* Bulgaria exports doubled in five years
* Cheap labour, low taxes attract investors
* Bulgaria hopes to undercut European competitors
* Red tape, poor infra, lack of strategy hobble investment
By Matthias Williams and Tsvetelia Tsolova
RUSE, Bulgaria, May 7 In its glory days, Ruse,
a town along the Danube river trading route, was a thriving
economic hub that was home to Bulgaria's first chamber of
commerce and known as 'little Vienna' for its Austrian-style
A hundred years on and after decades economic decline under
Communism, its location on the southeastern edge of Europe, near
Turkey and bordering Romania, is helping attract investors such
as Witte Automotive, a German car part maker that supplies
majors including Ford.
Witte is one of dozens of foreign companies, from Japan to
South Africa, driving an auto component manufacturing boom that
could lift the fortunes of the European Union's poorest member.
Bulgaria is hungry for new, sustainable foreign investment after
a real estate bubble burst during the financial crisis in 2009.
"The industry is growing, and the interest is growing too,"
said Till Truckenmueller, the chairman of Automotive Cluster
Bulgaria, an industry group, in an interview in Sofia. "There
are decisions by the big players in the past several years to
have new plants here."
"We are working on bringing a car manufacturer here," he
said. "Be sure, if we convince one, then the automotive industry
here will explode."
Bulgaria may still be years away from attaining the holy
grail of attracting a major car manufacturer because structural
problems, such as red tape, poor infrastructure and training
These problems could stop the sector from becoming a game
changer for the economy and are also what left Bulgaria on the
sidelines in a car production boom that started in the 1990s in
countries such as Poland, the Czech Republic and Slovakia.
But that is slowly changing, as more and more component
makers are attracted by Bulgaria's location, low taxes and
labour costs, and a currency pegged to the euro.
The government is hoping to undercut Bulgaria's wealthier
peers in Central and Eastern Europe in the same way that these
countries had previously undercut the West.
As a sign of the changing times, Witte's Bulgaria unit will
move to a much larger factory this year. It plans to double its
existing workforce of around 260 workers and expects sales to
rise to more than 25 million euros ($35 million) in 2014, from
modest beginnings of less than 1 million euros in 2010.
"The group will grow, definitely quite significantly, and
the main growth will be here in Bulgaria," said Tomas Jindra,
Witte's Bulgaria CEO said at the company's Ruse factory.
Similarly, exports in the sector overall have doubled to
around 1 billion euros in the past five years, Bulgarian
industry officials say, making up about 4.5 percent of total
exports and 2.5 percent of the country's gross domestic product.
More firms are planning either to expand operations or enter
the market for the first time.
France's Montupet recently built a second
production unit, while Johnson Controls has more than
500 engineers in Sofia that design instrument panels and
infotainment systems. Global part suppliers like U.S. firm
Sensata, Canada's Magna International, Japan's
Yazaki and Sumitomo Electric have set up operations.
A shift in car production from Western Europe to East has
propelled the economies of countries formerly behind the Iron
Curtain, from Slovakia to Romania, where Renault's
Dacia cars have become a major export.
Bulgaria, which unlike others has no long history of car
production, has failed to attract any car maker beyond China's
Great Wall Motor Co Ltd, which set up a
modestly-sized plant with a local partner in the town of Lovech
The difference in production costs is still too narrow for
existing auto parts manufacturers to close down factories in,
say, the Czech Republic and move them to Bulgaria, according to
Jens Wiese of the global advisory firm AlixPartners.
But its convenient location and cheap labour mean that car
part makers are now looking at Bulgaria as an option for green
field projects, said Wiese, drawing new investment away from
more established car making countries.
The average Bulgarian labour cost per worker is 3.70 euro an
hour, compared to 7.20 for Poland, 7.90 for Hungary and 8.60 for
Slovakia, Wiese said, citing German government statistics.
"In that regard, Bulgaria has some attractiveness as a low
cost production base, particularly for labour-intense
operations" said Wiese, a Senior Director and car expert.
"And many of the 'first wave' Eastern European places like
Czech Republic, or Hungary, or Slovenia, they've already become
more costly. And as suppliers are establishing additional
locations, they will always look for ways to optimize labour
costs amongst other criteria."
Another boon for investors is that Bulgaria has a rich
history, dating back to Communist times, of electronics and
computer engineering. That helped companies such as Belgium's
EPIQ - acquired by the Philippine firm IMI three years
ago - which set up an electronics-focused car parts factory in
1997, whose sales have jumped 30 percent in 2013 alone.
When the company first arrived, EPIQ found a ready-made
talent pool of engineers in the town of Botevgrad, after a local
state-run electronics factory went bankrupt in 1995, IMI's
Bulgaria managing director Eric De Candido told Reuters.
RED TAPE AND INFRASTRUCTURE
Bulgaria is working hard to address the problems facing
businesses as they enter the market, said Kostadin Djatev,
deputy executive director of the state-run agency set up to
foster foreign investment.
Under a special Investment Promotion Act, Bulgaria offers
sweeteners such as procuring land for major companies at below
market prices and reimbursing their workers' social security
payments for three years.
Nevertheless, the Black Sea country faces an uphill
challenge to make its industry more competitive and lure more
companies, including other car part makers, to invest.
Witte situated its factory in Ruse, a university town that
in theory gives the company a rich talent pool of engineers,
accountants and managers to draw on as it expands.
But many of the graduates are so poorly trained that only a
fraction of them are worth hiring, according to CEO Jindra,
reflecting Bulgaria's overall shoddy education system.
Cutting through reams of red tape is another hassle. Witte's
current plant is rented from a textile company, and it bought
land for a much larger site with an eye to future growth.
Even getting government permission to switch the land use of
its new site from agricultural work to manufacturing took months
Another gripe is the country's stunted road network. A main
road route north into Romania and on to central Europe is via a
tiny, congested bridge over the Danube on the edge of Ruse,
where trucks can wait hours to pass.
"When I enter Bulgaria via the bridge, I'm thinking 'Am I in
Iraq? Am I anywhere in Asia?' This is so terrible," Jindra said.
Most of all, industry players lament what they say is a lack
of a sector-wide strategy to foster growth in the car industry,
whether it be through tax breaks or subsidies, that would allow
Bulgaria to catch its competitors.
The government says it is doing what it can.
"What we do here is really try and help each and every
investor that comes to us, and help them through some of these
bureaucratic procedures and processes and problems they might
face," Djatev said.
"It's hard to change fast, but the government is working a
(Additional reporting by Ivana Sekularac in Belgrade; editing
by Anna Willard)