State car production – a chain collision with economic logic

, News

The president of the executive board of the Dveri movement, Boško Puskic, came out recently with a proposal that the state should take over the car factory in Kragujevac and start the production of its own car. This proposal followed as a consequence of the news that the workers of the Stelantis factory will have to either go abroad to work or get fired with severance pay.

How exactly did the turnover in the Stelantis factory come about? What exactly does the announcement of the Dveri movement mean and what would be the consequences of the state takeover and management of this factory?

Problems in the Stelantis factory

For several years now, Stelantis’ factory in Kragujevac has been experiencing problems related to the declining sales of the only model produced in it – the Fiat 500l car.

The recent news that the state has signed a contract with this car company to assemble a new electric car instead of an outdated model should have been a relief, despite the fact that the contract was lubricated with 48 million euros in direct subsidies (and maybe more because there is no information on the release payment of taxes or refunds of taxes paid and contributions to wages, as has been the case so far). 

That is why the recent news that workers will have to choose between being sent to work abroad in other Stelantis factories or being fired with severance pay instead of returning to work was completely unexpected.

An even worse suggestion on how to solve this problem stuck to this bad news. The president of the executive board of Dveri, Borko Puskic, came out with a proposal that the state take over the car factory in Kragujevac and start the production of its own car.

When the medicine is worse than the disease

Unfortunately, this solution does more harm than good. Private ownership of car companies proved to be far superior since communism – one should not look further than Germany, where Volkswagen and Opel were built in the West (not to mention Mercedes), and Trabant and Warburg in the East.

Due to poor technological and financial results, state-owned car companies have either been privatized over the past decades, or entered into arrangements with private companies where a private partner would be the one to make operational decisions in a joint venture. Even in Russia, where the state remains the owner of some car companies, they do business with joint ventures with Western companies such as Renault.

Also, car production is quite a technologically demanding job. Today, up to 5,000 individual parts go into one car, which is why car companies are part of global supply chains, because these parts are produced around the world and often go around the globe several times before being installed in a finished car.

Cars from Kragujevac are only produced on paper in Serbia, because a huge part of their components are installed from abroad, which is clearly seen from customs data: Serbia is not only a major exporter of cars (in line with the production of Fiat 500l) but also a major importer auto parts.      

We can best see this through the data on gross value added (GVA) of the Stelantis factory in Kragujevac, which can be calculated from the financial statements, more precisely the income statement. GVA implies the difference between operating income and operating expenses less depreciation costs and subsidies – it tells us the share of newly added value in the product added by the company.

It is quite understandable that BDV is not the same if the car factory produces almost all or at least the vast majority of parts, or when it just assembles them and previously bought them from other manufacturers. In 2014, the last year of the boom in sales of the Fiat 500l model, followed by a decline in sales and production, the factory in Kragujevac had a GVA of only 9% in the car it made. This level remains more or less unchanged even later, so in 2018 it amounted to 9%, when operating revenues were halved due to weaker performance in the foreign market.

In other words, taking over the factory and state management of it would be a real disaster because we produce only a small part of automobile parts, while the vast majority are imported. And it is enough that you only need one part, so that in the end you do not have a car that can be driven or sold.

Developing a new car model would require the development of new technology that does not currently exist in Serbia, and the launch of a number of new factories that have not been operating in Serbia for decades or have never been. Due to the increasingly expensive development of new technologies and low margins, there is a growing trend in the car market (a recent example is Stelantis itself, which is a conglomerate of former Fiat, Chrysler, Peugeot and Citroen and several other brands). In such a bloodthirsty fight, there is still no small factory from Serbia that could not fight for its place under the sun. 

EPS as a reminder why the state should not run companies 

In addition to these specific arguments related to the automotive industry, we are talking about a country that has not already proven to be a good manager of a large number of companies that it disposes of and manages. All the stories about independent management fall apart when the owner of a roastery is appointed director of the largest and perhaps most important company in the country, as was the case with EPS, and when the same management tries to generate electricity by burning mud because it cannot adequately manage coal mines, which brought the entire energy system to the brink of collapse and cost EPS a minimum of 500m euros.

The difference between theory and practice can be great: as one German philosopher said, in theory we wanted the Reformation, and in practice we got Lutheranism. That is how we would expect a capable and independent manager, and we would get a new Grčić. 

In addition to the above-mentioned specifics for the automotive industry itself, these non-specific objections to state economic activities in Serbia in general, would lead to the fact that very soon this potential factory of state cars would be one big furnace for burning state money. Because such a company could survive only with abundant subsidies, as is already the case with a number of other state-owned companies, even those that operate in branches in which they have very little or no competition. 

Account without bartender and export to Russia

In addition to all this, Mr. Pushkic’s statement that the state car from Kragujevac would meet the conditions for duty-free export to the Eurasian Union market (Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan) clearly shows that this idea is not well thought out in this segment either.

First, cars are not on the list of duty-free products when imported into the Eurasian Union from Serbia, regardless of which factory produces them and in whose ownership it is. Russia has been pursuing a protectionist policy with high tariffs on car imports for years to enable its Avtovaz business, and this has led some foreign companies (Nissan, Ford, Toyota, GM, Volkswagen) to open their car factories in Russia instead of facing these customs.

Therefore, in order to abolish customs duties on car exports from Serbia, it is necessary to sign a new free trade agreement, and Russia does not seem ready to do such a thing at all. 

Also, in order for a car from Kragujevac to be considered a Serbian product, it is not enough for it to be assembled in Serbia, but for the total added value coming from our country to be at least 51% of the total value of the car. This is not the case at the moment, but the gross value added (GVA) from Serbia in these cars is less than 10%, since most of the parts come from imports, and only a small part is made in our country. 

An idea for a garbage dump of history

The idea that the state should make cars is a place in the dustbin of history. When the SFRY tried to make cars, it succeeded only with the help of foreign already developed technology (fija and stojadin, for example), and when in the 1980s it tried to produce a car itself and export it to the USA, then the south became the object of ridicule and it was voted the worst car on sale.

Until the country’s disintegration, Zastava was maintained with abundant state aid such as high tariffs on car imports, interest-free loans from state-owned banks to buy cars, and direct subsidies to pay salaries and other expenses. There is no reason to believe that such an experiment would lead to any other economic results. It may sound nice, it may be popular among voters, and especially among the residents of Kragujevac and employees in the factory itself, but it is not a recipe for success but for disaster, Talas writes.