Colliers International | Automotive Industry in Bulgaria, Research 2016

Automotive Industry in Bulgaria Research 2016

Contents

1.

2.

3.

3.1.

3.2.

3.3.

3.4.

3.5.

4.

4.1.

4.2.

4.3.

4.4.

4.5.

4.6.

4.7.

4.8.

4.9.

4.10.

4.11.

4.12.

4.13.

4.14.

4.15.

4.16.

4.17.

4.18.

4.19.

5.

5.1.

5.2.

5.3.

5.4.

5.5.

6.

2

Summary Forecast Overview of the Bulgarian automotive industry Introduction Main indicators by region Human Capital Infrastructure Cost comparison Sentiment survey Summary Perspective for the Bulgarian economy development in 2016 Reasons for choosing Bulgaria Revenue expectations for 2016 Production for the automotive industry Plans for further development in mid-term period (during the next 3 years) Evaluation of factors related to the business environment Business Challenges Current problems Occupied Properties Size of the company in terms of employees Forecast on employees growth Strategy for maintaining and developing the skills of the employees Plans for investing in properties and equipment by the end of 2016 Capacity utilization rate (operating rate) Location of suppliers Reliability of suppliers Corruption Electric vehicles Conclusions Labor costs Qualification of labor force Location of the country Corporate tax and tax incentives Country ranking Interview

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3 3 4 4 6 7 8 8 10 10 10 10 11 11 11 12 12 12 13 13 14 14 14 15 15 15 16 16 17 17 17 17 18 18 19

1. Summary > The automotive industry in Bulgaria

> Current challenges in Bulgaria

»» There are approx. 100 large enterprises forming the Automotive Industry in Bulgaria, producing parts for almost any brand from the global automotive industry

»» Lack of skilled labor force

»» Most companies are Tier 1, 2 and 3 suppliers and only one producer with assembly plant to date; R&D companies are focused on improving the automation of manufacturing, as well as designing contemporary electronic systems

»» Majority of suppliers located beyond national borders

»» The total revenue of the Industry in Bulgaria represents 3.5% of Bulgaria’s Gross Domestic Product.

> The expectations of the business

»» More than 33,000 employed »» Automotive companies are present in all regions in Bulgaria; South Central region is still most active »» 12 companies employ more than 1,000 employees »» ¤ 1.55 bln. revenue generated throughout 2015 »» Almost all companies’ businesses are labor and electricity intensive and use large premises »» Most companies resort to in-house staff training

»» Bureaucracy »» Inefficient legal system

»» Better macroeconomic performance in 2016 when compared to 2015 »» Higher revenues in 2016 »» Investors show sentiment towards expansion within the current location »» Employers consider increase of the number of employees »» No change in property investments »» An increase in equipment investments »» Positive to neutral influence of the expansion of electric vehicles

> Advantages of doing business in Bulgaria »» Low labor costs »» Member of EU »» Proximity to clients and producers »» Low real estate costs »» Low electricity prices »» Tax incentives when doing business in regions with high unemployment rate

2. Forecast »» New entries and further growth of the existing enterprises

»» Closer connection between education and business

»» More investments in training

»» Further development of infrastructure corresponding to the needs of the industry

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Automotive industry | Research, 2016

3. Overview of the Bulgarian automotive industry 3.1. Introduction With 3.5% of Bulgaria’s Gross Domestic Product, the automotive industry is surely taking a solid place in the economy of the country.

At the moment, there are around 100 large enterprises producing components for the global automotive industry. They are spread across the whole country making it possible for companies to tap into different pools of labor talent.

This study presents a research on the costs, human resources, infrastructure and comparison between several countries, situated in Western, Central and Eastern Europe. The research is supported by a sentiment survey among automotive companies in Bulgaria, conducted by Automotive Cluster Bulgaria and Colliers International, reviewing the reasons for choosing Bulgaria as a destination for their businesses, their expectations on growth and business development, as well as details on the specifications of their businesses.

The aforementioned companies are mainly Tier 1, 2 and 3 suppliers and not all of them, as seen in the survey, are dedicated to the automotive industry. This survey is based on core and non-core

Production Capacity

R&D Capacity

Car assembly

Interior and seats

Powertrain systems

Locking systems

Electronics and electronic components

Air conditioning systems (A/C)

Electric cabling

Lightning and signaling systems

Engines and engine components

Batteries and electric car components

Electronics software

Supporting system design

Diagnostic software

Manufacturing system development

Electric system design

Transportation systems

Mechanical system design

Miscellaneous

Sensor and indicator design

4

automotive companies. The first group of companies are dedicated to the automotive industry and, as mentioned above, mostly Tier 1, 2 and 3 suppliers. There is only one producer with an assembly plant to date – Great Wall. The non-core automotive producers are companies from light manufacturing sector whose activity is not solely dedicated to automotive. When it comes to product mix, both core and non-core companies are specialized in various productions like airbags, bearings, sealing solutions, cabling, sensors, electronics, lighting, batteries, A/C system, powertrain, etc. Whether it is engines components for Porsche, microchips for Volvo, leather upholstery for Mini Cooper, or aluminum frames for the latest BMW 7-series, the automotive segment in Bulgaria captures a very wide spectrum of parts and elements from the final product production. Automotive companies in Bulgaria produce parts for Audi, Mercedes, Volkswagen, Renault, Ford, Lada, Fiat, Porsche, Seat, Skoda, Volvo, Nissan, Mini, General Motors and many more.

Automotive industry | Research, 2016

Source: Automotive Cluster Bulgaria

Automotive Map of Bulgaria 2016-2020

The image above presents the current locations of the automotive companies, as well as the planned expansions.

As presented, there are two preferred locations for establishment of a business – to the east the area around Sofia, Pernik, and Mezdra, and in the central part of the country – Plovdiv, Pazardzhik, and Rakovski. Other big enterprises are located in the regions of Ruse, Kardzhali, Sliven and Yambol.

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Automotive industry | Research, 2016

Below is a study of the main factors affecting the Automotive Industry in Bulgaria, as well as cost comparison among several European countries. After the cost analysis section, you can find the results from the sentiment survey, which we conducted among the automotive companies. Based on the feedback from the survey, we calculated the importance of each industry factor and an index of Desirability. Finally, this study ends with summary and a short forecast.

3.2. Main indicators by region Regardless of the type of the companies, all of them share common business specifics, such as labor and energy intensity, need of large premises, skilled workers, etc. The map below provides summary of all key indicators by region and details of the presence of automotive companies:

North Central

2,860 38,500 €302.51

2,180 38,900 €138.22 Powertrain and chassis Body and main parts 54,399 €85.51 €26.84 19.42%

Electrical & electronics 3,473 €152.07 €19.57 6.47%

Southwest 7,209 71.600 €457.25

Electrical & electronics interior 155,845 €74.10 €20.91 4.57%

South Central

7,759 60,900 €382.07 Powertrain and chassis Electrical and electronics 53,058 €97.36 €35.71 9.35%

Northeast 723 46,400 €65.45 Body and main parts 48,352 €63.26 €0.99 1.51%

Southeast 12,360 49,000 €203.55 Electrical and electronics Body and main parts Powertrain and chassis 19,219 €82.11 €7.96 3.91%

Region

Total

Employees

33,090

Unemployed

305,300

Turn-over Company register (in mln)

¤ 1,549.04

Main production

As a result of the activity of all core companies, more than 30,800 people are employed. The total turnover and profit of all companies are EUR 1,360 and EUR 107 million, respectively.

This study is based on the Automotive Industry in Bulgaria, which includes core and non-core companies. That is why our main focus is on the core companies, but the influence of the non-core ones cannot be ignored as well. In order to obtain deeper knowledge on the sector, we have asked the business “What part of your revenue is from production connected with the automotive industry?” is section 2.5 of this paper. As a result, we have estimated adjusted turn over, profit, investments, number of employees, etc. of the Industry as a whole.* After all adjustments were made, the key indicators for the performance of the industry in Bulgaria are as follows: »»

EUR 1.55 bln total revenue

»»

33,000 employees

»»

EUR 112 mln profit

»»

EUR 554 mln investments

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Automotive industry | Research, 2016

Recent graduates and students

334,346

Investments (in mln)

¤ 554.42

Profit/Loss (in mln)

¤ 111.98

Profit margin

7.2%

As the map above describes, the highest activity is in the Southwest region with slightly over EUR 450 million turnover, which represents 29.5% of the total amount for Bulgaria. In addition, the latter takes second place, after South Central region, when it comes to total profit.

The region that has the largest number of recent graduates and students is the Southwest one. Large contribution to this region is the capital of Bulgaria – Sofia, which comprises 20 universities from 46 in Bulgaria. In 2015, there are more than 155,000 students and graduates in the Southwest region. The second place is taken from the North Central region and Veliko Tarnovo, in particular.

Five universities are operating there with over 54,000 students and graduates in 2015.

* The companies, which selected above 75% revenue from production meant for the Automotive Industry, are considered as core companies. For the remaining, which selected below 75%, was estimated a statistical median, which was later multiplied by the respective indicator (revenue, profit, number of employees, investments, etc.)

Source: Colliers’ research

Northwest

3.3. Human capital Because of the high labor intensity of the Industry, deeper knowledge, regarding the specifics of the human resources on the market, has to be obtained in order to reveal any potential for further development in the examined country. The higher frictional unemployment rate and the more recent engineering graduates a country has, the more attractive it appears in front of investors. The following lines describe the situation on the Bulgarian labor market and give details concerning the higher education in Bulgaria by region and field of study as well.

Employment - Automotive Segment Bulgaria (in ‘000) 30 25 20 15 10 5 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2011

2014

The following chart presents the number of students and graduates (Bachelor’s and Master’s degree), as well as the unemployment rate, by regions:

Students, Graduates and Unemployment rate by regions for 2015 (in `000) 160

14%

140

12%

120

10%

100

The table below shows the total amount of graduates in several fields of study throughout 2015. It is also separated by type of degree (Professional Bachelor’s, Bachelor’s, Masters or PhD).

The table comprises graduates within the whole country.

The field with most graduates, according to the table, is “Economic science and administration”, but among them, there are also many graduates in technological and construction subjects. The share of the graduates, who have studied “Economy and administration”, is 65%, while the shares for “Technology” and “Computer Science” are 23% and 7% respectively.

8%

80

6%

60

Degree Field of study

4%

40 20

2%

0

0%

Northwest Students

North Central Graduates

Northeast

2015 2016

Source: Automotive Cluster Bulgaria

Employment

Southwest

South Central

Southeast

Unemployment Rate *right axis

Source: National Statistical Institute

The highest unemployment rates are in Silistra (21.8%), Shumen (19.7%) and Vidin (18.8%). The three of them are located in the Northern regions. In the provinces where many students and graduates reside the unemployment rate is considerably lower in comparison to the others – Sofia (4.3%), Varna (5.7%) and Plovdiv (9.6%). It is worth mentioning that there are certain tax incentives in municipalities with high unemployment rate. More details regarding the incentives is presented in section 3.4 of this study.

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2012 2013

Automotive industry | Research, 2016

Economic Science and Administration

Professional Bachelor’s Master’s Bachelor

PhD

644

9,084

8,785

119

Natural Science

-

232

203

83

Physics and Chemistry

-

408

330

94

Mathematic and Statistics

-

59

28

14

Computer Science

58

1,199

703

36

Technology

411

3,754

2,426

166

Source: National Statistical Institute

3.4. Infrastructure

‘000 km

One of the main drivers for the development of this industry is infrastructure and access to main roads and railway lines. The total lengths of motorways and railway lines in Bulgaria are 776 kilometers and 4070 kilometers respectively.

45 40 35 30 25 20 15 10 5 0

In 2003 the total length of motorways in Bulgaria was 328 kilometers and in 2016 it is 776 kilometers. This is nearly 137% increase for 13 years. On the other side, the length of railway lines is slowly decreasing. In 2003 there were 4,316 kilometers of lines and now there are 4,070 kilometers.

Total length of motorways (in km) Total length of railway lines (in km)

Source: Eurostat Germany

France

UK

Spain

Italy

Poland

Hungary

The graph presents the total length of railway lines and in several countries from Western, Central and Eastern Europe, as well as the data for Turkey.

Czech Republic

Romania

Bulgaria

Turkey

This is a decrease with 5.7% for the period. Currently, there are five motorway projects in process of construction. By the end of 2022, the length of the motorways in Bulgaria will exceed 1,300 kilometers.

3.5. Cost comparison Bulgaria is known for its specific business environment such as competitive salary, flat tax rate of 10%, tax concession for making business in regions with high unemployment rate, etc.

Average annual employee cost (in ‘000 Euro) 80

Construction costs* (Euro/m²) 700

71.2

70

650

600

55.7

60

536

500

50

50

43.2 41.4

400

40

405

380

19

14.6 17.2

20

300

250

350 260

200 9.8

10

350

300

300

30

5.1

0

100

0.11

0.11

0.09

0.10

0.08

0.05

ga r ia Bu l

lic Ro m an ia

ec

kR

ep

ub

ga ry

d

Hu n

Po

lan

Ita ly

ain Sp

om

e

Ki n

Cz

25 20

20

0.10

19

19

15

16 10

10

10 5

Automotive industry | Research, 2016

a

ga r ia Bu l

Ro m an i

ic bl ep u

ga ry

kR

Cz

ec

Hu n

d lan

Ita ly

ain Sp

Po

Ki n

gd

om

e an c Fr

d ite Un

Ge r

ga r ia Bu l

ic Ro m an ia

bl ep u

ec

kR

ga ry

d lan Po

Ita ly

ain Sp

Hu n

Cz

Un

ite

d

Ki n

gd

om

e an c Fr

Sources: Eurostat, KPMG, Colliers’ research, World Bank

m an y

0

0.00 m an y

31.4

25

0.14

0.12

33.3

30 29.7

0.19

0.18

gd

an c d ite Un

Corporate tax (%) 35

0.20

0.15

Ge r

Fr

Ge r

ec Cz

ite Un

0.25 0.20

m an y

ga r ia

ep kR

Bu l

ub lic Ro m an ia

ga ry

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Hu n

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lan

Ita ly

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gd

an c d

Ki n

Fr

Ge r

m an y

0

Electricity prices for kWh industrial consumers *Including all taxes and levies (in Euro)

8

In order to compare these conditions to other countries, we have made a table, comprising main expenditures for firms in the sector.

* The presented costs regard 12 meters high warehouses

The annual average salary in Bulgaria is the lowest in the European Union. Compared to Germany it is almost 14 times smaller. Note that the quoted average annual employee cost applies for the automotive industry. In Bulgaria it represents 10.9% of the COGS (Cost of goods sold). The COGS comprises every cost related to the end product. Compared to the other countries, Bulgaria has an advantage with prices for electricity maintaining EUR 0.083 for kWh (industrial prices). The electricity prices include all taxes and levies. Only Hungary has the same corporate tax rate when the income is not exceeding HUF 500,000,000 (EUR 1,613,285).

In Bulgaria the construction cost for a warehouse made from reinforced concrete is approximately EUR 260/m². In the countries from Western and Central Europe the construction costs are in the range from EUR 300/m² in Spain to EUR 650/m² in France.

Poland is providing the lowest price for this type of construction, with an average price of EUR 250/m².

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Automotive industry | Research, 2016

There is only one European country offering prices competitive to their Bulgarian analogue – Serbia. The average annual employee cost in Serbia is around EUR 6,600. The price for electricity for medium-size industries is about EUR 0.059 for kWh. Since 1st January 2013, the corporate tax in Serbia amounts to 15% of the adjusted company’s profit . In order to build a 12-meter warehouse one must pay approximately EUR 350/m². However, the country is not a member of the European Union yet and for this reason, there is no possibility for duty free trade with the members of the European Union. As the automotive companies in Bulgaria shared in the survey, the membership of a country in the EU is crucial for their businesses. * Taxable profit is calculated by adjusting the company´s profit or loss declared in the P&L account according to the provisions of the Corporate Income Tax Law. Adjustments include certain disallowed costs, adjustment of certain revenues, transfer pricing as well as depreciation.

4. Sentiment survey 4.1. Summary In the spring of 2016 Colliers, in partnership with Automotive Cluster Bulgaria, conducted a survey among the largest automotive components-production companies in Bulgaria.

The purpose was to outline insights regarding the decision of choosing Bulgaria as a destination for establishing their business.

4.2. Perspective for the Bulgarian economy development in 2016 When asked “In your opinion, how does the perspective for the overall development of the Bulgarian economy in 2016 look like?”, more than half of the respondents are feeling positive about the future of the Bulgarian economy. Only 9% are of the opinion that the economy will be worse by the end of 2016. The other 32% are expecting that there will be no major changes. The following graph presents the aforementioned expectations for the development of the economy:

In your opinion, how does the perspective for the whole development of the Bulgarian economy in 2016 look like?

Positive, compared to 2015 59%

32% 9%

The same as in 2015

Negative, compared to 2015

4.3. Reasons for choosing Bulgaria The most significant reason is the cost of labor. Half of the participants have chosen labor cost as the main reason for choosing Bulgaria instead of another country for their business. Second and third reasons mentioned are European Union membership with 45%, in which Bulgaria is a member state since January 2007, and “Location and proximity to clients and producers”. The fourth place is taken by “Taxes and fees” with 36% from the respondents. The chart shows the main factors for choosing Bulgaria:

Which are the reasons to choose Bulgaria for the further development of your business?

Labor force price

50%

European Union

45%

Locationproximity to clients and producers

45%

Taxes and fees

36%

Currency board Electricity price

14%

Accessibility to labor force

14%

Competence/ Quality of labor force

10 Automotive industry | Research, 2016

23%

9%

4.4. Revenue expectations for 2016 Revenue expectations follow the pattern of expectations for the development of the Bulgarian economy, only on more positive terms. A total of 64% from the respondents are positive about the outcome at the end of the year. From the rest, 23% do not expect any change at all and 14 percent think that this year the revenue will get worse.

What expectations do you have when it comes to the revenue of your company during 2016?

No expectations for a change

23% 64% 14%

It will get worse

It will get better

What part of your revenue is from production, connected with the automotive industry?

4.5. Production for the automotive industry Another major indicator regarding the business of these firms is revenue from production generated by the automotive industry. More than a third of the respondents have shown that 75% or more of their production capacity is involved in the automotive industry. From the remaining, 48% involve less than 30% in products related to the automotive industry and 14% produce between 30 and 75% of their capacity for the industry.

50 45 40 35 30 25 20 15 10 5 0

48% 38%

14%

Above 75%

Between 30 and 75%

Up to 30%

4.6. Plans for further development in mid-term period (2017-2019) Over 60% of the respondents consider an expansion within their current location. One out of four has no plans for further development of the business. There are also some sentiments

towards expanding in a different location in Bulgaria or expanding in another country.

What kind of plans do you have for the further development of your business in medium-term period?

To expand within your current location

64%

No expectations for a change

23%

To contract your present activity To expand in other locations

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9% 5%

4.7. Evaluation of business environment factors The following chart shows the degree of importance and the level of satisfaction of 10 factors, as answered in the survey.

The scale ranges from 1 for very poor to 6 for excellent.

Evaluation of business environment factors Infrastructure 6

Price of labor force

5 4.7

4

Legal system 3.2

3

Qualification of labor force

2.9

2 4.1

3.2

Tax system

1

Degree of importance

0

Level of satisfaction

2.6

Availability of skilled labor force

2.6

Public Đ°dministration 2.5 3,4

Incentives/tax concessions

Political stability

4.1

Price of electricity

4.8. Business challenges The major difficulties, which most of the businesses had to deal during their establishment in Bulgaria, were skilled labor force and public administration with 35% and 22%

respectively. Other difficulties such as legal system, lack of business environment and corruption are further down the list.

Which are the difficulties during the development of your business in Bulgaria?

Skilled labor force

35%

Public administration

22%

Legal system

13%

Lack of business environment

9%

Competitive suppliers

9%

Corruption

4%

Small market - lack of big clients

4%

High export costs

4%

4.9. Current problems The biggest challenge, according to the survey, is sourcing skilled labor force. Due to low wages, many skilled and qualified workers move to countries with higher remuneration and standard of living. As seen in section “Human resources� and in the conclusions below, every

year around 60,000 students from universities and colleges take a degree in various subjects and fields. Other difficulties like public administration, inefficient legal system in need of restructuring, lack of business environment, have little influence on the companies of the sample.

What are the problems in your business, to which you still cannot find a solution?

Skilled labor force

23%

Lack of business environment

5%

Limited possibilities to participate in government procurement

5%

Industrial waste storage

5%

Improve the equipment

5%

Old legal system

5%

Public administration

5%

High use of electricity

5%

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4.10. Occupied properties In order to obtain sophisticated knowledge about the current market situation in the automotive industry, it is important to reveal the type of buildings in which the production is made. Therefore, the next question in the survey regards the type of the premises – whether they are owned / renovated factories, owned build-to-suit, rented or rented build-to-suit.

More than half of the respondents are in owned / renovated factories. One fifth are situated in an owned build-to-suit building.

In what type of buildings are you producing?

NA Build-to-Suit, rental

Rented

5% 5% 55%

15%

Owned/renovated factories

18% Build-to-Suit, owned

4.11. Size of the company in terms of employees This section focuses on the size of the businesses in terms of number of employees. One out of four companies has more than 1,000 employees. 18% have employees between 51-250 people. Other 18% from the respondents report staff consisting

of 251-1,000 people. The provided in the introduction map presents the exact location of the companies comprising more than 1,000 employees. The latter are presented as medium- or big-size circles.

how many employees work for your company at the moment

5%

< 10 employees

23%

11 - 50 employees

18%

51 - 250 employees

18%

14%

9%

251 - 1,000 employees

1,001 - 2,000 employees

> 2,000 employees

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4.12. Forecast on employees growth More than 40% of the managers have reported willingness to increase the number of employees by the end of 2016. From the remaining, 36% are not thinking about staff increase and 23% have not provided an answer.

41%

36%

To increase

To maintain

4.13. Strategy for maintaining and developing employee skills Difficulty number one, as shown in section â&#x20AC;&#x153;Difficulties in the development of a business in Bulgariaâ&#x20AC;?, is the lack of skilled labor force. Here is how the companies manage this issue:

what is your strategy for maintaining and developing the skills of your employees 77%

9%

14%

Internal company training

Own training center outside of Bulgaria

State schools, institutions of higher education and universities

4.14. Plans for investing in properties and equipment by the end of 2016 The companies willing to invest more in new property or upgrading the current one are 27%, while 50% are not considering an increase in property investments. The remaining 23% have not answered the question.

INVESTMENT IN PROPERTY

To increase 27%

To maintain 50%

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As regards equipment, majority of the companies show even more investment appetite. 59% want to invest more in equipment during 2016, while 18% think about maintaining the current state of investment in their production capacity.

INVESTMENT IN EQUIPMENT

To increase 59%

To maintain 18%

4.15. Capacity utilization rate (operating rate) What is your capacity utilization rate (operating rate)?

Capacity utilization rate is a metric used to measure the ratio at which potential output levels are being met or used. Most of the respondents have pointed a capacity utilization rate between 75 and 90 percent.

Above 90%

14%

Between 75–90%

36%

Between 50–75%

18%

Up to 50%

5%

NA

27%

4.16. Location of suppliers The results from the survey show that the majority of suppliers are located beyond the national borders. Most of these suppliers are situated in countries with traditions in the industry – Germany, Italy, France, etc. This might be

considered as a challenge. Nevertheless, it must be noted, that Bulgaria is a member of EU benefiting from duty free trade with the other member countries.

is the majority of your suppliers located in bulgaria?

No 45% Yes 32%

4.17. Reliability of suppliers On the question “How do you valuate the reliability of your suppliers? (as a balance between time for delivery and quality)”,

59% are satisfied from their suppliers, 18% are neither satisfied nor dissatisfied and 23% have not answered the question.

how do you valuate the Reliability of your suppliers? (as a balance between time for delivery and quality)

Good 59%

15 Automotive industry | Research, 2016

Average 18%

No answer 23%

4.18. Corruption In the survey managers were asked if corruption in Bulgaria affected their business. Results are presented on the chart below:

Does corruption in Bulgaria affect your business?

Yes 41% 36% 23%

No

NA

4.19. Electric vehicles In the near future more and more vehicles are expected to be electric and thus energy-saving. This type of cars does not have the same parts like an ordinary car. Most of the respondents are of the opinion, that this step would help

their development or there would be no influence at all. Only 5% think that electric cars would contract their business. The following chart presents these expectations:

What would be the influence on your business, if the electric vehicles expand their share of sales in global aspect? It would help our development

27%

There would be no influence It would contract our business Not certain about it NA

16 Automotive industry | Research, 2016

36% 5% 9% 23%

5. Conclusions

As a result of the research, conducted by Colliers International and Automotive Cluster Bulgaria, several topics are summarized below: • Labor costs • Qualification of labor force • Location of the country • Corporate tax and tax incentives

5.1. Labor costs According to the conducted survey, the cost of labor is the largest advantage of Bulgaria when choosing a country for the expansion of a business. This factor was chosen by half of the respondents as a key one in their decision-making process. However, the labor cost is not the only criterion when it comes to human capital. Bulgaria is well known for the high skill sets of the talent pool as well. Nowadays, Bulgaria is becoming a popular destination, as employees are fluent in various languages, command mathematics and engineering skills. Also, due to the religious and cultural coherence of the country (>90% Christian orthodox), the employees express loyalty in their work, which is also appreciated by employers.

In terms of mathematical and engineering science, Bulgaria takes place among many international pre- and post-college science competitions, many of which won by the Bulgarians.

In section “Cost comparison”, we have compared the position of Bulgaria among the other European countries in terms of cost of labor. The average annual employee cost in the automotive industry, as seen in Eurostat, in Bulgaria is approximately EUR 5,100 per year. Every other country in the sample (10 European countries) has higher cost of labor, due to required minimal wages, expensive social security system, high living standards, etc. Currently, the minimal wage in Bulgaria is BGN 420 (EUR 215). Social security expense for third category labor amounts to 18.1% from the gross wage of the employee and the cost of living index of Sofia, as seen in Numbeo, is 38.21 taking 290th position from a sample of 372 cities across the world. For comparison, Hamburg in Germany takes 79th position with a value of the index 75.42 and Paris in France is at 30th place with 83.89.

5.2. Qualification of labor force It is often considered that countries with low wages cannot offer skilled labor force. As seen in section “Business Challenges in Bulgaria” one out of three respondents faces the same problem, namely low qualification of the employees.

Nevertheless, for the past 5 years about 310,800 graduates have obtained either Bachelor’s or Master’s degree, according

to the National Statistical Institute. Meanwhile, some 270,000 students are on average in the educational system. These two numbers represent 8% from the Bulgarian population. As a conclusion, there is an upcoming skilled talent pool that will join the labor market and contribute to solution of the labor availability challenge.

5.3. Location of the country 45% of the respondents have pointed the importance of the location as a major reason for choosing Bulgaria. Most of the companies are tier 1 and 2 suppliers and the proximity to large automotive manufactures is crucial for their business. That makes Bulgaria a reasonable choice, due to the membership

17 Automotive industry | Research, 2016

in the EU (free movement of the production within the Union) and the vicinity to major European countries with traditions in the industry. The aforementioned membership allows duty free movement of the production within the Union.

5.4. Corporate tax and tax incentives Only Hungary provides corporate tax equal to its Bulgarian analogue. It is worth mentioning that the tax rate in Hungary applies for taxable income up to HUF 500,000,000 (approximately EUR 1,600,000). The excess amount is taxed at 19%. Our sample comprises 109 companies from which 73 have an income above EUR 1,600,000.

The Corporate Income Tax Act allows corporate tax concession up to 100% in municipalities with unemployment rate 25% higher than the national average. These municipalities are shown in blue color on the map below:

UNEMPLOYMENT RATE BY MUNICIPALITIES Vidin - Region center

Novo Selo Bregovo

Vidin

Boinitza

Lom - Municipality

Kula Lom

Ruzhentzi Chuprene

Valchedrum

Montana

Hairedin

Kostinbrod Slivnitza Bojurishte

Pernik

Yablanitza

Suhindol

Lovech Ugarchin

Sevlievo Troyan

Gorna Chelopech Anton Zlatitza Malina Pirdop Mirkovo Elin Pelin Chavdar Koprivshtitza Panagyurishte

Ihtiman

Dve Mogili

Polski Trambesh Pavlikeni

Popovo Strajitza

Veliko Tarnovo

Lyaskovetz Zlataritza

Dryanovo

Targovishte Antonovo

Kazanluk

Sopot

Stara Zagora

Brezovo Kaloyanovo

Strumyane Sandanski

Satovcha

Borino Dospat

Hadjidimovo

Petrich

Kurdjali

Banite

Smolyan

Ruen

Momchilgrad Djebel Zlatograd Kirkovo

Nesebar

Karnobat

Nova Zagora

Burgas

Yambol

Madjarovo

Ivailovgrad

Nedelino

Byala Pomorie

Straldja

Ardino

Madan Rudozem

Var na

Beloslav Avren

Aitos

Samokov Kostenetz Bobov Sapareva Tundja Lesichevo Radnevo Dolna Saedinenie Dol Banya Rakovski Bania Septemvri Dupnitza Churpan Opan Maritza Boboshevo Elhovo Pazardjik Belovo Galabovo Rila Plovdiv Sadovo Kocherinovo Topolovgrad Perushtitza Nevestino Peshtera Dimitrovgrad Yakoruda Krichim Simeonovgrad Rakitovo Parvomai Kuklen Blagoevgrad Bratzigovo Velingrad Mineralni Rodopi Harmanli Asenovgrad Belitza bani Razlog Simitly Haskovo Svilengrad Sarnitsa Batak Devin Lyubimetz Laki Bansko Stambolovo Chernoochene Chepelare Kresna Garmen Goze Delchev

Aksakovo

Dolni Chiflik

Kameno

Bratya Daskalovi

Kyustend il

Kavarna

Dalgopol

Sungurlare

Sliven

Maglij Nikolaevo

Pavel Bnya

Karlovo

Suvorovo Devnya

Provadia

Tvarditza

Gurkovo

Vetrino

Kaspichan

Smyadovo

Kotel

Shabla Balchik

Vulchi Dol

Shumen

Varbitza Elena

Dobrich

Novi Pazar

Veliki Preslav

Omurtag

Tryavna

Apriltzi

Dobrich region

Kaolinovo Nikola Venetz Kozlevo

Hitrino

Loznitza

Hisarya

Strelcha

Razgrad

General Toshevo

Tervel

Isperih Samuil

Opaka

Gorna Oryahovitza

Gabrovo

Tet even

Etropole

Kovachevtzi Radomir

Pordim Letnitza

Pravetz

Tzenovo

Krushari

Dulovo Zavet

Tzar Kaloyan

Byala

Botevgrad

Sofia region

Sofia -city

Breznik

Pleven

Lukovit

Roman Mezdra

Dragoman

Dolnu Dabnik

Cherven Bryag

Svishtov

Levski

Alfatar

Kubrat Vyatovo

Borovo

Nikopol

Kneja

Vratza

Svoge

Trekliano

Dolna Iskar Mitropolia

Byala Slatina

Krivodol

Godech

Guliantzi Belene

Borovan

Chiprovtzi

Zemen

Oryahovo

Mizia

Boichinovtzi

Berkovitza Georgi Damianovo Varshetz

Trun

Ivanovo

Kozlodui

Brusartzi Yakimovo Medkovez

Koinardja

Sitovo Glavinitza

Ruse

Gramada Makresh Dimovo Belogradchik

Silistra

Tutrakan

Slivo Pole

Krumovgrad

Sredetz

Sozopol Primorsk o Malko Tarnovo

Bolyarovo

Tzarevo

Municipalities with an unemployment rate lower than the country`s average Municipalities with an unemployment rate equal to or higher than the country`s average (Art. 3, (8) RAIPA) Municipalities with an unemployment rate 25% higher than the country`s average (Art. 183, (1) CITA; Art. 3, (8) RAIPA)

5.5. Country ranking Further to considering all the important factors, related to automotive industry, we have created a country ranking comprising the countries in section “Cost comparison”. The countries are ranked by index, consisting of the weighted positions of every country in the list. The weights of every factor are determined by the results of the survey in section “Reasons for choosing Bulgaria”. The weights are afterwards multiplied by the respective position of the country in regards to each indicator presented in the section “Cost comparison section”. Note that not every expenditure is presented in that section. The ranking depends only on the presented sample of expenditures. The lower index presents better conditions in the examined country. In order to provide better understanding of the index, we have given an example: Poland – third place when considering annual labor costs, multiplied by the weight of this factor 0.21 equals to 0.63. Fifth place in electricity prices is multiplied by the weight factor of 0.06 equals 0.28. Poland is also fifth in corporate tax which is multiplied by the weight of

18 Automotive industry | Research, 2016

Country

Index

Rank

Bulgaria

0.42

1

Romania

1.04

2

Hungary

1.36

3

Poland

1.66

4

Czech Republic

1.75

5

Spain

2.91

6

United Kingdom

3.02

7

Italy

3.11

8

France

3.72

9

Germany

3.85

10

this factor 0.15 equals 0.75. The final index is the sum of the weights (0.63 + 0.28 + 0.75 = 1.66).

6. Interview Ivaylo Petrov

General Manager Magna Powertrain Plovdiv

Q: Bulgaria is your only destination on the Balkans, what were the reasons to choose our country? (list them by priority) 1. The overall trend of moving supply chain south-east.

2. EU member: Expectation for political stability and reliable and predictable tax frame.

3. Cost 4. Traditions in manufacturing industry.

Q: Which were the other countries Bulgaria competed with?

A: Romania, Ukraine, Slovakia, Poland

Q. How do you evaluate the business climate here?

A: For big companies, rather good.

Q: After many years of operation on the local market (since 2007 - former ixetic, then acquired by Magna in 2012), have you identified competitive advantages for your business that you didnâ&#x20AC;&#x2122;t expect when choosing initially the market?

the consequences. As example, very unprofessional and low level talks about changing tax frame, from people obviously lacking expertise in the area, are considered a dangerous signal for potential investors.

Simply said, the reliability of the country should improve, as a whole. For this, politicians should think twice, before talking and/or acting.

Educational system, in my opinion the single chaos criteria for the future of Bulgaria, should get more value oriented.

Dual system is a good start. However, the highest priority of any educational system should be first to distribute the needed values and make sure, after 12 years in school and 5 to 10 years in university, certain values and ethical principles are deeply bound into most of the young people. This will help a ton for the next point as well.

Justice and law enforcement system are the second chaos criteria, if they donâ&#x20AC;&#x2122;t work as they should, Bulgaria will never become the country it wants to be.

None or little of the above will happen if the right leaders donâ&#x20AC;&#x2122;t get to rule the country. Unfortunately, I am not a big optimist here.

What has improved is the responsiveness from the government. Understanding and considering the advice from the real business, as well.

A: I do not recall any unexpected advantages.

Q: What has improved and what needs to improve in Bulgaria for investors like you?

Q. What are your business plans for the next 3 years in our country?

A: For the improvement potential, I would say on political level, it is necessary to stop talking about certain changes in the business environment, before making a risk analysis of

A: Growth, cannot share more for the time being.

19 Automotive industry | Research, 2016

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