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.

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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)

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

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.

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

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