Rethinking European automotive competitiveness: The R&D CEE opportunity

Across the world, automotive leaders are fighting to gain an advantage in the implementation of new technologies, such as autonomous driving, vehicle connectivity, electrification, and shared mobility. Software is fundamental to these trends, putting unprecedented pressure on their R&D functions. The biggest structural challenge for Western Europe’s automotive companies is the high cost of and competition for software and R&D talent. The outlook shows an increasing trend. Over the next five years, software development in automotive is expected to grow 13 percent, which translates into an increase in demand for software engineers of 6 percent year over year.

Carmakers now compete vigorously with high-tech companies to be the emerging leaders who will make a difference, so the costs for attracting and retaining workers are rising. The number of unfilled positions in the information and communications technology (ICT) space in Western Europe (WE) rose by 43 percent between 2016 and 2018.

To remain successful, automotive players in WE need to rethink their R&D.

CEE offers advantages for developing automotive R&D

There are five reasons WE automotive companies might look toward CEE for a solution:

  • Available talent pool. The relevant talent pool in CEE is only 10 to 15 percent smaller than the one in Germany (6.6 million versus 8.0 million), and there is less competition given the relatively smaller presence of global engineering and IT companies in the region (Exhibit 1).
Competition for talent is less intense in Central and Eastern European countries because of fewer top engineering employers.
  • Competitive wages. The region’s R&D-related salary costs are 60 percent lower than in WE. Although this wage gap has recently narrowed somewhat in percentage terms, it has still grown in nominal terms over the past ten years, reaching up to €40,000 per employee per year.
  • Automotive manufacturing and R&D maturity. Several WE companies are already taking advantage of the CEE opportunity, but there is significant room for growth. In the automotive sector, R&D full-time-equivalent employees comprise only 1.9 percent of the workforce in CEE, compared to 13.4 percent in Germany (Exhibit 2).
There’s room for growth in Central and Eastern Europe, where R&D workers account for a comparatively small share of the automotive workforce.
  • Well-developed infrastructure. CEE boasts a network of easily accessible airports, relatively modern highway and rail systems, and well-developed digital infrastructure.
  • Government support. In various ways, the governments of CEE countries encourage this type of investment via a variety of incentives, including tax breaks, investment subsidies, streamlined bureaucratic processes, and funding for training partnerships with universities.

Developing R&D in CEE is likely to increase European automotive competitiveness

The near-sourcing of R&D activities from countries in CEE will likely increase the European automotive sector’s broader global competitiveness. As more companies look east to set up R&D centers, very specific long-term benefits accrue to both the automotive company and the CEE region as well:

  • Economic growth and resilience. A rise in R&D activity likely leads to GDP growth for the host country driven directly by both higher productivity and the greater incentive for governments and businesses to invest. Automotive players can benefit from economic growth in the region, because strong economies attract skilled people, which supports a talent pipeline and further strengthens the R&D ecosystem.
  • Talent-first economies. Sustained R&D activities also support a stronger talent base in CEE economies. By offering local career opportunities for an ambitious workforce, these activities are a remedy for the “brain drain” that many economies fear. Diversifying the skill base of the workforce is also a barrier against the reductions in manufacturing jobs that result from automation.
  • A robust advanced industries sector. Automotive R&D success in CEE makes the region even more attractive for other advanced sectors, such as machinery, robotics, and aerospace.

Both automotive players and CEE countries can help lay the foundation for success

Automotive players in WE who are serious about pursuing the R&D opportunity in CEE should set their ambitions at the CEO level. They can consider clear actions related to the identification of appropriate R&D activities, the selection of the right CEE location, and initiating the setup in the region.

Governments in CEE countries can help via an approach to enabling a sustainable R&D foot. Governments may facilitate further value creation by focusing on enhancing geographic clusters and encouraging partnerships among academic, commercial, social, and public institutions.

Several regional characteristics—related to workforce, industry ecosystem, infrastructure, and investment policies—make CEE a potentially attractive part of the R&D solution set. With highly methodical planning and multipartner collaborations, near-sourcing select R&D activities to CEE has the potential to help automotive companies remain competitive and support the economies of CEE countries.

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