An insider’s look at the East’s rapid growth

Skoda’s Vratislav Kulhanek recounts the region’s landmark changes and looks ahead to the next big events

Central Europe emerged from communism in 1989 with no world-class automakers and a fragmented, obsolete manufacturing base.

Decades of xenophobia by Eastern Bloc governments and their long-standing policies of favoring weapons technology over consumer goods left the East’s auto industry generations behind western Europe.

Indeed, Italy’s Fiat Auto was the former Soviet Bloc’s leading automaker by default. Through longstanding licensing deals with Poland’s FSO and Russia’s AvtoVAZ, as well as its own sales in the region, Fiat accounted for about six out of every 10 cars sold behind the former Iron Curtain in the 1970s and 1980s.

But Czechoslovakia’s Skoda stood apart, developing its own models and proprietary technology as an instrument of government policy.

“It was government policy that automobile production must be independent from the West,” said Vratislav Kulhanek, the head of Skoda’s supervisory board.

As one of Europe’s three oldest automakers, Skoda had a rich and time-tested culture of craftsmanship to fall back on in developing and producing its own vehicles. But it lacked access to state-of-the-art technology, and the finances to be able to buy it and apply it.

VW steps in

That problem was eliminated in 1991, when Volkswagen bought control of the Czech company. VW’s acquisition sparked a wave of investment that has forever changed the European automotive landscape, creating a modern, low-cost manufacturing counterweight to the industry’s high-cost plants in the West.

Since 1995, according to estimates by Deutsche Industriebank, Western and Asian automakers and suppliers have poured about E20 billion into new capacity in the region, comprising the Czech Republic, Slovakia, Poland, Hungary and Romania.

“Everything was here. It was no problem for international companies to find partners,” said Kulhanek, who joined Skoda in 1997 as chairman of the management board. “The only problem was technology.”

As they expanded in a bid to capitalize on the region’s low labor costs, Western automakers went on a binge of new plant construction, adding about 1 million units of vehicle capacity.

The second wave

A second wave of automotive investment, heavily Asian, is now coming on line, adding another 1 million units of new capacity to the region.

Kulhanek says the addition of so much automaking capacity in the region has helped – even forced – the supplier sector to become more mature and competitive.

“Five years ago, suppliers contributed about 30 percent of Czech automotive sector output, and Skoda made up 70 percent,” he said. “Now Skoda provides only about 45 percent.”

The entry of the Czech Republic, Slovakia, Poland and Hungary into the European Union in 2004 has brought greater labor mobility to the region. In Hungary, nearly one-third of Suzuki’s work force in Esztergom comes from neighboring Slovakia.

Next frontier

Kulhanek believes the auto industry’s next big move will be into Russia and the Ukraine.

GM, Ford, Hyundai and Renault already assemble some vehicles in Russia, and VW, Fiat and Toyota have firm plans to start.

“Russia at the moment is only vehicle assembly, nothing more,” he said. “They need to build a modern supplier industry. When they develop a strong supplier industry, I am sure they will get Western investment.”

The Ukraine needs to find a different business model than Russia, he advised. Ukrainian automaker ZAZ builds cars at home and at the former Daewoo FSO plant in Poland to export to Russia, and hopes to start sales within the EU.

“With a little help,” Kulhanek said, “[the Ukraine] could become another Poland” in terms of auto output.

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