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The Specter of Detroit

Foreign car factories have boosted western Slovakia, but one-industry regions are famously vulnerable.

by Martin Ehl 29 April 2014

The boxy, multicolored factory buildings positioned along the Vah river in the foothills of Slovakia’s Mala Fatra mountains resemble huge Lego blocks stacked in a meadow. From a distance, from an eternally clogged road that connects Zilina and Martin across the Strecno strait, the Hyundai-Kia factory really looks like a set of children's building blocks. However, from close up, the halls seem almost endless, like the stream of cars leaving the factory.

 

It was truly the arrival of the Korean investor 10 years ago that changed Slovak industry. Even though Volkswagen was expanding its investments in the country and a contract had already been signed to build a Peugeot factory, it was the arrival of the Korean company and its subcontractors that last year made Slovakia the top car producer per capita in Europe. Now Kia is considering expanding the factory to produce 100,000 more cars than the 313,000 that rolled off the line last year.

 

The story of Kia in Slovakia is instructive in the sense that it addressed the most pressing local problem: unemployment in a region where a number of armament companies had gone bankrupt. The average wage in Kia is now 1,150 euros ($1,600) almost 60 percent more than the 726 euro regional average.

 

“The main benefit is the creation of jobs in a region with higher unemployment,” said Vladimir Balaz, an economist at the Slovak Academy of Sciences. Overall, the standard of living is rising in the region and consumption is itself creating new jobs.

 

But Balaz said Korean exclusivity undermines the project’s benefits and makes the region vulnerable to the factory’s shifting fortunes. “Kia brought its own chain of suppliers, and when it leaves, they also leave. No Slovak firm is a direct supplier,” he said.

 

Kia has been a pioneer in several areas. The Korean corporate culture sparked controversy with its collective calisthenics and bowing instead of handshakes. The first case of expropriation of land at the factory site elicited great attention after the owners and the state could not agree on the purchase price. 

 

Now there are three automobile producers in Slovakia and occasionally there is discussion of the arrival of a fourth, BMW. The automobile industry is concentrated in the west, where the reverberations of the economic crisis were felt less. The new factories are more modern than those in Western Europe. Slovaks often produce models that are shipped around the world, some of which are produced only here. For example, there is talk that the Slovak VW factory could produce the luxurious SUV Lamborghini Ursus. Only a few thousand of these cars, which cost $150,000 to $200,000 each, would be produced annually, with the company targeting mainly the Chinese market.

 

The 80,000 Slovaks who work in the automobile business have adopted German precision, the freer regime of the French, and the Korean drill. Last year, they produced about $16 billion euros’ worth of cars, which amounted to a quarter of their country’s exports. But to do so, they had to import 12 billion euros’ worth of components. Slovakia is thus more of an assembly factory than the “Detroit” of Europe.

 

The benefits of automakers on Slovakia’s long-term economic development are debatable. Large companies negotiate all sorts of advantages with the state, about which small- or average-sized firms can only dream. That’s why smaller and middle-sized Slovak businesses do not like them very much. “In the case of Kia, among the main minuses are the large-scale state investment aid, tax relief, and subsidies for the creation of jobs,” Balaz said. “And then combine that with the low-added value [of the work] – no research or development, no innovation, only assembly.”

 

A few months ago, an article in the Sme newspaper compared Slovakia’s development with the collapse of the center of the American automobile industry in Michigan. It warned that Slovak firms could function for a few more decades, but if the education system, for example, does not change or investments are not made in other spheres in the meantime, then mainly western Slovakia could end up like bankrupt Detroit.

 

That, however, is not a problem for the Korean managers in Zilina and its surroundings, but for Slovak politicians and those who elect them. 

Martin Ehl
 
is the foreign editor of the Czech daily 
Hospodarske noviny, where this column originally appeared. He tweets at @MartinCZV4EU.
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