Romanian Auto Parts Market

Main Investors in the Automotive Industry

Three or four investors have reportedly surpassed the USD 119 million benchmark including: Michelin, Continental, Lisa Draxlmaier and, most recently, Germany’s INA Schaeffler. There are a dozen additional investors with over USD 12 million invested, slated to be joined shortly by others in addition to a slightly higher number of smaller local investors.

The majority of these foreign companies has selected the western region of the country (Timisoara, Sibiu, Cluj, but also smaller cities) as their preferred geographic location, or alternatively has chosen to be located near the Dacia factories in Pitesti. Exceptions include the Ploiesti Industrial Park and several locations in Oltenia (Slatina, Dragasani). This geographic distribution is mirrored in other industrial sectors, which can be taken as a sign of an inconsistent national business climate.

In 2004, the net imports of cars and other vehicles exceeded exports by some USD 778 million. The deficit increased to USD 1,058 million in the first three quarters of 2004. Imports of automobiles increased by 91% compared to the same period last year, to USD 1.5 billion, while exports increased by a mere 45%. 2004 exports of auto parts amounted to USD 379 million, only USD 125 million more than imports. In other words, Romania registered a USD 0.77 billion surplus last year in terms of automobile trade, and a surplus of only USD 0.12 billion for parts.

The Germans dominate the geographic origin of investors and it is natural that the destination of exports of auto parts is predominantly to that country. Almost 68% of exports were destined for Germany followed by Austria, Italy and France. While the ratio of French investors is increasing along with Renault’s development plans, they are mostly focused on the domestic market, namely the Dacia factories, and then ultimately on exports, but only in the event a Dacia-dedicated investment is not feasible. The majority of imports originate in Germany (some 30 percent), reflecting the structure of the automotive park and possibly also the practice of contract manufacturing. Korean imports, led by Daewoo, enjoy a 13 percent market share.

In 2001 Michelin took over two tire factories in Zalau and Floresti from the Tofan Group, including re-treading activities, for an amount estimated by analysts as exceeding USD 119 million. Continental, another major tire producer, chose to invest USD 167 million in its own production capacity in Timisoara and Sibiu.

Another major tire manufacturer, Pirelli, is slated to open a steel cord (tire reinforcement) factory in Slatina, with Continental as minority partner. To date, Pirelli (who also owns Telecom Italia) recently began producing cables for the electronic and telecom industry.

Lisa Draxlmaier has invested in several manufacturers located in Brasov, Timisoara, Pitesti, Satu Mare and Hunedoara, to the tune of USD 143 million since 1994. The German company produces mostly electronic components (wiring). With the exception of the tire manufacturers, Draxlmaier remains the most important investor in this sector. The firm, headquartered in Bavaria, is not a typical multinational, rather is considered a well-developed mid-sized company, which has been successful at achieving both flexibility and specialization in a well-defined segment. In 2004, Draxlmaier inaugurated a new cable production facility in Hunedoara worth USD 8 million. The new production unit will supply wiring for the Mini cars produced by BMW and will initially create some 600 jobs, slated to increase to 1,000 by the end of the year. This is the fifth production unit, which the German company has established in Romania, following those in Brasov, Timisoara, Pitesti and Satu Mare. The total value of the firm’s investment to date surpasses USD 143 million. According to official statistics, Draxlmaier Romania is ranked first among Romania’s top exporters to Germany.

Ina Schaeffler (whose full name is INA Walzlager Schaeffler KG), also from Germany, shares the same business model in terms of being recognized as well developed, mid-sized, privately held company with sales estimated at approximately USD 8 billion. The firm’s decision to invest in the Brasov region was reportedly also influenced by the low cost work force, the strong infrastructure coupled with the presence of competitive suppliers in the region. The increasing appearance of more car manufacturing facilities in Eastern Europe will inevitably lead to continued development in the region. @@page@@

 Another German multinational company from Nurenberg, Leoni Wiring Systems, is approaching a USD 119 million investment threshold in Romania. The two units in Arad and Bistrita Nasaud, both producers of electric cabling, were slated to upgrade their investments up to USD 66 million in 2004 and USD 36 million in 2005. The firm’s annual sales projections were estimated at USD 33 million but recently had to be updated to reflect the real annual sales figure achieved which were in actuality were almost double the estimate at USD 60 million.

The German auto sub-assembly producer, Schlemmer, will open a new plant for producing protection cables for the automotive industry, through its Satu Mare production unit. The new company, Schlemmer Romanian SRL, will invest USD 12 million and provide at estimated 80 new jobs with production to start up in early 2006. In addition to offering competitive operational costs, Schlemmer will benefit from logistical advantages, namely the ability to provide real time delivery to auto producers both in Romania and in neighboring countries. Schlemmer GmbH is one of the principal producers and worldwide distributors of cable protection systems, air and fluid and mechatronic system solutions for clients active in the automobile industry. The firms also distributor cable systems in the industry and offer wholesale trade. Schlemmer has production units in Italy, Spain, Turkey, Morocco, Tunisia, China, South Korea, Brazil as well as distribution network in 26 countries.

The SWOT Analysis of Romania’s auto parts industry

Strengths: A technically qualified labor force with potential for assimilation and adjustment, availability of domestic raw materials, the ability to manufacture components for car manufacturers, opportunities for green-field investments, the existence of production units located in geographical proximity to infrastructure networks, a large domestic market with a growing absorption capacity, an institutional and legal framework necessary for the implementation of the European Union directives and ECE-ONU regulations.

Weaknesses: Need to update general engineering skills, technologies in operation are those utilized in the ‘80’s; obsolete traditional production systems; inefficient management of human, material and energy resources; counter productive approach to the Quality – Cost – Delivery system; difficulty in accessing training courses resulting in limited professional development of the labor force’s professional capacities; the introduction of the quality and environment management system at a slow pace, which results in insufficient quality performance, environmental protection and the implementation of clean technologies; absence of any viable mechanisms for used cars  recovery/recycling, while industrial services are still operating at minimal levels, innovative methodology implementation is still in the early stages.

Opportunities: The general trend of the market towards assimilation, the tendency of the multinationals to focus on new, emerging markets and the relocation of the auto parts manufacture operation to alternative countries offering more developed sectors, the setting up of the mechanisms for a competitive environment through the support and promotion inherently offered through the application of standards such as ISO 9000:2000 and ISO TS 16949 and ISO 14000 related to the environment management systems; promotion of the innovation as a competitive factor through various programs.

Threats are linked to the sector’s ability to put together an adequate network of suppliers for auto parts integrators and the manufacturers of finite products. They depend, to a large extent, on the capacity of the auto parts producers to adapt to the efficiency, quality and consumption requirements dictated by the integrators acting as the liaison between supplier and end user. The introduction of standards related to environmental protection and the reduction of raw materials and electricity consumption represent real challenges. The reduction and or elimination of major industrial complexes whose operations pollute the environment while using large amounts of electricity should also be taken into consideration. Reduction in budget allocated to research and development has resulted in the country’s inability to sustain or encourage innovation within the sector. When it comes to research, Romania has basically has no strategy in place.

Future prospects

An overview of Romanian foreign trade in the automotive area shows massive imports of cars, as well as increased exports of auto parts. Exports include cabling, steering wheels, car upholstery, connectors, tire cords, and generally any part that involves a significant amount of labor, or anything that is unprofitable to manufacture in more developed countries.

There are some exceptions, such as the Siemens Group in Timisoara, which produces automotive software. According to data from the Association of Producers and Importers of Automobiles (APIA), 30 percent more automobiles were sold in the first nine months of 2005 than the year before, while imports have increased by 33 percent.
The wild success of Dacia’s new Logan model has provided no small measure of hope, as has the increased activity of component producers (some of whose engines are just now revving up). Renault’s hope for its new model is coupled with the formation of new production and assembly centers in other developing countries, such as Russia and Iran. Record sales anticipated in the coming years by the French producers will be counted as exports to these countries.

Renault Romania recently announced they will investment some USD 256 million to build a gearbox facility in Pitesti. The production site will manufacture 2,000 units per day in 2008, which would translate to USD 2.4 billion in revenue for Renault Romania. Everything produced in the new Renault facility will be exported to France, Japan, Mexico, Turkey, the U.K. and South Korea. The French carmaker anticipates that the facility in Pitesti will reach sales in amount of USD 143 million in its first year of operation in 2008. @@page@@

Ford Europe, Volkswagen and Audi reportedly are contemplating the possibility of securing partnerships with Romanian companies. It is believed that the success of the Logan car is motivating them to take a close look at the Romanian market. The external suppliers of the Logan components realized fairly early on that it was much more cost effective to manufacture in Romania. Companies, such as Valeo and Euro APS, have begun to produce not only for Dacia-Renault but also for other European manufacturers.

Why is it that only the car component manufacturers are interested in penetrating the market? To get the final car, the car manufacturers need to have a large and long-term secured market. Renault approached Dacia, based on these characteristics.

The second point is the super bureaucratic aspect of the initial phase of the investment. These companies manufacture subassemblies. They will bring in their know-how and will be dependent on the cheap labor they’ll try to specialize. The subassemblies represent the second phase.

The third phase can’t be omitted – the car production. As the manufacture of car parts is a cost-effective business, some of the traditional suppliers of Renault are gearing up to pour millions of euros into setting up production facilities and launching businesses in Romania. Dourdin group, a manufacturer of hood and aluminum grill ornaments, recently announced it had opened a subsidiary in Romania and was ready to begin production with investments on the order of several million euros. The facility in Romania forms part of the agreement that Dourdin group has with Dacia-Renault to produce parts for Solenza in Turkey. Thanks to the new Logan project, they have now also secured a supply contract with Dacia-Renault and we will begin production locally and the production from Turkey will be transferred to Romania. The company’s headquarters and production facility were set up near Bucharest. Production is currently in the testing phase. The remaining equipment is slated to arrive shortly from Western Europe. Under the contract negotiated with the Dacia carmaker, Dourdin will produce up to 600 pieces daily with the plant projected to work at full capacity.
The local subsidiary of French-based tire producer Michelin announced a USD 30 million investment in its manufacturing operations in Romania. The investment, which will be spread across the following three years, will support the establishment of a new steel-cord for tires facility in Salaj. In addition, the money will also go towards upgrading Michelin’s existing facilities in Zalau and Floresti.

Sub-assembly producer Auto Chassis Int’l opened a production facility in Mioveni, Arges County, and will reportedly invest USD 81 million over the next three years. SNR Rulmenti in Sibiu, a Renault subsidiary, specializes in producing bearings for gearboxes for Renault and several leading carmakers such as Nissan, Peugeot, Volkswagen, Audi, Fiat and General Motors. A production plant in Sibiu represents the first stage of an USD 18 million investment.

Pirelli of Italy and Continental of Germany recently formed a joint venture to build a USD 48 million metallic cord plant in Slatina.  Continental will cover approximately 20 percent of the costs.

The Tunisian company Coficab has announced plans to invest USD 30 million in a green field investment for the production of electric wiring for the car industry. With profits on the order USD 119 million, Coficab is one of the main producers of car electric wiring in Europe and North Africa. Coficab is part of the Ellouni Group of companies.

German company Ruwel has announced it will to invest some USD 90-95 million in a project to produce electric wiring, in the Cluj Industrial Park. The company’s CEO, Wilfried Sehner, declared in a recent press report, that the firm is awaiting approval for a refinancing project from the European Investment Bank, which will reportedly cover 75% of the investment costs.

Auto Chassis International, a member of the French Group Renault, will invest USD 81 million over the next few years to develop a production unit near Mioveni (Arges) to produce auto parts chassis to be delivered to subsidiaries in Romania, Slovenia and Turkey.  ACI will be located in the industrial area near the Dacia supplier and will also provide components for the Renault Clio and the Nissan Micra.

Autoliv, the Swedish producer of safety systems including safety belts, airbags, will transfered a portion of its production capacity from Germany to Romania at the end of 2005. The decision is part of a strategy to relocate to Southeastern Europe, due to lower workforce costs. Autoliv has been in Romania since 1997 providing safety systems to the Dacia and Daewoo factories.

The German firm Kromberg & Schubert will open a plant in Medias to manufacture electric wiring production. Towards that end, the firm has rented production facilities from Automecanica SA.

When Romania joins the European Union, probably in 2007, the Romanian market will likely experience a boom in used car imports, as all the restrictions on imports of used cars will be lifted.  As such the market will experience a corresponding increase in auto parts sales and production. To regulate the used vehicle market, the Association of Car Manufacturers and Importers (APIA) officials will design a catalogue of the prices of used cars to begin creating market standards.

Legal framework

More restrictive rules on automotive market
Officials from the Competition Council APIA debated a new regulation regarding the enforcement of the Competition Law within the automotive sector, which was published in Monitorul Oficial, no. 280 on March 31, 2004. According to the regulation, which went into effect on January 1st, 2006 contracts for new vehicle distribution and after-sale services (spare parts and repairing and maintenance services) will be evaluated in terms compliance with the stipulations of the Competition Law. The implementation of the new provisions as well as future cooperation between the Competition Council and APIA will be to the advantage of both sides, fostering competition in the automotive market to the ultimate benefit of the consumer.

The characteristics of the automotive market necessitate the signing of agreements between representatives of the production/distribution chain, spare parts and after sale services and more restrictive rules to be enforced when evaluating the vertical agreements. To comply with these conditions, manufacturers and dealers will have to modify their contracts, by introducing or eliminating certain clauses. If the conditions are not met, the contractual parties will have to ask for licenses individually, for each contract. The objective of the new regulation is to strengthen competition in the new vehicle distribution market and on after sale services, through better positioning of dealers versus the producers.