Article content

(Bloomberg) — With its 19th-century architecture and communist-era concrete, Dolny Kubin is typical of central Europe and its past. The town in northern Slovakia is also emblematic of something more ominous for the future.

Over the past three decades, Dolny Kubin became home to investors such as Austrian auto parts maker Miba AG as the former Czechoslovakia went from being a relic of the old Eastern bloc to one of the world’s biggest car producers.

Article content

Article content

But the region that became known as Europe’s Detroit is starting 2024 in another transition as the shift to electric vehicles accelerates and the European Union champions domestic production. The difference this time is that rather than catchup, the challenge is to avoid falling behind and undermining the dynamo of the economy.

Carmakers are investing heavily in the EV switch. Volkswagen AG will start producing all-electric SUV models after 2025 in Slovakia, while Volvo is building a new plant near the city of Kosice that will produce EVs starting in 2026. The problem is what happens to the vast network of suppliers that make up the backbone of the industry and keep the economy going.

In the worst-case scenario, as many as 85,000 jobs in Slovakia, or 4.5% of the workforce, may be eliminated in the shift to electromobility, according to a study by GLOBSEC, a think tank based in Bratislava, the Slovak capital.

In the Czech Republic, home of Volkswagen’s Skoda brand, the prime minister has made it a strategic priority to help the local auto industry with the transition. Like Slovakia, the country is in various stages of talks with potential investors to build battery plants, though neither is anywhere near Hungary and Poland in attracting them.

Article content

Article content

“If we don’t manage this transformation, we will have a problem with employment,” said Alexander Matusek, president of Slovakia’s automotive industry lobby group. 

It’s hard to overstate the importance of the auto industry to Slovakia and the Czech Republic, which peacefully split from one another in 1993. The two countries make more cars per person than anywhere else in the world.

They depend on automotive factories for at least a quarter of their exports, which have driven economic growth to average 3.5% in Slovakia and 2.4% in the Czech Republic over the past two decades, higher than the EU average.Half of Slovakia’s industrial production comes from carmakers and their suppliers. A total of 260,000 people are employed at four carmakers and 350 automotive suppliers located around Slovakia. In the Czech Republic, the number of employed in the sector is almost double that.

Dolny Kubin, a town of about 18,000, sits in the Zilina region of Slovakia that is also home to Korean carmaker Kia’s sprawling plant. It took two decades to take the 20% jobless rate down to 4%, also thanks to Miba, which makes components for combustion engines and transmissions for customers including Volkswagen and Stellantis, whose brands include Fiat and Citroen.

Article content

Mayor Jan Prilepok worries that the shift to electric cars will throw his town into reverse. “I know from conversations with suppliers that they are ready to adapt, but they are dependent on their customers to handle the transformation,” he said. “We see this as a serious threat. Parallels with Nokia and its mobile phones in the past come to my mind.”

Hundreds of companies that support carmakers are scattered around the Czech Republic and Slovakia. They are now trying to keep orders and jobs in the industry that’s undergoing the biggest upheaval since state-run automakers were privatized and new ones set up in the 1990s.

The pressure comes from the fact that a conventional car drivetrain has 200 or so moving parts, while an electric one has about a tenth of that. There’s also no need for such things as fuel injectors and exhaust systems.

Volkswagen started production of the latest versions of flagship models VW Passat and Skoda Superb late last year at its Bratislava plant, but they may be among the last combustion engine-powered cars to be built there.

The 128-year-old Skoda plans to invest €5.6 billion ($6.1 billion) by 2027 in the move to EVs ahead of the EU’s ban on the sale of new gasoline and diesel cars after 2035, Chief Executive Officer Klaus Zellmer said in an interview in Prague last year. 

Article content

Critics, though, blame the EU for undermining the industry. The transition is too quick and companies will struggle even more to compete with China, according to Zdenek Zajicek, the head of the Czech industry association.

“Europe has taken on a great tempo and set in a direction that in a way puts us at a disadvantageous position compared to other continents,” he said in an interview posted online in November.

Some companies are already starting to feel that. Kongsberg Automotive, a maker of gear shifts in Vrable, central Slovakia, laid off 192 employees in October because of rising costs. Another supplier, Svec Group, said it has to meet the EU’s green criteria that Chinese rivals don’t.

“We don’t even buy the material at the price they sell their final products,” said Lubomir Svec, whose company makes press tools for the production of bodywork components in Vrable. “We ask our customers today what they’ll do to face this transformation, and even they don’t know yet.”

What’s raising even more questions about their future is that the Czech Republic and Slovakia risk falling behind in attracting investors to build electric battery plants. Hungary and Poland have almost a dozen factories that are already producing or in the process of being built. 

Article content

The issue is that when carmakers choose to expand, they might direct new production to where they have nearby suppliers of batteries, according to Vazil Hudak, a former economy minister in Slovakia and a vice chairman at the GLOBSEC think tank. 

Volkswagen said in November there was “no business rationale” for another battery plant at the moment after having picked other sites in Europe and Canada.

Meanwhile, Miba, which employs 750 people in Dolny Kubin, is aware of the tough challenges ahead. Even if its engineers find new opportunities, there’s no guarantee the company will be able to keep all of its employees, said Vladimir Toman, the plant’s managing director since 1994. “The situation in the market is changing dramatically,” he said. 

Sign up to the Eastern Europe Edition newsletter, delivered every Tuesday, for insights from our reporters into what’s shaping economics and investments from the Baltic Sea to the Balkans.

—With assistance from Peter Laca.

Article content