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2015
Macedonia and the European Periphery Automotive Regional Value Chain
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1 Contents
1 Contents ................................................................................................................................................ 1
2 Origins and evolution ............................................................................................................................ 2
3 Macedonia’s positioning within the European Periphery Regional Value Chain ................................. 3
3.1 Snapshot of Macedonia’s Automotive Industry - Cluster figures ............................................. 6
4 Support Institutions, Policies, and Cluster Agents .............................................................................. 12
5 Relevant Auto-Component Systems and Strategic Segments for Macedonia.................................... 16
5.1 Electronics and Electrical Component System in Macedonia – Structural Industry Analysis . 17
5.2 Bus Manufacturing in Macedonia – Structural Industry Analysis ........................................... 21
6 Policy Recommendations: ................................................................................................................... 25
6.1 Strategic Repositioning Options for Macedonia within the European Periphery Regional
Automotive Value Chain ..................................................................................................................... 25
6.2 Policy Recommendations on FDI Backward Linkages Programs for Macedonia Automotive 30
7 References .......................................................................................................................................... 33
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2 Origins and evolution
A small landlocked country in the southern part of the Balkans, Macedonia is progressively emerging as
a potential hub for automotive components production and bus manufacturing within the European
Periphery Automotive Regional Value Chain, as a result of the proactive FDI attraction strategy of the
government in automotive since 2006, the relatively efficient public administration and predictable
business environment in comparison to other members the Euro periphery automotive RVC, rising
production and labor costs in Central-East European countries, and increasing geopolitical instability in
the North African, Middle Eastern, and post-Soviet sub-regions of the Euro periphery automotive RVC.
Traditionally an agricultural-based economy, Macedonia can nonetheless claim relevant engineering and
manufacturing capabilities, which are a legacy of the automotive component suppliers network for the
Zastava plant in Serbia since the 1960s. In particular, the availability of a low-cost skilled workforce,
supported by the modernization of the scientific higher education system (1,100 graduates per year
from the Faculty of Mechanical Engineering alone), and a generous, yet effectively managed, SEZs
incentives regime, have been two key pillars of the targeted FDI attraction strategy of the GoM
(InvestMacedonia and the Directorate of Technological and Industrial Development Zones – DTIZD)
towards automotive.
As a result, Macedonia is now on the map of investment destinations for automotive components
manufacturing with an FDI stock of Euro 127 mln (2005-2010), a growing pipeline of Tier 1 and Tier 2
auto components investments (7 greenfield FDI expected in 2015), a total number of around 50
companies operating in the industry, employing around 2,500 workers, with a value added of Euro 45.5
mln, and exports of around Euro 24.5 mln (InvestMacedonia, 2015).
Figure 1 - Macedonia’s Automotive Components Exports by Region (2001 – 2011)
According to the National Bank of Macedonia, 26% of FDI that entered the country in 2011 in the form
of equity capital, reinvested capital and other capital was for vehicle and transportation equipment
manufacturing. Automotive investments in Macedonia have both increased the country’s exports of
automotive parts and repositioned them in terms of markets. Historically, the Macedonian small
indigenous automotive cluster has been exporting to the Russian Federation. While the country’s
automotive cluster has struggled in the wake of the collapse of the Soviet Union, it remained dependent
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on Russia as a market. However, the influx of Western investors both increased exports and shifted their
destination from East to West (Sturgeon, 20131).
However, while the current strategy of increasing the pool of FDI (Tier 1 and Tier 2) to consolidate the
recently gained foothold in automotive as a relatively low-cost medium-technology location for
components production seems appropriate to create the ‘critical mass’ of manufacturing capabilities in
the short to medium term, Macedonia’s current positioning within the Euro periphery RVC simply as
small low-cost location for labor-intensive productions will soon encounter the following challenges: 1)
low or almost non-existing integration between Tier 1 and Tier 2 FDI and local companies, 2) mounting
upward pressure on wages and availability of skilled workers given the ‘smallness’ of the country, 3)
inability to compete with Serbia and neighboring countries with a larger manufacturing base, larger
workforce, and better logistics connections as an undifferentiated low cost location for automotive and,
consequently 4) need to specialize and reposition itself towards those strategic segments within the
automotive Euro periphery RVC in which small scale, customization, medium-to-high skill intensity of
workforce, and reliance on proprietary technology/ies in one or more specific niches give a competitive
edge over larger competitors.
3 Macedonia’s positioning within the European Periphery
Regional Value Chain
Macedonia’s automotive industry is part of the European periphery automotive regional value chain (EP
RVC), which includes around 13 countries in Central-Eastern and Southeast Europe, North Africa, and
the Middle East (see below). The main end-market for the EP RVC is Western Europe and the demand
trends, such as increased onboard electronics, high fuel efficiency and stringent environmental
regulation, onboard safety and networked mobility, etc., in this market influence the investment and
sourcing decisions of the OEMs that the EP RVC feeds into.
Figure 2 - The European Periphery Automotive Regional Value Chain - Countries
1 Timothy Sturgeon and Ezequiel Zylberberg “Global Value Chains, Special Economic Zones and Domestic Linkages. The Extension of Automotive Value Chains into Nicaragua and Macedonia” – The World Bank, 2013.
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While the growth prospects for the EP RVC are positive, with a broader addressable market (Western,
Central, and Eastern Europe,) projected to represent 21% of global sales of passengers vehicles (PV),
16% of commercial vehicles, and 1% of two wheelers (2W) in 2020, Macedonia is expected to remain a
small market and a minor player within the EP RVC with a potential of 6,000 PV, 2,000 CV, and 2,000 2W
sales in 2020. Figure 3 - Expected Sales in 2020
The small size of the domestic market for vehicles, and the composition of the trade flows with the top
trading partners (Macedonia automotive exports amounted to USD 34 mln in 2012 primarily to France
(12%), Slovenia (13%), and Poland (12%), while imports were equal to USD 279 mln primarily from
Germany (45%), China (13%), and Italy (6%), which consists primarily of exports of components (68% of
automotive exports) and imports of final vehicles (93% of automotive imports), indicate that the
potential for specialization of Macedonia within the EP RVC lies in pursuing a strategic positioning as a
sizeable hub for automotive components production.
Figure 4 - Macedonia automotive exports mostly components and imports mostly passenger vehicles
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The possibility of positioning of Macedonia as a hub for automotive components will need to harness
the emerging production location trends in the EP RVC, according to which OEMs and Tier 1 are looking
to develop systems/components hubs in Eastern European countries, while North African countries are
attracting investments for vehicle assembly plants [Roland Berger investment forecast 2020]. In this
regard, the overall EP RVC automotive supplier base is comparable to other emerging regions, with low
labor costs representing a major competitive advantage (see below).
Figure 5 - European Periphery Automotive Suppliers presence by component type and process type
A key challenge for Macedonia is to upgrade its supplier base and develop a critical mass of local
producers in specific components, if it is to reposition itself as a regional hub for automotive
components manufacturing. Currently, Macedonia’s aspirations towards this goal contrast with the
perceived image by investors that see Poland, Turkey, and Czech Republic as consolidated hubs for
suppliers by component, while only 3 Macedonian suppliers made it to the list of suppliers by
component of the automotive industry analysis of Roland Berger (2014).
Figure 6 - Country wise supplier presence by component type (# of suppliers)
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Similarly, the prospects for a strategic repositioning of Macedonia within the EP RVC would need to take
into account the limited presence of supporting industries2 relevant for the automotive sector, which
amount to a total output of $194 million as opposed to $121 billion for Turkey, $118 billion for Poland,
and $66 billion for the Czech Republic.
Figure 7 - Magnitude of supporting industries by country (output in USD million)
3.1 Snapshot of Macedonia’s Automotive Industry - Cluster figures
The automotive industry in Macedonia consists of around 50 companies, which employ around 2,500
workers, and generate Euro 45.5 mln of value added, and export around Euro 24.5 mln
(InvestMacedonia, 2014). Most of these companies (approximately 38) are local and manufacture
products for other industries as well, such as construction, pharmaceuticals, medical equipment, and
others. They are Tier 2 and Tier 3 suppliers, which generate only 7.6% of revenues in automotive but
account for half of the employment in the industry (World Bank, 2013). They manufacture primarily
aluminum and plastic parts, seat belts and seat belts parts, seats and interior parts, clutches and
clutches parts, shock absorbers, printed circuit boards (PCB), wire harnesses, electric and electronic
parts, brake components, die casting products, buses and minibuses chassis and body parts. In terms of
manufacturing capabilities, local companies show relevant capability in a range of processes such as
machining, forging, aluminum die-casting, and plastic injection molding inherited from the Yugoslav
times.
However, capacity utilization of the local clusters remains at 50%-70% and there is very limited supply
chain integration among local firms, as there are few firms in each cluster that produce a vast array of
products (from aluminum parts to PCB prototypes) leaving little scope for collaboration or consolidation
(World Bank, 2013). At the same time, the domestic automotive industry is characterized by low
technological development, which is reflected in the need to import all intricate parts and components
with higher value added and in the extremely low research and development (R&D) expenditures.
2 Supporting industries include chemicals & chemical products, rubber & plastics products, basic metals, fabricated
metal products, machinery & equipment, electrical machinery and apparatus.
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According to a World Bank policy note (2013), the average R&D expenditure in the country for the
period 2005–09 was 0.14 percent of GDP, which is relatively low compared to other countries in the
region. Small automotive component suppliers are generally unable to invest in new technologies. Links
between industry and public R&D institutions are nonexistent but critical to shoulder the fixed costs and
risks involved in R&D.
Local automotive Tier 2 and Tier 3 manufacturers are geographically clustered in the regions around
Skopje and in the southwest of the country around Orhid, Struga, and Resen (see map below). Figure 8 - Automotive Clusters in Macedonia (2014)
The geographic concentration of local Tier 2 and Tier 3 firms only partially overlaps (in the area around
Skopje) with the production sites of the recent wave of automotive FDI to Macedonia (see map below),
which have located mainly in the SEZs managed by TIDZ since 2007. The limited degree of co-location
between local firms and Tier 1 FDI provides an indication of the minimal clustering effects currently at
play in Macedonia and of the almost absent backward linkages between the foreign large-scale
multinationals that have established operations in the country over the past few years and the local Tier
2 and Tier 3 companies, which are currently unable to meet the quality, volume, and financial
requirements of FDI with few notable exceptions. This situation has put the Government of Macedonia
under increasing political pressure, and the consolidation of backward linkages between domestic and
foreign companies has become a top policy priority of InvestMacedonia and TIDZ to complement an
otherwise successful FDI attraction and SEZ strategy.
Overall, around 15 automotive FDI have established manufacturing facilities in Macedonia since 2007
(see map below), with a significant acceleration over the past three years and a strong pipeline of 7 new
investments for 2015 (see table below). Tier 1 and Tier 2 companies constitute the bulk of the
multinationals that have set operations in Macedonia with the notable exception of VanHool, a major
OEM bus manufacturer serving the EU and the US markets.
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Figure 9 - Major Recent Automotive FDI in Macedonia
These new foreign entrants are fully integrated into the EP RVC, account for approximately 92% of the
revenue generated by the automotive industry in Macedonia, and for 96% of automotive exports. While
the location decisions are aligned with the supply chain optimization strategies of the parent companies
with regards to the EP RVC, they all have selected Macedonia to locate the most labor intensive phases
of production of their respective supply chains, attracted by the relatively low cost, availability,
flexibility, and good skills of the workforce, the transparency of the public administration, which
compensate for slightly higher logistics costs, and the proactive FDI attraction strategy of
InvestMacedonia and TIDZ.
Table 1 - Pipeline of Automotive FDI in Macedonia in 2015
New Automotive FDI in the TIDZs in 2015 (announced)
Country of origin
Cap-Con USA
Gentherm USA
Key Safety Systems USA
Mediterr Shock Absorbers Italy
Mensan Otomotiv Turkey
ODW Elektrik Germany
Kostal Germany Source: InvestMacedonia, 2015
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The wave of Tier 1 FDI was pioneered by Johnson Controls (US) and Johnson Matthey (UK) which set up
greenfield manufacturing facilities at the 140-hectare Skopje SEZ (managed by TIDZ) since 2007. Johnson
Controls opened a $40 million plant to produce electronic dashboard components in 2007 employing
300 people and, and a $28 million plant for the production of car seats in the SEZ in Stip in 2012
employing 1,400 workers at full regime to leverage the connections with the existing textile cluster in
that area. Johnson Matthey opened a Euro 55 million emission control catalyst plant employing 600
workers to serve the rapidly growing demand for automotive emission control catalysts in Europe, which
is driven by the continuously tightening emissions limits regulations in the EU.
The flow of automotive FDI that has followed these two initial investments (focusing on catalysts, car
seats, and PCB) has primarily focused on autopart systems and sub-components with an incipient
specialization on wire harnesses (Draxlmaier, ODW-Electrick, Amphenol, Kromberg & Schubert,
COFICAB), airbags and safety systems (KSS, Amphenol), electric components and capacitors (Kemet
Capacitors), rubber and armored hoses (Technohose), PCBs and mechatronics parts (Visteon,
Marquardt), anti-vibration components and shock absorbers (LTH Learnica, MSA), brake discs (Mensan
Otomotiv). The emerging specialization on these auto-component systems is also confirmed by the
composition of automotive components exports which reflects for example the prominent position of
Johnson Matthey as exporter of catalysts (see Figure 10).
Figure 10 - Macedonia’s Export of Automotive Components by Type
Similarly, the Tier 1 and Tier 2 FDI that have located in Macedonia are fully integrated in their respective
supply chains to serve OEMS in the EP RVC (see section on strategic segments below), as illustrated by
the destinations of the auto-components exports in the figure below, and have minimal connections
with the local Tier 2 and Tier 3 producers as supply chain management and their procurement strategies
are part of their parent groups competitive strategies for the EP RVC (see section on backward linkages).
Figure 11 - Macedonia’s Export of Automotive Components by Country of Destination
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In general, the location decision of the automotive FDI established in Macedonia have been driven by
cost efficiency considerations, and have been attracted by the availability of a sizable pool of skilled
workers with a 96% overall literacy rate, and lower salaries in comparison to other countries in the EP
RVC (see Figure 12).
Figure 12 - Number of High School Graduates in Technical Fields
3 Number of College Graduates in Technical Fields
Source: State Statistical Office of the Republic of Macedonia, 2014
Figure 13 - Average Net Monthly Salary in Selected Countries of the EP RVC in 2014
Source: InvestMacedonia, 2014
However, cost efficiencies based on low labor costs alone will progressively be eroded as the demand
for labor generated continued influx of FDI on a relatively small workforce will increase inflationary
pressures on salaries, as already shown by the upward trend from 2009 to 2014 (see Figure 14).
Figure 14 - Average Gross Monthly Salary in Manufacturing in Macedonia (2009 – 2014)
Source: State Statistical Office of the Republic of Macedonia, 2014
3 Mechanical Engineering, Electrical Engineering & Computer Sciences, Technological Engineering & Metallurgy,
Textile & Leather Processing, Transport Engineering
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FDI have also factored in their location decision the lower energy prices available to them in Macedonia
when compared to neighbors (see Table 2). However, reliable electricity and gas supplies are available
mostly in the SEZs where FDI are located, while 90% of firms do not have access to piped natural gas due
to the underdeveloped infrastructure in the country. Most firms use a combination of electricity and
heating oil to meet their energy needs, which is a more costly option compared to natural gas (GDS
2011). Although energy consumption is not a key cost component in car assembly and component
manufacturing (with the exclusion of the production of steel), the limited reliability of natural gas supply
outside of the SEZs represents a critical bottleneck for the upgrading of the production processes of
domestic suppliers.
Table 2 - Energy prices, selected countries (2011)
In addition to low labor and energy costs, Tier 1 and 2 automotive FDI have located to Macedonia to
access a broader addressable duty-free market of potentially 650 million customers resulting from three
multilateral trade agreements (SAA with EU, EFTA with Switzerland, Norway, Iceland, and Liechtenstein,
and CEFTA with the rest of the Western Balkans) and two bilateral agreements with Turkey and Ukraine.
Figure 15 - Macedonia’s Automotive Broader Addressable Market & Free Trade Agreements
Source: InvestMacedonia, 2015
As of June 2011
Country LPG* Heating Oil*
Electricity US$/kWh Gas US$/kWh US$/liter US$/liter
France 0.076$ 0.050$ 0.854$ 1.232$
Sweden 0.083$ 0.069$ na 1.848$
Bulgaria 0.091$ 0.044$ 0.812$ 1.624$
Romania 0.105$ 0.033$ 0.802$ 1.540$
United Kingdom 0.113$ 0.032$ 1.222$ 1.103$
Germany 0.130$ 0.067$ 0.899$ 1.201$
Italy 0.157$ 0.056$ 0.834$ 1.904$
Macedonia (nominal)** $0.043 - $0.076
Macedonia (effective***) 0.09$ * Excludes value added and other taxes except heating oil (retail price)
** Includes low-high tariff rates
*** Includes charges related to load factor, etc
Compiled by Global Development Solutions, LLC from industry sources
Industrial Price*
not available outside
FEZ1.075$ 1.750$
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These free trade agreements make up for the slight transportation and logistics time and cost
disadvantages that Macedonia has with respect to Serbia, Bosnia, or Central Europe in reaching the EU
market. At the same time, efficient and transparent border control administration and lower labor costs
allow Tier 1 and Tier 2 FDI to seamlessly reach auto assembly facilities in Europe within 2 and 1/2 days,
which is within the range of transport time to be part of the EP automotive RVC (see Table 3).
Table 3 - Transportation Costs and Delivery Times from Skopje to other points of the EP RVC
Source: InvestMacedonia, 2015
4 Support Institutions, Policies, and Cluster Agents
Macedonia is now on the map of possible investment and manufacturing locations within the European
periphery automotive regional value chain as a result of a coordinated and explicit institutional support
framework and policies relative to SEZs, investment facilitation, trade (see previous section) and skills
development.
Invest in Macedonia (IIM) was established in 2005 with the mandate of attracting FDI to the country. It
has played a key role in facilitating the early investment deals in automotive and it has grown from a
staff of four to more than 50. IIM is present in 29 countries worldwide, with a focus on North America (7
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economic promoters and one office in Detroit), Germany (4 promoters), and the UK (3 promoters) to
target potential investors from the automotive industry. In fact, while IIM has targeted a number of
industries including medical devices, agribusiness and IT, the automotive industry remains at the core of
its investment attraction strategy. Currently IIM is pursuing two strategic priorities in automotive: the
first one is to continue to attract auto-parts Tier 1 multinationals, and possibly an additional OEM in the
bus segment, to consolidate a critical mass of automotive FDI in Macedonia. The second priority is to
create and strengthen backward linkages with domestic firms in the automotive sector, and, to this end,
it is in the process of launching a supplier development program and a supplier database in partnership
with TDIZ, the Ministry of Finance, and the World Bank.
The Directorate of Technological Industrial Development Zones (DTIDZ), was established in 2002 with the
mandate of developing and servicing greenfield investments in Macedonia. DTIDZ manages the four
active SEZs: Skopje 1 (140 hectares), Skopje 2 (95 hectares), Stip (208 hectares) and Tetovo (97 hectares)
along with the additional SEZs that are progressively coming online (see map below).
Figure 16 - Special Economic Zones in Macedonia (TIDZ)
DITDZ and SEZs have played a crucial role in Macedonia’s FDI attraction strategy, especially in
automotive as most of the Tier 1, Tier 2, and the only OEM FDI have located in the zones. DITDZ’s good
performance in terms of investment facilitation and aftercare has been commonly recognized by the FDI
located in the SEZs, which currently present a 50-50 split between technology intensive and labor
intensive productions in terms of number of companies, and a 75-25 split in terms of investment
volumes. DITDZ has pursued a strategy of spreading new investments evenly throughout the country
primarily driven by political, ethnicity, and labor market considerations. While this is not necessarily in
line with the location decisions of firms, FDI have always the final word on site selection and there not
seem to have been relevant increases in logistical costs implications, given the small size of the country.
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While coordination between IIM and DITDZ is in some cases suboptimal, with overlapping roles in the
investment facilitation and aftercare functions, FDI present in Macedonia have been consistently
satisfied with the performance of both institutions and attribute to their proactive role one of the key
reasons for choosing Macedonia. Another key reason for locating in Macedonia mentioned by investors
has been the generous SEZs’ incentive package, which while it has served well the purpose of
jumpstarting automotive FDI flows to the country, it is increasingly under political scrutiny in terms of
disparity of treatment between foreign and domestic companies (see Table 4).
Table 4 - Incentives’ Regime Inside and Outside the SEZs in Macedonia
Outside the Zone Inside the Zone
Customs Duties on Raw Materials 0% - 15% 0%
Customs Duties on Machinery 5% - 20% 0%
Value Added Tax (VAT) 18% 0%
VAT refund period for exporters 3 months – 6 months Not applicable
Corporate and Personal Income Tax 10% 0% for 10 years
Energy Electricity brownouts, low natural gas connectivity
Uninterrupted connectivity to competitively priced natural gas
supplies
Land Well developed sites are generally those of former
SOEs – unpredictable price gouging to lessees of municipal/state land
Prime locations, preferential prices
Source: World Bank, 2013
These measures and SEZ infrastructure, which receive high ratings in global comparisons4, have resulted
in overall increased FDI inflows, especially in medium- and high-tech manufacturing industries. These
investments jumped to EUR 78 million in 2013, accounting for net exports of EUR 87 million in 2013 and
were up to EUR 190 million in 2014, with total exports of EUR 1.2 billion. The new FDIs located in and
outside the SEZs employed around 5,000 workers in 2013 (World Bank, 2013).
Overall, the management of both institutions has a clear understanding of the fact that Macedonia’s
comparative advantage as a location for low-cost labor intensive FDI will be progressively eroded as
inflationary pressures on a small workforce will accelerate (total population is 2.1 million), and they are
both pursuing a two-pronged strategy for the automotive sector. On the one hand, one objective is to
attract from 3 to 5 large labor intensive FDI employing an average of 1,000 workers each to contribute
to the job creation agenda of the government. On the other hand, the objective is to attract between 10
and 15 medium investments (from 200 to 600 employees each) with specialized know-how and global
market niches to position the automotive industry of Macedonia in two to three clearly recognizable
strategic segments.
4 Financial Times study European Cities and Regions for the Future 2014/15 rates several regions in fYR Macedonia among the top ten in nine out of ten categories. Ratings for price efficiency, business cooperation and FDI strategy were particularly favorable.
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Technical Education Centers are an important part of the support institutions for the automotive
industry in Macedonia as the continued presence of a skilled workforce will remain a key asset for the
growth of the industry. The Faculty of Mechanical Engineering of the “Ss. Cyril and Methodius”
University in Skopje is playing an active role in modernizing curricula and partnering with the industry to
provide an increasing cadre of engineers and technicians (see annex with mission notes) with a focus on
mechatronics and science materials. While some joint business startup and excellence centers have not
yet delivered on expected results, the Johnson Controls Training Center started operating in 2006 as a
joint venture with the Faculty of Mechanical Engineering and provides training programs to perspective
employees.
Figure 17 - Location of Technical Education Centers in Macedonia
Automotive Working Group. The Government of Macedonia has established an interministerial working
group on the automotive industry chaired by the Ministry of Finance in 2014 to devise a coherent
strategy for the industry and focus policy efforts on the establishment of backward linkages with the
domestic industry. DTIDZ, InvestMacedonia, the Foreign Investors Council, and other institutions are
part of the working group. The relatively low implementation capacity of the WG is expected to be
complemented by the active engagement of the World Bank through the Supplier Development Pilot
project and the Macedonia Backward Linkages project. The Macedonia Automotive Cluster is the
industry association involved in the working group, but its aggregation capacities and activities are
currently minimal.
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5 Relevant Auto-Component Systems and Strategic Segments
for Macedonia
Over the past five years Macedonia has been organically growing into an embryonic automotive
components hub, as well as into a bus manufacturing location, within the European Periphery Regional
Value Chain. While still at a very early stage of development, with FDI representing the bulk of firms for
each auto-component production present in the country and a marginal involvement of local Tier 2 and
3 suppliers, the focus on automotive component manufacturing presents insertion and repositioning
opportunities into the EP RVC in consideration of the emerging trends in passenger vehicles component
systems manufacturing globally. Overall, the value of components systems in light vehicles (passenger
cars/light trucks) has grown at a 2% CAGR since 2000 to $14,000 per vehicle in 2013 (this excludes OEMs
final assembly costs and profits), which translates into a total maker of $1.2 trillion potential annual
sales globally (BofA-Merrill Lynch, 2014). With 16 different major component systems for an average
passenger vehicle (see figure below - BofA-Merrill Lynch, 2014), and with the top five of them
representing 67% of the total component value (see table below), a key issue for the automotive
industry and policymakers in Macedonia is to identify both the current and potential component
systems in which the country has, or can acquire, the relevant capabilities and factor conditions to
compete in the EP RVC.
Figure 18 - Major Component Systems, Summaries and Estimated Content per Vehicle
Source: BofA Merrill Lynch Global Research (2014)
Macedonia has currently nascent manufacturing capabilities, and growth options, in the following auto-
component systems: Electronics and Electrical (prominently wire harnesses and electric components),
Interiors (car seats, passenger restraints, seat covers), Exhaust (catalysts), Telematics (diagnostic
software, on-board electronics, high performance capacitors), Transmission (clutch boxes), Suspension
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(aluminum anti-vibration components). Each of these component systems follow specific competitive
dynamics, provide various degrees of outsourcing and growth opportunities, require different levels of
resource intensity (labor, capital, knowledge, energy), and contribute different levels of value added
(see table below). In many cases, component systems manufacturing in Macedonia is at an embryonic
stage, mostly revolving around one or two FDI plants such as in the case of Johnson Matthey for the
exhaust system, or a mix of a single FDI (Visteon) and 2 to 5 ‘outlier’ local companies such as Ein Sof for
the electronics and telematics component systems. The remainder of this section will provide a strategic
segment analysis of the electronics and electrical component system productive base in Macedonia
within the context of the EP RVC, and a strategic segmentation analysis of the bus manufacturing value
chain in Macedonia as an illustration of a parallel positioning of the Macedonian automotive industry in
OEM final production in addition to the growth of a specialized auto-component hub. An in-depth
analysis of the current productive structure and companies operating in the auto-component systems
present in Macedonia is provided in the Annex with the company profiles.
Table 5 - Component Systems Profiles Summary
Source: BofA Merrill Lynch Global Research (2014)
5.1 Electronics and Electrical Component System in Macedonia – Structural
Industry Analysis Over the past five years Macedonia has developed an embryonic auto-component cluster specializing in
the Electronics and Electrical systems of cars/light trucks, with around six foreign companies
(Draxlmaier, Amphenol, ODW Elektrik, Kromberg&Shubert, Coficab, Kemet Capacitors) focusing on the
more labor intensive (wire harnesses) and standardized (capacitors and solenoids) components of the
electronic and electrical system.
Globally, the market size for the automotive electronics and electrical systems is estimated at $153
billion (see box below) with an expected high and stable growth for the next 5-10 years, as part of the
broader trend of increasing vehicle onboard electronics within other sub-systems such as onboard audio
and telematics, or climate and engine controls. With an estimated component value of $1,825, the
electronics and electrical systems represent 13% of total value of components for an average car/light
trucks per vehicle (BofA Merrill Lynch, 2014). The low degree of concentration of competitors globally,
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the relative fragmentation of the supplier base, and the medium level of outsourcing of sub-components
within these systems, indicate that there is a good growth potential in specializing in the electronics and
electrical systems. Table 6 - Electronics and Electrical System
Source: BofA Merrill Lynch Global Research (2014)
However, the actual growth prospects for the Macedonian cluster focusing on the electronics and
electric systems depend on its degree of integration and positioning within the EP RVC, and on the
structure and competitive dynamics at play in the specific strategic segments Macedonia is currently
engaged in.
Threat of Entry - Barriers to Entry (BTE): To establish operations in wire harnesses and electric
architecture of cars/light trucks in Macedonia, the minimum investment requirements range from Euro
6 million to Euro 15 million for a Tier 2 supplier (Amphenol, ODW Elektrik), to Euro 35 million for a Tier 1
supplier (Draxlmaier). Production requirements allow for a modular and scalable strategy of investment,
which encourages entry into this segment. As the most labor intensive phases of production have
located to Macedonia (with R&D performed at HQ), labor requirements focus mostly on the availability
of a sizable pool of workers rather than skills, as an 8-to-14-week on-the-job training is sufficient to
achieve the necessary skills level. The availability of a sizable pool of workers with easily transferable
skills from the textile industry in locations such as Kavadarci or Kocani also maintains barriers to entry
low. Brand recognition is not a critical asset, and this reduces the amount of investment in intangible
assets needed to enter the segment as well. However, long production runs with a minimum production
of 970,000 pieces a year to break-even, and an average of 11.5 million per year, indicates that volumes
and production scalability do play a role in securing OEMs’ contracts.
Intensity of Rivalry among Existing Competitors – Degree of Competition (CSF – innovation, cost,
technology): There are around 10 existing competitors in electric systems/wiring harnesses for the EP
RVC, with 5 Tier 1 global players which have established production within a 2,000 km radius from the
assembly plants of OEMs serving the EU market. Usually, these multinational players have a global
footprint (for example Draxlemaier is the 64th largest auto-supplier globally with 58 production sites in
22 countries), serve multiple industries (for example Amphenol operates in the mobile communication
infrastructure, industrial infrastructure, IT and Big Data, commercial aircrafts, and automobile industries,
with automobile representing 15% of global sales of $1.3 billion in 2014), and leverage strong
technological synergies among their product lines across industries (for example, in Macedonia
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Amphenol produces automotive sensors, single electric wire for seatbelt, charger plug for electric car,
and network antennas for mobile communications).
As competition is primarily driven by cost, Tier 1 and Tier 2 suppliers have established manual and semi-
automatic production lines in Macedonia to take advantage of the lower labor costs in the medium term
(fully automated production technology is expected to become a viable option in 5 to 10 years as
salaries will continue to rise). The intensity of rivalry follows a cyclical pattern as it is linked with the life-
cycle of a specific car model, and it peaks at the time of the design/launch of a new model. Once OEMs
award contracts for a specific model, the winning Tier 1 is expected to enjoy stable contractual
arrangements for the life-cycle of the model (on average 3 years), during which the switching costs to a
different Tier 1 supplier are too high.
Tier 1 (Draxlemaier) suppliers in Macedonia focus on the premium car segment of European OEMs (such
as Mercedes-Benz, Audi, or BMW) and provide the full customer-specific wiring harnesses systems (KSK)
for the top-end models. Flexible configuration of the system, with over 1,000 possible configurations for
each model, a made-to-order linkage with a high information exchange (8 days between the selection of
the configuration by the final customer and the time the full KSK must be on the assembly line), and the
capabilities to offer a differentiated product to deal with the increasing complexity of car wiring (43 km
per cars) due to increasing onboard electronics, are some of the critical success factors (CSF) that allow
Tier 1s to gain higher margins.
However, Tier 2 suppliers, which do not serve directly the premium car segments of the EP RVC,
compete primarily on costs as they are price takers and contractual arrangements include progressive
cost reductions, as efficiency gains in the simplification of the design of the components and reduction
of the lead times are passed on to the buyers.
Overall, compliance with all automotive industry quality certifications (ISO TS16949) and strict quality
management (target zero defects ppm), continuous efficiency gains, made-to-order logistics, and
availability of low-salaries medium-skilled labor force are the critical success factors common to both
Tier 1 and Tier 2 wire harnesses manufacturers in Macedonia.
Pressure from Substitute Products: Electrical systems and overall wiring harnesses of vehicles are based
on a consolidated technology and pressure from substitute products seem to be low. As a matter of fact,
the global trends towards increased onboard electronics make the demand forecasts for the product
positive and stable. Technological trends towards the adoption of electronic cables wiring systems, and
the simplification of the design and number of components, do not pose any major threat to the
operation of current Tier 1 and Tier 2. One potentially disruptive innovation for this strategic segment is
the diffusion of wireless technology for onboard electronics and electric components. However, this
possible substitution is expected to take place in the medium to long term, as safety concerns will
continue to demand wired technology for a while.
Power of Suppliers: Tier 1 and Tier 2 companies located in Macedonia procure inputs and components
through their centralized purchasing departments in HQ, and this gives them a strong bargaining power
vis-à-vis suppliers. OEMs participate as well in the selection of suppliers of key components and in the
case of built-to-print wiring systems. Tier 1 companies (for example Draxlemaier) manage a complex
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supply chain with around 4,000 different components (sensors, electric switches, etc.) required for the
manufacturing process, and usually require Tier 2 and Tier 3 suppliers of the electric wires and of bulky
components to co-locate in Macedonia (such as in the case of Coficab, Kostal, Amphenol). Overall, there
are less than 8-10 suppliers in this segment of the EP RVC (5 suppliers of electric wires to Tier 1, 3
suppliers of connectors, 1 supplier of terminals, and few other suppliers of raw materials) with a
medium to large size dimension and a multinational footprint. The power of suppliers remains
moderate.
Power of Buyers: Buyers exert significant power over manufacturers of electrical systems and the
production of overall wiring harnesses, as OEMs (and Tier 1s) determine product quality and safety
specifications, co-design and develop the product with Tier 1 suppliers, dictate delivery schedules, and
are often directly involved in the selection of the Tier 3 suppliers. A handful of OEMs serving the
European market concentrate the vast majority of the demand, and follow price sensitive procurement
strategies. Tier 1 suppliers in Macedonia are in a slightly better bargaining position as they serve the
premium car segments of mostly German OEMs, in which higher margins on the final product and
demand for product differentiation allow for more favorable contractual arrangements. Tier 2 suppliers
in Macedonia are mostly price takers vis-à-vis Tier 1 companies, as they on average supply to 7 to 9 Tier
1s that account for 80% to 90% of their sales.
Resource Intensity (Knowledge, Capital, Labor, Natural Resources, and Energy): The electrical systems
and wire harnesses segment in Macedonia is characterized by labor-intensive manual and semi-
automatic production processes, with 4,850 workers for a Tier 1 producer and between 350 and 1,000
workers for Tier 2 producers. At the same time, it is characterized by low capital and energy intensity,
medium knowledge intensity (with around 5% of the workforce with an engineering degree), and high
natural resources intensity, with a high exposure to price fluctuations of raw material inputs (see Figure
19).
Figure 19 - Electronics and Electrical raw material input price index
Source: BofA Merrill Lynch Global Research (2014)
Type of VC Linkages (by time and information intensity): The electrical systems and wire harnesses
segment in Macedonia is characterized by made-to-order linkages, with a one-week (8 days) delivery
time between Tier 1 or Tier 2 suppliers and OEMs in the EP RVC. A one and half day by truck
transportation time determines a 2,000 km radius maximum geographical coverage of the linkages. The
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possible multiple configurations of the wiring systems, according to the order of the final customer,
require a high-intensity information exchange between OEMs and the suppliers in Macedonia.
Localization Potential: Currently, the procurement function of Tier 1 and Tier 2 companies located in
Macedonia remains centralized in the headquarters of the parent companies in Europe. This sourcing
strategy reduces the chances of localization of the production of components and raw materials for the
electric systems in Macedonia, since plant managers of Tier 1 and 2 companies do not have the mandate
to source locally. At the same time, independent assessments conducted by the FDI in the segment
present in Macedonia indicate that there are no Tier 3 suppliers in Macedonia currently capable of
delivering the volumes and quality and safety required, and the potential to reach the scale needed
seems limited given the international scale of current suppliers. Only construction, packaging, and
transport services have been localized.
5.2 Bus Manufacturing in Macedonia – Structural Industry Analysis
In parallel to the nascent automotive components segments, Macedonia has revamped its bus assembly
capabilities over the past three years with the entry of a major OEM European bus manufacturer from
Belgium (VanHool). In fact, while the privatization and consequent liquidation of Macedonian SOEs
involved in bus manufacturing during the Yugoslav times, primarily serving the Russian and Middle-
Eastern markets, has led to the progressive disappearance of the old bus manufacturing cluster in
Macedonia, it has nonetheless left in the region available skilled labor and production capabilities. With
an investment of Euro 25 million and 431 employees, VanHool started operations in Macedonia in 2013
as part of its corporate strategy of maintaining a solid foothold in the North American market by
lowering production costs. In fact, the decision to relocate to Macedonia the production of the standard
long distance coaches for the US market was driven by the need to fulfill a 300 standard buses order at
lower production costs that the ones allowed in Belgium, as part of an overall order of 500 buses
including 200 high-end tourism buses that would continue to be manufactured in Belgium.
Overall, the global bus manufacturing industry is estimated to reach US $41 billion, with a CAGR of 3.1%,
by 2017, and 664,000 units by 2018. More stringent reduction emission regulations, cost-saving and
energy-efficiency technological advancements, and growth in emerging markets are expected to create
significant growth opportunities. Growth in bus demand will pick up due to enforced restrictions on
private vehicles led by government emission standards to reduce congestion and pollution levels5. The
introduction of hybrid buses is expected to help there in both of those areas. With the rise in fuel prices,
people are increasingly shifting from private to public transportation, which increases the number of
buses in use.
Five major trends will drive growth. The major one is expansion in the size of the global urban
population. Rising government investment in public transportation networks, particularly bus rapid
transit systems, to reduce traffic congestion and improve air quality, is another trend. Further aspects
are growth in the number and size of private transportation companies, and the climbing worldwide
sales of electric, hybrid, compressed natural gas (CNG), and liquefied natural gas (LNG) models, as many
5 “Global Bus Manufacturing Industry 2012-2017: Trend, Profit, and Forecast Analysis.” Lucintel 2012.
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countries adopt more stringent emissions standards and as environmental considerations grow in
importance. Finally, growth in the use of school bus models is expected in response to government
efforts to expand access to education, safety concerns, and more favorable conditions in the large US
market. Table 7 - World Bus Demand (thousand units)
Source: The Fredonia Group Inc. (2015)
The Asia/Pacific region is projected to account for more than three-fifths of all new global bus demand
through 2018. China alone will be responsible for nearly half of the global total. Growth is expected to
pick up in both China and India, the region’s two largest bus markets, after declining moderately during
the second part of the 2008-2013 period. Japan, Taiwan, and South Korea are also expected to perform
considerably better between 2013 and 2018 as older buses are replaced. After a period of sizable losses,
demand for buses in North America and Western Europe is projected to rebound noticeably, as sales of
electric, hybrid, CNG, and LNG buses grow. Since 2003, demand for these models has increased
dramatically in these markets (from relatively small existing bases).
Bus manufacturing, and the bus assembly phase in particular, is labor intensive with 21.2 hours worked
per $1,000 of value added, as compared to 4.4 hours worked per $1,000 of value added for automobile
manufacturing6. It is characterized by a discrete production process and small batches production runs,
as buyers require tailor-made solutions that leave limited scope for automation of the production
process. At the same time, the high ratio of the unit value of a finished bus (between $300,000 and
$400,000) to transport costs (up to $10,000) allows for the location of manufacturing sites away from
end markets as shipping long distance is a viable option. These industry structural requirements seem to
fit well Macedonia’s current offerings as a potential production hub for bus assembly in the EP RVC.
Threat of Entry - Barriers to Entry (BTE): The minimum investment size to establish a bus manufacturing
operation (for standard long distance coaches) to serve the EU and North-American markets from
Macedonia is of 25 million Euro, which constitutes a moderate barrier to entry for international OEMs
competing on the EP RVC (as compared for example to a 1 billion Euro investment by FIAT for a
passenger vehicles manufacturing plant in Serbia). The availability of a critical mass of semi-skilled
workers at relatively low salaries represents a critical entry factor due to the labor intensity of bus
6 2014 US Annual Manufacturing Survey, WB staff calculations.
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assembly, and the fact that a two month on-the-job training will usually suffice to re-train blue-collar
workers. Brand recognition is an important asset and it does require sizeable investment in specialized
marketing towards bus fleet operators. At the same time, the presence of a sales and distribution
network, as well as aftermarket services and maintenance networks in end markets (VanHool has a 30%
minority stake in ABC Bus Companies Inc. in the US), constitute critical investments to compete in this
business which increase the barriers to entry. Overall, the threat of entry in bus
assembly/manufacturing for standard long distance coaches appears to be moderate to medium.
Intensity of Rivalry among Existing Competitors – Degree of Competition (CSF – innovation, cost,
technology): Around 10 major bus manufacturers OEMs directly compete in the European RVC,
leveraging their multinational scale of operation such as in the case of global players like Mercedes,
Volvo, or MAN. Competition is primarily driven by cost optimization needs of price sensitive buyers,
especially in the lower-end bus models such as intercity coaches. Critical manufacturing and supply
management capabilities rest on the know-how to design and assemble in a cost-effective way lower
value added intercity buses, which are composed of a complex set of thousands of parts with limited
scale economies. Small batch production runs, high labor intensity, and limited scope for automation of
the production process, make the availability of low cost readily trainable workers a critical success
factor. Similarly, the ability to provide tailor-made solutions and a complete range of bus models
(VanHool produces intercity coaches in Macedonia, while the high-end tourist buses model range is
produced in Belgium), as well as of powertrain solutions (internal combustion engine, electric, hybrid,
LNG, CNG, etc.) according to environmental regulations in end markets, constitute two distinctive
success factors for OEMs to remain competitive. Product design and innovation play a critical role as
well, with a 3-year cycle for the release of a new model series followed by a restyling (front and end
exteriors, and full interiors) after two years. Direct competition follows a cyclical pattern as well, with
OEMs in the EP RVC competing for medium-term contracts with fleet management companies and
public transit systems, and subsequently enjoying stable revenue flows for the duration of the contract.
Pressure from Substitute Products: The growth of global bus sales is expected to be restrained by rising
use of motorcycles and light motor vehicles as income levels climb in emerging markets. The expansion
of rail transportation networks around the world is also expected to moderate bus market growth.
Overall, the pressure from substitute products such as motorcycles, ‘no frills’ cars, car-sharing
management services, and the expansion of intercity rail networks will continue to exert a moderate
threat of substitution on this product segment.
Power of Suppliers: Bus assembly and manufacturing entails supply chain management capabilities for a
complex set of thousands of parts and components through both just-in-time and made to order
delivery linkages. While both US and European Tier 1 suppliers of bulky critical high-value component
systems such as engines, axles, or transmissions, display a good bargaining power due to their
international scale of operation and proprietary technology, the large majority of remaining Tier 1 and
Tier 2 suppliers in the EP RVC do not present a particularly strong bargaining position vis-à-vis major bus
manufacturers such as VanHool. Vertically integrated OEMs bus manufacturers such as VanHool
continue to centralize procurement in HQ, thus benefitting from scale orders discounts, and to directly
supply with daily shipments their assembly plants in the EP RVC. Tier 2 local suppliers of chassis modules
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(Aktiva) and fiberglass body components (Uniplast) in Macedonia will remain price-takers for the
foreseeable future.
Power of Buyers: Medium-sized commercial passenger intercity bus fleet operators constitute the bulk
of buyers for long-distance standard coaches, along with larger bus distribution and transportation
support services operators. Non-transportation-industry clients buying small to medium bus fleets for
corporate needs (such as Google for example) represent a typical buyer as well. Although bus
manufacturers OEMs have a diversified portfolio of buyers (VanHool sells to 20 fleet operators in the US
market alone), the medium to large size of orders (ranging from 10 to 200 buses) empowers buyers to
transfer the pressure of cost reduction, environmental standards, and tailored design requirements to
the OEMs. Large distributors show a fortiori stronger bargaining power also in financial terms, with 90%
of bus manufactured usually preordered. The strong demand growth forecasts for buses, and expected
entry of new fleet operators globally, mitigate in part the bargaining strength of buyers and allow to
forecast stable margins with moderate growth for OEM bus manufacturers in the EP RVC for the next 5
years.
Resource Intensity (Knowledge, Capital, Labor, Natural Resources, and Energy): Bus assembly is labor
intensive with 21.2 hours worked per $1,000 of value added, as compared to 4.4 hours worked per
$1,000 of value added for automobile manufacturing7. The manufacturing process is not particularly
energy intensive with $19.3 energy costs for every $1,000 of value added, as opposed for example to
combustion engine and parts manufacturing with $38 of energy costs for every $1,000 of value added8.
Similarly, bus manufacturing is also relatively not capital intensive with $517 gross surplus per $1,000 of
value added, as opposed to $812 gross surplus per $1,000 of value added for automobile
manufacturing9, and a $25 million capital investment to start operations in Macedonia.
Type of VC Linkages (by time and information intensity): Bus assembly operations (VanHool) in
Macedonia have an installed capacity of 450 buses per year, and require a supply chain capable of
delivering 10 buses per week, with a production timeline of 40 days per bus. In light of the centralized
procurement process in HQ, the linkages between the manufacturing plant in Skopje and the parent
company in Belgium are characterized by high-intensity information exchange and just-in-time delivery
mechanisms, with 7 or 8 large trucks supplying the vast majority of parts and components. Linkages with
existing local Tier 2 Macedonian suppliers (Aktiva for chassis modules, and Uniplast for fiberglass body
parts) are made-to-order with low information exchange. Similarly, linkages with Tier 1 suppliers of high
value modules are made-to-order but with a high-intensity information exchange. For example, engines
are supplied from the US, transmissions from Hungary, axles from Spain and Germany, or windshields
and special glasses from Finland, all with a few weeks of lead time and high intensity information
exchanges on technical specifications.
Localization Potential: Currently only two Tier 2 local suppliers provide 4 to 5 chassis modules per bus
(Aktiva) and fiberglass body parts (Uniplast for wheel arches and entrance steps), while several
thousand components are procured centrally and supplied from the Balkans, Central Europe, and
7 2014 US Annual Manufacturing Survey, WB staff calculations.
8 2014 US Annual Manufacturing Survey, WB staff calculations.
9 2014 US Annual Manufacturing Survey, WB staff calculations.
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Turkey. The potential for the local sourcing of parts and components is significant in consideration of the
complex set of thousand parts required in bus manufacturing, and the pressure to reduce costs by
finding reliable local suppliers of high-volume low-value components. Bended polyester and metal body
parts, piping for brake fluid and fuel lines, interiors (wood panels, decorations, toilet cabin), seats, wire
harnesses, paint are some of the high-volume low-volume components that OEM bus manufacturers
like VanHool are likely to source locally in an initial stage. Currently there are between 20 to 30 local
producers in Macedonia that could supply these components. However, their small size and inability to
meet the volume requirements for the bus assembly supply chain prevents them from entering VanHool
supply chain. Limited knowledge of the safety and quality requirements for bus components, along with
minimal understanding of the procurement function and access to the decision points within OEMs’
organizational structures, further decreases localization opportunities. High administrative switching
costs for OEMs to select local suppliers of high number low-value simple components, such as for
thousands of screws, nuts, rivets, and other small metal parts in each bus, contribute to the low
localization of non-critical components. Overall, Macedonian suppliers are not perceived yet as capable
of meeting the quality, scale, price, and delivery reliability critical success factors required for bus
manufacturing without (sometimes moderate) investment in equipment, process management, and
marketing capabilities. OEMs’ corporate functions in procurement, design, engineering, and aftersales
services remain absent in Macedonia, however both design and engineering might localize to the
country in the medium term once the nascent research-industry collaboration on mechanical
engineering and automotive reaches critical mass.
6 Policy Recommendations:
6.1 Strategic Repositioning Options for Macedonia within the European
Periphery Regional Automotive Value Chain
The analysis conducted in the previous sections indicates that there seem to emerge two distinct, yet
not mutually exclusive, strategic repositioning options for the Macedonian automotive industry within
the European periphery regional value chain, in line with the current factor endowments of the country
and competitive dynamics at play within each of the relevant automotive strategic segments for
Macedonia. These strategic repositioning options relate to:
1) Pursuing a specialization strategy in up to three auto-component systems for passengers and
light trucks vehicles for non-networked individual mobility (Strategic Segment 2), and
2) Developing a regional hub for bus manufacturing for non-networked group mobility (Strategic
Segment 4).
Both repositioning options fall within the strategic segmentation analytical framework adopted for the
global automotive industry under the “Industry-Specific Global Value Chain Analytics” project of the
World Bank. According to this strategic segmentation analysis, each strategic segment of the automotive
industry is defined by a matrix of specific needs (mobility of persons and of merchandise), typology of
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final users (individuals/groups or heavy/light merchandise), and mix of products and services (mobility in
networked densely populated areas or mobility in non-networked intercity/rural/scarcely populated
areas). The combination of needs, final users, and mix of products/services defines the strategic
segments that characterize the automotive industry globally (see Figure 20). Figure 20 - Strategic Segmentation – Automotive Industry
Source: World Bank, GVC Project, team analysis.
At the same time, the competitive dynamics within each strategic segment of the automotive industry
require a specific “ideal” value chain configuration for firms and networks of firms to successfully
compete and operate in that segment. The ideal value chain configuration is determined according to:
1) the optimal distribution of activities between the local, regional, and global levels of the value chain
in terms of minimum efficient scale of operation and production runs,
2) the type (knowledge intensive, capital intensive, labor intensive, natural resources and energy
intensive) and level of intensity (low-medium-high) of each value chain activity, and
3) the typology of value chain linkages (just-in-time – made-to-order – on-stock) by time (24-48 hours –
weeks – months) and information exchange (high or low information exchange) that are required to
compete effectively in a specific strategic segment.
As an illustration, the ideal value chain configuration to compete in strategic segment 2 (the “Toyota
Corolla” segment) of the global automotive industry is presented below, and can be used as a
benchmark to identify the strengths, weaknesses, and upgrading potential of the actual value chain
present in a specific country or region.
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Figure 21 - Classification of Value Chain Activities and Linkages Typologies – Automotive Industry
Source: World Bank, GVC Project, team analysis.
Figure 22 - Ideal Value Chain/s for Strategic Segment 2 – Automotive Industry
Source: World Bank, GVC Project, team calculations based on NAICS 2014.
In the case of Macedonia, the strategic segmentation analysis shows that one strategic repositioning
option for the automotive industry relates to specializing into up to three automotive components
systems for strategic segment 2 as presented in the previous section and summarized below.
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Figure 23 - Strategic Repositioning Option 1 – Macedonia as a specialized hub for selected automotive component systems for Strategic Segment 2
While resource endowments, the small size of the manufacturing base, and the proximity to
competitors with a solid productive foothold in automotive such as Serbia indicate that pursuing the
establishment of an OEM for passengers vehicles (Strategic Segment 2) might not be a feasible option in
the medium term, the benchmarking analysis of the Macedonian value chain, within the European RVC,
against the “ideal” value chain for strategic segment 2 (see Figure 24) confirms that Macedonia has the
potential to upgrade its manufacturing capabilities in up to three specialized auto-components systems
as illustrated in the previous section.
Figure 24 - Benchmarking Macedonia’s Automotive Industry against the Ideal Value Chain for Strategic Segment 2
Source: World Bank, GVC Project, author’s analysis based on NAICS 2014.
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In fact, the local automotive chain in Macedonia shows only sub-optimal value chain activities in
electronics, interiors, and tooling when compared to the ideal chain for strategic segment 2, and the
resulting policy implications are that:
1) The gap between the current automotive supplier base in Macedonia and the ideal local value chain
activities remains too wide to pursue a narrow FDI attraction strategy targeted at European OEMs
operating in segment 2, and
2) Macedonia should develop an upgrading policy, both in terms of targeted FDI attraction and Tier 2
and 3 supplier base development for segment 2, to leverage the emerging productive
agglomerations in up to three of the following auto-component systems: Electronics and Electrical,
Interiors, Exhaust (catalysts), Telematics, Transmission, or Suspension (see previous section).
A second strategic repositioning option for Macedonia is to upgrade its capabilities as a regional
manufacturing hub for strategic segment 4 (intercity mobility of groups) leveraging its current factors
endowment, the positive global demand trends in this segment, and the presence of a major European
OEM in the country (see graph below).
Figure 25 - Strategic Repositioning Option 2 – Macedonia as a regional hub for bus manufacturing for Strategic Segment 4
In fact, the benchmarking analysis of the Macedonian value chain, within the European RVC, against the
“ideal” value chain for strategic segment 4 (see graph below) confirms that the labor intensive (21.1
hours worked per 1,000 of value added versus 4.4 hours worked per 1,000 of value added for PV
manufacturing), the relatively low minimal efficient scale investment requirements (USD 25 million
versus USD 1 billion for PVs assembly), the discrete production process and small batches production
runs, the limited room for automation, the high ratio between unit value and transport costs required to
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effectively compete in strategic segment 4, fit in with the current endowments and productive
capabilities of Macedonia.
Figure 26 - Benchmarking Macedonia’s bus manufacturing chain against the Ideal Value Chain for Strategic Segment 4
Source: World Bank, GVC Project, author’s analysis based on NAICS 2014.
Overall, the benchmarking analysis of the bus manufacturing value chain in Macedonia indicate that
assembly, shipping, and chassis manufacturing activities are up-to-standard, while interiors, exteriors,
and tooling manufacturing activities are present locally, but are in need of upgrading to consolidate
Macedonia’s foothold in the well-functioning European regional value chain for strategic segment 4.
Pursuing such consolidation strategy would entail implementing the following policy initiatives:
1) Targeting the sectoral FDI attraction strategy for automotive towards additional OEMs operating in
strategic segment 4, as a way to create a critical mass of bus manufacturers in country and position
Macedonia as a regional hub for final assembly;
2) Deepening the local supply chain for bus manufacturing, by implementing tailored supplier
development programs for potential local Tier 2 and Tier 3 suppliers, with a focus on those value
chain activities already present but in need of upgrading such as interiors, exteriors, or tooling.
6.2 Policy Recommendations on FDI Backward Linkages Programs for
Macedonia Automotive
The strategic repositioning options for both segments 2 and 4 for the automotive industry in Macedonia
have in common the need to strengthen the local supplier base for Tier 2 and Tier 3 companies. Either
the policy of deepening the local supply chain for bus manufacturing (segment 4), or the policy option of
repositioning Macedonia as a specialized regional hub for auto-component systems, rely on the premise
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that a critical mass of local suppliers is progressively upgraded. To this end, the Government of
Macedonia is currently partnering with the World Bank Group to launch a supplier development
program to address this policy gap and consolidate the local manufacturing base in automotive. Below
are presented some preliminary policy recommendations on the design features of a possible supplier
development program for automotive in Macedonia, based on the value chain analysis conducted in the
previous sections:
1) Engage procurement managers in the regional headquarters of OEM, Tier 1, and Tier 2 FDI present
in Macedonia as partners of any supplier development program. The sourcing function of the
automotive FDI present in Macedonia remains centralized at the regional HQ level. This holds true
for the vast majority of automotive FDI in the European periphery regional value chain, irrespective
of the strategic segment or value chain activity they operate in, and suggests that the design of any
supplier development program will need to explicitly engage automotive buyers at the regional
level, as FDI plant managers in Macedonia have minimal decision-making authority in terms of
sourcing strategies.
2) Invest upfront in business intelligence activities to factor in the Global and Regional Corporate
Strategies of the Automotive FDI in the Euro RVC in the design of any Supplier Development
Program. The large majority of Tier 1 and Tier 2 FDI located in Macedonia have either a global or
multinational footprint, this means that sourcing strategies and entry requirements into their supply
chains will be aligned to their overall corporate strategy. A clear business intelligence of these
corporate-level strategies is a critical building block of the design of any supplier development
program in terms of selection of potential beneficiaries and of tailoring of the buyer-supplier
matching components of such programs.
3) Calibrate the level of effort of the supplier development program targeted at specific value chain
activity according to their upgrading potential, as determined by the competitive dynamics of the
strategic segment. The analysis presented in this report shows that the growth, employment, and
upgrading potential for companies/suppliers operating in a specific value chain activity is
determined by the competitive dynamics at play in the specific strategic segment they operate. For
example, the analysis of strategic segment 2 shows that the value added and margins that can be
potentially captured by auto-parts suppliers varies according to the auto-component system they
feed into.
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Table 8 - Component Systems Profiles Summary
Source: BofA Merrill Lynch Global Research (2014)
The design of any supplier development program should calibrate the level of program’s efforts
according to the degree to which the upgrading potential for each value chain activity matches the
resource endowments, and manufacturing capabilities, of the potential local suppliers in that
specific VC activity.
4) Move towards a regional platform for FDI attraction in automotive in the Western Balkans and
design supplier development programs to leverage the regional dimension of the European
automotive RVC. As the present analysis clearly illustrates, the European periphery automotive
regional value chain is constituted by a well-integrated production network. This implies that value
chain entry and upgrading opportunities for Macedonian suppliers are not limited to the
procurement needs of Tier 1 or Tier 2 FDI located in Macedonia, but to the whole network of OEMs,
Tier 1, and Tier 2 FDI present in the European RVC. The design of any supplier development program
should be informed by a mapping of such insertion opportunities throughout the European RVC, and
not just focused on Macedonia, as past backward linkages programs have done.
5) Set realistic localization targets for supplier development programs in line with the minimum
efficient scale of operation for the localization of value chain activities according to the structural
production requirements of the global automotive industry. Many supplier development programs
perform poorly in terms of increasing the ratio of local content produced by local suppliers, because
they fail to factor in the design of the program the existence of different minimum thresholds for
the effective localization of value chain activities according to the type of automotive components
manufactured. As an illustration, the analysis conducted by Roland Berger in 2012 on the
automotive industry shows that the minimum efficient scale to localize production ranges from
25,000 head-rests per year to 1,000,000 pistons per year (see below).
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Figure 27 - Minimum Efficient Scale of Production of Automotive Components to Localize operations (‘000 units)
Source: Roland Berger Strategy Consultants, 2014
6) Identify and Minimize Switching Costs for FDI to localize sourcing to local suppliers. Supplier
development programs often fail to identify the administrative, technological, financial, or supply
chain risk minimization, switching costs faced by FDI in sourcing components and services from local
suppliers. This results in the underperformance of the supplier development programs themselves.
It is therefore critical to identify and establish mechanisms to minimize these switching costs as part
of the design of the program. As an illustration, the analysis of the bus manufacturing value chain in
Macedonia shows that there is significant potential to localize the procurement of large-volumes-
low-value small metallic components. However, the administrative switching cost of updating the
current inventory management system to allow entry of local suppliers is a relevant deterrent to the
process of localization. Similarly, the accounting requirements demanded by Tier 1 and Tier 2
multinational suppliers, operating in just-in-time linkages, to local suppliers to enter their supply
chain are a critical supply chain disruption risk mitigation requirement to minimize production
stoppages due to the financial default of even a minor local supplier. The ability to identify and
address these various types of switching costs constitutes a distinct feature of a properly designed
supplier development program.
7 References
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“Global Automotive Supplier Review – Who Makes the Car?”, Bank of America and Merril Lynch, 2014.
34 | P a g e
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Viktor Mizo, “Republic of Macedonia: Investment Opportunities in the Automotive Components Sector
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Roland Berger Strategy Consultants, “Automotive Value Chain – Global Outlook” – prepared for The
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Timothy Sturgeon and Ezequiel Zylberberg, “Global Value Chains, Special Economic Zones and Domestic
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Constraints and Opportunities in Automotive, Apparel, Agribusiness, and Logistic Services”, Policy Note 2
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