Even with heavy rains falling, the sprawling construction site hummed. Yellow and orange excavators slowly danced around a maze of muddy pits, waving giant fistfuls of dirt as a chorus line of trucks criss-crossed the landscape.
This 50-acre plot of land in Oradea, Romania, near the border with Hungary, beat out many other sites in Europe to become the home of Nokian Tires’ new 650 million euro, or $706 million, factory. Like an industrial-minded Goldilocks, the Finnish tire company sought the right combination of real estate, transport links, labor supply and a pro-business environment.
However, the make-or-break feature that every host country had to have wouldn’t have even appeared on the radar a few years ago: membership in both the European Union and the North Atlantic Treaty Organization.
Geopolitical risk “was the starting point,” said Jukka Moisio, Nokian’s chief executive and president. That was not the case before Russia invaded Ukraine on February 24, 2022.
Nokian Tires’ changed business strategy highlights the transformed global economic playing field that governments and companies face. As the war in Ukraine continues and tensions rise between the US and China, critical decisions about offices, supply chains, investments and sales are no longer primarily driven by cost concerns.
As the world globalizes, political threat assessments loom much larger than before.
“This is a world that has fundamentally changed,” said Henry Farrell, a political scientist at Johns Hopkins. “We can’t just think in terms of innovation and efficiency. We also have to think about safety.”
For Nokian Tyres, which first sold shares on the Helsinki stock exchange in 1995, the new reality hit like a hammer blow. About 80 percent of Nokian’s passenger car tires were produced in Russia. And the country accounted for 20 percent of its sales.
The dangers of excessive concentration hit home, Mr. Moisio said, “when your company is losing billions.”
Within six weeks of the start of the war, it became clear that the company had no choice but to leave Russia and ramp up production elsewhere. Rubber has been added to the European Union’s rapidly expanding portfolio sanctions. Public sentiment in Finland soured. The stock price plunged. In January 2022, the share price was over €34; today it is €8.25.
“We were very exposed,” Mr. Moisio said, sipping coffee in a sunny conference room at the company’s modest Helsinki office. The Russian operation had high returns, but it also had high risks, a fact that, with time, faded from view.
Diversifying may not be as efficient or cheap, he said, but “it’s a lot safer.”
C-suite executives are relearning that the market often fails to accurately measure risk. January an inquiry of 1,200 global CEOs by the consulting firm EY found that 97 percent have changed their strategic investment plans due to new geopolitical tensions. More than a third said they were relocating operations.
China, which has become an increasingly tight home for foreign businesses and investment, is among the places companies are leaving. About one in four companies planned to move operations outside the country, a survey conducted last year by the European Union Chamber of Commerce in China found.
Businesses suddenly find themselves “stranded in a no-man’s land of warring empires,” Mr. Farrell and his co-author, Abraham Newman, argue in a new. a book.
Mr. Moisio’s tenure at Nokian coincided with the triple crown of crises. He started in May 2020, a few months after the Covid-19 pandemic essentially shut down global business. Like other companies, Nokian buckled down, cutting production and capital expenditures. Its lack of outstanding debt helped it ride out the storm.
And when the economy bounced back, Nokian struggled to restart production and restock raw materials amid a huge disruption to the supply chain and transportation. The war posed an existential threat to Nokian’s operations.
Adding production lines to existing facilities is often the fastest and cheapest way to increase production. However, Nokian decided not to expand its operation in Russia.
Production there was already concentrated, Mr. Moisio said, but more importantly, the constant supply chain bottlenecks underscored the added risks and costs of transporting materials over long distances.
Going forward, instead of locating 80 percent of production in one place, often far from the market, 80 percent of production would be local or regional.
“It flipped,” Mr. Moisio said.
Tires for the Nordic market would be produced in Finland. Tires for American customers would be manufactured in the United States. And in the future, Europe would be served by a European factory.
Diversification was, to some extent, already incorporated into the company’s strategic plan. It opened a factory in Dayton, Ohio, in 2019, in addition to the original factory that operated in Nokia, the Finnish city that gave the tire manufacturer its name.
At the end of 2021, the company opened new production lines at both of these plants.
When it came time to build the next factory, executives assumed it would be in Eastern Europe, close to their largest European markets in Germany, Austria, Switzerland and France, as well as Poland and the Czech Republic.
That moment came much 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 to leave Russia have begun, as has a high-speed search for a new location. Aided by consulting firm Deloitte, the site’s evaluation process, which included dozens of applicants across Europe, was completed in four months, said Adrian Kaczmarczyk, senior vice president of supply operations. By comparison, in 2015 Deloitte took nine months to recommend a website in a single country, the United States.
The goal was to start commercial production by early 2025.
Serbia had a flourishing automotive sector, but was eliminated from the beginning because it was neither in the European Union nor in NATO. Turkey was a member of NATO but not of the European Union. And Hungary has been labeled high risk because of its illiberal prime minister, Viktor Orban, and close relationship with Russia.
At each successive round, a long list of other considerations kicked in. Where were the nearest highways, ports and rail lines? Was there a sufficient pool of qualified personnel? Was land available? Could permitting and construction time be fast-tracked? How pro-business were the authorities?
Nokian would look to reduce the carbon footprint of a new factory anyway, said Mr. Moisio, the chief executive. But the decision to commit to a 100 percent emissions-free plant probably wouldn’t have happened without war. After all, cheap gas from Russia was what helped lure Nokia there in the first place. Now, the disappearance of that supply has accelerated the company’s thinking about ending dependence on fossil fuels.
“Disruption allowed us to think differently,” Mr. Moisio said.
As the fanning 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 for various reasons. Slovenia and the Czech Republic were considered low-to-medium risk countries, but Mr. Kaczmarczyk said they could not find suitable plots of land.
Slovakia fell into the same bucket and already had a large auto industry. Bratislava, however, has made it clear that it has no interest in attracting more heavy industry, only information technology, Mr. Kaczmarczyk said.
In the end, six candidates made Deloitte’s final cut: two sites in Romania, two in Poland, and one each in Portugal and Spain.
The messy mix of new and old considerations that businesses must consider was evident in the list of finalists. Geopolitics, as the head of Nokian Tires said, was a starting point, but it was not necessarily the end point.
Spain has almost no geopolitical risk. And the site in El Rebollar had great talent, but Deloitte ruled it out due to high wage costs and heavy labor regulations. Portugal, another country without a security risk, was rejected due to concerns about the electricity 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 anti-democratic government and has repeatedly clashed with the European Commission due to the supremacy of European legislation and the independence of Poland’s courts.
However, low labor costs, the presence of other multinational employers and a fast permitting process outweighed the concerns enough to elevate the sites in Gorzow and Konin to second and third place.
Oradea, the top recommendation, ultimately offered a better balance between the company’s competing priorities. The cost of work in Romania, like Poland, was among the lowest in Europe. And its risk rating, although labeled relatively high, was lower than Poland’s.
There were other pluses in Oradea as well. Construction could begin immediately; utilities were already in place; a new solar power plant was in the works. The amount of development subsidies of the European Union for companies investing in Romania was greater than in Poland. And local officials were enthusiastic.
Mihai Jurca, the mayor of Oradea, detailed the appeal of the area during a tour of the turreted confection of Art Nouveau buildings in the renovated city center.
“It was a flourishing cultural and commercial city, a crossroads between East and West,” in the early 20th century, under the Austro-Hungarian Empire, Mr. Jurca said.
Today the city, a rich economic center of 220,000 with a university, has applied for businesses and European Union funds, building industrial parks that host domestic and international companies such as Plexus, a British electronics manufacturer, and Eberspaecher, a German car supplier.
Nokian is not looking to replicate the kind of mega-factory in Romania that it operated in Russia – or anywhere else, for that matter. The idea of concentrating production is “outdated,” Mr. Moisio said.
For him, the company emerged from crisis mode on March 16, the day that $258 million from the sale of its Russian operation landed in Nokian’s bank account. Although only a fraction of the total value, the amount helped finance the construction and closed the company’s involvement with Russia.
Now uncertainty is the norm, Mr. Moisio said, and business leaders must constantly ask, “What can we do? What’s our Plan B?”