Boasting the highest per-capita car production in the world, Slovakia has become a magnet for export-oriented manufacturing industries such as automotive and electronics, and a hotspot for shared services centres (SSCs) and business process outsourcing centres (BPOs).

As a transit hub on the New Silk Road, Slovakia is actively developing and upgrading its infrastructure to prepare for the expected increase in cargo traffic between Europe and Asia. It also benefits from its favourable location between the seaports of southern and northern Europe.

The Slovakian government is also keen on adopting and promoting the use of new technology to facilitate cross-border cargo movement. And it is continuing to stretch its wings to Asia, with initiatives such as a plan to start a double tax treaty negotiation with Hong Kong. The private sector is also keen to develop its services for clients who are looking for a reliable business accelerator to tap the European market.

The Troika underlying the Slovak Economy

After its “velvet divorce” from the Czech Republic on 1 January 1993, Slovakia embarked on a number of ambitious structural reforms with a vision of becoming one of the best business locations in Europe. Joining the EU in 2004, becoming part of the Schengen area in 2007 and adopting the euro on 1 January 2009, together with fiscal reforms such as the abolition of dividend tax, profit transfer tax and real estate transfer tax, have helped the country develop into the darling of investors both from the former Soviet bloc and western Europe.

With its strong industrial base, Slovakia’s economy has become one of the fastest-growing in the Eurozone. It has an average annual GDP growth of 1.9% since its adoption of the euro in 2009, and is the best-performing Eurozone member in the 16+1 format (co-operation between 16 CEE countries and China). And thanks to its concentration on export-led development, it has become a magnet for export-oriented manufacturing, especially in the automotive and electronics industries, and a hotspot for SSCs and BPOs.

1. Automotive Industry

Slovakia prides itself on its heritage in mechanical engineering, which is closely connected to the country’s vibrant automotive industry. Since 2007, Slovakia has been the world’s biggest per-capita carmaker, producing 192 vehicles per 1,000 inhabitants in 2016 (which compares to a global average of 10 vehicles per 1,000 inhabitants).

The automotive industry accounts for more than 40% of Slovakia’s industrial production and one-third of its total exports. The country’s annual car production exceeded one million vehicles for the first time in 2015. Last year, that figure edged up to 1.04mn, and the sector is expecting an annual output of up to 1.35mn vehicles by 2020.

The driving force behind this impressive growth are three established carmakers – Volkswagen (VW), Peugeot Citroën (PSA) and Kia, which have been manufacturing cars in Slovakia since 1991, 2003 and 2004 respectively – and their tier 1 and tier 2 suppliers which have been constantly expanding their manufacturing plants across the country.

Jaguar Land Rover (JLR), a relative newcomer to Slovakia, has invested in a new 300,000 sq m manufacturing facility which is set to provide further impetus to the industry. Aimed at a yearly capacity of 300,000 vehicles and an initial annual production of 150,000 vehicles planned for 2019, the upcoming JLR plant is forecast to boost the country’s car production by 15% to 30% upon completion in October 2018.

Automotive R&D in Slovakia has flourished hand in hand with the rise in car production, especially for e-mobility products and initiatives such as wireless chargers for e-cars, electrical race cars and testing for driverless cars. Other early fruits of successful auto-related R&D projects include seat systems by American company Johnson Controls, lighting systems by Austria’s ZKW, brake calipers by Continental Automotive of Germany, transport automation by their compatriots Siemens, and twinspin gearboxes and automatic logistics systems created by two domestic businesses, Spinea and CEIT.

2. Electronics

With electronics and electrical systems now accounting for some 30% of a passenger car’s overall production cost, it’s clear that the electronic industry is actually shaping the future of the automobile industry.

Against this backdrop, Slovakia has developed the electronics industry into its second largest pillar industry, accounting for about 11% of the country’s total industrial production. The production plants of such global electronics giants as Foxconn, Samsung, Panasonic and Whirlpool, have made Slovakia the biggest LCD TVs supplier for the European market and a major manufacturing base of home appliances in CEE.

Even though Slovakia does not have its own automotive or many homegrown electronics brands and mainly produces products on an OEM (Original Equipment Manufacturer) basis for international names, the success of the automotive and electronics industries in Slovakia has played an important part in kick-starting a handful of homegrown innovations. These include the creation of the world’s most advanced flying car by AeroMobil; popular antivirus software developed by ESET to counter the notorious computer virus “Vienna”; and the production by Sygic of one of the most installed offline navigation applications worldwide.

3. SSCs and BPOs

Slovakia has developed a leading reputation for quality and high-value services over the past decade. The country’s combination of highly-qualified, multilingual personnel, reasonable wage levels, competitive prices for office space and investment incentives of up to 35% of total investment costs, have attracted more than 60 SSCs and BPOs to the country.

They provide a multi-functional scope of operations, including accounting and finance, IT, customer service, HR, procurement, purchasing and order processing, and sales and marketing, or execute specific outsourced business processes for companies from abroad.

Most of the SSCs & BPOs in Slovakia are from the US and Western Europe, with only about 3% coming from Asia. Chinese companies active in Slovakia include Lenovo and Yanfeng Automotive Interiors (YFAI).

Foreign companies in Slovakia tend to be drawn to the capital Bratislava and the country’s second largest city Košice, thanks to their more modern infrastructure and favourable location to and connections with other major CEE cities. But new hubs such as Banská Bystrica, Nitra, Prešov, Trenčín, Trnava and Žilina are gradually developing by offering a more flexible combination of business conditions.

Lenovo has based its EMEA Support Centre in Bratislava since 2006, serving clients and customers from Europe, the Middle East and Africa following its acquisition of IBM’s PC business in 2005. YFAI has located its Automotive Business Center in Bratislava since 2007, delivering core business process capabilities in purchasing, finance, quality, customer business unit management, and human resources for the European and South African markets, and working complementarily with its Slovakian-based production plant and engineering centre.

Jockeying for a Position as a Transit Hub on the New Silk Road

The choice of Slovakia by the Chinese companies goes beyond production cost considerations. The country’s strategic location as an inland hub connecting Europe with China over three transit corridors – the Tran-Siberian transit (Slovakia-Manchuria), the Kazakh transit (Slovakia-Alashankou) and the Trans-Caspian transit (Slovakia-Alashankou via Azerbaijan and Georgia) – has enabled Chinese manufacturers to ship parts and components directly by rail in about 12 days to factories in Slovakia for processing near to their final European market. This allows the companies to enjoy both the more agile supply chain response capabilities and the tariff-free status of being made in the EU.

As a case in point, the ongoing acquisition of the country’s largest steel mill US Steel Košice (USSK) by He-Steel Group of China not only helps the Chinese steelmaker gain a foothold in the European industry and avoid prohibitive EU anti-dumping duties on steel imports, it also highlights Slovakia’s strategic location close to non-EU European suppliers of raw materials for its automotive and electronics industries, such as Ukraine.

While bulk cargos and non-containerised goods such as raw materials for steel production remain the major products carried by the railways, the Slovak government is actively investing on railway infrastructure to make it more competitive for higher-value container traffic. It is enhancing the trans-loading capacity for the movement of containers between the broad-gauge (1,520mm) trains used in former Soviet countries, such as Russia, Kazakhstan and Belarus, and the standard-gauge (1,435mm) trains used in China and the EU.

Priority projects include the modernisation of the broad-gauge railway between Maťovce and Košice along the Uzhhorod-Košice line (used mainly for transporting iron ore from Ukraine to the steel industry near Košice) and the expansion of the intermodal terminal at Dobrá, the European end of the rail link with Yingkou (the port city of China's north-east Liaoning province).

D1 Expo Business Centre offers not only office space but also a permanent product exposition for its clients.

In order to prepare for the expected increase in Eurasia rail cargo traffic and make itself more attractive to international manufacturing and logistics companies, Slovakia has also been developing and upgrading its intermodal logistics infrastructure. By doing this, it also hopes to maximize the benefit of its advantageous location between seaports in southern Europe, such as Koper in Slovenia and Trieste in Italy, and those in northern Europe, like Hamburg in Germany.

Key projects include an intermodal terminal and a global logistics and industrial park (GLIP) at Košice, a tri-modal (rail, road and river) terminal close to the international airport at Bratislava and new intermodal terminals at Žilina and Leopoldov.

The Slovakian government, especially the Ministry of Finance and Ministry of Transport, is also keen on adopting and promoting the use of new technology such as electronic locks and electronic customs clearance systems to make tracking or tracing cross-border cargo movement more effective. To achieve this, the Slovakian government is working closely with Russia, Ukraine and Kazakhstan.

An early sign of the likely success of these joint negotiations has been the resumption of Eurasian freight rail services from Changsha, the capital of central China’s Hunan province, to Budapest, the Hungarian capital. The service, which runs through Slovakia and trans-loads at the Dobrá terminal near the Slovak-Ukrainian border, returned into service on 14 June 2017.

Following the Memorandum of Understanding between Slovakia and China for Common Support of the Silk Road Economic Belt and 21st Century Maritime Silk Road Initiatives in the field of transport and logistics, which was signed on 26 November 2015 in Beijing, Slovakia is also looking to expand its activities to Asia.  One example of this includes the possibility to start negotiations on a double tax treaty with Hong Kong.

An exposition of EFG’s street lamps at D1 Expo Business Centre.

Aside from projects initiated by the public sector, private enterprises, such as the Bratislava-based business consultant D1 Solution and the Austrian-based integrated logistics partner Cargo-Partner, have been investing extensively to try to attract clients who are looking for a reliable CEE business accelerator.

By offering tailor-made services from end-to-end supply chain set-up to sales and account management, D1 Solution has positioned itself as a business enabler for local and overseas companies looking to make inroads into the EU market. Its Expo Business Centre, strategically located at the intersection of the country’s main thoroughfare, the D1 highway, and the busy state road 503, has already attracted a handful of Chinese producers of lighting technologies, including the Weledu Group and members/partners such as BestLumi, CEC/SED, EFG and MCOB, since opening in June 2016.

Cargo-Partner, riding on its strong market position in the CEE region and its logistics centres in Bratislava and Dunajská Streda (next to the Slovakia’s largest rail terminal), is also expanding its trans-loading and warehousing capacity in Slovakia to further enhance the country’s inter-modality across the CEE hinterland.

Cargo-Partner already has a substantial presence in the Asia-Pacific region, with offices in the Chinese mainland, Hong Kong, Taiwan, South Korea and five of the ASEAN countries (Malaysia, Myanmar, Singapore, Thailand and Vietnam). It increased its turnover in the Asia-Pacific region from €23mn to €180mn in the decade ending 2016, and hopes to raise that figure to €300mn by 2020.

In order to achieve this, the company opened a new bonded customs warehouse in Shanghai in October 2016 and has made plans for the continual development of its services, especially in information technology, e-commerce solutions and vertical market expertise in food and beverage, healthcare, textiles and fashion products.

The head office of Cargo-Partner in Bratislava, Slovakia.

The company’s managing director in Slovakia, Tibor Majzún, says Slovakia’s competitive cost-effectiveness, together with its ready inter-modal connectivity, is increasingly welcomed by Asian companies looking for a regional distribution base in Europe.

He also believes the successful implementation of the BRI, especially the strengthened Eurasian connectivity, would help to benefit enterprises beyond industry heavyweights like Foxconn, IKEA, Samsung and the four carmakers. He says Cargo-Partner, with its Asia-Pacific Head Office in Hong Kong, can serve as a conduit for sea-land cargo moving between Europe and Asia.

The Visegrad Four (V4) nations, consisting of the Czech Republic, Hungary, Poland and Slovakia, have had remarkable success in aligning and strengthening their economies to compete and play a dominant role in the regional economy of Central and Eastern Europe (CEE). They are poised to benefit most from the multifaceted alignment of the “16+1” format co-operation between Central and Eastern European countries and China) and Belt and Road Initiative (BRI).

The V4 countries, located in the heart of Europe, have seen rising trade and investment flows on the back of strengthened Sino-CEE co-operation and connectivity. Meanwhile, more and more V4 businesses have taken on a more global perspective in searching for new markets.

Hong Kong, given its unique combination of a vibrant capital market and a large professional services cluster with extensive global networks and affiliations, can be a crucial link in providing the important capital flows and the highly sought-after assurance to new-to-the-market V4 enterprises and investors.

Enhanced connectivity and increasingly vibrant investment flows have not only made it possible for each of the V4 countries to reinvent and reposition itself in the bigger picture of Sino-CEE co-operation, they have also provided traders and manufacturers with more possibilities in terms of regional distribution and supply chain management.

V4 Countries as Core BRI Partners in CEE

Central and Eastern European Countries (CEECs) have played an increasingly pivotal role in China’s foreign policy, and are key partners in the BRI. The “16+1” format and the BRI  have multifaceted alignment as both development initiatives led by China are aiming at intensifying and expanding co-operation with the 16 CEECs, including investment in infrastructure and cooperation in industry and technology development.

Different CEECs may benefit differently from the strengthening Sino-CEEC co-operation and connectivity subject to their own development plans and national strategies. The V4, which play a leading role in the regional economy and have had remarkable success aligning and strengthening their economies to compete effectively regionally and internationally, are poised to benefit most in drawing trade and investment interest.

Representing more than half of the population and nearly two-thirds of the economic output of the 16 CEE member countries under the umbrella of the “16+1” format, the V4 are naturally important and active participants in the BRI. They offer a progressively interesting logistic alternative for shippers and their forwarders moving cargo between Asia and Western Europe, which is considered a priority to the success of the BRI as it aims to enhance the connectivity between Asia, Europe and Africa.

Banking on the good Sino-V4 relations and China’s continuous implementation of its “going out” strategy, China’s outbound direct investment (ODI) in the V4 countries has been flourishing, while bilateral trade blossoms. In the five years ending 2015, China’s ODI to the V4 grew by more than 65% from US$769mn to US$1.28bn, accounting for nearly two-thirds of China’s ODI in the 16 CEECs. Though China’s investment in V4 countries and the other CEECs is far from significant in the light of China’ total ODI, Hong Kong’s professional services providers and Chinese-funded corporate structures have quite often been involved in Sino-V4 investment deals such as M&As and takeovers.

While cash-rich Chinese investors have already made successful inroads into V4 countries by acquiring promising businesses over the past decade, more brownfield and greenfield projects, both private and public, are expected to materialise in the bloc in the coming years. Such a sustained wave of Chinese investment, plus generous funding from European Structural and Investment Funds (ESIF) supporting mega infrastructure projects, research and innovation and small businesses (including start-ups), will certainly give a big shot in the arm for the V4 economy to rejuvenate its industrial and commercial prowess.

Just as they are the leading recipients of Chinese ODI in CEE, the V4 countries are also the leading trading partners of China among the 16 CEECs, accounting for 73% of the total Sino-CEEC trade in 2016. Trade between China and CEECs has remained unbalanced, however. This unbalanced trade pattern – China exported nearly twice as much as it imported from the V4 countries in 2016 – has become a raison d’etre for deeper and wider Sino-V4 cooperation from mergers and acquisitions (M&As) and takeovers to higher value-added manufacturing, technology exchanges and infrastructure and real estate (IRES) projects.

The pattern of Hong Kong’s trade with V4 countries coincides with that of Sino-V4 trade – with the four countries accounting for more than 75% of Hong Kong’s total trade with the 16 CEECs in 2016. Boasting a year-on-year growth in trade of between 9% and 22%, (compared to the regional average of less than 7%) Hungary, Poland and Slovakia were not only Hong Kong’s key trading partners in the CEE, but the city’s fast-growing export destinations in the region last year.

As the vibrant Sino-V4 investment flows are playing an increasingly important and active role in nurturing V4 businesses to take on a more global perspective, more and more V4 enterprises are looking further afield in their search for new markets. This is also partly due to the dire need to compensate for the loss of the Russian market due to the ongoing economic sanctions between the EU and Russia. In this regard, Hong Kong, widely considered a safe and clear-cut gateway for V4 companies to explore the Chinese mainland market, is seeing an encouraging inflow and expansion of well-known V4 enterprises, products and brands.

The unique combination of a vibrant capital market with diverse financing channels and a large professional and financial advisory services cluster with extensive global networks and affiliations has thus made Hong Kong an irreplaceable partner for V4 investors, intermediaries and project owners hoping to take advantage of BRI and “16+1” opportunities. As a regional hub for legal services and dispute resolution underpinned by a trusted common law system and an independent judiciary, Hong Kong can be a crucial link in providing highly sought-after assurances to new-to-the-market V4 enterprises and investors.

New Positions of V4 Nations in Sino-CEE Co-operation

Strengthening Sino-V4 trade and investment flows are certainly good signs of the successful implementation of the 16+1 format and BRI in CEE. They have empowered the V4 countries to reinvent and reposition themselves in the bigger picture of Sino-CEE co-operation, while providing traders and manufacturers with far more possibilities in terms of regional distribution and supply chain management.

Poland: Profiting from Increasing Asia-Europe Rail Traffic

Poland, as the region’s largest economy, has successfully captured the lion’s share of the increasing Eurasian rail traffic and developed itself into a rail logistics hub for Asia-Europe cargo trains, thanks partly to the ongoing Russian-Ukrainian conflicts that have compromised the Eurasian rail traffic passing through Russia and Ukraine to Hungary or Slovakia. This, together with the nation’s unrivalled advantage of being the only one among the V4 countries to have access to open sea, has made Poland a natural choice with respect to regional distribution in CEE.

New projects, such as the Pomeranian Special Economic Zone (PSEZ) in Biala Podlaska near the Polish-Belarusian border, will also further empower the country to better accommodate the increasing demand for railway track gauge change  (due to the differences of the Russian broad-gauge system and the European standard gauge system), transshipment and even manufacturing processing facilities.

Riding on the better Asia-Europe rail connection, and the cheaper rail freight due to Asia-bound trains not usually being as fully loaded as Europe-bound trains, Polish companies such as vegetables and fruit growers have started to send apples and other processed food to the Chinese market by rail. This trend has also led to Hong Kong traders and service providers becoming a lifestyle showcase for Polish food and beverages including wine, beer, spirits, fruit and derivatives such as jam, juices and cosmetics.

Hungary: Leading the Way in BRI Co-operation

Hungary is the first European country to sign a memorandum of understanding (MoU) on BRI cooperation with the Chinese mainland. The country’s “Opening to the East” policy is very much in line with the BRI and has been well received by investors such as China’s leading electric automaker BYD, which opened its first fully-owned bus plant in Europe in the northern Hungarian town of Komarom in April this year. Meanwhile, several well-known Hungarian companies, including the world-leading Building Information Modeling (BIM) software developer and a significant player in the field of global female healthcare, have continued to grow their Asian businesses through either their regional headquarters or partners in Hong Kong. 

Being the No.1 destination of Chinese outbound FDI in CEE, Hungary is also an important partner to RMB internationalisation in Europe. Home to the regional headquarters of the Bank of China (BOC), which has operated a subsidiary in the country since 2003 and maintained a full-fledged branch since 2014, Hungary was selected by the Bank to launch its first RMB clearing centre in CEE in October 2015 and its first Chinese RMB and Hungarian forint debit card in Europe in January 2017.

As regards logistics, the thrice-weekly direct cargo flights from Hong Kong to Budapest, the capital of Hungary, have made the country a possible air hub for cargo distribution in CEE, while the ongoing project of the high-speed Budapest-Belgrade rail line (which is expected to achieve substantial progress this year) and its further extension to Skopje, the capital of Macedonia, and the Greek capital Athens, will afford the landlocked country a better connection with seaports in the Adriatic and Mediterranean Seas. There is also the already serviceable China-Europe land-sea fast intermodal transport route connecting Hungary with the Greek Port of Piraeus operated by China COSCO Shipping.

The Czech Republic: Boom Time for China-Led M&As

Having one of, if not the best flight passenger connections with the Chinese mainland among CEECs, the Czech Republic welcomes more Chinese tourists (more than 300,000 in 2016) than any other country in the region. The increased belly cargo capacities plus the new cargo flights routing from Hong Kong to Prague have also enabled Chinese express delivery companies to better fulfill the cross-border e-commerce bonanza.

Boosting one of the densest rail networks in Europe (after Luxembourg and Belgium), the Czech Republic has also attracted many multinationals such as Foxconn and Amazon to set up regional logistics centres. As a leading global producer of wheelsets, wheels, axles and other wheelset components for rolling stock, Czech companies are also heavily involved in the expanding Eurasian rail development. One such company, which won the MTRC contract to supply wheels for MTR passenger trains in 2015, opened its first Asia office in Hong Kong in September 2016.

Aside from tourism and logistics, Czech Republic sees a wide array of Chinese-led M&A deals spanning sport, real estate, airlines, travel agencies, hotels, breweries and most recently a DIY and gardening chain. Ongoing deals, including the takeover of the Group Skoda Transportation, the biggest producer of railway vehicles in CEE, by China Railway Rolling Stock Corporation (CRRC), are expected to open the door for Chinese manufacturers to march into the European market, source of technology and pool of talents. Some of the M&A deals have been done through the corporate structures of Chinese enterprises in Hong Kong, while at least one famous Czech glass and lighting company has set up a holding company in Hong Kong to stay close to both the production base in the Chinese mainland and the rosy residential and commercial property market in Asia.

Slovakia: BRI Investment and the Route to Modernisation

Slovakia, with the highest per-capita car production in the world, has been a magnet for auto-related investment in CEECs. All three established car producers – Volkswagen, Peugeot Citroën and Kia – and their tier 1 and tier 2 suppliers are constantly expanding their manufacturing plants in the country, while the investment project Jaguar Land Rover (starting production in 2018) has become the largest business case in Europe during the last seven years.

The recent acquisition of the country’s largest steel mill in Košice by He-Steel Group of China, the world’s second largest steel maker, has not only helped the Chinese steel maker to gain a foothold in the European steelmaking industry to avoid prohibitive EU anti-dumping duties on steel imports, but also highlighted Slovakia’s strategic location to facilitate manufacturing industries such as automotive and electronics that utilise raw materials coming from non-EU European suppliers such as Ukraine.

To prepare for the expected increase in rail cargo traffic between Europe and Asia and strengthen its attractiveness for international manufacturing and logistics companies, Slovakia, riding on its favourable catchment zone in between seaports in southern Europe (e.g., the Slovenian Port of Koper and the Italian Port of Trieste) and northern Europe (e.g., the Port of Hamburg), is active in developing and upgrading its infrastructure. This includes the modern transshipment facilities of Slovakian cities such as Bratislava, the country’s capital, and Košice in eastern Slovakia, close to Ukraine, Hungary and Poland.

Hardware aside, the Slovakian government is keen on adopting and promoting the use of new technology such as electronic locks and electronic customs clearance systems to allow cargo owners and forwarders to facilitate a more effective means to track or trace cross-border cargo movement. Meanwhile, the country is stretching its wings wide to Asia, including, but not confined to, a plan to start a double tax treaty negotiation with Hong Kong soon.