Driving forces: can Slovakia stay ahead in the age of car electrification?

23.02.2022 Driving forces: can Slovakia stay ahead in the age of car electrification?

Slovakia is the largest producer of cars in the world per capita and home to four of the world's largest original equipment manufacturers. But transport is changing. Can Slovakia maintain its market lead in the age of electrification - and how can finance help? We spoke to Tomáš Frič of VUB.

Car manufacturing is the largest industry in Slovakia, accounting for 13% of GDP, 47.7% of industrial production and 42% of industrial exports.

Slovakia is home to four of the world's largest original equipment manufacturers (OEMs): Volkswagen set up in Bratislava in 1991; PSA Peugeot Citroën in Trnava in 2003; Kia Motors Slovakia in Žilina in 2004; and Jaguar Land Rover in Nitra in 2016.

These automotive giants have made Slovakia the biggest car producer per capita in the world, producing 184 cars per 1,000 people. Located in the west of the country, the "Big Four" directly employ 164,000 Slovak people, but the network of parts suppliers, large and small, that surrounds them takes that tally to about 250,000.

The Slovak automotive sector is one of the most integrated into global value chains and accounts for the largest share of regional value chain trade in Slovak manufacturing. It's split into two tiers: affiliates of major carmakers, with higher value added; and large Slovak companies and SMEs.

Embracing global value

Having such big companies with sizeable interests in the country presents Slovakia with an opportunity to be at the forefront of growth areas spearheaded by industry leaders.

Of the forces shaping transportation today, electrification is the most immediate, and each of Slovakia's big four producers have committed to reducing vehicle emissions through new electric vehicle (EV) models.

Kia recently announced plans to start production of a new model electric car at its Žilina plant in 2024 as part of a wider aim to strengthen their electric car segment.

"Electrification is one of the most tangible growth industries that we can see taking shape in factories and on roads. Car manufacturers are already focusing on producing these cars, and an existing regulation to reduce emissions drives this change," says Tomáš Frič of VUB.

It's crucial for Slovakia to keep pace with the fast-moving developments in the automotive market. It leads the field in combustion engine vehicle production, but is only the third-best place in Europe to produce electric vehicles, behind Germany and France. To maintain its automotive industry for generations to come, Slovakia needs investment into research and development (R&D) in manufacturing.

Intelligent manufacturing - involving automation, the development of innovative materials and making the best use of waste - has been identified as a key target area by the European Commission.

Through its Recovery and Resilience Facility (RRF), the Slovak government intends to reform research, development and innovation across all industries. RRF will invest around €738m into support schemes to mobilise public-private research cooperation and boost innovation in SMEs.

There will also need to be support from private finance to push this objective. "We try to motivate our customers to make investments toward the green economy, including circularity with benefits to them," says Frič, pointing out that VUB offers clients better loans if they can prove green credentials.

The bank has also re-evaluated the maturity times of loans to make sure customers exploring bold new R&D spaces have the time to become profitable.

"So far, still, we are more a manufacturing country than an innovation base," says Frič. "But we see from collaboration with our customers that production itself is already changing and moving toward new ways of working," says Frič.

Batteries

One area where a strong base for growth has been established is in battery manufacturing. The EU battery market is projected to be worth €250bn in 2025 and there is continued pressure for higher-efficiency, higher-performance and more affordable batteries that can be part of the circular economy.

The Slovak Battery Alliance (SBaA) was formed in 2018 to establish a network of Slovak industry, science and research that would work together to establish a 10 GWh battery gigafactory.

One of its founding members, InoBat Auto, backed by €5m of government support and cooperating with US company Wildcat Discovery Technologies, has started building the country's first electric car battery factory in Voderady. An R&D centre will follow and the group hopes to complete the gigafactory by 2024.

The big four also have a role in the booming battery manufacturing scene. In 2019 PSA Group started its first battery production hall in Slovakia, producing 10,250 battery packs. There are also hopes Slovakia will be chosen as the Eastern European base for one of Volkswagen's five gigafactories - a decision due in the first half of 2022.

These are giant steps for a huge industry to make, but they are also necessary if we are to move towards mobility solutions that are better for the planet. VUB believes its role as a bank is to support the automotive industry in Slovakia to keep pace with the global agenda, both commercially and in terms of sustainability.

Frič notes that those two concerns will soon fully overlap. "There are three magic letters - E, S and G - and the circular economy is an integral part of our plan. I think we can already see things in general moving in that direction. It's not only about how we, as a financial organisation, operate; we also play quite a key role in supporting the parts of the economy that are better for the environment and more sustainable."