The war between Russia and Ukraine has forever changed this business in Finland

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Even as the rain fell, the sprawling construction site was buzzing. Yellow and orange excavators danced slowly around a maze of muddy pits, waving giant handfuls of dirt as a chorus of trucks moved across the landscape.

This 50-hectare plot in Oradea, Romania, close to the border with Hungary, beat numerous other locations in Europe to become the home of Nokian Tires’ new €650 million, or $706 million, plant. Like an industrially inclined Goldilocks, the Finnish tire company had searched for the right combination of real estate, transport links, labor supply and pro-business climate.

Yet the all-or-nothing attribute that every host nation should 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 CEO 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 facing governments and businesses. As the war in Ukraine continues and tensions between the United States and China mount, critical decisions about offices, supply chains, investments and sales are no longer driven primarily by cost concerns.

As the world re-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 Tires, which first sold shares on the Helsinki Stock Exchange in 1995, the new reality hit like a bomb. About 80 percent of Nokian passenger car tires were produced in Russia. And the country accounted for 20 percent of sales.

The dangers of overconcentration strike, 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 leave Russia and increase production elsewhere. Rubber had been added to the rapidly expanding sanctions package of the European Union. Public sentiment in Finland soured. The share price plummeted. In January 2022, the share price was over €34; today it is € 8.25.

“We were very visible,” said Mr. Moisio sipping coffee in a sunny conference room in the company’s quiet Helsinki office. The Russian operation had high returns, but also high risks, a fact that had faded from view over time.

Diversification may not be as efficient or cheap, he said, but “it’s much safer.”

C-suite executives are learning again that the market often fails to accurately measure risk. A January survey of 1,200 global CEOs by the consulting firm EY found that 97 percent had changed their strategic investment plans due to new geopolitical tensions. More than a third said they were moving their activities.

China, which has increasingly become a fraught home for foreign business and investment, is one of the places companies are leaving. About one in four companies planned to move operations abroad, according to a survey by the European Union Chamber of Commerce in China last year.

Companies suddenly find themselves “stranded in the no man’s land of belligerent empires,” argue Mr. Farrell and his co-author, Abraham Newman, in a new book.

Mr. Moisio’s tenure at Nokian coincided with the triple crisis crown. It started in May 2020, a few months after the Covid-19 pandemic essentially shut down global trade. Like other companies, Nokian hunkered down, cutting production and capital expenditure. The lack of outstanding debt helped it weather the storm.

And as the economy recovered, Nokian scrambled to restart production and replenish raw materials amid a massive supply chain and transportation disruption. The war posed an existential threat to Nokian’s operations.

Adding production lines to existing facilities is often the quickest and cheapest way to increase output. Nevertheless, Nokian decided not to expand its activities in Russia.

Production was already concentrated there, Mr. Moisio said, but more importantly, continued supply chain bottlenecks underlined the additional risks and costs of transporting materials over long distances.

In the future, instead of placing 80 percent of production in one place, often far from the market, 80 percent of production would be local or regional.

“It was upside down,” said Mr. Moisio.

Tires for the Scandinavian market would be produced in Finland. Tires for US customers would be manufactured in the United States. And in the future, Europe would be served by a European factory.

To some extent, diversification was already included in the company’s strategic plan. It opened a factory in Dayton, Ohio, in 2019, next to the original factory that operated in Nokia, the Finnish city that gave the tire maker its name.

At the end of 2021, the company opened new production lines in both factories.

When it came time to build the next factory, executives thought 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 much sooner than anyone expected.

In June 2022, less than four months after the invasion of Ukraine, Nokian executives asked the board to approve a departure from Russia and the construction of a new factory.

Negotiations to leave Russia began, as did a rapid search for a new location. With the help of consulting firm Deloitte, the site review process, which involved dozens of candidates across Europe, was completed in four months, said Adrian Kaczmarczyk, senior vice president of supply operations. In comparison, in 2015 it took Deloitte nine months to recommend a site in one country, the United States.

The goal was to begin commercial production in early 2025.

Serbia had a thriving automotive sector, but was eliminated from the start because it was neither in the European Union nor NATO. Turkey was a member of NATO, but not of the European Union. And Hungary was labeled as high risk because of its illiberal prime minister, Viktor Orban, and its close relationship with Russia.

With each successive round came a long list of other considerations. Where were the nearest highway, port and rail lines? Was there enough qualified personnel? Was land available? Can permits and construction time be accelerated? How pro-business were the authorities?

Nokian would have tried anyway to reduce the carbon footprint of a new factory, CEO Moisio said. But the decision to commit to a 100 percent zero-emission factory probably wouldn’t have been made had it not been for war. After all, it was cheap gas from Russia that lured Nokian there in the first place. Now the disappearance of that stock accelerated the company’s thinking about ending its dependence on fossil fuels.

“Disruption allowed us to think differently,” said Mr. Moisio.

As the winnowing progressed, a complex matrix of minor and major considerations came into play. Was there good health care and an international school where foreign managers could send their children? What was the probability of natural disasters?

Countries and cities fell out for various reasons. Slovenia and the Czech Republic were considered low to medium risk countries, but Mr Kaczmarczyk said they could not find suitable pieces of land.

Slovakia fell into the same boat and already had a large car industry. However, Bratislava made it clear that it had no interest in attracting more heavy industry, only information technology, Mr Kaczmarczyk said.

In the end, six candidates made it to Deloitte’s final selection: two locations in Romania, two in Poland and one each in Portugal and Spain.

The messy mix of new and old considerations faced by companies was evident in the list of finalists. Geopolitics, as the CEO of Nokian Tires said, had been a starting point, but not necessarily the ending point.

Spain has virtually no geopolitical risk. And the El Rebollar facility had a large talent pool, but Deloitte shut it down due to high labor costs and tough 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 as high risk despite its staunchly anti-Russian stance. It has an anti-democratic government and has repeatedly clashed with the European Commission over the primacy of European law and the independence of Polish courts.

But low labor costs, the presence of other multinational employers and a quick permitting process outweighed the concerns enough to push the Gorzow and Konin sites into second and third place.

Oradea, the top recommendation, ultimately offered a better balance between the company’s competing priorities. Labor costs in Romania, as in Poland, were among the lowest in Europe. And the risk rating, although labeled relatively high, was lower than Poland’s.

There were also other positives in Oradea. Construction could start immediately; utilities were already there; a new solar power plant was in the works. The amount of development grants from the European Union for companies investing in Romania was greater than in Poland. And local officials were enthusiastic.

Mihai Jurca, Oradea’s city manager, described the area’s appeal while touring the turreted art nouveau buildings in the renovated city center.

“It was a thriving cultural and commercial city, a hub between East and West,” in the early 20th century, under the Austro-Hungarian Empire, Mr Jurca said.

Today, the city, a prosperous economic center of 220,000 people with a university, has attracted companies and funds from the European Union, while building industrial parks that are home to domestic and international companies such as Plexus, a British electronics manufacturer, and Eberspaecher, a German car supplier.

Nokian doesn’t intend to replicate the kind of mega-factory in Romania it used to run in Russia – or anywhere else for that matter. The idea of ​​concentrating production is “old-fashioned,” Mr Moisio said.

For him, the company emerged from crisis mode on March 16, the day $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 construction and sealed the company’s involvement in Russia.

Now uncertainty is the norm, said Mr. Moisio, and business leaders must constantly ask, “What can we do? What’s our plan B?”

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