The Czech Car Growth-Engine?

News today which is of more than passing interest from the Czech Republic. The South Korean industrial group Hyundai has announced that it is going to build its first European car plant at Nosovice. The factory - which is scheduled to cost around one billion euros - should begin production in October 2008 with full capacity of 300,000 vehicles a year being reached in 2009. This new output, when added to added to the 600,000 cars or so produced annually by Volkswagen's Skoda Auto and the Franco-Japanese joint venture, TPCA, will bring the Czech Republic into the front line - along with Germany, France and Italy - of the European automotive industry.

As elsewhere this will have its good and its bad side.

The investment will obviously give an enormous push to Czech skill-cluster accumulation. As the AFP article notes Hyundai was attracted to Czechia by the existence of an already established network of auto suppliers, good transport communications, low wage costs and a skilled, adaptable workforce. Since in this industry more feeds more this new impetus could then attract even more car and car component manufacturers, especially anyone who is trying get a foothold in the European market.

On the downside the Czech economy will now become even more heavily car dependent. The car production and components sector already accounts for around 20 percent of total industrial production and it constituted 18 percent of total exports in 2005, so any real downturn in the European car market would now hit them especially hard. And again, very few goodies come for free. The impact of the new investment on the domestic currency - the koruna - is likely to be to nudge it upwards, and as some are noting, this may hit other lower-wage-lower-skill areas like textiles. But this is a price which needs to be paid as Czechia moves up the 'value-component' ladder, and it is nice to see that they are making such rapid progress.

The inward investment could attract an inflow of labour too, and this will only help them better address their low fertility and ageing problems. Some suggest that the only brake to further auto industry development in the Czech Republic would be if companies found it hard to recruit sufficient skilled and re-trainable workers. With this in view it is interesting to note that the plant is to be sited in the East of the country, within striking distance of the Slovak and Polish borders.

Indeed it seem that Poland looks to be one of the big losers here. New Economist had an interesting post last week about how the London-based Centre for European Reform recently put Poland at the bottom of its competitiveness league vis-a-vis the entire group of 25 European Union nations (The report also put Italy as low as 23rd out of the 25 EU members, down in the same league as Bulgaria and Romania).

So here there will be winners and losers, and, just as the New Trade Theorists would predict, there will be a considerable interplay of networking and other 'increasing returns' effects.

Which brings me to my last point: is the Czech Republic about to become a minor EU growth engine, another Ireland? I first raised this point in this post, where I make a comparison with slow growth Portugal (which is, it will be remembered, inside the euro system, and suffering from all kinds of negative consequences following on from its initial dramatic entry). Certainly Czechia's demographics are very different from those of Ireland, but it does have a large number of young people who are able, willing and under-employed, and if it can get those network effects rolling and continue the forced march up the value chain, then being a small country it may be able to attract inward migrants in sufficient quantities to make all the difference. Who knows. As the Spanish like to say, que sera, sera.