Clare Nuttall in Bucharest -
Low spending power in Southeast Europe means carmakers in the region rely mainly on exports, and they received a boost from the revival in the EU market in the last year. Although low labour costs provide a strong incentive for production in the region, recent sales figures show that the success of the main manufacturers depends on individual companies’ strategies.
With most of the plants in the Southeast Europe region supplying other European markets, the pickup in EU-wide demand for new cars in 2014 and early 2015 boded well for manufacturers. The latest data from the European Automobile Manufacturers’ Association (ACEA) published on May 19 showed that in April demand for new passenger cars increased for the 20th consecutive month to 1,166,482 units, the highest volume for April since 2009. The largest increase in new passenger car registrations in the first four months of 2015 was in Spain – up 23.9% compared with an EU average of 8.2% – followed by Italy, the UK, Germany and France.
Given the small markets and lower spending power, Southeast Europe’s car demand is modest, even compared with that of Central Europe; for example, according to ACEA data 19,915 new cars were registered in the region’s largest economy Romania in January-April (up 9% on year), compared with 120,196 in Poland.
Consultancy IHS finds that car sales across seven Southeast Europe economies (Bosnia & Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Slovenia) peaked at almost 650,000 in 2007. “The region was hit hard by the crisis and we don’t expect to see this level of demand come back before the end of the decade,” IHS’s director of global light vehicle production, Mark Fulthorpe, tells bne IntelliNews. “This is a small marketplace with less obvious appeal than larger markets such as Poland, the Czech Republic or Hungary. We believe movement into Southeast Europe is in line with cost-based decisions rather than because of enormous opportunities in those markets.”
By 2020, this regional market will still not have fully recovered; IHS forecasts total sales of just over 462,000 for the year. However, across the same set of countries, it expects production to reach over 680,000 by 2020, well above pre-crisis levels. In Romania, for example, production is set to pass 436,000, around twice the forecast sales. “The large weight of exports for cars manufactured in Romania is explained by the fact that the strategy of Dacia and Ford was to create here production hubs for a regional or global market. Hence local production was driven by global demand and a correlation with the development of local sales is not relevant,” says Bogdan Belciu, partner at PwC Romania.
However, Belciu adds that the country has “very significant growth potential”. “On the one hand, cars per capita are significantly below EU levels and the declining trend in car sales since the economic recession seems to gradually reverse.” He also notes that with second hand cars outnumbering new cars by around three to one, a switch to newer cars “represents a significant opportunity in years to come.”
Although its primary focus is on exports, the Dacia plant’s emphasis on low cost models has helped it become the standout success in the region, according to Fulthorpe. “In terms of vehicle manufacturing, the big story is Romania. The Dacia plant, acquired by Renault 15 years ago, “stands apart from others in the region and clearly has the broadest strategic implications.” By 2014, it produced almost 340,000 units, close to pre-crisis production.
In neighbouring Serbia, Fiat’s takeover of the old Zastava factory, where it has since built a new plant, looks to be a successful export-oriented venture. FIAT Chrysler Automobiles Serbia has already established itself as Serbia’s largest exporter.
A more recent entrant to the market is China’s Great Wall, which has a partnership agreement with Bulgaria’s Litex Motors. While the venture is still at a very early stage, the Chinese company may use Bulgaria as a base to target other markets, and could later emerge as another low-cost producer in the region.
By contrast, both Ford Romania and Renault’s Revoz in Slovenia have announced cutbacks recently. While at first glance this raises questions about the rationale for production in the region, Fulthorpe points out that in both cases production declines can be traced to over-estimations in demand for particular models. He cites Ford’s decision to produce the B-max multi-purpose vehicle (MPV) “with great expectations of serving the global market from Romania”, but says that since then “the market has moved on”, resulting in a fall in production in 2014.
Ford announced a redundancy programme at its Craiova plant in November. After 490 employees applied for voluntary redundancy, Ford Romania reached an agreement with trade unions on a reduced working programme at Craiova to avoid collective dismissal for a further 170 people. “These actions are intended to best utilise the remaining workforce at Craiova, and to meet current and future production requirements as Ford continues to seek opportunities to source other vehicle production opportunities for Craiova,” a spokesperson for the company tells bne IntelliNews.
In Slovenia, the Revoz assembly plant hired 1,000 temporary workers following the launch of two new models – the new Renault Twingo and the Daimler Smart. However, in March the company cancelled the night shift introduced the previous year and laid off 450 temporary workers, according to news service SEEbiz.
Despite these developments, the SEE region has been part of the wider west-east shift where auto-manufacturers and their suppliers moved initially to Central Europe, and more recently entered lower-cost locations further south. Excluding Slovenia, where labour costs in the automotive industry are among the highest in Emerging Europe, costs in most of Southeast Europe remain well below their peers in Central Europe. PwC’s Belciu notes that while costs are important in attracting firms in the sector to Romania, “availability of qualified staff is equally a decisive factor”
In April, Germany’s Draxlmaier, which employs 15,000 people in Romania, invested a further €50mn in a new plant in Codlea to produce dashboards, door panels and other components. The following month, local media reported that Japan’s Fujikura was looking at two locations in southern Romania for its fourth car parts plant in the country.
Elsewhere in the region, Lear Corporation said on May 19 that it plans to open a plant to produce car seat covers in Macedonia this summer, despite the ongoing political turmoil there. In Serbia, Austria’s TTTech announced on May 6 that it would acquire 35% of RT-RK, a specialist in automotive and industrial electronics, while Paris-based Hutchinson, which produces rubber parts mainly for the automotive sector, is planning to build a €7.3mn plant in Ruma, the municipality said on April 17.
So far, movement across Europe has been mainly from west to east. However, there are recent signs of smaller scale west to east movement given the fighting in Ukraine and Western trade sanctions against Russia. While Russia still has a sizable domestic market, the economy is expected to contract by 4.5% this year, and both countries’ potential to supply European markets has been eroded. Real estate professionals in Romania, for example, say they have received inquiries from companies with operations in Russia who are now looking for industrial premises in Romania, as international manufacturers look for new locations in the more stable and open markets of Southeast Europe.
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