Central Europe poised to be automaking giant

Not so long ago, central Europe's highways and driveways were home to aging jalopies. In the next decade, however, the region is likely to emerge as a major new-model production center where output could approach that of France.

It is a prospect that unnerves government and union leaders in Western Europe ahead of the European Union's enlargement toward the east. Unions in France and Spain have already made clear their objections.

Spanish authorities expressed concern at the recent decision by Seat, controlled by the Volkswagen group, to transfer part of its production of the Ibiza model to the Slovak capital Bratislava.

But industry analysts say current members of the EU need not worry too much about a massive relocation of their auto plants, primarily because the cost of shutting down a factory and compensating laid-off workers is prohibitive.

"Despite their investments in Spain and Portugal in the 1980s, German automakers have continued to step up local production," said Karl-Heinz Bienewitz of the German Automobile Industry Federation.

Nonetheless, Western Europe cannot afford to be complacent and can no longer count on a steady and heavy automobile-sector investment flow.

"All the new plants opened by auto manufacturers or components makers are now establishing themselves in Eastern Europe," noted Gaetan Toulemonde, an analyst with Deutsche Bank.

Peugeot Citroen of France, for example, has just announced plans to build a new plant somewhere in Central Europe that will have an annual production capacity of at least 300,000 vehicles.

The regions under consideration by Peugeot are located in the Czech Republic, Slovakia, Poland and Hungary, where some 1.1 million vehicles were turned out last year.

Projections by the French Economy Ministry put production in Central Europe - including Slovenia and Romania - at around 2.8 million units by 2010, compared with 2.21 million in Spain and 3.18 million in France last year.

Cheaper labor costs constitute Central Europe's attraction to auto manufacturers. Salaries in the region equal, at most, 25 percent of those in France and 15 percent of German wages.

"Weak labor costs in these countries are clearly a determining factor," said Peugeot Citroen chairman Jean-Martin Folz.

But the region also offers an experienced workforce that produced trucks, buses and armored vehicles during the Soviet era.

European automakers since the fall of Communism 13 years ago have invested 15 billion euros in former Soviet bloc countries and have benefited from generous tax exemptions and state subsidies.

In addition to assembly plants, the region has units to manufacture engines and spare parts of all kinds. Auto component producers are expected to follow their clients into Central Europe, hoping as well to take advantage of cheaper labor than in their home markets.

Eastern and Central Europe also offer a market that is far from saturated with cars. Automobile ownership among the 105 million inhabitants of the 10 formerly Communist countries that are candidates to join the EU is proportionally half that of the EU at present.

Of the cars now in circulation, millions are still late-model rattletraps that sometimes end their days abandoned by the side of the road. Candidate countries closest to EU accession are currently trying to recycle such vehicles before 2004 but infrastructure is lacking and costs are high.

Bulgaria, although unlikely to be able to join the EU before 2007, today resembles a giant auto cemetery, where an estimated 600,000 vehicles are rusting in streets and yards, according to the Environment Ministry. More than 400,000 of them are no longer of any use - not even for spare parts.

Such eyesores were to have been removed and recycled according to a 1997 decree. But to date only 500 vehicles - mostly in the capital Sofia - have been affected by the directive.

In Slovakia, used cars arriving from western Europe are often declared as sources of spare parts, for customs purposes, but are then placed in circulation with license plates from even older - but still registered - vehicles.

Car owners in candidate countries such as Hungary and Slovenia have been trying to recycle their old cars but cost has proved to be a major constraint.

As a result streets, fields and forests in Hungary are sometimes littered with abandoned vehicles. Each year some 130,000 cars are declared unfit for the road.