The strong growth in production seen in Poland, Hungary, the Czech Republic, Romania and Slovakia means eastern Europe is still a big attraction for OEMs
In the late 1990s and early 2000s, Eastern Europe up to the Russian border received substantial investment from European, Japanese and Korean vehicle companies seeking low cost manufacturing sites for both vehicles and components. Most of the major vehicle brands have invested in the region and while costs of doing business there have risen, investment continues. Mercedes, for example, has officially confirmed the construction of an engine plant in Poland, its first European engine factory outside Germany. This decision was driven partly by the cost competitiveness of Poland versus Germany, but a more fundamental driver is the lack of capacity in Germany and the need for Mercedes – like other vehicle manufacturers – to balance domestic and wider European production footprints.
Rising production across the regionProduction has risen strongly in Poland, Hungary, the Czech Republic, Romania and Slovakia in recent times; and it is Slovakia which has arguably done best of all, with Slovakian production surpassing 1m vehicles in 2015 and further production growth expected. The VW group made nearly 400,000 vehicles last year, Kia 338,000 and PSA just over 303,000 units. These plants all plan for rising production volumes and new models and they will soon be joined by Jaguar Land Rover: the UK company will open its first plant on continental Europe in Slovakia in 2018, with the long-awaited replacement for the Defender expected to be the first vehicle to come off the assembly line. Initially capacity for 150,000 units will be installed, with a range of as yet unnamed models to be added to the Defender range; longer term, this new plant could see production to rise to 300,000 per year, similar to the recent output volumes of the other plants in the country.
The PSA plant in Slovakia is an interesting case: with PSA needing to move production away from high cost France, its Slovakian plant saw production rise nearly 19% in 2015; and having reached just over 303,000 last year, the plant is due to make 315,000 units in 2016, 345,000 in 2017 and 360,000 in 2018. Historically most of the output has been of the Peugeot 208, which represented c85% of 2015 production, but with the new Citroen C3 being allocated to Slovakia (and the new C3 Picasso moving to Opel in Spain), the C3 will represent around 35-40% of the PSA Slovakia’s plant in the long term. PSA is also understood to be considering a new plant in Eastern Europe, as it looks to reduce further its dependence on French production sites, especially for small cars.
Strong growth in Czech RepublicAcross the border in the Czech Republic, production reached nearly 1.3m in 2015, a 3% rise over 2014; however, Hyundai saw production at its Czech plant rise 11% to over 342,000 units, with the target for 2016 set at 350,000 units. Also in the Czech Republic, production of Skoda – and SEAT – models continues to increase. In order to help the SEAT subsidiary turn a profit, VW has decided to base some of the more recent and some future SEAT models on Skoda vehicles and have these SEAT models produced by Skoda; thus the SEAT Toledo is effectively a Skoda Rapid, while the new SEAT Ateca SUV is also made by Skoda; a second SEAT SUV also made by Skoda is also a possibility in the next five years.
While most OEMs in Eastern Europe supplying into the EU, Hyundai and Kia output reaches other markets, notably Russia
Premium brands expanding in HungaryOne of the notable developments in recent years has been the growth of Audi production – of vehicles and engines – in Hungary and more recently Mercedes which has seen car production in Hungary accelerate. With JLR producing soon in Slovakia and Porsche switching the next Cayenne to full production at the VW factory in Slovakia, more than half a million premium brand vehicles will soon be made in the region. The 1bn Euros investment confirmed for Mercedes Hungary in 2016 for a second assembly hall will be for both front- and rear-wheel-drive cars; the expectation is that Mercedes will shift some of the C-class product out of Bremen to this plant to alleviate stress on the Bremen plant which has one of the most complex production line-ups of all Mercedes factories.
Korean OEMs encounter successHyundai and Kia have established car, engine and transmission plants in the Czech Republic and Slovakia, as well as having brought more than a dozen Korean suppliers over to the region to supply them; both car plants can produce over 300,000 vehicles a year and the engine and transmission plants have similar total capacity to enable self-sufficiency in these core areas. Hyundai-Mobis – which makes front-end modules and chassis parts especially – and Dymos, a seat and foam maker, are the biggest Korean investors in the region. While most of the vehicle companies in Eastern Europe use their plants there for supplying into the EU, Hyundai and Kia are amongst those exploring their output elsewhere, notably to Russia, and in the case of Hyundai, the i30 is exported to Australia.
Eastern Europe is not just for EU marketsIt is not just Hyundai and Kia who export beyond Europe. For example, Fiat – which was aided by attractive funding from the European Investment Bank – took over the former Yugo facility in Zastava, Serbia and has made it into the sole production site for 500L, a 5- and 7-seater small MPV. Most of 100,000-plus units made there are for EU (with around 5% for the US), but they are also exported into Russia; and, following an agreement signed in August 2016, the 500L will be sold elsewhere in the Eurasian region, essentially the former CIS/Soviet states, following the agreement of Kazakhstan which had resisted a free trade deal with Serbia. Such additional markets will go some way to prevent further cutbacks in employment at this plant which has moved from three to two shifts this year and cut employment by around 900, from the peak of 3,200.
To the north in Poland, GM is producing Cascada coupe-cabrio for sale as Buicks in North America and as Holdens in Australia, along with Opel/Vauxhall models for the European market. Australian supplies started in February 2015, with Buick models exported from November that year, the first Buick models coming off the production line a month earlier. Holden versions of the Astra are also expected to begin shipping to Australia by the end of the year.
In Hungary, Suzuki has been producing cars and SUVs for more than 20 years; currently it makes the SX-4 crossover and the Vitara SUV; while the SX4 is made elsewhere in the world, Hungary is the sole production site for the Vitara. Export markets include Brazil, with exports starting in late 2016.
Dependence reduced on high cost GermanyMercedes produces cars in Hungary, where it is in the process of doubling capacity, and transmissions in Romania; and by early 2019 it will be producing engines in Jawor, Poland, in the south-wets of the country. Around 500m Euros will be investment to make four-cylinder diesel and gasoline engines.
Volkswagen has also expanded its commercial vehicle range with a new plant in Poland, to make the Crafter, a model it previously sourced under and OEM agreement with Mercedes. However out has invested 750m Euros in a new plant in Poznan, next to its existing factory which makes the Caddy small van and Transporter medium van; the new operation will make up to 100,000 units a year, a substantial increase on the 30-40,000 units traditionally sourced from Mercedes.
A bargaining chip with unionsFiat has long used its Polish plant especially as a stick with which to beat down its Italian unions’ demands; as Fiat transforms its Italian production line-up to focus on SUVs for Fiat, Jeep and Alfa, as well a broader range of Alfa cars, the only car Fiat is likely to make in Italy is the Panda. Along with the 500L made in Serbia, the 500 is made in Poland which is where Fiat will also make the Punto replacement, expected to be called 500 Plus.
Industrial disputes never far awayAudi has been one of the big investors in Hungary, investing more than 8bn Euros since it started operations in the country in 1993; it employs over 11,000 people directly at its Gyor plant which makes TDI engines, as well as A3 and TT cars. By 2018, it will start production of the new Q3 SUV, taking on production from the SEAT plant in Barcelona. However, through 2016, strike threats have hung over the plant, with the workforce demanding a 100,000 forints as a one-off bonus and a 20,000 forints per month wage increase, equivalent to around a 6% rise which they unions want backdated to January 1 2016. Negotiations are continuing.
Growth has led to labour shortagesIn Slovakia and Hungary, there are other labour problems. In fact the labour market in Slovakia – and some other parts of the region – is tightening, with labour shortages being reported; with continued investment comes demand for more skilled workers but through 2015, vehicle companies and suppliers have begun to experience difficulties in recruiting sufficient people and when they can recruit they are having to pay higher than expected wages. Hungary too is facing labour shortages, a somewhat ironic situation given the country’s government’s refusal to accept migrants from Syria and beyond. One of the reasons behind the labours shortage in Hungary is the commuting undertaken by people in the Gyor area who travel to work in VW plant in Bratislava.
Some production is leaving Eastern EuropeDacia –owned by Renault – has been the main driver behind the rise in vehicle production in Romania in recent years. As production of the Duster SUV has grown strongly in recent times, Dacia has decided against further expansion of the Pitesti factory and instead decided to move production of the Logan MCV (the estate version) to the new Renault group plant in Tangiers, Morocco; this plant is located in a tax-free zone which means vehicles made there can be imported into the EU without any import duties. One of the reasons which contributed to Dacia deciding not to expand in Romania was the refusal of the Romania authorities to upgrade the road infrastructure into and out of the plant; without this it would have made expanding production in Romania impractical.
Ford to utilise Romanian capacity… finallyFor many years Ford has operated its plant in Craiova at well below capacity, making a maximum of 70,000 B-Max MPVs a year, well below the factory’s notional 300,000 units annual capacity. Now, after many false starts and unfulfilled pledges it finally looks as if Ford Romania will have a model range to fill the factory, or at least make greater use of the plant than has been the case hitherto. 200m Euros is being invested to allow the plant to make the EcoSport B-segment SUV, with half of this invested during 2016; and additional 30m Euros is being invested in engine production. Production of the EcoSport will begin in the fourth quarter of 2017; it is possible that a European version of the new Ka (which will initially be made for Europe in Brazil) could be added to this plant before the end of the decade.
Suppliers following vehicle companies eastIt is not just the vehicle companies who are expanding in Eastern Europe; numerous suppliers have followed the vehicle companies there, to supply both the new vehicle plants and also supply back into Western Europe. Investments in 2016 include:•SC Rolem investing 15m Euros in two new facilities in Romania, to make plastic trim components for BMW, Mercedes, VW and Volvo amongst others• Affiliated company HIB Rolem Trim is investing in another facility in Romanian with Ningbo HuaXiang Electronics to make decorative trim parts for dashboards, centre consoles and door trims for the Mercedes A- and B-class lines• Johnson Controls – which is soon to be called Adient when its seating business is floated off – has expanded its PU foam production in Zory, Poland; c20mn Euros (US$22m) is being invested by 2019.• To the south in Serbia, Italy’s Aunde, a seat and seat parts maker, has expanded a factory originally set up to supply the Fiat 500L, following a contract award from Mercedes; and Leoni, a German wiring common, is also investing 22m Euros in two new plants in Serbia, to supply BMW and Jaguar Land Rover.• In Hungary, Dana is expanding production of gear components, with an investment of 15bn forints, while Japanese electronics supplier Mitsuba is opening a new plant in Hungary, with an investment of nearly 14m Euros, of which 2.75m is a grant from the Hungarian government. A third major investment in Hungary in 2016 comes form ThyssenKrupp which is investing 100m Euros to make engine and steering parts. This new plant will be the first ThyssenKrupp plant in Europe to make two sets of components in the same facility; production electronic steering parts and cylinder head covers, with integrated camshafts, will begin in 2018.