Waiting for a thaw

During the auto industry's halcyon days just three years ago, Jarosław Kocoń, president of the Ital-Mot Fiat dealership, was selling up to 300 cars a month. "Back in 1999, consumers were optimistic, we looked to the future with confidence; the economy was stable and interest rates for loans were falling," he said. With his firm's turnover now reaching only 150-200 units per month, Kocoń is not the only auto dealer whose sales have sunk some 50% in the past two to three years. Wojciech Drzewiecki, president of car-market watcher Samar, estimated that 328,000 new cars were sold in Poland last year, 32% less than in 2000 and down 48% from a record 640,000 new vehicles sold in 1999. Meanwhile, used car imports have soared and in November 2001 surpassed the total number of new cars sold. The car industry, which continues to plunge deeper into crisis on the back of what it calls ill remedies concocted by the previous government, is now looking to Poland's three-month-old Democratic Left Alliance (SLD)-led administration for solutions to the sector's malaise. This week the industry may finally get some answers. The administration Jan. 15 is scheduled to adopt its policy for the automotive sector, according to Tomasz Bryzek, deputy director of the industrial policy department at the Economy Ministry. The former Solidarity Electoral Action (AWS)-led government set up a crisis team last year that included a fresh round of legislative proposals to save the ailing industry. But before those policies could become law the AWS lost parliamentary elections to SLD, which in October formed a coalition government with the Labor Union (UP) and the Peasants Party (PSL). "These proposals are now being examined by the new administration," Bryzek said. "Which and when these solutions will be implemented has yet to be decided." Carmakers and distributors have long called for a change in policy, which in their opinion has strongly contributed to the sector's woes. "In 1999, the first signs of an economic crisis emerged, so the government began to seek funds to fill the budget gap and decided that money can be squeezed out of the auto industry," Kocoń said. "An excise tax (6%) was put on cars in 2000, then VAT (value-added tax) deductions on petrol were eliminated, and finally interest rates were raised. All this began to put buyers off." Not in the driver's seat Meanwhile, consumers have had a tougher time thanks to an economic slowdown that has touched the majority of industries. "Many who could afford a car two years ago can hardly afford a tram ticket today," Kocoń said. Darek, 30, an IT-specialist, is saving up for his first car, but he won't buy it any time soon because the risks associated with taking out a car loan are too great right now. "The tough situation on the labor market scares people away from taking out a loan, because they don't know what things will be like in their company in half a year," he said. "Your job must be secure for two to three years to come if you want to buy a car." Like Darek, thousands of Poles have been holding out for better times to buy a new car. Poland recorded Europe's second-biggest - after Iceland - drop in car sales in 2001, while the EU recorded a slight market expansion, 0.57%, in the January-November 2001 period, according to Samar. While imports of new cars remained at a stable 1,300-2,000 units per month, it was mainly the local producers - Fiat, Daewoo and Opel - that suffered severe losses on the domestic market (see graph). "Domestic makers produce cars in the low-entry segment and this part of the market was hit hardest by the economic recession and unemployment concerns among buyers," Drzewiecki said. In the first 11 months of 2001, multinationals with a strong Polish manufacturing base saw local sales plummet. U.S.-based General Motors (GM) sold 31% fewer Opels than in the same period of 2000, while Italy's Fiat and Korea-based Daewoo saw sales dive 40% and 63% respectively. Against this backdrop, used cars from Western Europe have increasingly flooded the market. In February 2001 alone, Poles imported 23,400 used autos, many of which were junked though repairable cars sold at rock bottom prices by their foreign owners. In an attempt to help local producers, the government banned the import of junked cars in April, but the move failed to stem the flood of used car imports. "After the new regulations were introduced, many drivers switched from junked cars toward older autos," said Rafał Zwoliński, an auto industry specialist at the Economy Ministry. In 2001, most imported cars were less than four years old, while now more than 80% are older than four years, he said. So despite the restrictions, used car imports have continued to soar, and in November 2001 surpassed the total number of new cars sold (see graph on page 13). Greener pastures As a result, the nation's battered automakers are looking to foreign markets to offload their surpluses. "In light of the dramatic fall of sales on the Polish market, we and other Polish makers would be in much more trouble if not for exports," said Bogusław Cieślar, spokesman for Fiat Auto Poland (FAP). FAP is the biggest Polish exporter with 71% of its vehicles retailing abroad and comprising about 50% of the Tychy-based plant's sales revenue in 2001, Cieślar said. "Polish carmakers have the capacity to produce 1 million vehicles annually while the market can absorb a maximum of 700,000," said Stefan Bieliński, president of the Polish Motoring Chamber, which represents the car industry. "Exports are the key avenue and chance for a sales increase." Maybe so, but markets in Western Europe are already suffering from overcapacity and their potential to absorb further imports is limited. "Signals are coming that the European car market is beginning to shrink," Drzewiecki said. In addition, the złoty has remained strong for more than a year now, impairing the price competitiveness of Polish vehicles on European markets. "Carmakers like us, who produce both for the Polish market and for exports, are hit twice - by the crisis on the Polish market and by the very strong złoty. It has cost us a lot," FAP's Cieślar said. But fortunately for Fiat and GM-owned Opel, whose Polish factories produce only small models, they stand a good chance on the European market as small vehicles sell well in Europe, currently making up some 30% of the total market, according to Drzewiecki. With potential limited in the West, the industry is pinning its hopes on the emerging Eastern European markets. Countries like the Ukraine, Russia or the Baltic states may soon begin to buy a lot of Polish cars as their economies get onto stronger growth tracks, according to Bieliński. Drzewiecki agreed. "Eastern car markets will definitely develop, and Russia in particular," he said. Car sales in Russia, currently at about 950,000 a year, may easily surpass the 1 million mark once the economy gathers steam, Drzewiecki said. "It's a chance for us because small cars will sell well there," he said. Where has all the investment gone? The 1990s saw major foreign investments in Poland, as its 38 million people and low labor costs attracted global automakers, including Daewoo and Fiat, who bought and modernized two leading but outmoded plants, in Warsaw and Tychy respectively. But as the market's ability to absorb new car sales has waned, so has the flood of foreign investment. When France's PSA, producer of Peugeot and Citroën, and Japan's Toyota decided to jointly build a E 1.5 billion plant in Central Europe, Poland was short-listed last fall along with the Czech Republic and Hungary. At the time, many analysts speculated that Poland was the most likely choice, as Toyota already had a plant near Wałbrzych. In the end, the firms chose the Czech Republic last month, and even Prime Minister Leszek Miller admitted that the Czechs had created better conditions for the investment than Poland. "The Czechs were better prepared … they have a government agency that woos investors, we don't," Drzewiecki said. He also said that Poland is losing out on other potential investments in Central Europe, as the government shows less flexibility than those in other Central European governments. "We react more slowly and lose individual projects due to organizational inefficiency," Drzewiecki said. As new investments are going elsewhere, old ones are going bad. The greatest auto privatization scheme of the post-communist era, the sale of the Warsaw car plant Fabryka Samochodów Osobowych (FSO) to Korea's Daewoo, failed. After Daewoo Motor, the parent company of Warsaw's Daewoo-FSO was declared bankrupt in 2000, the annual sales of Warsaw-made vehicles slid by 63% to just 40,000 units in 2001 from 107,000 in 2000. "As a result of the crisis in the Daewoo corporation, customers lost confidence in the brand," Drzewiecki said. The government has been looking for a new investor to take over the troubled Warsaw plant, but so far unsuccessfully. While speculation is mounting about Daewoo-FSO's potential bankruptcy, its smaller sister plant in Lublin, Daewoo Motor Polska (DMP), a van maker, already declared insolvency last September. The government and the court-appointed receiver are now trying to attract an investor to save what is left of the plant and to finish the suspended construction of a second site in Lublin, planned for production of the new LD-100 van model. But they have also been unsuccessful. If no investor is found for Daewoo-FSO and DMP, these plants will collapse," Kocoń said. Drzewiecki said the chances of finding an investor were slim. "Investors prefer to build plants from scratch, and in the case of DMP and Daewoo-FSO, an investor would have to deal with the existing structures that have been there for years," he said. The auto industry believes that the creation of a friendly investment environment is the government's task. Representatives of the industry are calling on the new administration to develop a system of incentives for potential investors. "If the government wants to reduce unemployment, it should create a system for employment promotion with incentives for investors, as they create jobs," Bieliński said. "The incentives should include tax breaks for producers that employ new workers as well as price-free transfer of land for investment." While industry sources are still far from optimistic, they said the car market has already hit bottom and shouldn't get any worse this year. "If the government takes positive action, then there is a chance for some 5% growth in 2002," Drzewiecki said. Positive action would, according to Drzewiecki, include a reduction of the excise tax on cars and measures aimed at stifling the import of used cars. Used car registrations reached 41% of all car registrations in Poland in 2001, an increase from 15% in 1999. These measures could include tying the amount of the excise tax - normally a luxury tax but in Poland's case just another tax - to the age of the vehicle and raising technical standards required for registering cars. "Also, the central bank's interest rates should be lowered further because loans are still too expensive," Drzewiecki said. The outgoing government's plan included the aforementioned auto industry suggestions but it's now up to the new administration to decide on their implementation. "It's all in the government's hands now," Kocoń said. The Economy Ministry's Bryzek pointed to the change in the excise tax rates as the most important element of the outgoing Cabinet's plan. "The idea was to burden used and old cars with higher taxation while reducing tax rates on new autos, which would provoke the required absorption patterns from the market," he said. The industry is waiting for the new government's policy, which, for dealers like Kocoń, may prove crucial to their continued existence. In 1999, Kocoń said, 11 Fiat dealers were operating in Warsaw. Today there are five. "We have at least one more hard year before us," he said. "I hope we survive."