New Gains, Old Problems

The countries of Eastern Europe have never walked in lockstep with their more established Western European brothers. Financial stability, political upheaval and poor infrastructure persist as major issues among the developing economies, as they continue their emergence from behind the former Iron Curtain.

It comes as little surprise then that the fragile status of the region's automakers has been affected only marginally by recent world events. There is, of course, the worry of lowered investment by foreign carmakers suffering from a recessionary breakdown at home in the post-Sept. 11 era.

Just as in Western Europe, automakers in the East already were struggling with overcapacity and see-saw demand. But while the terrorism crisis in America and the ensuing war in Afghanistan have deepened a slowdown in the U.S. and prompted West European carmakers to cut production by 630,000 units, or 8%, by next March, demand in the East has picked up.

Lithuania saw September new car sales hit record highs, jumping 56% to 726 units, compared with the year-ago period. Romanian sales also climbed, reaching 42,606 units in the year's first half, up 13% on the previous year, thanks primarily to Renault SA-controlled Dacia. Dacia's output year-on-year rose by 20.4% to 22,400, with sales totaling 19,862 cars, up 12.2% from like year-ago period. The automaker hopes to sell 74,500 cars this year with its budget Renault 12 copy and new SuperRNova.

Daewoo Automobile Romania SA, however, saw output fall 34.5% compared with year-ago period, while sport/utility vehicle maker ARO SA production fell by 26% to 311 units. Daewoo is No.2 in the Romanian market, but sales remain small. Only 4,471 Daewoo cars were sold in the first eight months. Low purchasing power is blamed in Romania; loans at affordable interest rates are said to be difficult to come by.

In Hungary, half Romania's size, new car registrations are twice that of the former. The recent introduction of the Volvo S60 diesel model in Bucharest has rekindled optimism for an overall sales increase. Volvo, in fact, is hoping to capture 26% to 30% market share this year against 22% in 2000. Volvo's official importer says plans for the next two years call for more than $4 million in investments aimed at the development of a nationwide network of dealers.

Czech Republic carmaker Skoda Auto a.s. — a subsidiary of Volkswagen AG and the country's largest exporter — saw its profits hit by a strong Czech (crown) currency. Skoda still expects profits to beat last year's net profit of $91.3 million. The Czech government, meanwhile, is striving for membership in the European Union in 2004.

German Chancellor Gerhard Schroeder in a published report says Volkswagen's investment at Skoda over the last decade is a good example of how Eastern European automakers can modernize. Poor manufacturing quality of outdated cars has been the hallmark of automakers of the communist era. Skoda, for example, has seen sales more than double since its takeover by VW, to 435,403 cars last year.

Russian President Vladimir Putin in October called on that country's automakers to step up quality and production of passenger cars, Russian news agencies report. Building quality cars at an affordable price is the “most important task” for the domestic industry, he says. Russia last year produced 969,000 passenger cars — a mere 66 cars for every 10,000 people among the 147 million population. Mr. Putin would like to see 300,000 more cars produced annually by 2006.

Russia, meanwhile, hopes its plan to raise customs duties on used car imports will stem the glut of cheap cars flowing into the country. Reports say Russia last year imported nearly 48,000 new Western cars, down 15% from the year prior, while imported used cars swelled by more than 90% to 155,000. Nevertheless, the country is seen by foreign carmakers as an opportunity for growth. Ford Motor Co. and BMW AG both have or are planning operations there. General Motors in June finalized plans with AvtoVAZ, Russia's largest carmaker, to form a joint venture to build sport/utility vehicles badged as Chevrolets.

Foreign automakers are cautious with their forecasts in a country where the average monthly salary is $100. All the same, Ford, which sells cars ranging from $14,000 to $75,000, reportedly expects sales to more than triple this year to 4,500 units, hitting 27,000 in 2005. Czech Skoda says it will boost sales to 8,000 cars by year's end, while Mercedes-Benz posted a 61% gain in the year's first half to 1,707 vehicles. None yet measures up to AvtoVAZ's 705,571 cars produced in 2000.

The region's most troubled spot is Poland, where prospects remain dismal, with a 57.4% drop in passenger car production in the year's first half and new car sales sliding 31% in the period to 191,081 units compared with year-ago figures. Analysts say high interest rates and rising fuel prices are weighing down the country's car market — once thought to be the crown jewel of Eastern Europe.