Inoculated Eastern Europe immune to world financial crisis

Will the financial crisis that has snaked through Asia, South America and Russia leaving chaos in its wake wreak havoc in Eastern Europe? That's the question and fear on everyone's mind.

Don't worry, say analysts who assure that Eastern Europe is still strong.

"The economies of Eastern Europe have really been able to distance themselves from Russia," says Paul Tibbitts, automotive analyst with PlanEcon.

There has been no hesitation or pullback by automakers investing in the region and none is expected as consumers in these emerging markets continue to demand cars. While small consumer goods retailers are seeing a decline in sales from Russians buying products and taking them across the border, automakers in Central and Eastern Europe continue to satisfy the domestic market.

Sums up Mr. Tibbitts, "Things are going well."

Individually, Poland remains the standout market with investment and sales expected to remain strong this year and in the near future.

During the first half of 1998 automakers invested about $1 billion in Poland, with another $1 billion to $2 billion more expected by the end of the year, says the Polish Agency for Foreign Investment (PAIZ). Last year there were 20 foreign automakers and suppliers operating in Poland. The number jumped to 31 after the first half of 1998.

Fiat SpA continues to be the largest player in Poland having shelled out $1. 9 billion in investments, according to PAIZ. But Daewoo Motor Co. Ltd. also has committed to the country with $1.2 billion in investments. General Motors Corp. has thrown its hat into the ring with a new $300 million Adam Opel AG factory in Gliwice, while Isuzu Motors Ltd. also will test the waters with a $364 million diesel engine factory in Tychy. Volkswagen AG also will invest $190 million in two plants set to open next year, while AB Volvo and Toyota Motor Corp. say they, too, will invest in Poland.

But will automakers realize the sales they are expecting from this emerging market? During the first half of this year, vehicle sales were up 8.2%. While larger than half-year sales increases in the U.S., Western Europe and Brazil, the number still is significantly lower than the 28% growth seen from 1996 to 1997.

Automakers hope to cash in on replacement sales as Poland's aging fleet gets older. The cars on Poland's roads are older than those in any other European Union country. About 5 million cars are 10 years or older while 2 million are 15 years or older, says PAIZ.

Those are the type of numbers that reinforce many automakers' commitments to the market , despite the small possibility of financial crisis spilling over into the country.

GM expects no residual effect in Poland from the turmoil in Russia. "I think we'll do quite well there," GM-Europe President Michael Burns says. The company is optimistic and is already grabbing sales. "We've got good strong growth there. It steadily will continue," he says.

But GM has some strong competitors in Poland. Daewoo has plans to wrest market share leadership away from Fiat by year's end. For the first nine months of 1998 Daewoo controlled 27.8% of the market, but Fiat was still holding on to the No. 1 spot with a 29.3% share. The Italian automaker won't give up without a fight. Fiat saw Poland as key when it decided to use it as a location to produce cars. Investment in the market is investment in the future, says Roberto Testore, chief executive officer of Fiat Auto.

"We must be ready to take these opportunities," he says.

The latest surveys say Poland will be one of the countries to see sales jump 50% on 1997 figures by 2007, he says. Although navigating the many financial crises in the world and in the region will be difficult, Fiat says it will not give up.

"We therefore do not intend to alter our underlying strategy," Mr. Testore says. "We shall not be intimidated by transitory difficulties into abandoning our expansion projects."

While many automakers use Poland to break out of the Western European market, Renault SA will use a slightly more southeastern country.

Turkey is set to play a key role in Renault's plan to become less reliant on France. The automaker has been present in Turkey for 27 years and now has 28% of the market.

"Starting from Turkey we are now developing the region, including all Mediterranean countries and all Black Sea countries," says Georges Douin, executive vice president-strategic and product planning international operations.

The automaker will use its long-standing presence in Turkey to develop not only Eastern Europe but the Middle East and Africa.

"We are convinced we can develop these regional sales from the Turkish post, " Mr. Douin says.

Renault's plant in Bursa, Turkey, will build 100,000 units this year and by 1999 reach its capacity of 160,000 units.

"Next year will be a very important step for this factory because it has just started to produce a new car, the Megane estate, which will be the unique site for the whole world," Mr. Douin says.

Long present in Slovenia with a manufacturing facility in Novo Mesto, Renault is also considering using Romania's government-owned Dacia as a way into the local market. The French automaker is looking into buying the company, which is scheduled to be privatized by the end of the year.

Renault could get a good deal on the company, which has strong brand recognition, but would have to invest heavily into Dacia once it was purchased.

Renault is not alone on the road to scoop up an Eastern European automaker with manufacturing expertise but little money. Hyundai Motor Co. Ltd. was once considered a front-runner for Dacia and is still on the prowl. Nearby, Yugoslavia's Zastava Yugo Automobili is said to be close to being bought by Peugeot SA. Daewoo, GM, Hyundai, Fiat and others all continue to look for investments in the area.

"We're fully aware . . . the road might not be smooth," says Fiat's Mr. Testore. "Ours is a hard job, but we don't want to give up."