More Potholes On Poland's Road To The Eu

Big-carmaker plant closings, plus political rifts, spell trouble

Ford Motor Co.'s 1994 decision to build an auto-assembly plant in the Polish town of Plonsk, just outside of Warsaw, was a godsend. The 400 new jobs provided a welcome boost to a small town still struggling to overcome the atrophy wrought by nearly half a century of communism. Plonsk even invested $275,000 of its modest budget to help train workers to put together Ford Transit vans and Escort compacts from imported kits. But now, Ford says it will close the plant in July--and the citizens of Plonsk are understandably unhappy. "It is a pity Ford is leaving," says Plonsk's mayor, Marian Michniewicz.

For Plonsk and Poland, it's an introduction to the downside of market capitalism. It's also a warning that Poland may have trouble attracting foreign investment. Poland's roads are the worst in the region, its telecommunications network is antiquated, and it has yet to shake a reputation for shoddy manufacturing. That means that big-name carmakers such as Ford won't use Poland as a production base for western Europe even though Polish wages are just a quarter of the European Union average. And there have been some key changes in tariffs that make plants such as Plonsk's expendable.

Ford isn't the only one saying goodbye. By next month, General Motors Corp.'s Adam Opel subsidiary plans to end assembly in Zeran, outside Warsaw, where it produces its Vectra model. And Fiat, which dominates the Polish market with a 30% share, is shuttering an assembly operation in Tychy where it makes the compact Punto and other models. Opel and Fiat have other factories in Poland that will continue to produce most of the cars they sell in the region. But their output will be supplemented by imports.

The timing of the closures is no coincidence. Poland is permitting about 45,000 duty-free car imports this year from the EU and has cut the tariff on the rest from 35% to 10% as part of its bid to join the European club. Big carmakers are already making more cars in western Europe than they can sell. So it makes little sense to maintain operations in Poland if low tariffs enable them to take advantage of economies of scale at their core factories.

Besides the cost factor, protecting brand image works against Poland as a place to make cars for sale in the West. Whether it's a penchant for German engineering or Italian workmanship, the emotional element of car-buying remains strong. "Made in Poland" just doesn't carry the same cachet as "Made in Germany." All of the cars made by Ford in Poland--and most of those made by Opel and Fiat--are earmarked for Eastern Europe, not the EU. The only exceptions are cars that reside at the very bottom of the range, such as Opel's $9,000 Agila and Fiat's $8,000 Seicento. Buyers in this segment care about only one thing--price. Western concerns about Polish standards are largely unfounded, but many Europeans still associate Poland with communist-era quality.

BITS AND PIECES. There are other bad signs for Poland as a place to do business. "Labor cost isn't the crucial factor anymore," says Opel supervisory board member Klaus Franz. Equally important are a solid infrastructure and, above all, political and economic stability. The government has been teetering near collapse after ministers from a minority party resigned on May 29. And some economists fear that Poland is getting dangerously close to overheating. If that happens, it may just bolster the EU's reluctance to let Poland in early. "There are bits and pieces falling into place here, and they're not positive for Poland," says Giancarlo Perasso, a vice-president at Chase Manhattan International Ltd. So far, there hasn't been an exodus of Western industry. But the car-plant closures, which coincide with a slowdown in sales growth, may be a sign of what's to come if times turn tough.

Polish reaction to the shutdowns has been subdued. "We don't think that's a problem," says Finance Minister Leszek Balcerowicz. Those plants accounted for just 7% of the 690,000 cars produced in Poland last year. Some officials were even glad to be rid of the plants because they don't want Poland to have a reputation for low-skill production. But if the country fails to steer its economy from the brink and convince Western Europeans that it can produce quality, not just volume, it may find more than carmakers switching off the ignition.

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