Auto manufacturers seem to be heading down an expressway to profits, although that road is taking some interesting new turns. With heightened competition from Asian producers and lower profit margins, Western auto assemblers – known in the industry as original equipment manufacturers (OEMs) – are turning to new markets where consumers have pent up demand and the money to purchase. Today, that means the markets of China, Russia and India – countries that 10 years ago would have barely made a blip on their radar screens.
Mature markets in western Europe and the US still offer opportunities for OEMs but those markets are developed, competitive and, therefore, tight. Car producers there stay ahead of the curve by designing and assembling sophisticated, yet fairly priced vehicles while accelerating in markets where consumer demand is high. The problem, according to Elias van Herwaarden, director, Fantus Location Strategies at Deloitte & Touche Corp Services in Brussels, is that auto manufacturers are one of the most traditional and staid manufacturing groups in the world. “Few will venture where no auto manufacturer has gone before,” he says.
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Racing east
In Europe, the expressway to developing markets has been paved by economic reforms and the EU’s expansion.
“In Europe, we never thought that we would be doing business and locating plants in once-communist countries that were considered our enemies,” says Mr van Herwaarden.
In Russia, in particular, an impressive increase in auto-related investment is taking place as manufacturers are seeking low-cost, highly skilled labour in a market with pent up demand. In October, Ford Motor Co revealed plans to invest $50m in upgrading its Russian plant to start assembling its new Focus model in May 2005. The reason: Russia’s booming demand for modern cars.
“We will begin to produce the new-generation Focus model in Vsevolozhsk near St Petersburg in May and will gradually start to replace the old model,” says Henrik Nensen, head of Ford in Russia.
Surge in demand
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Demand in Russia is booming due to five years of rapid economic growth that has put new cars within the financial reach of a burgeoning middle class. Ford was among the first OEMs to open a plant in Russia and its surging sales have prompted other producers, such as Toyota, Nissan and Volkswagen, to consider following suit.
Originally, Ford executives estimated that the company would sell 30,000 cars in Russia in 2004 (import models included) but the firm’s marketing and sales head in Russia, Sergei Bogdanov, says that the company has revised these estimates upwards by one-third. “Ford will produce 30,000 Focus cars in Russia, up from 16,000 last year, and import another 10,000 cars,” he says. “This will represent a 13% share of the market for foreign cars in Russia, imported or produced domestically.”
Ford executives reveal that the company is aiming to capture 10% of the Russian car market by 2010 – a market that is currently dominated by local manufacturer Ladas.
The rumour mills are already turning regarding German-US automotive giant DaimlerChrysler, which is reported to be seeking to establish its own assembly plant in Russia. Russian government sources, visiting Stuttgart recently, revealed to a German business newspaper that DaimlerChrysler is studying various possible sites, including one near St Petersburg where it had already purchased land. The facility, however, would assemble completely knocked-down (CKD) parts shipped from production plants outside of Russia, a strategy that Chrysler used in other developing markets.
German automaker BMW is the only premium class car assembler in Russia. It opened an assembly line in 1999 at the Kaliningrad-based Avtotor plant. The firm is certain that the opening of this line gave it a leading share of the Russian premium-class car market. The difference in price between cars produced in Kaliningrad and those imported directly from Germany is about 10%-15%. However, Russian analysts believe that if DaimlerChrysler decides to produce Mercedes Benz cars in Russia, it will have the same success as BMW.
Low-cost drive
Russia is another chapter in the story that began in the mid-1990s when auto manufacturers in Europe started to seek out lower-cost manufacturing locations. Portugal and Spain were among the early destinations, with Poland, the Czech Republic and Hungary following.
“By the second half of the 1990s, everybody was going to central Europe not just for simple technology, but for high-tech cars and components,” says Mr van Herwaarden. “Car manufacturers started looking toward the East the minute the Berlin Wall came down. The reason was because workers there are skilled, dedicated, enthusiastic and creative.”
General Motors (GM) is a prime example of that trend. In 1994, the company began assembling Opel Astras in Warsaw, then in 1998 in Gliwice, Poland, the Opel Vectra. Today, the Gliwice plant is regarded one of the most modern automotive factories in the world. The facility quickly became GM Poland’s main manufacturing centre, allowing closure of the Warsaw plant in June 2000.
Overall, GM has invested more than $650m in Opel Polska, implementing modern methods of management and production, qualified staff, high quality and environment-friendly solutions in designing its production processes. The Opel Polska plant is the largest foreign investment in the Katowice Special Economic Zone, employing more than 2200 people and exporting an average of 82% of its total production. Consequently, the number of suppliers that have located to Poland to supply GM has grown from six in 1997 to 73 today. These suppliers sell not only to the Opel plant but also to other GM units in Europe, North America, Asia and South America.
Michael Burns, president of GM Europe, says: “The flexibility, productivity and quality levels demonstrated at the Opel Polska plant are an excellent basis for the increased capacity utilisation going forward.”
Show of confidence
Further evidence of manufacturers’ confidence in the central European workforce is Valeo’s investment in a new technical centre in the Czech Republic’s capital city of Prague. Valeo is a supplier of components, integrated systems and modules for cars and trucks and it ranks among the world’s top automotive suppliers. The 1400 square-metre facility provides engineering support to heating, ventilation and air conditioning, and control panel programmes led by Valeo’s existing network of research and development (R&D) centres.
“The decision by a company like Valeo to locate in central Europe is not based on low labour costs,” says Mr van Herwaarden. “It is about skills, and dedicated and creative labour.”
Audi is expanding in Hungary for similar reasons. “Hungary comprises our third biggest operations in the Audi Group,” says Thomas Faustmann, CEO at Audi Hungary. Audi has been operating in a duty-free area near Gyor since 1992. The plant, which employs about 5000 people, produces almost the entire range of Audi engines.
“Audi’s investment in Hungary has had a positive effect on that country and has given the automobile industry a technological lead,” says Mr Faustmann. “We have been assembling our two strongest and most well-equipped Audi A3 models in Hungary and in two years’ time we will roll out a new model from the plant.” Mr Faustmann cites labour costs as part of the reason. “But the biggest advantage is the flexibility of the workforce to adjust to changes,” he says.
Even Romania is attracting a share of the industry, for similar reasons. In early November, TRW Automotive Holdings Corp, based in the US city of Michigan, opened its first plant in Romania. In early 2005, it will move into a new, purpose-built 41,000 square-foot plant located in Timisoara. This will double the size of the operation and increase employee numbers from 250 to about 1100 by the end of 2005. The initial phase of this project represents an investment of $16m.
Several companies, mainly German and American, have relocated or started production activities in western Romania. Mr van Herwaarden sees Romania as a good fit for auto manufacturers given that nation’s strong ties to Germany’s auto industry. “Romanian workers love to work for German companies,” he says. “And they cost 15%-20% less than workers in Germany.”
An added advantage for assemblers to locate in non-EU states, like Romania and Russia, is that such countries do not have the burden of adhering to EU rules and regulations.