FIAT’s decision presages the end of an era of easy successes

20.12.2012
The Italian Fiat decided to close one of its manufacturing plants in Tychy, Poland. In 2013, Fiat's output in Poland will drop from 650 thousand two years ago to as little as 300 thousand cars. The problems of the Polish Fiat reflect like in a magnifying glass some of the important challenges faced by the Polish economy. Firstly, the high level of industrial productivity does not guarantee a fast development any more. Secondly, we live in an environment where capital has a nationality, and Poland's national capital remains limited. Let's hope that Fiat's problems do not presage an unfavourable period for the Polish economy.
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(graphs DG/CC BY-NC-SA by Ben McLeod)

(graphs DG/CC BY-NC-SA by Ben McLeod)

Fiat Auto Poland is generally considered as one of Poland’s major businesses. In terms of turnover, it is one of the country’s top ten companies, a holder of a cult brand, a company that embodies the dream of Polish industrial expansion and, what is more, the most productive company in the Italian group; Fiat Auto Poland has been the nation’s pride and joy.

Given the above, it is hardly surprising that Fiat’s problems made the headlines in the national media, raised concerns among politicians and became a symbol of the first recession in the country’s recent history. A few days ago, Fiat announced that 1,500 of its employees, or nearly one-third of the staff, would be made redundant. The factory in Tychy will shortly cease the production of its most important model, namely the old Panda. The role of the Polish plant in the Italian group’s future plans will be diminishing. The plant in Tychy, thus far top of the class and almost a model enterprise, is verging towards the position of an outsider. Why?

In a nutshell, car sales in Europe have been falling dramatically – it is especially true in the case of small vehicles, and the situation calls for redundancies in overstaffed plants. Although the plant in Tychy is manifold more productive than Fiat’s Italian factories, given the company’s emblematic position in Italy and the strong influence of trade unions, the group could not possibly limit staff redundancies to the home market. Last year, the group’s factory in Sicily was closed and now the time has come for cuts in Poland. Moreover, Fiat has changed its strategy to focus on the production of more expensive, luxury cars, such as Jeeps, Maseratis, Alfa Romeos. The Polish factory is no place for such adventures, just like Lieutenant Borewicz at the wheel of his Fiat is no James Bond.

Fiat’s difficult situation in Poland can, however, be subject to a more profound study and serve as a magnifying glass for the analysis of some of the problems of Polish economy. This company is a symbol, so let’s refer to it as such. Fiat epitomizes the successes of Polish economy, but its problems can also be regarded as Cassandra’s prophecy of rather serious threats faced by it.

(graphs DG/CC BY-NC-SA by Ben McLeod)

(graphs DG/CC BY-NC-SA by Ben McLeod)

Best among cheaper products

Fiat Auto Poland undoubtedly represents the successful transformation of the Polish industry attracting foreign capital and rapidly increasing its productivity. The President of the Fiat group, Sergio Marchionne, used to refer to the Polish plant as an example and a role model to the group’s other plants throughout the world.

Until recently, less than 6,000 workers of the Tychy plant were able to manufacture over 600,000 vehicles per year, while the output of the five Italian factories employing nearly 22,000 people remained below 700,00 vehicles per year. We must not forget that vehicles manufactured in Italy are larger and more technologically advanced but, on the other hand, labour costs in Poland are much lower. The effectiveness of the Polish plant is therefore very high.

Moreover, industrial successes are observed in many industries. Poland has a great number of companies and plants not only in the automotive industry, but also the machinery, aviation, furniture, food, and metal sector, manufacturing high-quality goods that are exported to markets throughout the world.

Here, however, lies a problem. Raising industrial productivity is a relatively simple and fast form of economic development, which only requires the market’s opening towards the world and the introduction of clear rules and incentives for investors. However, as shown by the economist Dani Rodrik in his recent works entitled „Unconditional Convergence“ and „The Future of Economic Convergence“, two difficult changes are necessary in order to sustain high economic growth over a long period of time. They consist, firstly, in the development of production in industries and industrial sectors with the highest global level of productivity and, secondly, in service productivity growth. They require a high level of expertise and are difficult to achieve.

(graphs DG/CC BY-NC afflictedmonkey)

(graphs DG/CC BY-NC afflictedmonkey)

Let us return to the example of Fiat, which highlights the problems described by Rodrik. Given Poland’s long tradition in the manufacturing of small vehicles, creation of a highly productive plant manufacturing small Fiats, Fords, etc. was successful. However, no luxury or technologically advanced vehicles are manufactured in Poland. Fiat does not reduce the production output in Tychy for political reasons only, but also – and perhaps primarily – because of the factory’s incapability to manufacture the types of cars that are to become central for the group’s new strategy. Furthermore, Poland lacks advanced services in the fields of design, research, etc. Given the above, although the productivity in the Polish sector of small cars is higher than for example in Italy, Poland’s economy as a whole is far less productive.

Some economists believe that the progress from less to more advanced technologies will proceed systematically and almost linearly. It is, however, a risky assumption. Rodrik argues quite convincingly that climbing towards the „highest shelves” is not as easy as the transition from the lowest shelf to – say – a middle one. In the first phase, three factors prove sufficient: private property protection, macroeconomic stability and openness to global markets. Such conditions are conducive to a rapid increase in productivity, particularly in the industrial sector, through the elimination of inefficiencies and the adaptation of foreign technologies.

In subsequent stages of development, an increase of productivity necessitates, however,  appropriate political, legal, financial, educational, and cultural institutions that encourage and promote entrepreneurship, provide incentives for risk-taking and stimulate innovation. Poland, however, has a problem with its institutions, as evidenced by all the ratings that evaluate economic freedom, quality of government, the judiciary branch, the legislative process and the area of research.

Capital waives a national flag

Fiat also reflects Poland’s successes and threats in another field. It is an example of a successful privatization process conducted through the use of foreign capital, but also a painful signal that the overall dependence on foreign capital and the evident weakness of domestic capital can be dangerous.

Fiat was one of the first large Polish companies which were privatized. At the turn of 1989 and 1990, when state-owned enterprises were converted into companies with State Treasury shareholding, the then factory of small-engine cars (Fabryka Samochodów Małolitrażowych, FSM) faced bankruptcy. The development of new models of cars required funding, which was beyond the possibilities of the Polish government. Italians immediately declared their desire to acquire the company, as years of cooperation in the production of various models of Fiats made the group from Turin a natural candidate among companies that wished to take over the Polish plant.

In May 1992, in the limelight and in the presence of high-ranking politicians, Fiat took control over the FSM. Back then, dozens of Polish companies benefited from an influx of foreign capital and technology, which led to the country’s rapid modernization. Today, almost 70% of Poland’s exports are realized by foreign investors.

Capital, however, has its specific nationality and is often behaving chimerically. In Italy, Fiat is regarded as a national treasure, and no one would dare suggest to move manufacturing activities from Italy to Poland in the times of economic crisis. Even the professional management board of Fiat does not deny that the company plays a crucial role in its home country. Even though from the point of view of production costs it would be advisable to maintain a high level of production  in the plant in Tychy and, simultaneously, reduce it in Italian factories, neither the mainstream Italian media nor business analysts and sectoral magazines would put forward such an argument.

One might say that economic nationalism brings nothing else but problems and there is some truth in that – Italy is an excellent example here. However, even when we discard pathological situations, capital – as a general trend observed throughout the world – tends towards domestic markets. This is confirmed by both observations and research. Economists once speculated why the majority of countries with a high saving rate maintain also a high rate of investment, even though no interdependencies should be observed between these variables in the context of free capital flows (just like no interdependencies are observed, for instance, between oil resources and oil consumption). It is due to the fact that even though capital is constantly moving around the globe, it also likes to „stay” at home.

Therefore, despite Poland’s giant benefits from foreign investments, it will be difficult to sustain a high growth rate in the future without strengthening domestic capital, which in turn will be difficult without an increase in domestic savings. In the times of crisis, foreign companies may reduce their level of production in our country for political reasons, even though this seems to be of minor importance. The fact that our capital resources may prove insufficient to provide funding to industries with a high growth potential is far more alarming. Poland is likely to record a low rate of investment, and therefore a slow growth of production assets. In terms of technology, we will be dependent on the decision of global players. The naturally high level of savings cannot solve all the problems, but maintaining a rapid pace of growth is impossible without them.

Fiat’s problems sparked patriotic comments among politicians and certain commentators who called for rescuing the Polish factory, exerting political pressure on Fiat’s management and convincing them to save jobs, as well as introducing a more tangible strategy supporting the automotive industry. However, the truth is that Polish politicians are helpless – they are unable  to influence decisions taken in Turin, or to bring about rapid changes in the Polish automotive industry.

(graphs DG/ CC BY-NC wwwuppertal)

(graphs DG/ CC BY-NC wwwuppertal)

The first step would consist in realizing that we are entering a difficult period and that the reaping the rewards of the 1989 transformation will soon come to an end. The time has come for a new transformation: from the free-market economy, albeit fettered by the constraints due to the inefficiency of national courts, inconsistent regulations and a complicated fiscal system, towards an economy which is favourable to foreign and domestic investors. If this proves to be a success, in a few years’ time Fiat might be back in Tychy with a new plan for the factory: manufacturing larger models of vehicles.

(graphs DG/CC BY-NC-SA by Ben McLeod)
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(graphs DG/CC BY-NC afflictedmonkey)
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(graphs DG/ CC BY-NC wwwuppertal)
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