COVID-19 and Other Uncertainties in Europe's Automotive Supply Chains Offer Growth Opportunities for Producers from Emerging Economies

Emmanuel Pouliquen is Principal Industry Specialist for IFC's Global Industry Department–Manufacturing 

The European automobile industry has been hard hit over the last year by a range of factors from the COVID-19 pandemic, with further clouds from Brexit to increased global trade tensions. But for automotive industry companies in emerging markets in Greater Europe—including West Balkans area, Ukraine, Maghreb countries, Egypt, and Turkey—the situation also offers opportunities for growth. 

Traditionally, carmakers based in Western Europe have dominated the European market, with major players including Germany's BMW, United States’ Ford, and Japan's Nissan producing in the U.K. Suppliers in Greater Europe's emerging economies generally produce lower value added vehicle equipment and parts for original equipment manufacturers (OEMs), but have often struggled to move up towards higher value-added products. They now have more opportunities to do so and grab more market share or vehicle content, but they will need higher-skilled workforces, knowhow, nimble strategies, and financial and technical support to succeed. 

Although COVID-19 has affected auto markets around the world, with sales for Europe down 22 percent to 16.2 million units in 2020 from 2019, according to LMC Automotive, markets are expected to rebound partially in 2021 as countries roll out vaccines and economies reopen. Analysts predict European sales will rebound by more than 15 percent from 2020, and return to pre-2019 levels in 2023 or 2024. New car sales may also get a boost because of people’s desires to maintain an individual mode of transport in the wake of COVID-19, and the potential for new government stimulus packages aimed at boosting economies and auto industries. 

Among other things, a trend towards regionalization of value chains and changing consumption patterns pushing for increased local or regional content offer new opportunities for car and OEM manufacturers in these emerging markets. While high costs may prevent developed countries from reshoring production lines, these developments could benefit manufacturers in Greater Europe, which offers both proximity and lower costs compared to Western European counterparts. But producers will need flexibility, technical skills, and lean manufacturing processes to compete. Focusing on niche production and hyper-segmentation can help them to do so. 

Another factor contributing to the shifting automotive landscape is the continuous increase of electrical content in vehicles, including hybrid and pure electric vehicles. Integrating electrification into their product lines will not only help parts manufacturers in Greater Europe to remain competitive and move up the value chain, but also generate more growth opportunities as demand increases for sustainable vehicles. Design and manufacture of such products requires engineers skilled in areas less conventional than mechanical engineering, and companies in Greater Europe must be willing to pay wages competitive with those of Western Europe if they want to attract and retain the relevant talents. 

Turkey's largest automaker recently partnered with International Finance Corporation, the World Bank's private lending arm, to launch the country's first large-scale production line for electric and hybrid commercial vehicles, among other initiatives. Ford Otomotiv Sanayi A.S., or Ford-Otosan, will produce the vehicles under the Ford brand largely for export to Europe. Other OEMs and Tier 1 automotive players from the U.S., Japan, and South Korea might also have an interest in investing in Greater Europe's Emerging Markets, providing local companies with additional options for growth beyond Germany and Western Europe. 

IFC is available to help manufacturers based in Greater Europe's Emerging Markets seize growth opportunities not just in the automotive sector but also in other sectors facing similar challenges and opportunities, such as in electronics, mechanical parts, and auto-related software. Besides financing, IFC can assist with expertise and advisory services addressing everything from technical to HR to governance and sustainability issues.