Trend study - Japanese automotive suppliers discover Central and Eastern Europe

• Production of automotive parts in Central and Eastern Europe (CEE) will double by 2015
• Share of automotive parts manufactured in CEE and used in European vehicles will amount to approximately 40% by 2015
• Japanese suppliers in CEE could triple their sales by 2015
• Uncertainty of future profit from North American market (the current core market), a weak yen and lower labor costs make entering the CEE market a favorable prospect for Japanese suppliers
• Success depends primarily on five factors

Japanese automotive suppliers have realistic chances of increasing their presence in Central and Eastern Europe (CEE). By 2015, production of automotive parts in CEE will double, attaining a value of approximately EUR 40 billion. At the same time, the share of automotive parts manufactured in CEE that are used in European vehicles will rise from 23% in 2005 to 39% in 2015. This means that between 2005 and 2015, Japanese suppliers in CEE could triple their sales from EUR 1.9 billion to EUR 6.2 billion. Several factors make the CEE market look more attractive to these businesses. In light of the uncertain profit situation in the North American market, which is key to many Japanese companies' profits, expanding their business in a European region such as CEE looks like a viable alternative. In addition, relatively low labor costs in CEE, the high quality of parts manufactured in the region and the yen's favorable exchange rate (easing investment in Europe), will drive new market entries and encourage others to expand their existing CEE production sites, a new study by Roland Berger Strategy Consultants argues. Based on their findings and experience, Roland Berger consultants recommend that market entry in these countries follow five steps.

In a new study Roland Berger Strategy Consultants reviewed how Japanese automotive suppliers entered the CEE market. Personal interviews with decision makers from eleven factories in CEE complemented the analysts' research. The production of automotive parts in CEE is expected to rise from EUR 20 billion in 2005 to EUR 40 billion in 2015. EUR 20 billion worth of parts will be exported to Western European car manufacturers. Another EUR 18 billion will remain in CEE to be used by local car manufacturers.

The share of parts produced in CEE that are then used in European vehicles will rise from 23% (2005) to 39% (2015). According to forecasts, Japanese suppliers in CEE thus have possibility to triple their sales from 2005 to 2015, from EUR 1.9 billion to 6.2 billion.

Moreover, labor costs in CEE are expected to remain low. In 2010, these costs are expected to reach only a third of the level of those in Germany.

Thus, the analysts conclude that if Japanese companies wish to succeed in CEE, they should consider five factors:

1. Selecting the right region

Central and Eastern Europe can be split into two sub-regions: the Visegrad countries (Poland, Czech Republic, Slovakia and Hungary) and the southeastern part (Romania, Bulgaria, Slovenia, Serbia, Montenegro, Croatia, Bosnia-Herzegovina, Macedonia and Albania). The four Visegrad countries are well-positioned to produce capital-intensive parts. Already automotive parts worth a total of EUR 18.4 billion were produced here in 2005. The southeastern countries, on the other hand, have a competitive advantage for labor-intensive parts. In 2005 alone, production reached a volume of EUR 1.6 billion. Differences in the levels of foreign direct investment explain why the two regions have not performed equally well. While some USD 25 billion foreign direct investment had flowed into the automotive industry in the Visegrad countries by 2006, the comparative figure for the southeastern countries was only USD 5 billion.

2. Consider balance between labor availability and industrial infrastructure when choosing a location

The four Visegrad countries are suffering from a severe labor shortage. Thus, companies should choose locations in regions that offer good industrial infrastructure and a relatively high number of well-trained workers. For example, southeastern Poland offers numerous suppliers as well as a sizable labor force.

3. Choose how to enter the market

Of the 44 Japanese suppliers surveyed, who were active in the CEE market, 26 of them chose to expand to the region because they could easily enter as stand-alone players, ensuring quick and familiar decision-making processes. Only 4 companies opted for an M&A prior to entering the market and 14 of them decided to engage in a joint venture to ease the difficulties of transferring the Japanese production system quickly.

4. Create cost-effective production with high quality

Because of a lack of qualified workers in the four Visegrad countries, choosing the right location is as important as learning from the experiences of already existing companies. For example, while local companies hire workers from other regions, they also arrange daily shuttles and/or dormitories to maximize time efficiency. Many of these firms have also introduced bonus systems based on attendance and performance to improve overall attendance rates.

5. Build up your business in Europe

Many Japanese suppliers who have expanded their business in Central and Eastern Europe have been able to attract orders from Western European OEMs because of their knowledge of local needs and business practices at their R&D sites. In order to expand further, the study recommends that companies rethink the task distribution between individual branches in each country and their European headquarters to optimize procedures.