05 July 2007

Rebuilding a sector, piece by piece

By Eric Jansson
Published by Financial Times, 5 July 2007

When Johnson Controls, a big manufacturer of car interior systems, went looking for its newest production site for high-end electronic components, the Republic of Macedonia was not the obvious answer.

The former Yugoslav automotive industry crashed decades ago, and with it the southern republic's role as a components supplier.

Moreover, the US manufacturer bases its European operations almost 2,000km away, in the industrial heartland of Germany's Rhine-Ruhr region.

But Europe's car industry is rapidly shifting east, where producers benefit from cheaper labour costs and spare industrial capacity. Johnson Controls, whose European turnover reached $8.8bn last year, is no exception.

Slovakia midway bet-ween Germany and Macedonia has become the prime beneficiary of this shift. Volkwagen opened production there in 1991, and Kia Motors and PSA Peugeot followed last year.

Yet increasingly, capacity in Slovakia is sapped. As component makers rush to supply the new production lines, their operations spill over into other eastern European countries and also beyond the manufacturing centres of Poland, Hungary and the Czech Republic.

For two years, Johnson Controls struggled to identify a new site where production could be linked to a research and development centre it recently opened in Bulgaria. "It was not easy to find a location where such high-end products can be produced, offering the right infrastructures, as well as availability from skilled engineers, within reasonable distance of our engineering centre in Sofia," says Philippe Simon, vice-president of operations for Johnson Controls' electronics division.

But Skopje, 200km away from the R&D centre, offered tax breaks in a free economic zone and ready access to skilled engineers through a Johnson Controls-sponsored programme at the University of Skopje.

The result is a big construction site near Skopje's international airport, the first in the previously empty Bunardzik free economic zone. Steel girders rise high above the foundation of what will be a 6,000 sq m workspace for the assembly of printed circuit boards, to be shipped to a Johnson Controls plant in Namestovo, Slovakia.

The $20m total investment is minute, measured against other auto industry investments in eastern Europe. The new operation will start by employing just 150 workers. But after watching the Republic of Macedonia's previous automotive components industry wither in the wake of Yugoslavia's collapse, local companies hope it will spur regeneration.

Indeed, Johnson Controls is counting on a degree of local renewal. Mr Simon says the company, which expects to be importing components at first, intends to cut costs by buying locally supplied plastics by 2010.

The excess capacity is available. Production by the country's existing manufacturers accounts for 16 per cent of gross domestic product, and on average they operate at just 63 per cent of capacity.

Viktor Mizo, head of the Republic of Macedonia's investment promotion agency, says excess capacity and low average wages put the country in an excellent position to capitalise on leading manufacturers' search for new, reliable markets in eastern Europe. Central European economies already suffer from over-investment and outbound labour migration, he argues, while economies further east lack the stability which, in the wake of the Balkan wars, Skopje now claims.

"Some would look to Ukraine, but given the political situation there, you cannot today see a €1.5bn investment going there. If you cannot go east, go south-east," he says.

The automotive industry's next test of Mr Mizo's sales pitch comes later this month, when London-based Johnson Matthey, the speciality chemicals company, takes a decision on a potential €75m investment in the Bunardzik free economic zone.

In March it signed a memorandum of understanding in Skopje for construction of a plant for catalytic converters. Its board will decide on the deal this month.

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