PRAGUE – Since the European Union added 10 countries last May, central Europe’s automotive industry has had a wild and surprising time.
Production in the region is rising. But new-car sales in central Europe have been flat, driven by an unexpected crash in Poland as a torrent of cheap, imported used cars overwhelmed the new-car market there.
“It’s been a mixed bag,” said Chris Lacey, General Motors Europe executive director for north, central and eastern Europe.
On the production side, automakers and suppliers have rushed into the region, attracted by low wages, relatively skilled labor and investment incentives.
In the 12 months following accession, production increased at most car factories in the five new EU members that assemble vehicles: Poland, the Czech Republic, Slovakia, Hungary and Slovenia. Total car production there was 1.38 million, up 8 percent from 1.28 million in the previous 12 months, according to J.D. Power-LMC.
The newest assembly plant in the region, the Toyota Peugeot Citroen Automobile joint venture in the Czech Republic, started regular production in March. By the end of May, it had built 11,000 minicars.
That volume will soar.
“By the first quarter of 2006, we expect to hit our peak production rate of 300,000 units a year,” said TPCA President Masatake Enomoto.
But the TPCA plant in Kolin is just the start of a huge central European expansion. Next year, PSA/Peugeot-Citroen and Kia will open assembly plants in Slovakia. Skoda, Volkswagen, Fiat and Suzuki plan to expand existing plants in the region in the next three years. Between 2004 and 2009, central Europe’s assembly capacity will grow to 2.2 million units.
To meet this surge in capacity, suppliers are investing heavily.
For example, supplier Hayes Lemmerz is expanding its two Czech wheel-making plants. It is the sole wheel supplier to TPCA and there are three other automakers located within 150km.
Automakers such as Volkswagen are not waiting for local suppliers to catch up but sometimes actively help them.
“You have to take matters into your own hands,” VW Slovakia Purchasing Director Wolfgang Rohroff says. “You talk to Tier 1s, ask them ‘What do you need?’ Then you take this list to Tier 2s and Tier 3s.”
He sees freight costs as a major savings opportunity since internal EU borders have effectively disappeared.
“I don’t care about what country. I just look within a radius of 400km – one day’s travel by truck,” Rohroff says.
Both automakers and suppliers had anticipated the effects of EU expansion and adjusted their systems.
“After the fireworks stopped, we just went back to work,” says Istvan Lepsenyi, managing director of Knorr-Bremse operations in Hungary.
Central European sales are a different matter.
In the 12 months since accession, numbers rose in some smaller markets, but fell in the larger markets like Poland, Hungary and the Czech Republic.
“We certainly didn’t expect that,” says Nigel Griffiths, director of international automotive industry research at Global Insight in London.
The drop was caused by several factors: a pre-accession jump in sales, automakers raising prices closer to western European levels, and changing tax and registration regimes.
Botched efforts to change car registration taxes, particularly in Hungary and Poland, caused market upheaval.
Governments sought to increase revenue, keep old cars out to protect local manufacturers, and harmonize regulatory regimes with EU directives. The tax changes and higher prices caused many potential car buyers to simply defer purchases or buy older cars, Griffiths says.
Poland was the biggest example of substitution. In 2004, 828,000 used cars – most of which were at least
10 years old – were imported, an exponential increase from 33,000 imports in 2003.