Even with sheets of rain falling, the sprawling construction site was buzzing. Yellow and orange excavators slowly danced around a maze of muddy pits, swinging giant fistfuls of dirt as a chorus line of trucks traipsed across the landscape.
This 50-acre plot in Oradea, Romania, close to the border with Hungary, beat out scores of other sites in Europe to become the home of Nokian Tyres’ new 650 million-euro, or $706 million, factory. Like an industrial-minded Goldilocks, the Finnish tire company had searched for the just-right combination of real estate, transport links, labor supply and pro-business environment.
Yet the make-or-break feature that every host country had to have would not have even appeared on the radar a few years ago: membership in both the European Union and the North Atlantic Treaty Organization.
Geopolitical risk “was the starting point,” said Jukka Moisio, the chief executive and president of Nokian. That was not the case before Russia invaded Ukraine on Feb. 24, 2022.
Nokian Tyres’ altered business strategy highlights the transformed global economic playing field that governments and companies are confronting. As the war in Ukraine drags on and tensions rise between the United States and China, critical decisions about offices, supply chains, investments and sales are no longer primarily ruled by concerns about costs.
As the world re-globalizes, assessments of political threats loom much larger than before.
“This is a world that has fundamentally changed,” said Henry Farrell, a political scientist at Johns Hopkins. “We cannot just think in terms of innovation and efficiency. We have to think about security, too.”
For Nokian Tyres, which first sold shares on the Helsinki stock exchange in 1995, the new reality struck like a hammer blow. Roughly 80 percent of Nokian’s passenger car tires were manufactured in Russia. And the country accounted for 20 percent of its sales.
The perils of over-concentration hit home, Mr. Moisio said, “when your company loses billions.”
Within six weeks of the war’s start, it became clear that the company had no choice but to exit Russia and ramp up production elsewhere. Rubber had been added to the European Union’s rapidly expanding package of sanctions. Public sentiment in Finland soured. The share price plunged. In January 2022, the share price was over €34; today it’s €8.25.
“We were very exposed,” Mr. Moisio said, sipping coffee in a sunny conference room at the company’s low-key Helsinki office. The Russian operation had high returns, but it also had high risks, a fact that, over time, had faded from view.
Diversifying may not be as efficient or cheap, he said, but “it’s far more secure.”
C-suite executives are relearning that the market often fails to accurately measure risk. A January survey of 1,200 global chief executives by the consulting firm EY found that 97 percent had altered their strategic investment plans because of new geopolitical tensions. More than a third said they were relocating operations.
China, which has become an increasingly fraught home for foreign businesses and investment, is among the places that firms are leaving. Roughly one in four companies planned to move operations out of the country, a survey conducted last year by the European Union Chamber of Commerce in China found.
Businesses are suddenly finding themselves “stranded in the no-man’s land of warring empires,” Mr. Farrell and his co-author, Abraham Newman, argue in a new book.
Mr. Moisio’s tenure at Nokian has coincided with the triple crown of crises. He started in May 2020, a few months after the Covid-19 pandemic essentially shut down global commerce. Like other companies, Nokian hunkered down, cutting production and capital spending. Its lack of outstanding debt helped it ride out the storm.
And when the economy bounced back, Nokian scrambled to restart production and restock raw materials amid a huge breakdown of the supply chain and transportation. The war posed an existential threat to Nokian’s operations.
Adding production lines to existing facilities is often the fastest and cheapest way to increase output. Still, Nokian decided not to expand its operation in Russia.
Production there was already concentrated, Mr. Moisio said, but more important, the persistent supply chain bottlenecks underscored the added risks and costs of transporting materials over long distances.
Going forward, instead of locating 80 percent of production in one spot, often far from the market, 80 percent of production would be local or regional.
“It turned upside down,” Mr. Moisio said.
Tires for the Nordic market would be produced in Finland. Tires for American customers would be manufactured in the United States. And in the future, Europe would be serviced by a European factory.
Diversification had, to some extent, already been incorporated into the company’s strategic plan. It opened a plant in Dayton, Tenn., in 2019, in addition to the original factory that operated in Nokia, the Finnish town that gave the tire maker its name.
At the end of 2021, the company opened new production lines at both of those plants.
When it came time to build the next factory, executives figured it would be in Eastern Europe, close to its largest European markets in Germany, Austria, Switzerland and France, as well as Poland and the Czech Republic.
That moment came much sooner than anyone expected.
In June 2022, less than four months after the invasion of Ukraine, Nokian executives asked the board to approve an exit from Russia and the construction of a new plant.
Negotiations to leave Russia commenced, as did a high-speed search for a new location. Aided by the consulting firm Deloitte, the site assessment process, which included dozens of candidates across Europe, was completed in four months, said Adrian Kaczmarczyk, senior vice president of supply operations. By comparison, in 2015 Deloitte took nine months to recommend a site in a single country, the United States.
The aim was to start commercial production by early 2025.
Serbia had a flourishing automotive sector, but was eliminated from the get-go because it was in neither the European Union nor NATO. Turkey was a member of NATO but not the European Union. And Hungary was labeled high risk because of its illiberal prime minister, Viktor Orban, and close relationship with Russia.
At each successive round, a long list of other considerations kicked in. Where were the closest highway, harbor and rail lines? Was there a sufficient pool of qualified employees? Was land available? Could permitting and construction time be fast-tracked? How pro-business were the authorities?
Nokian would have looked to reduce a new factory’s carbon footprint in any event, Mr. Moisio, the chief executive, said. But the decision to commit to a 100 percent emissions-free plant probably would not have happened in the absence of war. After all, cheap gas from Russia was what helped lure Nokian there in the first place. Now, the disappearance of that supply accelerated the company’s thinking about ending dependence on fossil fuels.
“Disruption allowed us to think differently,” Mr. Moisio said.
As the winnowing progressed, a complex matrix of small and large considerations came into play. Was there good health care and an international school where foreign managers could send their children? What was the likelihood of natural disasters?
Countries and cities fell out for various reasons. Slovenia and the Czech Republic were considered low-to-medium-risk countries, but Mr. Kaczmarczyk said they couldn’t find appropriate plots of land.
Slovakia fell into the same bucket and already had a large automotive industry. Bratislava, though, made clear it had no interest in attracting more heavy industry, only information technology, Mr. Kaczmarczyk said.
At the end, six candidates made Deloitte’s final cut: two sites in Romania, two in Poland, and one each in Portugal and Spain.
The messy mix of new and old considerations that businesses have to contemplate were evident in the list of finalists. Geopolitics, as the Nokian Tyres chief executive said, had been a starting point, but it was not necessarily the end point.
Spain has virtually no geopolitical risk. And the site in El Rebollar had a large talent pool, but Deloitte ruled it out because of high wage costs and heavy labor regulations. Portugal, another country with no security risk, was rejected because of worries about the power supply and the speed of the permitting process.
Poland, along with Hungary and Serbia, had been labeled high risk despite its staunch anti-Russia stance. It has an antidemocratic government and has repeatedly clashed with the European Commission over the primacy of European legislation and the independence of Poland’s courts.
Yet low labor costs, the presence of other multinational employers and a quick permitting process outweighed the worries enough to elevate the sites in Gorzow and Konin to second and third place.
Oradea, the top recommendation, ultimately offered a better balance among the company’s competing priorities. The cost of labor in Romania, like Poland, was among the lowest in Europe. And its risk rating, though labeled relatively high, was lower than Poland’s.
There were other pluses as well in Oradea. Construction could start immediately; utilities were already in place; a new solar power plant was in the works. The amount of development grants from the European Union for companies investing in Romania was larger than in Poland. And local officials were enthusiastic.
Mihai Jurca, Oradea’s city manager, detailed the area’s appeal during a tour of the turreted confection of Art Nouveau buildings in the renovated city center.
“It was a flourishing cultural and commercial city, a junction point between East and West,” in the early 20th century, under the Austro-Hungarian Empire, Mr. Jurca said.
Today the city, an affluent economic hub of 220,000 with a university, has solicited businesses and European Union funds, while constructing industrial parks that house domestic and international companies like Plexus, a British electronics manufacturer, and Eberspaecher, a German automotive supplier.
Nokian is not looking to replicate the kind of megafactory in Romania that it ran in Russia — or anywhere else, for that matter. The idea of concentrating production is “old-fashioned,” Mr. Moisio said.
For him, the company emerged from crisis mode on March 16, the day $258 million from sale of its Russian operation landed in Nokian’s bank account. Although only a fraction of the total value, the amount helped finance the construction and closed out the company’s involvement with Russia.
Now uncertainty is the norm, Mr. Moisio said, and business leaders need to constantly be asking: “What can we do? What’s our Plan B?”
Source: Economy - nytimes.com
