Benchmarking the Automotive Industry in Central & Eastern Europe: Creating and Preserving Value for the Long-term

I N D U ST R I A L M A R K E T S
Benchmarking the Automotive Industry
in Central & Eastern Europe:
Creating and Preserving Value
for the Long-term
K P M G I N C E NT R A L & E AST E R N E U R O P E

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© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Contents
Introduction
4
1
Executive Summary
5
2
Methodology
7
Financial Performance – Determining the
8
3
High Performers
4
Regulation and Compliance
10
5
Risk 17
6
Entering New Markets
29
Generating Value Through Managing
34
7
Performance
8
Conclusion
43
Appendix: Demographic Distribution of
44
9
Survey Participants
10
KPMG Information
46
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Introduction
The automotive sector in Central and Eastern Europe (CEE) has experienced
unprecedented expansion during much of the last decade, enjoying the benefits
of both growth and investment. Without doubt, the global financial and economic
downturn, which has unfolded during the past six months, will have a major
impact on the region. The significant decline in consumer demand for
automobiles is causing manufacturers to scale back production with a
corresponding effect on the supply chain. Manufacturers and suppliers have
already announced job reduction programs in the region and it is likely that this
will continue throughout much of 2009. However, CEE's reputation as a cost-
effective and productive manufacturing location means that the medium-term
outlook is broadly positive and the issue of value remains forefront in the minds
of the region's automotive executives.
Considering the current environment, executives are no doubt focused on
preserving the value they have created over many years during an era of
significant change in one of the world's most dynamic regions. This requires
many tasks, for example conserving and maintaining cash while simultaneously
retaining highly skilled human resources. It also mandates the ability to identify
and manage numerous risks, often originating outside the regions’ borders, yet
landing squarely on the door step of local economies with frightening speed.
But executives are equally concerned with creating value. So while risks
confronting the automotive sector and the region may indeed be increasing,
some players will likely consider industry upheaval an opportunity to find new
platforms for medium- and long-term growth in both profits and revenue.
To assist executives in the region's automotive sector in gaining insights into
value creation and value preservation strategies this survey seeks to benchmark
a sample of automotive sector companies operating in key countries of Central &
Eastern Europe, including the Czech Republic, Hungary, Poland, Romania and
Slovakia against their global manufacturing peers. We benchmarked this sample
both against the automotive sector and again against a wider sample of industrial
manufacturing organizations.
To our readers, we believe, and hope you agree, that the knowledge provided in
our survey is beneficial, whatever your role in the organization or the sector as a
whole. To the executives who participated in the survey our heartfelt thanks for
your time and efforts to assist this endeavor.
Andrew Sutherland
Head of Automotive Sector for KPMG in Central & Eastern Europe
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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CEE Auto Benchmarking Report 5
1 Executive Summary
The emerging markets of Central &
High performing companies – those
Eastern Europe (CEE) are
companies who met our criteria for
sometimes considered undersized
outsized financial performance,
markets, especially relative to the often
representing approximately 5% of
mentioned BRIC countries: Brazil,
companies in the database (please
Russia, India & China. However, when
see our sidebar below: Making the
it comes to the automotive industry,
grade).
the region is increasingly oversized, as
“original equipment manufacturers”
In a global economy where emerging
(OEMs) and suppliers continue
markets and industrialized economies
relocating to the region for a broad
often follow divergent paths, it is
range of factors including the cost and
somewhat of a surprise that one of the
quality of the workforce; its ideal
main themes to emerge from our
location at the nexus between east
survey is the continuing integration of
The Czech Republic, for
and west; as well as an increasingly
the CEE region into the global
example - the country in
favorable tax environment.
economy, and these countries’
the region with the highest
continued convergence with the
But as suppliers and OEMs continue to
developed economies in Western
levels of car ownership -
set up new facilities and new
Europe and the US.
still has less than 80% the
operations – either through green
ownership levels of the UK
fields, acquisitions or joint ventures –
As an overall message we see this is
and Germany, while
the array of management challenges
largely positive, and to some extent the
are increasingly complex. Therefore, in
region is enjoying the best of both
Romania’s ownership is
this survey we have asked automotive
worlds. For example, as with the more
barely 45% of these levels. executives for their key insights into
established EU states in Western Europe,
issues that cause the most concern as
the region and the industry are starting to
well as their approach to solving these
achieve a critical mass of infrastructure
problems.
after almost two decades of extensive
investment. Also, the stability of EU
We have also attempted to go one
membership has substantially reduced
step further. To assist executives in
risks typically associated with emerging
their decision making we have
markets, where a lack of transparency
benchmarked those insights from
around financial, legal and environmental
executives in the region and compared
regulations can cloud a company’s true
their approach to three separate
performance.
groups:
At the same time, these countries are
Global industrial manufacturers – our
also achieving outsized growth as
proprietary database of over 260
markets are still far from saturated.
industrial manufacturing companies
The Czech Republic, for example - the
country in the region with the highest
Global automotive manufacturers – a
levels of car ownership - still has less
subset of our database comprising
than 80% the ownership levels of
over 130 vehicle manufacturers and
the UK and Germany, while Romania’s
component suppliers
ownership is barely 45% of these
levels.
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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6 CEE Auto Benchmarking Report
There are however, several key caveats
Overall, high performing companies
developed markets. This is wreaking
to this generally rosy picture. For
are spending more and applying
greater havoc for automotive
instance the overall growth and
more capacity towards compliance
companies where JIT systems are
profitability profiles are beginning to
issues.
more common place, as companies
match the less-than astounding
are finding it more difficult to
numbers found in mature economies.
The approach of the CEE automotive
accurately forecast demand and
While the majority of survey
sector to regulatory and compliance
therefore efficiently schedule
respondents from the CEE automotive
issues was also very similar to the
production.
sector were able to post double digit
typical global participant in our
revenue growth and profit margins, the
survey in that most companies
In terms of strategic decisions that
financial performance profile of the
tended to integrate compliance into
drive growth, automotive companies
these companies tended to match that
company processes. This differs
in the CEE region differ from their
of participants in the global industry.
however from the approach taken by
global counterparts as they are
high performing companies, who are
relatively more likely to seek growth
Nevertheless some key differences
more likely to add on more
through new markets. Both high
between emerging and mature
resources for compliance issues,
performers and average companies
markets come to light in this survey,
make greater use of third party
preferred to capture new customers
and from which automotive executives
providers, and tailor their approach
in existing markets as a growth
and their organizations can learn key
specifically to each country, rather
strategy. This may be driven by the
lessons. These differences were most
than have a standardized, one-size-
small size and structural elements of
pronounced in the areas of Risk and
fits all solution.
the countries in the region,
Operational Efficiency, as companies in
positioning them as largely export
the region experience inflation, strong
There appear to be stark differences
markets. Also, high performers tend
currencies, rising wages and increased
in how the regional automotive
to enter new markets through
operational and supply chain risk.
companies perceive Risk in several
acquisitions rather then JVs or
key areas, most notably financial
greenfield operations.
Hopefully, executives and their
risk, operational and supply chain
companies can benefit from these
risk, and labor risk. These are very
Preferred corporate structures for
insights when tailoring their strategies
likely driven by conditions on the
companies in the CEE region differ
and executing their plans across all
ground in CEE which include
from their global counterparts in that
realms of the organization including
inflation, strengthening currencies (a
joint ventures appear relatively more
Strategic Development; Risk
danger for exporters), rising wages
popular, and outsourcing operations
Management; Operations & Supply
and an increasingly tight labor
as a way to enter new markets is
Chain; and Regulation & Compliance.
market, particularly for skilled labor.
not a strategy any of the companies
Key highlights of our findings are as
High performers see financial,
in the region pursued. Companies in
follows:
macroeconomic, regulatory, IT, and
the region also appear more hesitant
tax risk to be greater, relative to the
about acquiring brown fields as a
When it comes to spending on key
average CEE company, than risks
market entry strategy. Regional and
regulatory and compliance issues,
such as the supply chain.
global players appear similar,
companies operating in the CEE
however, when it comes to building
region fell very much in line with the
And supply chains, although
green field operations, as this is
global averages across all industries,
increasingly global, are nevertheless
slightly more popular for regional
as well as with the automotive
perceived as fragile. With many
companies than the average global
sector. One difference however, was
small players the market is still
player, although still in-line.
spending on environmental
fragmented, implying that reliability
compliance, which was less for
and quality of supply are not
Auto companies in CEE are facing
regional automotive companies.
necessarily at the levels of the more
rising labor costs at a much higher
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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CEE Auto Benchmarking Report 7
rate compared to the average global
When it comes to sourcing from low
Tax optimization strategies appear to
player in our survey. This issue
cost countries, companies in the
be an area where the automotive
appears to be a double-edged sword
region appear a bit behind the curve
sector in the region is less likely to
for companies as they try to have
relative to their global counterparts,
have fully leveraged potential saving
the best of both emerging and
and are less engaged compared to
opportunities. On balance,
industrialized markets. Unfortunately,
the other peer groups. However they
companies in the region are less
development and stability come at a
are more likely to be considering
likely than their global counterparts
price which in the automotive
sourcing from low cost countries,
to have achieved their optimal tax
industry is clearly a cost squeeze
particularly for raw material and
rate, and at the same time
due to a severe shortage of labor, in
components. This may be a result of
companies are more likely to be
the industry, and rising wages,
rising wages and inflation in the
planning to improve their tax
generally. The good news is the
region as many countries, once
liabilities in the near future. This
region is also posting productivity
considered low cost countries, are
outlook is potentially driven by
gains that are generally trending
increasingly less so, and hence are
already low tax rates and an increase
above inflation, meaning that in real
looking further east for cost savings.
in flat taxes in the region. The
terms wages are actually steady or
Surprisingly, high performers were
exception to this is Hungary where
even declining. The question is
not taking advantage of low cost
personal and social taxes on
whether the automotive sector is
country sourcing options but did
employees are having a negative
enjoying this benefit to the same
appear to be getting advantages
effect for many companies.
extent.
from leveraging their IT infrastructure
and tax planning.
2 Methodology
This report, which focuses on the
study was based on the questionnaire
available data from market research
automotive industry in Central &
used in KPMG’s Global Manufacturing
firms, the media and KPMG
Eastern Europe, is an extension of an
Benchmark Survey, where 269
International were used to assist in
earlier study on global automotive and
interviews were carried out between
evaluating the proprietary data and
industrial product manufacturers. The
late Spring and early Summer 2007.
provide qualitative examples in support
original research for this study includes
of the quantitative analysis. We would
a questionnaire which was answered
Our final analysis and interpretations
also note that our research was
by 25 companies in five countries
are based on the combined data set of
conducted prior to the full scale
within the Central and Eastern Europe
surveys conducted in the region and
unfolding of the financial and economic
region (The Czech Republic, Hungary,
globally. Additionally a select number
downturn of 2008. This is a potentially
Poland, Romania and Slovakia) during a
of supplementary, qualitative
limiting factor to our survey.
six-month period from October 2007 to
interviews were carried by the author
March 2008. The questionnaire used
with regional automotive executives
for the Central & Eastern European
and industry analysts. Finally, publically
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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8 CEE Auto Benchmarking Report
Only about 5% of the companies were able to claim
the mantle of “high performing” in our survey.
To achieve this status companies were required to
report both annual revenue growth and pre-tax profit
margins greater than 15%.
3 Financial Performance –
Determining the High Performers
Making the Grade
that profits in the future are more
Both large and small companies
important than profits from the past or
were represented, with sizes ranging
What constitutes high performance
even today, establishing accurate
from total revenues of just over USD
can be a tricky question. There are
forecasts for the companies in this
200 million, to over USD 20 billion.
many different measures for gauging
survey was beyond the scope of this
The median annual revenue for the
performance and every executive and
study.
high performing per group was
analyst has their preferred method for
between USD 300 and 400 mln.
measuring the health and value of an
Likewise obtaining data about each
organization. Market share, market
company’s past earnings and revenue
All main global geographic regions
capitalization, return on equity, total
was prohibitive, such that we were
were well represented including
assets, and so on are all valid
unable to obtain a reliable indicator for
30% of companies coming from
measures and tell similar stories - so
earnings’ volatility and accurately
Europe; 60% coming from the
how to pick the correct measure?
incorporate risk in any quantifiable way
Americas; and 10% from Asia.
into our measure of a high performing
In the final analysis there tend to be
company.
Automotive companies made up
three measures upon which most
almost one-third of the high
others rest, and which fundamentally
Nevertheless, our criteria were
performers (30%) with industrial
drive underlying asset values for an
stringent enough such that only about
manufactures representing slightly
organization. These are the annual
5% of the companies were able to
more of this peer group (40%), with
growth rate of the firm’s revenues; the
claim the mantle of “high performing”
metals producers (10%) and other
relative profitability of the company, or
in our survey. To achieve this status
industries (20%) making up the
its profit margin; and the sustainability
companies were required to report
remaining share.
of these margins and growth rates
both annual revenue growth and pre-
over time, or its risk profile.
tax profit margins greater than 15%.
Major emerging markets were also
well represented as 50% of the high
In this survey we have chosen to focus
This elite group proved to be quite
performing peer group came from
on the first two elements as the best
diverse, but one that well represented
the BRIC countries (Brazil, Russia,
way to compile a current snap shot of
our sample. Some facts about the
India, and China).
company performance. While realizing
demographic breakdown include:
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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CEE Auto Benchmarking Report 9
Figure 1: In terms of pre-tax profit margins, in approximate terms
what is your company’s current profitability?
100%
90%
80%
70%
60%
All
50%
40%
Industry
30%
High performers
20%
10%
CEE
0%
’
t
i
ve
an
n
10%
15%
25%
25%
r th
Do
used
egat
o
o
o
te
ef
N
eak even
5 t
a
/r
Br
11 t
16 t
Gre
Less than 5%
know
Sources: KPMG International, KPMG in Central and Eastern Europe, 2008
Figure 2: What is your company’s forecasted annual
revenue growth over the next three years?
100%
90%
80%
70%
60%
All
50%
Industry
40%
30%
High performers
20%
10%
CEE
0%
i
l
l
e
t
h
%
i
n
an
5
on’t
ow
10%
15%
20%
th
20%
D
used
decl
arginal
gr
to
o
o
o
re
ef
m
5 t
/r
o/
Up
11 t
16 t
Mo
Revenue w
Zer
know
Sources: KPMG International, KPMG in Central and Eastern Europe, 2008
© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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10 CEE Auto Benchmarking Report
4 Regulation and Compliance
In a post-Enron world, the regulatory burden of management time can impose
and compliance environment for
significant costs in terms of lost
business across the globe is more
opportunities which are impossible to
complex than ever before. Perhaps more
calculate. As one executive at a leading
frightening, is the ever increasing rate of
auto parts manufacturer puts it, “for us,
change of regulation. Take for example
compliance is more an issue of
one European Auto supplier grappling
management discipline than it is a cost
with International Financial Reporting
issue.”3 This appears to be even truer for
Standards (IFRS): “It would not be an
the auto sector in CEE due to the
issue if you didn’t have any changes to
significant strain on resources these
the regime – the problem is there are
companies are experiencing. Virtually all
continual changes”1. And while it’s true
respondents who viewed regulatory
that the impact will vary across different
issues as a significant risk found not
industries and geographies, in many
having enough resources to be a
respects the automotive industry in CEE
significant challenge (please see figure 3).
appears to be feeling the impact, and
“The way I look at it, you
responding, in very similar measure as
Interestingly the high performing
have to spend money now
other automotive and industrial
companies in our survey were more
to save money in the
manufacturers across the globe.
likely to take a different approach and
spend more money than the typical
future. In order to make
The typical response for most
company we interviewed. These
compliance a repeatable
companies in our survey is to integrate
companies were more likely to set up
and sustainable process,
compliance processes into existing
stand alone processes, outsource
companies should
processes. This has largely proven an
compliance activities to third parties
effective method from a cost point of
and use different approaches for
automate as much as they
view. While the costs can be
different countries. While this may
can so that human-related
significant, they are largely
seem counter intuitive, it may be the
costs can drop over
manageable with companies typically
case these companies are more
estimating costs on the order of 1%
forward looking and treating
time.4”
for both financial and environmental
compliance costs as much as an
compliance costs. This appears to be
investment for the future than a one-
good news for the auto sector in CEE.
off cost in the current period.
According to Gartner Group, an
integrated approach is in line with best
According to one analyst, John
practices which suggest that
Haggerty at AMR Research Inc., costs
companies who take individual
incurred now can bring future benefits.
solutions for each regulatory challenge
“The way I look at it, you have to spend
1 KPMG International, Global Manufacturing
can potentially face costs many times
money now to save money in the
Benchmark Survey: How manufacturing
corporations preserve and create value. 2007, p. 12.
over compared to companies who take
future. In order to make compliance a
2
an integrated approach2.
repeatable and sustainable process,
John Bace et al, Understanding the costs of
compliance. Gartner, Inc. 7 July 2006. p. 1.
companies should automate as much as
3 KPMG International, Global Manufacturing
It’s also important to point out that looking
they can so that human-related costs
Benchmark Survey: How manufacturing
at cost alone can be deceiving, as the
can drop over time.4”
corporations preserve and create value. 2007, p 12.
4 John Haggerty, Compliance spending saves
money. AMR Research. 10 March 2006.
http://searchstoragechannel.techtarget.com/generic/
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© 2009 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of
independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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