Despite the blanket of rain falling, the huge construction site was buzzing. Yellow and orange excavators danced slowly around a labyrinth of muddy pits, dangling huge handfuls of dirt as a chorus line of trucks plodded across the landscape.
The 50-acre plot in Romania’s Oradea, near the Hungarian border, has become home to Nokian Tires’ new 650 million euro, or $706 million, factory, beating out several other sites in Europe. Like the Goldilocks of industrial thought, the Finnish tire company had discovered the right combination of real estate, transport links, labor supply and a pro-business climate.
Yet what should have been a make-or-break feature for each host country didn’t even appear on the radar until a few years ago: membership in both the European Union and the North Atlantic Treaty Organization.
Nokian chief executive and chairman Jukka Moisio said geopolitical risk “was the starting point”. This was not the case before Russia invaded Ukraine on February 24, 2022.
Nokian Tires’ changed business strategy reflects the changing global economic playing field that governments and companies are facing. As the war in Ukraine drags on and tensions rise between the United States and China, critical decisions about offices, supply chains, investments and sales are no longer governed primarily by concerns about cost .
As the world becomes globalized again, the assessment of political threats is greater than ever before.
“This is a world that has fundamentally changed,” said Henry Farrell, a political scientist at Johns Hopkins. “We cannot think only in terms of innovation and efficiency. We also have to think about security.”
For Nokian Tires, which first sold shares on the Helsinki Stock Exchange in 1995, the new reality came as a hammer blow. About 80 percent of Nokian’s passenger car tires were manufactured in Russia. And the country accounted for 20 percent of its sales.
The dangers of over-concentration drive home, Mr. Moisio said, “when your company loses billions.”
Within six weeks of the start of the war, it became clear that the company had no choice but to pull out of Russia and increase production elsewhere. Rubber was also included in the EU’s booming package Sanctions, Public sentiment in Finland turned sour. Share price fell. In January 2022, the share price was over €34; Today it is €8.25.
“We were overexposed,” said Mr. Moisio, sipping coffee in the sunny conference room of the company’s modest Helsinki office. The Russian operation had high returns, but it also contained high risks, a fact which, over time, had faded from view.
Diversification may not be as efficient or cheaper, he said, but “it’s far safer.”
C-suite executives are learning again that the market often fails to measure risk accurately. one january survey A survey of 1,200 global CEOs by consulting firm EY found that 97 percent have changed their strategic investment plans because of new geopolitical tensions. More than a third said they were relocating operations.
China, which has become an increasingly risky home for foreign businesses and investment, is one of the places companies are moving to. roughly one in four A survey conducted last year by the European Union Chamber of Commerce in China found that companies planned to move their operations out of the country.
Businesses are suddenly finding themselves “stranded in the unknown land of warring empires”, Mr Farrell and his co-author, Abraham Newman, argue in a new Book,
Mr. Moisio’s tenure at Nokian coincides with a triple crown of crises. They started in May 2020, when the COVID-19 pandemic essentially shut down global commerce. Like other companies, Nokian also cut production and capital expenditure. Its lack of outstanding debt helped it ride out the storm.
And when the economy returned, Nokian struggled to restart production and re-stock raw materials amid severe disruptions to the supply chain and transportation. The war posed a potential threat to Nokian’s operations.
Adding production lines to existing facilities is often the fastest and cheapest way to increase production. Nevertheless, Nokian decided not to expand its operations in Russia.
Production was already concentrated there, Mr Moisio said, but more importantly, persistent supply chain constraints underscored the additional risks and costs of transporting materials over long distances.
Going forward, 80 percent of production will be local or regional, instead of being done in one place, often far from the market.
“It backfired,” Mr. Moisio said.
Tires for the Nordic market will be produced in Finland. Tires for American customers will be manufactured in the United States. And in the future, Europe will be served by a European factory.
Diversification was, to some extent, already factored into the company’s strategic plan. It opened a plant in Dayton, Ohio in 2019, in addition to the original factory it operates in the Finnish city of Nokia, which gave the tire maker its name.
In late 2021, the company opened new production lines at both of those plants.
When it came time to build the next factory, officials anticipated it would be in Eastern Europe, close to the largest European markets in Germany, Austria, Switzerland and France, as well as Poland and the Czech Republic.
That moment came sooner than anyone expected.
In June 2022, less than four months after the invasion of Ukraine, Nokian executives asked the board to approve an exit from Russia and the construction of a new plant.
Negotiations began to leave Russia, as well as a rapid search for a new location. With the help of consulting firm Deloitte, the site evaluation process, which included dozens of candidates from across Europe, was completed in four months, said Adrian Kaczmarski, senior vice president of supply operations. By comparison, it took nine months for Deloitte to recommend a site in one country, the United States, in 2015.
It was aimed to start commercial production by early 2025.
Serbia had a flourishing automotive sector, but was excluded from the beginning because it was neither in the European Union nor NATO. Türkiye was a member of NATO but not of the European Union. And Hungary was labeled high risk because of its intolerant prime minister, Viktor Orban, and close ties to Russia.
In each successive round, a long list of other ideas emerged. Where were the nearest highways, ports and rail lines? Was there an adequate pool of qualified employees? Was land available? Can the approval and construction time be expedited? How pro-business were the officers?
Nokian will in any case focus on reducing the carbon footprint of the new factory, said chief executive Mr Moisio. But the decision to commit to a 100 percent emissions-free plant probably would not have happened in the absence of the war. After all, cheap gas from Russia is what helped attract Nokian there in the first place. Now, the disappearance of that supply has accelerated the company’s quest to end its dependence on fossil fuels.
“The disruption allowed us to think differently,” Mr. Moisio said.
As the winnowing progressed, a complex matrix of small and large considerations came into play. Was there good health care and an international school where foreign managers could send their children? 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 Mr Kaczmarski said they could not find suitable plots of land.
Slovakia was in the same situation and already had a large automotive industry. However, Bratislava has made it clear it is not interested in attracting more heavy industry, only information technology, Mr Kaczmarski said.
In the end, six candidates made the final selection for Deloitte: two sites in Romania, two in Poland, and one each in Portugal and Spain.
The messy mix of new and old ideas that businesses have to consider was evident in the list of finalists. As the chief executive of Nokian Tires said, geopolitics was a starting point, but not necessarily the end point.
Spain has virtually no geopolitical risk. And the site at El Rebollar had a large talent pool, but was rejected by Deloitte due to high wage costs and onerous labor regulations. Portugal, another country with no security risk, was rejected due to concerns about power supply and the speed of the permitting process.
Poland, along with Hungary and Serbia, was labeled high risk despite its staunch anti-Russian stance. It has an undemocratic government and has repeatedly clashed with the European Commission over the primacy of European law and the independence of Poland’s courts.
Yet low labor costs, the presence of other multinational employers and a speedy permitting process allayed concerns, prompting the sites in Gorzów and Konin to rank second and third.
Top recommendation, Oradea ultimately offered a better balance between the company’s competing priorities. Labor costs in Romania, like Poland, were among the lowest in Europe. And its risk rating, although labeled relatively high, was lower than that of Poland.
Oradea had other advantages as well. Construction could begin immediately; The utilities were already in place; Work was underway on a new solar power plant. amount of growth Grant The number of companies investing in Romania from the EU was larger than in Poland. And local officials were excited.
Mihai Jurka, city manager of Oradea, details the area’s appeal during a tour of the turreted confection of Art Nouveau buildings in the rebuilt city center.
In the early 20th century, under the Austro-Hungarian Empire, Mr. Jurka said, “it was a flourishing cultural and commercial city, a junction point between East and West.”
Today the city, a thriving economic center of 220,000 people with a university, has sought businesses and EU funding while building industrial parks, which include domestic and international companies such as British electronics manufacturer Plexus and German automotive supplier Eberspacher. companies are included.
Nokian isn’t trying to replicate the kind of megafactory in Romania that it ran in Russia — or anywhere else for that matter. The idea of focusing on production is “old fashioned,” Mr. Moisio said.
For him, the company emerged from crisis mode on March 16, the day Nokian’s bank account received $258 million from the sale of its Russian operation. Although only a fraction of the total value, this amount helped finance the construction and ended the company’s involvement with Russia.
Uncertainty is the norm now, Mr. Moisio said, and business leaders need to continually ask: “What can we do? What’s our plan B?”