INDUSTRY ANALYSIS "Motor Vehicle Parts and Equipment Manufacture"

CARDS 2002 Project
Development of Investment and Business Climate in Croatia







INDUSTRY ANALYSIS



“Motor Vehicle
Parts and Equipment Manufacture”























The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

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2
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
CONTENTS:


Foreword _____________________________________________3
1. Introduction ________________________________________5
2. Industry Definition, Segments and Boundaries _________ 8
2.1. Definition of Industry Products - Segmentation _______ 8
2.2. Market Size __________________________________11
2.3. Labour supply_________________________________15
3. Porter's Model ____________________________________ 18
3.1. Industry Rivalry Analysis _______________________19
3.2. Market Permeability - Entry Barriers_______________21
3.3. Threat of Substitute Products _____________________23
3.4. Bargaining Power of Suppliers ___________________24
3.5. Bargaining Power of Buyers _____________________26
4. SWOT analysis ____________________________________ 30
5. The industry life cycle ______________________________ 34
6. Competitiveness assessment – peer group ______________ 36
7. Conclusion________________________________________ 37








The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

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3
CARDS 2002 Project
Development of Investment and Business Climate in Croatia


Foreword

In last several decades, we have witnessed numerous changes in car
industry, of which globalisation of production is certainly the most
important one. For example, in the observed period there has been
intensive trend of migration of important production plants from former
traditional car producing countries, such as Western European countries,
to transition and Asian countries. Growing competition among car
manufacturers worldwide and continuous pressure for reduction of
production costs have the strongest impact on intensification of
globalisation of car production in recent years. So, in last 15 years,
countries in the Central and Eastern Europe, during transition process,
recorded high level of foreign investments in car production, mainly in
green-field projects. At the beginning of last decade, the first foreign
investments in car industry were noticed in Hungary and Czech Republic
and during several last years Slovakia is recognised as the country with
the highest level of foreign investments in car production. In addition to
lower labour costs, the state measures directed to attraction of foreign
investments, such as tax concessions, financial support and construction
of infrastructure also had favourable impact on decision of international
companies to move parts of its production into transition countries. In
addition to capital inflow in the form of direct foreign investments as one
of the preferable methods of funding of balance-of-payment deficit,
positive impacts on domestic economies were far more complex and
significant. As investments were made mainly in green-field projects,
these investments opened many new workplaces contributing positively
to reduction of high unemployment rate in majority of transition
countries. Also, since car producing companies owned by foreign
companies engaged large number of local companies as subcontractors,
foreign investments had significant indirect influence on increase of




The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

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4
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
employment as well. The mentioned investments were directed mainly to
export oriented production that generated strong growth of commodity
export and balanced international commodity exchange of the countries
– recipients of foreign investments. For example, in recent years some
transition countries had trade surplus owing to, among other things,
strong export of cars.

However, during the observed period, in Croatia there were no
significant green-field investment in production of cars and car parts.
Reasons are, in the first place, considerably more expensive labour force
in that time but also the lack of proactive policy of attraction of foreign
investment in the mentioned branch of industry. As the latest research
show that the most of added value in car industry is generated exactly in
production of spare parts and supporting operations, such as research
and development, and only smaller part is generated in car assembly,
our analysis is focused on the segment of production of car parts and
accessories. In spite of past low level of realised foreign investments in
the said branch of industry, our opinion is that there is certain potential
to achieve growth of such investments in Croatia in the medium term.
Our optimism is based, first of all, on comparable advantages of
Croatia, such as highly quality and educated labour force, short distance
to markets and car production plants in countries of Western and Central
Europe and on positive examples of several local companies that
achieved complete integration into international chain of part suppliers
for world well-known car producers. In addition, anticipated further
growth of car production capacities in the world suggests that significant
foreign investments could be expected in the car industry.







The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

5
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
1. Introduction

Based on the Classification of Economic Activities in the European
The industry of
Community (NACE), the industry of manufacture of parts and equipment
manufacture of parts
for motor vehicles and engines (NACE 34.3) is placed within the
and equipment for
industry of motor vehicles, trailers and semi-trailers manufacture (NACE
motor vehicles and
34), which is part of the group of activities related to manufacture of
engines is part of the
transport vehicles (NACE DM).
group of activities

related to manufacture
According to the latest data available, during the year 2004 the
of transport vehicles …
transport vehicle manufacture industry generated a Gross Value Added
(GVA) of EUR 450 million, which covers only 2% of Croatia's total GVA.
At the same time, the industry employed approx. 23,000 people, which
is around 1.8% of the total people employed in Croatia.

Table 1: GVA, number of employees and productivity in the transport
vehicle manufacture industry (NACE DM)

Source: wiiw, calculated by author

Combined revenues earned during the year 2004 by the companies
registered in Croatia, whose main activity is manufacture of motor
vehicles, trailers and semi-trailers (NACE 34), totalled HRK 1.55 billion,
while they employed a total of 3,132 people. At the same time,
companies with more than 10 employees and registered under the
NACE 34 generated combined sales revenue of HRK 862 million.




The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

6
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
Expenditures for primary materials amounted to HRK 455 million, while
those for other intermediary goods amounted to approx. HRK 131
million. The abovementioned data lead to a conclusion that the
companies in question generated a gross value added of HRK 387
million during 2004. Approximately 70% of material consumed in the
production of vehicles and trailers was supplied form foreign markets,
which indicates a strong import dependence of this industry.
In analyzing the 2004 total revenues structure for the industry of motor
vehicles, trailers and semi-trailers manufacture, it is evident that 77.2% of
77.2% of the total
the total revenues were generated by companies dealing in motor
revenues for the
industry of motor
vehicle parts and equipment manufacture (NACE 34.3). Companies
vehicles were
dealing exclusively in motor vehicles manufacture (NACE 34.1) earned
generated by
companies dealing in
only 12.2% of the total revenues, amounting to HRK 188 million. The
motor vehicle parts …
revenues earned by companies manufacturing vehicle bodies, trailers
and semi-trailers (NACE 34.2) were even lower, amounting to only HRK
165 million, or 10.7% of the total revenues in the industry.

Figure 1: Structure of total revenues in motor vehicles, trailers and semi-
trailers manufacture (NCEA 34)

12%
11%
77%
Motor vehicles manufacture

Bodies, trailers and semi-trailers manufacture

Motor vehicle parts and equipment manufacture


Source: FINA, Croatian Chamber of Economy





The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

7
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
There is a similar distribution in the structure of workforce employed,
There is a similar
whereby the industry of motor vehicle parts and equipment manufacture
distribution in the
structure of
employed almost 75% of all workforce employed within motor vehicles,
workforce
employed…
trailers and semi-trailers manufacture in 2004. Slightly less than 20% or
approx. 570 workers were employed in motor vehicles manufacture,
while only 240 people, approx. 8%, worked in manufacture of vehicle
bodies and various types of trailers.

Figure 2: Structure of workforce employed in motor vehicles, trailers and
semi-trailers manufacture (NCEA 34)
18%
8%
74%
Motor vehicles manufacture
Bodies, trailers and semi-trailers manufacture
Motor vehicle parts and equipment manufacture
Source: FINA, Croatian Chamber of Economy

During the year 2004, the motor vehicles and trailers industry imported
EUR 1.314 million worth of products, which amounted to almost 10% of
During the year
2004, the motor
the total imports. Such high level of imports within the industry was
vehicles and
trailers industry
mostly generated by import of automobiles, which have been seeing
imported EUR
significant increase in sales during the last five years, bringing the total
1.376 million
worth of
to more than 70,000 new vehicles sold in 2004. Import of used vehicles
products…
from EU countries has also been making significant impact lately. For the
same period, the export of these products amounted to a mere EUR 116
million, most of which was covered by export of parts for the automobile
industry.




The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

8
CARDS 2002 Project
Development of Investment and Business Climate in Croatia

Table 2: Foreign trade, 2004.

Source: Central Bureau of Statistics, Croatian National Bank, calculated by author

Since the commencement of foreign investment in Croatia, i.e. from
From 1993 to the end
1993 to the end of 2002, the industry of motor vehicles and trailers
of 2002, the industry
saw a total of slightly
manufacture saw a total of slightly over USD 11 million worth of foreign
over USD 11 million of
FDI…
investment, although invested in no more than five companies.



2. Industry Definition,
Segments and Boundaries


2.1. Definition of Industry Products -
Segmentation

The automobile parts
production may be
Based on the situation on the market, i.e. the relations between buyers
divided into the so-
and suppliers, as well as the ways of entering the market, the automobile
called “first-tier
production” and
parts production may be divided into the so-called “first mounting
“second-tier
production”….
production” and “production of spare parts”.

The “first mounting production” is a direct business arrangement
between the automobile manufacturers and buyers, without any
“First-tier production”
participation of wholesalers or other agents. Auto manufacturers give
can be divided into
their suppliers exact specifications as to the quantity, type, dimensions
first-tier and second-tier
suppliers…
and material for the products to be supplied. Also, auto parts suppliers




The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

9
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
are often suggested to choose certain suppliers of material to be used in
their production. At the same time, the production system is under a
constant supervision by auto manufacturers, and so are the financial
business results. “First mounting production” can be divided into first-tier
and second-tier suppliers. First-tier suppliers mostly have direct long-term
arrangements with auto manufacturers or are involved in joint ventures.
Also, such suppliers meet all the relevant international standards, as well
as manufacturer-specific standards, and have already undergone long-
lasting quality and production system tests by their customers. First-tier
suppliers have lately been increasingly involved in the vehicle
development stage.

The so-called second-tier suppliers' business arrangements with auto
manufacturers or first-tier suppliers are generally more short-term-based,
and such suppliers are still in the process of monitoring production
systems and acquiring all the necessary certificates. Also, second-tier
suppliers mostly manufacture only one segment for auto manufacturing.
There has lately been an increasingly evident trend of the so-called
synchronized production, whereby parts are manufactured precisely
based on the current needs of the factory, which significantly reduces
storage costs, but increases the importance of suppliers in the production
process.

“Second-tier
“Production of spare parts” can be divided into original parts production
production” is the
production of spare
and “no name” parts production.
parts for
automobiles…

The first type is quite similar to “first mounting production” as regards the
ways of entering the market and manufacturing, and it also involves
direct business arrangements with auto manufacturers, who buy the
products and distribute them further on through their dealers to end-




The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

---

10
CARDS 2002 Project
Development of Investment and Business Climate in Croatia
buyers. The production of original spare parts is nevertheless subject to
strict norms and standards as specified by auto manufacturers.
“No name” spare parts are manufactured without auto manufacturers'
licences. Such products are distributed the same way as consumer
goods, i.e. through networks of wholesalers and retailers. Due to the
characteristics mentioned, price competitiveness bears the greatest
importance here, and since the production process is not subject to a
complex certification procedure, there are more manufacturers and thus
more competition. The production of “no name” spare parts is a segment
that generates the least value added in the auto industry. Currently, the
production of “no name” spare parts still covers a significant portion of
the total auto parts production in Croatia.

Figure 3: Auto parts production structure
Auto parts production
“First- mounting”
production
“First-tier” suppliers
“Second-tier suppliers”
Spare parts production
Original spare parts
“No name” spare
parts








The Project is financed by
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
the European Union.
Markets Groups.

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