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April 15, 2005

GERMANY: Challenges from the east face Spanish auto industry

Spain’s car industry is at the heart of one of the biggest issues also facing Western Europe’s other major auto markets.

Spain’s car industry is at the heart of one of the biggest issues also facing Western Europe’s other major auto markets.

With an expanding Europe, diminishing profit margins and growing customer demands, western European car production is under threat from low-cost labour not only in Asia but also in neighbouring eastern and central Europe – a topic which will be tackled at the Automotive News Europe Congress in Barcelona next month.

Spain is currently the third-largest auto-producing country in Europe. Its annual output of three million units places it ahead of the UK and Italy, and behind only Germany and France. But production in Spain may drop 30% within five years, experts have warned.

“Spain’s main problem is the entrance into the European Union of 10 new countries that have low wages and are well situated,” said Joaquin Ruiz de Velasco, business strategy professor at Madrid university the Instituto de Empresa.

When it entered the EU in 1986, Spain was a low-wage magnet that attracted heavy investment from the industry. But as Spanish wages have gradually risen almost to the level of Germany, France and other high-wage EU manufacturing centres, its primary advantage has faded considerably.

Spain may also suffer from the fact that its plants, built largely in the 1980s, are widely scattered, are a long distance by road or rail from many EU countries, and there are few clusters of suppliers around the car makers’ facilities. All of which creates logistical problems, adding cost.

The Spanish auto industry should address its structural problems immediately, said Antonio Luis Ocana, national secretary of the UGT union, which is responsible for Spanish manufacturing plants, before automakers start making the next round of decisions on where to build models. Ocana thinks parts plants should be located closer to assembly plants and that suppliers in Spain must boost their R&D capabilities. “If there are not more regrouped clusters of suppliers, we will lose production in the long term,” he said.

This is in stark contrast with the situation in Central Europe – especially Slovakia and Czech Republic, EU accession countries which have been the subject of major investment in their automotive production bases. Volkswagen and PSA/Peugeot-Citroen are co-operating on attracting suppliers to Slovakia. VW already has a plant there, while PSA’s opens in 2006. VW has developed supplier parks near its Bratislava base, while PSA is starting work on a supplier park in Trnava. Kia, also in Slovakia, opens its plant soon and a PSA/Toyota joint venture in the Czech Republic is up and running.

By 2008, the combined annual output of the VW, PSA and Kia plants alone is expected to be 800,000 units. And these are only part of a wider and growing infrastructure, with 13 assembly plants and hundreds of parts factories within a 200-mile (300 kilometre) radius of PSA’s Trnava factory, covering areas of Poland, Slovenia and Hungary in addition to Slovakia and Czech Republic.

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