructure is lagging behind

Note: Distinctive features of the country are marked in yellow

USP A low-cost base for labor intensive production

Features

Hungry for industry investment• No car production implemented yet• Not influenced by a dominant automotive player• Chinese producer Great Wall Motors intends to • implement production in 2011

Challenge To attract OEMs in order to establish automotive industry

Potential Low-cost advantage

Note: USP means Unique Selling Proposition

Bulgaria at a glance

Great Wall Motors will become the first OEM in Bulgaria.


Sofia

Varna

Burgas

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

0

10,000

20,000

30,000

40,000

50,000

60,000

2006 2007 2008 2009


Sales

Ligh

t veh

icle

sal

es

Bulgaria hosts a number of small to mid-sized component manufacturers with export-driven production activities. Following the entrance of Great Wall Motors in Bulgaria, the local component sector is expected to gain momentum, possibly attracting other foreign investors to the market and easily sustaining the 7%–9% annual growth registered during the last couple of years in this segment.

Figure 12: Sales and production (in units), compared between 2008 and 2012


60,000

45,000

30,000

15,000

00 15,000 30,000 45,000 60,000

Light vehicle production2008 2012F

Ligh

t veh

icle

sal

es


Market demand

With a population of 7.6 million, Bulgaria is one of the smaller CEE countries. It is characterized by a relatively high rate of passenger car ownership of 632 per 1,000 inhabitants, similar to the car penetration densities of Poland and Czech Republic. Nevertheless, the vehicle population in Bulgaria is quite aged, significantly exceeding EU averages.

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 the EU average) and the lack of import barriers for older vehicles. In contrast, the new passenger car market is relatively small, though new car sales enjoyed robust growth between 2004 and 2008, mainly driven by the abundance of financing opportunities. As a result of the global economic crisis, Bulgarian consumers dramatically withdrew discretionary spending. The contraction in the new car sales market was overwhelming as new vehicles sold fell to approximately 29,000 units in 2009 from around 56,000 units in 2008.

In 2009, Hyundai was the leading brand in the country in terms of car unit sales, followed by Toyota, Peugeot and Volkswagen.

Automotive player

Chinese manufacturer Great Wall Motors will start local production in the town of Lovech by 2011. The entry of Great Wall Motors is expected to be the cornerstone for Bulgaria in establishing a competitive domestic automotive industry.

In the downturn

Similar to other countries, the global crisis has led to fading consumer confidence and decreased sales in most industries in Bulgaria.

The effects of the global financial meltdown put an abrupt halt to the robust economic growth in the country as real GDP decreased by 5% in 2009.

Thus, the country is dependent on FDI, which was the main engine behind the high

economic growth during recent years. In light of the crisis, FDI in Bulgaria in 2009 dropped by almost half, down to 3,212 million euro. A strong rebound in FDI is vital for the economic recovery of the country.

Bulgaria is an attractive business destination with respect to labor costs. Amid the current challenging economic environment, the relatively low cost of human capital is a strong argument for companies to relocate their facilities to the country, even from other low-cost CEE regions. In response to the ongoing slowdown in the automotive sector, Grammer AG, passenger seating and car interior fittings supplier, decided to relocate its sewing activities from Czech Republic, Slovenia and Poland to Bulgaria and Serbia in 2009.

Your contact for automotive initiatives in Bulgaria:

Diana Nikolaeva | Partner | TransactionErnst & Young Bulgaria EOODBusiness Park Sofia, Building 10, Sofia 1766, BulgariaOffice: +359 2 81 77 161 | Mobile: +359 0889 632035 | Email: [email protected]

“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)

Figure 14: Light vehicle sales by brand (in units), 2007 and 2009

20072009

Hyundai

Toyota

Peugeot

Volkswagen


1,7103,329

5,8132,820

4,3842,263

3,8802,251


Risks and opportunities

Risks

Underdeveloped road infrastructure • The network of roads and highways in the

country remains largely underdeveloped. According to the statistics of the International Road Federation, only 70% of Bulgaria’s highways, 51% of its national roads and 28% of its secondary roads are in good condition. Bulgaria has some 480 kilometers of operational highway infrastructure but none of the six highways are entirely complete (729 planned kilometers are awaiting construction). Because the successful implementation of future highway and road construction projects is subject to adequate EU funding and strong political will, the newly elected Government has listed highway construction among its top priorities. However, bringing the road network up to Western standards is expected to be a long and arduous process.

Slow reform processes since EU accession in 2007 and certain non-transparent business practices • Bulgaria has been criticized for lack

of transparency in certain business practices. More open governance and increased accountability, especially in the field of public procurement, will stimulate foreign investments in the sector significantly.

• As a result of Bulgaria’s accession to the EU, the appropriateness of those practices has come under closer scrutiny than in the past. Anticorruption measures and firm regulatory policies are still to be implemented in many areas.

Opportunities

Low human capital costs attract labor-intensive manufacturing operations, while the geographical proximity to Turkey and its developing industry offers upside potential• Current wage levels in Bulgaria are below

the averages of other CEE members of the EU. The difference in labor costs is quite significant even between Bulgaria 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.

• Bulgaria can potentially capitalize on the cost pressure in the automotive industry to absorb some of the labor-intensive manufacturing activities from Turkey, its neighbor to the south. Turkish companies might consider outsourcing operations to Bulgaria in view of the potential labor-cost efficiencies and Bulgaria’s proximity to existing operations in the Bursa region of Turkey.

• Bulgaria’s workforce includes a large number of educated and skilled people. A high percentage of the workforce has completed some form of secondary, technical or vocational education. Many Bulgarians have strong backgrounds in engineering and science. The skilled workforce is a considerable incentive for foreign companies to invest in Bulgaria.

Tax system has been reformed• The tax system has recently been

reformed. To attract foreign investment and stimulate domestic entrepreneurship, the Bulgarian Government has adopted one of the lowest corporate income tax rates in Europe, a 10% flat rate.

National Assembly in Sofia (Bulgarian: Narodno Sabranie) is the unicameral parliament and legislative body of the Republic of Bulgaria.


Czech Republic

Introduction

Czech Republic has a singular position in Eastern Europe, gifted with a long-time automotive tradition through the manufacturer Škoda.

Škoda has unfolded into a global player with the aim of conquering the emerging markets. In its home country, the manufacturer continues to dominate the market with a new passenger car market share of 29.5% in 2009. Škoda ranks first in used car sales, though the advantage of homegrown manufacturing is slowly dissipating.

As a result of its automotive past and long-time competence in machine construction, Czech Republic has been able to garner a large volume of FDI, about 70 billion euro, since 1998. Beyond its mechanical skills, the country also benefits from bordering WE.

Altogether, the country is home to three global manufacturers. Second to Škoda, the Toyota-PSA joint venture (TPCA) entered Czech Republic after the country joined the EU in 2004. Shortly thereafter, Hyundai established a strategic base for its European operations in Czech Republic and started production in 2008.


Strong car history (Škoda)

Three global OEMs (Škoda, Toyota PSA, Hyundai) Robust supplier base

Small population Purchase power

Strongly export oriented No distinctive import activities

No premium car production Volume car production

People with engineering background Availability of personnel limited


Modest impact of the economic downturn on light vehicles (-11.1% sales/+10.8% production in 2009)

Neighboring Germany and Poland

Infrastructure is distinctive


USP Beneficiary of scrappage programs

Features

Settled as production base for small car segment• Hosting strong emerging market brand (Škoda)• Over 100 year old automotive tradition — own car brand • (Škoda)Highly integrated into European automotive value chain• Neighboring Western Europe — an advantage of time and • logistics

Challenge New competitive advantage has to be found as low-cost advantage melts

Potential Small car production base; investment into R&D


Czech Republic at a glance

The country is home to three global manufacturers − Škoda, Toyota-PSA and Hyundai.


Prague Ostrava

Mladá Boleslav

Vrchlábi

Kolin

International suppliers followed the global clients into the country. Through the combination of its foundation in machinery, a skilled workforce and foreign investment, Czech Republic developed an attractive supplier portfolio which is anchored in the global automotive value chain. With the country’s technology competence, the component sector not only supplies resident enterprises but is mainly active in foreign trade business.

Figure 16: Light vehicle sales and production compared (in units), 2006–09

1,000,000900,000800,000700,000600,000500,000400,000300,000200,000100,000

02006 2007 2008 2009


Sales Production

Figure 15: Sales and production (in units) compared between 2008 and 2012


1,500,000

250,000

0

0 250,000 1,500,000

Production2008 2012F

Sale

s

500,000 750,000 1,000,000 1,250,000

500,000

750,000

1,000,000

1,250,000



20072009

Škoda

Ford

Volkswagen

Renault


64,30650,492

14,67218,520

13,73014,248

11,88912,055

Figure 18: Light vehicle production by brand (in units), 2007 and 2009

20072009

Škoda

Peugeot

Citroen

Hyundai


581,636492,873

104,551115,923

98,547115,989

0112,396

Market demand

With 10.2 million inhabitants, Czech Republic is a small CEE member, and the car density, with 505 cars per 1,000 people, already equals WE levels. However, the Czech vehicle population is 14 years old on average, and the speed of replacement is relatively slow. This can be linked to the fact that used car imports have been a strong competitor since import barriers dropped.

With entry into the EU, the country experienced significant GDP growth, but since 2008, growth has slowed. Accordingly, new light vehicle sales grew over the last five years but showed a reversal in 2009 as household demand declined in the last quarter of 2008 due to the downturn and a rise in consumer prices.

From a production perspective, the automotive sector represents about 20% of Czech Republic’s industry revenues

and overall exports. The ratio of domestic production to domestic sales of light vehicles was 5:1 in 2009. This fact underlines the position of the country as an export nation.

Automotive players

In 1992, Škoda began its prosperous global success story when Volkswagen started to invest into the Czech automotive manufacturer. Today, Škoda is one of the largest economic groups in Czech Republic, with its main operations based in Mladá Boleslav, a city located 50 kilometers from Prague. The smallest model, Fabia, accounts for the largest share of the total production volume. A new technology center was established last year to prepare for the future. Further, a 60 million euro expansion of the transmission facility allows it to supply city cars. And going forward, the Czech manufacturer will develop components for VW.

TPCA owns a car plant in Kolin, near Prague, with a capacity of 300,000 units per year. The partners — Toyota, Citroen and Peugeot — share a common platform for their A segment models.

The Korean carmaker Hyundai built its plant in Nošovice in the eastern part of the country, with a capacity of 300,000 units for three different models, and began production in November 2008. The company stated that it located a plant on the European continent in order to produce close to the market. The Nošovice location was chosen to be near the Slovakian-affiliated Kia facility, in order to share components.

In the downturn

As Czech Republic’s economy is strongly cross-border, with more than 80% export share in GDP relating to industrial production, the weak market conditions that

Your contact for automotive initiatives in Czech Republic:

Milan Kocka | Partner | AssuranceErnst & Young Audit, s.r.o.Karlovo nám. 10 | 120 00 Prague | Czech RepublicOffice: +420 225 335 349 | Mobile: +420 731 627 221 | Email: [email protected]

“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)


permeated WE affected even Czech Republic which is one of the best performers in Eastern Europe.

The variations in currency exchange rates do not help the situation as this was one of the reasons why VW located its news production facility (for the “Up!” model) in Slovakia rather than in the Czech city of Vrchlábi.

However, the automotive sector in Czech Republic is still much less affected by the credit crunch than other CEE countries.After a shrinking demand for company cars, a government measure contributed to growth in new car sales in the first five months of 2009. The initiative allows companies to write off the value-added tax (VAT) on new or used cars purchased or leased after 1 April 2009.

The Czech automotive sector increasingly benefits from focusing on the A and B segments. Thanks to WE scrappage incentive programs, Škoda was able to increase the production of its former backbone model, Fabia, in 2009.

Despite the economic crisis, Hyundai announced its intention to invest to expand capacity of transmission output to produce 500,000 units between now and 2012.

In the following months, a decline in production is expected due to the end of scrap subsidy programs in most of the EU countries.


Risks

Skill shortage and increasing wages are currently a reduced risk• While the country’s overall unemployment

rate stood at a moderate 5.4% in 2008, it rose to 9.3% in 2009.

• Some time ago, there was a shortage of skilled labor. In the middle of 2008, Hyundai noted the absence of specialists for quality control and for its paint shop. Škoda even looked for labor in Vietnam at the end of 2007, since Polish and Slovakian guest workers preferred to work in WE countries. However, due to the economic downturn, companies began to lay off workers.

Government intention to reduce dependency on the manufacturing industry• Some politicians have started to question

whether the country’s dependency on the manufacturing industry, in particular the automotive sector, could become a risk. The automotive sector contributed 8% to GDP and 19% to exports in 2008. In response, the Czech Government published a new investment regulation at the beginning of 2009. It stipulates that only R&D and shared service center operations are subsidized in the future.

Strong currency/variation in exchange rates• Changes in currency exchange rates

make business activities complicated, especially given the strong Czech koruna in 2008 and 2009. Due to the strong

currency exchange, the majority of the inhabitants await Czech Republic’s integration into the European monetary union to gain more stability. However, experts do not expect the currency adoption before 2013 or 2014.

Opportunities

Good infrastructure and a large base of local suppliers attract investment• Czech Republic has a long tradition of

automotive engineering and production. Škoda celebrated its 100th anniversary in 2005, and other automotive brands, such as truck makers Tatra and Avia, also have a long history in the country.

• More than any other CEE country, Czech Republic is characterized by a strong automotive supplier capability.

• The investment and business depelopment agency CzechInvest claims that more than half of the largest global automotive suppliers have operations in the country. This large portfolio of suppliers allows access to an almost complete local supply chain, providing significant cost advantages.

• Czech Republic benefits from its geographical position in the middle of Europe. Global companies located in Czech Republic function mainly as export bases to Western countries. The close proximity assures time and logistical savings.

• Further stimulus for the country is expected from EU subsidies of 27 billion euro for infrastructure projects up to 2013.

The Charles Bridge in Prague (Czech: Karlův Most) is a historical bridge that crosses the Vltara River.


Hungary

Introduction

Before 1990, Hungary was involved in significant truck and bus production with domestic brands Ikarus and Rába Automotive. Today, Rába supplies its three strategic markets (the EU, the US and the Commonwealth of Independent States [CIS]) mainly with axles and chassis as well as other components.

After the dissolution of the Eastern Bloc, three global car manufacturers established

themselves in the country. With Suzuki, Opel, Audi and the associated component suppliers, the automotive industry became the main pillar of Hungarian manufacturing. However, since then, Opel has shifted its activities to powertrain production.

Hungary has not lost its attractiveness, as Daimler AG (Daimler) has decided to open a plant in Kecskemét, 86 kilometers from Budapest, to manufacture new compact models in the near future.


Commercial vehicle history

Three global OEMs (Suzuki, Opel, Audi) Robust supplier base


Export oriented No distinctive import activities

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)


USP Established as supplier of powertrain

FeaturesWon new investor: Mercedes-Benz A and B class • productionHosts both premium and volume brand production•

Challenge Follow-up to new powertrain technologies, especially as producer of powertrains

Potential Hosting four established OEMs, and expansion of small car production


Hungary at a glance

Daimler has decided to open a plant in Hungary.


Budapest

Pecs

GyörEsztergom

In terms of parts production, Hungary is focused mainly on building engines. Both GM and Audi have established major factories with the same focus, and Suzuki has announced similar plans. Beyond that, a supplier base for other relevant parts is present, and mainly driven by the existence of the global vehicle manufacturers.

Historically, Hungary served as a base for component production for delivery to the domestic commercial vehicle industry, but also to the Russian producer AvtoVAZ.


2006 2007 2008 2009


Sales Production

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

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500,000

400,000

300,000

200,000

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00 100,000 200,000 300,000 500,000400,000


Ligh

t veh

icle

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es


Market demand

As a domestic producer with a market share of 28% in 2009, Suzuki benefits from producing locally. It also benefits from its focus on small cars, as the Hungarian population tends to buy affordable cars like those produced by Suzuki. However, with only 9.9 million inhabitants, Hungary cannot offer the sales opportunities that several other CEE countries can.

With Hungarians’ cars having an average age of more than 11 years, more than 3 million people could potentially replace their vehicles within the upcoming years. Moreover, with a car density of 360 vehicles per 1,000 people, the demand for cars has become obvious as new car sales increased continuously between 1996 and 2006. But after 2006, the population’s spending power was severely affected by a political crisis. Further, Hungary’s attractiveness for manufacturers in the automotive industry is not the domestic car market but rather the

infrastructure and industry traditions that the country offers.

Automotive players

As a producer of affordable cars, Suzuki held the dominant market share for the past 11 years. The Japanese carmaker committed itself to various cooperative ventures with other companies in Hungary to extend its capacities. In 2003, the company decided jointly with Fiat to build SUVs for both brands that would be identical in construction, namely the Suzuki SX4 and the Fiat Sedici. In addition, Suzuki began assembling the Opel Agila and producing the Suzuki Splash in 2008. These two are also based on an identical platform.

Audi Hungaria owns one of the biggest engine production facilities in the world, which is located in Györ. In 2008, the Hungarian plant produced almost 2 million engines to supply all Audi models as well as

other VW brands both within Hungary and in other countries. Moreover, the premium models, the TT Coupé and the Roadster, have been assembled in Gyor since 1998. In 2007, the A3 Cabriolet, which is based on the same platform, was added to the assembly portfolio. Lately, Audi announced plans to increase investment in its engine R&D facility.

The GM powertrain facility in Szentgotthárd supplies different GM brands in Europe. Daimler will start production of the new generation of Mercedes-Benz A and B class models in Hungary in 2012. This decision was influenced by, among other things, the labor cost advantage, a suitable portfolio of suppliers and a convenient logistical infrastructure. The compact model production is very important to Daimler, which is attempting to match the tastes of potential Eastern European customers. These customers tend to prefer the B and C1 segments. Daimler is also focused on strengthening these segments across Europe.

Your contact for automotive initiatives in Hungary:

Robert Heinczinger | Partner | TaxErnst & Young1132 Budapest Váci út 20| Budapest| HungaryOffice: +36 1 451 8262 | Mobile: +36 30 919 3814 | Email: [email protected]

“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)


20072009

Suzuki

Ford

Volkswagen

Opel


32,27313,607

22,4799,833

17,8678,535

21,6958,176


20072009

Suzuki

Opel

Audi

Fiat


193,610119,319

58849,481

56,98243,959

38,33811,006


In the downturn

Hungary began economic reforms in reaction to the downturn at a relatively early stage and thereupon enjoyed a flow of FDIs.

Nevertheless, Hungary faced economic conflicts even before the current recession. The Government managed to provide stabilization by requesting financial support from the International Monetary Fund (IMF) at the end of 2008. However, the global downturn then knocked Hungary back again and left the financial system and the currency with significant concerns. The high level of external debt as well as the overall economic vulnerability have forced the Government to carry out cost-cutting measures during 2009. This will have a negative effect on the already slowing domestic demand.

Until 2006, Hungary was the recipient of nearly 33% of the entire FDI flowing into CEE. Now the Government is making an effort to enhance Hungary’s attractiveness for foreign investment again by shifting the tax burden from corporate taxes to VATs.

Regarding automotive output in particular, Audi suffers more as one of the main Hungarian exporters, due to its role as premium carmaker and as an engine supplier to the crisis-affected regions of Europe.

On the other side, as a beneficiary of foreign scrappage programs, Suzuki absorbed some of the negative effects on the sector. However, even Suzuki, a manufacturer with high output volumes, has faced difficulties and suffered from decreasing outputs.

Moving to supplier investments, Apollo, a tire manufacturer from India, recently reversed its intention to establish a new plant in Gyongyos. Nevertheless, Hankook Tire, a South Korean supplier, will increase investment in its only European plant, in Hungary, with the intention of increasing its capacity and market share in the tire sector in Europe by 2011.


Risks

Currency risks and volatility• Like the other new EU-member states, it

will maintain its local currency for a conversion period before introducing the euro and participating in the European Monetary Union.

• At the beginning of the financial crisis, the forint depreciated heavily, but it has been steadily gaining value in recent months.

• The devaluation of the forint against the euro has made Hungary relatively cheap for euro-based economies. This proves to be a strong competitive edge against Slovakia, where the car industry is also strong.

Financial vulnerability• The relatively high level of external debts

and the strong export-orientation of the quite small market make Hungary fragile, particularly when facing the global downturn and the alteration in exchange rates.

• However, Hungary managed to get financial support of around 20 billion euro from international organizations in order to secure the international liquidity and stability of the financial system. This should contribute to the trust of investors. That being said, reforms still must be implemented to cut the budget deficit.

Opportunities

The Hungarian economy is quite mature compared to other CEE countries; its legal system follows Western standards, providing strong protection for investors• Hungary is among the most developed

former Eastern Bloc countries. Its economy is more mature and is becoming more settled as the emerging-market phase runs its course.

• Privatization and efforts to attract FDI, combined with Hungary’s historical and cultural links to the old monarchy, helped the country grow quickly after the Eastern Bloc countries became 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.

Megyeri Bridge (Hungarian: Megyeri Híd) spans the River Danube between Buda and Pest.

Hungary is geographically well-placed to benefit from EU enlargement in the Adriatics• Hungary is likely to benefit from

becoming more central in the EU area. The Adriatic region, which borders Hungary to the south, is less developed, and Hungarian businesses might have a competitive advantage in their proximity to this and other emerging neighboring markets.

Labor cost advantage and a qualified workforce • Compared to Poland and Czech Republic,

for example, Hungary still offers relatively low wages on all hierarchy levels, particularly in the blue-collar sectors.

• There are Eastern European countries that can offer lower labor costs, such as Romania, but according to Eurostat, labor productivity is higher in Hungary.

• Hungary has also been praised for the qualification level of its work force. This was one of the factors that Daimler mentioned regarding its decision of Hungary as its production base.

• In 2010, the labor tax has been streamlined so that employer contributions will be reduced by 5% in order to improve the employment rate and labor costs


Poland

Introduction

Since Poland is one of the three biggest nations in Eastern Europe and has steadily evolved economically, large amounts of FDI flowed in during the 1990s when four global automotive manufacturers settled in the country.

As resident VW decided to limit its production portfolio to LCVs, Daewoo, the first to market, backed out of car production due to insolvency. Today, former Daewoo subsidiary FSO and GM jointly produce low-budget Chevrolet models. The dominating car producer, however, is Fiat, with its largest operation base outside Italy and Brazil in Tychy, Poland.


Two global OEMs (Fiat, GM) Robust supplier base

Midsized population Purchase power

Strongly export oriented No distinctive import activities


People with engineering background Availability of personnel is limited


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.

USP Currently hosts largest Fiat plant outside Italy and Brazil. Thereby, Poland is a significant small car producer.

Features

One of the most successful CEE reformers• Third biggest nation in CEE• Poland is the largest beneficiary of EU subsidies• Neighboring Western Europe — an advantage of time and • logisticsHighly integrated into European automotive value chain•

Challenge New car sales, new competitive advantage has to be found as low-cost advantage melts

Potential Small car production accords the trend to economic cars, population of 38 million


Poland at a glance

Poland hosts Fiat’s largest base of operations after Italy and Brazil.


Warsaw

KatowiceGliwice

Lubin

Poznan

Tychy

Apart from vehicle production, Poland is well positioned as a component supplier, both inside and outside the country. Overall, more than half of Poland’s automotive revenue is generated through component sales. And in spite of the current economic downturn, tire manufacturer Bridgestone opened another facility, driven by its long-term strategy for Europe. Overall, Poland is strongly export driven.


1,000,000900,000800,000700,000600,000500,000400,000300,000200,000100,000

02006 2007 2008 2009


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Market demand

Poland is viewed as one of the most successful Eastern European reformers, producing annual growth figures averaging over 4.8% GDP in the past. And with a population of 38.5 million, Poland accounts for a relevant portion of all car sales in CEE.

Although demand for new vehicles has been growing steadily, there is still a market for three times as many new car sales. This can be attributed to the low import barriers triggered by accession to the EU. As a consequence, the country is flooded with cheaper used car imports. Only every eighth passenger car is less than five years old, and the vehicle population averages 12–14 years old.

Automotive players

The largest producer, Fiat, is based in Tychy, a city in southern Poland. In 2005, Fiat and Ford entered a cooperation agreement to develop small cars, the Fiat 500 and the new Ford Ka, with the intention of reducing production costs. Thus, Tychy became one of the biggest assembly facilities in Eastern Europe, with a capacity of 600,000 units annually.

Under GM leadership, the family car Opel Zafira is produced in Gliwice, and 95% are sold in WE. In August 2009, the production of the new Opel Astra was started. In addition, GM established the Chevrolet, one of the fastest-growing brands in Europe, in cooperation with FSO, a Polish vehicle manufacturer and former subsidiary of Daewoo. Volkswagen in Poznań stopped its passenger car assembly in Poland to focus on LCVs, the T5 and the Caddy.

In 2008, Toyota opened a new transmission manufacturing facility and BMW setup a new logistics and spare parts warehousing centre.

Poland also covers bus production through MAN, AB Volvo, Scania and Solaris.

Next to small and cheap passenger car production, future-oriented technology has also found its way into the country. BorgWarner, a leading supplier of turbochargers, opened a new plant in Mielec to supply Fiat, which produces the smallest engine in Europe, for a future city car.

In the downturn

The effect on car sales and production has been less harsh in Poland than in most other CEE countries, as Poland continued to benefit from the strong export of locally

Your contact for automotive initiatives in Poland:

Leszek Lerch | Partner | AssuranceErnst & Young Chorzowska 50 | 40 – 121 Katowice | PolandOffice: +48 32 760 7740 | Mobile: +48 50 510 3050 | Email: [email protected]

“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)


20072009

Fiat

Škoda

Volkswagen

Ford


38,30041,907

33,21038,305

27,40232,640

25,96030,298


20072009

Fiat

Volkswagen

Ford

Opel


361,787492,957

138,193167,037

0112,840

186,36294,484


produced cars. The automotive sales market shrank approximately 4.5% in 2009 in total.

The main issue in Poland is the restrictive behavior of the credit institutions. However, the Government has made sure to improve fleet sales by exempting company purchasers from VAT on utility vehicles.

In terms of investment activities, Bosch and DENSO decided to terminate their joint venture for cordierite ceramic diesel particulate filters due to the slowing economy and overcapacities in Europe.

But Poland might benefit from the more robust demand for small cars. The Polish passenger car industry saw some revival in export demand during 2009 from scrappage incentives in WE countries. Fiat in Tychy was one of the main beneficiaries. Fiat Auto increased production capacities thanks to the success of Panda and Fiat 500.

Risk and opportunity

Risks

Road infrastructure is a key challenge• The quality of public transportation

infrastructure — including highways, roads and railways — is not yet at the desired level.

• The Polish Government has launched programs targeting improvement, but implementation is slow. In fact, the infrastructure programs are delayed for the 2012 European Football Championship, which will be co-hosted by Poland.

• Progress can be seen in fast-growing regions such as Wrocław, Poznań, Katowice and Kraków, where highways already connect to Germany and WE. Warsaw still lacks this facility.

Legal regulations and the talent market• Laws are frequently amended to meet EU

requirements. However, the amendments can produce optimization opportunities for foreign investors.

• Unemployment is high, but skilled young talent is sometimes difficult to hire and retain. The countrywide unemployment rate in Poland stood at a rather high 11% in 2009 and may still increase due to the global economic slowdown.

• With EU membership and the opening of WE labor markets, Poles — especially the young and well-skilled — are increasingly working in WE to earn higher salaries.

• Engineers and skilled industrial labor are being absorbed by the industry in the boom areas (also by quickly developing R&D centers), so mid-sized, less well-known enterprises may have difficulty finding the talent they need. However, rising wages may subside due to the current crisis.

Opportunities

The 38.5 million Poles represent a large local market• Poland, with a population of

approximately 38.5 million, is the sixth largest country in the EU after Germany, the UK, France, Italy and Spain.

• Currently, new car sales are limited due to the popularity of used car imports. But this situation may change with the trend to more environmentally friendly cars.

• In particular, aftermarket sales in Poland offers promise due to the predominance of used cars.

Poland is the largest beneficiary of EU subsidies • The process of EU integration created a

huge opportunity for Poland to obtain financial support from the EU. Polish companies and local Governments alike are beneficiaries of an EU budget until 2013. In this period, Poland will be able to obtain support of more than 67 billion euro for various types of improvement. This includes infrastructure modernization, employee training and R&D to support for new investments. This will, of course, have a significant impact on the development of infrastructure in Poland.

Special Economic Zones offer extraordinary incentives for FDI• The Polish Government has defined

17 Special Economic Zones (SEZ) outside the fast-growing areas to support economic development.

• Beyond the EU funding schemes available to investors, FDI in those areas is supported by generous tax incentives. These might reach up to 70% of capital expenditure for newly established manufacturing operations. However, following EU membership, a majority of SEZ incentive schemes will most likely expire by 2020.

• Poland also lost a few foreign investments to its neighbors Czech Republic and Slovakia.

• However, Poland is still considered a trustworthy and reliable partner for international business. The investment incentive system in Poland is compliant with the requirements of the European Community.

• To improve the investment environment, the Polish Government is considering introducing an integrated 15% flat tax on companies and individuals in 2011. Authorities streamlined the personal income tax law in 2008 to two brackets, 18% and 32%.

The Holy Cross Bridge (Polish: Świętokrzyski Most) in Warsaw is a bridge over the Vistula River linking Powísle neighborhood with Praga Północ district.


Romania

Introduction

The domestic company Roman has produced trucks in Braşov since the 1950s. The company was established on the ground of the former Romloc automotive factory, which was built in 1921. However, the truck maker was sold to a Malaysian company in 2003 and its production volume is currently at a low level.

Romania, however, symbolizes the transition to a new dimension of low-budget cars under 7,000 euro. The Dacia Logan together with its derivate the Sandero hatchback, produced by Renault in Pitesti, are the cheapest cars in Europe. By its focus on this market, the Romanian automotive industry is in the comfortable position of having the right product to aim at two growing target segments: the unsaturated emerging markets and the growing WE client group with a preference for affordable cars.


Commercial vehicle production history

Two global OEMs (Renault, Ford) Supplier industry vertically integrated

Midsize population No distinctive purchase power

Development to an exporter No distinctive import activities


People with engineering background Availability of personnel


Neighboring Bulgaria and Ukraine

No. 2 FDI investment location for automotive suppliers in CEE in 2009 Major portion of used cars

Strong impact of the economic downturn on light vehicles sales (-53.3% sales). However, production recorded a growth of 20.9% in 2009


USP Low-budget car base — the cheapest European car, Dacia Logan, is produced here

Features

Third most important automotive market in CEE• Strategic base for innovation-oriented French • manufacturer Renault, which also is building an R&D center in RomaniaChinese Chery vehicle manufacturer has ambitions for • Romania in order to enter EuropeLow-cost advantage•

Challenge Follow-up to new technologies

Potential With a low-budget car, which is unique, there is not much risk in future sales


Romania at a glance

Romania’s automotive industry symbolizes the transition to low-budget cars.


BucharestCraiova

PitestiTimisoara

The domestic component industry is (like the Russian structure) highly vertically integrated. Beyond that, international parts makers locate in Romania for the cost advantages for labor-intensive work and for the investment-friendly tax breaks. Romania’s parts makers segment is mostly dominated by Continental, Michelin, Takata-Petri and Dacia. Romania seems to be the most viable location for parts makers, thanks to its geographical location and highly qualified employees (due to the proximity of technical universities).


2006 2007 2008 2009


Light vehicle sales Light vehicle production

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Market demand

The country has 22.2 million people, and is one of the larger CEE countries in terms of the population. Moreover, the rate of car ownership is one of the lowest in CEE — with 247 cars per 1,000 people — thus demand for cars has been boosted by an enduring scrappage program, good credit availability and an economically good growth performance. In 2007, the peak of new car sales was reached with 315,621 units but came under pressure in the following year, when it reached only 270,901 units. Used car sales grew rapidly after the Government imposed an environmentally friendly fee on car imports in July 2008. Overall, more than 50% of the Romanian vehicle population does not conform to the European emission standards.

Automotive players

The liaison between Renault and the Romanian brand Dacia started in the 1960s. First established as supplier factory for truck maker Roman, the plant in Pitesti was converted into a production base for the Dacia model, enabled through a Renault license. Since 1999, activities have been upgraded and the plant modernized due to the majority takeover by Renault.

The assimilation became a success story in 2004 when Dacia Logan and variants went into production. Today, Renault produces by far the largest portion of passenger cars in Romania. The budget car concept is tremendously successful and more and more vehicle producers have tried to adopt the idea. Renault also started the build up

of its largest R&D center outside France in Titu, to further develop automotive concepts for emerging markets. The company’s representatives stressed that they have the full support of the Romanian authorities and expect subsidies from the Romanian state. Thus, Romania became a strategic base for Renault’s international expansion plans.

Ford acquired a majority stake in Automobile Craiova in 2008, the former Daewoo-owned production unit, in order to solve its European capacity problems. The US firm invested in an upgrade of the facility and the production of the Ford Transit Connect started in September 2009. The light commercial vehicle will be followed in 2010 by a new model with the working title “B-Max,” a small passenger car.

Your contact for automotive initiatives in Romania:

Anca Ionescu | Partner | Tax Advisory & Compliance Services Ernst & Young SRLPremium Plaza Building, 3rd Floor, 63-69 Dr. Iacob Felix Street | 011033, Bucharest | RomaniaOffice: +40 21 402 4000 | Mobile: +40 744 758 274 | Email: [email protected]


20072009

Dacia

Hyundai

Volkswagen

Ford


41,862

10,982

26,11210,916

21,73010,499

101,799

13,000


20072009

Dacia

Ford

Chevrolet/Daewoo


222,686296,010

3000

00

18,861


German automotive component supplier Continental has a broad presence in Romania, both through its ContiTech subsidiary and a Continental-branded tire plant. ContiTech Romania produces drive belts at a 6 million euro plant in Timisoara. The Continental tire plant is also based in Timisoara. The company has a daily production capacity of 24,000 tires.

Truck producer Roman, located in the Braşov region, has struggled with potential insolvency for several years, with a privatization attempt in 2003 failing to revive its fortunes. Malaysian commercial vehicle manufacturer Pesaka Astana acquired a majority stake in the company in order to establish an industrial park on the ground of the Roman factory. Thus, truck production of Roman will be reduced.

In the downturn

Romania’s international automotive production base has been hit hard by the global credit crunch, with rising unemployment and a slump in consumer confidence. This has caused a tremendous increase in second-hand car sales, as limited access to credit prevents customers from buying new vehicles. Car sales dropped over 50% in 2009. Before 2008, Romania had been the fastest-growing automotive market among the new EU members in CEE in vehicle sales

For the past few years the Romanian Government had been trying to stimulate new car sales with the aid of a scrappage program, and this was successful until 2008.

To support the domestic automotive industry, the Government is very interested in pleasing the country’s two essential vehicle manufacturers Renault and Ford with incentives and credits.

At the end of 2008, Renault and major suppliers gained financial support from the state and a loan commitment from the EIB. Still, Renault has cut the investment sum for its location in Romania, which is partly intended for the development of the Dacia Logan SUV.

Newcomer Ford also gains state aid until 2012. Moreover, the Government has guaranteed loans from the EIB in order to support Ford with its new investment in Romania.

The Government itself is trying to secure another loan from international facilities such as the EU and the IMF as the country fights large deficits in the state budget and balance of payments.

Several automotive players continue with their investment plans, based on their long-term strategies:

Renault boosted annual production capacity at Pitesti from 350,000 units in 2008 to 400,000 units in 2009 and aimed to build another 400,000 complete knock down kits (CKD)* for assembly in Brazil, Colombia, India, Iran, Morocco, Russia and South Africa. Three new Logan models have been added to the range by the end of 2009. The increase in production volumes at Pitesti, along with a move to increase local content from 65% to 80% within two years, will lead to a large increase in demand from local automotive suppliers. According to Dacia, suppliers will open up more than 20 plants to cope with the increased capacity at Pitesti.

* A vehicle that is stripped fully disassembled to foreign subsidiaries in order to reduce freight charges.

“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)


Chery Automobile intends to develop markets outside China. Hence the company plans to import passenger cars into Romania and invest in a local sales network. The Chinese car manufacturer already had ambitions for Romania in 2007, when it bid for the Daewoo plant in Craiova. However, Ford finally acquired that plant.

Automotive supplier Takata-Petri has moved production of steering wheels for Mercedes-Benz and Honda to Arad, after closing the plant in Walbrzych, Poland, at the end of August 2009. Over the last four years, Takata’s Romanian business has recorded a steady two-digit rise. According to Takata representatives, the decision to move production from Poland to Romania was made as part of a global operations restructuring program.

INA Schaeffler completed an investment in Braşov in 2009, and Honsel is sticking to its plan to invest in a production plant for aluminum casting in Slatina.

The supplier Preh started to establish a facility in Braşov in September 2009. Preh’s stated reasons are the inexpensive Romanian cost structure and Brasov’s tradition as an industry and university base.

Chinese tractor producer HOYO will start to assemble tractors, in Răsnov, which is in Brasov county (northwest of Bucharest).


Risks

Bureaucracy and slow reform activities• At the administrative level, various

processes, formalities and certifications are still considered too bureaucratic.

• The practical interpretation and application of the fiscal legislation may lead to contradictory solutions, although, in this respect, significant changes in legislation have taken place during the last years. Corruption is a problem as well.

General lack of infrastructure, requiring strong commitment from the Government• The current condition of roads is poor, as

65% of Romania’s total infrastructure is in need of improvement. This is why most business activities focus on Bucharest, since most of the weak infrastructure is outside of the capital. The lack of significant infrastructure investment is a major impediment to economic development. But modernization up to EU standards has become one of the main national priorities for the period 2007–13. Three main highways are currently under construction, crossing the country from east to west, and are expected to be finished between 2010 and 2013. Due to its inadequate infrastructure, Romania lost a potential Daimler investment to Hungary.


Opportunities

Investment conditions• Romania’s fiscal legislation has been

reformed both to fit EU rules and to become more attractive to investors who increasingly view Romania as a good place to invest.

• Romania offers flexible time schedules and advantageous tax incentives. Since the beginning of 2009, the tax on dividends distributed within the EU has decreased from 16% to 10%. However, 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.

National Theatre Bucharest (Romanian: Teatrul Naţional “Ion Luca Caragiale” Bucureşti) became a national institution in 1864.

Large economy and favorable geographical location• Romania’s attractiveness as a destination

for FDI is often attributed to the large domestic market with a population of 22.2 million and its geographical location as a connection between the Black, Caspian and Mediterranean Seas.

• In 2006, GDP growth was 7.8%, one of the highest rates in Europe, and even in 2008 still reached 7.1%. A downward trend occurred in 2009, but a slow recovery is expected from 2010 on.


Russia

Introduction

Russia, with its population of approximately 140 million, is seen as the most promising automotive market in all of Europe because it has yet to reach its saturation point. The significant economic growth during the last several years led Russia to nearly catch Germany in 2008 in terms of new car sales in Europe (2.76 million cars versus Germany’s 3.1 million). However, in 2009 new car sales dropped by nearly 50%.

Russia’s main OEMs originated in the former Soviet Union. Today, AvtoVAZ, the biggest carmaker in Russia and Eastern Europe, still holds a dominant market share. However, AvtoVAZ has slowly been ceding share to foreign competitors since the early 2000s. Consequently, the growth in new car sales has lately been driven by foreign brands: the volume of foreign cars sold in Russia increased significantly between 2006 and 2008.



Several global OEMs, domestic player AvtoVAZ Supplier industry vertically integrated

Huge population Purchasing power

No distinctive export activities Import activities

Low premium car production Volume car production


No EU member No euro adoption

Bordering China and Scandinavia

By far No. 1 FDI investment location for automotive suppliers in CEE in 2009 High import barriers

Severe impact of the economic downturn on light vehicles(-49.9% sales/ -60.1% production in 2009)


USP Momentarily the market is down — however, Russia is the most sales-promising country in Europe

Features

fifiSales potential of 5-6 million cars• Nearly overtook Germany in 2008 in new car sales • volumefiLess integrated with WE• State-owned automotive players•

ChallengeDependence on raw materials; Russian domestic automotive industry has to catch up in terms of technological competence

Potential A population of 140 million people with a desire for premium products but also a need for low-cost products


Russia at a glance

Russia is the most promising automotive market in all of Europe.


Kaliningrad

St. Petersburg

MoscowTogliatti

Taganrog

Kaluga

Nizhny Novgorod Ulyanovsk

Naberezhnie Chelny

Izhevsk

However, the country wants to ensure the survival of its domestic industry by cooperating with WE players. One of the main issues is the shortage of high-tech components, as outdated parts production is highly integrated into the operations of the national manufacturers.

For this reason, Russia adopted legislation to attract foreign investment with the long-term objective of making Russia a net exporter of vehicles. As a result, production facilities with a maximum capacity greater than 1 million units have been developed by foreign brands over the past several years.

Figure 32 : Light vehicle sales and production compared (in units), 2006–09

2006 2007 2008 2009


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Market demand

Russia’s new car market grew at an average annual rate of 21% over the past five years to reach 2.76 million before the downturn and was the fastest growing European automotive market. High-yield earnings from oil and gas, growing purchasing power and easy access to affordable credit contributed to the fruitful development. And there still exists a strong potential, given that 45.9% of the 31 million-unit vehicle population is 10 years, or older.

During the growth phase, consumers began to switch their allegiance to foreign brands, and their preferences shifted to a higher price range. In the current economic slowdown, this trend has been reversed, with negative effects on mid-priced cars. The luxury segment remained relatively unaffected.

Unlike the new EU members in Eastern Europe, Russia does not have to fight a flood of used car imports. The country maintains import barriers for used and new car imports, and may do so until it enters the WTO.

Automotive players

The Russian output of light vehicles in 2009 accounted for about 595,807 vehicles, down from 1,469,898 in 2008.

AvtoVAZ has its main facility in Togliatti and sells the most popular brand, Lada. Recently, the company has experienced liquidity issues brought on by a sharp decline in demand. However, the recent scrapping incentives program has affected the company’s sales and production dynamics in a positive way.

In addition, Renault’s recent involvement is expected to make the company competitive and profitable in the mid- to long term. Renault started a strategic partnership with AvtoVAZ in 2008. This agreement gives Renault access to more production capacity, whereas the Russian partner wants to benefit from access to modern technology.

KAMAZ, Russia’s major commercial vehicle producer, is located in Naberezhnye Chelny. The state’s share of both AvtoVAZ and KAMAZ were consolidated in the newly established Avtoinvest holding, an arm of Russian Technologies, the state corporation. GAZ, located in Nizhny Novgorod, is Russia’s second-largest vehicle manufacturer, focused on light commercial vehicles. GAZ also exports vehicles into such CIS markets as Ukraine, Kazakhstan, Azerbaijan and

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, CISOffice: +7 495 755 9817 | Mobile: +7 916 330 2292 | Email: [email protected]


20072009

Lada

Chevrolet

Ford

Hyundai


354,306

282,884158,451

175,64382,083

147,84374,607

683,817


20072009

Lada

Dacia

Chevrolet

GAZ


757,805299,700

49,65069,241

47,966104,516

207,53246,928


Armenia. Avtodiesel in Yaroslavl, Russia’s leading diesel engine manufacturer, belongs to GAZ as well.

Today, 11 foreign carmakers have production operations or are constructing plants in Russia. Ford became the first investor back in 1998. In 2003, GM began to produce a locally developed SUV under the Chevrolet brand in a joint venture with AvtoVAZ. Nissan opened its plant in St. Petersburg in May 2009 and, PSA and Mitsubishi joined operations in Kaluga in April 2010. Volkswagen has developed its assembly facility in Kaluga into a fully fledged manufacturing operation step by step, and Toyota opened its new plant in St. Petersburg in 2007. In addition, Toyota was the first automaker to establish its own financial arm in Russia, followed by the captive banks of Daimler and BMW. Also South Korean manufacturer Hyundai is in the process of establishing a plant in Russia for the production of its Verna model in 2011. Last, but not least China’s largest CV manufacturer Beiqi Foton Motor and Chinese passenger car manufacturer Great Wall Motor have production plans in Russia.

In the downturn

The Russian economy has been hit hardest among CEE countries by the downturn, with a negative GDP growth of 7.9% in 2009. The worldwide slowdown disclosed structural problems in the Russian banking system and other economic challenges. The resulting lack of financing led to a sharp cutback in capital investment. Moreover, oil and gas revenues shrank and unemployment increased. This, in conjunction with lower consumer confidence and scarce credit, had a very negative effect on the passenger car market: passenger car sales declined by 50% in 2009. In 2010 a sales growth of 8%–9% is expected, with higher growth rates from 2011 on.

In 2009, the production of foreign models nearly reached the level of domestic cars, gaining further share from AvtoVAZ. However, most of the foreign producers also have to reduce production.

At the beginning of the downturn, the Russian Government initiated some measures to stimulate automotive sales. In particular, the Government allocated US$63 million (RUB2 billion) in February

2009 to subsidize automotive consumer finance for the purchase of locally produced budget vehicles. However, the measure did not help to restore consumer confidence. In May 2009, the Government widened the price bracket to include a broader range of locally produced cars. With the measure having proved effective in boosting sales in 2009, the state has announced plans to allocate money to banks to subsidize low interest rates on car loans: RUB1 billion in 2010, RUB1.75 billion in 2011, RUB1 billion in 2012 and RUB0.5 billion — in 2013. In addition to the credit subsidies, the Government initiated a scrappage program for vehicles older than 10 years in March 2010, with RUB50,000 or close to US$2,000 given to the owner of an older car in exchange for a purchase of a domestically produced car. This measure is targeting the replacement of approximately 200,000 units of Russia’s old passenger vehicles fleet. As of 14 April 2010, about 29% the total planned scrappage certificates, 57,395, had already been issued.

Moreover, as of 2009, the Government increased import customs duties to 30% in order to stimulate local manufacturing.

“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)


To support the ailing national automakers, the Government also provided state guarantees and financial aid to AvtoVAZ, GAZ and KAMAZ to help restructure their debts and prevent massive lay-offs. In addition, AvtoVAZ intends to renew its obsolete product portfolio.

In spite of the measures taken, the Russian vehicle contract manufacturer IzhAvto announced its bankruptcy (IzhAvto used to assemble the Lada and Kia brands).

Suzuki has been the lone foreign automaker to put its investment plans on hold, halting its efforts to build a plant in St. Petersburg. However, the majority of foreign automotive investors’ plans remain unchanged. GM began to manufacture the Chevrolet Cruze in September 2009 in

St. Petersburg after the plant had been shut down for two months. Other OEMs such as Avtoframos, a subsidiary of Renault, which produces cars in Moscow and Ford vehicles near St. Petersburg, also had temporary shutdowns. Daimler increased its 10% share in KAMAZ and recently announced further joint projects with the Russian truck manufacturer.

The prospect of a quick recovery of the Russian economy and passenger car market is highly unlikely. GDP declined by about 7.9% in 2009, and purchasing power, together with consumer spending, will follow the same trend. However, as Russia remains the largest unsaturated market in CEE, it will inevitably return to accelerated levels of sales and production as soon as economic conditions improve.



Risks

High dependence on commodity prices and increased protectionist measures make imports less attractive.• The Russian economy is likely to lose

growth momentum in 2010-2012, which will lead to a slow revitalization of the passenger car market largely dependent on overall customer spending.

• The general economic downturn, despite yet nearly stable petrol prices will incentivize people to drive less and postpone buying new cars.

• Increased import duties have put a significant dent in foreign-brand car sales.

• The benefits of a state support program, as well as a scrappage program that began on 8 March 2010, have been mainly absorbed by domestic brands.

Opportunities

Although the market suffered significantly during the credit crunch and immediate recovery is not expected, the Russian market is far from saturated and represents a considerable prospect for further growth for global players.• The Government has selected a long-term

strategy of partnerships with foreign producers of passenger cars that implies no further increase of import duties as an optimal industry development scenario.

• There is a strong consumer preference for foreign brands.

• Local OEMs are not in a position to compete on quality and operations excellence terms and are still burdened with a high level of leverage, integration and non-core and social assets.

• Russia is still a major net importer of vehicles.

The Picturesque Bridge (Russian: Zhivopisniy Bridge) spans the Moskva River in north western Moscow.

• There is access to other CIS markets when localized thanks to trade incentives.

• An old car fleet and relatively low car density as compared to developed automotive markets provide a basis for future car market growth.

• The Government has adopted a 10-year automotive industry strategy.

• Resuming of the state program of preferential subsidized car lending in February 2010 will further support demand.

• A number of international car and auto component manufacturers have announced plans to open production facilities in Russia or to increase their existing capacities.

• Pent-up demand is likely to drive passenger car sales growth in the long term.


Slovakia

Introduction

When VW acquired a small production plant from BAZ in Bratislava in 1991, the Slovak automotive industry embarked on its accelerated success story. Slovakia was proud to develop a production base predominantly for high-end SUVs.

However, much more impressive is the fact that Slovakia has the highest per capita car production in the world. Once PSA and the Hyundai subsidiary Kia joined VW in Slovakia, car production almost doubled. Hence, despite its small size, Slovakia is, after Czech Republic and Poland, the third-largest car producer among the new EU members.


No significant vehicle production experience

Three global OEMs (VW, Kia and PSA) Supplier base


Massive export activities No distinctive import activities

Premium car production Volume car production


EU member since 2004 Euro adoption since 2007

Bordering Poland, Czech Republic, Austria, Ukraine and Hungary Economic stability

Modest impact of the economic downturn on light vehicles (-6.8% sales/ -18.2% production in 2009)


USP Premium brand manufacturing (SUV) and beneficiary through euro adoption

Features

Third-largest car producer in CEE despite the small • populationOne of the best EU performers• Won new investment of an OEM, thanks to the euro • adoption

Challenge Premium SUV production

Potential Production of the new small car family of VW


Slovakia at a glance

Slovakia has the highest per capita car production in the world.


BratislavaZilina

Trnava

As the automotive industry became established as a main pillar of Slovak production, this was rewarded with an investment-friendly environment through the creation of industrial parks, tax breaks and governmental subsidies to attract suppliers.


2006 2007 2008 2009


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Market demand

Slovakia, with a population of 5.4 million, is one of the two smallest Central European new EU members but is one of the best performers. Following reforms, the economy and consumption have experienced prosperous growth in the past five years.

However, Slovak car ownership is relatively low compared to the rest of Europe and, as in the other new EU countries, used car imports are a significant factor. Imports account for one out of every two car purchases, and the average vehicle age, while decreasing, is 13 years. Imports of vehicles more than 10 years old are not permitted, and a certificate of compliance with EU norms is a requirement.

In 2008, new car sales reached a peak of 97,000, an increase of 16.4%, thanks to the strong development of the Slovak economy in recent years and the adoption of the euro. In 2009, new car sales dropped to 90,400.

The Czech brand Skoda, long familiar to Slovakians, is the leader in terms of new car sales.

Automotive players

Overall, 488,021 passenger cars were produced in Slovak plants in 2008, up from 178,000 in 2005, as a result of increasing establishment of foreign production capacities. Domestic light vehicle production declined by 19% in 2009.

In 2011, VW will begin production of the new small family car “Up!” near Bratislava, perpetuating the current trend toward small and efficient cars. The production site builds the Škoda Octavia and the VW Touareg, Audi Q7 and Porsche Cayenne.

Both Kia and PSA began their investments in Slovakia in 2006. Kia builds vehicles near Žilina, 200 kilometers from Bratislava. Its facility produces the compact SUV Sportage and the compact family car Cee’d. PSA has

set up an assembly line in the western Slovak town of Trnava, where it builds the Peugeot 207, one of the most popular small cars in Europe, and the efficiency-oriented compact van Citroen C3 Picasso. If required, Slovakia could increase car production to a maximum annual capacity of approximately 900,000 units.

The circle of passenger car manufacturers may be enlarged as the Chinese Jianghuai Automobile Company is in negotiations with the Slovakian Government about the establishment of a manufacturing facility there.

In the downturn

Before the slowdown, Slovakia was one of the most rapidly growing of all European economies. The country enjoyed prosperous economic development with a nominal GDP increase in 2008 of 36% on 2005 levels.

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 RepublicOffice: +421 2 3333 9668| Mobile: +421 910 820 028 | Email: [email protected]

“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)


20072009

Škoda

Renault

Peugeot

Kia


17,96315,140

4,5859,642

6,0617,024

4,6996,349


20072009

Kia

Peugeot

Citroen

Volkswagen


130,459119,038

112,403177,236

091,329

126,42729,576


The New Bridge (Slovakian: Nový Most) in Bratislava runs over the Danube River.

Like other European countries, Slovakia has had to deal with layoffs in the current crisis, but it has not, been as severely affected as some other markets. Nevertheless, GDP fell substantially in 2009.

The Slovak automotive sector has been known for producing large gas-guzzling vehicles. But Slovakia’s adoption of the euro has led to new investment in the production of economy cars, starting with the VW “Up!” The gains in economy car production might offset the losses associated with the downturn in the premium SUV segment.

Confronted with the slowdown, the Government reacted quickly by implementing different measures, as the automotive industry accounts for approximately 33% of GDP. Slovakia was one of the first Eastern European economies to follow the example of Germany and France in offering subsidies to citizens who wanted to trade in their old cars and buy new ones. Accordingly, sales of private cars grew, and Škoda retained its leading position. However, the subsidy did little to support the domestic, largely high-end, production. On the production side, the Government guaranteed the possibility of short-time work and was prepared to subsidize every workplace until 2010.

An overview of investment activities reveals that no plans have been canceled to date, because investors still regard Slovakia as a favorable location. But some implementation dates have been postponed, given the current economic situation.

Nevertheless, PSA has even increased its output of the Citroen C3 Picasso in Trnava due to strong demand. And Kia Motors has expanded capacity in its engine production plant in order to supply its affiliate, Hyundai, which has a plant in the neighboring Czech Republic. Further investment initiatives were also announced by, Getrag and Continental, at the end of 2008.


Risk

Activity in the sector is largely concentrated in the Bratislava and Trnava areas; hiring and retaining skilled labor is becoming increasingly challenging in this region• VW’s entry into the Bratislava region was

followed by that of a number of suppliers, which boosted the capital’s regional economy. VW employs about 10,000 people at this facility. High demand for workers to staff the manufacturing operations at the plant and the supplier parks has created a daily workforce migration from up to 100 kilometers away.

• The operations of PSA in Trnava (50 kilometers north of Bratislava) and Kia in Zilina (200 kilometers northeast of Bratislava) are likely to exert further pressure on labor availability, resulting in higher wages and more difficult conditions for smaller component manufacturers establishing new operations.

Opportunities

Favorable environment for automotive manufacturing and investment• The Slovak Government has been

proactive in its dealings with large investors such as VW, PSA and Kia, offering tailored infrastructure solutions and attractive incentives. This approach, linked with persuasive reforms such as a flat tax and a user-friendly corporate tax system, has helped to secure these prestigious projects.

• The country’s economy demonstrates a clear focus on developing industrial manufacturing activities. The country’s dependence on the manufacturing sector, and the automotive industry in particular, affords a reasonable basis for assuming that operations in Slovakia will enjoy a favorable environment for many years to come. But the Government may start to promote service- and R&D-oriented projects in the future in order to reduce dependence on manufacturing.

Economic stability • Slovakia adopted the euro in January

2009, after meeting the economic criteria. This will bring stability to the high-grade export activities and preclude losses triggered by currency fluctuations. The euro adoption was one of the main reasons that VW chose Slovakia as a production site for its new “Up!” family model.

• Slovakia’s debt ratio is below the EU average, which makes its financial system quite robust in comparison with other EU members in Eastern Europe.


Slovenia

Introduction

Slovenia was home to its own automotive industry when it was part of Yugoslavia.

However, the Slovenian commercial vehicle producer TAM had to file for bankruptcy when its market size shrank to 2 million inhabitants after the dissolution of

Yugoslavia in the early 1990s. The sole remaining automotive plant was a facility in Novo Mesto owned by Revoz, a former joint venture between Renault and the domestic vehicle manufacturer IMV. Revoz became a wholly owned subsidiary of Renault in 2004; it is still the only automotive manufacturer in Slovenia.



Sole OEM (Renault) Limited supplier base


Exporter No distinctive import activities



EU member since 2004 Euro adoption since 2007

Neighboring Italy, Austria, Hungary and Croatia

Solid infrastructure and economic stability In the past less investment friendly

Modest impact of the economic downturn on light vehicles(-21.0% sales/ + 7.4% production in 2009)


USP The Switzerland of CEE

Features One of the smallest and wealthiest CEE state; nearly Western standards

ChallengeNo low-cost advantage; only home to one vehicle manufacturer, which already relocated part of production to home-country

Potential Infrastructure; euro adoption and stability; governmental incentives for R&D


Slovenia at a glance

Renault is the sole automotive manufacturer in Slovenia.


Ljubljana

Novo Mesto

The supplier sector is rather limited. The domestic players remained from formerly supplying Zastava Automobiles, a Fiat joint venture established in neighboring Serbia in the 1950s. National component manufacturer Cimos, for example, supplies carmakers in WE with brake systems. Only a few foreign suppliers entered — such as Goodyear, by acquiring a domestic tire producer.

Figure 40: Light vehicle sales and production compared (in units) 2006–09

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Market demand

The Slovenian market does not offer the growth opportunities of the other emerging markets in CEE, as the population of 2 million is one of the smallest in the whole of Europe. However, Slovenia is the wealthiest state among the new EU members, with the highest GNP per capita. Hence, the level of backlog demand (prevalent in some countries due to having access to a limited range of cars in the past) is low. The average age of a car in Slovenia is 6 years, which is similar to WE, and car ownership amounts to 600 cars per 1,000 people.

Demand for new cars reached 80,000 units in 1999 and was not affected by noticeable fluctuations anymore. In 2009, new car sales accounted for 54,999 units. Renault held dominant leadership position in terms of car sales with 29% in 2009. However, despite the higher income level, most

consumers in Slovenia purchase a passenger car in the smaller B and C1 segment, as in neighboring Eastern countries. This trend might arise due to high barriers for cheaper used car imports.

Automotive players

IMV was founded in 1954 and opened a production site in Novo Mesto in order to produce British Austin passenger cars by license. Then the alliance with Renault was established.

Since the takeover, Renault has extended its production massively for export purposes. In 2008, Renault reached a production level of 198,094 units and in 2009 over 212,000 units. The production portfolio consists of Renault Clio and Renault Twingo II. The A segment model Twingo is built exclusively in Slovenia. Both models are mainly intended for other, larger European markets.

In the downturn

As an export-dependent nation, Slovenia is suffering from the consequences of the downturn. In 2009, the GDP noted a negative growth of 7.8%.

Slovenia benefits from its stable and liberal political environment and a business-friendly infrastructure. In addition, the financial system is quite robust, as foreign influence has been limited in this sector over the years. Slovenia became the first new EU-member to be admitted to the monetary EU community, in 2007.

The Government concentrates rather on measures to equip the industry for the future than boosting short-term sales through scrappage incentive programs. A second Government financial support package was announced for the development of new technologies in the automotive sector and others with the aim to position Slovenia as

Your contact for automotive initiatives in Slovenia:

Stephen Fish | Partner | Assurance Ernst & Young d.o.o.Dunajska cesta 111 | 1000 Ljubljana | SloveniaOffice: +386 1 5831 722 | Mobile: +386 31 616 725 | Email: [email protected]

“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)


20072009

Renault

Volkswagen

Citroen

Opel


10,580

8,2916,345

6,3355,155

6,6404,752

14,390


20072009

Renault


200,164212,680


a location for mechatronics. Meaning research activities and the creation of higher added value becomes more in focus, supported by the strong interactivity between industry and universities.

A shift of the industry focus seems necessary due to the relatively high cost of labor. Head and armrest producer Grammer lately relocated sewing activities from Czech Republic, Spain, Poland and Slovenia to Serbia and Bulgaria. Only through increasing technology competence can the Slovenian automotive industry set itself apart from the neighboring low-cost countries.

The Government passed an economic stimulus package to provide companies with liquidity and prevent layoffs by facilitating short-time work. In addition, it has cut taxes: VAT has been lowered to 8.5% from 20% on approximately 3,000 products until the end of 2010.

Renault, the supporting pillar of Slovenia’s automotive industry, announced in Spring 2009 that it would relocate the production of the Clio II back to France. Renault said it would compensate by raising the Twingo production due to the demand triggered by scrappage initiatives in other countries. In May 2009, Renault announced plans to add the production of a new small model with the working title “X33.” For this investment, the Slovenian Government provided a grant to Revoz.


Risks

Established business practices, combined with prevailing socialist traditions, may create challenges for foreign investors• Slovenia has a long-standing socialist

political tradition. The privatization process for some former state-owned enterprises in banking and telecoms, as well as other sectors, has been rather restrictive, aimed at protecting the “crown jewels” of the country. When privatization has taken place, the Government has retained a substantial stake in many of the businesses.

• For companies considering a greenfield investment, the legal system allows a fully owned investment, but companies entering the Slovenian market find it beneficial to involve local authorities in the overall investment strategy.

• Although the tax system has been aligned with WE pre-accession standards, taxes are an uncertain area for investors. This has stemmed from a perceived inconsistent application of rules and interpretations among the various regional tax authorities in the country. In 2007, a tax reform aimed at reducing personal and corporate tax rates was introduced. In 2009, the corporate tax rate was reduced to 21%. And tax holidays can be utilized in SEZs.

• Slovenia has concentrated on attracting businesses in service areas that require more highly skilled employees, as opposed to relying on cheaper labor for more traditional manufacturing operations. Slovenia is about to catch up with WE economically, with Slovenian GDP per capita approaching that of Portugal. Labor costs are following this trend closely: they are now well above the average of the EU’s other new member states, with high personal income tax rates and high social security costs.

Opportunities

A solid road infrastructure, proximity to WE markets and the relationship to its neighbors in the former Yugoslavia represent some of the country’s strengths• The road and highway infrastructure is

well developed, and the condition of these roads is better than that of the roads in many other Eastern European countries. This infrastructure, together with the geographical proximity to WE countries, offers logistical advantages. The Port of Koper is also used extensively, particularly by Asian automotive manufacturers.

• Traditionally, due primarily to its location, Slovenia has represented the trading hub for the former Yugoslavia. This has made Slovenia an attractive gateway for business in the other former Yugoslav countries, although it now faces increased competition from Serbia in this regard.

Old city centre of Ljubljana (Slovenian: Stara Ljublijana), the capital and largest city of Slovenia.


Turkey

Introduction

For decades, Turkey has been a production base for buses and trucks. MAN as well as Mercedes-Benz entered the country in the 1960s to begin bus production. Then Mercedes-Benz added truck manufacturing in 1986. Nevertheless, Turkey also has a history in car manufacturing through entering alliances with Western producers at an early stage. Two of the three biggest joint ventures, Fiat Tofaş and Ford Otosan, are partly in the hands of the Turkish

conglomerate Koc Holding, which therewith controls nearly 50% of car production countrywide. The biggest single producer, however, is Renault Oyak. After reforms in 2001, Turkey was able to attract further foreign automotive players, especially thanks to the country’s free trade access to the EU. This factor contributed significantly to the development of Turkey as an export hub. Moreover, Turkey earned the image of a low-cost, high-quality location, bridging Europe and Asia.



Local producers cooperate with foreign OEMs Solid supplier base

Large population No distinctive purchase power

Export activities No distinctive import activities



EU entry negotiation since 2005 No euro adoption

Bordering Iraq and other countries

Modest impact of the economic downturn on light vehicles (+12.8% sales/ -21.0% production in 2009)


USP Bridge to the Middle East and Asia

FeaturesşşşşLow-cost advantage• Bursa is the automotive heart of Turkey• şPreferred location for Asian vehicle manufacturers•

Challenge Vulnerable economic situation, which hampers a continuous development

Potential Sales potential due to population size; bridge to emerging markets


Turkey at a glance

The biggest single car producer in Turkey is Renault Oyak.


Istanbul

AnkaraBursa

Izmit

The component sector did not take long to prosper after the arrival of global vehicle manufacturers. In addition to domestic suppliers, several domestic-foreign partnerships have been established. Moreover, Turkey also plays a major role in producing components, the majority of which are for export. In 2007, for the first time, the Turkish automotive industry even overtook the domestic textile industry as biggest exporter.

Figure 44: Projected sales and production (in units) compared between 2008 and 2012

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Market demand

Apart from Russia, Turkey offers the biggest growth potential in CEE, with a population greater than 76 million, the lowest car density in Europe and an average car age of 16 years. However, the market potential has not had the chance to unfold in its entirety, due to the ups and downs of Turkey’s volatile economy. New passenger car sales peaked with 678,000 vehicles in the period between 2003 and 2004, due to a scrappage program. In 2008, the domestic car sales fell 17% to 494,569 units, but rose nearly 13% to over 557,000 vehicles in 2009.

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 | TurkeyOffice: +90 212 368 52 33 | Mobile: +90 533 815 59 98 | Email: [email protected]

”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)


20072009

Fiat

Ford

Renault

Hyundai


77,07784,820

84,725

82,69472,055

38,78764,947

101,678


20072009

Renault

Fiat

Ford

Toyota


263,656277,572

178,626192,164

279,922171,732

161,51672,264

Automotive players

Nearly 1.1 million,198 light vehicles were produced in Turkey in 2008, but domestic production dropped by more than 20% in 2009. Oyak Renault, a joint venture since 1969 between Renault and the Turkish Army Pension Fund, manufactures the Renault Megane, Clio, Fluence and from 2011 E-Fluence passenger cars as well as powertrain components in Bursa, about 90 kilometers south of Istanbul.

In the 1960s, Otosan (Otomobil Sanayi) began car manufacturing in alliancewith Ford in the province Kocaeli. Today, the joint venture produces the Ford Transit Connect van and plays a significant role in Ford’s supply chain. The domestic automaker, Tofas, began producing and promoting re-branded Fiat cars under

license in 1971. Since 2001, however, the factory has produced only Fiat-branded cars such as the Doblo, the Linea and the Palio.

In 2005, PSA and Fiat agreed to jointly develop a common platform for vans to be sold throughout Europe under the Fiat, Peugeot and Citroen brands.

Asian manufacturers established plants in Turkey as well. The İzmit factory, founded in 1997, was Hyundai’s first overseas production plant. Toyota and Honda entered the market in the 1990s. From China: Chery Automobile will start operations in Turkey in the second half of 2011.

As noted earlier, Turkey is also home to bus and truck manufacturers such as Mercedes-Benz, MAN, Isuzu and Iveco.


• In October 2008, Lamborghini opened its first showroom in Istanbul. The brand considers Turkey an important part of its development strategy, due to the country’s strategic location between Europe and Asia.

In contrast to the investment plans of others, Honda intends to delay the expansion of its Turkish facility, which was supposed to supply the now crisis-affected Russian market.

In the downturn

The Turkish automotive industry has expanded rapidly over the past couple of years as it has become more integrated into the European automotive value chain. Eighty percent of the country’s automotive production is for export, and the industry accounted for 30% of overall Turkish export sales in 2008.

Accordingly, the global downturn had a significant impact as it reversed the economic improvement brought on by a disciplined monetary policy for the purpose of securing stabilization. An agreement with the IMF might be an option in order to secure financial resources and attract further investment. The downturn also revealed other issues, such as a weak currency and high debt.

To boost domestic demand for passenger cars, the Government initiated a consumption tax break in Spring 2009 for three months , which resulted in a 10% increase in passenger car sales for the year.

In terms of light vehicle and car production, Turkey also has benefited from the European scrappage programs. However, some Turkish exporters are approaching the Middle East as an alternative automotive market to the slowing European market.

Turkey’s solid industrial base and its efforts to converge with EU standards have made it an attractive place to invest for automobile manufacturers:• Hyundai decided to relocate parts of its

i20 production to Turkey from India due to local labor conflicts in India and in order to produce closer to the European market.

• The Chinese automotive manufacturer Chery announced plans in March 2009 to establish a factory in Turkey for the purpose of supplying Turkey and Eastern Europe, and Chinese player Dongfeng Motor intends to invest into its new passenger car manufacturing unit.

• Hella, supplier of head lamps and automotive electronics, acquired 49% of a Turkish vehicle parts trading company in January 2009 in Istanbul with the intention of participating in the significant aftermarket business.

Maiden’s Tower (Turkish: Kiz Kulesi) in Istanbul sits on a small islet located in the Bosphorus strait off the coast of Üsküdar.



Risks

Challenging macroeconomic expectations• From a macroeconomic standpoint,

Turkey faces serious challenges ahead and could have difficulty meeting targets from the IMF.

• While long-term interest rates (over 60% in 2001) still exceed 20%, the current account balance remains negative, which should be an additional obstacle to reducing foreign debts.

• Despite continuous growth figures combined with an inflation rate, Turkey needs to manage its vulnerability to economic shocks by implementing structural changes. Turkey’s economy is very much dependent on large capital inflows.

• Although the inflation rate has been reduced significantly, inflation is an ongoing issue and requires tight monetary policy.

The country’s geographical position might put exports to some countries at risk• Higher energy prices have led to

increasing transport prices around the globe. This has had a direct influence on vehicle transportation costs.

• 90% of exports go to WE; direct neighbors import little of Turkey’s vehicle output.

• As other CEE countries closer to WE markets increase their production, Turkey could face fierce competition due to its greater distance from these markets. On the other hand, Turkey offers unparalleled proximity to the Middle East and northern Africa.

• In recent years, growth in domestic sales has been slow, despite credit offers that have made it easier for Turkish customers to buy a car.

Opportunities

Low car density combined with strong population growth• Turkey’s comparatively small car fleet

(7.1 million passenger cars) and large population present a strong combination for prospective growth.

• A well-established foreign automotive industry and structural reforms make it easier for foreign OEMs to enter the market and expand production.

• With about 15 foreign OEM projects and more than 700 foreign suppliers involved, it can be considered a mature industry sector that affords easy access for establishing new facilities.

• Turkey has a low labor costs compared to many European countries, a skilled workforce and a highly developed technological infrastructure.

Tax regulations• After the tax reform that began in 2005,

the current corporate tax code (with a flat tax rate of 20%) enables taxpayers to have more clarity in respect of their tax applications, which will promote the investment environment (e.g., thin capitalization, transfer pricing, foreign tax credit, participation exemption).



Ukraine

Introduction

For decades, Ukraine has had an automotive industry of its own, though recently its auto companies have worked predominantly as contract manufacturers for foreign carmakers. As the country does not have any significant global manufacturers of its own, the Government hopes that the

stabilization of the economical and political situation could drive foreign investment. In contrast to other CEE automotive countries, most vehicles produced in Ukraine, which is the third-largest automotive market in CEE after Russia and Turkey in terms of population, are intended for domestic sales.


Vehicle production history

Own production, no significant presence of global vehicle manufacturers

Supplier base available, but few global players

Rather large population Purchasing power

No distinctive export activities Import activities



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(-73.5% sales/ -84.8% production in 2009)


USP Bridge to the Middle East and Asia

FeaturesAfter Russia, second-biggest country in Europe• Joined WTO in 2008• Low-cost advantage•

Challenge Dependence on Russia; rather sealed off from the rest of the EU

Potential Sales potential due to population


Ukraine at a glance

Most vehicle produced in Ukraine are intended for domestic sales.


KyivCherkassy

Ilyichevsk

Lutsk

Zaporizhie

Zakarpattya

Kremenchug

ZAZ, a closed joint stock company, is Ukraine’s largest car producer and the market leader. The company, which was founded in 1863 as a producer of agricultural machines, began producing cars under its own label in the 1960s. After the collapse of the Soviet Union, the company entered a joint venture with Daewoo. However, the Korean automotive manufacturer went bankrupt in 2000, and since then, ZAZ has predominantly manufactured a variety of foreign brands under license; its major agreement involves producing Chevrolets for GM. Since 2002, 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, approximately 50 of which are of foreign origin. Most of the components produced in Ukraine by international suppliers are exported.


2006 2007 2008 2009


Sales Production

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Figure 47: Sales and production development (in units) compared between 2008 and 2012


800,000

600,000

400,000

200,000

00 200,000 400,000 600,000 800,000


Ligh

t veh

icle

sal

es


Market demand

With a population of over 45 million, one of the lowest car ownership densities and an obsolete vehicle population, Ukraine’s automotive market has grown continuously since 2003.

In 2008, light vehicle sales grew by 15% and reached 623,252 new vehicle sales. During 2009, domestic light vehicle demand dropped by over 70%. Russian AvtoVAZ Lada kept its dominant market share, ahead of Daewoo and Hyundai.

Foreign brands reached a leading position in 2008, with cheap new cars enjoying increasing popularity. Used car sales, which had stagnated, revived during the credit crunch.

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: [email protected]

“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)


20072009

ZAZ

Lada

Kia

Chevrolet/Daewoo


Note: Light vehicles sales data was not available

161,71118,211

46,53214,199

14,005

17,9554,791

69,443

Upon joining the WTO in 2008, Ukraine cut vehicle import duties and removed import restrictions on vehicles more than eight years old. However, due to the economic crisis, the customs duty for import cars was raised in February 2009 to 23% again.

Automotive players

In 2009, light vehicle production in Ukraine fell by more than three-quarters to 84,192 units from 413,938 units in 2008. The major passenger car producer ZAZ, located in Zaporizhe, is the only company thatoffers complete car manufacturing operations. Under license, the company assembles cars from the Chevrolet, Chery, Lada, Opel and, as of recently, Kia brands. UkrAVTO also cooperates with Mercedes-Benz and Toyota in car distribution.

About 20 companies have been established under Bogdan Corporation, which was founded in 2005 to expand Ukraine’s engagement in the automotive sector. At LuAZ, Hyundai and Lada vehicles are assembled under license, whereas trucks are manufactured under the license of Isuzu at OJSC Cherkasy Bus and Hyundai vehicles at Hyundai Motors Ukraine.

Eurocar produces vehicles only for VW. The company, located in Zakarpattya, was established in 2002 and is mainly used for the assembly of Škoda vehicles.

AvtoKrAZ Holding Company, a former Ukrainian-Russian joint venture founded in 1995 in Kremenchug produces of heavy-duty vehicles, and the Lviv Bus Factory manufactures LAZ buses in Lviv.

In the downturn

The global crisis had a severe impact on Ukraine. Demand and prices for ferrous metals — the main export commodity of Ukraine — collapsed. The resulting drop in consumer confidence caused theUkrainian automotive market to shrink by over 73% in 2009, the worst performance of any CEE country — this after Ukraine had been one of the fastest-growing markets in recent years. As the majority of local production is intended for domestic market, the output plummeted by over 84% during 2009.


Despite the slump, the Government has not implemented any scrappage programs. There do exist governmental efforts to support car dealers in case they trade in scrap cars in payment from end consumers, but it has not been implemented. The dramatic production cuts are predominantly a result of the very weak domestic market. UkrAVTO wants to push exports with a rebranded version of the Chevrolet Lanos, named “Chance,” intended for countries such as Russia, Moldova and Kazakhstan. The car company also has decided to add Kia vehicles to its production portfolio and will take over the distribution, as it owns the largest sales network in the country.

The KrAZ unit in Kremenschug plans to establish another factory for the production of small and compact cars with an annual capacity of 250,000 units. Who its cooperation partner will be is not yet clear.

Leoni AG (Leoni), the global supplier of cable systems, and VW established a joint venture for the manufacturing of wiring systems for automotive powertrains in Striy. Leoni has a presence in Ukraine since 2002 and lately decided to relocate part of its production capacities from Poland to Ukraine. In contrast, Bogdan Corporation has frozen the construction of its Russian bus plant as car sales in Russia have fallen significantly during 2009.

Risk and opportunity

Risks

The absence of political and economic stability• High inflation, which is the result of the

current negative account balance, leads to a decrease in industrial production and slow economic growth.

• Uncertainty in energy policy and constant Government representations about the possibility of moving away from Russia as Ukraine’s main energy supplier make the task of energy cost prediction more difficult.

• Shortcomings in social policy in previous years could cause the state to divert budget resources intended for infrastructure development or fulfillment of investor commitments.

Opportunities

The second-largest economy and car market in the CIS• According to Ukraine Autos Report Q1

2009, the ongoing untapped growth potential due to low rates of car ownership should reach 1 million vehicles by 2013.

Bridge to Russia• Another competitive advantage is its

closeness to Russia, which is Ukraine’s most important foreign trade partner, accounting for more than 22% of the total volume of Ukrainian foreign trade.

• The bilateral agreement on free trade between Ukraine and Russia allows lower, even zero, import rates.

Investment incentives and low wage level• In 2006, the Government released the

Concept for Developing the Ukrainian Automobile Industry and Regulating the Automotive Market Until 2015. It is believed that this will stimulate FDI in the industry.

• Some international parts makes have settled in Ukraine to benefit from labor costs that are 10 times less than WE levels and better than in Poland, Slovakia, Hungary or Romania.

A view of Monastery Square (Ukrainian: Mykhailivska Square) in Kyiv, looking toward the golden-domed St. Michael’s Monastery.


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.


RiyadhSaudi Arabia

Turkey

Iran

CairoEgypt

Jeddah

Damman

DubaiU.A.E.

• Saudi Arabia: most significant automotive Gulf economy in terms of sales

Saudi Arabia is the biggest oil exporter in the world, with a strong economy and per capita income comparable to those of Poland and Czech Republic. The Monarchy is home to more than 28 million inhabitants. The aggressive fiscal policies of the Saudi Government, which has emphasized capital expenditure as well as more indirect fiscal stimulus measures, have helped protect the Saudi economy from the impact of the global economic downturn. Further, a continuous rise in oil prices since the first quarter of 2009, is also boosting the Saudi economy. It is expected that the economy will grow by approximately 3% during 2010.

If we analyze the Middle East market, it is evident that Saudi Arabia is the biggest importer of motor vehicles and their parts, which are then either sold domestically or re-exported to other nations in the Gulf region. Currently, there is no production of vehicles in the Kingdom and only a small number of commercial vehicles are assembled locally.

Japanese brands, being dominant in the region, account for approximately 66% of the sales in the Kingdom. Toyota is the dominant player and its Camry, Corolla and Hilux models are the most successful models. European brands, being the second best-selling brands in the Kingdom, account for approximately 25% of the Saudi market. The remaining share goes to brands

imported from the US, South Korea and Malaysia.

Keeping in view the spending power of Saudis and strong economy, there is a niche market for sales of imported vehicles, especially the luxury cars. For instance, Saudia Arabia is important for BMW as the biggest importer of the BMW 7 series in the region. Moreover, there is a growing market for used cars, which represent approximately 25% of the total number of vehicles in the Kingdom and approximately 15% of the market.

The huge oil reserves, high business confidence and increased spending power of the people provide a favorable background for the automotive sector. The introduction of some new regulations is also expected to contribute to boost the sale of new cars in the Kingdom. The maximum age for import of light vehicles and buses has been fixed at five years by the Customs Department of Saudi Arabia. The maximum age for heavy trucks has been restricted to 10 years. The reduction in imported used vehicles due to the new regulations are expected to positively stimulate the market. Consumers in the Kingdom like to make cash purchases and thus are not as dependent on availability of consumer credit as in other markets. Cash transactions are expected to continue to represent the majority of purchases in the immediate future.

• Egypt: seen as export hub for both the Middle East and Northern Africa.

Egypt is located on both the African and Asian continents, though it also belongs to the Middle East. In terms of sales, 174,835 new passenger cars have been registered in 2009, with the potential for increasing volume in future years. The population of more than 78 million has a car penetration of 45 vehicles per 1,000 people. Small-volume production takes place in Egypt, although it is increasing. In 2009, approximately 107,000 units were assembled. Nissan expanded its activities in the country in 2004 to produce pick-up trucks for the Middle Eastern and Northern African markets. The link between Nissan and Egypt began in 1997, when the Seoudi Group located in Cairo, started to produce Nissan- branded models under license. Meanwhile, other brands such as Lada, Peugeot, Suzuki, Iveco, Chevrolet and Chinese brands are produced here as well, partly by Egyptian companies, partly in joint venture formations.


Iran

Introduction

In 2009, Iran’s automotive sector was the second-most active industry of the country, after its oil and gas industry . The country has become the largest vehicle producer in the region, manufacturing 46% of all cars produced in the region and its neighboring countries.

IKCO, founded in 1962 in Tehran, is the largest automotive manufacturer in Iran. The company is involved in both passenger car and commercial vehicle production.

Together, IKCO and Societe Annonyme Iranienne de Production Automobile Corporation (SAIPA) comprise 96% of domestic car sales.

Paykan was the most popular middle-class car in Iran, produced by Khodro from 1967 until 2005. The vehicle was based on a license of a UK brand whose rights were sold to Iran in 1979. Today, the company produces primarily Peugeot variants in cooperation with PSA and a few self-developed brands.

In 1993, the Government implemented an import tariff of 100%. Consequently, a growing number of global vehicle manufacturers, such as Hyundai-Kia and Renault, formed ventures with state-owned domestic manufacturers in order to develop the market.


Vehicle production experience limited

State-owned license/jointly vehicle production in cooperation with WE OEMs Supplier base lacks of quality

Large young population Purchase power is on a low level

Self-supply of vehicle demand with domestic production International trade less distinctive


Lack of people with engineering background Availability of personnel

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


USP Vehicle production base for the Persian Gulf states and Central Asia

Feature Export potential is expandable

Challenge Dependence on oil industry; political conflicts with Western countries

Potential Sales potential due to large young population of 73 million; old and uneconomical car parc


Iran at a glance

Iran is the largest production location in the region.


Tehran

However, the Government lifted the 10-year ban on car imports in 2003 and gradually lowered the high import tariff. This was an effort to strengthen the domestic automotive sector as well as support technology transfer.

The international economic sanctions arising from Iran’s controversial nuclear power program do not make business activities easier.

Along with vehicle production, the component industry has also developed 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 with tax breaks and other incentives. Still, foreign manufacturers import components for vehicle production due to quality issues.

Figure 51: Light vehicle sales and production compared (in units) 2006–09

2006 2007 2008 2009


Sales Production

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Figure 50: Sales and production development(in units) compared between 2008 and 2012


2,000,000

1,500,000

1,000,000

500,000

0

0 500,000 2,000,0001,500,0001,000,000


Ligh

t veh

icle

sal

es


Market demand

With a relatively youthful population of approximately 66 million, Iran is a growth market with a strong demand for vehicles. The increase in car demand is also attributed to population growth, urbanization and the growing number of women among purchasers.

Accordingly, the sale of passenger cars has grown steadily and the market has absorbed more than 1 million cars annually

Figure 52: Light vehicle sales by brand (in units) 2007 and 2009

20072009

Kia

Peugeot

Paykan

IKCO


456,303454,886

431,613

94,722116,709

88,859105,141

350,422

Figure 53: Light vehicle production by brand (in units) 2007 and 2009

20072009

Kia

Peugeot

Paykan

IKCO


456,303545,886

431,613350,422

94,722116,709

88,859105,141

in recent years. In 2007, the rate of car ownership was estimated to be 107 per 1,000 people, and the vehicle population is quite small but over-aged.

Because of the high import tariffs, the demand on cars is mainly met by domestic production. This looks different for lightweight and commercial vehicles. Since domestic production operates on a low level in these categories, the tariffs are lower, particularly for trucks. In 2006, the Government lowered the automotive

import tariff levels to 90% (for lightweight vehicles), and since then, a huge influx of imported vehicles has been witnessed in the country. The tariff level for import of heavy vehicles (buses) is even lower, at 20%, due to low levels of local production and high demand.

The three dominant brands, Peugeot, Kia and IKCO, capture 87% of the market share in the passenger car market.


To reduce pollution and ease the effects of heavy traffic on urban infrastructure, the Government has implemented several measures. One of them was the introduction in 2008 of a scrappage program. Nevertheless, the tool did not receive the desired response.

Triggered by the unfavorable economic circumstances, Iranian automotive manufacturers are trying to expand their businesses into regions outside Iran.

For example, IKCO remains active and put the country’s biggest car production plant into operation in summer 2008. It also invested into its Syrian plant in May 2009 in order to develop the location as an export base for its Samand model into the Middle East.

In December 2008, the Malaysian vehicle manufacturer Proton decided to assemble cars in Iran by partnering with IKCO.

The national producer Ardebil Sabalan Khodrow-Maywan and bus producer Daewoo from South Korea signed a letter of agreement in May 2009 with the intention to establish a joint venture in the middle of the downturn.

And Russian commercial vehicle producer KAMAZ expanded its capacity in Iran in July 2008 due to a rising demand for trucks.

Automotive players

Over 1 million passenger cars have been produced in Iran in 2009. IKCO, with its joint ventures, accounts for the majority of the nation’s automotive output. Kia was the most-produced brand ahead of Peugeot and IKCO. Several global manufacturers established capacities in Iran, most of them located in Tehran. They assemble cars in cooperation with domestic, state-owned manufacturers.

IKCO, the most successful Iranian car producer, owns a joint venture with PSA which produces Peugeot vehicles next to its own car, Samand. The company recently launched a micro-hybrid version of Samand and the Runna model has been launched in 2009 which appear to be based on the Peugeot 206.

IKCO is also involved in export activities to other countries of the Middle East by means of the Peugeot 206, a car which has been designed in cooperation with the French partner. The company also established operations in Syria in 2004 and other countries in order to expand business. Moreover, the national manufacturer is involved in the partial assembly of Hyundai and Renault vehicles. Khodro Diesel produces primarily trucks and busses but also established a joint venture with Daimler in order to assemble the Mercedes-Benz E-class. IKCO also opened a plant in Syria and established a new plant in Turkey in 2008.

Another major national passenger car manufacturer is SAIPA. Next to its own products, the company produces vehicles in cooperation with global manufacturers, such as Citroen, Nissan and Kia. At SAIPA Diesel, Volvo trucks are produced, whereas the subsidiary Zamad focuses on busses.In 2006, Renault started to produce the low-budget car Tondar 90 in a joint venture with the Iranian consortium AID. The car is based on the Renault Logan and was designed particularly for emerging markets. The assembly takes place at the plants of IKCO and PIDF.

Nissan vehicles are produced by SAIPA and PIDF but the company is in negotiations to invest in Iran.

Mercedes-Benz, Toyota, BMW, Hyundai and Mitsubishi have secured the necessary permits to import cars to Iran.

Iran’s component industry consists of approximately 1,200 companies.

In the downturn

The Iranian automotive industry has been heavily impacted by the credit crunch and economic downturn, which only added to the strain on Iran’s business activities from the United Nations sanctions. And the pressure is even greater on the local producers, which are focused on the domestic market without having many alternatives yet.



Risks

Economic sanctions• The economic sanctions hamper the

import and export activities of the country through the limitation in trade and in credit availability. The sanctions from 2006 were tightened in March 2008 and now prohibit the trade of goods that can be used for both civil and military purposes. Moreover, all countries were asked to be reluctant in their payment transactions with Iranian banks.

Influence of Government and protectionism• The economy of Iran, including the

automotive industry, is mainly controlled by the Government. The auto sector is subject to a five-year plan, and the overall privatization process is very slow. What comes quickly are the import barriers which reduce the import of cars.

Dependence on oil and gas demand• In 2008, Iran’s net oil export revenues

amounted to approximately USD$73 billion and decreased to USD$49 billion in 2009. Oil exports provide approximately 50% of Iran’s Government revenues, while crude oil and its derivatives account for nearly 80% of Iran’s total exports. The dependence on these resources will become awkward if the demand for oil decreases.

Opportunities

Geographic and demographic facts • Apart from the current market stagnation

triggered by external factors, there is still a clear demand for cars, as the car density is lower than in CEE markets and the vehicle population is over-aged.

• Demographically, other than Iran’s youth factor (70% of the population is under the age of 30), there is a re-emergence of a wealthy upper class and a growing niche of middle-class entrepreneurs.

• The foreign companies which are currently active in Iran not only take advantage of the growing market and low cost production opportunities, but they also use Iran as an export base for the Persian Gulf states and Central Asia.

Efforts to take part in economic business activities and to increase foreign investment• Several new automotive manufacturing

companies have been established as a result of the Iranian Government’s protective policies being eased.

• Since 1995, Iran has made efforts to gain membership in the WTO and is a member of the Economic Cooperation Organization (ECO), a regional economic association of middle-Asian states such as Turkey and Uzbekistan.

• The Government strives toward foreign investment and therefore introduced some measures to attract investors over time. For example, the investment protection law was updated in 2006 to improve legal procedures and attract foreign investment. Furthermore, there has been tax reform and the unification of currency exchange rates. As the private sector in Iran lacks access to capital, foreign investors can acquire companies being privatized in Iran after June 2008. However, they are allowed to control only a partial stake.



Global interest in advanced powertrain technology: how is Central and Eastern Europe seizing opportunities?

Despite the global financial turmoil impacting business throughout 2009, several vehicle manufacturers, as well as new entrants worldwide, have been focusing on making major advances in developing alternative solutions to the

traditional internal combustion engine. The scope of activity around advanced powertrains is broad and highly diversified, as pictured in the diagram below. However, while vehicle electrification has received a lot of media attention and government

support in various countries, substantial improvements are also being implemented to increase the efficiency of traditional fuel and diesel engines, but also to improve overall vehicle weight, drivers’ behavior, and other areas.

Figure 54: Technology overview of powertrain architectures

Type of vehicle Natural gas vehicle monovalent

Natural gas vehicle bivalent

Conventional engine

Hybrid electric vehicle

(parallel)

Hybrid electric vehicle (serial)

Plug-in hybrid vehicle

Pure electric vehicle

Fuel cell electric vehicle

Description Vehicle with a natural gas tank

only

Vehicle with a natural gas and a gasoline tank

Vehicle with a gasoline tank

only

Vehicle with a battery and a gasoline tank — powered by combustion engine and

electric motor

Vehicle with a battery and a

gasoline tank — powered only by electric motor

Access to the grid to recharge

battery

Vehicle with a battery only

Vehicle with a fuel cell only

Powertain architecture

Propulsion Technology

Combustion engine

Combustion engine

Combustion engine

Combustion engine + electric

motor


motor


motor

Electric Fuel cell + electric motor

Energy Carrier Fuel Fuel Fuel Fuel and electricity

Fuel and electricity

Fuel and electricity

Electricity Hydrogen

Natural

Gasoline

Battery

Hydrogen

Note: Each shadow area demonstrates applicability of different energy source across the various powertrain architectures.Source: Ernst & Young internal analysis

Natural gas tank

Combustion engine

Pressure navigator with

pressure sensor

Gasoline

Natural gas tank

Combustion engine

Control unit for natural gas and petrol drive

Pressure navigator with

pressure sensor and shut of

valve

Combustion engine

Gasoline tank

Regenerative breaking

Combustionengine

Electric motor

Batteries

Gasoline

p


Electric motor

Generator

Gasoline

Combustion engine

Batteries


Combustionengine

Electric motor

Batteries

Gasoline


Electric motor

Batteries

Fuel cell stack

H2 Tank


Electric motor

Batteries


The pathway leading to an increased focus on advanced powertrains is involving new companies currently outside the existing automotive industry value chain as well as significant stakeholders in other industries that increasingly see the car as a converged mean through which their core businesses can flourish. Here are a few examples:

• Telecom companies see the car of the future as a data-gathering platform which will require advanced roaming technologies as it gets connected to the grid but also as safety technologies increases, connecting vehicles to police stations, hospitals, etc.

• Renewable energy companies recognize passenger cars as a great means to increased demand for their energy 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.

• Large component manufacturers see vehicle electrification as an opportunity to create plug-in hybrid (PHEV) and electric vehicle (EV) models and hence enter the world of manufacturers.

One doesn’t change an industry as vital and embedded in the global economy as the automotive industry overnight, and many questions remain about the exact course that this evolving chapter in motoring will take. More than ever, collaboration in the early stages is required to accelerate technological progress and materialize new business models — both essential to support the industry transformation. The new stakeholders in the evolving automotive value chain can be regrouped in clusters highlighted on following page.


Figure 55: Advanced powertrain initiatives in CEE:

CEE country, date Initiative Details

Russia, January 2010 EV production plans are under discussion in Russia.

Mikhail Prokhorov, a Russian entrepreneur who owns industrial truck • 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 on EVs.

Following its re-organization, Russian manufacturer AvtoVAZ has discussed with • 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 AutomotiveTechnologies Sp. z o.o. (IAT) produces a three-wheeled EV.

Pruszków-based IAT is manufacturing a three-wheeled EV called the RE-Volt.• IAT is a Polish contract manufacturer for the automotive industry.•

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 in Czech Republic.

ČEZ, the largest electricity producer in Czech Republic, is investing at least 500 • 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 fuel-cell passenger bus.

Škoda Electric collaborated with Proton Motor (a fuel cell producer) and UJV • 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 initial appearance on six models.

Kia’s eco-friendly Idle Stop & Go system cuts fuel consumption by 15% by • 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, December 2008

Tatra is in the beginning stages of planning hybrid and electric-powered vehicles.

Czech truck manufacturer Tatra has begun research and testing into hybrid and • electric-powered vehicles.

Czech Republic, October 2008

Vítkovice Machinery Group (VMG) is investing in compressed natural gas (CNG) technology.

VMG is installing CNG filling stations and producing components that will allow the • conversion of vehicles to run on CNG.VMG is also forming a future fuels development research team.•

While several examples of convergence between the new stakeholders in the alternative drive landscape can be

witnessed in Asia, North America and WE, CEE countries are also trying to embrace innovations toward new vehicle

technologies. In Figure 55 are a few examples of current powertrain initiatives across CEE:


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.


Market opportunities

The new automotive value chain to support these changes is still coalescing; success will require extensive interaction and cooperation between the existing automotive industry stakeholders, Governments, other industries, new technology innovators and the public at large. This is complicated by the fact that vehicle electrification is only one aspect of the industry’s efforts to mitigate climate change, and society’s overall commitment to the effort remains uncertain.

Moving forward, manufacturers will be able to leverage their advanced powertrain technologies in CEE. EV development will likely come first through the mainstream manufacturers, especially those with a CEE presence. The localization of R&D efforts will also become important for the development of new technologies in this region.

Although there is not a clear path for the future development of advanced technologies, what is evident is that more players will need to be involved in determining the course of the automotive industry over the next few decades. Key stakeholders in the evolving automotive industry value chain include Governments, infrastructure and utility companies, vehicle and battery manufacturers and start-up companies, which play a distinct role in the transformation process of the industry.

Business as usual is over, and is becoming more complicated each day. The question for CEE will soon be: how is this region responding to the business transformation and opportunities ahead? Below are examples of how the stakeholders in the evolving automotive industry value chain can contribute to and also impede advanced powertrain initiatives, with a particular focus on what could be done in CEE.

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

GovernmentElected officials• Regional and city administrators• Regulators• Vehicle and energy associations• Research institutes •

Governments are often the appropriate • outlet for community-wide measures to support infrastructure development.Governments and regulators can act as • industry catalysts while supporting consensus and clarity of standardization.City administrations can create demand • supporting start-up projects.

Governments can set expectation levels • too low or establish infrastructure too slowly, which may not motivate the industry community to accelerate the pace of improvement.Due to macroeconomic and other • factors, some Governments postpone the implementation of low emission standards.

Together with OEM and supplier • collaboration, regional governments could implement comprehensive R&D programs to stimulate the localization of alternative drive manufacturing activities in their respective automotive hubs.City administrations could replicate • 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.

InfrastructureCharging stations• Connection to the grid• Digital infrastructure•

The infrastructure facilitating grid • connection is a new segment playing a key role in the evolution of vehicle electrification.Connecting vehicles to the grid opens • up a wide array of high-tech opportunities, revving up the industry.

Ownership questions related to • infrastructure are not clear. For example, who pays for the installation of charging stations? Who should own the digital architecture for billing?Potentially attractive public-private • partnerships are difficult to launch due to a lack of dialogue and understanding of priorities.

CEE Governments and city • administrators could incentivize PHEV and EV testing while supporting utilities to embrace renewables as alternative energy resources.City administrations need to support • charging-station initiatives. Some already under way include:

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.

Projects can be witnessed among selected companies, but alternative-drive R&D does not seem to be prioritized in this geography. This leaves major opportunity areas open to leverage talent and resources in the near future.

To promote the use of EVs, countries such as the US, Japan and China as well as WE have introduced specific tax incentives and regulations. North America has made the highest contribution to the HEV market, and consistent demand has led to a high consumption of HEV batteries. The Asia-Pacific region, however, remains the hotbed of activity, with significant prospects for both the HEV and EV battery markets and a presence of major battery manufacturers.


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

UtilitiesTraditional energy companies owning • and maintaining the gridOil and gas companies entering the • advanced powertrain industry

Major utilities may support renewable • energy projects by sharing their experiences with other companies on the grid impact of electric vehicle testing, as well as smart grid initiatives and testing.Several oil and gas companies have the • capacity to support strong R&D, promoting major changes in the industry.

A strongly regulated environment may • impede innovations needed to bridge the gap between the energy world and automotive business.Utilities producing energy from fossil • fuels may need to shift to cleaner sources to establish credibility with regulators and consumers.Energy grids in some countries may • become strained by the demand for EV power.

Several markets in CEE, such as • Czech Republic, Slovenia and Poland, present favorable testing conditions for EVs. Smart grid testing in conjunction with EV simulation could trigger new types of R&D activities.Vast natural gas resources in Russia • could supply vehicle initiatives in the CIS and surrounding countries. This includes the commercial liquefied 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 Car and truck producers• Major suppliers •

Several OEMs can capitalize on car • design and production know-how through access to archived electric manufacturing experience.Major suppliers have the ability to • support OEMs to accelerate EV launch.Several suppliers are currently key • stakeholders of OEMs in regard to alternative drive solutions.

Several manufacturers are still • uncommitted to developing EVs, which sends discouraging signals to the public and to battery manufacturers, which need high-volume expectations to justify significant capital investments.

Among the few OEMs headquartered in • CEE, no major announcements have been made supporting PHEVs or EVs in the years to come.Suppliers tend to follow developments • taking place in their more immediate regions. OEMs in the CEE would need to send a stronger commitment to 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 Joint venture between chemical and • electro-engineering companiesElectric divisions of global Tier 1* • suppliers*Smaller players owning key • technologies

Battery manufacturers are becoming • even more important than other Tier 1 suppliers as the need grows to bridge different industries: automotive, utilities, telecommunications, etc.The possibilities around second life of • used battery for storage purposes combined with leasing alternatives are transforming the industry.

Lack of communication on • standardization at the cell level may delay further improvement. Lack of strong financial planning may • cause bankruptcies.Greater standardization, for instance on • common cell size, would help accelerate further developments.

Battery manufacturers are already • established or expanding production in Asia and North America. However, most of them have concluded partnership agreements with OEMs with operations in CEE.

Start-ups Small-scale electric manufacturing • venturesRenewable energy providers (solar, • wind)Engineering companies with fleet • conversion support

Entrepreneurship and vision, which • often come from start-up companies, are essential drivers in the journey to vehicle electrification.

Untested business plans and short-term • ROI expectations may jeopardize innovative projects.

CEE could become an important hub • supporting start-up companies searching for an alternative market to their home countries in which more affordable conditions could allow the testing and launching of initiatives more 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

Car brand Model nameType oftechnology(PEV or PHEV)

Range percharge(miles)¹

Vehicle type Plant locationPlanned

launch year

Audi e-tron PEV 155 Compact car TBD 2012

BMW Mini E PEV 150 Compact sedan Oxford, UK TBD

BMW Concept ActiveE PEV 100 Coupe Spartanburg, South Carolina, US TBD

Bright Automotive IDEA PHEV 40 Light commercial vehicle Anderson, Indiana, US 2012

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

Chrysler Dodge Circuit (concept) PEV 150–200 Coupe TBD 2011

Citroen C-Zero PEV 80 Four-door hatchback TBD 2010

CODA Automotive EV sedan PEV 90–120 Four-door sedan Tianjin, China 2010

Fiat Electric Fiat 500 N/A N/A Compact sedan/hatchback Toluca, Mexico TBD

Ford Focus EV PEV 100 Four-door sedan and/or 5-door hatchback Wayne, Michigan, US Late 2011

GM Chevrolet Volt PHEV 40 Five-seat hatchback Detroit-Hamtramck, Michigan, US Late 2010

GM Chevrolet Spark PEV 186 Compact car Orion Township-Pontiac, Michigan, US 2010

Hyundai Blue-Will PHEV 40 Four-seat sedan concept

No plans for production version TBD

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

Optimal Energy Joule PEV 248 Five-seat urban passenger vehicle

Cape Town/Port Elizabeth South Africa 2012

Peugeot iOn EV PEV 81 Compact sedan TBD 2010

Peugeot 3008 Hybrid4 PHEV N/A Compact sedan Sochaux, France/Mulhouse, France 2011

Renault Fluence Z.E. (concept) PEV 99 Compact sedan Bursa, Turkey 2011

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

Car brand Model nameType oftechnology(PEV or PHEV)

Range percharge(miles)¹

Vehicle type Plant locationPlanned

launch year

Tesla Roadster EV PEV 244 Two-seat roadster

Hethel, UK (chassis assembly); Menlo Park, California, US (battery and powertrain assembly)

2009

Th!nk Global Th!nk City PEV 112 Compact sedanUusikaupunki, Finland; Elkhart County, Indiana, US

2009 (Europe);2011 (US)

Venturi Fetish PEV 155 Two-seat roadster Principality of Monaco 2006

Visionary Vehicles Bricklin PHEV 100 Luxury sedan Contract with existing manufacturers 2011

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 acronym — Russia is going its own way

In recent decades, most major vehicle manufacturers’ strategies have relied on strong growth in emerging markets. In the past several years, carmakers have come a long way in entering new markets, pioneering manufacturing activities or setting up partnerships with local players while adjusting to unique, indigenous market needs. Before the global financial crisis which began in the fall of 2008, Russia was one of the most promising growth markets, certainly deserving strong board-member attention by any global suppliers not yet present there. Most car sales predictions in mid-2008 were for Russia to reach 5 million units a year by 2010. In fact, market forecasts were predicting Russia would become one of the strongest growth markets in the world, along with China and India.

The global financial downturn, however, has affected the automotive industry in emerging markets, and Russia’s industry was clearly hit in a very distinctive way. Access to credit and volatile purchasing power of consumers have always been sensitive issues since Russia adopted capitalism, and both were severely jeopardized as the financial crisis began to spread out globally. The crisis brings to light that Russia’s economy remains fragile and undiversified while its manufacturing footprint has not evolved appreciably in the last decade.

Since 2004, analysts have focused on grouping the major rapid-growth markets under the now well-known acronym BRIC (Brazil, Russia, India and China). On their own, these four countries were predicted to represent a significant portion of the global GDP while becoming substantial players in the automotive industry.

But 2009 has led to some distancing of the four countries in terms of prospective economic growth and overall appetite for new cars sales, focus on export, and so on. In fact, a closer look at the BRIC countries reveals that beyond strong growth prospects, the four countries have very little in common, particularly in regard to the automotive industry. Not only have car output and export taken different paths across the BRIC countries, but more than ever it seems that there is neither a “BRIC car” nor a “BRIC automotive strategy.”

Following are some illustrative examples, which also show Russia’s distinctive path:

Brazil• Brazil and India have become strong

exporting markets. The significant improvement of Brazil’s economic fundamentals has created a stable market including favorable exporting conditions. Although export suffered severely following the global financial crisis, it is set to strongly resume in the next two years and confirm the country’s strong export potential within both South America and Europe. In comparison, Russia’s export strategy for cars has remained modest in recent years, mainly driven by export to neighboring CIS and

African countries but never to the point of potentially making Russia an export hub.

• Brazil and China are among the very few countries that allowed automotive companies to report positive numbers in 2009.

• Brazil is a unique market for flex-fuel vehicles (which can run on ethanol, gasoline or the two combined), which now account for more than 90% of new vehicles sold in the country.

• Brazil’s focus on ethanol-powered engines reaches back to the early 1980s. Flex-fuel vehicles began in 2003, which makes Brazil one of the first countries to focus on alternative energy sources to supply the transportation industry.

• Sales patterns in Brazil are not yet back to quarter three 2008 levels, but demand for flex-fuel vehicles, which enjoy better tax rates than conventional-fuel vehicles, has increased compared to pre-crisis levels.

Russia• Russia is probably the most distanced

country from the others by the crisis in terms of how it was affected by and reacted to the crisis. Car sales and production in Russia fell strongly, as in most markets, but now appear to be affected for several years to come as access to credit and consumer cautions are still lowering demand across the country.

• While most emerging markets (except, for instance, Iran and Malaysia) first developed their automotive industry with strong participation from foreign carmakers, Russia had its own industry.


Across both the passenger and commercial segments, Russia’s entry into capitalism inherited a strong indigenous automotive industry across all segments except the two-wheeler industry: passengers cars, commercial trucks of all sizes as well as busses have been produced in Russia since the early 1930s.

• Despite this unique characteristic, in Russia, not only are lower-tier component manufacturers generally unable to satisfy foreign quality standards, but also raw materials such as metal are not processed using standards satisfactory to accommodate larger volumes.

• Despite restructuring activities in recent years, Russia’s indigenous automotive manufacturing industry remains strongly vertically integrated.

• Russia has by far the smallest amount of foreign component manufacturer plants among the BRIC countries. Suppliers currently manufacturing parts in Russia find it very challenging to localize their production with the support of indigenous players.

• Environment-related issues do not seem to be a priority in Russia, which makes it difficult for the country to become an important platform for alternative drive vehicles such as electric and natural gas vehicles.

• The Russian Government has deployed resources to support nanotechnology developments across various industry sectors, including automotive. It remains to be seen whether this initiative will position Russia as an exporter of advanced vehicle technologies with regard to vehicle consumption and weight efficiency in the future.

• Russia was more severely hit by the global financial crisis than the other BRIC countries and will need time to adjust. From an automotive standpoint, Russia may need three or four years to get back to pre-crisis demand levels. But an important question that is still unanswered is: where will the Russian automotive industry stand technologically among the BRIC economies once it emerges from the current crisis? If the remaining BRIC countries continue to progress technologically, it will prove difficult for Russia to catch up.

India• India is now witnessing a strong rise in car

sales, in fact stronger than before the crisis. Exports continued to grow during 2009 across most segments. The country was quick to escape lethargic sales and is now back to focusing on growth management rather than incentive implementation.

• India is home to companies leading new areas of development in the automotive industry, such as electric vehicles (with, for instance, REVA) and ultra-low-cost cars (Tata).

• New emerging markets are gaining popularity and attention among vehicle and component manufacturers: Vietnam, Thailand and countries in North Africa and the Middle East have witnessed investments and are likely to gain more attention in the years to come.

China• Chinese consumers were relatively quick

to get back to pre-crisis car purchasing patterns, but nowadays they prefer smaller vehicles with lower emissions (mainly due to newly introduced incentives).

• China is currently home to an unprecedented surge of R&D and innovation in the automotive industry. For some international OEMs, China has become the main location of all international operations outside the headquarters country. And the country has a culture of its own which makes it a unique case for several players.

• Several global automotive players are localizing key business activities in China.

• Demand in China has created separate needs in Southeast Asian countries: companies initially aiming at supplying Southeast Asia from China now need to consider localizing facilities in markets such as Indonesia, Thailand and Vietnam due to high demand in China, which creates a surge of interest in those neighboring markets.

• In China, active Government involvement in the automotive industry has lately become an essential reality in the business landscape, providing incentives needed to support consumption of more environment-friendly vehicles and motivating players to intensify development in electric cars. This support has had a strong impact on R&D developments and allowed some passenger car manufacturers such as BYD to rapidly expand their leadership footprints in the electric vehicle industry segment.


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Autobeat Daily EUROPEErnst & Young sponsors the electronic AutoBeat Daily newsletter, which is published regularly. It contains brief and compact information about the news in the US, Asian and European automotive markets. If you want to be added to the subscription list, please write an email to: [email protected]

European automotive survey 2009Even in times of crisis, Germany can call itself the world’s leading automotive location according to automotive managers from the rest of Europe, and takes the top spot in the list of world’s most attractive automotive locations. These are some of the findings of the European Automotive Survey 2009 conducted by Ernst & Young.

Gauging interest for plug-in hybrid and electric vehicles in select markets In this powertrain survey Ernst & Young measured the understanding of and interest in plug-in hybrid and electric vehicles in the US, China, Japan and Europe.

Automotive market in Russia and the CISThis report outlines our view of the current situation on the Russian and the CIS automotive markets as well as our outlook for possible market development in the following years. Despite the recent slowdown in sales volumes, we remain positive about the long-term prospects for the Russian automotive industry.


Revving up! Indian Automotive industry — a perspective This report encompasses the entire value chain of the automotive industry and also covers component suppliers, vehicle manufacturers and trends in vehicle retailing in India.

Destination ahead: the automotive industry in the era of climate change and sustainability — Asia spotlight editionIn this report, we get to the heart of the issues that are changing the face of the industry: the evolving regulatory landscape, advanced powertrain vehicle technologies and alternative fuels. We also have a special segment on how the Chinese automotive industry is responding to climate change and its impact on the automotive industry.

UK car dealerships — lessons from the last recessionUK car dealerships: lessons from the last recession provides a perspective on the current and future trends in the UK automotive retail market and highlights the 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 in 2008.


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