Despite the continuous rain, the vast construction site was buzzing with activity. Yellow-and-orange excavators danced slowly around a maze of muddy pits, hoisting giants of dirt as a chorus of trucks traversed the landscape.
This 50-acre site in Oradea, Romania, near the Hungarian border, beats out many other places in Europe, spending €650 million, or $706 million, for a new Nokian Tire plant. became the headquarters. Like the industrial-minded Goldilocks, the Finnish tire company was looking for the right mix of real estate, transportation, labor supply and business environment.
But the defining feature that every host country must have – membership in both the European Union and the North Atlantic Treaty Organization – would not even have been noted a few years ago.
Nokian chief executive and president Jukka Moisio said geopolitical risk was “the starting point.” Not until February 24, 2022, when Russia invaded Ukraine.
Nokian Tires’ modified business strategy highlights the changing competitive conditions in the global economy facing governments and businesses. As the Ukraine war drags on and tensions between the United States and China escalate, key decisions about offices, supply chains, investments and sales are no longer driven primarily by cost concerns.
As the world becomes globalized again, the valuation of political threats is much greater than before.
“This is a radically changed world,” says Johns Hopkins political scientist Henry Farrell. “We can’t just think about innovation and efficiency. We must also think about safety.”
For Nokian Tires, which sold its first stake on the Helsinki Stock Exchange in 1995, the new reality hit like a hammer. About 80% of Nokian passenger car tires were manufactured in Russia. And that country accounted for 20 percent of sales.
Moisio said the dangers of over-concentration really hit home “when the company lost billions of dollars.”
Within six weeks of the start of the war, it became clear that the company had no choice but to withdraw from Russia and expand production elsewhere. Rubber has been added to the European Union’s rapidly expanding package. sanctions. Finnish public sentiment worsened. Stock prices plummeted. The stock price in January 2022 he was above 34 euros. Today it is 8.25 euros.
“We were very exposed,” Moisio said over coffee in a sunny conference room in the company’s sober Helsinki office. The Russian operation had great benefits, but also great risks, a fact that was forgotten over time.
Diversification may not be as efficient or cheap, he said, but “it’s much safer.”
Executives are recognizing again that markets often fail to measure risk accurately. January investigation A survey of 1,200 chief executives around the world by consulting firm EY found that 97% had changed their strategic investment plans because of new geopolitical tensions. More than a third said they would relocate their business.
China, which has become an increasingly difficult home for foreign companies and investments, has become one of the countries from which companies are leaving. about 1 in 4 A survey last year by China’s European Union Chamber of Commerce found that many companies were planning to move operations abroad.
Businesses are suddenly finding themselves “stranded in the no man’s land of a war empire,” argue Farrell and co-author Abraham Newman in a new book. Book.
Moisio’s tenure at Nokian coincided with a triple crisis. He started his business in May 2020, months after the COVID-19 pandemic effectively brought global commerce to a halt. Like other companies, Nokian also cut back on his production and capital spending. With no outstanding debts, he was able to weather the storm.
And when the economy recovered, Nokian scrambled to restart production and replenish raw materials amid major disruptions to supply chains and transportation. The war posed an existential threat to Nokian’s business.
Adding production lines to an existing facility is often the fastest and cheapest way to increase production. Still, Nokian has decided not to expand its operations in Russia.
Moisio said production was already concentrated there, but more importantly, continued bottlenecks in the supply chain increased the risks and costs of transporting materials over long distances. said to have embossed.
In the future, 80% of production will be local or regional, rather than concentrated in one location far from the market.
“The situation has changed,” Moisio said.
Tires for the Nordic market will be produced in Finland. Tires for US customers will be manufactured in the US. And in the future, European services will be performed by European factories.
Diversification was already part of the company’s strategic plan. In 2019, it opened another factory in Dayton, Ohio, in addition to the factory that operated in Nokia, the Finnish town that gave the tire manufacturer its name.
The company will open new production lines at both plants at the end of 2021.
When the time came to build the next factory, management wanted to build a factory in Eastern Europe, close to the largest European markets: Germany, Austria, Switzerland, France, Poland and the Czech Republic.
The moment came much sooner than anyone expected.
In June 2022, less than four months after the invasion of Ukraine, Nokian executives asked the board of directors to approve the withdrawal from Russia and the construction of a new factory.
Negotiations to withdraw from Russia began, and the search for a new location began hastily. Adrian Kazmarczyk, senior vice president of supply operations, said consulting firm Deloitte helped complete a site evaluation process involving dozens of potential sites across Europe in four months. By comparison, in 2015 Deloitte took him nine months to recommend a site in one country, the United States.
The goal was to start commercial production by early 2025.
Serbia had a thriving automotive industry, but was excluded from the start because it was neither a member of the European Union nor NATO. Turkey was a member of her NATO, but not the European Union. And Hungary has been labeled a high-risk country because of its close ties with illiberal Prime Minister Viktor Orban and Russia.
A long list of other considerations began as the rounds continued. Where are the nearest highways, ports and rail lines? Were there enough qualified employees? Was land available? Could it speed up permitting and construction? How pro-business were the authorities?
Moisio said Nokian would have considered reducing the carbon footprint of the new plant anyway. But without the war, the decision to go for a 100 percent zero-emissions factory probably wouldn’t have happened. After all, it was cheap gasoline from Russia that helped lure Nokian there in the first place. Now that supply has run out, the company has accelerated its thinking about ending its reliance on fossil fuels.
“The chaos made us think differently,” Moisio said.
As the sifting progressed, considerations large and small became a complex tangle. Was there adequate medical care or an international school that foreign business owners could send their children to? What was the likelihood of natural disasters?
Countries and cities fell apart for various reasons. Slovenia and the Czech Republic were considered low- to medium-risk countries, but Kaczmarczyk said he had not found suitable land.
Slovakia also fell into the same bucket and already had a large automobile industry. However, Bratislava has made it clear that it is not interested in attracting more heavy industry, only information technology, Kaczmarczyk said.
Ultimately, six candidates were shortlisted by Deloitte, two in Romania, two in Poland, one in Portugal and one in Spain.
It was clear from the list of finalists that there was a jumble of old and new considerations for companies to consider. As the Nokian Tires CEO put it, geopolitics was the starting point, but not necessarily the end point.
Spain has few geopolitical risks. El Reboral’s site attracted a lot of talent, but Deloitte excluded it because of high wage costs and strict labor regulations. Portugal, another country without security risks, was denied over concerns about power supply and the speed of the permitting process.
Poland, like Hungary and Serbia, was seen as a high risk despite its staunch anti-Russian stance. It has an anti-democratic government and has repeatedly clashed with the European Commission over the supremacy of European law and the independence of Polish courts.
However, low labor costs, the presence of other multinational employers, and the speed of the permitting process far outweighed any concerns, pushing the Gorzow and Konin sites to second and third place.
A top recommendation, Oradea ultimately provided a better balance between the company’s competing priorities. Labor costs in Romania, like Poland, were among the lowest in Europe. And although its risk rating is considered relatively high, it was lower than Poland.
Oradea had other advantages. Construction could start soon. Utilities had already been introduced. A new solar power plant was under construction.amount of development Subsidy More money came from the European Union to companies investing in Romania than from Poland. Local officials were also enthusiastic.
Oradea City Manager Mihaly Yurka elaborated on the region’s attractions during a tour of the turrets of Art Nouveau buildings in the refurbished city centre.
Jürka said that in the early 20th century under the Austro-Hungarian Empire, “it flourished as a city of culture and commerce, a point of contact between the East and the West.”
Now a wealthy economic center of 220,000 people and home to a university, the city attracts corporate and European Union funding, while British electronics maker Plexus and German auto supplier Eberspe It is constructing an industrial park that houses domestic and foreign companies such as Hya.
Nokian doesn’t want to replicate the mega-factories it operated in Romania in Russia or anywhere else. The idea of centralizing production is “outdated,” Moisio said.
For him, the company emerged from crisis mode on March 16, the day that $258 million from the sale of its Russian business was deposited into Nokian’s bank account. Although a fraction of the total, this amount helped finance construction and cut off the company’s involvement with Russia.
Moisio said that uncertainty is now the norm, and business leaders need to constantly ask: what’s our plan B? “
