Slovakia struggles to protect automotive hub reputation

Slovakia, a small landlocked country in the heart of Europe, is facing a crisis Perfect storm It also seeks to protect itself The cars have an enviable reputation.

From the founding of the Bratislava Automobile Corporation (BAZ) in the early 1970s until the fall of communism and its subsequent ascent into the European Union, Slovakia positioned itself as the world’s leading automobile producer per capita.

Nicknamed the “Detroit of Europe” and with a population of just 5.4 million, this mountainous country has attracted major manufacturers such as Volkswagen, StellantisKia and Jaguar Land Rover.

Swedish car company Volvo Cars is also preparing to open an electric vehicle factory near Kosice in eastern Slovakia, marking its fifth manufacturing facility in the country.

Such is its dominance, Slovakia’s automobile industry currently represents nearly 11% of its GDP, half of the country’s industrial output, and about a tenth of the country’s total employment.

Many challenges, from US tariffs and Chinese competition However, rising domestic taxes and a geopolitical shift away from the European Union threaten to undermine its position as a global leader in automobile production.

Matej Hornak, an analyst at Slovenská Sporiteľňa, Slovakia’s largest bank, described Slovakia’s auto sector as uniquely vulnerable to Trump’s tariffs compared to others in Central and Eastern Europe.

That’s because Slovakia’s exports to the United States represent 4% of its total exports, and about 80% of that volume consists of cars, Hornak said.

Zuzana Belakova, director of the economics and business program at Globsec, a think tank based in the Slovak capital Bratislava, singled out the US tariffs as the biggest near-term risk to Slovakia’s auto industry.

“The main immediate risk, more than the transition to electric cars and all the other risks, is tariffs. This is a big challenge,” Belakova told CNBC by phone.

“I would say now, in the current situation, the US-EU trade alliance has stabilized, and tariffs have been reduced to 15%, which is certainly better than the initial proposal but still a challenge,” she added.

United States and European Union Agreed on a framework trade agreement In July, the US administration of Donald Trump imposed a blanket 15% tariff on most EU goods. The agreement represents a significant reduction from Trump’s threat to impose 30% tariffs and nearly halve the tariff rate on Europe’s auto sector from 27.5%.

Industry groups, which initially welcomed the trade deal, expressed deep concern about the costs associated with the new tariff reality.

“While falling US demand poses a challenge for Slovak automakers, they are simultaneously facing pressure in other markets as competition from Chinese manufacturers intensifies,” Hornak told CNBC via email.

“US tariffs are only one piece of the puzzle – the broader picture requires closer attention,” he added.

Volkswagen She chose Portugal to Slovakia for its new electric model ID.1, while Stellantis, which has a Trnava plant in western Slovkaia, She chose Spain As a destination for a new electric car.

However, Slovenska Sporita’s Hornak said the country’s car factories still appear competitive within their own corporate groups when it comes to allocating EV production.

Volvo The next EV factory The project in eastern Slovakia, for example, represents “one of the most important investments in this area,” with Chinese company Gotion High Tech and Slovakian partner InoBat set to build an electric vehicle battery factory, reflecting “another major investment,” Hornak said.

“On the other hand, there is a lack of targeted government and institutional support for the transformation of the industry. In fact, the situation is quite the opposite: due to fiscal consolidation measures, the business environment in Slovakia is deteriorating,” Hornak said.

“The increasing burden of taxes and fees on companies – such as the introduction of a transaction tax – further disadvantages local companies in the international market,” he added.

Prime Minister Robert Fico’s government has raised taxes and imposed new fees on financial transactions as part of a broader campaign to fix the country’s troubled public finances. Measures that It raised tensions Within the ruling coalition, it was criticized by Slovakia’s automobile industry.

Aleksandar Matusek, President of the Automotive Industry Association of Slovakia (AIA SR), He told Bloomberg in late May Fico’s government risks damaging the country’s auto sector through higher taxes, as well as a geopolitical shift away from major trading partners.

A Slovak government spokesperson did not respond to CNBC’s request for comment.

Slovak Prime Minister He said Trump announced earlier this month that he would refuse to support tougher European Union sanctions on Russia unless the bloc first addresses rising energy costs and growing pressures on the region’s auto industry.

Thousands of people They took to the streets Demonstrations took place in Bratislava last month to protest a meeting between Fico and Putin, in an escalation of previous demonstrations over Fico’s pro-Russian stance.

“The Slovak government’s more flexible stance toward Russia and its growing skepticism toward the European Union create additional uncertainty for Slovak companies, adding another layer of strategic risk to their planning,” Hornak said.

“As a result, European leaders increasingly view Slovakia as a less reliable partner, which could negatively impact investment decisions – both from existing investors and from potential new entrants,” Hornak said.