Serbia's automotive companies drive inward investment

Serbian manufacturing is pulling in impressive levels of foreign investment, and hit unprecedented highs in 2018 after attracting 66 projects valued at about $3bn, according to greenfield investment monitor fDi Markets. Over the past five years, 56% of all greenfield FDI projects to Serbia have been in manufacturing.

The automotive sector is, therefore, Serbia’s second largest market after real estate for foreign investment – based on number of projects since 2003 – with the sector seeing record amounts of FDI in 2019, which resulted in 8700 new jobs, according to fDi Markets. 

And this boom could be set to continue. Volkswagen, for example, has shortlisted Serbia for its new $1.6bn factory in southeastern Europe (which will employ 5000 people) even though, unlike fellow contenders Bulgaria and Romania, it is not yet an EU member. 

Engine of growth

Serbia’s automotive industry dates back to the late 1930s, when local vehicle manufacturer Zastava produced its first automobile under licence from Italy's Fiat. Several decades later, foreign manufacturers such as Mercedes, Peugeot and Ford set up shop as Serbia became a Balkan hub for automotives. However, the industry was severely disrupted by Yugoslavia’s disintegration and the political instability of the 1990s. 

Today, however, automotives is one of Serbia’s most vibrant sectors. About 60 automotive companies from Europe, the US and Asia operate in the country, between them investing a total of roughly €2bn that has created 30,000 jobs, according to 2018 research from the Chamber of Commerce and Industry of Serbia. 

Fiat Chrysler Automobiles has been a key presence in the country. It is Serbia’s leading exporter and employs about 2400 people at its factory in FAS Free Zone Kragujevac, producing roughly 80,000 cars a year for export to US and EU markets, according to DAS, Serbia's development agency. 

“The 1990s saw the destruction of Yugoslavia’s market after EU economic sanctions. The arrival of Fiat [a decade ago] brought new hope. It increased interest of tier 1 and tier 2 companies to [invest in Serbia] so automotive became one of the leading export industries in the country,” says Slobodan Radović, general manager of a facility owned by Teknia Group, a Spanish automotive components manufacturer that has operations across 13 countries. 

Serbia’s automotive industry accounts for just over 10% of the country’s exports, and supplies almost all major European car manufacturers, according to DAS. The bulk of this production involves vehicle chassis system parts, especially tyres and suspension, followed by electrical system and engine components. 

For this reason, as well as Serbia’s low construction, labour and energy costs compared with other countries in Europe, China’s Shandong Linglong began construction in 2019 on its $1bn tyre factory in Serbia’s Free Zone Zrenjanin, the company told national news outlet Radio Television of Serbia.

Growing free zones

The vast majority of automotive manufacturers moving to Serbia operate from one of the country’s 15 free economic zones, all of which are located near the border or by Corridor 10, one of the pan-European highways. Doubling in number over the past decade, Serbia’s free zones have proven successful across numerous sectors and now host about 200 companies, including major names such as Continental, Swarovski, Siemens and Michelin. 

The zones’ export value has grown in size by nine times since 2008, reaching €2.18bn in 2018, as the number of manufacturing companies has grown 10-fold over that period, according to the government’s Free Zones Administration. While the zones ship to Asia and North America too, Germany and Italy are the main export partners.

Serbia’s oldest site, Free Zone Pirot, was named Europe’s leading free zone for foreign investment in fDi’s 2018 Global Free Zones of the Year awards, due to its financial incentives and 22% increase in manufacturing investors between 2016 and 2017. Michelin-owned Tigar Tyres, the zone’s anchor tenant, has invested €230m in recent years, and the site benefits from excellent connectivity for the export of goods. 

Companies operating in Serbia’s free zones are exempt from customs duties, other import duties, VAT on the sale of goods and services within and between zones, and payment of VAT on energy consumption (electric energy, gas, fuel oil and coal).

German presence

Bosch, Dräxlmaier, ZF Friedrichshafen and many other German manufacturers have undertaken a whopping 35% of all foreign investment projects in Serbian automotives since 2003, according to fDi Markets. 

In 2019, Germany’s Boysen Group invested €60m in an exhaust system production site in Free Zone Subotica, attracted by Serbia’s low wages and strategic location for customer delivery in central and south-east Europe, according to CEO Rolf Geisel. Moreover, the City Assembly of Subotica allowed Boysen to use the construction land for free, according to Radio Television of Serbia. After Germany, the next top sources of FDI in Serbian automotives are France, Germany, Italy, South Korea, the US and China, according to fDi Markets.

Chinese companies are entering the scene particularly fast. Yanfeng Automotive Interiors (a manufacturer of interior trim) opened a production facility in Free Zone Šumadija, one of two free zones located in Kragujevac, while China’s MeiTa Europe has expanded its production site in Baric, where it produces metal turbo components in Free Zone Belgrade.

Government incentives

Serbian governments, especially under current president Aleksandar Vučić, have made concerted efforts to incentivise foreign investment in manufacturing. Government subsidies are particularly generous towards investments that are either capital heavy, located outside the capital Belgrade, or create a large number of full-time jobs. Investors that qualify receive between €3000 and €7000 per new employee, for example. 

“[Companies are coming] for Serbia’s strategic geography [and] the presumption that an EU candidate can expect significant growth. Serbia’s automotive sector has a good tradition, particularly of well-trained staff and a relatively cheap labour rate. The whole process is [well] supported and subsidised by the government,” says Mr Radović.

Serbia ranks joint second with Hungary in terms of the cost-to-quality ratio for FDI in automotive components manufacturing, while Romania takes top place, according to fDi Benchmark. On top of its strategic location, Serbia benefits from numerous free-trade agreements, such as the Central European Free Trade Agreement, with the European Free Trade Association, Russia and Turkey, and a Generalised System of Preferences with the US, Australia and Japan. 

Nonetheless, according to data collated by the World Economic Forum in 2018, Serbia’s logistics need improving, and the country ranks second worst in the western Balkan region in terms of road quality. The government is aware of the problem, however. Over the past two years, Chinese finance and contractors (among others) have combined to commence work on motorway upgrades, including the Belgrade bypass and Serbia-Montenegro highway. 

Upgrades such as these, further down the road, will keep Serbian automotives on course to remain one of the country’s most attractive markets for foreign investment.

Costs of this report were underwritten by the following sponsors: Ministry of Finance of Serbia, The Chamber of Commerce and Industry of Serbia, the Free Zones Administration of Serbia, Free Zone Subotica, Free Zone Svilajnac, Free Zone Uzice, Free Zone Priboj and Free Zone Smederevo. Reporting and editing were carried out independently by fDi Magazine.