Daimler inaugurates €800 mln plant in Hungary >>> The opening of the first Chinese car factory in the EU was a landmark event for both Bulgaria and Chinese automakers

The opening of the first Chinese car factory in the EU was a landmark event for both Bulgaria and Chinese automakers. Noteworthy as the opening was, the plant is still small scale and predominantly Bulgarian-financed - not quite the foreign investment coup some would have us believe.

But the choice of Bulgaria by Great Wall Motors certainly gives the country a chance to build up its automotive supply chain and develop a much-needed export-oriented industry. It also highlights Bulgaria's competitive advantages as a manufacturing centre. Chinese automakers - and those from other emerging markets - will also be watching with interest to see how Great Wall's pioneering move into the extremely competitive and demanding EU market fares.

The first Chinese-badged vehicles to be made in the EU rolled off the production lines at Great Wall Motor's plant, in Bahovitsa, near Lovech in northern Bulgaria, in February. The factory is a joint venture between Great Wall and Litex Motors, a subsidiary of Litex Commerce, a large and influential Bulgarian holding company originally based in Lovech.

Output is expected to reach 4,000 units this year, ramping up to 50,000 when at full capacity - as soon as 2013, with total investment reaching 100m. Models produced will include a city car, an SUV and a pick-up truck, with the portfolio potentially expanding in the future. Initially sales will focus on the Bulgarian market, with exports to other Balkan countries starting towards the end of the year, but Great Wall's company president and chief executive, Feng Ying Wang, has said that her company hopes to expand sales across Europe over three to five years.

Great wall of money

Great Wall is the first original equipment manufacturer (OEM) - that is, manufacturer of complete vehicles - to establish operations in Bulgaria since an abortive attempt by the UK's Rover in the mid-1990s, which resulted in only 2,200 units being produced.

Great Wall's decision to locate a factory in Bulgaria is a fillip for the country. Foreign direct investment, previously an important growth driver, has flagged due to the global crisis and Bulgaria's own sluggish economic performance. With the country's leading investment partners labouring under the Eurozone's malaise, Bulgaria has belatedly turned east. "It's very important, as this is the first sizeable manufacturing plant developed in partnership between Bulgarian and Chinese firms," Borislav Stefanov, executive director of the official InvestBulgaria Agency, tells bne. "Until now, there has been very little investment from China, despite it being a big exporter of foreign direct investment globally. Chinese investment rose from 10m in 2010 to 15m last year, but that's still a relatively small amount."

Indeed it is - and, for all the fanfare about Chinese interest in Bulgaria, it's notable that the Bahovitsa plant is first and foremost a Litex investment. The Bulgarian company has ponied up 90% of the cash thus far, allowing Great Wall to enter the EU with remarkably little capital risk.

More importantly, as the International Monetary Fund highlighted on a number of occasions even before Bulgaria's service-led boom of the mid-2000s came to an end, the country needs to expand its base of export-oriented industries, both to diversify the economy and to balance its current account.

And Bulgaria does have a number of advantages for manufacturers seeking access to the EU market and beyond: exports to other member states are free of additional taxes and duties, and trade relations with Balkan non-members are also favourable. As Stefanov points out, Bulgaria has lower costs for labour, land and utilities than most EU members, and benefits from macroeconomic and political stability (for example, public debt is less than 20% of GDP). Flat corporate and income taxes of 10% are the lowest in the EU, and Stefanov insists that they are "staying where they are".

Finally, there is location. While not as close to the heart of Europe as Slovakia, for example, Bulgaria is within reach of the former Soviet Union countries and the Middle East, to which Stefanov hopes automotive firms based in the country will look for exports over the longer term. "Both companies - Litex Motors and Great Wall Motors - desire to deliver quality, affordable, well-equipped and attractively designed vehicles to the European consumers at the best price/product ratio on the market," Kiril Georgiev, advertising and PR manager at Litex Motors, tells bne. "Bulgaria as a country is strategically located for a gradual and long-term entry into European market by Great Wall. Bulgaria also has a high quality workforce and excellent business conditions."

Quality issues

For the time being, the Great Wall vehicles will largely be assembled from kits manufactured in China, meaning that the value added in Bulgaria will not be as much as it could be. Bulgaria does already have a small but lively automotive components sector, with local and international making parts including cables, seats, hinges, upholstery and cylinder heads. These businesses will be hoping that Great Wall and Litex realise their stated aim of increasing the proportion of locally-sourced components at the Bahovitsa plant. Other suppliers may look to set up in Bulgaria if they see the market growing. "We are looking for national subcontractors for some components," Georgiev says. "We plan to offer them the opportunity to establish production facilities next to our plant and such to establish an industrial area and thus additionally to stimulate the regional and national economy. This process is a long-term one and will take time for implementation in the next few years."

The development of a domestic supply chain has been one of the features of Renault's stellar success with its Romanian subsidiary Dacia, which is now one of that country's leading exporters and is supported by a cluster of suppliers around its plant near Pitesti (as well as others elsewhere in the region including Bulgaria). Stefanov also points to the example of Slovakia, which went from having a negligible auto industry in the early 1990s to producing more finished units per head than any other country. "The automotive industry does tend to form clusters quite quickly," he says. "At the moment, most tier-one and tier-two supplies will come from China. Suppliers will be looking to see if volumes increase to provide opportunities for them to come to Bulgaria."

David Leggett, managing editor of automotive industry website just-auto.com and an experienced analyst of the sector, strikes a more cautious tone on the development. "Bulgaria is not known as a hotbed of automotive manufacturing," he notes.

There are also likely to be questions over the quality of Chinese-built cars assembled in Bulgaria, particularly after well-publicised safety issues with other Chinese manufacturers in Europe in the past. "This is a significant and interesting development, a Chinese manufacturer dipping its toe into Europe," Leggett tells bne. "Great Wall is a pioneer and, if successful, others like Chery will want to follow. But we have yet to see how many units they will sell, and what quality they will be. Let's wait to see how quickly production ramps up."