Nicholas Watson in Prague -

News that the crisis carmaker of choice, Romania's Dacia, saw its exports rise by almost 45% on year during the January-April period shows there's a lot of life in Central and Eastern Europe's car industry. Indeed, after suffering horribly from the global economic crisis, the region's car industry is expected to continue to benefit at the expense of Western Europe's car industry.

Dacia's Logan car model became one of the more ironic symbols of the crisis. Bought by Renault back in the late 1990s, Dacia was restructured specifically to produce this bulky-looking saloon car, which with its virtues of affordability and reliability was tailored specifically for developing markets such as those in CEE.

However, the Logan became a sneaky winner of Germany's crisis stimulus plan (and others), when that country began offering 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 Merc, BMW or Audi, German consumers opted for the bargain €7,500 Logan, using the cash-for-clunkers programme to get a 33% reduction.

Dacia's success is actually the most visible symbol of a resurgent car industry in emerging Europe and beyond. Although global car production fell for a second year running in 2009 (production of motor vehicles dropped by almost 10m units, or 13.5%, according to the recently released data from the International Organization of Motor Vehicle Manufacturers), Moody's Investors Service in May raised its outlook for the global auto manufacturing industry to positive from stable to "reflect its view that trends in volumes, demand and prices have recovered faster than anticipated."

Any recovery comes as blessed relief for emerging Europe, which over the past decade has come to rely (over rely, say some) on the car industry, but found it to be one of the most affected on a global level during the crisis. For Slovakia, the Czech Republic, Poland and Hungary, the sector represents a huge share of manufacturing value added and exports - more than 20% of Slovakian manufacturing exports, for instance, while Dacia's exports in the first quarter accounted for almost 8% of Romania's total exports.

However, even as CEE countries suffered a drop in production of half a million vehicles, about 12%, in 2009, the region has been able to increase its share in total European production, despite the sharper impact of the crisis on their economies, which killed local demand, and despite the pressures of Western governments on carmakers to maintain production in the home country to avoid job cuts.

According to UniCredit Group, in one decade the share of motor vehicles (passenger car and commercial vehicles) produced in CEE out of the total European production jumped from 9% (in 1999, including Turkey) to 22.4% in 2008, to 24% in 2009. "The West-East substitution of production clearly continued, despite a two-speed evolution could clearly be seen: on one side, the strength of Central European countries; on the other, the weakness of the sector in Ukraine and Russia," says Matteo Ferrazzi, of UniCredit.

Reasons to be cheerful

The reasons behind the continued substitution aren't hard to pick out. Firstly, production in CEE is more efficient due to the lower costs and, in many cases, newer and modern factories, thus there is an incentive to reduce production in Western Europe rather than in CEE. Secondly, the crisis eased the growing upward pressures on labour costs, making CEE's competitiveness on costs higher than in comparison with some years ago. Thirdly, all the top-10 automotive players in the world, representing almost 80% of global production, already have plants in CEE and are still betting on this area for their future development; the same is true for the top-10 automotive suppliers, all with factories in the region. Finally, CEE countries concentrate more on building smaller cars - such as the Fiat Panda in Poland, the Toyota Aygo in the Czech Republic, the Renault Twingo in Slovenia and the Logan in Romania - which did better in the crisis because they are cheaper and the scrap incentives were, in some cases, more relevant given the lower pollution emissions of smaller cars.

"We believe the above factors will remain in place, at least partially, during the next years even if the crisis fades, and this will bode well for the role of automotive production in the region," says Ferrazzi.

Furthermore, recent events show that original equipment makers (OEMs) are expanding their production capacity in CEE - for example, Italy's Fiat is expanding in Serbia, where it established a joint venture with the government there; Mercedes invested EUR800m in a new plant in Kecskemet, Hungary; Bosch is closing its plant in Glamorgan in Wales, UK in 2011 and is moving to Hungary; and Toyota is shifting back production of the new Corolla model vehicle to Turkey in 2012. "These trends confirm that CEE will further increase its role as the production arm of Western Europe in the automotive sector. The 'borderless economy' of Central Europe - in particular, the Czech Republic, Slovakia and Hungary - will remain one of the most important clusters for the main OEMs and their suppliers, not only from Western Europe but also from Asia," says Ferrazzi.