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INVESTMENT LEADERS

Interview with Rudolf Rusnák, Chairman of Supervisory Board Vice-president for Automotive

WHILE known mainly as a tire maker during its first 100 years of existence, the Slovak-owned Matador firm began to diversify with the decision of major foreign auto manufacturers to come to Slovakia, such as PSA Peugeot-Citroen (2003) and KIA (2004).

Rudolf Rusnák is the chairman of the supervisory board and the vice-president for automotive of Matador. Now 43, he joined Matador in 1986 following his studies at the electrotechnical faculty of the Slovak University of Technology in Bratislava.
photo: Courtesy of Matador

WHILE known mainly as a tire maker during its first 100 years of existence, the Slovak-owned Matador firm began to diversify with the decision of major foreign auto manufacturers to come to Slovakia, such as PSA Peugeot-Citroen (2003) and KIA (2004). By the first half of 2006, its new automotive section was producing a turnover of Sk3.5 billion, and when the firm's joint venture with a KIA supplier, Matador-Dong Won, comes on line in November this year, it is expected to produce a further 24-25 million euros annually in output. Matador Automotive's main products are pressed and welded parts from Vráble, pressed components from Bratislava, and transport system manipulators from Dubnica.


The Slovak Spectator: How did a company that makes tires end up supplying door frames to KIA?

Rudolf Rusnák (RR): Matador Automotive was launched at the end of 2004 with the purchase of a 51 percent stake in PAL Inalfa in Vráble, which at that time was a supplier of undercarriages, suspension systems and bumpers to FAV. With the entry of Matador we began to work on recruiting other customers as well, and we were successful with the KIA project.

Our strategy is to grow with the market that is growing up here around us. In 2005 around 200,000 cars were made in Slovakia. By 2010 this number is forecast to grow to 800,000 to 900,000, and if you look around our factory, within about a 500-kilometre radius about four million cars will be manufactured every year. That's why succeeding with KIA was such a key issue for us. Negotiations were long and tough, because the Korean mentality is somewhat different than our mentality or that of the Germans.


TSS: In what way?

RR: I would say that negotiations and personal relations lack that German kind of pragmatism and directness. We are accustomed to meetings where there is a plan, an agenda that we follow point by point. With our Korean partners there were a lot of unrelated areas, we would jump from issue to issue, and you never really knew how things were going. They aren't accustomed to saying yes or no directly, so meetings tend to end with a promise to think about it, that the price of some item could be reduced, and so on. Everything is left open, and every issue can be returned to.

I think the main idea in this approach is that they first want to assess their negotiating partners as people, and only then the firm they represent. If they don't trust you as a person, I get the feeling that it doesn't really matter what firm you represent.


TSS: Korean auto manufacturers tend to prefer their own suppliers, and bring a large number with them wherever they go. How did you, as a Slovak firm, manage to win a supply contract with KIA?

RR: We were the only [Slovak firm] to do so. I think part of the reason was that we were so patient, and spent so much time in talks both during and after working hours. What you find with the Koreans is that they are able to spend a whole day in talks, and then after work, during dinner, to come to conclusions that are formalized the next day.

Our first talks were in January 2005, with representatives of the Dong Won company, which is our partner in the KIA project, while our common enterprise was formed in September. In the meantime I visited Korea five times, and they were here on numerous occasions. The final phase was complicated by the Anti-Monopoly Bureau, but even without that, the negotiations took a very long time. At the same time we gave them support in the Slovak legislative environment that other Korean suppliers didn't have at such a level.

Now they are satisfied and far more open with us than before because they see that we don't have the same problems as the other Korean suppliers, some of which began building without a construction permit, or set up their work contracts in conflict with labour law, and had various other problems with Slovak legislation. It's a headache for them, and they don't know what to do about it.

We were assigned an 'A' rating putting us in the best-prepared group of suppliers following the visit of Chang-Kyun Han, the vice-president of KIA. The benefit of that is that they are counting on us to be suppliers in the same volume to the Hyundai project [in the Czech Republic], and we are now preparing a request for state aid in the Czech Republic, because Czech law is more benevolent towards foreign investors. Our previous aim was to expand our factory in Dubnica to supply Hyundai, but the Koreans told us it made no sense, and that as long as the Czechs were offering subsidies, it would be better to build a factory there, given the distance we would have to be transporting the supplies.


TSS: What are the risks of tying your business to one large client?

RR: An auto company will never give you a contract to supply them for evermore, it's a looser relationship than that. But it still has its rules, and as long as we meet our deadlines and maintain quality, they stick with their suppliers and take them everywhere they go, whether in China, India, the US or here. And if you lose their business, you lose it all around the world. They have a slightly different philosophy than the German auto makers.


TSS: Have you had any luck with PSA?

RR: We were a bit late off the mark with the PSA project, because we didn't get into automotive until our entry into PAL Inalfa in 2004. But we were eventually successful there as well; we have passed all of the certification audits, and we have been nominated for cooperation on their next project, the A58, which they will start making in Trnava in about 18 months as their next model. In the automotive industry, if you want to work on a project you have to get involved about two years before the model begins production.


TSS: At the same time as car manufacturing in this country is ramping up, the new Fico government is calling for investors to bring more added-value production to Slovakia, and saying they don't want just assembly plants in the country but creative and high-tech projects as well. Do you agree with this view?

RR: I'm convinced that the auto industry brings added-value and high-tech benefits to this country, for several reasons. Let's start with prices - in the sector there is enormous pressure to reduce costs, just as there is pressure to maintain reliability, safety and everything that is related. These two main goals cannot be achieved at the same time unless you implement new technology, which in turn requires a certain background and service environment. It requires sub-suppliers and people on the ground who know how to use the technology, meaning that our people acquire new skills and experience, and that Slovak companies generate added value.

Recently, a Czech delegate to the Slovak Automobile Industry Association said that in the past decade, the export activity of Czech auto sub-suppliers had increased tenfold, while the number of jobs in the sector had increased only 20 percent. From those figures you can really see the effects of the pressure on increased productivity through more advanced technology.

For another thing, auto firms are increasingly moving R&D operations to Slovakia, because it's cheaper for them and brings them closer to their customers. That allows our people to be engaged in such work without having to travel to another country for it.

So I don't agree that the auto industry doesn't offer Slovakia a desirable level of added value, because we have long ceased to be a country that just assembles auto parts made elsewhere. When KIA launches production we will have a plant making motors, the first in the country. When Getrag-Ford [in Kechnec in eastern Slovakia] launches, we will have a maker of transmissions. Soon, every possible passenger car part will be manufactured in Slovakia, even though we will still have no car made from all Slovak-manufactured parts. But the sector is already very well diversified, and includes glass products, plastics, leather, machinery and steel.


TSS: Another misgiving that is voiced concerning the concentration of auto production in Slovakia is that one day - perhaps in 10 to 15 years - these factories will be moving further east in search of cheaper labour, meaning that Slovakia has to be ready by then to replace this economic output with other activity. Has your company factored this in to its long-range business plans?

RR: Our strategy is very simple. In the next four years we want to grow with the market, and to double our automotive division output by 2010, the year that all these new projects should be up and running.

Auto manufacturing is heavy manufacturing, and moving an operation costs a lot of money. In economic terms, for a car factory to pay for itself it has to produce for 2.5 car lifecycles. The lifecycle of a car is now about four years, so according to the more pessimistic outlooks, 2010 should be the peak of production in this country, followed by at least another six years in which the factories should be working at full output.

Of course, when you look at the penetration of cars in the Russian market, it's only about 150 cars per 1,000 inhabitants, whereas mature economies tend to have upwards of 400 cars per 1,000. Slovakia, the Czech Republic and Poland have around 250, Germany from 500 to 600. With these figures and all of Russia's raw materials, we can expect sales of new cars there to continue its boom growth in the double digits annually.

Our key partners are KIA, PSA, Volkswagen and Suzuki in Hungary, and we have told them that if they move into Russia and are interested in having us, we will follow them. We have made the most progress in these plans with VW, because Škoda is involved, mainly in terms of personnel, with VW's operation in Kaluga near Moscow, where they are to make about 40,000 Octavias in two years and about 80,000 Fox models.

For the future our main interest is to become a part of the supplier network of the state auto company Autowas, which is the main player there and makes about 800,000 vehicles a year. Putin has said Autowas will remain in Russian hands, and that they are interested in parts at Russian prices but of European quality.


TSS: But are either you or Slovakia as a whole insulated against the possible departure of these larger auto manufacturers from this country?

RR: Our cooperation with the four major auto manufacturers in the area - KIA, PSA, VW and Suzuki - as well as our cooperation with Samsung Galanta, which takes 20 percent of our production, and Electrolux provides us with enough diversification to eliminate any risks associated with auto industry fluctuations. Another advantage, and this actually belongs to Slovakia, is that cars of many different classes are made in this country, from very expensive cars at VW Bratislava to mid-range and economy classes at other manufacturers. This helps protect the country and our company from industry cycles.

In terms of the country as a whole, it has always been a nice dream that one day a Slovak carmaker would emerge, but this is more about capital than know-how these days. Below the auto makers there used to be only direct suppliers, but now we are seeing a new segment emerge, the so-called 0.5 suppliers, who are capable of assembling cars to order, such as Magna, which assembles for Mercedes in Graz in Austria. I can imagine something like that emerging in Slovakia from among our direct suppliers. On the other hand, I believe the carmakers will retain the functions of concept development, marketing and sales and everything that is related.


TSS: For this to happen - for Slovakia to produce an auto assembler - the government will have to invest a great deal in education and skills development. Is the country headed in the right direction on this score?

RR: It remains to be seen how the new government's educational priorities are put into effect. We in the industry see that market developments are moving much too quickly for the current educational structure to respond. We think that the government's declared university education policy is very good, but in the business sphere we are waiting to see concrete steps.

We have 25 or 26 universities in this country, but I don't think that quality has kept up with quantity. The whole automotive industry in Slovakia is mounting a huge campaign on education policy, because we face a desperate shortage of skilled labourers who are able to work CNC machines or program an automated workplace. Most students these days apply for academic stream secondary schools and then go on to university as a way of delaying their entry to the workforce. At the same time, we are losing capital-intensive courses at secondary trade schools such as auto shops and labs, and replacing them with courses schooling chefs and waiters. In Trnava, for example, a school that once had four auto mechanic courses now has one, and three culinary courses.

To give you an idea of the effect this is having, the average age of our machinists in Dubnica is 50 years, and in the past three years we have managed to recruit only two school graduates. When all of these new automotive projects get up and running, we will need thousands of new people to enter the sub-supplier network alone, and the unemployment rate is already down to 10 percent.

Developments in the skilled trades are so catastrophic that in a decade we may not be able to staff our needs unless the government changes its educational policy, and maybe even its immigration policy to allow us to recruit Bulgarians, Romanians and Ukrainians to positions the Slovak labour market is no longer able to satisfy.

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