Slovakia is struggling to protect its reputation as an automotive hub

Slovakia, a small landlocked country in the middle of Europe, faces a The perfect storm As it wants to protect it An enviable automotive reputation.

From the establishment of the Bratislava Automobile Works (BAZ) in the early 1970s to the fall of communism and subsequent entry into the European Union, Slovakia positioned itself as the world’s leading producer of cars per capita.

Nicknamed the “Detroit of Europe,” the mountainous nation of just 5.4 million has attracted major manufacturers such as Volkswagen, of the starsKia and Jaguar Land Rover.

Sweden’s Volvo Cars is also preparing to open an electric vehicle factory near Kosice in eastern Slovakia, representing the country’s fifth production facility.

Such is its dominance, Slovakia’s auto industry currently accounts for roughly 11% of its gross domestic product, half of the country’s industrial output, and about a tenth of total employment.

Many challenges, from US tariffs And Chinese competition However, high domestic taxes and a geopolitical shift away from the EU threaten to undermine its position as a world leader in car manufacturing.

Matej Hornak, an analyst at Slovakia’s largest bank, Slovenska Sporitania, described Slovakia’s auto sector as uniquely exposed to Trump’s tariffs compared to others in Central and Eastern Europe.

Because Slovakia’s exports to the U.S. account for 4% of its total exports, Hornák said, roughly 80% consists of automobiles.

Zuzana Pelakova, director of the economy and business program at GlobSec, a think tank based in Slovakia’s capital Bratislava, cited US tariffs as the most imminent threat to Slovakia’s auto industry.

“The main immediate risk, the EV transition and above all else, is tariffs. This is a significant challenge,” Pelakova told CNBC by telephone.

“I would say now, in the current situation, the US-EU trade alliance has stabilized and tariffs have been reduced to 15%, which is certainly better than the initial proposal but still challenging,” she added.

US and EU Agreed on a framework trade agreement In July, US Donald Trump’s administration imposed a blanket tariff of 15% on most EU goods. The deal marked a significant drop from Trump’s threat to impose 30% tariffs and almost halved the tariff rate on Europe’s auto sector from 27.5%.

Industry groups that tentatively welcomed the trade deal expressed deep concerns about the costs associated with the new tariff reality.

“While the decline in US demand is a challenge for Slovak carmakers, they are simultaneously facing pressure in other markets as competition from Chinese manufacturers intensifies,” Hornak told CNBC via email.

“US tariffs are thus only one piece of the puzzle – more attention needs to be paid to the wider picture,” he added.

Volkswagen Portugal was chosen on Slovakia for its new electric ID.1 model, while Stellantis, which has its Trnava plant in western Slovakia, Choose Spain as its destination for new EVs.

Even so, Slovenska Sporitania’s Hornak said the country’s car plants still appear to be competitive for the allocation of EV production among their respective corporate groups.

Volvo’s Upcoming EV plant In eastern Slovakia, for example, representing “one of the most significant investments in the region,” Hornak said, China’s Goshan Hitech and Slovakian partner Innobat are “set to build an EV battery plant that reflects another significant investment.”

“On the other hand, there is a lack of targeted governmental and institutional support for the transformation of the industry. In fact, the situation is quite the opposite: due to fiscal consolidation measures, the business environment in Slovakia is deteriorating,” said Hornák.

“Increasing tax and levy burden on companies – such as the introduction of transaction tax – further harms domestic businesses in international markets,” he added.

Prime Minister Robert Fico’s government has raised taxes on financial transactions and imposed new duties as part of a broader effort to repair the country’s troubled public finances. Solution, J created tension Within the ruling coalition, Slovakia’s auto industry has drawn criticism.

Aleksandar Matusek, Head of the Automotive Industry Association of Slovakia (AIA SR), told Bloomberg in late May Fico’s government has threatened to hurt the country’s auto sector with tax hikes, as well as a geopolitical shift away from major trading partners.

A Slovakian government spokesman did not respond to a CNBC request for comment.

Prime Minister of Slovakia said Earlier this month it will refuse to back tough EU energy sanctions against Russia unless the bloc first tackles rising energy costs and mounting pressure on the region’s car industry.

Thousands of people Down the road of Bratislava last month to protest a meeting between Fico and Putin, in an escalation of previous protests about Fico’s pro-Russia stance.

“The Slovak government’s more favorable stance towards Russia and its high Euroscepticism create additional uncertainty for Slovak companies and add another layer of strategic risk to their planning,” Hornák said.

“As a result, Slovakia is perceived by European leaders as a less reliable partner, which could negatively impact investment decisions – both from existing investors and potential new entrants,” Hornák said.