North Macedonia has a long history in the automotive sector, dating back to the Yugoslav period when the region’s factories began by supplying the Serbian automotive producer Zastava. From there, the manufacturing sector slowly became specialised, as several producers of automotive components began sprouting up around the country. Despite suffering from slow economic growth in the immediate post-communist period, privatisation led to many companies being bought by foreign investors which aided the economy’s growth. According to the World Bank, the North Macedonian outlook is now increasingly positive as GDP per capita rose by 2.43 per cent in 2018, with overall economic growth expected to rise by 3.2 per cent by 2020. This fast-paced economic success partly has the booming automotive component industry to thank.
Recently, a wave of foreign investors has come to North Macedonia, where 50 automotive component companies currently operate. These companies have a large global reach, exporting to Europe, Russia, Turkey, Africa and around the globe, encompassing a market of over 650 million people. North Macedonia’s location allows it to deliver to many of these regions quickly, taking less than a day to Central and Eastern Europe and Turkey, and two days maximum to Western Europe. With vehicle components currently making up 3.8 per cent of all exports, current trends project for this increase. However other analysts are projecting a market saturation point, depending on how the sector adapts to cope with ever-changing market forces.
Competitive tax rates
The recipe for the industry’s current success is a result of various ingredients that encourage foreign investment while focusing on establishing development for the long term. Nevertheless, under close analysis this recipe can be improved in order to ensure future growth.
One of the main factors leading to growth within the sector is the government’s attitude towards the industry. Positive economic policies have dramatically encouraged foreign investment and aided the country in getting ahead in a cost competitive market. One of the first foreign companies to invest in North Macedonia, Johnston Matthey has benefited greatly from these curated government policies. The company’s managing director Olivier Krotozyner told Emerging Europe that “investment was made in cooperation with the government authorities” adding that “we have always had a positive and professional relationship.”
One of the main reasons for strong government-company relations is the low tax rate for doing business. North Macedonia’s low income tax is complemented by a corporate tax rate of 10 per cent, which compared to other countries in the region is relatively low. For example, Romania’s sits at 16 per cent while Poland’s is at 19 per cent. Moreover, the value added tax (VAT) which lies at 18 per cent can drop to five per cent in some circumstances. To further encourage business and investment opportunities, the North Macedonian Bank for Development Promotion lowered the export factoring interest rate from six per cent to five per cent per annum in 2016, in order to benefit the country’s exporters.
North Macedonia’s business conditions also gain from various taxation and investment treaties with the majority of European countries, as well as duty free access to the European market. As much as 96 per cent of foreign trade is currently unrestricted. However, Jatin Thakrar, who has been involved in the automotive sector for many years, and is currently the retiring CEO of DURA Auto, believes that there are some limits to this. He suggests that the rates on import duties on raw materials are a major issue which governments have failed to overcome, despite their objective to protect local industry. This, Mr Thakrar suggests, “needs to be aligned with EU duty rates urgently to provide a competitive advantage for the sector and local industry”.
Apart from the government’s economic policies, other factors also play a large role as Mr Krotozyner emphasises. “While the government’s policies played a part, there are many other benefits for selecting North Macedonia; it is a very secure country, with a good infrastructure and general transport links,” he says.
Skilled workers, in limited numbers
A major factor influencing the profitability of businesses in the automotive sector is the available workforce. Labour within the region is very cost-competitive, lowering a firm’s overall costs. In 2018 the average gross salary was 580 euros across all sectors, while the manufacturing sector was at 490 euros. This is amongst the lowest gross monthly salaries in the region, where unemployment is forecast by the World Bank to remain at around 20.5 per cent. Fifteen years ago, before the influx of automotive component makers and overall economic growth, this was a staggering 18 per cent higher.
The Macedonian government has also launched technological and industrial development zones which are aimed at providing favourable investment conditions for businesses. This includes offering pre-built industrial sites, factories and support services as well as tax and customs incentives. The government has also decreased the steps for business registration from 12 steps to four. Combined, this vastly speeds up the processes for companies looking to enter the market.
Education is also a primary tool in generating further industrial development. Some 165 university students are currently undergoing training in preparation for the future workforce of Johnson Controls which is currently constructing a 40 million-US dollar facility outside the capital Skopje. Ensuring a skilled and accessible workforce is key for North Macedonia’s industrial development, as well as keeping labour and wages domestic. This has a particular impact on North Macedonia’s young population, with nearly half being aged under 30.
Nevertheless, many suggest that the education system could be further improved to help business development. “Education needs to change in a major way,” says Mr Thakrar. “North Macedonia needs to move towards a high value-added, export driven economy if there is to be a long-term improvement in the per capita income of people.” He stresses that more long-term thinking is required, and Singapore is an example that could be more closely followed. “Too many people believe that joining NATO and the EU will bring in money,” he says. “That may be short lived, and then what? Where do you want Macedonian graduates to be in say, 20 years?”
Furthermore, Mr Krotozyner points out that there are limitations to North Macedonia’s skilled workforce, purely because of size constraints, which is always a consideration in terms of company expansion.
Despite the hurdles, North Macedonia continues to move forward. In 2006, North Macedonia’s ease of doing business rating sat at 94th out of 175 according to the World Bank. Last year the country’s ranking rose to 10th place, just one place below the United Kingdom.
However, this low tax and lack of regulation brought about by strong government focus on encouraging the automotive component sector has had some adverse effects. Stringent environmental regulations on pollution and carbon emissions are limiting large investments and running contradictory to government policy focus on industry. Nevertheless, the country’s carbon emissions per capita is on the general decline, and the industry has shown a willingness to adapt.
The challenge for North Macedonia now is to keep up with ever-changing market pressures. The low labour costs are set to erode in the future as the country’s GDP continues to grow, diminishing investor advantages. The public sector will need to rearrange efforts in order to better standards of living while fostering private sector growth. Another future challenge for the sector will be new technology and changing consumer preferences. For example, the rise of Tesla and other electric vehicle companies will require an acclimatisation of the industry if it is expected to keep up with the fast-paced market. Mr Thakrar suggests that the “auto sector will change over a period of time”, pointing to the businesses and people that will have the biggest influence, rather than the government itself.
The automotive component sector of North Macedonia is an interesting case in what government policy, environmental factors and luck can do for fostering business development. What makes it more interesting is how it will cope with current and future challenges, as these changing markets can provide a wealth of new opportunities if North Macedonia plays its cards right, otherwise it could well be left behind in the turbulence.
[…] Source link Tax Preparation […]
[…] Source link […]
[…] Source link […]
[…] Според предвидувањата на Светската Банка, по растот на бруто домашниот производ (БДП) по жител за 2,43% во 2018 година, вкупниот економски раст до 2020 година може да достигне 3,2%. И дел од експанзијата ќе биде благодарение на рапидно растечкото производство на автомобилски компоненти. […]
[…] Read More… […]