CHAPTER 2
Box 2.1: Volkswagen and Škoda Intra-firm trade with Eastern European affiliates is estimated to have helped German firms increase productivity by more than 20 percent, and German offshoring within Europe has raised the productivity of the subsidiaries almost threefold compared with that of local firms. More imported inputs have raised firm productivity in Hungary, driven to a large extent by access to increased variety or complexity of inputs—not just volumes. Reductions in intra-firm tariffs and input tariffs associated with EU enlargement has helped the offshoring relationship between German or Austrian firms and their Eastern European affiliates by raising their total factor productivity. The relationship between Germany’s Volkswagen and the Czech Republic’s Škoda provides an inspiring example. Volkswagen (VW) acquired Škoda in 1991, and took over its management 10 years later. In 1990, Škoda sold 170,000 cars despite having enjoyed a
monopoly in communist Czechoslovakia. The cars inspired jokes and derision. By 2007, its annual sales were up to 630,000, with plants in places as far away as India, and cars that had started to inspire loyalty. Before the global crisis, its plans were to increase sales to more than a million. Its rapid growth had made it an important part of VW’s strategy to outdo GM and Toyota for global market share. Škoda has its own cars but also makes components for VW. Starting with the basics, VW helped Škoda transition into a market economy. VW allowed Škoda to benchmark its production practices against those of plants in Germany. The quality of Škoda’s own cars has improved, overcoming a reputation for bad quality, and some components are now shared in Škoda and VW cars. Škoda now makes high-tech components for VW automobiles, including transmissions and engines. One example is the Mlada Boleslav engine plant. In 2009, the plant started making
a cutting-edge 1.2TSI petrol forced-induction engine, the product of collaborative R&D, that could produce 77 KW. VW used to fear the loss of intellectual property, limiting willingness to share technology and know-how. But the 1.2TSI is an example of how this has clearly changed. The Czech auto industry includes a broad and complex supplier network within its borders. The simple parts of the production process shifted east 10 years ago and have continued to move further east. The Czech Republic and the Slovak Republic have increased their presence in higher value-added activities that are more complex technically. Source: Marin 2010a; Hansen 2010; Halpern, Koren, and Szeidl 2011; Ledgard 2005; Škoda Auto 2010; Watson 2010; Volkswagen 2009. For a discussion of the car industry in Europe, see Rhys 2004.
states has increased, trade of the new members outside the EU15 grew even faster than their trade with the EU15, and so the relative importance of the EU15 has declined. The EU candidate countries seem to be following the same pattern with a lag of a few years. A typical example is the trade in motor vehicles, accounting for almost one-fifth of all exports by new member states. EU enlargement has created new markets for advanced economies in Europe and helped emerging Europe become more competitive, not just in Europe but worldwide. Germany is not the final assembly point for inputs imported from the east—in fact, both German (and Austrian, Belgian, Dutch, French, and Scandinavian) companies and their eastern subsidiaries are exporting successfully along a differentiated product range. This pattern is distinct from the role Japan and now China play in Asia (box 2.2). Second, an examination of intermediates trade shows that Factory Europe is not as large as Factory Asia, but it is becoming smarter more quickly. Trade in intermediates is a smaller proportion of total trade within Europe than within Asia. EU enlargement has led to a rapid increase in intermediates trade with the new member states, although once again, new members have increased their trade with non-EU partners even faster. Most important, however, intermediates trade within the enlarged European Union has become a lot more sophisticated and complex, at the same time as the sophistication and complexity of the EU15’s trade with the rest of the world has stagnated. EU enlargement has had a limited effect on the size of Factory Europe, but it has influenced its complexity. Factory Europe is becoming a bit bigger, but a lot more brainy.
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