U.S. COMPANY A PIONEER INVESTOR IN MACEDONIA

UNCLAS SECTION 01 OF 02 SKOPJE 000139 SIPDIS SENSITIVE SIPDIS DEPT FOR EUR/SCA E.O. 12958: N/A TAGS: ECON EINV EIND PGOV MK SUBJECT: U.S. COMPANY A PIONEER INVESTOR IN MACEDONIA Summary -------------- ¶1. (SBU) In March the U.S. multi-national company Johnson Controls will begin production at its factory in Macedonia's free trade zone (FTZ) and will start exporting electronic circuit boards to major automobile companies. The Johnson Controls factory represents a breakthrough for Macedonia - the first investment in the FTZ and the first "greenfield" investment by a major multi-national company. The GOM expects additional companies will invest in the FTZ, helping to jump-start the Macedonian economy. In order for that to happen, however, the GOM needs to show it has learned from the challenges Johnson Controls has faced in clearing bureaucratic hurdles. End summary. Being First Has Its Advantages... -------------- ¶2. (U). Milwaukee-based Johnson Controls' decision to invest in Macedonia in 2006 was a coup for the country. It was the first major multi-national company (with 2007 sales of over $34.6 billion and 140,000 employees world-wide) to make a substantial "greenfield" investment in Macedonia. Although a large area near the Skopje airport was designated for a free trade zone (FTZ) in 2000, it had remained vacant until Johnson Controls broke ground for construction of its factory in late 2006. The FTZ offers export-oriented companies additional tax and tariff incentives. ¶3. (SBU) In order to entice Johnson Controls to locate its factory in Macedonia rather than in other Central European countries, the GOM offered the company a number of benefits. These incentives, which have not been made public, include not only generous tax breaks, but also an extra low-cost lease for land in the FTZ, GOM subsidizing of training costs for Johnson Controls' employees, and fast-tracking of shipments through Macedonian customs. The EU Commission criticized the GOM for providing support that goes beyond what EU governments are allowed to provide investors. The GOM replied that, as Macedonia was not yet in the EU, it needed to offer extra incentives to attract high-caliber investors. However, the GOM agreed with the EU that future investors would not receive all the benefits that Johnson Controls had received. ...And Disadvantages -------------- ¶4. (SBU) Despite strong GOM support, Johnson Controls encountered numerous bureaucratic barriers to establishing its operations. �0A;Johnson Controls' plant manager, Avram Stojcevski, told econoff that many of the GOM's bureaucratic procedures necessary for operating in the FTZ were not in place, while those that did exist were cumbersome and inefficient. Top GOM officials tried to be helpful in clearing the hurdles, but weak institutional capacity created delays. Obtaining building permits for the factory, for example, was a difficult and time consuming process. The company also faced problems connecting to various utilities such as electricity and sewage, since no utility infrastructure existed in the FTZ prior to Johnson Controls' arrival. Securing a natural gas connection was the most difficult, as there is a long-running dispute between the GOM and the private company with which it shares ownership of the natural gas network. Factory Now Up And Running -------------- ¶5. (SBU) Despite those obstacles, the factory is now ready to assemble electronic circuit boards used in automobiles and in March will begin supplying Peugeot and Renault. The company expects to have 115 employees by September, and as additional assembly lines are installed production and employment will increase. Stojcevski said Johnson Controls has reserved an option to lease additional land next to the factory if they decide to expand further once the existing facility is running at full capacity. Johnson Controls Will Have Neighbors -------------- ¶6. (SBU) Attracting significant levels of foreign direct investment has been a cornerstone of the GOM's economic development strategy. GOM officials hope that additional investors will build factories in the FTZ, leading to a higher economic growth rate and lower unemployment. So far there has been some positive news. The British manufacturing company Johnson Matthey has announced it will open a factory in the FTZ to assemble catalytic converters for diesel engines. An Italian manufacturing company also intends to locate a factory in the FTZ. These companies' intentions show that there is growing interest in greenfield investments in Macedonia, given the attractive tax benefits, available low-cost workforce due to the high unemployment rate, and relative geographical proximity to markets in Western Europe. Were Lessons Learned? -------------- SKOPJE 00000139 002 OF 002 ¶7. (SBU) To attract foreign investors, the GOM has two ministers devoted full-time to meeting with companies around the world, and has been heavily advertising Macedonia's pro-business policies in international publications such as the Economist magazine. Ultimately, however, if the GOM wants to attract significant investment in the FTZ it will need to demonstrate that it has learned from Johnson Controls' experience. As the pioneer, Johnson Controls experienced numerous bureaucratic headaches, but it also enjoyed some benefits from being first into the FTZ. Future potential investors might shy away unless the GOM can show it has done more to cut the red tape and make it easier to set up shop and do business. Milovanovic