The economies of Central and Eastern Europe had a generally good year in 2000. Growth was reported across the board. In Central Europe, average GDP expansion reached 4.5% last year - a net acceleration on 1999. Meanwhile, Russia is enjoying an export-led recovery. This solid result was marred only by the crisis that hit Turkey late in the year. Unfortunately for the car industry, much of the impetus for expansion is coming from the supply side as favourable export conditions drive up industrial output. There has been less cause for celebration on the demand side. Although still broadly positive, growth here has been much weaker, and consumers have been reticent to spend on consumer durables. This has been felt in a number of markets.

Indeed, several car markets saw sales decline sharply last year. Consumer purchases were sometimes hampered by tight monetary policy, but a number of other factors contributed toward keeping the overall car market weak. Total demand across the entire region fell from 2.67m units in 1999 to 2.51m units last year. This year we expect another, much deeper, decline in demand, to 2.287m cars, the lowest level since 1996.

The bright spots were Turkey, which boomed to record levels until the crash cut short its expansion, Hungary, Croatia and the Czech Republic. But the list of weak areas was just as lengthy. In Poland, higher taxes, interest rates and the withdrawal of several low-cost models from the market pulled sales much lower. In Romania, Renault struggled to keep consumers interested in its base Dacia in the run-up to the SupeRNova launch. Slovakia reported a fall in buying interest. Russia's largely closed market remained fairly static. Daewoo's fortunes impacted negatively on Poland, Uzbekistan and the Ukraine.

In market share terms, Daewoo was the big loser last year. It relies very heavily on the Polish market for sales volumes, and this market is collapsing. Fiat, in contrast, managed Poland's decline more successfully, and it reaped better sales in the pre-crisis Turkish market. Renault also flourished in Turkey, while Skoda's expanding share was merely the first in a multi-year share rise.

Car production (including assembly) in 2000 moved ahead modestly. It rose 3.3% to 2.29m units. Output from the region now stands at 21.9% of West European output and 6.8% of world output, up from 5.4% in 1995. Car companies are working to make their operations more efficient and more integrated - in response to falling barriers to trade, changing tastes and rising purchasing power. In some cases, this means short-term production sacrifices. This occurred at Fiat in Poland and Renault in Romania. Company fragility has also played a role in shaping output. Daewoo suffered most in this regard, as its operations in Eastern Europe suffered severe output contractions.

Total regional output will have risen 25% to 3.5m units by 2006 and to 4.13m units by 2011. Production will tread water this year. Output in Turkey and Poland will continue to be depressed. Czech production will rise as production of the new large Skoda starts. The rise in Russian output will take place later in the period, once buying ability can support Western production operations.

Table I: Car Sales Summary - Eastern Europe

QF
1998
1999
2000
2001
2002
2003
2004
2005
2006
2011
New Cars
BULGARIA
9,742
9,412
10,197
12,489
17,458
21,578
28,488
30,828
32,172
49,658
%ch
46.8
-3.4
8.3
22.5
39.8
23.6
32
8.2
4.4
54.4
CROATIA
57,505
55,687
62,009
64,258
67,958
71,425
74,598
78,885
83,587
98,745
%ch
13.8
-3.2
11.4
3.6
5.8
5.1
4.4
5.7
6
18.1
CZECH REPUBLIC
140,957
146,051
148,685
158,122
182,232
200,858
205,338
214,943
224,751
280,285
%ch
-17.8
3.6
1.8
6.3
15.2
10.2
2.2
4.7
4.6
24.7
HUNGARY
103,541
129,296
133,236
129,452
131,285
126,852
136,446
141,241
147,710
176,397
%ch
29.8
24.9
3
-2.8
1.4
-3.4
7.6
3.5
4.6
19.4
MACEDONIA
12,110
10,010
14,238
11,258
13,002
14,857
16,230
18,235
19,341
25,454
%ch
57.7
-17.3
42.2
-20.9
15.5
14.3
9.2
12.4
6.1
31.6
POLAND
515,256
625,837
473,110
399,716
467,462
541,637
619,099
669,250
770,311
951,246
%ch
7.8
21.5
-24.4
-15.5
16.9
15.9
14.3
8.1
15.1
23.5
ROMANIA
114,793
96,632
66,276
81,667
90,114
96,850
113,768
123,390
128,948
158,740
%ch
22.3
-15.8
-31.4
23.2
10.3
7.5
17.5
8.5
4.5
23.1
SLOVAKIA
69,041
56,447
54,739
60,634
65,577
73,956
80,362
86,552
91,402
112,081
%ch
11.2
-18.2
-3
10.8
8.2
12.8
8.7
7.7
5.6
22.6
SLOVENIA
69,329
78,142
62,350
66,535
70,149
71,128
73,260
71,466
74,887
80,668
%ch
12.7
12.7
-20.2
6.7
5.4
1.4
3
-2.4
4.8
7.7
TURKEY
315,584
284,446
467,486
234,804
273,313
341,298
404,132
455,708
494,938
625,967
%ch
-8.5
-9.9
64.3
-49.8
16.4
24.9
18.4
12.8
8.6
26.5
Total New Cars
1,407,858
1,491,960
1,492,326
1,218,935
1,378,550
1,560,439
1,751,721
1,890,498
2,068,047
2,559,241
%ch
3.8
6
0
-18.3
13.1
13.2
12.3
7.9
9.4
23.8
xhseahj
Car Sales Summary - Former Soviet Union
aF
1998
1999
2000
2001
2002
2003
2004
2005
2006
2011
New Cars
BELARUS
4,844
3,749
3,332
3,270
3,140
3,180
3,483
3,684
4,241
8,372
%ch
4
-22.6
-11.1
-1.9
-4
1.3
9.5
5.8
15.1
97.4
ESTONIA
10,445
8,906
10,625
12,966
15,090
18,046
21,971
26,493
30,063
52,857
%ch
-6
-14.7
19.3
22
16.4
19.6
21.7
20.6
13.5
75.8
LATVIA
6,147
6,760
7,303
8,963
10,846
12,985
15,302
18,340
21,446
40,156
%ch
36.9
10
8
22.7
21
19.7
17.8
19.9
16.9
87.2
LITHUANIA
6,594
4,832
6,330
7,764
8,742
9,601
11,548
13,458
15,774
33,698
%ch
-14.5
-26.7
31
22.7
12.6
9.8
20.3
16.5
17.2
113.6
RUSSIA
791,538
921,673
913,294
941,856
970,125
1,013,629
1,069,751
1,126,359
1,189,563
1,565,987
%ch
-17.6
16.4
-0.9
3.1
3
4.5
5.5
5.3
5.6
31.6
UKRAINE
45,935
83,489
61,720
74,636
81,006
88,041
95,305
103,333
118,877
180,283
%ch
85.3
81.8
-26.1
20.9
8.5
8.7
8.3
8.4
15
51.7
UZBEKISTAN
37,632
46,324
15,032
19,189
27,484
31,201
35,679
38,655
40,878
64,051
%ch
-4.7
23.1
-67.6
27.7
43.2
13.5
14.4
8.3
5.8
56.7
Total New Cars
903,135
1,075,733
1,017,636
1,068,644
1,116,433
1,176,683
1,253,039
1,330,322
1,420,842
1,945,404
%ch
-14.2
19.1
-5.4
5
4.5
5.4
6.5
6.2
6.8
36.9
Total New Cars(*)
2,310,993
2,567,693
2,509,962
2,287,579
2,494,983
2,737,122
3,004,760
3,220,820
3,488,889
4,504,645
%ch
-4.1
11.1
-2.2
-8.9
9.1
9.7
9.8
7.2
8.3
29.1


Table 2: Factors Affecting the Car Forecast in E. Europe


k 1999 2000 2001 2002 2003 2004 2005
CENTRAL AND EASTERN EUROPE (+) Daewoo Matiz (+) Skoda Fabia, Opel Agila, Suzuki Wagon R, Clio Symbol (+) Fiat Doblo, Dacia SupeRNova (+) Ford Focus Van sold more widely, 4-door Seicento (+) Russian western output rises (+) Seicento replacement k k
BULGARIA (VAT: 22%) (-) weak domestic demand (+) improving economy helps car demand (+) wider economic reform boosts consumption (+) economy continues growth (+) economy continues growth k k
CROATIA (VAT: 22%) (-) recession, (-) Trosarina excise tax on big cars (+) return to economic growth (+) reform of imports taxes (+) gradual rise in consumer spending (+) economic growth gathers pace (+) economic growth continues k k
POLAND (VAT: 22%) (+) import tariffs fall to 15% (++) buyers anticipate tax rises (-) excise tax rises (-) interest rates & petrol costs rise (-) cheap models phased out (-) few cheap models (-) high int. rates and taxes (-) Daewoo plight continues (+) EU import tariffs at 0% (+) cons. spending rises (+) GDP growth firm (+) cons. Spending peaks (+) Seicento replacement (+) GDP growth firm k
CZECH REPUBLIC (VAT: 22%) (-) recession (+) return to economic growth (~) last days of Felicia (++) Fabia launch (+) EU import tariffs now at 0% (+) Fabia push starts in earnest (+) improving economic picture (+) new large Skoda (+) GDP growth firm (+) GDP growth firm k
HUNGARY (VAT: 25%) (++) high wage growth, low int. rates, wider credit (+) strong economy lifts sales (+) new Wagon R, Fabia (+) GDP growth firm (+) GDP growth firm (+) GDP growth firm k k
ROMANIA (VAT: 22%) (-) recession hits car sales (+) econ. recovery starts but (---) ex. rate falls and (---) buyers wait for new Nova (+++) buying catches up with new Nova (-) Daewoo plight uncertain (+) import duties now at 0% (+) GDP growth firm (+) GDP growth firm (+) SupeRNova volume builds (+) new Dacia II k
SLOVAKIA (VAT: 23%) (-) recession (-) 7% import surcharge reintroduced (+) economy strengthens (+) Skoda Fabia helps H2 car demand (++) large growth in consumer spending (+) consumer spending rises(+) new large Skoda (+) consumer spending increase to 6.6% before 2004 peak k k
SLOVENIA (VAT: 19%) (++) buying before VAT introduced in July (--) VAT in place (+) firm GDP growth (~) saturated market (+) firm GDP growth (~) saturated market (+) firm GDP growth (~) saturated market k k
TURKEY (VAT: 17% base, 23% on cars) (--) Russia (-) August quake disrupts economy (+++) plunging interest rates cause car boom (+) importers push hard (+) new Clio (---) sharp devaluation (---) high interest rates (---) policy uncertainty (+) recovery in economy starts (-) risks remain high (++) recovery gathers pace (-) risks remain high k k
RUSSIA (VAT: 20%) (-) weak economy (+) GDP up sharply but (-) demand is very weak (-) production at full capacity (+) recovery continues but slows (-) western makers struggle to build (+) recovery widens (+) Fiat starts output, improvements at VAZ & GAZ (+) growing middle class (+) new Niva increases output k k
UKRAINE (VAT: 18%) (-) weak economy (--) Daewoo/ZAZ collapses (-) recovery weaker than Russia (-) Daewoo fails to recover (+) recovery gradually gathers pace (-) Daewoo still in trouble (+) recovery gradually gathers pace (+) GDP growth firms k k
UZBEKISTAN (VAT: 20%) (-) GDP growth slows (-) Daewoo reduces investments (-) weak domestic demand hampers Uz-Daewoo output (--) devalued ex rate dampens consumer demand (-) Uz-Daewoo in trouble (+) GDP, spending recover (+) GDP, spending recover k k
ESTONIA (VAT: 18%) (-) increased excise taxes (++) economy recovers rapidly (++) GDP growth strong (+) renewal of old parc continues (+) strong GDP growth (+) strong GDP growth k k
LATVIA (VAT: 18%) (~) excise tax hits used imports harder than new (++) sharply improving economy (+) improving economy (+) improving economy (+) improving economy k k
LITHUANIA (VAT: 18%) (-) deep economic contraction (+) improving economy (+) improving economy (+) improving economy (+) improving economy kk k
Note (+) = positive effect,(~) = limited or ambiguous effect, (-) = negative effect.

I: Outlook for sales in CE and CIS

Macro developments

In many respects, the economies of Central and Eastern Europe and Turkey had their best year in 2000. In Central and Eastern Europe all economies grew, without exception, the first time this has occurred during the transition. In Central Europe average GDP growth rose to 4.5%, up from 1.1% in 1999. In Russia, an important export-led bounce-back is occurring, after the turmoil of August 1998. And even the weaker economies of the Ukraine and Belarus reported growth. Turkey enjoyed a return to significant expansion, before it was hit with a brace of crises in late 2000 and early 2001.

Exhibit I - Real GDP Growth in Eastern Europe (percentages)

Country
1998
1999
2000
Czech Republic
-2.2
-0.8
2.8
Hungary
4.9
4.4
5.4
Poland
4.8
4.1
4.5
Romania
-5.4
-3.2
2.2
Slovakia
4.1
1.9
2.6
Slovenia
3.8
4.9
4.3
Russia
-4.9
3.5
7.7
Turkey
3.5
-5
4.5

Micro-economic reform and restructuring are taking place in all economies, albeit at differing speeds. Firms are focusing more on profit generation, by improving production efficiencies and pushing exports. Indeed, higher industrial output and export growth were the driving forces behind much of the GDP growth last year.
Trade barriers are being dismantled as the core economies prepare for EU accession. This is drawing Central Europe closer to the West European economy, and promoting more rapid convergence. In 2000, the six EU applicant countries (Poland, the Czech Republic, Estonia, Hungary, Slovakia and Slovenia) sold between 60% and 80% of their exports into the EU.

Incomes are also converging. Although they remain below those of the poorest EU countries of Greece and Portugal, the Central European economies are closing the gap. In 1992, Poland's average per capita GDP was just 28.4% of the EU average, but this had risen to 36.3% in 1999. By 2005, Hungary's income levels will reach nearly 75% of Portuguese incomes, while those of the Czech Republic will exceed 80%.

Car market developments

Against this background, then, it is a little surprising that car demand fell last year. Total demand across the entire region fell from 2.67m units in 1999 to 2.51m units last year. This year, with economic growth expected in all markets except Turkey, it is remarkable that we expect another, much deeper, decline in demand, to 2.287m cars, the lowest level since 1996.

Exhibit II - Total Car Sales EE/FSU/Turkey (000 units)

So, what are the factors that are bringing about this weakness? In many ways last year's top-line growth figures mask the real economic adjustments that are still taking place across the region. The transition process is marked by adjustment-response iterations, as labour and capital adapt to the free market system.

Exhibit III - Key macro and micro factors affecting car demand in 2000

Country Main drivers
Poland Rising excise taxes. Retirement of key low-cost models from production. Tight monetary policy. Company difficulties. Daewoo's financial strife resulted in large-scale desertion of the brand's models.
Romania Emerging from long recession. Consumer demand weak. Buyers wait for SupeRNova. Daewoo difficulties hamper demand.
Russia Consumer demand remains weak. Capacity is constrained. Policy environment unpredictable.
Turkey Lower interest rates cause consumer boom until crisis of confidence causes massive devaluation. Interest rates spike. Political uncertainty very high.

In these fragile economies, sharp policy changes can be required to relieve pressure - perhaps in inflation, government finances or the current account. Moreover, these changes can leave parts of the economy floundering for short periods. In some cases, such as Turkey, a brutal adjustment can result in a significant deterioration in an economy's short- and medium-term prospects. Running alongside these macro effects are micro-economic adjustments, which are made by companies working to improve the competitiveness of their enterprises. Here, too, reform can result in a short-term negative outcome as they trade this off against better long-term performance.

Last year a number of these macro-economic and micro-economic factors influenced consumer demand in general and car demand in particular. An outline of the major country developments and outlook is presented below (see Exhibit V).

In many cases, the structural nature of these drivers means that economies will not post an immediate return to growth. In general, however, the underlining health of most economies will prompt a fairly rapid return to healthier car market conditions. As a result, 2000 and 2001 should been seen as pit-stops in the race to regional convergence rather than as serious motor breakdowns or forced retirement. By 2006, we expect total car demand in the region to stand at 3.7m units, up from 2.28m units in 2001. By 2011, the figure will be 4.5m units.

Exhibit IV - Car Demand in CE and FSU 1998-2006 (000 units)

Market share developments

Each carmaker fared differently last year, each more or less exposed to the volatility that rocked the key markets. The chart below uses data for the big six Central European markets plus Turkey.

Obviously, the biggest casualty was at Daewoo. In 1999, the company rivalled Fiat as the biggest seller across the region. Nevertheless, the weakness of its position was underlined by the collapse of the Polish market - upon which its fortunes depend. Last year, sales in the region slumped from 214,500 to 128,700 cars. In contrast, Fiat managed the downturn better, losing less volume in Poland and reaping healthy sales in Turkey for most of the year. Renault, too, capitalised on the booming Turkish market, prospering from the widespread success of the Clio Symbol.

Exhibit V - Market Shares in Central Europe and Turkey (percentages)

We doubt whether Daewoo will be able to claw back any lost share. Although it does have a few new products this year, such as the Tacuma, it has relied too heavily on low-cost models to gain market share. These are now showing their age, and it will be increasingly difficult to entice the lower income buyers, who make up the bulk of its clientele, back to the brand. Daewoo's financial distress confounds the situation. It is still possible that heavy production cutbacks will be invoked across the region, leaving its market share under further threat of decline.

We see Skoda as the big winner over the next few years. The brand is attractive to buyers on a budget, and the new Fabia will compete strongly against the likes of the Lanos. Additions to the top of the scale - such as the W8 vehicle - will further bolster its volume sales.

BRAND NAME
1998
1999
2000
2001
2002
2003
2004
2005
2006
2011
ALFA ROMEO
4,098
3,330
4,144
4,618
4,732
4,961
5,252
5,434
6,579
8,656
ARO
1,362
1,217
668
342
145
0
0
0
0
0
ASIA MOTORS
31
4
0
0
0
0
0
0
0
0
ASTON MARTIN
0
0
0
3
3
3
3
3
3
5
AUDI
4,784
5,175
5,250
5,251
5,819
5,875
6,565
6,865
7,398
8,960
BMW
2,308
2,839
2,974
2,933
3,183
3,846
5,544
6,861
7,612
9,059
CHEVROLET
0
1
5
6
7
8
6
8
9
8
CHRYSLER
834
1,037
1,081
1,271
1,546
1,679
1,645
1,691
1,803
2,516
CITROEN
21,347
20,212
23,874
22,538
23,305
30,375
31,446
34,304
36,577
43,082
DACIA
85,087
68,611
39,406
53,476
58,646
59,089
73,655
86,562
91,229
115,673
DAEWOO
158,678
213,915
127,810
103,780
111,188
132,539
145,548
162,589
184,318
229,466
DAIHATSU
264
256
46
322
479
552
542
611
800
902
DODGE
0
0
2
0
0
0
0
0
0
0
FERRARI
9
6
8
8
6
7
6
4
4
7
FIAT
170,057
186,954
143,740
115,307
130,309
140,556
160,157
167,828
196,174
236,625
FORD
46,605
47,961
31,250
25,598
29,100
30,094
33,073
34,261
37,350
44,553
FSO
27,940
18,659
10,339
2,072
261
0
0
0
0
0
HONDA
17,378
17,706
10,519
13,297
16,103
18,354
18,932
19,253
20,927
28,676
HYUNDAI
8,144
10,142
11,638
12,399
16,181
18,138
19,058
20,940
23,596
33,378
JAGUAR
62
142
175
210
426
454
455
450
448
653
JEEP
237
350
590
574
595
605
565
637
653
456
KIA
7,473
11,430
9,540
9,688
9,391
8,943
9,942
10,133
11,070
12,819
LADA
1,640
2,826
2,458
2,570
2,925
3,280
3,603
3,711
4,279
5,002
LANCIA
1,011
420
539
679
1,053
1,210
1,287
1,274
1,451
2,006
LAND ROVER
511
1,329
1,271
1,343
1,294
1,347
1,413
1,623
1,844
2,134
LEXUS
55
94
144
173
192
204
231
244
301
393
MARUTI
0
0
2
0
0
0
0
0
0
0
MASERATI
1
2
2
5
5
5
7
9
9
15
MAZDA
6,334
6,168
5,197
4,962
5,285
6,017
7,785
8,127
8,642
9,074
MERCEDES-BENZ
3,348
4,718
5,860
5,674
6,480
6,655
6,991
7,498
8,248
8,914
MINI
0
0
2
271
537
627
663
741
782
1,320
MITSUBISHI
4,278
4,487
3,719
3,590
4,082
5,711
6,667
7,042
7,814
9,392
MTX
0
7
0
0
0
0
0
0
0
0
NISSAN
14,886
15,189
15,017
15,327
19,182
20,090
23,505
24,352
26,415
27,811
NOT KNOWN
438
109
68
10
4
0
0
0
0
0
OPEL
74,582
94,817
75,944
72,647
87,783
109,343
116,283
123,578
134,866
176,680
PEUGEOT
22,099
31,148
40,914
39,134
40,938
42,978
44,372
45,252
52,348
50,304
PORSCHE
21
65
78
89
89
89
91
91
92
59
PROTON
223
383
216
279
328
350
331
291
277
318
RENAULT
55,069
62,930
64,234
61,985
66,274
73,935
79,633
81,815
84,603
106,116
ROLLS ROYCE
0
0
0
0
0
1
2
1
0
1
ROVER
2,324
2,247
1,382
1,255
1,313
1,149
1,177
1,224
1,459
1,383
SAAB
439
459
647
611
636
694
1,111
1,702
1,947
1,990
SEAT
21,081
24,212
23,278
21,471
24,408
27,232
28,305
28,549
29,953
37,291
SKODA
146,992
154,882
160,044
176,176
192,252
207,638
233,924
241,333
260,009
342,416
SMART
8
19
7
12
15
16
15
17
16
10
SSANGYONG
442
833
383
49
74
104
117
109
127
108
SUBARU
586
740
768
781
850
826
823
830
879
987
SUZUKI
30,033
37,912
33,022
33,235
37,412
40,531
41,940
40,340
42,755
56,034
TATRA
5
1
0
3
2
2
2
3
4
0
TOYOTA
20,951
23,793
24,380
24,593
26,626
31,629
35,027
36,220
40,552
45,743
VOLVO
2,948
2,629
3,896
4,489
4,421
3,976
5,457
6,664
7,562
7,182
VW
45,675
50,012
51,865
51,010
70,934
69,564
75,117
85,768
94,225
91,240
ZAZ
239
27
0
10
0
0
0
0
0
0
Grand Total
1,012,917
1,132,405
938,396
896,126
1,006,819
1,111,281
1,228,273
1,306,842
1,438,009
1,759,417

Author: Tim Armstrong
Paris: + 33 1 40 75 25 93


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