Europe’s Momentum Moves East in 2006

Special Report

2006 Year in Review

As 2006 drew to a close, the map of Europe looked the same as it did in 2005.

But a tide of socio-economic change steadily gathered strength and carried with it investment windfalls that expanded eastward the borders of Europe’s auto industry.

France’s PSA Peugeot Citroen embodied this shift, in microcosm.

In mid-second quarter, the auto maker opened its first wholly owned plant in Eastern Europe – a €700 million ($880 million) site in Trnava, Slovakia, to accommodate production of Peugeot’s all-important 207 sedan.

In September, a second production shift was added. And the following month, PSA’s Jean-Martin Folz heaped praise on the project for meeting “all our objectives” and announced the auto maker was studying a move to expand further east.

“We are exploring different types of solutions to produce cars in Russia,” he said.

Some auto makers did not stop there as Italy’s Fiat Automobiles SpA, arguably Europe’s turnaround success story of the year, announced joint ventures with China-based Chery Automobile Co. Ltd. and Tata Motors Ltd. of India.

In October, Fiat signed a memorandum of understanding that would see Chery supply 1.6L and 1.8L gasoline engines for application in Fiat cars sold in China and elsewhere.

Two months later, the Italian auto maker inked a landmark agreement with Tata to accommodate production of Fiat and Tata vehicles at Fiat’s plant in Ranjangaon, Maharashtra.

“This is a strategic partnership which is evolving,” Fiat Group CEO Sergio Marchionne said of the Tata tie-up. But the remark could have applied to any of several similar agreements negotiated by Fiat.

Maturing economies east of Europe’s traditional core, along with growing labor-cost disparity, contributed mightily to this change in climate.

Western Europe Sales Rose 1.3%

Western Europe – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the U.K. – enjoyed a modest 1.3% growth in light vehicle sales, according to Ward’s data.

Meanwhile, the Baltic states of Latvia, Lithuania and Estonia saw new car demand in 2006 rise by 52%, 33% and 29%, respectively, according to a report by Global Insight Inc.

And the European Union was poised to expand to 27 member nations on Jan. 1, 2007 – bolstered by Romania and Bulgaria. Global Insight said those countries enjoyed auto sales jumps of 19% and 23%, respectively.

This increased buying power was fueled by an expansion of Europe’s manufacturing base which stemmed, in part, from improving worker skill levels and “benign” labor unions, according to another study by PricewaterhouseCoopers.

It described the quality of the workforce in Eastern and Central Europe as “very high,” and therein was a “large pool of factory operatives skilled in metal cutting, bending, welding, plastics, tooling, assembly and finishing.”

Most were under the age of 35 and proficient in English. Other languages commonly spoken included German, French, Italian, Spanish and Russian.

However, the “single biggest reason for migrating to Central and Eastern Europe is the potential labor savings,” the consulting firm said, adding the average monthly labor cost in the core EU states was $3,658.

In Romania, this figure was $402, while in Bulgaria, it was $219.

“Even in Slovenia, which has the highest wages in the region, the average is still only 42.7% of (the EU states),” PricewaterhouseCoopers said. This translates to $1,562.

This disparity was not lost on labor unions, whose response indicated they intend to be something other than “benign” in the emerging economies.

“We are fighting very, very hard to strengthen the trade union movement in countries like Slovakia,” said Marcello Malentacchi, general secretary of the International Metalworkers Federation, an umbrella organization for dominant European auto industry unions such as IG Metall and Amicus.

“The level of unionization in the eastern countries is often higher than in the western countries,” Malentacchi told Ward’s. “But obviously, please keep in mind they come from a tradition where trade unions were forced on them. So they’re not necessarily (enthusiastic).”

However, he added, unions in those regions are becoming “more and more active.”

Eurozone Grew 2.7%

Against a backdrop that saw the entire Eurozone’s economy grow by just over 2.7%, its best performance since 2000, auto makers it seemed, were no less active. In 2006, Europe’s two largest auto makers – Volkswagen AG and PSA – saw their respective leadership structures get overhauled.

Meanwhile, BMW AG saw a change at the top while Marchionne revealed he would appoint his successor – on the automotive side of Fiat’s business – sometime in 2007.

Despite VW’s improving fortunes, behind-the-scenes conflicts contributed to the ouster of CEO Bernd Pischetsrieder. Effective Jan. 1, 2007, his job was scheduled to go to Martin Winterkorn, a protege of VW Chairman Ferdinand Piech who also led the auto maker’s Audi operations to record achievements in 2006.

Similarly, PSA’s Folz announced in September that he would step down. The auto maker’s supervisory board, where six of the 12 seats were held by the Peugeot family, selected Christian Streiff as Folz’s successor.

An auto industry outsider, Streiff’s career was highlighted by a lengthy tenure at the helm of glass-maker St. Gobain and a shorter stint as CEO of Airbus.

“The arrival of Streiff symbolizes the need for radical changes at PSA,” according to a report by Global Insight. “After a successful period that peaked in 2002 when the car maker’s model line was on average less than four years old, the fortunes of PSA have deteriorated swiftly, in line with falling sales in Western Europe and a rapidly aging model range.”

Noting that disappointing sales of key products such as the 1007 and 407 led the auto maker to issue profit warnings, the report added: “The company faces new challenges and needs a new strategy.”

PSA earned €800 million ($1.04 billion) in 2006, down 1.4% from 2005.

Worldwide, PSA’s sales declined slightly by 0.7% to 3.37 million units, the auto maker reported. Its sales in international markets rose 4%, against a 2.7% decline in Western Europe.

The redesigned Peugeot 207, introduced in April, exceeded by 8,000 the auto maker’s first-year target of 300,000 unit sales. Total sales of the brand’s entire compact-car lineup – the 107, 206, 207 and 1007 – rose nearly 20% in 2006.

October saw the successful launch of Citroen’s small people-mover, the C4 Picasso. More than 24,000 units were sold, boosting sales of the brand’s mid-range MPV lineup by more than 11%.

Benefiting from the second-half introductions of the new-generation Peugeot Boxer and Citroën Relay, the auto maker led the European light commercial vehicle market.

The Boxer shared its platform with the Fiat Ducato – the result of a longstanding joint venture between PSA and Fiat Auto SpA. The models introduced in 2006 represented the third generation of those vehicles, assembled at the Sevel Sur JV factory in Italy.

For Fiat, 2006 marked a key chapter in its ongoing turnaround by recording its first profit since 2000. The auto maker reported a trading profit of €291 million ($378.4 million), a €572 million ($743 million) swing from 2005 when it lost €281 million ($365 million).

The auto maker benefited heavily from the Grande Punto’s first full year of sales.

Fiat also made headlines with plans to renew its Alfa Romeo brand. The 450-hp 8C Competizione sports car, partially engineered by Maserati, debuted at the Paris auto show along with plans to sell the €135,000 ($171,000) vehicle in 2007.

“You need a car like this to make people aware of the fact (Alfa offers) a huge amount of technical know-how and engineering know-how,” Marchionne said.

Arguably, the auto maker’s most important unveiling in 2006 involved a new Fiat logo, which featured elongated white letters against a red background. Encased in a round, chrome frame, it had a three-dimensional appearance that suggested “Italian design, dynamism and a strong personality,” the auto maker explained.

“We have decided to acknowledge the progress achieved so far, by changing our logo, as a tangible sign of the new impetus that is projecting us towards future challenges,” said Luca De Meo, Fiat brand president. “This is why the new logo will make its debut (in 2007) on the front of the new Bravo, before being gradually adopted on all Fiat models.”

New Head at BMW

At BMW AG, Management Board Chairman Helmut Panke went out on top, stepping down from his post in favor of Norbert Reinhofer as the luxury vehicle maker recorded its “most successful year ever.”

Pre-tax profit topped the €4-billion mark for the first time in 2006 at €4.1 billion – an increase of 25.5% over 2005. Net profit was €2.9 billion, which was 28.4% better than the previous year.

Margins could have been higher if not for the rising cost of oil and other materials, the auto maker suggested in its annual report.

“The price of precious metals has been rising for several years,” the report said. “During the first half of 2006, pace of increase accelerated even faster in some cases. Market prices dipped a little during the summer months before stabilizing at a high level towards the end of the year.”

Factoring in sales of its Rolls-Royce and Mini-brand cars, BMW sold a total of 1.4 million vehicles in 2006, 3.5% more than it sold the previous year. And because nearly 1.2 million units of the 2006 total bore the black-and-blue propeller badge of its core brand, BMW claimed the title of world’s top-selling luxury car brand.

Spearheading BMW’s market push were the 1-Series, with nearly 152,000 deliveries, and the 3-Series. The latter line was highlighted by the 2006 debut of the 3-Series coupe, powered by BMW’s first turbocharged engine since the introduction of the 745i sedan in 1981.

BMW AG launched the hydrogen-powered H7 sedan in 2006.

The 335i coupe served as the initial application for BMW’s N54-model 3.0L twin-turbo I-6. The 300-hp mill had a combined city/highway fuel-economy rating of 24.5 mpg (9.6 L/100 km), thanks to its 6-speed Steptronic automatic transmission and direct injection from piezohydraulic fuel injectors.

BMW also noted a spike in diesel-powered cars. In 2006, 40% of its cars boasted diesel mills, up from 39% and 34% in 2005 and 2004, respectively.

In Portugal, 91% of all new BMW vehicles featured diesel engines.

Pushing the technology envelope further, BMW rolled out a test fleet of 100 V-12-equipped 7-Series sedans that could run on gasoline or liquid hydrogen. The H7 was destined for a hand-picked group of customers in London, Berlin, Frankfurt, Milan, Los Angeles and Washington D.C., Beijing and Shanghai.

This advanced experiment complemented a European Commission draft proposal, published in July, which advocated the accelerated introduction of zero-emission, hydrogen-powered vehicles.

“Hydrogen propulsion will reduce the emission of greenhouse gases and improve air quality in Europe,” said Commission Vice-President Günter Verheugen, who also is responsible for enterprise and industry policy. “The market introduction of such vehicles, thus, could entail a boost for Europe’s competitiveness and a significant improvement to the environment.”

Suffering from a production slow-down to accommodate the introduction of a redesigned ’07 Mini Cooper, the sporty small car racked up sales of just 188,000 units.

But Rolls-Royce claimed to be the “most successful motor vehicle” in the ultra-luxury segment with 805 deliveries worldwide.

At Renault SA, CEO Carlos Ghosn was distracted by an exercise to explore an alliance with General Motors Corp. After spending 10 weeks evaluating the proposition put forward by GM shareholder Kirk Kerkorian, Ghosn declared “the timing isn’t right” for such a move.

“It was clear that our shareholders were worried about it, and I’m sensitive to that,” he said. “Their concern was they didn’t want us to stretch ourselves too thin. My job is to create value for our stakeholders, so we (talked to GM). It didn’t go through. Fine. I learned a lot. Next time we talk (with another auto maker) it will be at a moment when we’re sure it is what our shareholders want. (But) today is not the right moment.”

Ghosn instead re-dedicated himself to “Renault Commitment 2009,” which calls for the auto maker to enter new 13 market segments and increase vehicle sales by 800,000 units by 2010.

Until that plan is realized, there is “no chance” of adding taking on another partner, he said.

Renault’s 2006 net income, not counting contributions from its stakes in Nissan Motor Co. Ltd. and Volvo, fell to €2.9 billion euros ($3.9 billion) from €3.5 billion ($4.7 billion) in 2005.

The auto maker’s key product instructions in 2006 included the entry-level Logan MCV, which launched in the fall, and the Twingo concept vehicle. Both were unveiled at the Paris auto show.

Demand was high for all-wheel-drive Porsche 911 4s.

Citing growth in places such as China and the Middle East, Porsche AG enjoyed a net income of €1.4 billion ($1.9 billion), up from €779 million ($1 billion) in 2005.

“(International markets) account for 13% of deliveries to customers and have thus become a veritable pillar for Porsche’s business,” the auto maker said. “Dependence on the German home market, which accounted for only 15%, and the North American market (39%), continues to fall.”

Porsche attributed its success, in part, to demand for the all-wheel-drive versions of its 911 model, along with the new 911 Turbo.

“With 33,088 units, we have never sold as many 911 models,” the auto maker said. “In many markets, the 911 dominates (its segment).”

The same was true of the Porsche Cayenne SUV, though the entry-level Boxster was said to “hold its own” in a highly competitive segment.

Emissions Rules Tightened

Meanwhile, the EC finished the year on a high note by ratcheting up its emissions requirements for nitrogen oxides (NOx) and particulates. Effective Sept. 1, 2009, the new standards (known as Euro 5 and 6) will require an 80% reduction in the particulate emissions from diesel-powered cars.

“This makes the introduction of particle filters for diesel cars obligatory,” the EC said.

Euro 6 will significantly lower NOx emission limits to 68% below 2006 levels, effective in 2014.

“The Euro 5 and 6 regulation is important for improving the environmental performance of vehicles,” Verheugen said. “At the same time, it will not hamper the competitiveness of the EU’s car industry. It can count on a reasonable lead time to properly plan for and react to these requirements.”

In addition, standardized test procedures for measuring emissions from heavy-duty vehicles and on on-board diagnostic systems were approved in 2006. The aim of this measure, the EC said, was to “ensure that real-life emissions conditions are better reflected in testing procedures.”

On the manufacturing front, Magna Steyr Fahrzeugtechnik AG & Co. KG grabbed the spotlight by winning J.D. Power’s Gold Award for quality. The Magna International Inc. subsidiary’s assembly plant in Austria was rated tops in Europe.

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