European carmakers: Heading east

Date: 29/03/03

How long can eastern Europe keep enticing western Europe's carmakers?

TRNAVA, a tiny town in western Slovakia, is the new face of European car manufacturing. In January, France's PSA Peugeot Citron chose it as the site for a new €700m ($745m) assembly plant that will start turning out 300,000 passenger cars a year in 2006. The French company's investment comes on the heels of a joint venture with Japan's Toyota to build a €1.5 billion plant in the Czech Republic. Meanwhile, Britain's MG Rover is poised to make a big investment in Poland; and Renault is preparing to launch a new budget model at its factory in Romania.

The appeal of central Europe is obvious: cheaper labour costs (roughly one-fifth of those in the European Union); good infrastructure; and a prized location at the heart of a soon-to-be enlarged EU. Gone are the days when poorer EU members, such as Spain and Portugal, could lure foreign carmakers with lower wages and hefty grants for underdeveloped regions. When Germany's Volkswagen announced last year that it was axing jobs in Spain and shifting part of its production to Bratislava, it confirmed that southern Europe's competitive edge in the car industry had been blunted. Louis Schweitzer, chairman of Renault, thinks that Toyota's factory in northern France, opened in 2001, will be “the last large car plant in western Europe”.

Peugeot's boss, Jean-Martin Folz, is not only opening factories in eastern Europe; he is also hoping for growth in the market there in the longer term. For now, though, new car sales in central Europe are a small fraction of those in the EU. Global Insight, a research group, expects sales among today's EU accession candidates to double by 2012, but they will still amount to only 13.4% of west European sales.

The investment rush is being encouraged by the fact that central European countries will no longer be able to offer investors such generous tax breaks once they join the EU in 2004 - which is why they are pulling out all the stops to win new investment now. The Czechs, who boast the region's highest foreign direct investment per head, win praise from multinationals for setting up CzechInvest, an inward investment agency that cuts through the bureaucratic rules that can stymie deals. Poland, the runner-up for Peugeot's two central European sites, has seen its star wane due to weaker investment incentives and heavier tax and administrative burdens. “We could do with a PolishInvest,” says Wojciech Drzewiecki, head of Samar, a Warsaw-based automotive consultancy.

Robust growth would also help. Sales of new cars in Poland have fallen by 60% in the past three years, as the economy has faltered. That has dashed hopes among local producers of a central European car boom, so putting a premium on exports to western Europe. Yet with currencies in the region strong in anticipation of EU membership, exports are being hit hard. Another concern is post-accession wage pressures. Trade unions at Renault's plant in Romania have just won a 17% pay rise after going on strike for four days. Not a good omen some four years before Romania is due to join the EU. The French carmaker's new model there may not be such a budget version after all.

Article poses the question: 'How long can eastern Europe keep enticing western Europe's carmakers?'

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