he automotive industry is by no means alone in experiencing a shift of high-volume manufacturing investments towards Central and Eastern Europe in recent years. As has been the case with other industries, Western European countries have countered the trend by focusing increasingly on what they have to offer in terms of high value-added skills and innovative technology. But, as skill levels rise internationally, Western Europe's claims to competitive advantage in that area may be under threat. And with environmental concerns forcing a race to push ahead with innovative R&D, and to establish viable alternatives to traditionally powered vehicles, Western Europe will need to promote both its past experience and its ability to adapt to change if it is to hold its ground in the sector.
   The automotive industry plays a vital role in the European economy. It provides work to more than two million Europeans and supports another 10 million jobs indirectly. The industry accounts for approximately three percent of the EU GDP, and contributes around €80 billion (US$126 billion) to exports. It is also the largest private R&D investor in Europe, with over €20 billion invested in innovation annually. According to European Automobile Manufacturers Association (ACEA) figures, Europe is the world's largest motor vehicle producing region. In total, there are more than 250 automobile manufacturing plants in Europe. These sites produce more than 18.5 million vehicles annually – over 32 per cent of the world's passenger cars.
   What these figures don't reflect, however, is that an increasing number of investments are going into Central and Eastern, rather than Western, Europe. Strong growth in vehicle demand in Central European – and particularly Eastern European – countries has been drawing in investors. At the same time, CEE is still considered a low-cost investment region. The combination of these factors, plus the 'EU effect' – which has seen sharp rises in FDI in countries like Bulgaria and Romania immediately prior to their admission to the EU – has led to increasing numbers of automotive investments, particularly in volume manufacturing, heading eastwards.    Already in 2008, South Korea's Hyundai Motor Co. has announced it is to build a $100-million spare-parts plant in Russia, in addition to a previously announced $400-million car plant in St. Petersburg. French manufacturer PSA Peugeot Citroën has also announced plans to build its first factory in Russia. The new plant in Kaluga will begin assembling mid-sized vehicles in 2010. This region was also chosen by Volkswagen's Czech subsidiary Skoda for a new $547-million plant to open in 2009. These large-scale investments have been announced just as Toyota has opened a $202.4-million plant in St. Petersburg, which is expected to have capacity of 50,000 units within two years, possibly rising to 300,000 vehicles with the construction of a second plant in the area.
   The automotive components sector has mirrored this shift. Figures from Ernst & Young's European Investment Monitor, for instance, show that, in 2000, Poland received five greenfield inward investment projects in this sector, but that this figure spiraled to 17 in 2005.
   Western Europe isn't losing out on all the major investments, however. In March 2008, Toyota Motor announced an investment of $175.53 million to make a new 1.3-liter small engine at one of its U.K. plants in Deeside. Also this year, Japanese car maker Honda announced that it is to invest £80 million (US$159 million) in new production facilities at its plant in Swindon. The investment will be in new production facilities to manufacture plastic car parts and metal castings for engines. Nissan is also to recruit 800 additional manufacturing staff for its plant in Sunderland, while Germany's BMW is increasing output of the British-built MINI, creating up to 450 additional jobs.
   Western Europe continues to win projects like these because it can counter the low-cost, high-demand attractions of its Eastern neighbors by offering a highly skilled work force, as well as a breadth of experience in the sector.
   Roel Spee, global leader of IBM's PLI-Global Location Strategies practice, says that despite the growing technical skills in the East, "Western Europe still has an advantage, especially because of the broader skills base." The presence of existing operations is also vital. "There's a lot of news in recent years about downsizing or closure of manufacturing facilities in the Western automotive industry," says Spee. "But, when a company has to choose where to locate a new production line for a new model for instance, then their existing operations are still options for them, and so very often it makes sense for them to expand an existing operation in Western Europe. An existing facility may be able to quickly provide the new capacity needed for a new model, and this is also an advantage, despite any higher operational costs that there might be. There can also be less implementation risk, and less investment cost."
   Peter Lemagnen, managing director of Oxford Intelligence, a business research company specializing in FDI issues, points out that with changes in the market, and in the customer/supplier relationship, those companies that will succeed will be those that can adapt to a fragmented market where customers are demanding more personalized vehicles.
   "Manufacturers will have to have flexibility in what they can produce from any one production line, and volume low-cost manufacturing won't necessarily be what's needed. The optimization of that sort of production will be key, as manufacturers are increasingly almost building to order."
     Western Europe is not only seen as offering traditional skills and expertise in automotive manufacturing, but also as a center of innovation, offering high-quality, cutting-edge R&D, design and expertise in new technologies.
   A report by Oxford Intelligence on the automotive sector identified the key areas of engineering technology where the most change is expected over the next few years: electronics, software and telematics; environmental issues including emissions and recycling; alternative fuels, efficiency and hybrid vehicles; stronger, lighter materials/materials technology; and more efficient and more flexible production processes.
   Western Europe is already taking a lead in many of these areas. Lemagnen points out that, in the face of stiff regulatory requirements and pressure on consumers to drive more environmentally friendly cars, companies in Europe have been working on alternative fuel technologies, advanced and lightweight materials and recyclability, for some time.
   "Environmental policy in the West is leading car companies to address the question of the materials they are using, which in turn has an impact on the manufacturing plants they are using. The supply chain base – in terms of the technologies required – is much more based in Western Europe. It doesn't actually exist in the East at the moment, although this will, of course, change over time."
   The efforts being made in these areas can be seen in the increasing number of collaborations in technology transfer, such as the JVs between Fiat and GM in powertrain and purchasing, and between Ford and ZF for transmission technology.
   Germany's BMW is currently testing cars run on hydrogen, while a consortium led by U.K. niche sportscar firm Morgan has developed a prototype car run on a very small fuel cell with a range of 200 miles (322 km.). Saab, meanwhile, is developing a flex-fuel model that can operate both on super SP95 and bioethanol E85. The PSA Group has also committed to develop vehicles in Europe that will be powered by superethanol E85, and Renault expects 50 per cent of its production to run on a mixture of petrol and ethanol in 2009. Meanwhile, the U.K. has welcomed recent electric-car facility investments from The Tanfield Group's Smith Electric Vehicle company, as well as U.S.-based Tesla Motors.    But Western Europe cannot be complacent about its ability to win investments in these areas. Roel Spee notes that, while Central and Eastern Europe have long been renowned for their technical and engineering skills, they aren't only attracting high-volume manufacturing projects, but are also now winning investments in development areas. He points to Renault's recent investments in increasing engineering operations in Romania. "It's a strong signal that there is confidence that the skills are really up to standard."
   However, he says, "Western Europe will continue to be competitive for automotive R&D and engineering activities, particularly because of its established skills base. These skills will develop more and more in Eastern Europe, but there will be a more level playing field in terms of cost for these high-value activities than for assembly and manufacturing, as the highly skilled engineers in the East quickly become more expensive. Low cost will not necessarily be the determining factor. Companies seeking to locate their high skilled R&D functions will primarily look to where the talent is."
   But what is certain to keep projects in the West, at least for the time being, says Peter Lemagnen, "is the level of technology – environmental technology, materials technology – that is required to meet the ongoing legislative pressures. As more and more countries join the EU, new members will be forced to meet those standards, but they don't necessarily have the imperative to do so right now. To have access to the supply chain that those pressures demand will mean that it will continue to be a benefit to be in Western Europe for some time to come."

   – Jonathan Sayers and Alison Semple are editors at Oxford Intelligence, on the Web at www.oxint.com.