Not Just Ladas: Car Sales Drop, Eastern Europe Production Booms

To say Eastern Europe is to the EU what Mexico is to the US is something of an oversimplification, but there certainly are similarities in both partnerships.

As with Mexico and the US after the signing of the North American Free Trade Act (NAFTA), the fall of the Berlin Wall and the ushering of the former communist states into the European Union has allowed Western firms to make major manufacturing investments into those regions with a view to exploiting historically lower wage levels and low transportation costs to market; this, in return for major boosts in the region in terms of employment, skills and the generation of support enterprises, such as component suppliers.

So successful has the process been in the automotive sector that nearly all the new European investment (outside of that in the UK) has been in Eastern Europe.

According to the FT, while auto production has declined sharply in the past decade in countries such as France and Spain, it has increased three or fourfold in the Czech Republic and Slovakia. Those two countries, with only 16 million people between them, now produce more cars than France, with a population four times the size.

Slovakia last year had the highest car production per capita in the world at 155 vehicles per 1,000 population. In the Czech Republic, benefiting from investment by PSA, Toyota and Hyundai, capacity has more than doubled in recent years. Together, they have contributed to raising light vehicle output to 105 per 1,000 population – the second-highest in Europe.

Hungary, Romania and Bulgaria have also benefited from investments by Daimler, Ford and Volkswagen, among others, in recent years, such that the region now accounts for 20% of EU light vehicle output, compared to just 10.5% in 2005.

Manufacturing Skills Gap

But while general wages have not risen to Western levels yet, they have seen sharp rises in the automotive sector as firms compete for skilled workers, pushing up wage costs. Fortunately for the region, sales have been global (not just regional into the EU), which has seen car sales falling for two years or more.

Audi has an engine plant at Gyor in Hungary that produces 2 million units a year and engines are exported to Audi plants around the world, not just the 125,000-per-year automotive assembly line next door. While foreign ownership of virtually all the East European car-making facilities is a sensitive issue for some, most acknowledge the investments have fueled thousands of well-paid skilled jobs, which support the local economy and whose exports help the country’s balance of payments.

So far, local car production does not equate to local car ownership – the region averages just 383 cars per 1,000 of population compared to 524 in Western Europe. Mind you, that’s still a whole lot better than in the days of communism, when car ownership was probably in the tens per 1000.

That’s some progress for ya.

Read more from Stuart Burns.

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