FEATURE: Spain shrugs off Eastern threat
Spain expects to keep its crown as Europe's third largest automobile manufacturer - at least in the medium term - despite growing competition from producers in Eastern Europe, according to industry observers in Madrid, writes Ivan Castano Freeman.
The Iberian country's quality and engineering know-how are 'superior' than rivals in Poland or the Czech Republic and that, combined with recent investments and a fledgling scheme to improve logistics, should help the country maintain or bolster its medium-term output rates, they say.
Spain made 2.9m cars accounting for 18% of Europe's output last year, up 4.5% from 2006 and recovering from weak gains in previous years. Rising imports from key markets in Germany, France and Italy helped fuel the gains though they could fall this year as consumers feel the pinch from the global credit crunch.
Spain makes the strong-selling Renault Megane, Ford Focus and Citroen C4 Picasso midsize sedans at big factories in Valladolid, Valencia and Vigo. It also assembles the Modus and Citroen C2 superminis. While there have been scares in recent years - such as the relocation of the Fork Ka and the near departure of the Opel Meriva and VW Polo - local observers expect the bulk of the current models to stay in Spain.
"I am optimistic," says David Barrientos, communications director at main manufacturing federation Anfac. "Eastern Europeans have their advantages but if we continue to do things right and improve logistics and labour relations, we should keep or increase our quota in the next four years."
While acknowledging that Eastern European labour is cheaper, he adds: "Companies don't look at labour costs only. They take into consideration social peace, the country's development and experience making cars. Our competitiveness is one of the best in the world. We could lose a car model but that could also happen to France, Italy or Eastern Europe."
By 'social peace' Barrientos refers to the current relationship between manufacturers and Spain's heavy-handed unions, which are always ready to stage bitter industrial actions whenever a carmaker threatens to curb production or cut jobs.
Their aggressiveness was on display in 2005 when they staged huge strikes and demonstrations over Seat's decision to axe 600 workers from its main factory in Martorell. The event triggered a media circus, forcing the government to become heavily involved.
"Union and manufacturers' relations have improved in the past four years and we are working to ensure they continue to do so," Barrientos claims.
Joaquin Arias Gallego, Renault's secretary general for top union CCOO, agrees with Barrientos. Echoing other observers, he says Spain's bread-winning small and midsize car models continue to win strong orders from Europe's leading markets. "Eastern European factories are specialised in making small, lower quality models which are more cost effective to make there," he boasts. "Brands prefer to assemble more premium small and midsize cars in our more efficient presses"
Moreover, Eastern Europe cannot match Spain's installed capacity and delivery speed, Arias says. He expects the industry's 75,000-strong workforce to stay fixed or grow on the back of an expanding portfolio of Spanish-made models.
Naturally, Eastern European manufacturers disagree. Jacob Farish, director of the Polish Automotive Industry Association, says Poland and other Eastern European factories are as good as Spain's.
"Polish factories are one of the best in the world and that is why more and more investors have decided to come to Poland," he charges. "We have quality, high worker knowledge and relatively low labour costs." Adds Farish: "Each European factory has to operate at the same standards so we make the same quality cars, from the smallest Fiat to the biggest SUV. The brands decide how much quality they want from each factory."
Poland makes Fiat's fledgling 500, the Opel Astra, the Chevrolet Aval and the Ford Ka among other models. Farish expects output to rise 10% to 880,000 cars this year and exceed 1m units by 2011 as Chevrolet and others beef up investment.
Colin Couchman, a senior automotive analyst at Global Insight in London, says Spain is unlikely to lose its European output share in the medium term, as brands will amortise recent investments before considering moving shop.
The country's large car portfolio and the possibility that expansionist Seat will increase domestic capacity should keep factories busy in coming years. Just as crucial, Eastern Europe is no longer a cheap-labour haven. Wage inflation is skyrocketing15%-20% a year and there is worsening shortage of skilled auto workers.
Agreeing with Farish, Couchman says manufacturing quality is similar across Europe so whether a brand leaves Spain depends more on production costs and geographical proximity to its main markets than quality.
Eastern Europe does offer better logistics than Spain, however. "There has been a lot of investment to improve infrastructure links to Germany and France while Spain is more on a limb geographically," says another industry analyst.
Farish adds: "We have a very good railway network and a there is going to be a new highway link to Germany."
"Logistics are our biggest handicap," Barrientos concedes, adding that they add 25% to a car's manufacturing cost in Spain. The industry is working to fix the problem and has devised a three-prong strategy to improve logistics. The first aims to increase rail-transport capacity by installing new lines to enable longer, 750m trains to circulate and increase the time frames allowed for cargo transport. Anfac also wants the government to help streamline road transport by allowing higher-capacity trucks to travel on the country's freeways. The third strategy looks at the nation's ports.
"We need better access to ports and more competitive tariffs," Barrientos says, adding that so-called short sea shipping lines (or short marine routes) should be mapped out to expedite transport in and out of Spanish ports.
If Spain fails to streamline logistics, its lead will start to crack against Eastern Europe, observers say, adding that this could happen in 5-7 years. However, Eastern producers also face challenges.
"They [Eastern Europe] have gotten a lot of money from [EU] structural funds and attracted a lot of investment so they can't be as flexible with investors as they were before. They can't give out free land or provide bigger tax incentives because that would be seen as unfair competition in the European Union," an industry analyst says.
"Manufacturing could also go elsewhere. There's always somewhere cheaper to go like China, North Africa or Russia."
Ivan Castano Freeman