A new report from international consulting firm PriceWaterhouseCoopers says automotive manufacturers, lured by the idea of lower costs, are increasingly setting up operations in Central and Eastern Europe.

But Canadians will see "no direct immediate impact" from the trend over the next few years, says Mark Walters, a tax-services partner in PriceWaterhouseCoopers' automotive industry group.

"The most at risk are probably the French or Belgians," he said in an interview. "Plus that your transportation costs from that region into North America would far outweigh any potential benefits."

Cost savings in Central and Eastern Europe must be balanced against a list of other factors, and companies should research any move carefully in advance, says the report, Eastern Influx: Automotive manufacturing in Central and Eastern Europe.

Dennis DesRosiers

"Flat sales, rising raw materials costs, increasing competition from Asia, overcapacity and falling car prices have all made the outlook for Western carmakers and their suppliers increasingly bleak," says the report. "So it is hardly surprising that they have been looking at every opportunity to reduce costs and - lured by the prospect of cheap labour - many of the industry leaders have moved into Central and Eastern Europe."

The report says between 1991 and 2006, automakers invested about $20 billion in the region, boosting its share of global automotive manufacturing from less than five per cent to 6.8 per cent.

That trend is expected to continue. It adds an estimated US$6 billion worth of automotive production will be moved to countries including the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia over the next five years.

Walters says labour costs might be lower in some areas, but because the industry is still relatively new there, finding skilled workers could be a challenge. Wages are only a small percentage of what their North American counterparts demand.

There are even regional wage differences in some countries. In the Czech Republic, for example, wages in Prague are 43 per cent higher than in Jizni Moravia and Severni Moravia.

Walters says if a company does try to move to an area to take advantage of lower wage costs, it has to also balance that against the availability of skilled labour and having the infrastructure required to support any manufacturing facility.

Railway and highway networks in some countries are poor, with traffic congestion quickly building as the volume of passenger and rail traffic increases. The report adds that many of the roads in Hungary, Poland and the Baltic States are not highways. About 14,000 km of new highways will be required over the next 10 years, simply to create a network comparable with the rest of the European Union, according to the European Union Road Federation.

"Any company wanting to move into that region really needs to do their homework. There are a lot of things that need to be taken into consideration that are not immediately apparent," explains Walters.

The report says there are also myths about doing business in Central and Eastern Europe.

Some people believe the level of political corruption, fraud and intellectual theft is much higher than it is in more developed countries.

"In fact, the political, economic and commercial climate is far more attractive than it is in many other parts of the world, although there are significant national variations," PriceWaterhouseCoopers' consultants writes.

"Some of what passes for common knowledge about Central and Eastern Europe is either incorrect or overstated. The eight states that joined the EU (European Union) in 2004 are politically and economically stable, and offer a favourable business environment - as shown by the high inflows of foreign direct investment they have already attracted. They are certainly not hotbeds of political corruption, economic crime, intellectual piracy or union activism," the report continues.

In a PriceWaterhouseCoopers global crime survey done in 2005, 45 per cent of companies worldwide reported that they had been victims of economic crime during the previous two years.

"The percentage of companies that reported experiencing such problems was marginally higher - at 47 per cent - in Central and Eastern Europe, suggesting that the prevalence of fraud is little more than the global average," the report said.

A 2006 study that looked at perceptions of corruption found that Estonia and Slovenia had achieved the greatest success in changing their image, putting them level with Spain and Portugal. Bulgaria, Poland and Romania "still have some way to go," however, PriceWaterhouseCoopers notes.

Everything started rolling for the region in 1990 when Japanese carmaker Suzuki built a new plant in Esztergom, Hungary. The company now produces 140,000 vehicles a year and is one of the country's largest employers.

Volkswagen moved into the Czech Republic the following year and other manufacturers, including Renault, Fiat and Audi, set up later in other nearby countries. After a while, the region was dubbed by analysts as the "new Detroit."

In his office near Detroit, automotive analyst Greg Gardner said the North American market is still firing on all cylinders when it comes to assembly. Gardner's employer - Harbour Consulting Group - released its carefully watched report in early June showing that two General Motors automotive plants in Oshawa are the most productive vehicle-assembly plants in North America.

The announcement came as a somewhat hollow victory for workers in the Toronto suburb, however. Despite finishing on top of the survey of 70 auto plants across the continent, both facilities are still facing an extensive construction overhaul and several thousand job losses.

Rounding out the top six list for manufacturing excellence was a Honda plant in Alliston, Ont., and the CAMI Automotive factory in Ingersoll, Ont., a joint venture between General Motors and Suzuki.

Canadian auto sales have been bullish so far this year, says Dennis DesRosiers, president of Toronto-based Dennis DesRosiers Automotive Consultants.

He notes this past May, dealers sold 185,471 units, setting a record for the highest monthly total in the history of the industry. The previous record was 183,000 units, set back in May 2002.

Capital spending on plants and equipment in the U.S. auto industry has declined sharply from $20 billion at the start of the decade to just over $12 billion in 2006, according to DesRosiers.

He adds during that same time period, Canadian auto industry investment has remained steady at about $3 billion. Meanwhile, Canada's percentage of North American investment has gone from 11.8 per cent in 2000 to 24.4 per cent for 2006.

Bank of Canada David Dodge hinted in early June the central bank might act sooner than expected this season and raise its key bank rate, pushing the consumer prime rate up slightly. That would make it more expensive for consumers to borrow money from major banks to finance large purchases such as automobiles. "This could have a slight effect on auto sales for the rest of the year, but not too dramatic," says DesRosiers.

The Associated Press reported in mid-June that General Motors, Ford and Chrysler were seeking substantial labour-cost reductions that would put them on a par with their Asian rivals during contract talks with the United Auto Workers, scheduled for later this summer.

Union spokespeople immediately told the wire service they had made major health-care concessions that saved Ford and GM billions already. Officials strongly hinted they were not prepared to give more, signaling it could be a difficult summer on the labour front.

(David Hatton can be reached at hatton@businessedge.ca)