Slovakia Autos Report Q2 2010

The Slovakian auto sector is on course for growth, as the country remains an important production hub.

This is evident from VW’s plan to produce its new small family cars, which are due to launch globally in 2011, at its plant in Bratislava. The expansion of the facility is expected to add 8,500 jobs in the country by 2011. As an estimated 97% of Slovakia’s auto output is exported, the outlook for the sector is directly linked to the health of the economy in its key export markets in Western Europe.

When the worldwide financial crisis hit near the end of 2008, production suffered as exports dived. But in recent months, auto exports have received a boost as car scrappage subsidies launched by its key trading partners have revived demand. In a sign of improving conditions for industry, Slovakian industrial output rose an annual 1.5% in November 2009, largely fuelled by a rise in auto exports, Bloomberg reported.

The category that posted the fastest growth was car production, which recorded a 16.2% annual rise, Bloomberg said.

The resurgent demand in key export markets has helped boost the three major players in Slovakia – Kia Motors, VW, and PSA Peugeot Citroën. PSA estimates production at its facility in Slovakia exceeded its 2009 target of 200,000 units after incentive schemes launched across Europe increased demand for the compact model it produces in Slovakia.

There are concerns in the industry that production may come back under pressure in 2010, due to the expiration of car junk schemes in Europe. But We believe output should revive as the economies in Western Europe, especially Germany, stage a recovery. The country’s focus on smaller and more affordable models should also help it tap into growing demand for more modest vehicles worldwide, and for cheaper marques from fast-growing emerging markets.

Over the long term, we see growth potential, as the country remains an important production hub for the three big players, which have a combined annual production capacity of nearly 900,000 units. We believe production this year will rise 4% to 546,109 units. By the end of 2014, we see output increasing to 685,534 units. We also forecast higher rates of capacity utilisation over the forecast period.

While a bounce back in exports is helping the Slovakian economy pull itself out of recession, domestic demand is still under pressure. Consumer spending has fallen amid rising unemployment. Investment also is slumping as businesses delay plans for expansion. According to just-auto.com, vehicle sales in Slovakia fell 1.8% y-o-y in 2009 to 87,269 units. The drop likely would have been worse were it not for a EUR55mn scrappage scheme the government introduced in the spring of 2009.

However, analysts have suggested that Slovak-based manufacturers, who export nearly all of their output, did not benefit greatly from the car-scrapping scheme and even Prime Minister Robert Fico has conceded the scheme had a very limited impact on the domestic autos industry. We expect sales to rise a slight 1.8% in 2010 to 99,569 units. Nonetheless, long-term income growth forecasts indicate that sales will recover. By 2014, we see sales rising to 116,604 units. Although car sales growth is expected to be sustained over the next five years, it will be at a lower rate than we previously forecast.