The Czech Republic: Minicar Muscle

The town of Kolin gets a hot new plant

When PSA Peugeot Citroën (PEUGY ) and Toyota Motor Corp. (TM ) announced plans in July, 2001, to build an assembly plant in Europe, more than 20 towns scattered from Portugal to Turkey rolled out the red carpet. After sifting through a pile of pitches offering everything from tax breaks to dirt-cheap labor, the partners settled on the Czech town of Kolin.

Kolin lies less than 160 kilometers from the German border, yet labor costs there are less than half those in Germany. Skilled engineers are plentiful, thanks to the country's numerous universities and technical institutes. Moreover, the Czech Republic boasts a long auto-manufacturing tradition: The country is home to 97-year-old Skoda, which was acquired by Volkswagen (VLKAY ) in 1991. Another key factor: With EU membership likely in 2004, Peugeot and Toyota can look forward to the dismantling of nontariff barriers to trade between East and West. "We looked across Europe, and the Czech Republic was the right place," says Denis Duchesne, regional managing director of PSA Peugeot Citroën.

Car bosses like Peugeot's Jean-Martin Folz and Toyota's Fujio Cho are making a major bet that eastward expansion will eventually yield hundreds of millions in extra revenues. Nowhere is the magnitude of that bet more visible than in the Czech Republic, which in the past decade has overtaken Poland to become the region's top producer of cars and light trucks.

The $1.3 billion Franco-Japanese joint venture will produce Toyota-, Citroën-, and Peugeot-badged cars using the same underbody. The tiny vehicles will have price tags to match: All will sell for under $7,800. More than two-thirds of the plant's output will go to Western Europe, where there is a growing appetite for fuel-efficient minicars, such as DaimlerChrysler's Smart (DCX ). The Czech Republic's location and its improving roads will facilitate exports. "Kolin offers a big advantage in terms of transportation costs," says Masatake Enomoto, president of the Czech venture.

For real penny-pinchers, Kolin may not look like the best deal, though. Czech workers already earn more than three times those in Romania, and their wages are rising. But Czech productivity is a compensating factor. VW has introduced Western quality controls and work habits to the area's labor force. In a new J.D. Power & Associates survey of German customer satisfaction, the $10,000 Skoda Fabia came in second only to the Toyota Yaris in the compact category. Toyota and Peugeot are confident they can emulate VW's success. "It's not only the economic factors but also the reliability of the people," says Duchesne.

Peugeot is upping the ante. On Oct. 28, it announced plans to pour some $700 million into a new assembly plant in Central Europe. You can bet the Czechs will be bidding.

By Christine Tierney in Prague

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