CEE drives for new markets further west

By bne IntelliNews December 10, 2010

Nicholas Watson in Prague -

News that the number of newly registered Skoda cars in Germany grew by almost 20% in November from the year before, giving the Czech automaker a 5% market share, is a reminder of how emerging Europe's car industry not only came through the crisis in remarkably sound shape, but is expected to benefit at the expense of the car industry further west.

Overall, the car industry in emerging Europe didn't suffer as badly as that in Western Europe. According to the International Organization of Motor Vehicle Manufacturers, emerging Europe produced 7.7% fewer vehicles in 2009 than 2008, but this fall was a lot less than the 19.5% fall suffered in Western Europe.

The main reason for that is the region primarily builds smaller cars - such as the Fiat Panda in Poland and the Toyota Aygo in the Czech Republic - which performed better in the crisis because they are cheaper and the scrap incentives were more relevant given the lower pollution emissions of smaller cars. "These scrappage schemes really favoured these smaller vehicles - Skoda sold about 100,000 units of its Fabia in the German market alone, which means that in 2009 one in seven Skodas sold was a Fabia in Germany," says Tim Urquhart, auto analyst at IHS Automotive.

Germany also proved fertile ground for another of the region's leading car makers - Dacia. Bought by Renault back in the late 1990s, Dacia was restructured to produce a bulky-looking saloon car called the Logan, which with its virtues of affordability and reliability was tailored specifically for consumers in developing markets such as those in Central and Eastern Europe (CEE). However, it was Germany that ended up being the Logan's largest market in 2009 as sales there surged 231%, a beneficiary of the crisis stimulus plan to offer owners of cars over nine years old €2,500 to junk their old bangers and buy new environmentally friendlier wheels. Rather than fork out for a brand-new Mercedes, BMW or Audi, German consumers opted for the bargain €7,500 Logan, using the cash-for-clunkers programme to get a 33% reduction.

In the short term, some predict the region's car industry could be hit disproportionately hard from the phasing out of these scrappage schemes. Rather than grow along with the economies in the region, IHS Automotive predicts car production in the Czech Republic, Hungary, Poland and Slovakia will actually fall from 2.532m units in 2010 to 2.525m in 2011, and then to 2.494m units in 2012.

Over the longer term, though, emerging Europe is expected to continue growing its share of Europe's overall car production. According to UniCredit, in one decade the share of produced in CEE out of total European production jumped from 9% in 1999 to 24% in 2009. Surprisingly given the drop in vehicle demand and the industry's overcapacity, there have been no plant closures anywhere in Europe to date. But this will surely change, with the aging plants in Western Europe more at risk than the newer, shinier plants in CEE. Also, one effect of the economic crisis is that it's eased some of the upward pressures on labour costs, making CEE's competitiveness on costs better than it has been for some years now.

Room to grow

The rush to move production to emerging Europe that made Slovakia the highest per-capita car producer in Europe has certainly tailed off, but there is still capacity being added. Mercedes-Benz will start producing cars in Hungary in 2012, while Ford acquired a plant in Romania and will begin production there from 2011. In September, General Motors said it would invest €500m in its Hungarian engine plant of to expand capacity. China is also showing interest in the region, which sees it not only as a market with good growth potential, but also one that can provide it with much-needed technology. Great Wall Motor Company will start producing cars in Bulgaria from next year, while Chery Automobile is sniffing around Poland.

It is technology that's regarded as key to the future of the car industry in the Czech Republic, Slovakia, Poland and Hungary. Until now, sophisticated new engine technologies have generally been developed outside the region in the home countries of the parent groups, which have been reluctant to see it leave there, fearing valuable intellectual property would be at risk. However, this is changing. For example, smaller engine technologies are being developed in Skoda's research centre in Mlada Boleslav, the Czech Republic, and then used throughout the worldwide operations of Skoda owner Volkswagen.

"The Czech Republic is becoming more developed in terms of the car parts produced here, products which are higher added-value and more complex technically," says Milan Kocka, partner at Ernst & Young. "The easiest part of production that was shifted to [Central Europe] in the last 10 years has in some cases shifted further to the east - and this is not a trend restricted to just the car parts industry, I'd say it's an overall a trend."

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