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Anno LIV Economia & Lavoro Thirty Years, pp. 31-44
EUROPEAN INTEGRATION AND INDUSTRIAL ACTORS’
LOCATION AND INVESTMENT DECISIONS IN THE CEE
AUTOMOTIVE INDUSTRY: WHAT TYPES OF CHANGES
ARE LIKELY TO BE BROUGHT BY INDUSTRY 4.0?
by Anita Pelle, Magdolna Sass, Gabriella Tabajdi
Anita Pelle, University of Szeged, Kálvária Avenue 1, 6722 Szeged (Hungary); pelle@eco.u-szeged.hu.
Magdolna Sass, Center for Economic and Regional Studies of Sciences and BGE, Tóth Kálmán Street 4, 1097,
Budapest (Hungary); sass.magdolna@krtk.mta.hu.
Gabriella Tabajdi, University of Szeged, Kálvária Avenue 1, 6722 Szeged (Hungary); tabajdi.gabriella@eco.u-
szeged.hu.
Codici JEL / JEL codes: F15, F23, L62, O14.
Europe remains relevant in the global
automotive industry. The Central and Eastern
European (CEE) countries’ role is influential: they
contribute to European competitiveness through
cost-based advantages in a fairly developed
technological and business environment. How
have the location advantages of CEE evolved
and been affected by European integration?
How may the changes linked to Industry 4.0
influence location and investment decisions in
the industry? With the help of the trade costs
concept interpreted in the broad sense, we
analyse these changes from the viewpoint of the
automotive industry. We show that, as a result
of European integration, automotive companies
and their suppliers by now consider the whole of
the EU as a single, fully integrated space. Then
we show how the various elements of Industry
4.0 may transform trade cost components. The
results of our analysis are double-checked and
supplemented by information gained from
companies. Our conclusion is that the enhanced
application of the various elements of Industry
4.0 in the practice of companies indeed affects
trade costs.
Keywords: European integration, Industry
4.0, trade costs, automotive industry, location de-
cisions, investment decisions.
L’Europa detiene un ruolo di primo piano
nell’industria automobilistica globale, e i Paesi
dell’Europa centrale e orientale giocano una parte
importante: contribuiscono alla competitività
dell’Europa, offrendo vantaggi in termini di costi
all’interno di un avanzato contesto tecnologico
ed economico. Come si sono evoluti i vantaggi
legati alla localizzazione dei Paesi dell’Europa
centrale e orientale? Che impatto ha avuto su
di essi l’integrazione europea? In che modo i
cambiamenti legati all’Industria 4.0 influenzano
le decisioni di localizzazione e di investimento
nel settore industriale in analisi? Con l’ausilio
del concetto dei costi commerciali interpretato
in senso lato, si analizzano questi cambiamenti
dal punto di vista dell’industria automobilistica.
Si dimostra che, a seguito dell’integrazione
europea, le aziende del settore automobilistico
e i loro fornitori considerano oramai l’UE
come uno spazio unico e pienamente integrato.
Inoltre, si affronta il tema di come i vari
elementi dell’Industria 4.0 possano trasformare
le componenti dei costi commerciali. I risultati
dell’analisi vengono verificati e integrati con
informazioni ottenute dalle aziende. Il saggio
conclude che una maggiore applicazione dei
vari elementi dell’Industria 4.0 all’interno delle
aziende ha un impatto sui costi commerciali.
Parole chiave: integrazione europea, Industria
4.0, costi commerciali, industria automobilistica,
decisioni di localizzazione, decisioni di investi-
mento.
ISSN 0012-978X
© Carocci Editore S.p.A.
32 Economia & Lavoro, LIV, 1
1. INTRODUCTION
Europe continues to be one of the world’s main automotive production regions
by accounting for 20% of total vehicle production and for 21% of total car output in
2018 (ACEA, 2019). Central and Eastern European (CEE) countries, and among them
especially the four Visegrád countries (Czechia, Hungary, Poland, and Slovakia) have
become important strongholds for the European automotive industry. Basically, through
relocations, offshoring, and outsourcing, the region has contributed significantly to
maintaining the competitiveness of European automotive production by offering a low
wage, low-to-medium (limitedly high) skilled production outlet. Mainly German, but
also other European carmakers are the lead firms and the first-tier participants of these
automotive value chains. At the other end, CEE countries contribute mainly with diversely
skilled labour, and have experienced a considerable increase in their automotive and
related components production and exports.
CEE countries joined the EU in 2004; however, their integration into the unified
European economic space started as early as in the beginning of the 1990s. Since the
conclusion of the Europe Agreements in December 1991, the Visegrád countries have
gradually opened up for foreign direct investment (FDI) from developed countries.
Regarding the automotive industry, foreign investment arrived into existing-but-outdated
capacities, as well as in the form of greenfield investments. By the time of EU accession,
these countries were deeply integrated in the EU economy, and so was their automotive
industrial production sector. Nevertheless, full membership in the EU yielded further
advantages.
Most lately, Industry 4.0 has been in the forefront of industrial development. It is likely
to bring fundamental changes into automotive production as well. There are different
definitions of, and approaches to Industry 4.0, but these all share the common conviction
that Industry 4.0 does and will have a large impact on the international organisation
of production. The magnitude of the impact is yet to unfold, but estimations point to
enormous changes in the world economy (Petropoulos, 2017), business models, production
networks, global value chains, or labour markets (OECD, 2016). Understandably, the CEE
region, which provides cheap, unskilled, mid-skilled, and increasingly highly skilled labour
for European industry, is likely to be affected. Indeed, the Organisation for Economic
Co-operation and Development (OECD) (OECD, 2018) shows that certain production
areas in CEE are among those that can be the most distressed by the Industry 4.0-related
changes.
In our article, we first go through the theoretical background, and briefly present
the results of literature. We then formulate our research questions, and present our
methodology. We consider how the European integration process diminished trade costs
significantly in the CEE automotive industry, and then we review the potential impact
of Industry 4.0 on the location factors of the CEE automotive industry. We identify and
present relevant company cases. The last section concludes.
2. THEORETICAL BACKGROUND: THE OLI FRAMEWORK AND THE TRADE COSTS APPROACH
Location advantages are usually perceived and conceptualised in the framework of
Dunning’s OLI framework (Dunning, 1993), where O stands for “ownership advantages”
33
Anita Pelle, Magdolna Sass, Gabriella Tabajdi
(i.e. those deriving from assets and resources owned by the firm), L for “location
advantages” (offered to firms by the geographical location they choose for their activities),
and I for “internalisation advantages” (referring to the process of realising firm-level gains
by keeping transactions within the network of the multinational company, i.e. between
parents and subsidiaries-affiliates) (Dunning, 1980; Dunning, 2000; Dunning, 2001).
These three are highly interrelated, and all of them are required for FDI to take place.
Our analysis relies on the trade costs approach in trying to assess changes in the location
advantages (L) of CEE countries, so we concentrate on this single element of the OLI
framework.
We assume that trade costs represent an important, even decisive part of location
advantages of the OLI framework. We can perceive trade costs in a narrow sense, according
to which only transportation and directly related costs are considered. According to
Obstfeld and Rogoff (2001), even transport costs in themselves can explain major puzzles
in the international economy. However, trade costs can be perceived in a broad sense as
well: “they include all costs incurred in getting a good to a final use other than the marginal
cost of producing the good itself: transportation costs (both freight costs and time costs),
policy barriers (tariffs and nontariff barriers), information costs, contract enforcement
costs, costs associated with the use of different currencies, legal and regulatory costs, and
local distribution costs (wholesale and retail).” (Anderson and Wincoop, 2004, pp. 691-2)
Thus, all costs related to the transfer of a product or service from the place of production
to the place of use or to the consumer are included in the concept. In our understanding,
trade costs in a wide sense form an important part of location advantages.
While technological developments have caused a significant decrease in trade costs in
recent decades in the narrow sense, and certain elements of trade costs in a broad sense
have also decreased considerably in the world economy (e.g. tariff barriers, information
costs due to the use of ICT, etc.) (Mirodout et al., 2013), they have remained fairly
large overall (Feenstra, 1998; Anderson and Wincoop, 2004; Moïsé and Le Bris, 2013).
According to Anderson and Wincoop (2004), total trade costs still represent an ad valorem
equivalent of about 170% of the value of goods (production cost).1 Thus, trade costs
may matter more than price factors in international trade. Due to this magnitude, trade
costs heavily influence the global economic and foreign trade structure, as well as the
specialisation of various countries in the production of certain final or intermediate goods
and services (WTO, 2015). Furthermore, policies may affect trade costs, reducing (or, in
certain regressive cases, elevating) them through unilateral, bilateral, regional, or global
measures and agreements. We consider trade costs in a wide sense as an important element
of location advantages.
3. THE CEE AUTOMOTIVE INDUSTRY
We are interested in how the reduction in trade costs in a wide sense impacts upon the
location advantages of CEE from the viewpoint of the automotive industry. As said above,
the four Visegrád countries play an important role in the European automotive industry,
1 The most important elements in the values of goods are: 21% transportation costs, 44% border-related trade
barriers (8% policy barriers, 7% language barriers, 14% currency barrier, 6% information barriers, and 3% security
barriers), and 55% retail and wholesale distribution (Anderson and Wincoop, 2004).
34 Economia & Lavoro, LIV, 1
through hosting numerous original equipment manufacturers (OEMs) and higher-tier
suppliers. Because of integration, investments, and (re)locations, the automotive industry
has become a leading industry in all these countries, with significantly increased production
and exports. Pavlínek et al. (2017) document this development, and show that the CEE
automotive industry has been restructured and modernised through FDI. It has also been
expanded by foreign multinationals (Pavlínek et al., 2009), and integrated in the European
and global automotive industry (Jürgens and Krzywdzinski, 2009; DomaĔski and Lung,
2009). As Pavlínek et al. (2017, p. 33) put it: “the CEE represents a prime example of an
integrated periphery made up of attractive production locations geographically close to
large and affluent markets in developed economies and with significantly lower production
costs, mainly because of lower wages.” Over time, even some upgrading could be observed
(Sass and Szalavetz, 2013). However, this FDI-based strategy has its costs and limits: it has
resulted in a truncated development because of high dependence on foreign multinational
firms (causing vulnerability), and limited opportunities for the development of an
indigenous automotive industry or at least the related development of ancillary automotive
industries (suppliers) (Pavlínek et al., 2009).
Accordingly, our research questions concern the trade costs (in a wide sense) and the
related location advantages of the CEE countries: how these have evolved over time due
to the integration process of these countries in the EU, and, most lately, how they may be
transformed by Industry 4.0.
4. METHODOLOGY
Our analysis relies on the review of related literature and on company case studies. For
the latter, we have found well-documented company cases that we have supplemented
with information from other sources (company websites, newspaper articles, and scientific
journal articles). Our choice of the methodology was constrained by the scarcity of
analyses of the phenomena in CEE. Data constraints and difficulties in identifying Industry
4.0-related developments were major reasons for not applying statistical analysis. However,
we deem our approach fruitful in terms of identifying the most important developments
and trends in the area; however, obviously, generalisation of our results may be problematic.
5. TRADE COSTS AND EUROPEAN INTEGRATION
The process of economic integration between countries may lead to a considerable
decrease in trade costs. In our understanding, the advancement of the European integration
process can be approached from the trade costs perspective: it has in fact yielded a
decrease in certain elements of trade costs, and an increase in trade flows between the
participating countries, accordingly. The higher the level of integration, the more all the
three main groups of trade costs – at-the-border measures (e.g. tariffs and customs and
border procedures), between-the-border measures (e.g. transport), and behind the border
measures (e.g. product standards) (WTO, 2015) – are decreased during the integration
process. At the lower level of integration, countries eliminate tariff and non-tariff barriers
only; however, these represent a smaller part of trade costs in the wide sense, as we saw
based on the calculations of Anderson and Wincoop (2004). Therefore, larger gains in terms
of more intense trade relations can be realised through reducing between and behind-the-
35
Anita Pelle, Magdolna Sass, Gabriella Tabajdi
border measures. The present level of European integration is indeed addressing all three
types of barriers.
Since the establishment of the European Economic Community (EEC) in 1957,
European integration has eliminated barriers to trade in goods. Moreover, inasmuch as
the initial level of economic integration addressed by the EEC was the common market,
the free movement of services, capital, and persons was also foreseen. In the first decades
of integration, these areas gradually evolved and included the introduction of unified
standards for products, a significant level of harmonisation of microeconomic policies
of EU Member States, and more efficient consumer protection. From the company
perspective, European integration has meant opportunities to realise economies of scale
and productivity gains, increased investment flows and technology transfer, and a business
environment strongly encouraging transnationalisation.
According to estimates, the single market established in 1992 increased the EU GDP
by 2.2% (233 billion euro), and intra-EU trade by 9% (Kommerskollegium, 2015), and
created 2.75 million jobs between 1992 and 2006, implying a 1.4% increase in employment
(Ilzkovitz et al., 2007). Intra-EU trade intensity grew by around 10 percentage points since
1992 (Vetter, 2013), while the exports of goods and services as a share of EU GDP rose
from around 18% (1960s) to 44.8% (2018) (World Bank, 2019). In the absence of the
single market, per capita European incomes would be 12% lower (Campos et al., 2014).
Most lately, the single market of services has been increasing dynamically, performing a
four-time expansion between 1992 and 2016; in fact, EU Member States’ trade in services
is 9% higher than would be without EU membership (UK Treasury, 2016).
Looking at the specific trade costs elements, we can state that transportation costs,
including both freight costs and time costs, have decreased significantly thanks to
European integration. Time reduction deriving from the abolishment of border controls
within the Schengen Area is the most spectacular, but the development of EU-wide
logistics (both at firm level and of the sector as a whole) helps optimisation of freight
costs as well. In terms of policy barriers encompassing tariffs and non-tariff barriers
(NTBs), the European single market is a customs-free area operating a customs union
(together with Turkey), which means unified tariffs on importing from third countries.
Regarding NTBs, the aim is to create a unified regulatory framework for firms at EU level.
Nevertheless, in case of such barriers sensed by companies, there are EU mechanisms and
institutions to turn to: SOLVIT is the dispute-settling mechanism of the single market,
while the Court of Justice of the European Union (CJEU) serves as the ultimate guard
overseeing compliance and enforcement of EU law, obviously covering single market
legislation.
Information costs within the EU have been reduced to minimal, and contract
enforcement costs are also reduced due to the existence of significant EU-level regulation
to adhere to (and, in case of violation, parties can turn to the CJEU). In respect of the costs
incurring due to the existence of different currencies, these are also significantly reduced
in the EU: 19 EU Member States are using the euro as their national currency, the Danish
crown has been pegged to the European currency unit (ECU) / euro since 1979, and the
rest of the EU real economy is also highly “euro-ised”, especially through the multinational
corporations that are operating fully in euro.
Last but not least, concerning legal and regulatory costs and local distribution costs,
due to unrestricted border-crossing, “local” does not necessarily refer to national markets
in terms of distribution, but it may well imply European in the first place already (table 1).
36 Economia & Lavoro, LIV, 1
The CEE countries have gradually realised these trade cost advantages in their integration
process: tariffs and other barriers to trade and investment were reduced by the Europe
Agreements before accession, while the other advantages came with full membership in
the EU.
Table 1. European integration and trade costs
Trade costs element Impact of the integration process
Transportation costs Time reduction; EU-wide logistics
Policy barriers No internal tariffs; unified tariffs in relation to
third countries; NTBs: there are means to fight
them.
Information costs Reduced to minimal
Contract enforcement costs Significant EU-level regulation to adhere to
Costs associated with the use of different currencies Euro area: 19 countries; most of EU highly “eu-
ro-ised”
Legal and regulatory costs and local distribution
costs Unrestricted border-crossing; “local” may imply
European.
Source: authors’ compilation.
Overall, trade costs for manufacturing are 21% lower within the EU than would be
under WTO (World Trade Organisation) terms, and 9% lower than would be in a free
trade area, while the trade cost reduction in the single market of services accounts for
around 7%, so there is large potential for further reduction in services, especially those
representing a high value added in EU Member States’ GDP (Sunesen and Hvidt Thelle,
2018).
6. THE POTENTIAL IMPACT OF INDUSTRY 4.0 ON TRADE COSTS AND ON THE CEE
AUTOMOTIVE INDUSTRY
Today’s globalised world is highly impacted by the Fourth Industrial Revolution, also
called “Industry 4.0”, and Europe is not an exception. The term “Industry 4.0” was first used
in Germany in 2011 (Kagermann et al., 2013). There are several definitions of Industry 4.0,
but it can be defined in a very simple way as the use of recently emerged new technologies
in the industrial sector (Morisson and Pattinson, 2019). Another definition addresses the
electronic connections of devices, as well as the possibilities provided by the inclusive and
pervasive digitalisation technologies that can improve the quality of production processes
and that can even rearrange them. A more formal definition of Industry 4.0 is: a new
production philosophy and way of operation that is based on the Internet of Things (IoT),
whereby smart factories emerge as resources, and machines and logistic systems are bound
together to one online integrated cyber-physical system (Kovács, 2017; Szalavetz, 2017a).
Literature links Industry 4.0 to the emergence of the following technologies: big data
and analytics, autonomous machines and robots, simulation, horizontal and vertical system
integration, industrial IoT, cybersecurity, additive manufacturing, and augmented reality.
Substantial transformation of labour and living conditions and improved efficiency in many
37
Anita Pelle, Magdolna Sass, Gabriella Tabajdi
fields are the most stressed impacts of Industry 4.0 (Pelle and Somosi, 2018; Szalavetz and
Somosi, 2019). For Europe, Industry 4.0 is specifically important as European industrial
competitiveness relies on knowledge-intensive, high value-added products and processes,
often at the global technological frontier (Kuruzcleki et al., 2016). Voszka (2019) highlights
that the key to European growth and competitiveness rests on the development of smart
technologies, robotisation, artificial intelligence, big data and analytics, IoT, and high-
efficiency ICT.
Regarding the automotive industry, Industry 4.0 holds vast possibilities to improve
efficiency. Essentially, flexibility of the production process increases, and production in
smaller scales becomes less expensive due to robotisation and to smart machines and
products. Autonomous robots communicating and cooperating with each other can be
used in several phases of the production processes ranging from wielding to assembling.
This way, producers become able to design and manufacture cars with different features
in a single flexible production line. Moreover, alongside the value chain, the production
process can become synchronised by integrated ICT systems, so traditional isolated
production can be substituted by fully automated and integrated industries. Planning and
production can occur virtually in an integrated system where suppliers and manufacturers
collaborate. Thus, production time and costs can be reduced, and, in parallel, diverging
customer expectations can be satisfied more easily (Rüßmann et al., 2015).
As for Industry 4.0’s impact on trade costs, and especially on those in the European
automotive industry, many of the abovementioned technologies matter, especially regarding
transportation, information, and local distribution costs (table 2).
Table 2. Technologies of Industry 4.0 that matter in terms of trade costs
Transportation costs Information costs Local distribution costs
3D printing and additive produc-
tion technologies IoT 3D printing
New technologies in transporta-
tion Horizontal system integration Smart logistics
Smart logistics, smart factories Big data and clouds IoT
Source: authors’ compilation.
3D printing and additive manufacturing basically means the creation of customised
objects while offering construction advantages like lightweight or complex designs (Van der
Elst, 2017; Rüßmann et al., 2015). This technology makes the switch from one production
location to another much easier, as, due to 3D printing, production does not have to be
centralised: it can be undertaken in any location with a 3D printer. This way, manufacturing
becomes more dependent on the evolution and size of the market it is serving, instead of
relying on labour costs, skills, and established outlets. Accordingly, production can move
closer to the end users, and may be relocated from the lower-wage countries, while, at
the same time, delivery times and transportation costs decrease (Davies, 2015; Strange-
Zucchella, 2017; Szalavetz, 2017b).
IoT is another crucial technology of Industry 4.0. It covers the connection of
devices to the internet through sensors enabling fast exchange and real-time retrieval
38 Economia & Lavoro, LIV, 1
of information, all across the world (Morisson and Pattinson, 2019; Kagermann,
2015). Moreover, IoT achieves greater integration of data between firms, suppliers,
and customers (Rüßmann et al., 2015), which might further reduce the cost of
information, increase the efficiency in distribution, and reduce costs of distribution due
to optimisation. In addition, IoT and the connection between devices are used in the
newest technologies of transportation.
Big data refers to the data characterised by volume, velocity, and variety (OECD, 2017).
Data is collected from different sources (customers, management, and production), and
evaluated in huge amounts (Rüßmann et al., 2015). The cloud allows for the storage of
ever-larger volumes of data. It is in fact a simple online data storage service that makes
data delivery much faster and up to date. As a result, companies will be able to monitor
emerging opportunities and trends in far-away markets without great investments and
resource commitments in local affiliates; and they will also be able to optimise their supply,
distribution, and production activities more efficiently around the world, realising reduced
costs of information and distribution (Strange and Zucchella, 2017).
A further Industry 4.0 technology influencing trade costs is horizontal system
integration. This refers to the integration of ICT systems used in different stages of the
supply chain to optimise collaboration (Kagermann et al., 2013). For trade costs, the
implication of horizontal integration is simply the reduction in costs, and the better and
quicker availability of information (Davies, 2015).
Smart factories and smart logistics also matter in terms of trade costs. Smart factory
is one that is more dynamic, flexible, modular, and intelligent. Such factories can get
closer to customers, even in the automotive industry (Roblek et al., 2016). Modularity and
smaller distance to customers can reduce transportation costs and distribution costs. Smart
logistics is important in transportation, as it enables a door-to-door transport chain that is
reliable and efficient (Kagermann, 2015). Due to increased efficiency, transportation costs
becoming unnecessary can be eliminated.
Last but not least, new technologies in transportation affect trade costs. The new
technologies include electric mobility, smart cars, or semi-autonomous transportation, and
are important for more effective logistics and mobility as well (Kagermann, 2015). As a
result, transportation costs can be reduced.
How is the CEE region likely to be affected? Not only are these countries lagging
behind in technology adoption, but, due to the changing nature of trade costs and to the
effects of Industry 4.0, they can be further affected heavily. Naudé et al. (2019) focus on
the differences among the readiness levels of CEE countries, and find that these countries
highly differ in their readiness for Industry 4.02. One consequence for the CEE region can
derive from 3D printing, as it makes the switch of production locations easier, so low labour
costs and available skills might not be that crucial anymore, but the size and evolution of
market demand and the ability of a location to host automatisation and digitalisation may
matter more (Szalavetz, 2017b; Naudé et al, 2019).
Thus, production activities in the CEE region may be relocated to the core countries,
where purchasing power is higher. On the other hand, this might also imply that European
2 The readiness level is based on three main components – technological competencies, entrepreneurial compe-
tencies, and government competencies –, and these were analysed through different indicators. From the CEE coun-
tries, Czechia was found the readiest, followed by Lithuania, Hungary, and Slovenia. Slovakia ranked sixth, preceding
Poland. The least ready countries in the region are Bulgaria and Romania (Estonia and Latvia were not among the
studied countries) (Naudé et al., 2019).
39
Anita Pelle, Magdolna Sass, Gabriella Tabajdi
companies choose to establish their new plants in Europe rather than in Asia or Africa,
and in this respect CEE is still a good choice for automotive firms (Davies, 2015). Szalavetz
and Somosi (2019) contradict this possibility of reshoring. In their survey of multinational
companies based in Hungary, including large automotive firms, they find that, instead of
moving the production away from Hungary, companies rather choose to develop their
Hungarian subsidiaries.
In addition, due to greater automatisation, there will be an increased demand for highly
skilled labour displacing cheap and lower-skilled labour. For the CEE countries and firms
to remain competitive in the international environment, education and training will be of
key importance (Strange and Zucchella, 2017). So, to attract further investment, on the one
hand, the absorption of new technologies is crucial, but, on the other hand, CEE countries
should improve their innovation policies and an Industry 4.0-supporting environment,
including education.
6.1. Company cases
In the previous section, we pointed out that new technologies in the automotive industry
might redraw the production map of Europe. Actually, there are already signs of this. Some
car manufacturers have already announced production restructuring or the suspension
of further investments to CEE countries. Such announcements have lately been made by
Volkswagen concerning its Czech facilities, by Daimler regarding its Hungarian plant, and
by BMW in relation to its planned Hungarian subsidiary.
The German car manufacturing giant, the Volkswagen Group, has been present in CEE
for many years, e.g. in Czechia since 1991 (Pavlínek, 2015a). The Czechs had been famous
for their car production through Skoda, the history of which roots back to the end of the
1800s. At that time, the company was free of any state intervention; however, after World
War II, it was nationalised, and was state-owned until the collapse of the USSR, which
actually caused serious problems to the firm. Yet, short after the fall of the socialist system,
the Czechoslovakian government announced a public tender for Skoda’s privatisation. As a
result, in 1991, Volkswagen became Skoda’s joint venture partner, and acquired 31% of the
company’s shares. Later, it steadily increased its stake in Skoda, and by 2000 Volkswagen
became its only owner (Pavlínek, 2015b).
Owning Skoda was a part of Volkswagen’s long-term strategy, as it had intended to enter
CEE countries, and saw Skoda as a bridge to these markets. It was a well-established brand
with workable production facilities (Pavlínek, 2015b; Brincks et al., 2018). Moreover, the
geographic proximity to Western Europe mattered; transportation costs were low. Also, the
promise and anticipation of Czechia’s and other CEE countries’ accession to the EU, and
the signed free trade agreements in 1992 gave further reasons for entering CEE (Frigant
and Miollan, 2014; Dieter, 2007), as these implied the reduction and/or elimination of
tariff barriers and NTBs.
Thanks to Volkswagen, Skoda could become a global brand, and could expand its
export markets from CEE and the post-Soviet region worldwide. Nevertheless, as Skoda
is part of the Volkswagen Group, not only Skoda’s parts are manufactured in its facilities,
but also parts and components for the group’s other brands are (e.g. SEAT, Audi, or
Volkswagen) (Túry, 2017).
Regarding the impact of new technologies, Volkswagen already decided to retool its
Zwickau factory in Germany to produce electric cars (Ewing, 2019), but will also convert
its Emden and Hanover production facilities to build electric vehicles (Automotive News
40 Economia & Lavoro, LIV, 1
Europe, 2018). This also implies that the production of traditional cars will be relocated
to CEE, for instance the Passat production will be moved from Emden to Kvasiny
(Czechia) (JÁRMĥIPAR.HU, 2018). Thus, the less technology-intensive productions will
be relocated to the less developed parts of Europe, while the technology and innovation-
driven manufacturing will be located to core EU Member States. However, due to the
relocation to CEE, firms can still enjoy the trade cost advantages that integration provides
for them.
A further real-life sign for this shift can be seen in Daimler’s and BMW’s investment
decisions in Hungary. Daimler and, more precisely, Mercedes-Benz have been operating
in Hungary since 2012; however, the investment decision was made back in 2008. Daimler
realised a greenfield investment of 800 million euro in Kecskemét, where 100,000 cars per
year can be produced (Vápár, 2013; Brincks et al., 2018). This decision was made four years
after Hungary’s EU accession, implying that most of the trade cost advantages deriving
from integration were applicable, and Hungary, by this time, became an established car
manufacturer location in Europe.
Several reasons were articulated supporting the choice of Kecskemét, many of
which are trade costs-related. Besides skilled labour, beneficial logistics conditions, and
extensive supplier network, further decisive factors were the proximity to Budapest, and
the availability of motorways. To further improve transportation opportunities for the
shipping of materials and products, an industrial railway track was built. An additional
factor was the supportive attitude of local and national governments, ensuring quick and
easy contract enforcement, and thus reducing the related costs (Vápár, 2013).
Since the start of production, Mercedes-Benz has become an important player in the
Hungarian economy, and the Kecskemét facility an essential part of the Daimler Group.
Mercedes-Benz has planned to open a second plant there (Brincks et al., 2018). However,
due to the technological transformation, in May 2019 Daimler announced to decrease the
volume of the planned production enlargement in Hungary (PORTFOLIO, [2019a]);
moreover, even the already ongoing production facility expansion has been suspended
until Daimler reviews its strategy (INDEX, 2019).
Regarding BMW in Debrecen, it has not even opened its facility; however, due to the
emerging trends, the company already had to review the volume of the planned investment,
as well as its complete strategy concerning the Hungarian subsidiary. The decision to build
a new plant in Hungary was made in the summer of 2018, and concerned a 1 billion euro
investment to produce 150,000 cars a year, and this would be the company’s first new plant
in the region since 2000 (Sachgau and Eder, 2018). And now, due to the latest market
trends and an accelerated shift towards electric car and self-driving car production, BMW
has to revise this decision (PORTFOLIO, [2019a]).
On the other hand, there are examples for the argument of Szalavetz and Somosi (2019)
as well, namely that, instead of relocation of production, firms invest more in their existing
CEE subsidiaries to develop them. Latest examples for that are Audi in Hungary, and LG
Chem in Poland.
Audi has been one of the cornerstones of the Hungarian car production and of the whole
national economy since 1993, but this subsidiary also enjoys a unique position within Audi
being its largest engine factory (Túry, 2017). Audi Hungaria is in fact the second largest
manufacturing firm in CEE, and contributes to Hungary’s GDP, export, and employment
to a high degree. In 2016, Audi accounted for more than 8% of Hungary’s total exports,
and was the country’s fourth largest employer (Fekete, 2018; Noszováth, 2018).
41
Anita Pelle, Magdolna Sass, Gabriella Tabajdi
Audi’s presence in GyĘr started as a brownfield investment, as the car manufacturer
bought the half-ready production facility of Rába, and transferred it to an engine
manufacturing plant. There were several reasons for choosing GyĘr, some of which
can be connected to trade costs minimisation, including geographic location, and the
proximity to Ingolstadt (the company’s German headquarters) and to motorways. Besides
transportation cost considerations, the skilled and available labour, the mechanical focus
of the local university, or the half-ready plant were also important factors (Fekete, 2018).
Since the start of the GyĘr plant, Audi has made several investments to develop the
facility further, and Hungary’s accession to the EU gave additional impetus to that. Since
2004, 11 new investments have been made (while between 1993 and 2004 only seven),
including expansions of existing capacities, and adding new plants (Fekete, 2018). One of
the largest investments dates to 2013, when Audi finished a 900 million euro expansion of
its vehicle assembly plant (Pavlínek, 2015a).
As GyĘr is an essential location in Audi’s and the whole Volkswagen Group’s engine
production, in October 2019 the company announced its intention to spend 14 billion euro
on restructuring this facility with a view to making it ready for electric engine production
(PORTFOLIO, [2019b]). Thanks to this investment, Audi Hungaria is expected to meet
the requirements of the new age of car production, and is foreseen to remain an important
member of the Volkswagen Group.
The LG Chem plant in Wroclaw was opened in 2018. It is a large-scale lithium-
ion battery factory producing up to 100,000 electric batteries per year. The investment
decision was motivated by the latest shift towards the increased production of electric
vehicles (Goettig, 2017). LG’s investment amounts to 325 million euro. This new plant
is expected to supply batteries for about 80,000 electric cars all over the EU (European
Commission, 2019). The newly opened Polish plant is already undergoing an expansion
of 4.4 billion zloty (ca. 1 billion euro) to make it one of Europe’s largest electric vehicle
battery factories (Charlish and Kahn, 2019). The case clearly shows that, in this new and
transforming era of automotive production, CEE can benefit inasmuch as LG brought
electric battery production to Poland to serve the European market and thus to exploit
European and some specific CEE trade costs advantages.
The presented company cases reveal that the technological transformation is indeed
affecting the European automotive industry. Some firms are responding to the new
challenges with production restructuring and by keeping the more technology and
knowledge-intensive production close to their R&D centres and headquarters, while
moving production with lower technology needs to CEE. In other cases, they react by
decreasing or postponing planned production expansions in the region, in the traditional
production segments. At the same time, some manufacturers invest in their CEE plants to
make them ready for the upcoming technological and market changes, or even new plants
are located to CEE.
7. CONCLUSIONS
There is still significant potential in further reducing trade costs, which continue to be
determinant in firms’ location and investment decisions. European integration has been a
great success in this regard, and CEE has by now become fully embedded in the European
industrial production structures. The new technologies have undoubtable impact on
42 Economia & Lavoro, LIV, 1
trade costs, on the automotive industry, and on CEE. However, the specific effects of
technological changes on the automotive industry in the CEE region are yet to unfold. Self-
driving autonomous cars, electric cars, car sharing, and freight sharing are revolutionising
the automotive industry, so, if the established giants wish to stay competitive, they have to
shift towards the production of electric and self-driving cars, as well as towards being not
only producers but also mobility servicers.
Industry 4.0 offers additional potential to improve efficiency, to optimise, and to reduce
costs, including trade costs. Company case studies are showing that the transformation has
started. The CEE region faces opportunities and threats in parallel; nevertheless, creating
an enabling environment for industrial actors to exploit the potential lying in Industry 4.0
can improve the region’s chances in the time to come.
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