Targeted subsectors: OEM and replacement, non-electronic The sector is resource intensive, so production costs are mainly determined by prices of raw materials and equipment. In Serbia indications are that raw material costs are higher than for main competitors, such as Romania, Turkey, and China. This is likely due to the relatively small size of the sector and weak bargaining power since the majority of production machinery, raw materials and intermediate goods are imported. In addition, Serbia has not invested in modern technology, as most machinery is old with an average age of 21 years and only 12% of companies have machines that are less then 10 years old. Transportation is not an important cost issue due to the relatively high value of a product unit and proximity to major export markets, such as EU and Russia. Serbia also benefits from low energy prices (the lowest in Europe), although this could change. The Serbian workforce has experience in both production and business administration that is comparable to Western European standards, but it is questionable whether qualified individuals would be drawn to the regions where auto parts are made, or whether better jobs in more desirable areas are available. Should demand and salaries increase, additional training would be needed on new technologies. Illegal imports of auto-parts and legal imports with inadequate certification create unfair competition in Serbia and impede growth. Complex administrative requirements for establishing a company, licensing requirements and unfair business practices are additional impediments. Exporters also find current exchange rate environment to be impeding export growth. Overall, however, there are few significant barriers to business, and free trade agreements – particularly one with Russia - offers foreign investment (FDI) opportunities. A case in point is the new French investor Lohr that will be exporting EUR 50 million value of auto-parts to Russia in 2008, creating significant export growth from the total EUR 90 million achieved by the sector in 2005).

Overview

Serbia has a long tradition in the automotive industry, and currently 70 companies specialize in auto parts production, employing about 25,000 people.  The first passenger vehicles for the mass market were produced in the early 1950s by Zastava in the city of Kragujevac. At its peak, Zastava produced more than 250,000 vehicles a year, so local component suppliers became experienced in meeting high quantity and capacity performance standards. In addition, Serbia maintained strong international partnerships, highlighted by many production licenses and joint ventures, particularly with German and Italian companies. Zastava produced several car models under license to FIAT and developed a top foundry to supply GM’s Opel. Serbian parts and components could be found in the production facilities of many western OEMs (original equipment manufacturers), including Mercedes, Ford and many others.   Although the industry encountered significant decline during the 1990s, Fiat’s announced €700 million investment and the presence of other major foreign companies such as Lohr, Draexlmaier, Michelin and Bauerhin on the Serbian market demonstrates renewed interest in the sector. The project seeks to help auto parts firms maximize their competitive advantages and better position themselves to succeed in the changing regional auto manufacturing industry. The Serbian sector’s exceptional cost efficiency (low labor and utilities cost), the increased just-in-time productivity of its skilled workforce, and its excellent market accessibility will all be leveraged in the project strategy to support generating linkages with buyers and investors.   

Strategy

 The strategic focus of the USAID Serbia Competitiveness Project is to: 

• Increase Serbia’s visibility as suppliers and partners to foreign OEMs and Tiers
• Leverage geographical advantage and a long tradition of manufacturing and export
• Utilize FTAs & existing FDI/partners to improve technology and expand markets  
• Build capacity in the industry to attain international industry standards certification
• Improve business management, marketing, communications and HR capacities 
• Attract new foreign (EU and USA) investors/JV partners
• Provide targeted communications and marketing support to promote companies and the industry in the international marketplace