Volkswagen’s Slovak unit increased car production by 1% last year and expects comparable modest growth in 2017 as it focuses on finishing an assembly hall and body shop into which it will invest nearly €1bn, the company said on May 10. 

The planned expansion by the local unit of the German auto giant is part of what Moody's Investors Service called in a May 9 report "a new wave of investment" in the country's automotive sector in 2016-20. The rating agency forecasts the trend could boost GDP growth, supporting private consumption and export growth.

Slovakia has come a long way since Volkswagen first entered the market as it acquired a small production plant in Bratislava in 1991. A quarter-century on, Slovakia broke the 1mn car barrier last year to solidify its position as the world’s greatest car producing country per capita, the Automotive Industry Association (ZAP SR) confirmed on April 20.

Slovak factories owned by Volkswagen, Kia and PSA Peugeot Citroen last year produced 190 vehicles for every 1,000 inhabitants last year, a rise of 11 cars per capita compared to 2014. Both Kia and PSA began their investments in Slovakia in 2006, with the South Korean company setting up production near Zilina, 200km from Bratislava, while its French rival set up an assembly line in the western Slovak town of Trnava.

Like the pioneering Volkswagen, the pair also plans to build new and enlarged factories. Indian-owned newcomer Jaguar Land Rover Automotive is joining them.

"We forecast Slovakia's real GDP growth will reach 3.2% in 2016 and 3.6% in 2017, supported by these new investments in the automotive sector and higher employment," Moody's analyst Marco Zaninelli writes in the report.

The forecast supports hopes expressed by the government last year, albeit the outlook is more modest. The boost from JLR could push GDP growth to 4% in 2016, Finance Minister Peter Kazimir told bne IntelliNews in November.

To attract "the investment of the decade" and steal a march on rival Poland, Slovakia retooled its law covering 'Investments of Significance' in order to be able to offer more incentives to the builder of the British marque. The government went on to designate the greenfield site in Nitra that it had offered to JLR as a strategic industrial park – the country's very first.

Pie in the sky

But not all expansion will bring long-term jobs. Volkswagen announced in February that it had completed basic construction of the €600mn body shop at its plant in Bratislava, in which it will install around 500 robots. The good news is that the company will invest a further €300mn into the facility, dismissing worries that the emissions scandal that hit the German company last year could derail investment plans in Slovakia.

Volkswagen's turnover increased by 17% in annual terms to a record €7.2bn. Nearly all of Volkswagen Slovakia’s production is sent abroad, mainly to Germany, the United States and China. With the expanded operations, the unit will also look to start exporting to Russia.

However, the ever-expanding auto sector and increased reliance on demand from outside markets is also a risk as well as a boon. Commentators have called for a thorough overhaul of the economic model because, despite the rapid car-driven development since the turn of the century, Slovakia remains a low wage, low productivity, low value-added economy.

Slovakia is overly dependent on a few big assembly plants and lacks research and development facilities, an ecosystem of small and medium-sized enterprises, or a vibrant start-up scene. This lack of diversity – the auto sector represents around 40% of industrial production – proved a vulnerability in the global financial crisis and could be again.

There is also growing concern that labour and capacity restraints will start to trim the pace of growth in the automotive sector. “It was such a positive year for the automotive industry, we were even concerned the development would be too rapid and intense in terms of labour mobility and finding [qualified] workers,” Juraj Sinay, chairman of ZAP SR fretted last month.

“There have been no major efforts so far to diversify the economy into other industrial sectors and this exposes it to external demand volatility,” an EU Commission report said in February. “Low innovation performance and business spending on R&D inhibit long-term growth prospects.” 

Bratislava's thoughts to turn that around appear to remain locked inside the box. While it is chasing high tech projects, they are more high profile variations on the auto theme than a deep-seated look at how it can diversify, raise the added value of projects arriving, and rebalance the regional disparities that plague the country.

The government has trumpeted recent efforts to attract high-tech carmaker Tesla. It has also been in discussion with US companies pushing to develop the world's first Hyperloop. The futuristic tube transport system would link the Slovak capital to Vienna and Budapest at speeds of over 1,000km per hour.

Former economy minister Vazil Hudak said at the time that the Hyperloop project would not only “cut distances substantially and network cities in unprecedented ways, it would lead to an increased demand for the creation of new innovation hubs, in Slovakia and all over Europe.”

Meanwhile, critics pointed out that Slovakia is still struggling to find the cash to run its health and education systems. At the same time, the technology behind the Hyperloop, let alone the economic blueprint, is still being worked out by US companies, Hyperloop Transportation and rival Hyperloop Technologies, which are yet to make a sale anywhere around the globe.