EMBARGOED UNTIL: Tuesday 13 February 2007
AUTOMOTIVE COMPANIES MUST EXAMINE REASONS FOR FOLLOWING THE CROWD EAST
US$6 billion worth of automotive production will be transferred to Central and Eastern Europe over the next five years, but relocating to another region is neither easy, nor is it always the right option. In the first of a new series of reports on setting up production facilities in the Central and Eastern European member states of the European Union, PricewaterhouseCoopers looks at the key factors to consider before following the crowd eastwards.
The market pressures to reduce costs mean it is sensible for many carmakers and suppliers to make the move east. Some components suppliers, for instance, move because they are under pressure from their customers or from institutional shareholders who do not understand the full implications. Even those for which it does make smart commercial sense sometimes make the shift too quickly, which creates issues detrimental to the running of the business.
There are three key stages involved in the relocation: strategic planning, the move itself and management of the post-move issues. The first part of 'Eastern Influx: Automotive Manufacturing in Central and Eastern Europe' discusses the issues associated with effective strategic planning and identifies key questions to answer before moving onto the next stage.
Matt Pottle, Central and Eastern Europe automotive leader, PricewaterhouseCoopers said:
"The smaller the company, the fewer the management resources it can deploy in planning the move. Yes, there are undoubtedly significant benefits in shifting manufacturing to Central and Eastern Europe but realising these benefits requires a strong business case and the right strategy. It is not necessarily something to do just because competitors have."
The key question is what a company hopes to gain by the move. Savings on labour costs is an obvious potential gain and average wages in Central and Eastern Europe are currently lower than in Western Europe. Although they are rising rapidly, it will still be many years before they catch up so cost savings seem secure. But there is little point in moving to an area where wages are low if labour is scarce and in some areas the demand for skilled labour is becoming so competitive it is driving wage rates up much more quickly. The statistics on 'average' costs can therefore mask huge local differences so need to be considered carefully.
The next issue is whether a company wants to expand its manufacturing facilities or transfer existing production elsewhere. Leaving one country to set up in another needs evaluation of the legal position, impact on its tax regime and liabilities and it typically takes a number of years to complete an exit and remove the assets from the balance sheet. There can also be potential political fallout; some national vehicle manufacturers depend on their national image to promote themselves, so closing a domestic plant to set up elsewhere can have dire consequences for the business.
But whether a company is expanding or migrating, the next decision is whether to acquire an existing facility or build from scratch. With decreasing numbers of car factories remaining to be acquired it is more likely to be the latter. Whether buying or building, the company also needs to consider the logistics of getting the necessary materials and components and distributing the finished product. Many Tier 1 suppliers set up satellite operations near carmakers with which they have close relationships but this is not always so practical for smaller companies with neither the resources nor the will to relocate.
This leads on to what processes to move. Labour-intensive activities tend to be more transferable than research and development - skills that constitute a large part of a company's intellectual assets. Sales, marketing and after sales operations should also be maintained in every country in which the product is sold.
The level of productivity is often lower in Central and Eastern Europe than the US and Western Europe, particularly when a factory has only just started up. So allowances need to be made for at least initial efficiency losses and high levels of on-site set up support.
Lastly, it is vital to have the management expertise to complete the transfer. Many manufacturers relocating abroad are disappointed by the outcome which is primarily caused by lack of management resources and focus.
Matt Pottle, Central and Eastern Europe automotive leader, PricewaterhouseCoopers added:
"On average it takes carmakers and suppliers much longer than expected to complete all the stages of a move to Central and Eastern Europe. Errors in the first stage of strategic planning will significantly reduce the chances of the remaining stages being completed on time and on budget."
The second in this series of reports will discuss the challenges associated with choosing the right location, including researching national and local variations.
ENDS
Notes to Editor:
1. For more information on PricewaterhouseCoopers Automotive practice, please visit
www.pwc.com/auto
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www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
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