The increasing flow of people between countries has been a hot topic for discussions and arguments in the past years. Emigration and immigration are the main drivers behind globalization. With the transformations people are experiencing under these conditions, goods are too, moving faster than ever. And so are vehicles. The flow of vehicles between people and countries is changing the future of the automotive industry.
European Cars: Born in the West, Dying in the East
Automakers are already suffering from behavioral trends in youngsters. The lack of desire to own a vehicle and the desire to share possessions instead is harmful to sales in the industry. This tendency is quite noticeable in Europe. And while in Western Europe, automakers are solving these problems through technological innovations and interactive experiences, Eastern Europe is going on another path.
Production over Sales
Ever since the fall of the Berlin Wall, Western European automakers have been largely outsourcing their production facilities to the eastern parts of the continent. The region has replaced the inefficiency and low standards of Soviet-era manufacturing with some of the most modern and productive plants in Europe. For example, Daimler’s production in Romania and Hungary grew by 14% in 2013 only.
According to Financial Тimes, Eastern Europe has been the only large region apart from China to increase its market share of car production in the last 15 years. By establishing production facilities in the East, companies do not only hope to expand their network but also evade taxes and tariffs. Reduced variable costs due to lower raw material costs and lower fixed costs due to lower wages will improve profitability for automakers.
According to Forbes’ findings, “while hourly labor costs in Germany range from €40-€52, the costs decrease to €13 per hour in Hungary, and to below €5 per hour in Romania and Bulgaria.”
The Benefits of Outsourcing for Automakers
Recently, Audi announced that the company is shifting production to existing lower-cost plants in Eastern Europe. The premium automaker will assemble two new models in Volkswagen plants in Slovakia and Hungary. The brand will start building a full-sized Q8 SUV at a factory in Bratislava, Slovakia, next year and in 2019 add the sporty, coupe-style Q4 SUV in Gyor, Hungary.
The upcoming changes certainly bring excitement about the brand in the region. Moreover, the automaker is not only increasing its brand value but also disrupting the manufacturing environment in a positive way. Thanks to the Gyor production plant, Audi won the title of the “most attractive employer” in Hungary six years in a row. The presence of automakers in the region is also helping their image as an employer brand.
In that sense, the automaker’s presence in the region contributes more to the overall brand image than the monthly balance sheet.
When It Comes to Sales…
The region is quite famous with the import of cars once considered modern and new in Western countries. They come to live their second life in the Balkans and the neighboring countries. These markets have a tendency of increasing average age of their auto parks. In Bulgaria, for example, nearly 50% of the vehicles registered in the country are of age 20 or older. People buy an old car only to pass it along in a few years to another owner that will take care of it until it dies out.
In Eastern Europe, the exchange and sale of the already used vehicle are nothing spectacular. It’s almost like neighbors swapping sugar for eggs at their doorsteps. If you ever lived in the region, you wouldn’t even think about this as a phenomenon. Nobody does anymore. Whether it is your neighbor’s old car or an old car from your neighbor country, it doesn’t matter. The point is that the car is cheap and it isn’t falling apart (just yet). Who cares that there are a million newer models somewhere out there in the West? As long as it can handle your trip to the seaside, you’ll take it.
But why is that? Is it that people in the East do not want to have safer, modern and better-equipped vehicles?
The Division between East and West
Generally, the demand for new cars in Eastern Europe is low. Instead, people rely highly on second-hand vehicles imported from Western countries. But this is predefined by certain economic and social factors in the region. There are some major differences between the West and “the poor East” that affect people’s buying potential and purchase habits in the category.
Priorities vs. Realities
In Eastern Europe, many people are still getting their hands on a personal vehicle for the first time. In the past, most families used to have only one vehicle. Today, this is changing as more people have the desire to touch that western freedom. The focus in the region is still on mobility. As more people look for job opportunities outside of their local community, mobility solutions become a necessity. Cheap mobility solutions, to be precise. This alignment of priorities puts factors such as depreciation and CO2 emissions further down the checklist.
Electric vehicles are also just a dream to the majority of countries in the post-Soviet bloc. At the same time, however, the West already considers them a common sight in the streets. The consciousness about the environmental impact of cars is much higher among people in Western Europe than in the East. Some even consider the flow of second-hand cars to the Eastern region as an act of exporting pollution.
It’s not that the people in the East are less educated or poorly informed. It’s just that their priorities are still focused on practicalities rather than self-actualization. This scheme of things largely defines their choice for second-hand vehicles.
Outsourced Production vs Local Market
Some Central and Eastern European (CEE) countries — notably the Czech Republic and Slovakia — are exporting large numbers of vehicles while their domestic markets remain small. These two countries produce more than five times their levels of domestic demand. Therefore, plants in these countries operate almost entirely independently of the local market, relying on high demand in the destination countries in Western Europe.
Apart from the increase in brand equity, automakers do not get much financial profit from the local market. The produced vehicles are shipped back to countries like Germany, France, and the UK. Locals receive only the second-hand models that local entrepreneurs buy from abroad and bring to their countries. As one might expect, the three big countries Poland, the Czech Republic, and Hungary are the predominant sales markets, accounting for nearly 80% of all new car registrations in the Eastern region. The others still rely on their cousins who travel West to bring the second-hand option with the best price-quality ratio.
Market Potential vs. Financial Incapability
The living standard in the East remains the biggest obstacle for automakers. Income levels are generally lower, but the negative demographic trends are only making the situation worse. However, automakers expect vehicle sales to grow in the next couple of years. As economic activity begins to pick up in Eastern Europe, combined with lower vehicle ownership rates, automakers and dealers hope to see an increase in sales. With wages as low as €5, however, this might be hard. People in these countries do not believe in big automotive companies because they seem too fancy for them.
The brands that will most likely enjoy the increase in buying power in the East are the ones positioned in the middle segment. The “modest ones,” as automakers call them. Skoda, and Volkswagen, for example. Audi is still far from being a mass market choice in Eastern Europe unless we consider the 90s models. Which, surprisingly or not, are still an attractive view in the streets of Eastern Europe.
The Glorious Life of a VW Golf
Germany is the most common source of second-hand vehicles for Eastern European countries. The Volkswagen is one of the brands that experience the highest number of trips across Europe. A true traveler indeed. The “Car of the people” after all. Literally. All people.
The Volkswagen Golf was first produced in 1974 and since then has become famous not only in Europe but also in North America and China. And no wonder. Currently, it is manufactured in Germany, Spain, and Slovakia. This huge exposure to the population of the world made the Golf a true success. In 2009, the brand won the title “World Car of the Year”.
So imagine the popularity of this brand, the demand it enjoys and the distances it travels until it reaches the right owner. They enjoy it for a while until they realize the Golf is too mediocre or just too small for them. Then what? They sell it. The Volkswagen Group has produced seven generations of the Golf, so it’s highly likely that even if you upgraded a couple of times, eventually you would want to drive something different. Maybe a Beetle?
Still, your car becomes “an old vehicle” the moment you take it out of the dealer’s lot. So now it is even cheaper. Thus, more affordable for that Eastern European who comes in with the trailers to fill in his portfolio.
The Resurrection in the East
From then on, the Volkswagen Golf begins a new life. A glorious life.
The Golf is the most wanted graduation gift among teenagers. It’s common in Eastern Europe that you would get a car from your parents as soon as you finish school. There’s a high chance this used to be your dad’s old Golf, but hey, as long as it’s good for driving around, you won’t mind. If you are a girl, this would be the last step to independence!
The Volkswagen Golf in Eastern Europe is youngsters’ first real possession. It is a family heritage passed down from one generation to another. A toy for the truly handy man, and a symbol of social status for the brave Eastern European woman who sticks it to her comrades in the city traffic. It is the car everyone goes through.
This is why the Volkswagen Golf has been topping the monthly sales figures in Eastern European countries for all models for a very long time. The Volkswagen Golf VII was even announced European car of the year in 2013. In Bulgaria, for example, The Volkswagen is the brand that dominates the auto park in the country. In 2016, there were more than 485,000 VW vehicles in the country. For comparison, Audi was enjoying less than a third of this number (a little over 176,000). Reality is nobody would mind driving an Audi. But few can actually afford one. Even if it’s second-hand.
The Indian Summer in the East
In the end, we would like to look at the current scheme of things as a chance for each vehicle to have a happier elderly life. If it weren’t for Eastern markets, old cars would die in Western metal landfill much sooner, wouldn’t they? We can’t keep our eyes closed to the potential safety and environmental threats old vehicles cause, however. There must be active control of the import of second-hand vehicles in the East in order to ensure their good quality and reliability. And we hope to see serious regulations passed soon.
The true problem, however, lies further from Eastern Europe. It gets worse when we start talking about developing countries. Eastern Europe is enjoying an increase in automotive sales, so there shouldn’t be much concern about realizing the market potential there. Yet, in Kenya, for example, 99% of all imported vehicles are second-hand cars. What would automakers and authorities do about that?