Flexible Labor Laws Drive Automakers to Spain

Germany’s Volkswagen AG and Daimler AG have recently ramped up their production capacity in Spain, encouraged by relatively flexible labor laws and a vast network of local parts suppliers.

The country has become Europe’s second-largest producer of vehicles behind Germany, and the eighth-biggest in the world.

Spain’s appeal comes largely from labor reforms enacted in 2012. The reforms made it easier for employers to lay off longtime employees and weakened collective bargaining agreements.

German auto companies poured €4 billion into Spain last year, making the country the second-largest destination for German foreign direct investment behind only the U.S., according to fDi Markets, a publication specialized in international investment.

The car sector accounted for 8.7% of Spain’s gross domestic product last year. It employs 9% of Spain’s labor force and produced a record 2.7 million vehicles last year, 80% exported.

Ford moved its production of Mondeo, Galaxy and S-Max models to Valencia in 2014. Ford plans to invest €2.3 billion in the Valencia plant by 2020. The plant has become the U.S. car maker’s biggest in Europe.

In Vitoria, northern Spain, lies Daimler’s second-largest van plant world-wide, where the German car maker produces the Mercedes Vito and V-Class midsize vans. Daimler has invested €1 billion in the plant since 2012. Detroit’s General Motors Co. , Renault SA and PSA Peugeot Citroën of France have also built an important presence in Spain.

Spain is still reeling from a housing bubble that unleashed a double-dip recession, bringing the unemployment rate from 8% in 2008 to 26% in 2013. The construction sector, once the country’s economic engine, lost about two-thirds of its workers. It accounted for 5% of Spain’s gross domestic product last year, half its precrisis level of 10%.

The country’s GDP grew 3.2% in 2015, but remains smaller than it was eight years ago. Unemployment is hovering around 20%, and part-time workers have grown from 12% to 15% of the workforce.

Sergi Basco, an economics professor at Universidad Carlos III in Madrid, says cheap labor has attracted investment and drawn jobs from more expensive countries further north. But it isn’t a long-term solution, he noted. -WSJ

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