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Workers assemble cars in Kia Motors Corp.’s factory in Zilina, 200 kilometres north of Bratislava, Slovakia, on Oct. 3, 2012. (PETR JOSEK/REUTERS)
Workers assemble cars in Kia Motors Corp.’s factory in Zilina, 200 kilometres north of Bratislava, Slovakia, on Oct. 3, 2012. (PETR JOSEK/REUTERS)

Eastern boom belies western gloom for car makers in Europe Add to ...

The irony for the struggling makers is that their wider problems are also forcing them to make cuts in their low-cost operations in Eastern Europe.

Peugeot, which endured a 13.7-per-cent fall in nine-month European sales, has announced plans to cut about 12,000 jobs in Europe and shut at least one factory in France. It will make production cuts at its French sites but also in Eastern Europe.

In Slovakia, it will shut for 21 days later this year, and in the Czech Republic it will shed 345 jobs at a plant it shares with Toyota and cut output by a fifth to 215,000 cars.

Similarly, Suzuki Motor Corp., which also produces cars for Fiat and Opel at its plant in Esztergom, Hungary, said it would cut one of its two shifts for the last two months of the year, producing only about 155,000 of its SX4, Splash, new Swift, Fiat Sedici and Opel Agila models.

Things are particularly bad in Poland, where car production is dominated by Fiat and General Motors’ unit Opel, which suffered drops of 16.8 and 15.2 per cent in sales, respectively, in the first nine months of 2012.

The latest data from Fiat’s plant in Poland showed output fell by a quarter to 277,617. Opel output fell 28 per cent there.

“It is clear that the crisis in the European automotive market is making its mark on Polish production plants,” Polish auto industry association Samar said.

While Volkswagen cut 16,500 jobs in Europe in the past decade, shut five plants and cut production by a fifth, it now runs its plants at close to full capacity and has cash to invest and expand. Unburdened by expensive labour contracts in the West, the Korean firms are also running at full capacity.

But Peugeot, Renault, Fiat and Opel are operating below the 75-per-cent capacity level industry experts say they need to make a profit.

Volkswagen, Hyundai, Kia and some other plants have also capitalized on robust local supply chains that provide up to 70 per cent of the parts that make the cars.

For example, Kia has an accompanying plant to produce engines for both itself and Hyundai, which returns the favour with transmissions. Volkswagen gets engines from a plant nearby in Gyor Hungary, which also makes Audis.

“Renault has eight plants in Europe. Fiat has six or seven. Hyundai and Kia have just one (each). That’s the difference,” said Petr Vanek, spokesman for Hyundai in the Czech Republic.

The advantage is clear. In the first half of 2012 Hyundai and Kia earned an average of €1,386 per vehicle before interest and tax. Skoda cleared €1,100, and VW managed €916, a survey by the CAR Centre of Automotive Research at the University of Duisburg-Essen showed.

Peugeot lost an average €789, while Fiat lost €142.

Average Czech wages – including salaries and employers’ social contributions – are just a third of Germany’s at €10 an hour. Romania is even cheaper, where an average worker costs €4, compared with France’s 34.

According to IHS Automotive analyst Carlos da Silva, three strategies are at work.

The first is to build high-end cars for less, as in Volkswagen’s Slovak plant, where it is the sole producer of the Touareg, the Audi Q7, and much of the Porsche Cayenne – cars that have resisted crisis.

The second is a European push into small family cars, less profitable models aimed at cost-conscious consumers that require large volumes and low overhead to squeeze out a profit.

That’s bad news for Europe’s strugglers.

Peugeot’s 308, Renault’s Clio and Megane, Fiat’s Bravo and Opel’s Astra are assembled in factories across the world, with production still going strong in more expensive Germany, Italy, and France.

In contrast, Kia’s Cee’d and the Hyundai i30 are made exclusively in emerging Europe. Volkswagen produces its “UP!” model solely in Bratislava.

“You have to make a lot of them,” Mr. da Silva said. “If they can compensate with a lower cost base, it makes a lot more sense for them to make them in Hungary, say, than in Stuttgart.”

The final approach is to counter the European downturn by targeting new markets as Skoda is doing in Russia, China and India. Dacia and the Korean car makers say their low-cost SUVs are perfect products for the world’s least developed – and fastest growing – regions.

“The crisis is both a challenge and an opportunity, because if you look at the size of the market, which is shrinking every year, Europe begins to look small and slow,” said Hyundai’s Mr. Vanek. “And so we are looking over the hill. We may have future potential markets elsewhere, on other continents, like Africa.”

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