Coronavirus: Central European focus on cars backfires | Business | Economic and financial news from a German point of view | DW

Some estimates suggest that the chip shortage could cost the global auto industry around 200 billion euros ($ 229 billion) in 2021 alone. Customers face a long wait to get their hands on a new car. and at skyrocketing prices. But the fallout should be felt more severely in central Europe.

Czech auto production will fall 13% this year to around 1 million vehicles, according to the Automobile Industry Association (Autosap). The country’s major automakers have been forced to cut production or even shut down altogether in recent months as stocks fill up with cars without functioning controls and radios.

Slovak factories have also experienced shutdowns. The Slovak Automobile Industry Association (ZAP) says that after an 11% drop in 2020, production will not return to pre-pandemic levels this year.

“This is a classic example of an external shock and heavily auto-dependent economies like Slovakia and the Czech Republic suffer from their lack of diversification,” Richard Grieveson of the Institute of Studies told DW. Vienna International Economics (wiiw).

The output of major central European automakers fell 20% from January to August, according to London-based risk consultancy Capital Economics, which warns that “the situation will get worse before it gets better”. They predict that the chip shortage will reduce GDP by 0.6 percentage points this year, and possibly 1.2 percentage points in 2022.

Size matters

This is very bad news for heavily dependent economies which are already watching pandemic recoveries recede.

The automotive industry accounts for around 9% of Czech GDP. Putting the blame squarely on “the problems of the auto industry”, economists at Komercni Bank recently lowered their forecast for the 2021 economic expansion from over 4% to just 1.9%, a small increase compared to a 5.8% contraction due to the pandemic in 2020.

Slovakia is expected to be hit even harder as its four auto factories – Jaguar Range Rover, Kia, PSA Peugeot Citroën and Volkswagen – make it the world’s largest car maker per capita. The country of 5 million produced more than a million cars in 2019.

Jaguar Range Rover warned on Nov. 1 that “global semiconductor supply shortages continued to constrain sales volumes and revenues” in the third quarter.

With the automobile responsible for 13% of GDP, almost half of industrial production and 46% of exports, the National Bank of Slovakia (NBS) recently carried out a “significant downward revision” of its growth forecasts. of GDP for 2021 to 3.5%.

It is no coincidence that Poland is far more resistant to the chip storm. The International Monetary Fund even raised its forecast for GDP growth last month to 5.1%, chip or no chip.

“Specialization can be an asset,” says colleague and automotive industry specialist Doris Hanzl-Weiss. “It can help attract FDI. But it can be a threat if problems arise.”

Endless in view of supply chain bottlenecks, industry diversification seems to be the solution

Cheap labor and infrastructure

Czechia and Slovakia have been chasing good things since they started tempting the global auto giants and their suppliers with skilled, cheap labor and good infrastructure in the wake of communism. The way their small economies were opened up during the transition made the dominance of the automobile almost inevitable, some suggest.

The strategy allowed them to make rapid progress in catching up with countries further west, as huge investments set up brilliant high-tech factories and huge supplier networks.

The Polish transformation has been a bit slower, and although it also has a significant automobile industry, its factories also produce white goods and furniture. Services are the most important sector.

It’s also a lot to do with the size. Poland’s 38 million inhabitants mean that foreign investors are not only building export-oriented factories, but also targeting domestic consumers. “It has created a more diverse economy, which is a huge advantage in the current situation,” Grieveson noted.

“The extreme openness and relatively small size of the Czech Republic and Slovakia expose these economies to external shocks and shifts in global demand,” said Lucia Mytna Kurekova, senior economist at the Slovak Governance Institute.

red flag

It is hoped that chips will start to exit Asian factories more easily by mid-2022. But some suggest that the difficulties should be seen as a warning of larger problems threatening the smaller and more open economies of central Europe.

Exports, which account for over 80% of Czech and Slovak GDP, fell alarmingly during the chip crisis. Skoda ships 5% of the country’s total exports. “When Volkswagen sneezes the whole country gets the flu,” Mytna Kurekova said.

But resolving supply chain bottlenecks may not necessarily restore the pair’s usual trade surpluses. Instead, analysts point to a growing list of challenges that include the deteriorating global business environment, demographics, environmental concerns, and automation.

“The components crisis exposes countries that are highly dependent on exports. Global trade is becoming more difficult due to considerations such as nationalism and the pandemic,” Grieveson said. “The transition to electric vehicles is another huge issue they are facing.”

These trends will only increase the pressure for countries like the Czech Republic and Slovakia to adjust the economic model they have so enthusiastically pursued since the collapse of communism.

The same old story

Based on the sale of skilled labor to foreign investors, the model has needed updating for years. The couple’s advantage in terms of labor costs is fading as frustration has set in among the local populations who still earn much less than the Germans or Austrians.

The key is to alleviate the need for bolting cars and increase their share of high value-added operations such as R&D, marketing and services. But these are hard results to achieve, building on a long and complex education reform and programs to support innovation, entrepreneurship and digitization.

The region’s political leaders are reluctant to abandon a model that has served their economies so well. The announcement of significant foreign investment offers a much better political return than reforms that will take many years to produce results that are difficult to quantify, critics say.

The Czech auto industry, for example, complains that despite the upcoming transformation, it cannot get the government to take the transition to electric vehicles seriously.

The OECD warns, however, that Slovakia has no choice but to go beyond its current low value-added model if it is to support economic progress. The recovery from the pandemic, he adds, offers Czechia “an opportunity to focus on investments improving productivity and better targeting of support for R&D”.

But the message still does not get across quickly enough, according to economists. And they don’t seem to believe that the warning provided by the chip shortage will do much to hasten it.

“Politically, they tend to see automotive specialization as an advantage, not a risk,” Mytna Kurekova said. “Auto investing keeps coming and we still tell investors the same story as 20 years ago. There is very little serious discussion about alternative models.”

Edited by: Hardy Graupner

Comments are closed.