Romania’s automotive industry symbolizes the transition to
low-budget cars. A new dimension of low-budget cars.
Romania symbolizes the transition to a new dimension of low-budget cars under 7,000 euro. The Dacia Logan together with its derivate the Sandero hatchback, produced by Renault in Pitesti, are the cheapest cars in Europe.
By its focus on this market, the Romanian automotive industry is in the comfortable position of having the right product to aim at two growing target segments: the unsaturated emerging markets and the growing WE client group with a preference for affordable cars.
The domestic component industry is (like the Russian structure) highly vertically integrated. Beyond that, international parts makers locate in Romania for the cost advantages for labor-intensive work and for the investment-friendly tax breaks.
Romania’s parts makers segment is mostly dominated by Continental, Michelin, Takata-Petri and Dacia. Romania seems to be the most viable location for parts makers, thanks to its geographical location and highly qualified employees (due to the proximity of technical universities).
Figure 27: Sales and production (in units) compared between 2008 and 2012
Figure 28: Light vehicle sales and production compared (in units), 2006–09
Market demand
The country has 22.2 million people, and is one of the larger CEE countries in terms of the population. Moreover, the rate of car ownership is one of the lowest in CEE — with 247 cars per 1,000 people — thus demand for cars has been boosted by an enduring scrappage program, good credit availability and an economically good growth performance.
In 2007, the peak of new car sales was reached with 315,621 units but came under pressure in the following year, when it reached only 270,901 units. Used car sales grew rapidly after the Government imposed an environmentally friendly fee on car imports in July 2008. Overall, more than 50% of the Romanian vehicle population does not conform to the European emission standards.
Automotive player
The liaison between Renault and the Romanian brand Dacia started in the 1960s. First established as supplier factory for truck maker Roman, the plant in Pitesti was converted into a production base for the Dacia model, enabled through a Renault license. Since 1999, activities have been upgraded and the plant modernized due to the majority takeover by Renault.
The assimilation became a success story in 2004 when Dacia Logan and variants went into production. Today, Renault produces by far the largest portion of passenger cars in Romania. The budget car concept is tremendously successful and more and more vehicle producers have tried to adopt the idea.
Renault also started the buildup of its largest R&D center outside France in Titu, to further develop automotive concepts for emerging markets. The company’s representatives stressed that they have the full support of the Romanian authorities and expect subsidies from the Romanian state. Thus, Romania became a strategic base for Renault’s international expansion plans.
Ford acquired a majority stake in Automobile Craiova in 2008, the former Daewoo-owned production unit, in order to solve its European capacity problems. The US firm invested in an upgrade of the facility and the production of the Ford Transit Connect started in September 2009. The light commercial vehicle will be followed in 2010 by a new model with the working title “B-Max,” a small passenger car.
Figure 29: Light vehicle sales by brand (in units), 2007 and 2009
Figure 30: Light vehicle production by brand (in units), 2007 and 2009
German automotive component supplier Continental has a broad presence in Romania, both through its ContiTech subsidiary and a Continental-branded tire plant. ContiTech Romania produces drive belts at a 6 million euro plant in Timisoara. The Continental tire plant is also based in Timisoara. The company has a daily production capacity of 24,000 tires.
Truck producer Roman, located in the Braşov region, has struggled with potential insolvency for several years, with a privatization attempt in 2003 failing to revive its fortunes. Malaysian commercial vehicle manufacturer Pesaka Astana acquired a majority stake in the company in order to establish an industrial park on the ground of the Roman factory. Thus, truck production of Roman will be reduced.
In the downturn
Romania’s international automotive production base has been hit hard by the global credit crunch, with rising unemployment and a slump in consumer confidence. This has caused a tremendous increase in second-hand car sales, as limited access to credit prevents customers from buying new vehicles. Car sales dropped over 50% in 2009.
Before 2008, Romania had been the fastest-growing automotive market among the new EU members in CEE in vehicle sales. For the past few years the Romanian Government had been trying to stimulate new car sales with the aid of a scrappage program, and this was successful until 2008.
To support the domestic automotive industry, the Government is very interested in pleasing the country’s two essential vehicle manufacturers Renault and Ford with incentives and credits. At the end of 2008, Renault and major suppliers gained financial support from the state and a loan commitment from the EIB. Still, Renault has cut the investment sum for its location in Romania, which is partly intended for the development of the Dacia Logan SUV.
Newcomer Ford also gains state aid until 2012. Moreover, the Government has guaranteed loans from the EIB in order to support Ford with its new investment in Romania. The Government itself is trying to secure another loan from international facilities such as the EU and the IMF as the country fights large deficits in the state budget and balance of payments.
Several automotive players continue with their investment plans, based on their long-term strategies:
Renault boosted annual production capacity at Pitesti from 350,000 units in 2008 to 400,000 units in 2009 and aimed to build another 400,000 complete knock down kits (CKD)* for assembly in Brazil, Colombia, India, Iran, Morocco, Russia and South Africa.
Three new Logan models have been added to the range by the end of 2009. The increase in production volumes at Pitesti, along with a move to increase local content from 65% to 80% within two years, will lead to a large increase in demand from local automotive suppliers. According to Dacia, suppliers will open up more than 20 plants to cope with the increased capacity at Pitesti.
Chery Automobile intends to develop markets outside China. Hence the company plans to import passenger cars into Romania and invest in a local sales network. The Chinese car manufacturer already had ambitions for Romania in 2007, when it bid for the Daewoo plant in Craiova. However, Ford finally acquired that plant.
Automotive supplier Takata-Petri has moved production of steering wheels for Mercedes-Benz and Honda to Arad, after closing the plant in Walbrzych, Poland, at the end of August 2009. Over the last four years, Takata’s Romanian business has recorded a steady two-digit rise. According to Takata representatives, the decision to move production from Poland to Romania was made as part of a global operations restructuring program.
INA Schaeffler completed an investment in Braşov in 2009, and Honsel is sticking to its plan to invest in a production plant for aluminum casting in Slatina. The supplier Preh started to establish a facility in Braşov in September 2009.
Preh’s stated reasons are the inexpensive Romanian cost structure and Brasov’s tradition as an industry and university base. Chinese tractor producer HOYO will start to assemble tractors, in Rásnov, which is in Brasov county (northwest of Bucharest).
Risks and opportunities
Risks
Bureaucracy and slow reform activities
- At the administrative level, various processes, formalities and certifications are still considered too bureaucratic.
- The practical interpretation and application of the fiscal legislation may lead to contradictory solutions, although, in this respect, significant changes in legislation have taken place during the last years. Corruption is a problem as well.
General lack of infrastructure, requiring strong commitment from the Government
- The current condition of roads is poor, as 65% of Romania’s total infrastructure is in need of improvement. This is why most business activities focus on Bucharest, since most of the weak infrastructure is outside of the capital. The lack of significant infrastructure investment is a major impediment to economic development. But modernization up to EU standards has become one of the main national priorities.
- Three main highways are currently under construction, crossing the country from east to west, and are expected to be finished between 2010 and 2013. Due to its inadequate infrastructure, Romania lost a potential Daimler investment to Hungary.
Opportunities
Investment conditions
- Romania’s fiscal legislation has been reformed both to fit EU rules and to become more attractive to investors who increasingly view Romania as a good place to invest.
- Romania offers flexible time schedules and advantageous tax incentives. Since the beginning of 2009, the tax on dividends distributed within the EU has decreased from 16% to 10%. However, taxes have been abolished on reinvested profit in the second quarter of 2009.
- Low labor cost is the main reason for most investors to settle in Romania. Its labor costs are still lower than in Czech Republic, Hungary, Slovakia and Poland.
- The country has a large manufacturing base and has historically been less focused on agriculture than have some other Eastern European countries. Romania employed more than 100,000 workers in the automotive sector, though many lost their jobs during the transition to a market economy. Many of these workers are now employed by the foreign automotive companies that entered the country in recent years.
- Investors can expect difficulties in finding skilled labor due to a significant concentration of industrial operations in big industrial areas.
Large economy and favorable geographical location
- Romania’s attractiveness as a destination for FDI is often attributed to the large domestic market with a population of 22.2 million and its geographical location as a connection between the Black, Caspian and Mediterranean Seas.
- In 2006, GDP growth was 7.8%, one of the highest rates in Europe, and even in 2008 still reached 7.1%. A downward trend occurred in 2009, but a slow recovery is expected from 2010 on.
*A vehicle that is stripped fully disassembled to foreign subsidiaries in order to reduce freight charges.
