The Eastern European Automotive Industry in A Post-Pandemic World: What Drives Performance?

The automotive industry is one of the key drivers of economic growth in countries in Central and South-Eastern Europe, with contributions of up to 15% of gross domestic product. At the same time, the automotive industry is at the heart of key transformations: new technologies on the horizon at the verge of the global “green deal”; supply chain uncertainties because of the effects of pandemics in Asia; and unpredictable demand side factors ranging from purchasing power to consumer preferences. These aspects, coupled with large, fixed investments and costly distribution channels, put the industry at the core of (radical) change initiatives. Ahead of these changes, our paper investigated the presence of firm, industry, and country effects on the profitability of firms in the automotive industry in Central, Eastern and South-Eastern European countries, considering different industry definitions and firm size. We found that firm effects are significant for profitability variation across companies, but differ in intensity based on the size of the company, which signals that firm size matters significantly as a driver of operational profitability, as it is converted into sustained competitive advantages. While industry effects bear very little significance for profitability variation in the automotive industry, our most surprising finding was that country effects are important for profitability and have more of an impact for smaller companies. This may be the consequence of “historical” factors that led to large Original Equipment Manufacturers setting up their manufacturing facilities in the region, but also of specific economic policies in the form of state aid addressed to the automotive industry. Keywords: automotive industry, profitability, Central and South-Eastern Europe, variance components, industry effects, country effect