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15 September, 2022

Where should Mercedes and Rivian establish their new European EV factory?

Legacy carmaker Mercedes and electric vehicle start-up Rivian are set to collaborate on a new factory in central and eastern Europe to produce electric vans. Investment Monitor examines where the best option is out of Hungary, Poland and Romania.

By Naomi Davies

Despite supply chain challenges, the electric vehicle (EV) revolution is accelerating worldwide. Electric car sales (including fully electric vehicles and plug-in hybrids) doubled to hit a record of 6.6 million in 2021. This momentum has also continued into 2022, with two million electric cars sold globally in Q1 at an annual growth rate of 80%.

As fuel prices soar amid turbulence regarding the supply of Russian oil and gas, EVs are becoming increasingly attractive to consumers. In addition, an ever-growing number of governments are encouraging their citizens to transition away from fossil fuel-powered cars to meet climate change goals. As a result, the global EV market is forecast to rise from $287.4bn in 2021 to $1.3trn by 2028.

What we know about the Mercedes and Rivian deal so far

In September 2022, Mercedes-Benz Vans, a business unit of the German automotive giant Mercedes-Benz Group, signed a memorandum of understanding with Rivian, the US’s best-funded automotive start-up, to form a joint-venture (JV) production company for electric vans.

As part of the agreement, the companies will share the cost to establish an all-new electric-only production facility leveraging an existing Mercedes site in central and eastern Europe. The factory will manufacture large electric vans for both companies. An opening date has yet to be confirmed, with official reports stating that the plant will begin operating “in a few years”.

The Mercedes JV is the latest in a series of moves by Rivian to ramp up its production capacity. The company, which counts Amazon and Ford among its key shareholders, is expected to produce 25,000 vehicles in 2022 at its manufacturing facility in Normal, Illinois.

Rivian has also begun rolling out custom electric delivery vehicles for Amazon, with thousands of vans expected in more than 100 US cities by the end of 2022 and 100,000 across the country by 2030. A second $5bn factory will open near Atlanta, Georgia, in 2024 with an annual production capacity of 400,000 vehicles.

Mercedes is also investing in the future. The company is set to invest $2bn (€2bn) in its European assembly plants to equip them for the shift to electric cars by the end of the decade. Mercedes will go all-electric by 2030 where market conditions allow.

Rivian is still eyeing European market

Rivian has been planning to open a European factory since early 2021. Reports suggest that the company may still build a separate factory for its passenger vehicles on the continent, although a final decision has yet to be confirmed.

In a previous study, Investment Monitor compiled an indicative data model that ranked Germany as the ideal location for the proposed factory due to its highly innovative economy, excellent infrastructure and world-class talent.

However, it was also noted that Germany was the most expensive option of the countries analysed. Given Rivian’s recent financial reports, which show a surge in operating losses from $1bn in 2020 to $4.7bn in 2021, cost-effectiveness may be of greater importance than it would be for more profitable companies.

In addition, the decision to partner with a legacy carmaker conforms with Rivian’s cautious business model. The company, which was founded in 2009 but operated in stealth mode until 2017 when it had near-production-ready vehicles to show, is known for its careful, well-analysed approach, with chief executive officer RJ Scaringe sometimes referred to as the anti-Elon Musk.

Through its JV with Stuttgart-based Mercedes, Rivian guarantees access to the company’s well-established European market as well as its supply chain and manufacturing footprint, all while splitting construction costs. The move has already proved advantageous, with Rivian shares jumping by nearly 11% when the partnership was announced.

The collaboration is also highly beneficial for Mercedes, which plans to introduce electric-only van models from 2025 onwards. For established automotive players such as Mercedes, the stress and cost associated with transitioning from combustion-powered vehicles to EVs brings various teething problems. A partnership with a start-up such as Rivian will allow for greater knowledge and technology sharing.

Which countries are being considered?

Our analysis shows that Mercedes currently operates factories in three central and eastern European countries – Hungary, Poland and Romania. The company also maintains a facility in Esipovo, near Moscow, but operations have been suspended at the site since early 2022 following Russia’s invasion of Ukraine.

Investment Monitor has analysed each location to assess which offers the best proposition for Mercedes and Rivian’s JV site.

Hungary leads for per capita FDI and car production

The Mercedes plant in Kecskemét in central Hungary became the company’s first European car factory outside of Germany when it opened in March 2012. The plant plays a key role in the company’s worldwide compact car production network and is the region’s largest industrial employer.

In mid-2022, Mercedes announced plans to invest €1bn (Ft405.25bn) in the site to introduce next-generation electric platforms in production. As the investment will secure future employment and develop regional infrastructure, the Hungarian government promised a $34.9m support package.

The automotive sector plays a central role in the Hungarian economy, contributing roughly 4% of the country’s GDP and employing more than 158,000 people. Some 700 auto companies have operations in Hungary, producing 420,000 cars annually. In addition, Hungary is the only country to host the production units of Europe’s three premium car manufacturers besides those from Germany.

On a per capita basis, Hungary is the leading destination for automotive foreign direct investment (FDI) and car production of the locations analysed. The country also comes out on top in terms of innovation, with the highest research and development (R&D) expenditure as a percentage of GDP (1.3% in 2020) and the largest number of automotive patents per capita.

Hungary also offers investors the lowest corporate tax rate in Europe at 9%. However, plans spearheaded by the OECD are currently under way to introduce a minimum global corporate tax rate of 15%, which are on course to take effect in 2024. Nearly 140 countries and jurisdictions around the world agreed to the measure, but the Hungarian government remains opposed, claiming that it will make its economy less competitive.

In addition, Rivian may be discouraged by the far-right-wing politics of Hungarian Prime Minister Viktor Orbán given that its company values are focused on environmental friendliness, diversity and inclusion. Orbán previously dismissed EU climate policy plans as a “utopian fantasy” that push up energy costs. This is at odds with Rivian’s mission centred on producing eco-friendly vehicles to combat climate change.

Orbán is also the only EU leader to have not openly condemned Russia’s invasion of Ukraine and has instead criticised Ukrainian President Volodymyr Zelensky. Hungary, which is about 85% dependent on Russian gas, has also opposed EU sanctions that would block its Russian energy shipments.

Poland's infrastructure comes out on top

Mercedes’ Polish factory is located in the municipality of Jawor, west of Wrocław in the Wałbrzych Special Economic Zone. The plant produces four-cylinder gasoline, diesel engines and batteries for electric cars. The state-of-the-art factory also closely follows digitalisation trends.

Electromobility is emerging as a key investment sector for Poland. Research from the government’s Strategy for Responsible Development forecasts that there will be one million EVs on Polish roads by 2025 as well as ongoing plans to electrify public transportation.

Poland was the leading central and eastern European country in the 2020 edition of the Global Quality Infrastructure Index with a score of 95.3. The country also has the highest road quality of the locations analysed. Physical infrastructure is likely to be a key concern for the companies as they begin to ship their vans across Europe. Poland also enjoys a strategic position along several key logistical routes including the New Silk Road project, and boasts four maritime ports of major strategic importance to the economy.

In terms of FDI, Poland is the leading location analysed for automotive foreign investment. A combined total of 68 inbound automotive projects were recorded in Poland between 2019 and 2021, nearly double the number recorded in Hungary and 40% more than the amount received by Romania.

A potential Mercedes/Rivian investment in Jawor would also benefit from access to the Wałbrzych Special Economic Zone. The zone’s tenants enjoy access to industry clusters, cooperation between vocational schools and entrepreneurs, and income tax relief up to 55%.

Romania proves most cost-effective

Mercedes currently operates two factories in Romania through its Star Assembly and Star Transmission subsidiaries. The facilities, which are in Szászsebes and Cugir, produce car parts for export.

In August 2022, the company announced it was preparing a €135m investment in Transylvania, for which it requested $37m in state support. The company plans to partially convert both factories to the production of electric car parts.

Romania’s sizeable automotive industry, which includes more than 500 companies, accounts for a significant part of the economy and provides about 28% of its GDP. The country’s cost-effectiveness is extremely attractive for potential investors, with highly skilled salaries, office costs and electricity prices all below the regional average. Romania also performed well in Yale’s 2022 Environmental Performance Index, which assesses environmental health and sustainability, outshining the other countries analysed.

However, in other categories Romania’s proposition is not as competitive, with its infrastructure quality, talent level and R&D prowess trailing the other locations. The country was also deemed high risk on Allianz’s Country Risk rating due to government instability, high private sector debt and a rapidly increasing current account deficit.

Hungary may clinch coveted investment

The new JV factory from Mercedes and Rivian is expected to bring huge capital investment and job creation to their chosen location. As Mercedes has already invested in EV-related activity in Hungary, Poland and Romania, each country is a viable option for the new factory, and the company has likely developed relationships with the respective investment promotion agencies.

From our analysis, Hungary looks to be in pole position to clinch the coveted investment given its longevity and ability to innovate. However, the country’s political landscape may prove to be a sticking point. If so, Poland’s excellent infrastructure makes the country a very attractive proposition.

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