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Eastern Europe: Region Grows As Manufacturing Point For Auto Industry

It's a success story in a region that has had to suffer a lot of hardship during the economic reforms of the last decade. Eastern Europe has managed to establish itself as a favorable environment for the auto industry, with factories from Poland to Romania manufacturing a wide range of vehicles for both domestic consumption and export. The East, most nations soon to be part of the European Union, provides cost-effective production processes along with quality work.

Prague, 20 August 2003 (RFE/RL) -- One of the most obvious changes in Eastern European cities in the past decade has been the flood of glossy new cars filling the streets.

This has led to environmental problems, as the region's antiquated road system was not built for such a traffic density. Traffic jams and pollution are on the rise.

But it would be a mistake to think that all these cars are imports from the West or from Asia. The East itself has become an important manufacturing site for Western European-, South Korean-, Japanese-, and U.S.-owned automakers.

In fact, automaking has become something of a regional success story, with the basic message being that the East can produce quality work and reliability at low cost. With 10 Central and Eastern European countries about to join the European Union's vast single market, that's the combination big corporations are looking for.

Industry analyst Mark Bursa edits the British-based "Automotive Emerging Markets" publication. He told RFE/RL: "The big thing that's driving the East European industry at the moment is the fact that countries like the Czech Republic, Hungary, and Poland are about to join the EU. This really makes starting up a new factory in Central Europe very, very attractive to vehicle manufacturers, especially the Japanese and the Koreans, who want to increase their market share in Western Europe. Because if these countries all become part of the European Union, it means they can build a new factory, on cheap land, with nice government grants, and a well-trained labor force."

Bursa cited the new factory at Kolin, near Prague, being built jointly by Toyota of Japan and Peugeot of France. He said it's a coup by the Czech Republic to capture two manufacturers at once, and he said he expects many component makers to set up businesses in and near Kolin to supply the new factory.

At Kolin, Toyota and Peugeot will build an important new small model which next year will fill a gap in their model range. And they are confident of the Czech work force's abilities, in that the car will be exported to world markets.

And other manufacturers are lining up as well. "The other manufacturer who will make an announcement next May, it's now known, is Hyundai from Korea, who have been looking now for quite some time for a European production base," Bursa said. "And they have always made it very clear that they are not looking at Western Europe at all. They are going to go straight into Eastern Europe, and they are holding a 'beauty contest,' if you like, at the moment, between different sites and different countries. There are a number of places in the running -- the Czech Republic, Hungary, Slovakia."

The Kia car brand, which is now owned by Hyundai, will also be produced at the new plant.

Another manufacturer eyeing the East is MG-Rover of Britain. Spokesman Stuart McKee explained that his company is interested in the former FSO car plant at Zeran in Warsaw. He said the plant would be used to produce for Eastern markets various models of the semi-luxury Rover range, as well as the sporty MG marque, once their production run is finished at the main Rover plant at Longbridge, near Oxford.

The mid-range Rover model, known as the 45, is envisaged as the mainstay of production at Zeran, but nothing is yet settled. McKee said, "At the moment, we don't have a decision from the plant, and the governments, and the bankers, as to whether that plan can go ahead."

Another British-based auto analyst, Paul Horrall, pointed out other Eastern successes. Germany's Audi has a plant in Hungary, and the Porsche sports-car company has opened a new plant in eastern Germany to build the most expensive car it has ever marketed, the new Carrera GT, which will sell for about 350,000 euros ($390,000). The new plant will also build the Porsche Cayenne super-luxury all-terrain vehicle, the bodies for which are built at the Volkswagen plant in Bratislava, Slovakia.

Also in Slovakia, work is soon to start at Trnava on a new 700 million-euro ($779 million) plant for the Peugeot-Citroen group. At a recent ceremony at the site, group president Jean-Martin Folz said that by 2006 the plant is expected to manufacture 55 cars per hour and have some 3,500 employees. Near the plant a new industrial park will be built for subcontractors supplying Peugeot-Citroen. Folz also said that Central and East Europe, along with Latin America and China, are the key target regions for sales expansion.

Another sign of confidence in the East comes from Fiat of Italy, which is to produce its new Panda model for pan-European markets at its plant in Tychy in southern Poland. "It will be one of Fiat's cheapest models, but in order to get that low cost base they have modernized and re-used their plant in Poland," analyst Horrall said.

U.S.-based General Motors also has a factory at Tychy and it is successfully producing the stylish Vectra and Astra models in its Opel and Vauxhall brands for pan-European markets.

Further east, the Dacia company of Romania is about to introduce a new medium-sized model which will sell for the remarkable price of some 5,000 euros ($5,566). Analysts say the newcomer will offer a lot of car for that money.

Dacia has been taken over by Renault of France, completing a link which has existed for many years. The present Dacia is based on the Renault 12 of the 1960s, which makes that vehicle's production run one of the longest in the world.

Daewoo, recently purchased by General Motors, is a South Korean manufacturer with deep roots in East Europe. It was one of the first foreign auto manufactures to show its faith in the Eastern European region, starting production at a large plant at Kraiova, southern Romania, and at the former FSO plant in Warsaw -- the same now sought by Rover -- as well as in Ukraine. Its worldwide expansion plans, however, proved too ambitious, and the company ran into financial difficulties.

Kraiova is still producing, and with General Motors now in control, a stable future perspective should open up for that factory, which produces models for export right up to the semi-luxury Eleganza.

Of course, all the expansion in the East comes at some expense to established facilities in the West. As Horrall said of the move eastwards: "It has been the easiest way of driving costs down by the Western manufacturers. And of course they now find themselves in a position where the [overall] market is shrinking slightly, and they have too much factory capacity. But the inefficient and expensive and old and outdated plants have tended therefore to be in the West of Europe rather than in Central Europe."

But even that trend towards factory closures has kept within bounds, and no major disadvantage is predicted for Western manufacturing bases.