Europe’s ‘Detroit’ runs into rough terrain

[hermeticist]

In the FT:

The General Motors factory in Gliwice in Poland is one of the most efficient in the ailing company, but that has not protected it from the downswing in the car industry.


The factory is reducing shifts from three to two this month, and is laying off contract workers. Tony Francavilla, the factory’s general manager, says that until late last year everything was going well, “until the floor fell out from under the market”. He adds that sales of the Zafira model, the factory’s main product, have fallen by about 30 per cent.

It is a situation being repeated across central Europe, a region that had become Europe’s Detroit due to cheap but highly skilled labour, membership of the European Union and good transport links with the west.

With small local markets that favour used cars over new, the vast majority of production is exported to western Europe, with a significant amount also bound for Russia. In 2007, the main car-producing countries of central Europe – Poland, Hungary, the Czech Republic, Romania and Slovakia – produced 2.8m cars and commercial vehicles, about 14 per cent of the EU total and about double their 2000 production.

But storm clouds are gathering. In Romania, the automaker Dacia, which is owned by France’s Renault, has stopped work four times over the previous quarter.

Stoppages totalling almost three weeks in November were followed by a decision in mid-December to stop its production lines for a month. Work at the carmaker’s plant is due to resume on January 12.


In Hungary, Audi has announced a month-long stoppage at its site in the western city of Gyor, although factory officials insisted this was the result of a seasonal drop in demand for its open-topped cars.

Already, 160 employees have been axed. Gordon Bajnai, Hungary’s economics minister, has said that unemployment in the sector is sure to rise.


Magyar Suzuki, the Hungarian affiliate of Japan’s Suzuki Motor, is axing 1,200 of 5,500 workers. Production for 2008 has been reduced from a planned 300,000 to 282,000, and further cuts to about 210,000 cars are planned for this year.

In the Czech Republic, where cars are responsible for about 10 per cent of gross domestic product, carmakers and their suppliers are expected to axe more than 13,000 workers by mid-2009.


The most exposed country is Slovakia, which has the world’s highest per capita car production, at 106 cars per 1,000 inhabitants.

Three big factories – Volkswagen, PSA Peugeot Citroën, and Korea’s Kia – have set up in the west of the country and car production amounts to a fifth of GDP.


Volkswagen, with a factory near Bratislava, the capital, is in the riskiest position – making gas-guzzlers such as the Porsche Cayenne, the Audi Q7 and the Volkswagen Touareg.

“A product mix that consists to a big extent of SUVs is obviously not a good one for this kind of crisis,” says Jan Toth, a Slovak economist.


The makers of smaller cars are cautiously optimistic that they will be spared the worst of the forthcoming pain. “The crisis is affecting demand for small cars much less than for large ones,” says Jean Mouro, director of the PSA Peugeot Citroën factory in Trnava.

Slovakia gets some added protection because of its cheaper labour costs. Mr Mouro says the company has cut production at its factories near Paris and Madrid while leaving production intact in Slovakia.


Although small carmakers are still relatively bullish, that sentiment may not survive long if the new car market continues to deteriorate.

Enrico Pavoni, chief executive of Fiat’s Polish subsidiary, is increasing production and hiring more workers at Fiat’s factory in Tychy, in southern Poland, where the company makes high-selling budget cars such as the Panda and the Fiat 500. However, even he turns gloomy when he considers whether the downturn could last much beyond 2009.


Sipping from a coffee cup decorated with a large US flag and the motto “God Bless America”, GM’s Mr Francavilla says his Polish workers still only cost about a third of their German counterparts, in spite of seeing multiple double-digit wage increases.

Workers in Gliwice are setting up a production line for the Opel Astra which is being moved from Antwerp. However, there is concern that the region’s cost advantages may not be all that useful in retaining or even attracting new factories if west European countries prop up their own car industries, which would make it politically difficult for manufacturers to shift production eastwards.