Automakers Pushing East in Europe

ead East is the name of a semi-famous 1970s rock band that was founded in St. Louis and continues to tour the clubs of the heartland some 30-plus years later. Today, head east might best describe the mindset of automobile makers as they assess the lay of the land in Europe.

        Take, for instance, the latest major project announced for Eastern Europe: Kia Motors‘ US$1.35-billion (1-billion-euro) assembly and manufacturing plant to be built on 371 acres (150 hectares) in Slovakia’s Zilna region. The mammoth project will create 2,400 jobs in a country of 5.4 million people that is quickly becoming a hub of auto manufacturing.

        Kia plans to begin production in 2006 and produce 200,000 vehicles per year with the possibility of increasing capacity to 300,000. Last year, Kia sold 150,000 vehicles in Europe, and this year plans to export more than 255,000.

Peter Lemagnen, a director and founder of business research firm Oxford Intelligence.

        Mong-Koo Chung, Hyundai Kia’s chairman, says the plant will be a major cog in the company’s goal of becoming a Top Five automaker by 2010.

Kia’s announcement was a nice follow-up to PSA Peugeot Citroën‘s 2003 unveiling of plans to build an $855-million (700-million-euro) factory in Trnava, Slovakia, that will employ 3,500 when it opens in 2006.

The trend is east in absolute general terms with new plants and supplier plants primarily locating in Eastern Europe,

says Peter Lemagnen, a director and founder of business research firm Oxford Intelligence.

East is moving further east. The Czech Republic and Hungary were the first wave of recipients. Now, Slovakia and Poland are getting more investments and it’s really a natural consequence. Hungary and the Czech Republic are relatively small countries with room for only so many plants before costs go up.

        Lemagnen notes that Slovakia, like other former Communist countries, has long been known for having a skilled manufacturing work force. He says while work forces in these countries might not have been entrepreneurial, they are highly educated in many disciplines with many qualified engineers and technicians, needing only to be brought up to speed with Western production standards and technologies.

        Oxford’s 2003 Automotive Report, citing data from the Global Investment Location Database (GILD), paints a clear picture of the eastward push. In 2002, Hungary led all of Europe with 42 auto projects, followed by Czech Republic with 37, Poland with 16 and Romania with 12. The U.K. with 17 projects and Spain with 12 set the pace in Western Europe. Worldwide, Hungary ranked third, behind China with 49 and the U.S. with 71.

        The eastward trend is by no means a death knell for auto manufacturing in Western Europe, Lemagnen says. It just means few, if any, new plants will be built.

If companies do put in a new plant, they will take out production at an older plant,

he says.

Companies will become much more flexible and much more high-tech, so they will be producing lower volumes of cars in a number of variants. Rather than making 50,000 of one model, they might be making 5,000 of this one and 4,000 of that one.

        Lemagnen, referring to research compiled by his brother and Oxford researcher Michel Lemagnen, says increased investment and production in the emerging economies of Eastern Europe are primarily aimed at meeting market demands in those countries, not necessarily to supply Western Europe with cheaper cars. For the most part, the new plants will be producing more cost-efficient economy models.

In the West, there will be a lot more added value and sophistication as manufacturers try and make sure their product offering is differentiated from a cheap car coming from Eastern Europe,

Lemagnen ex-plains.

We will see fewer manufacturers and probably a major Western European company will be absorbed or drop out. There are too many competing.

        Poland – with a population of 49 million and a lot of people who want to drive cars – will continue to see investment, Lemagnen believes. But when Slovakia and Poland reach saturation points, look for automakers to continue their eastward march into Romania, Bulgaria and Russia.

Romania has some car production and Bulgaria has yet to do things, and then there’s Russia itself,

he says.

I am absolutely convinced they will see investment, primarily to serve that market or surrounding markets. It’s such a huge market.

        Carol Thomas, Central and Eastern European analyst for LMC Automotive Forecasting, says demand for cars in Poland and Turkey, the most populous countries in the region, will continue to grow. She says car demand grew by 25 percent in the region last year, almost entirely due to Turkey.

AxleTech is expanding its plant in Saint Etienne, France.

Turkey’s on a bit of a roll with growth [rate] of five-percent stronger than expected last year,

Thomas says.

        Thomas says 358,000 cars were sold in Poland last year. That figure should grow larger with the country’s embryonic economic recovery. She believes the long-term outlook in Central and Eastern Europe is bright due to a relatively low level of car ownership in those countries.

Japanese company Asmo, a manufacturer of servomotors for automobiles, will locate a factory in Zru nad Sazavou, Czech Republic, to produce power window regulator motors, blower motors for air conditioners and motors for throttle valves.

        Asmo officials say they chose the site in the Central Bohemia region due to positive references from Japanese companies already operating there. The company will invest $15 million (12.3 million euros) and create more than 240 jobs by 2010.

        Lear Corp. plans to open a 500-employee plant at the site of a former textile mill in Jaroslaw, Poland. Lear, which already has three factories in Poland, plans to manufacture seats, dashboards and door trims.

        In the west, Johnson Controls has added more than 100 engineers at its facility in Pontoise, France, northwest of Paris, bringing its total work force there to 800. Elsewhere in France, AxleTech International is expanding its plant in Saint Etienne, adding 90 employees over the next three years. The facility produces heavy-duty off-road axles and components, planetary axles, brakes and related after-market parts for commercial specialty trucks, military vehicles and off-highway machines used in the construction, material handling, forestry, mining and agricultural industries.