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Slowdown signs - Auto slump hits Slovak economy badly

It is reported that Kia Motors, which produces cars in Zilina at the foot of the pine clad Tatra Mountains in Slovakia, has trimmed shifts to 6 hours from 8 as it dials back production 15%.

Such cutbacks may seem mild compared with the troubles in Michigan, but they're a big deal for this nation of 5.4 million people. Some 80,000 Slovaks work for the automakers and a dense cluster of suppliers, such as Visteon, Delphi and US Steel. In 2008, Slovakia churned out 591,000 vehicles. But this year output is likely to drop below 500,000 and won't grow again until 2011. Unemployment has shot up to 10.5% from 8.7% at the end of 2008, while the economy contracted at an annual rate of 5.4% in the first quarter.

Foreign investment has slowed to a trickle. Even as Slovakia's adoption of the euro has eliminated currency risk for many businesses, it has made Slovak workers more expensive than those in Hungary or the Czech Republic, not to mention Romania and Ukraine, countries whose currencies are much weaker than the euro. In 2007 the Slovak Investment & Trade Development Agency attracted 64 foreign projects worth USD 1.8 billion, mostly auto related. This year, just two projects have been completed.

The auto industry slump is a blow for one of the most successful members of the former Soviet bloc and a model for emerging countries everywhere. In 2004, Slovakia introduced a 19% flat tax on both business and personal income. That and a low cost, skilled workforce prompted a surge in foreign investment, helping push growth to more than 10% by 2007. The Kia factory will cut production to 170,000 vehicles this year, from 200,000 in 2008, well below capacity of 300,000 vehicles. And Slovak workers are more productive than Romanians or Ukrainians, even if they are more expensive.

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