Automotive brief: Bulgaria
- Investor Services
Bulgaria’s car industry: Strong growth despite infrastructure, demographic limitations
In January, Bulgaria took over the presidency of the European Union (EU). After more than a decade since joining the bloc in 2007, Bulgaria is under direct spotlight in the EU, as its government works with EU institutions to run and implement the EU agenda. It is a perfect opportunity for the government to showcase its achievements – both economic and political – to a broader European and international audience.
Bulgaria has much to be proud of economically over the past decade
- GDP per capita grew on average by 7.3% between 2001 and 2007, and then by 2.2% between 2008 and 2016, a slowdown largely due to the European economic woes
- Foreign investment significantly increased since the early 2000s, driving growth rates upwards and reducing unemployment
The automotive industry is among the sectors that have seen the largest expansion and in-flow of foreign investment over the past decade. According to the Automotive Cluster Bulgaria, the leading automotive industry body in the country, the sector employs 1% of Bulgaria workforce and contributes to more than 3% of GDP. Some of the largest international automotive players have production facilities in Bulgaria. Low labour costs, qualified and skilled labour force and relative proximity and free access to large West European markets, make Bulgaria an attractive destination for large automotive businesses looking to expand their operations.
As everywhere, businesses looking at opportunities in Bulgaria’s automotive sector will also face a set of risks such as poor infrastructure, downward demographic trends, and persistent corruption.
For Bulgaria, one of the main benefits of EU membership is access to the EU’s regional and structural funds, aimed to narrow intra-EU development and wealth gaps. As one of the poorest EU members, since accession, Bulgaria has been one of the largest beneficiaries of EU funds with whose help governments have funded the construction of several large infrastructure projects over the past few years.
Most important for the automotive sector are the two main motorway projects:
1. The Trakia Motorway connects the capital Sofia in the west with the two large port cities on the Black Sea coast, Varna and Burgas, and was completed in 2013, significantly reducing travel times between Sofia and the sea coast.
2. The Hemus Motorway is meant to connect Sofia to the sea coast through the northern part of the country, but is yet to be completed, with only 170km section operational out of planned 420km.
This highlights one of the key infrastructure deficiencies in the country. Road and overall transport infrastructure in the south of the country are in much better shape than in the north. This has implications for industries – such as the automotive sector – that require reliable supply chain routes and whose operations can be adversely affected if no suitable alternative routes exist. Moreover, the slow development of transport infrastructure to the north impedes efforts to better integrate automotive clusters in Bulgaria with those in other countries in the region, such as Romania and Hungary, which have seen similarly large expansion of this sector over the past decade.
Demographic trends in Bulgaria are among the worst in the world. The country’s population has been continually shrinking since the early 1990s and it population is projected to decline to 5.5m in 2050, from around 7m in 2016 and 9m in 1990. This has two key implications for the automotive sector: availability of labour and size of the market.
While many businesses have invested in Bulgaria attracted by the relatively cheap and high-skilled labour force, this is likely to change in the next few years. Unemployment has steadily declined to around 7% and there is very little spare labour available to hire locally. Labour shortages are likely to become an increasingly pressing issue for companies in the next few years. Declining demographic trends combined with strict immigration policies will make it ever more difficult for businesses to hire qualified labour, driving labour costs upwards.
In addition, projections for the size of the automotive market are likely to reflect the downward demographic trends. With the fastest shrinking population in Europe, the consumer base in Bulgaria will grow slower than in other similar economies in the region. Consequently, as an automotive market, Bulgaria will become comparatively less attractive.
Corruption – both in the public and the private sectors – remains a major obstacle for businesses in Bulgaria. Bulgaria is regularly ranked among the most corrupt EU members. Although more attention is paid to corrupt practices in the public sector and the state administration, lack of transparent and competitive practices in the private sector poses a serious threat to companies. Exposure through third parties, suppliers and contractors is a persistent threat for businesses in sectors such as the automotive which depend on a wide range of local businesses for services and support. While the automotive sector has not seen many corruption scandals over the past decade, since these companies are not usually involved in high-profile public procurement scandals, corruption remains a substantial risk for companies in this industry.
Investment in Bulgaria’s car industry will remain attractive, as the Bulgarian economy continues to grow and the government extends investment incentives to the automotive and other high-tech sectors. Balancing those opportunities with the risks is key to successfully doing business in the country.