THE MANUFACTURING CLUSTER

THE MANUFACTURING CLUSTER GROWTH VIA GREENFIELD & CAPACITY ACQUISITION BUSINESS SWEDEN, OCTOBER 2017 GROWTH VIA GREENFIELD & CAPACITY ACQUISITION BUSINESS SWEDEN 1

THE MANUFACTURING CLUSTER The European manufacturing scene is re-focusing in order to meet the industrial needs of tomorrow. Global manufacturers are establishing and re-investing in the Eastern and Southern parts of Europe; attracting sub-suppliers and building clusters within their industries. Factors, such as labour availability and cost, subventions and focus on industrial upgrades are key catalysers. Did you know that the Indian company Apollo Tyres first Greenfield investment outside India is was carried out in Hungary? That Mercedes- Benz is building a second manufacturing plant in Hungary, which is going to be operational from 2020? Have you heard that ThyssenKrupp builds a new auto component facility for EUR35M that will open 2020? That Serbia ranks number one in the world for Greenfield direct foreign investments? The European manufacturing scene is increasingly getting attention from global manufacturers, concentrated in the eastern and southern parts of Europe. Key reasons for establishing in the region are: Low labour cost Availability of both blue and white collar labour, especially in Serbia Available subventions Proximity to the domestic market (management) Technology advancement/industrial upgrades EU funds available for development of the region Infrastructure and proximity to customers Cluster advantages, clients or suppliers Serbia: a hidden gem for manufacturing The top investment destination in the world Serbia has since 2007 attracted more than EUR 21 billion of foreign direct investments and grown into one of the premier investment locations in Central and Eastern Europe. After a rocky road during the first half of the 1990 s, Serbia has regained its position as the top investment destination in the world, measured by the number of jobs created relative to the size of the population. The list of foreign investors is topped by world-class companies and banks such as FIAT, Telenor, Stada, Microsoft, Coca-Cola, Delhaize, Michelin, Gazprom, Bosch, Siemens and Intesa Sanpaolo, among others. Serbian s political system s strong focus on EU and WTO accessions (Serbia started EU accession 2 BUSINESS SWEDEN GROWTH VIA GREENFIELD & CAPACITY ACQUISITION

negotiations in January 2014 and is a WTO observer country) supports this trend and the country s business attractiveness. Further, the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development also aim to tackle some of the issues that foreign investors face in Serbia and aim to improve the general business climate. Policies towards foreign direct investment Attracting FDI is a top priority for the Serbian government. A new law on investments passed in October 2015, extends national treatment to, and eliminates discriminatory practices against, foreign investors. The law also allows the repatriation of profits and dividends, provides guarantees against expropriation, allows customs duty waivers for equipment imported as capital in kind, and enables foreign investors to qualify for government incentives. The incentives that the Serbian government offers to investors are favourable and divided into three categories: 1) financial incentives, 2) corporate tax incentives and 3) payroll tax incentives. Looking at the financial incentives for example, investors may be granted state subventions of: 20% - 40% of the total costs of two years gross salaries, plus, 10% - 30% on the amount of eligible costs in fixed assets, plus, an additional 10% - 20% of the total costs of two years gross salaries for labour intensive projects (projects that will employ more than 200 persons). A qualified labour force at favourable cost One of Serbia s great advantages is the structure of its labour force: skilled, widely available and cost effective. The average gross monthly salary for a Serbian worker is EUR 529, which is among the lowest in the CEE region. To add to this, the labour activity in Serbia is fairly low with about 16% of the labour force remaining unemployed in 2016. Adding to the unemployment pool of available labour, Serbia has five university centres across the country, with approx. 241 thousand active university students that yearly supply the economy with additional labour. Serbia s relationships with Western economies when it comes to production have given Serbian workers specific know-how in industries such as electronics and led them to adopt advanced technology applications and rigorous quality control standards. Thus, Serbian workers require minimum training to adopt new technologies and assembly processes fast. Further, Serbia was ranked 4th out of the 76 countries in Business English proficiency by BEI, lowering problems such as communication for foreign investors. Average Monthly Salary (Gross monthly salary in in 2016) 457 529 568 799 927 971 1058 1613 Example of financial subventions (Calculations based on investment in a group 3 region*) Investment value # of jobs created Net monthly salary Source: Eurostat Industry 4.0 on the rise in Hungary EUR 1M 250 Jobs EUR 350 Incentives for innovations of tomorrow 1.2M Estimated total EUR in subventions * Subventions are based on a classification of Serbian regions into 5 groups. Source: Serbian Development Agency In 2016, 71 investment projects were completed in Hungary, representing a 6% increase year-onyear worth more than EUR 3243M. Top reasons for investing in Hungary are the central location, well-educated and trained workforce, supply chain opportunities in automotive and electronic industries and government emphasis on innovation and knowledge-based technologies. GROWTH VIA GREENFIELD & CAPACITY ACQUISITION BUSINESS SWEDEN 3

Since 2008, Hungary is home to the European Institute of Innovation and Technology (EIT). The average gross monthly salary for a Hungarian worker is EUR 799, which is lower than other CEE players like Poland and Czech Republic. Nevertheless, Hungary is an attractive market which can be seen through its low unemployment of 5.1% in 2016. The rising shortage in labour force is one of the strongest drivers for the Hungarian government s focus on investment subventions for particularly technological upgrades and innovation, alongside conventional subventions for labour. The Hungarian Government, through ITD Hungary as intermediary, offers an incentive package containing the following elements: 1) cash subsidy decided individually by the Hungarian Government, 2) development tax allowance, 3) training subsidy, and 4) job creation subsidy. For investors to receive cash subsidy, the following has to be fulfilled: Investment volume At least EUR 10M (If an investment project of EUR 10-25 million is eligible to apply for EU co-financed tenders, the direct subsidy is replaced with the tender option) Job creation potential Investment volume > EUR 50M 100 jobs in non-preferred regions (min.) 50 jobs in preferred regions (min.) Investment volume EUR 10M - 50M 50 jobs in non-preferred regions (min.) 25 jobs in preferred regions (min.) Changes to cash subsidy system (Intensified R&D focus since 01.01.2017 to promote the est. of new R&D centres) Investment criteria that has to be fulfilled: Reach EUR 3M of R&D project related expenditure during a max 3 year period Increase of R&D headcount by 25 employees Subvention amount: Maximum 25% of investment value The role of the Hungarian economy has started to shift from "Made in Hungary" towards "Invented in Hungary" partly due to non-refundable cash incentive system supporting R&D activities and technologyintensive investments Róbert Ésik, President of HIPA From manufacturing plants to R&D investment sites According to the World Bank Group, the Czech Republic, Hungary, Poland, Romania and Slovakia will remain in the group of the fastest growing economies in the EU in the coming years. In 2015, GDP growth in CEE (3.1%) was nearly double that of the euro area (1.6%). One of the driving forces behind this is the CEE economies industrial focus and market support for industrial innovation development. The biggest CEE countries; Hungary, the Czech Republic, Poland and Slovakia, are positioned in the world s top quintile of economies with the highest industrial competitiveness CIP index (measuring the capacity of countries to further develop their industrial sectors). The automotive industry in Hungary is one example of this where, in recent years, Hungary no longer functions exclusively as an automotive assembly plant but also increasingly as a R&D and innovation centre. The two most important directions of development in Hungary are currently electromobility and development related to self-driving cars, which is mirrored in the high amount of investment in automotive industry. Out of the 71 investment projects that were negotiated during 2016, 25 were related to the automotive industry, an industry that accounts for approximately EUR 1948M working capital in Hungary. Source: Hungarian Investment Promotion Agency 4 BUSINESS SWEDEN GROWTH VIA GREENFIELD & CAPACITY ACQUISITION

Pioneering technologies of tomorrow 3D printing, driverless vehicles and smart factories are no longer buzz words reflecting what the future holds, they are the realities of today. So called Key Enabling Technologies (KETs); photonics, nanotechnologies, biotechnology, advanced materials, micro- and nano-technology, advanced manufacturing systems, aimed at moving the industrial status quo to an industry 4.0 level are priority action lines of the European industrial policy. The European Strategy for KETs aims to increase the exploitation of KETs and to reverse the decline in manufacturing that the EU has been experiencing. As far as global indicators show, the CEE region may be the axis of future growth for industry 4.0: compared to world averages this European region in general has been developing the fastest. Registrations of intellectual property rights give good indications of this where the biggest CEE countries stand strong compared to world averages. Data compiled by the German economic research institution ZEW show that the innovation dynamics of member states that joined EU in or after 2004 is high and approaching the world average. For example Hungary, with 47.7%, almost has reached the global average of 60.6% with regard to the six KET technologies. Re-focusing in order to re-industrialise Being cutting edge of industry requires staying ahead of the development and utilising the opportunities offered by digitalisation and automation. Policymakers are well aware of the central role of digitalisation for the factories of the future, and most CEE countries are re-shaping national strategies to include R&D and innovation as important parameters for future development. In order for CEE to stay relevant for the manufacturing scene and take its industry heritage to the next level, this a natural step. In order to have a more modern industrial production structure, capable of creating more added value, the CEE region must shift towards innovation-focused economies and the industrial sector must be supported by up-todate knowledge, research and development, as well as tertiary and vocational education. Hungarian policymakers exemplify how this can be done in their Industry 4.0 National Technology Platform, which the most important advisory organization to the government to stay in the forefront. Alongside this, the Hungarian government has changed its incentive structure to, besides classical incentives for labour and land, also include incentives for investments made in R&D and innovation. Key enabling technologies (KET s) (Dynamics in 2001-2006 and 2007-2012: calculations are based on the quotient of averages in the two periods.) Czech R. Hungary Poland Slovakia Romania World Photonics 302.4 260.9 68.5 912.5 6.9 126.1 Nanotechnology 85.6 244.1 245.5 1708.3 432.7 142.5 (Industrial) Bio technology 50.3-4.7 150.5-27.5 124.4 75.7 Advanced materials 24.2 26.7 231.6 52.3 62.7 58.1 Micro- & nanoelectronics Adv. manufacturing systems No. of registered patents (by EPO) 360.3 152.3 19.7-20.7 32.1 27.8 45.9 20.2 215.9 327.8 104.8 28.1 187 148 305 163 234 105* * Only EU28 data Source: ZEW, KET observatory, Eurostat GROWTH VIA GREENFIELD & CAPACITY ACQUISITION BUSINESS SWEDEN 5

Key questions for executives Europe is reinventing itself as a manufacturing hub. A context offering low labour costs, high labour availability and affordable land are contributing factors to more and more manufacturers establishing in the region. Additionally, cluster advantages, manufacturing expertise, attractive incentives for investments and industry upgrades, are catalysers. Europe is investing to become the high technology manufacturing hub of the future, what are you doing to seize the manufacturing opportunities in Southern and Eastern Europe? Are you an executive working on your internationalisation strategy for 2018 and ahead, especially looking into supply chain and brownfield and greenfield opportunities? What competences do you needed to reach your goals and make an informed decision? Do you know what investment incentives you can leverage on? How can your company benchmark the potential of different countries to conclude an optimal set-up? Are there any interesting manufacturers to acquire that can be part of your existing operations? Are you interested in learning more about the manufacturing opportunities? For more information, or in case of any questions, please contact: Hampus Nilzén Trade Commissioner E hampus.nilzen@business-sweden.se Maja Zoric Senior Project Manager T +436642351523 E maja.zoric@business-sweden.se 6 BUSINESS SWEDEN GROWTH VIA GREENFIELD & CAPACITY ACQUISITION

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