WIIW Industry Study 4/1999 - Abstract

In Central and Eastern Europe, as in most economies, the transport equipment sector plays a major role in manufacturing, due to its size and foreign trade volume as well as its links with the rest of the economy. It is considered a medium-high technology industry and belongs to the most globalized segments of manufacturing world-wide. In the Central and Eastern European countries (CEECs), the transport equipment sector is one of the fastest growing sectors, characterized by extraordinary production and export growth and supported by a  massive inflow of foreign direct investment.

Part One of the study investigates the development and prospects of the transport equipment sector in the following countries:
- Bulgaria
- Czech Republic
- Hungary
- Poland
- Romania
- Slovakia
- Slovenia

In size, the transport equipment sector emerged as a major player in total manufacturing of the more advanced CEECs today and contributes between 9% and 12% of output, with the Czech Republic and Hungary having the largest shares of the CEECs analysed. Only in Romania and Bulgaria, is the sector of minor importance. When compared to countries of Western Europe, the CEECs are in the middle of the range, having smaller transport equipment shares than the more advanced EU countries but larger ones than the less advanced countries.

In the first phase of transition, which lasted from 1989 to around 1992, the output of the transport equipment sector declined along with the larger economy and was even more affected than total manufacturing. From 1993 on, the performance of the sector improved and it became one of the most successful segments of manufacturing, due to growing domestic demand and the inflow of foreign investment in particular. The Hungarian and Polish transport equipment sectors emerged as the regional growth leaders, while the Slovenian one continued to decline.

As an employer, the transport equipment sector is of middle importance and employment shares range between 3% in Bulgaria and 9% in Romania today. Output shares were decisively larger than employment shares in all countries in 1997, except in Bulgaria and Romania, where production is still more labour-intensive.

As is typical for all CEECs and all sectors of manufacturing, wages, productivity and unit labour costs in the transport equipment sector were and are generally much lower than in West European countries, for which we used Austria as a point of reference. Only in Hungary, did the sector’s productivity surpass the Austrian level in 1997. From 1993 to 1997, wages and productivity rose in all countries. As the productivity increase was larger than the wage increase, unit labour costs declined in most countries but increased in the Czech Republic and Slovenia. In general however, unit labour costs remain at a much lower level than in Austria.

Ranges for CEECs' unit labour costs in the transport equipment sector as a percentage of the Austrian level:
Bulgaria 23% - 51%
Czech Republic 22% - 33%
Hungary  12% - 21%
Poland 29% - 40%
Romania 17% - 57%
Slovakia 17% - 27%
Slovenia  38% - 45%
(The lower range is calculated at purchasing power parities (PPP) for GDP, the upper range at PPP for fixed capital formation; figures are from 1997, with the exception of the Austrian level which is for 1996)

In CEECs' manufacturing exports to the EU, the transport equipment sector holds a significant trade position in the more advanced CEECs, with shares ranging between 11% in Poland, 20% in Slovenia and Slovakia and 22% in Hungary. The sector is exceptionally export-oriented, shows a small revealed comparative advantage compared to total manufacturing and concentrates on exports of automotive products. In Romania and Bulgaria, on the other hand, the transport equipment sector has only a very small export share in total manufacturing. Other transport equipment products form a large part of their exports, leading to more unstable export structures over time.

Transport equipment imports from the EU have increased together with exports in the more advanced CEECs, and today account for 9% of total manufacturing imports in Hungary, up to 19% in Slovenia. Again, Romania and Bulgaria showed much lower shares. Higher absolute imports than exports, however, made the sector a net importer in most CEECs, the only exception being the Hungarian transport equipment sector, which achieved a sectoral trade surplus since 1995.

On the EU market, CEECs transport equipment exports had a market share in total EU (12) imports (excluding intra-EU trade) of 1% in 1989, which increased to 8.5% in 1997. When compared to the CEECs total manufacturing exports, these market shares lay first below and then above the average of 2.8% and 6.9%. On the Austrian market, transport equipment exports from the CEECs were more important and accounted for 14% of Austria’s non-EU transport equipment imports in 1997.

The transport equipment sector is a central target for foreign investors, which in fact, have taken over the automotive production in the CEECs (see below). Reasons for investment in the region were manifold and included favourable labour conditions, export possibilities, growing purchasing power on the domestic market and investment incentives. Foreign penetration is therefore very high in all CEECs, except in Bulgaria and Romania.
Future prospects for the transport equipment sector differ between countries and between industries. Based on GDP forecasts and 1999 car sales, future trends are the best for Hungary, followed by Poland and Slovenia, while they are less bright for the Czech and Slovak Republics and relatively volatile for Bulgaria and Romania. While in the automotive industry future prospects are quite bright and foreign investment interest is still unbroken, a lower number of cars per 1000 inhabitants exists than in the West, and a long-term income increase is predicted, the industry labelled other transport equipment is handicapped by the widespread neglect of public transport systems and imminent structural problems.

Part Two of the study presents a more thorough micro-analysis of the transport equipment sector, containing company profiles of selected domestic enterprises and foreign investors in different industries and sub-branches.

Shaped by the CMEA-division of labour during the communist regime and former licence agreements with West European companies, the automotive industry in the Central and Eastern European Countries forms the major part of the transport equipment sector and is booming today. While in Poland it accounts for approximately 70% of the sector’s output, it holds 84% in the Czech Republic and even 97% in Hungary. Foreign investors and their aggressive export strategies have shaped the regional automotive landscape: Germany’s Volkswagen in the Czech and the Slovak Republic, France’s Renault in Slovenia, Italy’s Fiat and South Korea’s Daewoo in Poland and Germany’s Audi or GM/Opel in Hungary, just to mention the most important. Component suppliers often followed. Romania has recently experienced an inflow of foreign investment, while in Bulgaria, the automotive industry is practically non-existent.

The industry entitled other transport equipment on the other hand, is relatively small, accounting for only 3% of total transport equipment output in Hungary, 16% in the Czech Republic and 32% in Poland. It consists of various problematic sub-branches, making losses and accumulating debts, including the shipbuilding industry, railway and tramway locomotives production and the aircraft industry. Privatisation and restructuring of the concerned companies is difficult because of their large numbers of employees and hence expected massive labour shedding with any major realignment. In most countries, foreign investors have stepped in steadily, but were sometimes challenged, especially in the sensitive sub-branch of aircraft manufacturing.
 
 
 

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