Automotive Industries speaks to Matt Carnogursky, General Manager, IPEC Management Eastern SRL.

More investors today are looking at Romania as an attractive destination. This is particularly true of automotive clients. According to experts, automotive companies come to Romania for two reasons – mainly to produce for the local market and to have a low-cost production base for export. Currently, the local automotive market consists of only two original equipment manufacturers or OEMs – Renault in Pitesti and the Daewoo plant in Craiova.

Both these plants are in south-eastern part of Romania, relatively inaccessible by road from Romania’s western border. “However the growing number of Tier-1 and Tier-2 suppliers, many of them clustered along the western border, from where they can easily reach the OEM’s of Central and Western Europe, create an automotive market in its own right. For example, a cable-harness manufacturer needs suppliers of automotive wire and connectors. A supplier of fuel injectors or transmission gears needs special heat treatment of metal parts. And almost everybody needs metal stamping and/or plastic injection molding. Importantly, whether you produce relatively simple fuel lines or complex sun-roof systems you need a good supply of affordable and stable labor. Just 2-3 years ago the supply of labor was very good while the supporting technologies were scarce. Now the technologies are moving in at the expense of the available labor. But there is lots of labor in this country of 22 million – but sometimes you have to look more carefully,” said Matt Carnogursky, general manager, IPEC Management Eastern SRL in an earlier interview to AI.

The Romanian operation of IPEC Group helps companies investing in the country. The company’s core competences include location search and analysis, acquisition of private or public land according to customer specifications, providing full design or bringing customers’ existing designs into compliance with Romanian regulations, finding qualified contractors for the construction work, managing the entire construction project, and, importantly, enforcing the highest standards of ethics and financial transparency of the entire process. The two basic operating modes of IPEC Group are project management and leasing of built-to-suit or multi-tenant production plants.

“Purely by observing some of our customers settling and expanding in the country I see the rather obvious success story of labor-intensive manufacturers such as Delphi and Yazaki. While Delphi’s US parent is making Chapter 11 headlines, its Romanian subsidiary is looking very strong and growing. Delphi, as far as I can see, is a stereotypical pioneer who is able to successfully stake out virgin areas with ample supply of inexpensive labor and set up shop at these locations. The second category of manufacturers bets not only on inexpensive labor but also on lower-cost high-tech production and even R&D. I believe that Hella Electronics SRL, a relatively new operation in Romania, as well as Siemens VDO are examples of such strategy,” said Carnogursky.

Romania’s membership to the European Union makes it a relatively safe bet for investors. And costs are still lower than in other European countries. However, recently, land prices in Romania have been going up. And there are problems finding managers who have the right experience – people with IT experience command world-class salaries in Romania. The IPEC Group has been closely tracking the trends, the depletion of labor resources in certain areas, and geographic directions in which the run on the resources has continued. “To offer a newly arriving company an insight about these trends may prove invaluable – you surely would want to make your multi-million-Euro investment at a location where you can operate it profitably for many years to come. While the insight is important, acting upon it is the next step. Where do you turn to securing land for your plant when the land prices seem to be escalating? Well, for some companies a purchase of private land is a valid option because they value a greater flexibility to choose their location. Meanwhile, many other companies can take advantage of public land, which is available for sale by auction in many municipalities – although the process could be daunting, and there is of course the “plug-and-play” alternative – leasing” says Carnogursky.

Automotive Industries spoke to Matt Carnogursky, General Manager, IPEC Management Eastern SRL.

AI: How do you see the automotive industry in Central and Eastern Europe developing in the near-term future?
My crystal ball may not be clearer on this subject than most. At that, let me narrow the topic mostly to Romania because I do not feel qualified to make statements about Poland, Russia or the Baltics. As we know, the Czech Republic is building it’s third OEM (excluding the once venerable but now defunct Tatra) – Hyundai near Koprivnice. This plant was originally considered for Slovakia but eventually placed across its western border, suggesting that Slovakia is already “full”. Hungary has not added an OEM in years and I am not convinced that the Hungarian system of incentives and the total cost of labor to the employer is competitive against other CEE countries. I have not heard Bulgaria making any automotive noises either. On the other hand, Ford has announced a major investment in the Daewoo plant in Craiova, Romania. Dacia’s plant in the nearby Pitesti keeps expanding its capacity, adding a transmission plant, and generally pushing its tier-1 suppliers off the main compound. Renault is building a major R&D center about 50 miles east of Pitesti. There are other suppliers converging on Pitesti, for some of which we are building facilities. My reading of the rally is that the suppliers sense, or have been offered, a substantial business growth in the area. Once the economies of scale start materializing some of the surrounding countries may, and probably already are, starting to see a loss of their automotive business to eastern Romania. In short, keep an eye on the Pitesti-Craiova region for the 5-10 years to come. And for those suppliers who want to stake out their strategic position in the area this is the time to beat the rush.

AI: What are some of the issues automotive companies take into account when relocating to emerging markets particularly in Eastern Europe?

With the rapid advance of globalization international manufacturers go almost any distance to find more competitive manufacturing locations. Once certain conditions of property rights and profit repatriation have been met the top two criteria become labor cost and logistics access. We must remember that different automotive suppliers have different needs in these regards, therefore, luckily, not everyone is trying to crowd into the same place. But the general prerequisites of low tax overhead and good supply of inexpensive yet trainable labor go a long way. Add a good road system and a nearby university to this and you have a winning combination. That said, let’s remember that such winning combinations get snapped up fast – which brings us back to point of strategic positioning.

AI: What do you think are some of the challenges facing investors in these countries?

The red tape associated with setting up a facility is a definitive challenge. The mechanics of recruiting the labor pool is another. Then, as is commonly the case, comes the challenge of ramping up the production. Let me elaborate on the first challenge – setting up a production plant. This is not an exact science; often the local bureaucrats work on automatic and return negative answers no matter what the question. Maybe this is just a result of decades of conditioning by the eastern-European social and political system or maybe they want us to read into their reluctance. Of course some of the refusals may be genuine but these, in my experience, are few and far apart. Therefore, if an automotive investor is highly risk averse he should arm himself with a great deal of patience – and hope that a competitor does not beat him to the punch. Plan B is of course leasing a plant, leaving the risks up to the developer.

AI: How can IPEC help?

Earlier on this article emphasized the transparency of our operations and, as a matter of routine, in managing construction projects, we do cut through the red tape and get the permits and all while respecting the law, the principles of ethics, and the principles of common sense. E.g., if a particular technology has been working in other parts of Europe there are few valid reasons, if any, to deny it to a manufacturer in Romania. So we build our case and eventually get the permit.

For the risk averse investors and for all those looking for “plug&play” solutions we offer built-to-lease premises as well as pre-built production space. Large multi-national companies are our lease customers – they know that this way they minimize the cost and the liability part of their balance sheets.

AI: What are some of the other Central and Eastern European countries IPEC is planning to set up shop in?

Bearing in mind that we do not serve only automotive clients, we have already started working in Bulgaria and our definite plan is to expand our existing operations in the Ukraine. Politically the country is stabilizing and in a few years this country of 50 million will become an interesting market as well as a supplier of labor – so ‘shop” early.