With its ongoing problems of static demand and massive overcapacity, the last thing Europe’s auto industry needs is more car production capability. Yet construction of two 300,000-unit car plants is underway, with another expected to be announced next spring, writes Mark Bursa.
The difference is that these plants are not in any of Europe’s traditional automotive heartlands: they are being built in Central Europe, the belt of former Communist nations running from the Baltic to the northern shores of the Adriatic that is emerging as one of the auto industry’s key ‘hot spots’ for growth.
Last year the ‘big five’ Central European markets – Poland, Hungary, Czech Republic, Slovakia and Slovenia – accounted for new car sales of just under a quarter of a million cars. But as a production centre their combined installed capacity is expected to top two million units by the end of the decade.
EU membership beckons
Central Europe is hot because these five countries will from next year become full members of the European Union – which means cars built there will be treated as ‘domestic’ European products everywhere else in the EU. Given the cost advantage that still exists in the region, a number of automakers are seizing the chance to take advantage of cheap land and cheap labour and are setting up state-of-the-art factories that will supply the whole of Europe.
The financial benefits are significant – but not applicable to all automakers. For those struggling with overcapacity, the last thing they need is to add more. But not all automakers have overcapacity issues in Western Europe. “Eastern Europe will allow the Japanese and Koreans to build market share in Europe,” says IBM analyst Michael Jedlicka. “The big losers will be the western OEMs that are not prepared to meet that challenge.”
Toyota’s Central European play
Toyota has already started making a significant Central European play. It opened a gearbox plant in Walbrzych, Poland, last year, and has subsequently announced a further €170 million spend on a diesel engine plant at Jelcz, near Wroclaw in south-western Poland. This will make 120,000 engines a year and employ 350 people when it starts production in 2005.
These plants will supply Toyota factories in the UK and Turkey – and some of the gearbox production is destined for Toyota’s most significant Central European project, a small car factory being built at Kolin, near the Czech capital of Prague. This factory is not just significant for the scale of the investment – $1.35 billion – or the planned volume from 2005 of 300,000 units. The plant is a joint venture with PSA Peugeot Citroen, and the cars it will produce will carry Toyota, Peugeot, and Citroen badges. It will build small, A-sector cars – incremental models for both JV partners – which will sell for prices below €7,500.
PSA’s strategy unfolds
If Toyota’s play in the region is impressive, Peugeot’s is even more so. In addition to the Kolin plant, PSA is building another 300,000-unit plant in Central Europe, at Trnava, about 50km from Slovakia’s capital, Bratislava. This plant will manufacture small A-sector vehicles beginning in 2006. It will employ 3,500 people and will represent a total investment of €700 million.
PSA is unique among European automakers in that it does not suffer from overcapacity. Chairman Jean-Martin Folz has studiously steered PSA away from mergers and alliances, and the company has delivered a succession of ‘hot’ products over recent years – Peugeot 206 and 307, and Citroen Picasso and C3 – that have seen sales soar from 2.1 million in 1997 to 3.27m in 2002, with the goal of selling 4m vehicles in 2006.
As a result, PSA is perfectly placed to take advantage of Central European expansion. All its Western European plants are running close to capacity – indeed, PSA has worked through the traditional summer shutdown at some plants over the past couple of years, and has introduced weekend shifts at some of its main French factories, such as Sochaux and Mulhouse.
Furthermore, PSA’s share is growing rapidly in Central Europe. Its market share in the five Central European countries plus Croatia was 13.6% in the first quarter of this year compared with 5% five years earlier. “Our markets have been moving steadily eastwards, but our production units remain rooted in western Europe, so it makes sense to move our centre of gravity east, where sales are growing fastest,” said PSA spokesman Hughes Dufour. PSA’s objective is to achieve a share of the Central European market in line with its share in Western Europe – 16.3% in the first quarter of 2003.
PSA also points out that Central Europe is hardly a remote region. “Trnava is closer to Frankfurt than our plant in Vigo, Portugal is,” said Jean-Marc Nicolle, PSA’s director of strategy. Trnava will build B-segment cars on the Citroen C3/Peugeot 207 platform, and these will include new model versions as well as replacement models for vehicles currently built. These are expected to include booted sedan versions, given the bodystyle’s continued popularity in central and eastern Europe.
Hyundai bypasses ‘western European transplant process’
The third major OEM to make a major play into Central Europe is Hyundai. The leading Korean automaker has been talking about setting up a European production base for some years, but clearly had one eye on EU enlargement as the trigger point for making an announcement. Effectively, Hyundai has bypassed the ‘western European transplant’ process that the leading Japanese OEMs went through in the 1980s and ’90s.
Hyundai is expected to announce its chosen site for a 200,000-unit car plant next spring. The Koreans are considering sites in the Czech Republic, Slovakia and Hungary. Hyundai spokesman Oles Gadacz said a site decision was not imminent. “Yes, we have undertaken feasibility studies on the site of our European plant but we are quite a while away from a final decision,” he said.
Among sites under consideration are several locations in the Czech Republic – two potential sites near the city of Ostrava; a 200-hectare site in Orlova Lutyne and a 290-hectare site in Nosovice – and a 360-hectare former air base site near Zetec in the north-west of the country. This site was one of those considered by PSA before it selected Trnava in neighbouring Slovakia. PSA also rejected potential sites in Hungary, and these are also believed to be in the running for the Hyundai site too.
The plant is likely to build B- and C-sector hatchbacks and sedans, and could produce both Hyundai and KIA vehicles. Hyundai officials have spoken of needing “critical mass” in Europe – 400,000 sales in total, including 200,000 units off one platform – before committing to European build. Last year sales in western Europe were around 300,000, though Hyundai’s share in Central Europe was tiny – only 14,000 vehicles sold – so the potential for growth is considerable.
The Czech government and European Union regional support programmes have targeted both Ostrava and Zetec with special incentives for investment and job creation. The smart money is on Zetec on grounds of location and infrastructure – Ostrava lacks good roads, whereas Zetec is less than 30km from the German border and 50km from Prague.
Indeed, the Central European auto industry seems to be clustering around the northern Czech Republic, southern Poland, Slovakia and Hungary. Already established in the region are several long-standing car plants, and these have in turn attracted substantial investments from major Tier 1 suppliers. Around 40 of the top 100 global supplier groups now have facilities in the Czech Republic alone.
Besides PSA, four other European OEMs are well-established in Central Europe. Biggest player is Volkswagen, largely through its purchase in 1991 of the biggest player in the region – Skoda, in which €3 billion has been invested since VW took control. However, VW also has factories in Bratislava, Slovakia and Poznan, Poland. This latter plant was set up in the early 1990s as a CKD plant to assemble light vans, one of a number of similar initiatives established after the fall of Communism.
Poland later changed its rules regarding CKD assembly – leaving auto makers with the option of upgrading the plants to full assembly or paying import duties on imported kits as if they were CBU vehicles. Some – such as Ford – pulled out of Polish assembly. VW did not, and has turned Poznan into a light van plant whose output is to soar from current levels of 40,000 units a year to 150,000 when production of the new T5 van starts in 2005.
VW is spending €250m at Poznan, and has spent a further €60m since 1991 at its Bratislava plant, which builds Golfs and makes gearboxes for use in other group plants. Like Poznan, this plant started assembling low volumes from kits and now builds in excess of 500 cars a day.
The other long-established players in the region are Fiat and Renault. Both companies have managed to maintain, and in Renault’s case renew, links forged with local industries under Communism. Fiat’s history in Poland stretches back to the 1950s, and it has wholly owned the two former FSM plants in Tychy and Bielsko-Biala since 1992.
Since then Fiat has spent in excess of €2 billion in Poland, principally upgrading the ageing Bielsko-Biala plant to build the Palio/Siena ‘world car’ range. Tychy was built in the early 1970s to make the Fiat 126, and has been relatively easy to upgrade to produce Cinquecento, Seicento and from this year, the new Panda. The two plants have a combined capacity of 500,000 units, and Tychy has always been the sole source point for all Europe for the cars it builds.
Renault has maintained its Revoz JV with the Slovenian government, and this is one of the success stories of Central Europe. In this year’s World Markets Research Centre (WMRC) European Automotive Productivity Index, the plant, which builds Clio in Novo Mesto, came sixth, ahead of both Toyota and Honda’a UK plants and GM’s much-vaunted Eisenach factory in former East Germany, seen as the role model for profitability in GM. Most of Novo Mesto’s capacity is exported, though Renault’s presence as the only automaker in Slovenia means it is the dominant player in the country with a 25% share.
Novo Mesto is part of a three-pronged regional structure involving plants in Turkey and Romania. The Turkish plant in Bursa is already integrated into Renault’s European supply chain and is sole source point for the new sedan version of the Megane.
Renault’s more ambitious play is its relationship with Romanian producer Dacia, which was renewed in 1998. As with Revoz, Renault set up the Dacia plant in the 1960s, though under the harsh Ceaucescu regime Renault exited the business, leaving it to struggle on through the 1990s building cars still recognisable as the Renault 12 of 1970.
Renault bought back in to Dacia in 1999, and will next year start production of a new and radical Dacia model, codenamed X90, for Central and Eastern Europe at the revitalised Dacia plant. This car will be a full-size family car but will be sold for €5,000 – seen as the price barrier to selling modern cars in Romania.
General Motors is the most recent new entrant to Central Europe. After communism fell, it started vehicle assembly in Szentgottard, Hungary, but has since restructured this plant into a major engine and transmissions factory.
Instead of Hungary, GM now builds vehicles in Poland. Following an abortive mid-’90s attempt to buy Polish producer FSO, GM opted to build a new factory in Gliwice, southern Poland. Initially this built Astra, but now it makes the Agila mini-MPV. This vehicle is based on the Wagon R design of GM affiliate Suzuki, and Suzuki assembles this model at its own plant in Hungary, established in the 1980s, with considerable parts cross-supply – some body panels are made in Hungary only; others only at Gliwice.
Missing from the Central European market are three major players: Ford, which pulled out of its Polish CKD operation in late ’90s but has since built a plant in Russia; DaimlerChrysler; and Bmw. These two OEMs have chosen to invest in former East Germany rather than in Central European markets. Indeed, BMW looked closely at a number of sites in Hungary, Slovakia and the Czech Republic for its new small car plant before settling for a site near Leipzig. Politically correct perhaps, but BMW may have missed out on an opportunity to take advantage of crucially lower costs.