Home News ‘Europe’s Detroit’ adapts to plunging car demand

‘Europe’s Detroit’ adapts to plunging car demand

Published on 25/03/2009

Zilina -- The big yellow robots at this car plant in northern Slovakia owned by South Korean manufacturer Kia have had to slow their synchronized dance since the start of the financial crisis.

Car production in Slovakia, the pillar of what was once one of the fastest-growing economies in the European Union, plunged 47.7 percent in January while exports fell by 29.9 percent amid a slump in demand.

But the former communist country, located in the heart of Europe and often compared to the US auto industry hub Detroit, has so far escaped the job cuts and production shutdowns that have plagued the US Motor City.

It is a pattern repeated across the region, where high-tech plants set up by foreign carmakers, as well as the flexibility of production lines and the workforce, have helped offset some of the fallout from the crisis.

Only French group PSA Peugeot Citroen has announced job cuts so far at its Slovak plant, with 190 jobs set to go.

All three major carmakers in Slovakia — PSA Peugeot Citroen, Germany’s Volkswagen and Kia — have however reduced working hours and production.

"Our facility is one of most modern plants in the world, which has helped us a lot," Kia’s chief executive in Slovakia, In-Kyu Bae, told AFP.

"The production line is very flexible and we can change the production speed and quantity easily," he said.

The South Korean group sells small, low-emission vehicles that are in high demand and says it has no plans to cut jobs at the plant, which opened in 2006.

The picture in Slovakia is similar to other countries in Central and Eastern Europe, which attracted foreign investors into their car industry as a way to boost their fledgling economies after the break-up of the Soviet Union.

Most investments came to Slovakia and neighbouring Czech Republic because of relatively low labour costs compared to Western Europe, along with their location and tradition in engineering and government tax incentives.

"Kia chose Slovakia … in 2004 because of its highly qualified workforce and its location — we can reach our customers in Western, Central and Eastern Europe as well as in Russia," said Dusan Dvorak, a spokesman for the company.

"Also, the positive approach of the Slovak government was important."

Slovakia’s former government created an investor-friendly environment with reforms such as low taxes and a weakening of trade unions. From 180,000 units in 2000, Slovakia more than tripled car production to 570,000 units last year.

Analysts say the country’s economy, which joined the euro zone in January 2009, is now relatively healthy and has greater immunity against the crisis.

"The crisis has hit Slovakia in a relatively good condition," said Maria Valachyova, an analyst with Slovak bank Slovenska Sporitelna.

"Despite the fact that we won’t be able to avoid a slowdown, the economy won’t probably fall into recession like in other European countries."

Slovakia’s economy grew by 6.4 percent in 2008 after a record-fast pace of 10.4 percent the year before — the biggest growth in the EU. The government estimates the economy will grow by 0.8 percent in the first quarter of 2009.

The auto crisis has also hit other countries in Central and Eastern Europe.

In the Czech Republic, car production fell by 36 percent in January compared to January 2008, while in Romania the fall was 64 percent. In Poland, car production was down by 28.9 percent in February on a 12-month comparison.

But there is mounting evidence that there too companies are coping. Czech Volkswagen unit Skoda Auto has said it expects unit sales to show only a single-digit decline this year, compared to far steeper drops elsewhere.

TPCA, a joint venture of Toyota Motor Corporation and PSA Peugeot Citroen based in Kolin, east of Prague, recently said it hoped to keep production at the 2008 level of 324,289 units over the year.

"Flexible car makers capable of adapting to the demand and producing small and cheap models have the biggest chances of surviving," Valachyova said.

Local car makers also posted relatively good results last year: the Czech Skoda belonging to Volkswagen saw sales rise by 7.1 percent in 2008 with a record number of 674,530 units produced.

In Romania, Dacia registered a new record in global sales for 2008 with 258,000 units sold — an annual growth rate of 12.1 percent.

Slovakia’s biggest exporter Volkswagen raised its 2008 net profit by 26 percent to 283.5 million euros (383.7 million dollars) against a year before.

"Profit margins should not be substantially decreased since most operations have already been forced into lean and efficient structures due to pressure on global cost and good control of expenses," Andrew Sutherland, an automotive industry expert with KPMG in Prague told the magazine Czech Business Weekly.

A good sign for Slovakia is that Volkswagen is now planning to launch production of small family cars at its Slovak plant in Bratislava, with a decision on the 300-million-euro (406-million-dollar) investment expected soon.

Tatiana Bednarikova/AFP/Expatica