Saturday, May 3, 2008

Romania: Craiova Welcomes Ford

Oxford Business Group Latest Briefing

Romania's automobile manufacturing industry has moved up a gear with the entry of Ford. The US giant has purchased an ailing Romanian vehicle firm and, with government support, is looking to overhaul it, adding a new dimension to an industry thus far led by the meteoric success of Renault Dacia.

On April 30, the European Union (EU) gave the green light to the Romanian government granting 143m euros ($223m) to Ford for investments in two automobile factories in the Eastern European country. The EU has strict rules on state funding for private enterprises, given the implications for intra-union competition. "The effect of the aid on competition is deemed to be outweighed by its positive contribution to regional development," a European Commission (EC) statement said.

The government support is part of a $934m plan to overhaul the existing Craiova Automobile plant previously owned by the Romanian government near the city of Craiova in south-west Romania. The two new factories will produce engines and complete automobiles, according to the international press.

"I am pleased to approve aid for these important investment projects, which are expected to create more than 40,000 direct and indirect jobs," said EU Competition Commissioner Neelie Kroes. Craiova is one of the EU's poorest regions and the economic boost derived from the car plant will be very valuable.

However, the government will not be permitted to hand out the aid until it has reclaimed $42m from Ford, after the EU found that it had undersold the Automobile Craiova factories to the US firm last year. Ford acquired 72.4% of the carmaker's assets for $89m, whereas the Union valued the stake at $131m.

Automobile Craiova has a somewhat torrid history. It was previously a joint venture between South Korea's Daewoo Motor Company, which had a 51% stake, and the Romanian government, which had the remaining 49%. After Daewoo Automobile Romania hit financial troubles, the state purchased Daewoo's share from the Korean firm's creditors for $60m in November 2006 and immediately started preparing the plants for re-privatisation. After interest by General Motors

The Craiova plants produced just 18,825 vehicles in 2007, which is expected to fall to 3000 this year as Ford undergoes its overhaul. However, the US firm has set its sights on making 300,000 units annually within the next five years, directly employing up to 9000 people in the process.

Ford will be hoping to emulate the achievements of French automaker Renault in Romania. Renault's Romanian wing, Dacia, has been one of the success stories in the country in recent years, with its signature model, the Logan, now being made in other Renault factories in emerging markets across the world, often from complete knocked-down kits (CKDs) produced in Dacia's plant in Mioveni near Pitesti, 130 km west of Bucharest.

Last year, Dacia produced almost 225,000 cars and CKDs, and saw sales increase 17.4% year-on-year. In the first quarter of 2008, sales increased by 37% to 62,635 vehicles. The Mioveni factory currently has an output of 1300 cars a day - or one every 52 seconds.

The company is aiming for annual sales of 400,000 by 2010, two-thirds of which will be sold abroad, entailing an extension of its plant, which currently has an annual capacity of 350,000. Dacia has already taken on an extra 900 staff over the past few months to boost its output to 320,000 this year.

Renault's investments in Romania have had widespread benefits for the country in general and the Pitesti region in particular. Dacia's aim to source more of its parts in the country has led to the growth of a thriving component industry in the city. In turn, this has lead to the positive multiplier effect of bringing in more investment and helping develop the skills base considerably, further increasing the area's appeal to players in the industry and the availability of affordable parts for Renault.

It should then come as no surprise that Mercedes Benz owner Daimler has apparently been looking into developing a vehicle plant with a potential output of 350,000 units annually in Romania. Having said that, most recent reports suggest that Daimler is now cooler on the country than had previously been the case. A recent two-week strike by Dacia workers, which cost the company an estimated $4.6m a day, ended with an average 23% pay rise - well short of the 65% that was being demanded, but enough perhaps to give the Germans pause for thought.

While wages are on the rise, labour remains relatively affordable by European standards. Romania also offers a favourable tax regime and already has a flourishing supply market for vehicle manufacturers, and its geographical position and ports are key assets for distribution. The new presence of Ford is indicative of confidence in the automobile sector's potential, though matching Dacia's international success will be quite a challenge.
(GM) and China's Chery, Ford emerged as the leading candidate and sealed the purchase on March 21 this year.

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