Sky High in Slovakia

Following Czechoslovakia’s velvet divorce in 1992, cynics said that Slovakia, the poorer but more beautiful half of the seventy-four-year partnership, ought to receive alimony. After all, Slovakia had only two claims to fame: it made good tanks, which were no longer needed by the dead Warsaw Pact countries; and Andy Warhol’s parents came from there, although the pop artist himself insisted, “I’m from nowhere.”

Today, Slovakia definitely is somewhere. In a display of peasant grit and capitalistic opportunism, the country has not only risen out of the rubble of communism but has grabbed hold of a solid piece of the global auto industry. Smaller than West Virginia, with Alps-like mountains, lush Danube-basin plateaus, and a long history of oppression by its powerful neighbors, Slovakia now finds itself on the verge of being the world’s biggest automaker.

Well, sort of.

The boast is a marketing gimmick. But a clever one. Slovakia is about to become the biggest automaker in the world per capita. By 2009, three assembly plants – an older Volkswagen operation near the capital of Bratislava, a newer Peugeot Citroën (PSA) plant near the walled-in city of Trnava, and Kia‘s brand-new, robot-packed monster strung along the wild Váh River in the Malá Fatra Mountains – will be producing some 900,000 vehicles per year in a nation of 5.4 million people. That shakes out to one new car for every six Slovaks.

The boom has made Slovakia the envy of the so-called “little tigers.” The tigers are four members of Central Europe’s post-communist rust belt: Poland, Hungary, the Czech Republic, and Slovakia. Industrially challenged after 1989, those countries now have eight assembly plants and hundreds of auto suppliers, and they are a key to the survival of automaking in the European Union, a sprawling economic system of 500 million people in twenty-seven countries, many with rising incomes and car lust. But the tiger with the sharpest claws and the biggest hunger is the smallest of the lot, Slovakia.

To better understand the transformation, I went there to talk with top managers, analysts, and critics of the car boom.

My first stop is Zilina, a small, funky city in the mountainous north. Kia’s complex is located on a greenfield site just east of the city. Two miles long, with assembly, engine, and cockpit systems linked by automated material handlers, it was built quickly, in twenty-eight months, after some 800 landowners sold out to the government and moved away. Here, Kia is making the Cee’d (pronounced “seed”), an oddly named, Euro-designed hatchback for the midrange market. The Korean company, whose reputation is to jump in and make a big splash – none of that old-fashioned incremental stuff for Kia – loves technology, and the plant proves it. There are about 400 robots, enough surveillance cameras to please Big Brother, and a single, universal assembly line that can handle eight different models at once. In 2007, production on the line was 150,000 vehicles. In 2009, it ramps up to 300,000.

In-Kyu Bae, Kia’s CEO in Slovakia, has a smart appearance that suggests he combines the power of a modest general and the hands-on attitude of a serious mechanic. Kia’s motto, “The Power to Surprise,” is sewn over a pocket. Bae says Kia came to Central Europe “to survive in a global market,” that the culture shock of Slovakia “was tough.” And that he is pleased. “This year, I’ll make a profit,” he declares. He’ll do so by selling Cee’ds in competitive markets, including Germany, to demonstrate the car’s appeal. “It is strong,” he boasts. “Unlimited speed. If we are not successful in Germany, we can’t be a success in Western Europe.”

It sounds like Bae has his sights on one German competitor in particular. “Audi,” he says, jutting out one arm and turning a thumb down. “Twenty years ago, it was a junk car.” The thumb flips up. “Today, Audi has high name value.” Bae sits back and crosses both arms. “Now, Kia can do that.”

Volkswagen’s CEO in Bratislava, Andreas Tostmann, isn’t convinced that Kia’s strategy is sound. A rising star at VW, Tostmann, 45, exudes Teutonic coolness. He wears rimless spectacles and a striped shirt and tie. When I ask if he’s visited Kia’s much-touted, robot-filled plant, he smiles faintly and says, “No.” But he knows what is fundamental in this country: cheap labor. It is just as efficient and more flexible than robots.

“If you don’t want to make use of Slovakia’s low labor costs, OK,” Tostmann says, alluding to Kia. “Then come in with a big technology investment, like Kia has. But that seems a little crazy to me.” He explains his rationale: “In Germany, we have forty euros ($60) an hour labor costs. In Austria, thirty. In Spain, twenty-five to thirty. Here, it is seven euros an hour.”

VW leans heavily on cheap labor. It has 9000 employees (Kia has 2000) working in eight large production halls on multiple assembly lines. “People from the poorer side of life,” as Tostmann puts it, they produce mostly high-ticket Touaregs and Audi Q7s. One line pounds out bodies, which go to Stuttgart for final assembly. A former mainstay, the low-end VW Polo, is now an anomaly in the SUV-dominated lineup. Total production this year will be about 250,000 vehicles.

“It doesn’t matter what you make here,” Tostmann says. “It will be profitable.”

Still, luxury SUVs lend the plant a certain cachet, and their markups have made this VW’s most profitable facility. More Polos wouldn’t have done that. Low-cost hands are crucial for tweaking pricey options, such as 620-watt sound systems and driving-dynamics packages, popular with the discriminating segment of the car market, most of it in Western Europe and America. The quality put into his soft-roaders is a result of extensive workforce training and motivation, Tostmann says. Such quality, he implies, remains outside the reach of robots. At least for now.

“VW would be dead without its Central European factories,” says Lyle Frink, a journalist for Automotive News Europe. And, he adds, Slovakia might never have gotten off the mat back in the 1990s without German help.

It started when VW bought a huge Škoda plant near Prague in 1991. Part of the deal was a small BAZ plant near Bratislava. BAZ produced a classic communist box on wheels favored by plumbers and tradesmen (even today, you might see a BAZ tooling around Bratislava, usually trailing a necktie of blue smoke). VW turned the outmoded plant into a noteworthy supplier. It showed that Slovaks could make good parts and the government could be helpful. After 2000, when other carmakers looked eastward, scouting for cheap plant locations in an expanding EU, Slovak leaders hyped VW’s success as their success. To auto companies in particular, they said, “Everything you want is here. Land. Investment. Cooperation.”

“They rolled out the red carpet,” says Frink. “And they broke all their own rules,” adds Roman Havlicek.

Havlicek is, to many minds in the little tigers, an enemy. They label him and his ilk “eco-terrorists.” Slovak leaders tell them they are blocking the progress of Slovakia.

Havlicek, a project coordinator for Friends of the Earth Slovakia, a watchdog group focused on foreign investors, shakes his head over such accusations. “A weak state is subsidizing strong companies,” he tells me, adding that it has done so “with dictatorship-like tactics” carried over from its communist past while mouthing platitudes about democratic capitalism. Sitting in a Bratislava café, the eco-warrior sounds weary from the David-and-Goliath battle that, he admits, has not gone that well for his side. Lately, however, the courts have ruled that the state must disclose obligations it has made to automakers and suppliers, and the media have been shining spotlights on illegal land expropriations by the state. A big problem, Havlicek says, is that the public really doesn’t care. “Their take on this is, ‘We need these plants.’ “

It is an elected government, of course, that has overseen the growth of Slovakia’s auto industry. Before 2004, when Slovakia joined the EU, leaders made promises, cut deals, and rammed them through in the proverbial smoky back room, to hell with critics, disenchanted landowners, whomever. Now, leaders must abide by EU regulations, which are more stringent and somewhat enforced. Meanwhile, a special department at the Ministry of Economy has been established to coordinate relations with the auto industry, and labor is flexing its muscles. A new nationalistic government led by Robert Fico owes labor, which helped elect it. One result is a proposed new labor code. Now on the table, the code would shift some power to unions inside auto plants. Predictably, the code is being opposed by the auto guys.

Another speed bump slowing Slovakia’s fast-forward pace is that classic paradox of an economic surge: low unemployment. All the new jobs have created a labor shortage. “It is our biggest challenge,” said Tostmann, although he added that Slovaks will work by the week, live rough, and then return to their families for the weekends. Bae, with his robots and technology, was less bothered by the labor shortage, but he did say, “Slovak people are not engineering people.”

Don’t tell that to suppliers.

“Their growth curve is still upward,” I hear from Martin Jesný, a journalist for the Slovak business journal, Trend. “Tier Two and Three suppliers are really booming,” he says. Some are locating in the central and eastern parts of Slovakia, an éclair-shaped country in which the auto biz is concentrated in the west. This puts them close to Hungary’s big Suzuki plant and Poland, where Fiat makes its popular Panda and GM builds the Agila and other vans.

In this environment, PSA is a curious oddity. The French carmaker has neither VW’s history in the region nor Kia‘s brash new presence (in June, I saw Kia ads everywhere, promoting things such as beer festivals and ZZ Top concerts, all part of a campaign to establish KIA of SlovaKIA as the Slovak car, like Škoda is the Czech car), but PSA might prove more visionary than either of these competitors. First, PSA is focused on emerging markets, where a new dynamic is flipping the status quo. That is, for the first time, car sales in emerging markets are surpassing those in mature markets, such as Western Europe and the United States, and will do so for the foreseeable future. Near Trnava, PSA assembles its Peugeot 207, a supermini specially designed for new markets. Second, PSA has allied itself with juggernaut Toyota. A PSA/Toyota joint venture in the Czech Republic makes the Peugeot 107, the Citroën C1, and the Toyota Aygo city cars. In Trnava, the Toyota production system, from logistics to manufacturing methods, is in place.

Sister plants, physically close but across national borders, are becoming the default mode in the little tigers. They share suppliers, reduce redundancies, and increase complex synergies, one of which is political leverage. In this part of the world, the political winds are always blowing – and changing directions. An automaker in two countries can play leaders off one another, jockey for tax breaks and deals, and, on a positive note, bring countries together in ways that communism and contemporary politics have failed to do. Presently, VW actually has three sister plants, in Slovakia, the Czech Republic, and Hungary, where the is assembled. Kia’s sister plant is under construction in the cabbage fields outside of Ostrava, in the Czech Republic; it opens in 2010, just fifty miles from Zilina. Once that happens, claimed Bae excitedly, “We’ll make a lot of profit! We’ll have high name value!”

So, in this ongoing story of industrial transformation on wheels, has Slovakia been innovative or exploited?

Both, it seems. Innovation involves novel means and methods. Kia’s rapid buildup of one of the world’s most high-tech auto plants fits the bill. As does PSA Slovakia’s small-car, new-market gambit. VW, with its costly land yachts and labor commitments, is more allied to yesterday. Certainly, the foreign giants have exploited Slovakia, but what else is new? In the global economy, especially if you’re small and perceived as backward, you don’t get much without giving something away. As interesting as the auto plants themselves, which are now a fait accompli, is the atmosphere of change that Slovakia has seeded, watered, and grown. And sprinkled with audacity.

To land its auto plants, Slovak leaders gambled and broke rules. They thought outside the box of democratic capitalism. And for now, the country is on a roll. It has avoided the low-quality label of India’s fledgling auto plants. And its segment of the auto industry is making money. Ford, GM, and Chrysler have lost billions since 2005, enough to build numerous Hyundai/Kia sister-plant complexes, which cost about $4 billion a pop. Sure, Slovakia has some corrections to make. Transparency might have to be forced, but it will come. Carbon awareness isn’t exactly a hot topic there, either, as attitudes toward emissions seem more 1957 than 2007. But Slovakia doesn’t need alimony and is filled with young blood. Only time will tell if the automakers will stay or move on. But for now, the littlest tiger is a kind of automotive wunderkind. Even Andy Warhol, the man from nowhere, would be a little impressed.

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