E. Europe Inches Its Way Ahead in the Auto Business

FOR most of Eastern Europe, the wave of Western investment expected after 1989 never materialized. Manufacturing is almost synonymous with bankruptcy and layoffs, as inefficient and capital-starved enterprises buckle under market forces.

But Hungary, Poland, and the Czech Republic have had remarkable success in attracting European automakers to set up operations in a sharp contrast with other industrial sectors. Fiat, Suzuki, and General Motors Europe produce cars here. The automobile industry has accounted for one-third of foreign investment in Poland over the past four years. Volkswagen's $410 million investment in Czech carmaker Skoda is the Czech Republic's largest, and Audi's planned $186 million outlay at a new components plant in Gyor may top the list of Hungarian investors.

``The sector has certainly been one of the bright spots,'' says Peter Gresiczki, who until recently was director general for external relations at Hungary's ministry for industry.

Hungarian officials used a combination of customs incentives, employment and infrastructure subsidies, and lengthy corporate tax holidays to draw European carmakers here. The Soviet trading system had denied Hungary a passenger car industry of its own. And foreign carmakers were willing to build new factories here.

``Coming to Hungary was a strategic move to look for future markets in the East,'' says Andras Danos of General Motors Hungary, which has invested $248 million in Szentgotthard. ``But the principal reason to build cars here was to supply the Hungarian market.''

GM's locally produced Opel Astras have captured a large share of the Hungarian market, although the cheap Russian-produced Lada remains the market leader. There is strong demand for passenger cars here, as ownership density is still considerably less than in the West. The average car in Hungary is 14 years old. In the Czech Republic the average is 17 years. By assembling cars locally, producers avoid heavy import tariffs, fees, and taxes which range from 19 percent in Hungary to as high as 80 percent in Poland.

``Production is still on a small scale so we need these tariffs to remain competitive,'' says Gabor Kozdy, deputy manager of Magyar Suzuki. The $185 million plant in Ksztergom began producing Suzuki Swifts earlier this year. In the future, many Hungarian-built Swifts will find their way to West Europe. Hungary, the Czech Republic, and Poland have signed association agreements with the European Community which hold out the prospect of duty-free export to the European market.

``The main reason foreign automakers are coming here is because they were looking for a place where they could make some money and push down costs,'' says Laszlo Kanyo, spokesman for general importer Porsche Hungaria. ``They can save at least 30 to 40 percent on wages and production costs by coming to Hungary.'' The labor issue is one that the carmakers prefer to underplay. When nonwage costs are included, a skilled German worker costs 10 times as much to employ as his Czech or Polish counterpart. Magyar Suzuki has been involved in wage disputes with its workers for several weeks.

But the advantages of Western investment are clear. Skoda has been able to modernize its production line and vehicle designs since selling a 31 percent stake to the Volkswagen group. VW recently announced that carmakers will build systems of domestic suppliers in the countries they work in. ``This subcontracting circle could be the catalyst for changing the way of thinking because quality demands of [the Western carmakers] are very high,'' Mr. Gresiczki says.

Hungary may be surpassed by Poland and the Czech Republic, according to Larry Hinkle, managing director of Ford Hungaria. The 10-year tax holidays that helped bring Suzuki, Ford, and GM to Hungary may not be offered to new investors if proposed legislation is approved.