RUSE, Bulgaria (Reuters) -- In its glory days, Ruse, a town along the Danube river trading route, was a thriving economic hub that was home to Bulgaria's first chamber of commerce and known as 'little Vienna' for its Austrian-style buildings.
A hundred years on and after decades of economic decline under Communism, its location on the southeastern edge of Europe, near Turkey and bordering Romania, is helping attract investors in the form of auto suppliers.
One such supplier is Witte Automotive, a German company that supplies components to automakers including Ford Motor Co.
Witte is one of dozens of foreign companies, from Japan to South Africa, driving an auto component manufacturing boom that could lift the fortunes of the European Union's poorest member. Bulgaria is hungry for new, sustainable foreign investment after a real estate bubble burst during the financial crisis in 2009.
"The industry is growing, and the interest is growing too," said Till Truckenmueller, the chairman of Automotive Cluster Bulgaria, an industry group, in an interview in Sofia. "There are decisions by the big players in the past several years to have new plants here."
In 2012, China's Great Wall Motor opened its first European factory in Lovech, northern Bulgaria, in a joint-venture with local company Litex Motor Corp. The 50,000-unit capacity plant builds the Steed pickup from kits supplied from China.
However, Bulgaria may still be years away from attracting a major automaker to build here because of structural problems, such as red tape, a bad infrastructure and poor training deter businesses. These problems could stop the sector from becoming a game changer for the economy and are also what left Bulgaria on the sidelines in a car production boom that started in the 1990s in countries such as Poland, the Czech Republic and Slovakia.
But that is slowly changing, as more and more suppliers are attracted by Bulgaria's location, low taxes and labor costs, and a currency pegged to the euro. The government is hoping to undercut Bulgaria's wealthier peers in central and eastern Europe in the same way that these countries previously undercut the West.
"We are working on bringing a car manufacturer here," he said. "Be sure, if we convince one, then the automotive industry here will explode."
In a sign of the changing times, Witte's Bulgaria unit will move to a much larger factory this year. It plans to double its existing workforce of around 260 workers and expects sales to rise to more than 25 million euros ($35 million) in 2014, from modest beginnings of less than 1 million euros in 2010.
"The group will grow, definitely quite significantly, and the main growth will be here in Bulgaria," said Tomas Jindra, Witte's Bulgaria CEO, said at the company's Ruse factory.
Similarly, exports in the sector overall have doubled to around 1 billion euros in the past five years, Bulgarian industry officials say, making up about 4.5 percent of total exports and 2.5 percent of the country's gross domestic product.
And now more firms are planning either to expand operations or enter the market for the first time. France's Montupet recently built a second production unit, while Johnson Controls has more than 500 engineers in Sofia that design instrument panels and infotainment systems. Global part suppliers such as U.S. firm Sensata, Canada's Magna International, Japan's Yazaki and Sumitomo Electric have all set up operations in the country.
A shift in car production from western Europe to the east has propelled the economies of countries formerly behind the Iron Curtain, from Slovakia to Romania, where Renault's Dacia cars have become a major export.
Bulgaria, which unlike others has no long history of car production, has failed to attract any carmaker beyond Great Wall.
The difference in production costs is still too narrow for existing suppliers to close down factories in, say, the Czech Republic and move them to Bulgaria, according to Jens Wiese of the global advisory firm AlixPartners. But its convenient location and cheap labor mean that these companies are now looking at Bulgaria as an option for green field projects, said Wiese, drawing new investment away from more established car making countries.
The average Bulgarian labor cost per worker is 3.70 euro an hour, compared with 7.20 for Poland, 7.90 for Hungary and 8.60 for Slovakia, Wiese said, citing German government statistics. "In that regard, Bulgaria has some attractiveness as a low cost production base, particularly for labor-intense operations" said Wiese, adding that many of the 'first wave' Eastern European production sites in the Czech Republic, Hungary, or Slovenia, have already become more costly.
Another boon for investors is that Bulgaria has a rich history, dating back to Communist times, of electronics and computer engineering. Companies such as Belgium's EPIQ - acquired by the Philippine firm IMI three years ago - set up an electronics-focused car parts factory in 1997 and has seen its sales jump 30 percent in 2013 alone. When the company first arrived, EPIQ found a ready-made talent pool of engineers in the town of Botevgrad, after a local state-run electronics factory went bankrupt in 1995, IMI's Bulgaria managing director Eric De Candido told Reuters.
Red tape and infrastructure
Bulgaria is working hard to address the problems facing businesses as they enter the market, said Kostadin Djatev, deputy executive director of the state-run agency set up to foster foreign investment. Under a special Investment Promotion Act, Bulgaria offers sweeteners such as procuring land for major companies at below market prices and reimbursing their workers' social security payments for three years. Nevertheless, the Black Sea country faces an uphill challenge to make its industry more competitive and lure more companies, including other suppliers, to invest.
Witte situated its factory in Ruse, a university town that in theory gives the company a rich talent pool of engineers, accountants and managers to draw on as it expands. But many of the graduates are so poorly trained that only a fraction of them are worth hiring, according to CEO Jindra, citing Bulgaria's poor overall education system.
Cutting through red tape is another problem. Witte's current plant is rented from a textile company, and it bought land for a much larger site with an eye to future growth. Even getting government permission to switch the land use of its new site from agricultural work to manufacturing took months of waiting. Another issue is the country's poor road network. A main road route north into Romania and on to central Europe is via a tiny, congested bridge over the Danube on the edge of Ruse, where trucks can wait hours to pass.
"When I enter Bulgaria via the bridge, I'm thinking 'Am I in Iraq? Am I anywhere in Asia?' This is so terrible," Jindra said. Most of all, industry players lament what they say is a lack of a sector-wide strategy to foster growth in the car industry, whether it be through tax breaks or subsidies, that would allow Bulgaria to catch its competitors.
The government says it is doing what it can. "What we do here is really try and help each and every investor that comes to us, and help them through some of these bureaucratic procedures and processes and problems they might face," Djatev said. "It's hard to change fast, but the government is working a lot nowadays."