European carmaking: Going east

Date: 06/03/04

A big win for Slovakia over Poland

SLOVAKIA may soon produce more cars per head of population than any other country on earth, thanks to this week's decision by Kia Motors, part of South Korea's Hyundai group, to build a new car plant there. Volkswagen is already making about 300,000 cars a year in Slovakia, including 80,000 of its pricey new Touareg off-roaders. Peugeot-Citron is building a 300,000-car plant which it expects to be up and running in 2006. Now Kia expects to add about 200,000 cars a year by 2007. Divide that projected output by Slovakia's 5.4m population, and you arrive at a figure of almost 150 cars built per 1,000 people - half as many again as the current top producers, the Belgians, managed last year.

Car industry investment has been a success story across much of post-communist central Europe. Volkswagen is the top exporter from Slovakia, the Czech Republic and Hungary. Fiat and Daewoo are the biggest foreign investors in Polish manufacturing industry. The main attraction for investors has been the combination of low wage rates and guaranteed access to European Union markets. The countries of central Europe will join the EU in May.

Slovakia has been an increasing favourite among investors since a fragile centre-right coalition government took charge there in 1998 and won re-election in 2002. This year it cut the rate of tax on both corporate profits and personal income to a flat 19%. Poland, Slovakia's main rival for the Kia plant, lost out largely because of its poor infrastructure and its complicated and unpredictable tax system.

The Kia plant, worth an initial €700m ($850m), may well mark the end of this wave of big new car plants in central Europe (though Honda, one notable absentee, says it may yet be tempted in). But the plants already in place, or planned, should ensure a steady inflow of related investment for years. Kia expects seven or eight of its Korean suppliers to follow it into Slovakia.

One day Slovakia may start to worry about having an economy that is so dependent on a few big firms within a single industry - and one with excess capacity, to boot. But for now it is much more worried about cutting an unemployment rate that averaged 18% last year. All jobs are welcome. And besides, by helping Slovak workers prosper, the car industry can help itself. Central Europeans are still only half as likely to own a car as their western counterparts. They may yet prove as good at consuming as they are at producing.

The Slovak Republic is winning the battle in eastern Europe to get car industry investment.