Suzuki OpensThrottle in Hungary:New CooperationWith GM &Sales Up 40%Suzuki is shifting into high gear inHungary. In May, the company announcedthat it has agreed with General Motors tojointly develop a new model for the smallcar segment. Suzuki will manufacture the

car at its plant inEsztergom Hungary,while GM willproduce the car at itsnew factory inGliwice, Poland.Suzuki plans toproduce 50,000 of thenew cars and willmarket them under itsown name.

And on the salesfront, business isbooming for Suzukias sales were up 40%

during the first five months of 1998.

To find our more about Suzuki’s plans forHungary, the CEAR spoke with Dr. FrigyesBanki, Deputy General Manager andMember of the Board of Suzuki’ssubsidiary in Hungary, Magyar Suzuki.

CEAR: Can you give us an update onSuzuki’s joint production agreementwith GM?Banki: This is a new challenge for Magyar

Feature Country: Hungary

• Regional Report — Powertrain Producers: p. 5

• Poland’s Controversial Auto Excise Tax: p. 6

• Measuring Intellectual Capital: p. 9

• Slovak Car Park Analysis: p. 10

• Quality Expectations Part II: p. 11

• Polish Fund Reorganizes Auto Holdings: p. 13

• Russia’s Auto Investment Incentives: p. 14

• Tax & Legal Update: p. 15

• Romania 1st Quarter Numbers: pp. 15, 16

• Investment Opportunities: p. 17

• 5 Questions With Skoda’s Detlef Wittig: p. 19

• Romanian Distributor List: p. 21

• Chrysler Saves $20 Million Per Plant: p. 22

• Audi Cranking Out Engines in Hungary: p. 24

BULGARIA CIS CZECH REPUBLIC HUNGARYPOLAND ROMANIA RUSSIA SLOVAK REPUBLIC SLOVENIA

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The Source For Automotive Information On Central Europe™

July 1998

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Volume III, Issue 7 ISSN 1088-1123

CENTRALEUROPEAUTOMOTIVEREPORT™

In This Issue

Poland

SZC and Hyundai Terminate Agreement

On May 28, 1998, Sobieslaw ZasadaCentrum terminated its controversialcooperation with Hyundai Corp. The twocompanies were planning to work togetherand assemble Hyundai’s Atos and Accentmodels in Starachowice, Poland.

According to SZC’s announcement, thereason for terminating negotiations wasHyundai’s withdrawal from the project’sco-financing arrangement, reportedly dueto the crisis in Korea. SZC also failed toobtain permission from the Ministry ofthe Economy to extend the May 29deadline for submitting requireddocuments.

Visteon Buys Companies In Poland

On May 27, 1998, VisteonAutomotive Systems announced thatit purchased two automotivecomponent companies in Poland.

The two companies — Pol-MotPraszka in Praszka, Poland and Pol-Mot ZEM in Duszniki Zdroj, Poland— were acquired from Pol-MotHolding in Warsaw and will berenamed Visteon Poland SA and VisteonZEM SA respectively.

Visteon Poland SA has 1,620 employeesand produces air brakes, coil springs, oiland water pumps, and aluminum castings.Visteon ZEM SA has 620 employees andmanufactures wiper systems and coolingand blower system motors. Visteon planssubstantial site, equipment, and traininginvestments at the two facilities.

“These two companies offer Visteon an

Summary

••••• Hyundai Quits Poland••••• Visteon Snaps Up Polish Suppliers••••• GM & Suzuki Will Jointly Produce

Small Car••••• Bridgestone in JV With Polish

Tiremaker••••• Daewoo FSO To Start Pilot Engine

Production••••• Eaton Buys Polish Transmission

Company••••• Skoda Plzen Selling Truckmaker

Tatra••••• Lucas Building Fast Fit Centers in

Czech Republic••••• CZ Builds 2 Millionth Gearbox for

Skoda-Auto••••• Slovak CV Producer Looks to

Germany for Business••••• Daewoo Buys Romanian Vehicle

Maker

Regional MarketHighlights

Profile

Continued on Page 2 Continued on Page 12

Dr. Frigyes Banki

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July 1998Volume III, Issue 7, ISSN 1088-1123

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excellent base to grow its business inCentral and Eastern Europe and createexport opportunities into WesternEurope,” said Visteon’s John Kill,European Operations Director.

“They will offer a local high qualitysupply base for the increasing number ofWestern automotive companies who aremoving into Central and Eastern Europe.The two Polish plants will also provide ahighly competitive production baseideally located for exports to WesternEurope.”

Visteon, an enterprise of Ford MotorCompany, is targeting 20 percent of itsgrowth from non-Ford business.

GM & Suzuki Will Cooperate on NewSmall Car Project

General Motors Europe and SuzukiMotor Corp. have agreed to jointlydevelop a new vehicle in the small carsegment. The car will be built in GM’snew plant in Gliwice, Poland and inSuzuki’s factory in Esztergom, Hungary.Start of production is planned for thebeginning of the year 2000. Eachcompany will market the car under itsown brand name in Europe.

When production of the new car begins atGM’s Polish factory, annual capacity willbe increased from 70,000 units to150,000 units. Investments totaling DM375 million ($200 million) will be madeby GM to expand capacity. Theworkforce at the Gliwice plant will alsobe increased from 2,000 to 3,000 people.

GM/Opel’s version of the small car willbe available with two recently introducedECOTEC engines — a 1.0 liter 12-valvethree-cylinder engine and a 1.2 liter 16-valve four-cylinder engine.

Eaton Purchases Poland’s BiggestTransmission Manufacturer

Eaton Corporation announced in Junethat it has signed a preliminary agreementto purchase Fabryka PrzekladniSamochodowych (FPS), a trucktransmission manufacturing companybased in Gdansk, Poland. Thetransaction, which is for an undisclosedamount, is subject to governmentalapproval.

FPS is the largest manufacturer of truck,

bus and van transmissions in Poland.The company also manufacturestruck transfer boxes, power take-offs, splitter boxes, and gear shiftmechanisms for domestic and exportmarkets. FPS has annual sales ofapproximately $20 million and about900 employees.

Bridgestone In Joint Venture WithPolish Tiremaker

Bridgestone Corp. is establishing atire manufacturing joint venture inPoland with the state-owned StomilPoznan SA. The joint venture willbe officially registered in July of thisyear, and production is expected tobegin by July of 2000 with about300 workers. Initial capacity will be5,000 passenger car and commercialvan tires a day.

Stomil is 100% owned by the StateTreasury. In such cases, permissionfor a joint venture must be issued byboth the Ministry of the Treasuryand the Ministry of Internal Affairsand Administration.

Unofficially, it has been reported thatBridgestone will hold 71.2% of theshares in the joint venture. Companycapital will total $63 million.

Stomil Poznan manufactures special-purpose tires for such sectors asaviation, the army, mining, and forindustrial vehicles and trucks. It isamong the special-importance plantsmentioned in the Defense Act andthe Official Secrets Act. Accordingto the daily Rzeczpospolita, in 1997Stomil Poznan recorded revenues ofPZL 71 million and a profit of PZL3.8 million.

“[The joint venture] proves that weare very much concerned about [thePolish] market,” Bridgestone/Firestone Polska sales and marketingmanager Grzegorz Krzyzanowskitold the CEAR. “It will be a big stepforward for us.”

The Bridgestone joint venture willcompete for business with Goodyearand Michelin who already operate inPoland through their own jointventures.

More Market Highlightson Page 4

CENTRALEUROPEAUTOMOTIVEREPORT™

Highlights Continued from Page 1

Ronald F. Suponcic, Jr.Publisher

Jeffrey A. Jones, Esq.Editor-in-Chief

1998EDITORIEDITORIEDITORIEDITORIEDITORIAAAAAL CL CL CL CL CAAAAALENDALENDALENDALENDALENDARRRRR

The Source For Automotive Information On Central EuropeOn The Web at http://www.cear.com

Issue Feature Automotive Reviews Special Reports Close Date

Jan 99 Poland Body/Chassis 1998 Year in Review/ Dec 10, 19981999 Forecast

Feb 99 Hungary Central Europe’s Vehicle Fleets Jan 10, 1999Executive of the Year

Mar 99 Czech Republic Components & Systems Auto Aftermarket Feb 10, 1999

Apr 99 Slovak Republic Marketing & Advertising na Mar 10, 1999

May 99 Romania/Bulgaria Electronics Auto Consultants Apr 10, 1999

Jun 99 Poland/Slovenia OEM Special: Who Supplies Who na May 10, 1999

Jul 98 Hungary Powertrain Exporting to Jun 10, 1998Central Europe

Aug 98 Not Published

Sep 98 Czech Republic Plastics Auto Engineering Aug 10, 1998

Oct 98 Slovak Republic Logistics Human Resources Sep 10, 1998

Nov 98 Romania/Bulgaria Interiors Real Estate Oct 10, 1998

Dec 98 Poland/Slovenia Financing na Nov 10, 1998

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4 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

Centra To Supply VW With Batteries

According to Krzysztof Paulus, directorgeneral of Polish battery producerCentra SA in Poznan, Centra will startto supply batteries to the Volkswagenfactory in Wolfsburg at the end of thisyear.

“We need to obtain Volkswagencertificates for our products first,” Paulustold the CEAR.

Centra has already received VDA6,which is required by Volkswagen, Audiand Mercedes. In mid July, according toPaulus, the company will undergoauditing for QS 9000 certification, whichis necessary to enter the Americanmarket. The next step will beVolkswagen certificates, which Centrashould obtain in October.

One out of every two storage batteriessold in Poland comes from Centra. Thecompany plans to produce 2.6 millionbatteries this year, 30% of which will beexported mainly to Germany, France,Great Britain, Russia, and Belarus.Exide is the majority owner of Centraand some export is done within itsdistribution chain.

Daewoo FSO To Begin PilotProduction Of L-4 Engine

In December 1999, Daewoo-FSO’sZeran (Warsaw) factory will start pilotproduction of new L-4 engines, saidKrystyna Danilczyk, press spokeswomanfor Daewoo-FSO.

Planned production capacity is 200,000units per year, of which 100,000 will befor the new Matiz model, 50,000 for thenew F-100 van, and the rest will beexported. Total investment in the projectshould total $200 million. The L-4engine offers multi-point fuel injection,1.0 or 1.2 liter capacity, and 62hp or71hp.

Gold Medals Awarded at PoznanInternational Motor Fair

Nine gold medals were presented at thisyear’s International Motor Fair inPoznan, which took place in late May.Participating in the fair were 800exhibitors, including 140 from abroad.

The awards went to:

• Mobil Delvac 1 SHC oil from MobilOil Francaise of France;

• an unleaded universal gasoline fromCPN SA of Poland;

• Eagle tires from the Goodyear Tireand Rubber Co. of Luxembourg;

• the Frigo family of winter tires fromthe Debica Tire Company inPoland;

• an electronic fuel consumptionmeasurement system fromMannesman VDO AG ofGermany;

• the Niedzwiedz-Lock II blockingdevice for gear shifts fromNiedzwiedz-Lock SC of Lubon,Poland;

• the Amsterdam car radio fromBlaupunkt GmbH Bosch Gruppeof Germany;

• the H4 car light bulb fromGluehlampenwerk Aachen ofGermany; and

• anti-dust filters from WIX-FiltronSp. z o.o. of Gostynin, Poland.

Delphi May Build Technical Center

Delphi Automotive Systems isconsidering plans to build a TechnicalCenter in Poland that would specialize indesign engineering work for the carindustry, according to reports by thePolish Press Agency.

Daewoo Teams Up With Akzo NobelFor Paint Supply

Akzo Nobel Car Refinishes Polska andCentrum Daewoo have signed anagreement for the use of Sikkens paintsand renovation materials by authorizedDaewoo service stations. The agreementis aimed at improving the quality of bodyand paint jobs offered by Daewoo.

Rumors About Japanese InvestmentsCirculating Again

More rumors are circulating that ToyotaMotor Corp . will build a passenger cartransmission factory in Poland. Thelocations mentioned as possible sitesinclude the special economic zones inWalbrzych and Legnica. The Japanesepress is also speculating that CalsonicCorp. shortly intends to form a jointventure with Polmo Kalisz for theproduction of parts for air-conditioningsystems.

Czech Republic

Lucas Establishing Fast-Fit Center

Network

Lucas Autobrzdy, a joint venturebetween Lucas Varity and the Czechcompany Ateso, has started the roll outof its network of fast-fit centers in theCzech Republic. The first center wasopened on May 15, 1998 in the city ofMost and 2 or 3 additional centers willbe opened in Brno in the near future.

By the end of 1998, Lucas expects toopen 22 fast-fit centers in the CzechRepublic. By the end of 1999, thecompany plans to have 40 centers. Thecenters will initially specialize in brakesand shock absorbers, with other productsto be added in the future.

AMP Investing In New Plant

The US company AMP Inc. is investing$21 million into a new auto parts plant inKurim, Czech Republic, according to theCzech daily Mlada fronta Dnes. Thefactory will produce connectors andbunched cables for cars, and will employabout 750 workers.

CZ Strakonice Produces 2 MillionGearboxes for Skoda-Auto

On June 2, 1998, the Czech company CZStrakonice produced the two millionthgearbox for Skoda-Auto in MladaBoleslav, Czech Republic. CZ producesgearboxes for Skoda’s Felicia andFavorit models.

CZ Vice Chairman Lubos Kubista toldthe CEAR that the company is alsocurrently involved in negotiations withVolkswagen regarding the production ofturbochargers. CZ producesturbochargers primarily for trucks andagricultural tractors — John Deere isone of the company’s key customers.

In addition to gearboxes andturbochargers, CZ produces vehiclechains, motorcycle components,aluminum castings, molds, and machinetools.

Skoda a.s. (Plzen) Selling Tatra

The Czech engineering group Skoda a.s.announced in early June that it plans tosell its heavily indebted truckmakerTatra a.s. In addition to Tatra, whosedebt currently runs at around CZK 3billion ($90 million), Skoda also plans tosell its ailing press making unit

Continued on Page 18

Highlights Continued from Page 2

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 5

Engines, transmissions, shafts —all of these powertrain productsare manufactured or assembled

by companies throughout CentralEurope. The sector has seen significantinvestment as manufacturers establishplants in the region to supply localcustomers and for export.

Major Engine & TransmissionProduction in Hungary

Hungary is home to two majorpowertrain manufacturers — Audi andGeneral Motors. Not only are thesecompanies currently producing inHungary, but they are activelyexpanding their manufacturingfootprints in the country.

GM has produced engines in Hungarysince 1992. In 1997, the companycompleted a DM 50 million expansionof its plant in Szentgotthard which, atfull capacity, will produce 460,000engines per year. The plant currentlybuilds 1.4 liter and 1.6 liter 16-valveEcotec engines for export and the localmarket.

GM recently announced that it isexpanding its presence in Hungary. Thecompany is investing $128 million intoa new transmission factory that will goon line in the year 2001.

Audi’s engine plant in Hungary hasgrown to be the company’s main engineproduction site. Since 1994, Audi hasmanufactured engines in Hungary,primarily for export to Germany (Audi& VW ) and the Czech Republic(Skoda). Audi assembles four-cylinder,V6, and V8 engines. In April, thecompany started assembling vehicles inHungary. (for more on Audi Hungaria,see Company Spotlight on page 24)

Poland Attracts Big Names

Poland’s powertrain producers includesome of the auto industry’s biggestnames, including Fiat, Daewoo, Isuzu,Delphi, Eaton, and GKN .

Isuzu is constructing a DM 300 milliondiesel engine factory in Poland to

and power transmission products,including constant velocity jointsand half shafts.

••••• FPS Tczew — Gearbox producer ismajority-owned by Zasada.

••••• Polmo Szeczencin — driveshaftproducer owned by PIASTNational Investment Fund

Czech Republic

••••• Skoda Auto — Produces two typesof engines, a 1.3 MPI, 1289cc, 40kW/54 BHP and 1.3 MPI, 1289cc,50 kW/68 BHP.

••••• Daewoo Avia — Produces 3.6-liter,4-cylinder diesel engines at plantoutside of Prague.

••••• Praga — Produces mechanicalgearboxes for trucks, buses,tractors, and special vehicles.Daewoo Avia is one of Praga’sbiggest customers for gearboxes.

Hungary

••••• Opel — Produces engines at plantin Szentgotthard. At full capacity,plant will produce 460,000 engines.Investing $128 million into newtransmission production.

••••• Audi Hungaria Motor —Produces four-cylinder, V6, and V8engines for export.

••••• VAW — Operates large cylinderhead and engine block plant inHungary.

••••• RABA — Diesel engine producer.••••• UKM Rekard — Privatized

company produces driveshafts andgearboxes.

Slovak Republic

••••• VW Bratislava — Producesgearboxes and gearboxcomponents. In 1997, productioncapacity was 259,000 gearboxes —goal for 1998 is 322,000 units and 7million components.

••••• Sachs Trnava — Producespassenger car and truck clutches.Supplies Skoda with 100% of itsclutch needs. Expanding toproduce torque converters fortrucks and buses.

Romania

••••• Daewoo Automobile Romania —In 1997, invested $450 million intoengine and transaxle shop. Enginesand transaxles are shipped to

Plenty of Power in Central Europe

Auto Powertrain Review

supply GM in Europe and Poland.Production will begin by mid-1999 andannual output will hit 300,000 units bythe year 2000.

The Daewoo-owned Andoria engineplant produces diesel engines inAndrychow, Poland.

In December 1999, Daewoo-FSO’sWarsaw factory will start pilot productionof the new L-4 engines. Plannedproduction capacity is 200,000 units peryear, of which 100,000 will be for thenew Matiz model, 50,000 for the new F-100 van, and the rest will be exported.

In September 1997, GKN startedconstructing its new $32 million facilityin Olesnica, Poland. The new plant willmanufacture driveline and powertransmission products, including constantvelocity joints and half shafts, for supplyto customers within Poland, includingFiat, and for export.

Initial production at GKN’s plant isplanned at 300,000 vehicle sets, andincreasing to 500,000 vehicle sets in thenear future.

Below is a quick look at some of the keypowertrain product producers inCentral Europe

Poland

••••• Isuzu Motors — diesel enginefactory under construction.

••••• Fiat Auto Poland — producesengines at its Bielsko Biala plant

••••• Daewoo FSO — starting pilotproduction of new L-4 engines

••••• Andoria — Diesel engine producer40% owned by Daewoo suppliesDaewoo Motor Polska

••••• Eaton — Has signed a preliminaryagreement to purchase FabrykaPrzekladni Samochodowych, thelargest manufacturer of truck, bus,and van transmissions in Poland.

••••• Delphi — Building new greenfieldfactory in the Special Economic Zonein Tychy to produce driveline halfshafts and steering components.

••••• GKN Automotive Polska — Newfactory will manufacture driveline

Continued on Page 20

6 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

The Polish government is planningto introduce a 2% excise tax onthe importation and sale of cars.

The project is very advanced and ifsuccessful might mean a significantreduction in the cost of importing luxurycars into Poland. On the other hand, itmight lead to a significant increase ofprices for cars in the medium and lowprice segment of the market.

Tax Accumulates Through SalesChain

The new system would provide for a 2%excise tax levied upon each transactionin the sales chain until the car is firstregistered. Depending on the length ofthe chain of transactions, the tax couldthus accumulate substantially on route tothe consumer. No threshold is foreseen inthe draft which means that even verycheap cars would be subject to the excisetax.

The current system in Poland providesfor excise tax on sales of cars whosevalue exceeds 7,500 ECU. The tax rate is10 % for cars sold domestically, leviedon their sales value. For imported carsthe excise is 15%, levied on the basis ofcustoms value increased by customs duty

(which currently amounts to a 35% fullrate!).

Cars are further subject to a 22% importor domestic VAT. The system may beregarded as part ofthe broader strategyof the Polishgovernment, aimed atencouraging bigautomotive producersto set up their plantsin Poland rather thanimport cars producedelsewhere.

Current SystemTweaks Importers& Government

The current system isstrongly criticized byimporters. First ofall, it has negative impact on the safetyof cars on Polish roads as in practice it ismainly additional safety equipment —such as ABS, extra air-bag — which putsimporters in an excise tax position. It isalso questionable whether the differencein excise tax on Polish and foreign cars isin line with Polish obligations underGATT 1994.

The current system is also unpopular ingovernmental circles as it is easilyavoidable. Foreign importers are able todiminish tax levies by importing intoPoland poorly equipped cars andinstalling additional equipment after salein Poland.

New Tax Would Hurt Local Producers

If the new system were introduced, itwould primarily hit producers of cars

priced below the7,500 ECUthreshold,especially thosebased in Polandwho get thegreatest benefitfrom the currentsystem. In fact, theintroduction of thenew system wouldbe the first step bya Polishgovernment toreduce the benefitsof automotiveproducers whohave invested in

Poland.

The financial manager of Daewoo - FSOJanusz Lach has given his negativeevaluation of the government’s proposalin the Rzeczpospolita newspaper sayingthat it is a manifestation of fiscalism. Hesaid that the ministerial plans are seen asa bow towards western producers withtotal disregard for those who producecars in Poland and create employment inthe country.

It is still an open question as to whetherthe new system is in line with Polishobligations under free trade agreementsthat prohibit the introduction of newtaxes. Specifically, Article 25 of theEurope Agreement establishing anassociation between Poland and the ECand its member states prohibitsintroduction of new, or increases ofexisting customs duties on imports orcharges having equivalent effect.

The new rules might also prompt theautomotive industry to soak incompletely sales structures, leading toincreased concentration of thisbusiness n

Poland Plans Excise Tax on Import &Sale of Cars

Import/Export Help DeskMariusz Maciejewski, Price Waterhouse, Warsaw

“The introduction of thenew excise tax systemwould be the first stepby a Polish governmentto reduce the benefits ofautomotive producerswho have invested inPoland.”

1998 (forecast) 1997Production (units) 70,000 63,500Exports (units) 50,000 47,700Turnover (forints) 85-86 billion 77 billionProfit (forints) 1.6 billion 1.6 billion

$US = 212 forints (June 1998)

Source: Magyar Suzuki

Magyar Suzuki’s Key Numbers

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CENTRALEUROPEAUTOMOTIVEREPORT™

Segment YTD SALES (Units) CHANGE (%) MARKET SHARE (%) SALES IN APRIL

1998 1997 1998 1997 1998 1997

1. Segment A 34,457 36,094 -4.54 25.06 27.63 13,794 12,010

2. Segment B 27,487 33,141 -17.06 19.99 25.37 11,276 11,035

3. Segment C 58,371 41,753 39.80 42.44 31.96 21,060 16,896

4. Segment C/D 14,290 17,458 -18.15 10.39 13.36 5,629 4,532

5. Segment D/E 1,733 635 172.91 1.26 0.49 806 262

6. Segment F 31 29 6.90 0.02 0.02 21 15

7. Segment S 298 586 0.00 0.00 0.00 142 195

8. Segment MPV 695 778 0.00 0.00 0.00 264 388

9. Segment 4WD 163 161 1.24 0.12 0.12 86 50

Total Passenger Cars 137,525 130,635 5.27 99.28 98.96 53,078 45,383

10. Light Comm. Segment 5,714 7,243 -21.11 46.21 55.07 2,261 2,671

11. Medium Comm. Segment 6,652 5,910 12.55 53.79 44.93 2,498 2,172

Total Commercial Vehicles 12,366 13,153 -5.98 100.00 100.00 4,759 4,843

Source: SAMAR s.c., Local Manufacturers and Official Importers, ACEA

Polish Vehicle Market Segmentation (YTD April 1998)

8 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

I recently attended a few auto shows in Central Europe, notably Poznan in Poland and Autotec inthe Czech Republic. I spoke with scores of companies and learned a lot about what companiesare doing and what people are thinking.

Although new cars sales growth rates are down in most Central European countries, the pace ofactivity in the auto sector is still intense. All companies — car makers, suppliers, distributors, andfinancing companies — are out hustling for business and devising new strategies to capture a biggerchunk of the market. Competition is vicious. It’s not a market for the weak or undercapitalized.

One of the biggest complaints I heard? “There just aren’t enough hours in the week to do everythingwe need to do.” People are overworked, staffs are lean, demands are high. The Eastern Europeansales manager for a major Western supplier covers the entire region with a staff of one. Himself. Heworks eight days a week.

Others were frustrated by the slow pace of infrastructure development in the region. In Poland, for instance, one truck maker notedthat there is lots of talk about roads and highways, but few results. “For a transit country [like Poland], it’s hard to understand.”

I heard a lot about how Central European customers are demanding more from companies. Customers want faster service (such asfor spare parts delivery), better availability of products, better aftersales service, and higher quality. Why is Lucas Autobrzdyrolling out a network of fast fit brake and shock absorber centers in the Czech Republic? It’s what their customers are demanding.

Parts sellers told me that Polish customers are now shopping for quality. They have more income and are willing to pay for betterbuilt products. In the past, customers were willing to buy cheaper parts and frequently replace them.But today, with rising mechanic’s rates (especially in Warsaw), this strategy is becoming costprohibitive. Customers see the benefit of buying quality.

One common sentiment is that the Central European market is exciting. “You never know what willhappen next,” said one parts distributor. “Everything is changing so rapidly.” Another Tier onesupplier happily declared, “Our business is booming.”

Tips For Success In Central Europe Overheard in Poznan

jones@cear.com

Jeff Jones

Visit the CEAR Central Europe Automotive Forum™ at http://www.cear.com/autoforum or click here CEAR.COM ™

Passenger Cars Light Commercial Vehicles Medium Commercial VehiclesMake Units Change Make Units Change Make Units Change

’98 v. ’97 ’98 v. ’97 ’98 v. ’97Units Units Units

Daewoo Lanos 10,380 10380 Citroen Berlingo 417 414 Mercedes Vito 804 436Fiat Siena 9,681 9681 Skoda Pick up 672 355 VW Transporter 559 299Daewoo Tico 13,171 6216 Renault Kangoo Exp. 35 35 Iveco Daily 332 177Daewoo Nubira 3,168 3168 Peugeot 306 XA 29 20 Peugeot Boxer 206 130Toyota Corolla 2,643 2040 Peugeot 106XA 6 5 Mercedes Sprinter 207 104Fiat Palio Wknd. 1,794 1794 Seat Inca 33 1 Kia Preggio 83 83Opel Astra 6,198 1533 Piaggio Porter 8 1 Kia Ceres 163 79Citroen Xsara 1,489 1489 Hyundai H100 P/V 96 42Toyota Avensis 1,131 1131 Daewoo Lublin 2,675 28Honda Civic 3,950 1115 Citroen Jumpy 28 28

Source: SAMAR, s.c.

Fastest Sales Climbers in Poland (YTD April 1998)

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 9

Intellectual capital is one of the mostimportant and sustainable sources ofcompetitive advantage for today’smodern companies — IC is simply thedriver of future earnings. Mostcompanies, however, don’t even knowhow to measure their IC. Based on lastmonth’s discussion of the fundamentalsof IC, this month Dr. Roos will explainand illustrate how car companiesdevelop a simple, yet robustmeasurement system of IC

Today, an increasing number ofcompanies rethink basic assumptions ofhow to point the way into the future.Most executives have already realizedthat profits, market share, and evencustomer satisfaction are all measures ofthe current position of the corporation.Current product-market combinationsand satisfaction measures alone aresimply bad predictors for where to makemoney tomorrow.

To find the best guidelines for futureactions, corporations must examine thedeeper and not so visible drivers offuture earnings, IC. The absurdity is thatwhile a company may just have gone into“intellectual bankruptcy”, the short-termprofits may very well rise since costshave been lowered!

To better manage – nurture and leverage— intellectual capital it is important tomeasure it. In turn, to be able to measuregrowth or decline in IC it is essential thatthe nature of IC itself is clear. This iswhy it is important to distinguishbetween different forms of intellectualcapital, as well as the dynamics amongthese. Whereas many companies have sofar only applied a ‘balance sheet’approach to intellectual capital, acomplementary ‘profit and loss’approach is a natural extension.

A major challenge in companies of todayis to have experts share their knowledgeand skills with others in the organization,which is an example of a flow fromhuman capital to structural capital. Thus,flows among the different forms ofcapital, intellectual and material, should

be measured as much as the stocks. It isthese flows that generate and alter thestocks, and it would thus be meaninglessto manage one without the other.

Start with Your Mission

Regardless of whether a company or unitis in manufacturing or service, thepurpose, business mission, vision, orgoals are always the starting point for anIC-management system. This means that,in principle, each organizational unitwould have different indicators of thedifferent IC categories simply becauseeach strategy will be different.

If the strategy is to compete on price, forinstance, it is what makes the companyhave low delivered costs that must becaptured by the indicators. Here, with aview of future earnings, indicators couldinclude supplier delivery performanceand cost management.

On the other hand, if the strategy is tocompete on high perceived value, theindicators must capture what makes thishappen, for example, superiorinnovations and quality image. Giventhat every business is unique in someaspect, each unit will separately have todevelop their own indicators for commoncategories of IC, like customer capital,innovation capital, and flow from humancapital to structural capital.

In Mec-Track, an Italian-basedmanufacturer of undercarriagecomponents within the CaterpillarOverseas Division (COSA),management grounded their pilot IC-management system in the newly re-worked mission statement: “Tostrengthen our worldwide leadershipposition in the production ofundercarriage components by offering toour customers differentiated products ofrecognized superior value.” The idea wasto try to measure growth and decline inonly the IC that contributed to reachingthis mission.

Measure Your Key Success Factors

The vehicle for measuring IC growth ordecline is the set of indicators used foreach category of IC, like customercapital or process capital. It is theseindicators that permit measurement, notthe IC categories as such. Because thesemeasurements must make sense to thosewho measure and be understood by thosebeing measured, the process ofidentifying indicators is a common senseand bottom-up process. The workinvolved often increases the awarenessof what is really important in the dailylife of people in a company.

This is why the next step is to translatethe mission or strategic intent into “keysuccess factors” (KSF). As their nameimplies, KSFs indicate what theparticular mission or strategic intent mustmeet to succeed.

The strategy of ensuring low deliveredcosts throughout the business system, forinstance, has a whole different set ofsuccess factors than the strategy ofachieving high perceived value from thecustomer’s perspective. The latter wouldallow a price premium whereas theformer would mean competing on price.

The KSFs are once again a reminder forall strategy makers of what are thefactors that need a constant monitoring.Relevant IC is just the IC that contributesto achieving your company mission. It isnice to have smart people and fancyequipment, but if this doesn’t help you towin in line with your mission or intent,the IC they represent is not relevant!

The best way to demonstrate that KSFsare really key is to measure thecompany’s success in each of the KSFs.A manager of COSA told me that thisapproach becomes obvious to people:“Y ou just go to the people working in thebusiness units and say: ‘So, you say thatthis is important for your business? OK.Do you have a measurement for this?’‘Well, no’ ‘Do you think you need ameasurement for this’ ‘Well, yes: I amthe one who said it is important!’” Foreach one of the KSFs, Meg-Tracmanagement suggested a few measuresthat would capture its essence.

During the first attempt, most companiestend to use non-financial indicators thatare already there in the existing

Managing for ExcellenceFacing the Intellectual Capital Challenge — Part II Dr. Johan Roos, Professor of General Management and Strategy,International Institute for Management Development

Continued on Page 16

10 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

By the year 2010, the number ofroad motor vehicles worldwidecould increase by 60% and fuel

consumption may increase by 50%. InCentral and Eastern Europe, a substantialdevelopment of the region’s auto sectoris expected — by the year 2000 vehicleproduction will increase by 75% and by2005 a 125% increase is expected. Thiswill raise the region’s share of worldproduction from 4% to nearly 10%.

Central and Eastern European countrieswill become more involved in theproduction of basic materials andsystems, as well as in the production,use, and recycling of cars. In thesecountries, the automotive industry hasclearly arrived.

In Slovakia, we’re witnessing substantialgrowth in passenger car production. VWBratislava’s increase in the number ofassembled cars to 150,000 per year, itsincrease in components production, aswell as the big changes in surroundingcountries (mainly the Czech Republicand Poland), are revitalizing ourmachinery industry.

AUTO SECTOR DEVELOPMENT INTHE SLOVAK REPUBLIC

The car fleet in any country can beevaluated from several points of view,but most commonly from the relativenumbers (e.g. per inhabitant, per squarekm, per road km, per filling station),technical progress (e.g. average age),driving unit (e.g. percentage of petroland diesel engines and electric motors)and fuel (e.g. classical, alternative, orgas). (see charts)

On January 1, 1998, the breakdown ofmotor vehicles operating on Slovakroads was:

83% - passenger cars & vans10% - trucks, special automobiles, andtractors6% - motorcycles over 50cc1% - buses

The number of vehicles in the SlovakRepublic does not grow dramatically —in each category there are fewer vehiclesthan in the more industrially developedcountries. In Slovakia, the solvency ofinhabitants and the economic activities in

industrial and agricultural production arenot intensive enough to sustain highergrowth levels.

TERRITORIAL DISTRIBUTION OFMOTOR VEHICLES

In Slovakia, large differences exist in thedistribution of cars. In and aroundBratislava, there are 330 passenger carsper 1,000 inhabitants (in the city thisfigure rises to 340), whereas in thedistricts of Trencin, Zilina, and Presovthe figure is about 170. In the region ofWest Slovakia, the inhabitants own morethan one half of all passenger cars in thewhole country. Differences inemployment rate, economic situation,location, and entrepreneurial activityincrease the distribution gap.

SLOVAKIA COMPARED TONEIGHBORING COUNTRIES

In the neighbouring states to the west ofSlovakia, the average number of cars per1,000 inhabitants is 400, to the North andSouth the figures are about the same asin Slovakia, (Poland -190, Hungary -203), while to the East it is much less (50- 80 per 1,000 people). Those countriesthat participate more in car production,have proportionally a higher number ofcars n

Slovakia’s Car ParkBig Variances; Western Region Owns Half of CarsDr. Jan Lesinsky, Slovak Technical University

Regional Distribution of Cars in SlovakiaDensity p/1,000 pop. Density p/sq. km % of Pass. Cars % of Pop.

Western Slovakia 239 35 52.5% 46.7%Central Slovakia 185 15.36 22% 24.7%Eastern Slovakia 189 18.43 25.5% 28.5%

Comparative World Car Density Figures (1998)Territory Number of Inhabitants (mil.) Car density*NAFTA ~ 380 400EU ~ 380 400JAP+KOR ~ 170 320C. and E. Europe ~ 175 150Russia ~ 148 80Slovak Republic ~ 5.3 211

*Passenger Cars per 1000 inhabitants

Car Density by District in SlovakiaDistrict Car Density per 1,000 Pop.Bratislava 330Trnava 250Trencin 175Nitra 206Zilina 166Banska Bystrica 203Poprad 165Kosice 215

Slovakia’s Car Density (1997)

Car Density p/1,000 pop. Car Density p/sq. km Car Park211 23.17 1,135,914 units

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 11

Last month’s column reviewed QS-9000 quality system requirements,including Quality Planning,

Design Skills, Preliminary ProcessCapability Requirements, On-goingProcess Performance Requirements,Measurement System Analysis, andCorrective & Preventive Action.

This month’s column continues thereview of requirements, and also coversQuality Operating System and MaterialsManagement System requirements.

QS-9000 Quality SystemRequirements (continued)

Training — As a Strategic Issue

Training should be viewed as a strategicissue affecting all of the supplier’spersonnel and training effectiveness shallbe periodically evaluated. Training mustdevelop competencies such that thebenefits may be fully realized to meetcustomer expectations.

Servicing — Feedback of InformationFrom Service

A procedure for communication ofinformation on service concerns tomanufacturing, engineering, and designactivities shall be established andmaintained.

Quality and Productivity Improvements;Techniques for Continuous Improvement

The supplier shall identify opportunitiesfor quality and productivity andimplement appropriate improvementprojects. The supplier shall demonstrateknowledge of the following measuresand methodologies and shall use thosethat are appropriate:

• Capability Indices• Control Charts (variables, attributes)• Cumulative Sum Charting• Design of Experiments• Theory of Experiments• Theory of Constraints• Overall Equipment Effectiveness

• Cost of Quality• Parts per Million Analysis• Value Analysis• Problem Solving• Benchmarking• Analysis of Motion/Ergonomics• Mistake Proofing

Manufacturing Capabilities

Suppliers shall use a cross functionalteam approach for developing facilities,processes, and equipment plans inconjunction with the advanced qualityplanning process. Methods shall bedeveloped for evaluating theeffectiveness of existing operations andprocesses.

Mistake proofing is the use of process ordesign features to prevent themanufacture of non-conforming product.

Suppliers shall establish and implement asystem for tooling management,including:

• Maintenance and repair facilities andpersonnel

• Storage and Recovery• Set-up• Tool change programs for perishable

tools

If any of this work is sub-contracted, atracking and follow-up system isrequired.

Quality Operating SystemRequirements

Quality Operating System (QOS)requirements define the mechanism forcontinual improvement. In automotivelanguage it is a way of doing business, asexpected by the global automotivecustomer base.

The Ford Motor Company definition ofQOS is: “A systematic, disciplinedapproach that uses standardized tools andpractices to manage business and achieveever increasing levels of customersatisfaction through continual

improvement.”

It is interesting and informative to readthe definition backwards:

Through continual improvement, we canachieve ever increasing levels ofcustomer satisfaction and manage thebusiness, using standardized tools andpractices with a systematic, disciplinedapproach.

This methodology requires a clearstatement of strategic imperatives andKey Results Measurables. Subsequentlythe identification of key processes todeliver the results and the quantificationof process measurables needs to belinked to the development ofImprovement Action Plans and aManagement Review Process.

Materials Management SystemRequirements

Materials Management SystemRequirements as encapsulated by theFord Motor Company Standard MS-9000, define the managementresponsibilities and structure to ensure aneffective and efficient Material Planningand Logistics function, covering in-bound, internal and out-bound elementsof the “total supplier to manufacturer tocustomer” chain of events.

The basic elements covered are:

• Management Responsibility• Materials Management System• Contract Review/Customer Interface• Scheduling System• Document Control

Quality Expectations of the Global AutomotiveIndustry Part IIBuilding Supplier Quality: Lesson 4With Ray Barker, Group Director, Business Excellence Strategy, Avon Rubber

Quality in Action

According to one aftermarketdistributor in Poland, Polishcustomers can now afford to payfor higher quality automotiveparts. Since last year, customershave started looking for betterquality in the parts they buy.

Continued on Page 20

12 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

CEAR: How will Magyar Suzuki’sparts purchasing program be changedby the agreement with GM?Banki: We’re inviting even moreEuropean suppliers [to establishoperations in Central Europe] and we arein discussions with new Hungariansuppliers. Our intention is to localize asmuch as possible. This is very importantfor the new model.

CEAR: What percentage of yourparts purchases are made locally?Banki: As for European local content,we are at 70%. [For Central Europe], thefigure is very modest, but we are startingcooperation with some suppliers inCEFTA countries, like the CzechRepublic, Poland, and Slovenia.

For instance, from the Czech Republiclast year we imported [parts valued at]around 30 million forints ($141,000).This year, it will be more than 1 billionforints ($4.72 million). This is a verystrong development.

The total Central and Eastern Europeancontent of the car is marginal, but wehave rapidly growing contacts withsuppliers [in those countries].

CEAR: What markets are youtargeting for the new car?Banki: First of all, Europe, but alsooutside of Europe. This [cooperationagreement] is one part of Suzuki MotorCorp.’s so-called “Global 5” initiative.Suzuki is trying to achieve a 5% marketshare out of the total world car market,including Japan.

Thus, Magyar Suzuki plays a veryimportant role in Suzuki’s near termstrategy, both as a production base and asa sales outlet. Magyar Suzuki is thecenter of Suzuki’s future plans inEurope.

Suzuki. It will be a step-by-stepdevelopment. We will gradually reachthe 50,000 [target] capacity. In thebeginning, we’ll produce the currentSwift model together with the new car.Eventually, production of the new carwill take the place of the Swiftproduction.

Production is targeted to begin [inHungary] early in the year 2000, andproduction at GM’s plant in Gliwicewill begin at the same time.

CEAR: How much will Suzuki investin the new production program?Banki: A round 15-20 billion yen ($110-$145 million), but no final decision hasbeen made yet.

CEAR: Will Suzuki’s and GM’sversions of the new car be similar?Banki: The plan is that the vehicles forthe respective brands will be distinctlydifferent. We will produce a car with aSuzuki 1.3 liter engine and Opel willproduce its car with an Opel engine. Theinterior and certain technical aspects willbe different, as well.

CEAR: What kind of facilityexpansion will be required for Suzuki?Banki: This year we’ll [start] building astamping plant for the [new project].The investment will be around 3.5 billionforints ($16.5 million). We’re going [tostamp] medium-sized body parts, not thebigger parts like doors.

CEAR: By how much will MagyarSuzuki expand its workforce toaccommodate the new production?

If we reach the target capacity, whichmeans the existing 70,000 capacity [plusthe 50,000 units planned for the newcar], we would need an additional 600workers.

CEAR: Why did Suzuki decide tobuild the new small car with GM?Banki: To decrease production costs.The two companies will jointly producestamped parts, [which] reduces toolingcosts. Tooling and machinery areexpensive. When we introduced theSwift face-lift in October 1996, just thetooling cost around 2 billion forints ($9.5million).

CEAR: How are Suzuki’s sales inHungary for 1998?Banki: This year we have seen veryrapid growth in the domestic market.[During the first five months], we’vesold 8,300 cars and we expect to sell20,000 units for the whole year. And thislooks like a very feasible goal. [Sales areup] about 40% [compared to] last year.

CEAR: Why have sales increased sodramatically?Banki: I think the better economicconditions are one of the factors, theincreasing purchasing power [ofHungarian consumers]. And, of course,the better image of [Suzuki], our quality,services, and the relatively low cost ofour cars.

We have the best and largest salesnetwork in the country. We have 120dealerships, which makes a sizeablecontribution to our success. These, Ithink, are the main factors.

The fast development of car [sales] thisyear has been a surprise for everybody.At this moment, we are reluctant to[expect] the 40% [sales growth rate tocontinue for the whole year], but weexpect to increase our sales for the wholeyear by 25-30%. For next year, we’ll bevery happy with a 10-15% growth rate.

CEAR: Will the new Hungariangovernment affect you plans inHungary?Banki: I don’t think so. The basiceconomic goals of the new governmentare just the same — to encourageinvestment and to maintain a predictableeconomic climate. Suzuki asked theprevious government and will ask thenew government to support and promotesmall and medium sized companies(SMEs).

We’d like to see strong SMEs who cansupply Magyar Suzuki. We [will] notease our requirements — price, service,quality — just because a [supplier]candidate is Hungarian. We areresponsible for the final product n

“Magyar Suzuki is thecenter of Suzuki’sfuture plans inEurope.”

Profile Continued from Page 1

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 13

Change is afoot at the Polish NationalInvestment Fund PIAST. The fund’sautomotive holdings are beingreorganized to capitalize on their naturalsynergy and to enter new markets.

The fund owns six companies active inthe automotive sector: battery maker“ ZAP” PIASTOW (batteries); FMS“POLMO” S.A. (steering gears, driveshafts, and steering shafts); FOS“POLMO” LODZ S.A. (pneumaticbraking system compressor, fuel pumps,carburetors); KAPENA S.A. (buses);WSK “KRAKOW” S.A. (water pumps,water & oil coolers, oil separators);“FAMAROL” S.A. (agriculturalequipment).

Charles Highett is Vice President,Business Development with EurofundManagement Polska, the managers ofPIAST. Mr. Highett has specificresponsibility for the Automotive Groupwithin the fund. The CEAR spoke withMr. Highett about the changes takingplace at the fund and where the future isfor the automotive group.

How is the fund reorganizing itsautomotive group?

We’re going to establish a holdingcompany and that’s on target for the thirdquarter of this year. [But] we’re puttingtogether something more than just a legalframework. We want to make sure [thecompanies all] work together properly.

We’re [focused] on trying to make surethat all the systems are right, all themanagement methodologies are right,and the right culture is in place. We’recross relating all sorts of contacts andtechnologies. There’s a huge amount ofgood will if you actually put it alltogether and leverage it. The sum of thewhole is much greater than the sum ofthe individual parts.

Were any of the companies workingtogether before the fund brought themtogether?

No, they were brought together under the

fund. Some had a clear direction, othersdidn’t. We pretty much know wherewe’re going with each company.

Some of the companieshave a number ofproduct groups,sometimes in disparatemarkets. Having amanagement trying tomanage differentmarkets, it becomesrather difficult. Sowhat we had to do isensure thatmanagement groupsclearly focused on onebusiness area. We thenstarted splitting thecompany into two or three strategicbusiness units or profit centers, or asappropriate for the company.

That’s now taking place and it’s createdan energy all by itself. It’s veryinteresting to observe how people whonow run the SBUs are demanding leanerprocesses and better service. Thiscreates some tension — but mostly it ishealthy.

Do you plan to sell off any of thecompanies in the Fund or keepeverything together as one entity?

Anything that is non-core, we’ll spin off.Anything that is core to our strategy,we’ll keep in the fund. If the businessand technology is global, we willprobably be going down the route offinding a strategic investor, but we wantto keep a significant stake for ourselves.

Investors in the holding company wouldprobably not be focused on individualproduct groupings. They would almostcertainly be either financial investorswho are interested in the sector or astrategic investor who has a widerinterest in the automotive aftermarket.

What automotive customers are youtargeting for the companies?

In Poland, the key customers are very

clear. Daewoo and Fiat are valuedcustomers. We’ve had detaileddiscussions with GM and we’re hopefulin a number of areas. With Isuzu, it willbe interesting to see how they’re going tosort out their supply base because they’revery specific. We’d like to think we’regoing to be able to supply Isuzu in anumber of areas but they set extremelytough criteria and have already

established firmlinks with existingsuppliers.

Of course, we’reinterested insupplying Andoriawho has the newRenault engines —and we must notforget the localtruck, bus, andtractormanufacturers, withwhom we enjoyexcellent relations.

We are realistic. If we can’t do it directlywith our own technology, we’ll eitherbuy licenses or bring in someone to do itwith us. Some of these matters are underdiscussion now, but I can’t be morespecific.

What are you doing to improve thedifferent companies’ product qualitylevels?

ZAP, FMS Polmo, FOS Polmo Lodz,and WSK Krakow all got ISO 9000 lastyear. FMS Polmo is going for QS 9000this year. The rest will be going for QS9000 as well. And we’ll be looking atISO 14000. We have to be there and wewill be there.

Will you focus on the OE market oraftermarket?

What we’re aiming at is to principallydevelop in the aftermarket, but not losingsight of the OE market. We recognizethe aftermarket is in the long run morelikely to give us a stable business and isnot a globally controlled business. TheOE business, when you get intosubassemblies, for example, is for themost part globally controlled. It’sdifficult to see how small companies cancompete in that market.

“There’s a hugeamount of good will ifyou actually put it alltogether and leverageit. The sum of thewhole is much greaterthan the sum of theindividual parts.”

Polish Fund Reorganizes AutoHoldings to Take on Aftermarket

Continued on Page 20

14 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

RRRRRussia & CISussia & CISussia & CISussia & CISussia & CISWWWWWatcatcatcatcatchhhhh

Certain large-scale investments inautomobile and automotive partsproduction are eligible for

exemptions from import customs dutiesand taxes for a period of up to 7 yearspursuant to Russian Presidential DecreeNo. 135 of February 5, 1998 (“DecreeNo. 135”).

In general, to qualify for the customsbenefits envisioned by Decree No. 135,an investment project must: (1) involvetotal investments of atleast 1.5 billion rubles($250 million) over afive year period; (2) forprojects with foreigninvestment, the foreigninvestor must invest150 million rubles ($25million) in the chartercapital of the Russianinvestment vehicle; and(3) by the end of a fiveyear period, at least50% of the totalproduction costs mustbe incurred in Russia.

On April 23, 1998, the RussianGovernment enacted a series ofregulations spelling out the requirementsof Decree No. 135 in greater detail.

In order to secure the benefits of DecreeNo. 135, a Russian entity owning amanufacturing facility must execute aninvestment agreement with the Ministryof the Economy and obtain approvalfrom the Russian Government (Cabinetof Ministers). Prior to these steps, theRussian company is first required todevelop a feasibility study and a businessplan for the investment project.

The feasibility study must be reviewedby examination boards of the Ministry ofthe Economy, the Ministry of Finance,the State Construction and HousingPolicy Committee, the StateEnvironmental Protection Committeeand the Fire Prevention Service of theMinistry of Internal Affairs and approvedby the Expert Council of the RussianGovernment.

Duty Free Imports

The customs benefits under Decree No.

135 are granted by declaring themanufacturing facility a “freewarehouse”, a customs regime underwhich components, raw materials andother inputs may be imported duty free tothe manufacturing facility and used tomanufacture a final product which maybe sold elsewhere in Russia.

Based on the approval of the RussianGovernment, the State CustomsCommittee grants the manufacturing

facility a licensefor the operationof a “freewarehouse”,which may notbe revokedwithout the priorconsent of theRussianGovernment.No productionat themanufacturingfacility otherthan asauthorized by

the Russian Government decision todesignate the facility a free warehouse ispermitted.

Vehicles and automotive partsmanufactured at an eligible facilitywithin the annual quotas established bythe Russian government are deemed tooriginate in Russia provided the localcost sourcing rules established by DecreeNo. 135 are complied with. Suchvehicles and automotive parts are notsubject to import customs duties andtaxes when shipped from themanufacturing facility to the rest ofRussia (such items will, however, besubject to domestic VAT and other taxeson the sales of vehicles within Russia).

Vehicles and automotive parts shippedfrom the manufacturing facility thatcomply with local cost sourcing rules,but exceed the annual quotas, are subjectto the normally applicable customs duties(at the rates in effect as of the time thecomponents or raw materials werebrought to the facility).

For vehicles and parts shipped from amanufacturing facility that do notcomply with the local cost sourcing

rules, the foreign components, rawmaterials and other inputs in the finalproduct are subject to import customsduties (at rates in effect as of the time theinputs are shipped from the facility).

Local Cost Sourcing Rules for Vehicles& Parts

Vehicles are deemed to meet the localcost sourcing rules if (1) they aremanufactured from separate componentsper a list approved by the Russiangovernment1 and (2) the share of costsincurred in Russia that are included inthe cost of production is 10% for the firstyear of the investment project, 20% forthe second year, 30% for the third year,40% for the fourth year and 50% for thefifth year and each year thereafter.

While the first part of the test may beintended to ensure that vehicles areactually produced at the manufacturingfacility, rather than merely assembledfrom kits, the regulations are somewhatambiguous and we are seeking furtherclarification from the Russiangovernment.

For parts, the local costs sourcing rulesare met if the annual local cost ratiorequirements (i.e., 10% for the first year,20% for the second year, etc.) arecomplied with. Costs incurred in Russiaare calculated as a ratio of the differencebetween overall production costs and thecost of imported raw materials,components and services to overallproduction costs (Overall ProductionCosts - Cost of imported inputs/OverallProduction Costs). Production costs aredetermined in accordance with Russiancost accounting rules, which are fairlyrestrictive and limit the inclusion ofcertain costs, including interest on loansused to acquire fixed assets.

Yearly Reports to RussianGovernment

Each year an eligible facility must submitto the Ministry of Economy, the Ministryof Finance and the State CustomsCommittee the following: a report on theshare of expenses incurred in Russia,certified by the Russian tax authorities; a

Russia’s Auto Sector Investment IncentiveDecree ExplainedSarah Carey, Partner, Steptoe & Johnson LLP

Continued on Page 16

“The customs benefits aregranted by declaring themanufacturing facility a‘free warehouse’, allowingcomponents, rawmaterials and other inputsto be imported duty free.”

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 15

At the end of 1997, the HungarianParliament passed a newCompanies Act. This Act will

come into force on June 16, 1998 and itmade the modification of some otherrelated acts necessary as well, includingseveral tax and accounting acts.

Dividend advance

From June 16, 1998, a dividendadvance can be paid only if theinterim balance sheet of the companymeets the following provisionsregarding payment of dividend:

Having paid the dividend advance, theequity of the company, computed by a

special method, cannot be lower than itsregistered share capital.

Thus, equity minus 1) tied-up capital orprofit reserve (retained earnings); 2)valuation reserve; 3) difference betweenthe deferred loss on foreign currency

investment credit and the provisions setup for it; and 4) dividend advance mustbe higher or equal to the registeredcapital.

Companies already existing on June 16,1998 have to apply the provisions in theyear 2000 for the first time.

Allowance received from a person notqualified as taxpayer, debts forgivenor assumed by him

From June 16, 1998, the allowancerendered by a resident/non-resident whodoes not qualify in Hungary as ataxpayer, as well as the debt forgiven byhim will not be handled for CIT purposesas dividend received, thus the tax basecannot be decreased by this sum.

Registration with the tax authority

From June 16, 1998, newly foundedcompanies will have to register only withthe court of registration. They willreceive the tax number, the statisticalnumber, and social security number (TB-number) through the court ofregistration.

Individual entrepreneurs will receive thetax number and social security numberthrough the economic chambers.

It is a significant change that fromJune 16, 1998 business activity cannotbe started in Hungary without a taxnumber n

“It is a significant changethat from June 16, 1998business activity cannot bestarted in Hungary without atax number.”

Tax, Customs, and Finance ReviewIldiko Hadas, Senior Manager, Ernst & Young, Budapest Office

Company 1998 1st Q 1997 1st Q % ChangeDacia 21,794 19,824 9.94%Daewoo 3,546 3,037 16.75%ARO 476 317 50.15%Volkswagen 307 281 9.25%Skoda 186 65 186.15%Ford 151 198 -23.73%Renault 136 34 300.00%Fiat 72 46 56.52%Kia 67 16 318.75%Nissan 56 23 143.47%Mercedes Benz 36 43 -16.27%Peugeot 36 7 414.28%Hyundai 32 10 220.00%Opel 30 24 25.00%

Source: APIA

Top Selling Passenger Car Brands in Romania (1 st Q)((units sold)

Romanian Car Exports (in units)

Company Model 1998 1st Q 1997 1st Q % ChangeARO 10 (1.4 liter) 27 54 -50.00%

10 (1.9 liter diesel) 107 133 -19.54%24 (2.5 liter) - 2 -24 (2.5-3.2 liter diesel) 2 19 -89.47%

Dacia Berlina 1.4 liter - 410 -Break 1.4 liter 13 5 160.00%Nova 1.6 liter 241 29 731.03%

Daewoo Cielo 1.5 liter 1,282 344 272.67%Espero 1.8 liter - - -

TOTAL 1,672 996 67.87%

Source: APIA

Romanian Car Exports (1 st Q)

16 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

measurement system: customersatisfaction, market share, defect rate,etc. This is absolutely normal, andindeed commendable.

The KSF “new products,” for instance,may be measured by “number of newproducts/number of total products.” AnIC-management system project, however,often gives rise to new insights regardingboth what will make or break thestrategy, and how to measure this in newways.

Put Indicators Back into Your ICLanguage

Indicators derived from one KSF do notnecessarily end up in the same IC form.On the contrary, often a single KSFincludes aspects of people’s skills,money, customer or partner relationships,and innovations. The next step is todevelop an appropriate IC-management“model,” one that allow you to put the

Excellence Continued from Page 9 various indicators into the few ICcategories you have already decidedmake most sense in your situation (seethe first article in this series).

The Management Challenge Revisited

Regardless of whether a company or unitis in manufacturing or service, thepurpose, business mission, vision, orgoals are always the starting point forwhat indicators to use.

The creation of an IC managementsystem is both a top-down and a bottom-up process. The initial start of the idea,as well as the initial framework, mustcome from the topmost layers of theorganization. The COSA team had thesupport of Vito Baumgartner, itschairman, and even Don Fites, CEO andChairman of Caterpillar Inc. in theglobal headquarters in Peoria, Illinois,was informed.

Yet, top management can only supplythe language and the framework — the

IC-categories. The filling in of theframework, the articulation of KSF andhow to come up with adequate measurescan only be done at a local level, by thepeople that know the day-to-day realitiesof the business.

The management challenge from thisperspective is to nurture and leveragegrowth in your company’s relevant IC –the one that helps you reach yourmission — and pick up on early warningsigns of declining IC.

This article helps you to begindeveloping a tool to manage IC after youmeasure its growth or decline. The topicof next month’s article is how to simplifymanagement by consolidating the manyindicators into a few indices, and a singleIC-index. Such an index will enable youto benchmark IC growth or declineamong units and companies.

Next Month: Developing an IC-Index

report on actual investments to date;information on production volumes,confirmed by an agency designed by theState Customs Committee; and a reporton the extent to which the facility’squotas have been reached or exceededand amount of customs duties saved bythe manufacturer as a result of thecustoms benefits.

Based upon an analysis of these reports,the Ministry of Economy and the StateCustoms Committee recommend to theRussian Government the level of quotasfor finished products eligible for importcustoms duties exemptions for thefollowing year. Quotas for eachmanufacturer are established both interms of number of units and overallvalue.

1 The list contains a minimumdescription of components that must beused in manufacturing automobiles at aneligible facility (including bodyassembly, engine, radiator, wheelassembly, front and rear wheelsuspension, battery, shock absorbers,exhaust system and repair kit) and maybe revised for a particular investmentproject by decision of the RussianGovernment n

Russia Continued from Page 14

Romanian Car Production & Assembly (in units)

Company Model 1998 1st Q 1997 1st Q % ChangeARO 10 (1.4 liter) 69 230 -70.00%

10 (1.9 liter diesel) 80 243 -67.07%24 (2.5 liter) 75 69 8.69%24 (2.5-3.2 liter diesel) 167 426 -60.79%

Dacia Berlina 1.4 liter 14,601 14,143 3.23%Break 1.4 liter 4,657 4,797 -2.91%Nova 1.6 liter 2,945 2,372 24.15%

Daewoo Cielo 1.5 liter 240 6,526 -96.32%Espero 1.5 liter - - -Espero 1.8 liter 578 780 -25.89%

TOTAL 23,412 29,536 -20.73%

Source: APIA

Romanian Car Production & Assembly (1 st Q)

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Classifieds &Investment Opportunities

CENTRALEUROPEAUTOMOTIVEREPORT™

Manufacturer of drivingshafts, steering shafts,steering gears, and spareparts seeks foreign investorWieslaw KosieradzkiPIASTtel: 48-22-827-8700fax: 48-22-826-7341Poland

Manufacturer of centrifugaloil separators, heaters, waterand oil coolers for cars &trucks, water pumps forvans, trucks, and ships seeksforeign investorWieslaw KosieradzkiPIASTtel: 48-22-827-8700fax: 48-22-826-7341Poland

Manufacturer of fuel supplysystems for car & vanengines, compressors forpneumatic braking systemsfor cars, buses, & farmtractors, compressor units &pneumatic fittings, & spareparts for compressors seeksforeign investorWieslaw KosieradzkiPIASTtel: 48-22-827-8700

fax: 48-22-826-7341Poland

Manufacturer of hydrauliccylinders, up to 32 barspressure, 25-160 pistondiameter, up to 4,000 mmlength, seeks SlovakRepublic commercialcooperation, offersproduction to orderJorgen VarkondaSNAZIRre:Rerosa s.r.o.tel: 421-7-5335-175fax: 421-7-5335-022Slovak Republic

Manufacturer of exhaustflanges, light welded steelconstructions, agriculturalmachines, and hydrauliccomponents under SauerCo. license seeks jointventure partnerJorgen VarkondaSNAZIRre: Topolcianske Strojarnea.s.tel: 421-7-5335-175fax: 421-7-5335-022Slovak Republic

Manufacturer of car & truckair and oil filters seeks jointventure partner forproduction, financial, anddistribution cooperation.Monthly air filter capacityfor cars of 60,000, and6,000 for trucksJorgen VarkondaSNAZIRre: Sandrik a.s.tel: 421-7-5335-175fax: 421-7-5335-022Slovak Republic

Manufacturer of pressedparts for cars, press units,electric carriages, andmachine tools seekscommercial or productioncooperationJorgen VarkondaSNAZIRre: BAZ a.s.tel: 421-7-5335-175fax: 421-7-5335-022Slovak Republic

U.S. partner sought forCzech producer ofcrankshafts (various sizesup to 2500 mm lengths) forpurpose of contractmanufacturing. Company is

supplier to producers ofengines for trucks, tractors,ships, & stationaryaggregates. 1996 turnoverexpected to be $20 million.Jan VeselyIESCtel: 420-2-2499-3170fax: 420-2-2499-3176Czech Republic

Partner sought for producerof diesel injectionequipment for development,production, & sale of singleand multi-cylinder in-lineinjection pumps for all typesof diesel engines, as well asfor injection systems,testing, measuring, &adjustment equipment.1995 turnover was $40million.Jan VeselyIESCtel: 420-2-2499-3170fax: 420-2-2499-3176Czech Republic

Manufacturer of plasticparts for Opel, Mercedes,VW, & Suzuki seeks equitypartner who is engaged inplastic processing business$5 millionCsaba Kilianre: Pemu ITDHtel: 36-1-118-0051fax: 36-1-118-3732Hungary

Supplier of seats for Suzukicars & Spare parts forIkarus seeks purchaser.Company undergoing

privatization process.Csaba Kilianre: 02/Aut/96ITDHtel: 36-1-118-0051fax: 36-1-118-3732Hungary

Battery manufacturer seeksjoint venture partner forprocessing used vehiclestarter batteries$2.1 millionCsaba Kilianre: PerionITDHtel: 36-1-118-0051fax: 36-1-118-3732Hungary

Russian bus company seeksAmerican joint venturepartner to manufacture newbus models. Business planavailable in EnglishVictor SergeyevichKostromin General DirectorPavlovo Bus Co.tel: 7-83171-6-81-14fax: 7-83171-6-03-18Russia

Russian company seeks ajoint venture partner to re-build car and truck tires andrecycle tires and otherrubber products into pellets.Alexander NikolayevichKalin General DirectorKstovo Tire Repair &Recyling PlantTel: 7-8312-38-12-75Fax: 7-8312-38-12-75

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Make sure the auto industry hears about your company’s activities inCentral Europe. Send the CEAR™ your news about:

• recent and projected sales and production figures• new joint ventures or cooperation agreements• facility expansion plans (e.g. new equipment, new buildings)• business expansion plans (e.g. new markets, new products, new supply contracts)• personnel changes, recent awards, licenses, certifications• new product news• upcoming company events (e.g. supplier conferences)

Fax, email, or mail press releases to the CEAR™:Email: info@cear.comFax: +1-206-374-5282Toll Free inside US Fax: (800) 684-3393Slovak Republic Fax: +421-7-361-085Post: 4800 Baseline Rd. Suite E104-340, Boulder, CO 80303 USA

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18 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

360 sets of 1500cc SOHC engines andmedium-type transaxles that will equipLanos models produced by Daewoo inPoland.

Another 3,800 sets will leave for Polandlater in June. Final homologation hasbeen obtained for Daewoo’s SOHCengines (single camshaft) and for themedium-type transaxles.

Daewoo Heavy Industries BuyingVehicle Manufacturer

Daewoo announced that it is acquiring a51% stake in the company Mecatim.Mecatim is a manufacturer of small cars,tractors, and automotive componentsbased in Timisoara, Romania. Mecatimwill reportedly supply parts to Daewoo’sassembly plant in Romania, as well as toother Daewoo plants.

Slovenia

New Cars Sales Drop In Slovenia

At the end of April, new cars sales inSlovenia totaled 23,302 units, down2.6% from 23,927 units sold during thesame period last year. Market leaderRenault saw its market share drop to18.83% from over 20% a year earlier.Renault’s sales totaled 4,387 vehicles.

Second ranked Volkswagen’s sales wereoff 2.5% at 2,887 units. VW controls12.39% of the market. Third rankedDaewoo saw its sales jump over 140% to2,032 units. The Korean company’smarket share shot up from 3.51% to8.72%.

The 5 best selling models in Sloveniaduring the first four months of 1998 werethe Renault Megane, Volkswagen Polo,Renault Clio, Fiat Punto, and OpelCorsa.

South Central Europe

Opel Top Seller In Croatia

During the first four months of 1998,Opel was the top selling brand inCroatia. Sales of 2,693 cars gave thecompany a 13.8% market share. TheOpel Corsa captured a 7% market share,and the Vectra also turned in strong sales.Sales of the new Astra in Croatia beginon May 22, 1998 n

Umformtechnik Erfurt .

Skoda (unrelated to the Volkswagen-owned Skoda-Auto) produces a widerange of equipment and machinery forthe transportation, nuclear power, andother industries. According topreliminary figures, the companysuffered a CZK 1.78 billion ($54 million)loss in 1997.

Hungary

Suzuki & GM Cooperate on Small Car

General Motors Europe and SuzukiMotor Corp. have agreed to jointlydevelop a new vehicle in the small carsegment. “We plan to produce 50,000units of the new car,” said TamasTihanyi, the PR & Marketing Managerfor Suzuki’s subsidiary in Hungary,Magyar Suzuki. (for more on MagyarSuzuki, see Profile on page 1)

RABA Engine Fitted With NewNatural Gas Vehicle System

Transcom International’s affiliatedcompany, Transcom EngineCorporation has developed anelectronic fuel injection and enginecontrol system for heavy duty vehicles.In May at the NGV’98 natural gasvehicles conference and exposition heldin Cologne, Germany, Transcom featuredan advanced turbocharged RenaultMGDR:06.20.45 natural gas engine anda RABA G10-TE190 natural gas enginefitted with the Transcom Natural GasVehicle System (NGVS). Both engines,one from Renault Vehicle Industries ofFrance, the other from RABA MotorCompany of Hungary, achieve theEURO III draft exhaust emissionstandard.

Transcom has invested over AUS $40million (US $26 million) into its NGVSand has tested the system in severalcountries. Transcom’s computercontrolled fuel injection and enginemanagement system is currently inservice in city buses in Perth andCanberra, Australia, and Szeged,Hungary.

Slovak Republic

VW Bratislava Hints At Expansion

Volkswagen Bratislava is undergoing

massive change, with plans to triple itsoutput of Golf models in 1998 up to120,000 units. But even greaterexpansion may lie ahead.

VW Bratislava’s personnel director,Jaroslav Holecek, who is responsible forfinding all of the new workers for VW’sexpansion plans, hinted at much biggerthings to come during a May speech inBratislava. After recounting VW’sturnover, investment, and employeefigures for 1998, he added that “thefigures for 1999 are several multiples ofthe figures for 1998.”

Turnover for 1998 is expected to be SK53,980 million ($1.6 billion), up fromSK 21,916 million ($660 million) in1997. Investment for 1998 is set at DM173.6 million ($100 million), and by theend of the year the company plans tohave 4,650 workers, an increase of over1,000 from last year.

CV Maker TAZ Sipox Looks toGermany for Business

TAZ Sipox, Ltd., Trnava is looking toexport its light commercial vehicle toGermany. TAZ took part in the Amitec’98 exhibition in Leipzig, Germany inApril to introduce the different versionsof its van, which include an ambulanceand hearse.

Final prices for the German market arenot yet set. Current prices begin at$12,600. According to TAZ’s marketingmanager Jaroslav Jurci, “the prices willbe very attractive to the customer.”

Last year, TAZ manufactured 831vehicles in various versions. Some 48%were exported, including exports to theCzech Republic. The TAZ vehicles arethe former Skoda 1203 model,production of which was moved fromMlada Boleslav, Czech Republic toSlovakia prior to 1989. The version ofthe van produced in Slovakia has aVolkswagen-made 1.9 liter dieselengine. TAZ intends to manufacture thevan, at the latest, until the year 2000.

Romania

Daewoo Sending Engines &Transaxles to Poland

On June 3, 1998, the first batch ofengines and transaxles left DaewooAutomobile Romania’s plant forPoland. Three trucks were loaded with

Highlights Continued from Page 4

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 19

Submit Your Nominations for the1998 CEAR™ Central European Automotive Excellence Award

The CENTRAL EUROPE AUTOMOTIVE REPORT™ is accepting nominations for the 1998 CEAR™ Central EuropeanAutomotive Excellence Award. This award will be presented to the Central European automotive manufacturer or supplier thathas best demonstrated market leadership through its use of innovative manufacturing and marketing systems. The award isgiven to recognize the positive influence such exemplary leadership has on the development of the Central Europeanautomotive sector. We would greatly appreciate your input in nominating candidates for this award.You may nominate your own company or others. The deadline for nominations is August 15, 1998.

1st Nominee Reasons

2nd Nominee Reasons

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Can you give us an update on Skoda’ssupplier localization program? Arelocal suppliers able to meet the qualityrequirements for Skoda’s new models,or will more supply contracts beshifted to Western companies?

“For Skoda-Auto it was alwaysabundantly clear that the only way toprosper was to continue to be able tomanufacture vehicles at favorable costlevels and therefore with its localsuppliers, but only then when Skoda wasable to do this to the high Westernquality and technical standards. Today,our customers expect the highest qualityand service at a Skoda price.

Out of 767 Skoda suppliers, 279 areCzech and Slovak. Skoda currentlysources nearly 75% by value of itspurchasing volume from these suppliers,and a further 25% from suppliers abroad.A major reason for this success was thework of Skoda’s supplier developmenttask force, as well as Skoda’s role asfacilitator for partnerships with Westernsuppliers. Skoda has been instrumentalin the creation of 90 joint venture andgreenfield agreements between Westernand Czech/Slovak companies.

By now, our suppliers use the latesttechnology and deliver world classquality components not only to Skoda,but to other vehicle manufacturers withinand outside the Volkswagen Group. For1997, they were awarded contracts fromVW , Audi , and Seat of a value of morethan DM 483 million ($268 million) peryear. As more and more Skoda suppliersachieve the higher quality ratings, so too,will their chances of being able to supplyinto the VW Group increase.”

What’s the biggest problem faced bylocal suppliers?

“After the fall of Communism, mostsuppliers obviously lacked Westernknow-how and technology. Therefore, afast knowledge transfer and strongWestern partners were of criticalimportance. Skoda’s fast growth inoutput helped the suppliers to quicklyrecover their high initial investmentoutlays and to strengthen their position inthe European supply industry.”

How are the on-site suppliers at thenew Octavia plant working out? Anyunseen difficulties with this type of asupply arrangement?

“We regard the integration of majorsystems (e.g. seats, doors, etc.) suppliersas an important strength of ourproduction system because it has clearlogistical advantages and allows thefastest possible flow of informationbetween car manufacturer and supplier toinstantly solve any problems. So far, thesystem is very successful and we havenot faced any major difficulties.”

What’s an important marketing trendin the Central European auto industryand how is Skoda-Auto contendingwith it?

“Central Europe is a reemerging marketin the world. Clearly, the levels ofincome in Central Europe are still farbehind Western standards. Therefore,car buyers are looking for high qualityand reliable products, as well as lowprices and low service/maintenancecosts. Skoda provides that.”

Last time we spoke, you mentionedthat Skoda-Auto makes heavy use ofthe press to promote its vehicles. Isthis still your primary source ofmarketing or have you adopted anynew strategies?

“We have placed a strong focus onexposure marketing and have added TVspots to our media unit. But still wehave a major focus on PR activities tosupport our marketing unit.”

5 Questions With Detlef Wittig,Vice Chairman & Chief Financial Officerof Skoda Auto

20 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

1998August 26-30 Moscow, Russia Moscow Int’l Motor ShowSept. 3-10 Hanover, Germany Auto ShowSept. 14-16 Nagaya, Japan Int’l Symposium on Advanced Vehicle

ControlsSept. 15-20 Nitra, Slovakia Autosalon NitraSept. 15-20 Frankfurt, Germany AutomechanikaSept. 18-27 Bucharest, Romania Bucharest Motor ShowSept. 27-Oct. 1 Paris, France FISITA World CongressSept. 29-Oct. 1 Detroit, MI Int’l Body Engineering ConferenceSept. 29-Oct. 4 Budapest, Hungary AutotechnikaOct. 1-3 Brussels, Belgium Int’l Electric Vehicle SymposiumOct. 1-11 Paris, France Int’l Road Transport ExhibitionOct. 1-11 Paris, France Int’l Paris Motor ShowOct. 6-8 Detroit, MI Global Powertrain CongressOct. 8-12 Ho Chi Minh City, Vietnam Auto Vietnam 98Oct. 12-13 Warsaw, Poland IBC UK Automobiles in Eastern

Europe ConferenceOct. 13-15 Amsterdam, The Netherlands InterAuto ’98Oct. 16-25 Sydney, Australia Int’l Motor ShowOct. 16-25 Panama City, Panama Panama Auto ExpoOct. 23-Nov. 1 Birmingham, UK British Int’l Motor ShowOct. 29-Nov. 1 Istanbul, Turkey Commercial Vehicles ’98Oct. 29-Nov. 8 Sao Paulo, Brazil Brazil Int’l Automobile Trade ShowNov. 4-7 Bangkok, Thailand Asia Automotive ’98Nov. 4-8 St. Petersburg, Russia St. Petersburg Auto & Service

ShowNov. 5-8 Istanbul, Turkey Auto ShowNov. 12-15 Cairo, Egypt, Cairo Motor ShowNov. 14-22 Suntec City, Singapore Singapore Motor ShowNov. 17-21 Sofia, Bulgaria Bulgaria Int’l Specialized Trade Show

Exhibitions, Conferences, and Shows in 1998 & 1999

disciplined approach to ensure theeffective resolution of internal andexternal supply problems by thedetermination of root cause andprevention of recurrence is clearlydemanded by QS-9000 and the MaterialManagement System requirements. Thesteps in the disciplined approach arerecommended as follows:

• Management decision to use Team-Oriented Problem Solving approach

• Form a team and use team approach• Define the problem and plan to take

action• Implement and verify interim

containment action(s)• Find, define, and verify root cause(s)• Select and verify solution(s) to

ensure permanent corrective actions• Implement permanent corrective

actions• Prevent recurrence of this and

similar failures, also identify anycompany improvementopportunities.

• Recognize individual contributionsand congratulate the team

Next Month: What the Sub-contractorSupply Base Expects of Their Customers

• Purchasing/SubcontractorManagement

• Product Identification & Traceability• Shipping• Manufacturing Flexibility/Inventory

Management• Inspection, Measuring, & Testing• Corrective & Preventive Action• Handling, Storage, Packaging,

Preservation, & Delivery• Control of Material Records• Internal Material Audits• Training• Statistical Techniques

Team-Oriented Problem Solving using a

Poland.••••• Dacia — produces powertrain

components for its Berlina, Break,and Nova models

••••• Hyundai — Signed agreement withDacia to produce 50,000 HyundaiAccent models and 100,000 enginesstarting in 1999. Accents will besold in Romania and engines will beused in Dacia models later in 1998.

••••• Roman — truckmaker producescrankshafts and camshafts n

Nov. 26-Dec. 6 Montevideo, Uruguay Montevideo Motor ShowNov. 27-Dec. 6 Essen, Germany Essen Motor ShowNov. 30-Dec. 2 Graz, Austria SAE Total Life Cycle Conference &

ExpositionDec. 2-5 Jakarta, Indonesia Indonesia Auto ShowDec. Detroit, MI SAE Global Vehicle Development

Conference1999Jan. 16-24 Brussels, Belgium Brussels Int’l Motor ShowFeb. 4-14 Amsterdam, The Netherlands Int’l Motor ShowMarch 11-21 Geneva, Switzerland Geneva Int’l Motor ShowMarch 26-Apr. 4 Belgrade, Yugoslavia Belgrade Motor ShowApril 8-16 Stockholm, Sweden Stockholm Int’l Motor ShowApril 11-17 Zagreb, Croatia Zagreb Motor ShowApril 13-18 Riga, Latvia Riga Motor ShowMay 22-30 Barcelona, Spain Barcelona Int’l Motor ShowMay 27-June 1 Poznan, Poland Int’l Automotive ShowJune 5-10 Brno, Czech Republic Brno Motor ShowJune 18-26 Sofia, Bulgaria Sofia Motor ShowAugust 24-29 Moscow, Russia Moscow Motor ShowSept. 30-Oct. 10 Bucharest, Romania Bucharest Motor ShowNov. 9-11 Birmingham, UK Autotech ‘99Nov. 13-21 Athens, Greece Athens Int’l Motor Show

Powertrain Continued from Page 5

Visit Trade Events under the Expert Directories at http://www.cear.comFor more information, please contact the CEAR™.To list Contact Information for your show contactTel: +1-440-843-9658, Fax: +1-206-374-5282, Email: info@cear.com

Quality Continued from Page 11

So we’ve got to move into theaftermarket. And we’re doing that by acoordinated strategy of developing adistribution structure and converting theproduct alignments. You can’t do thisovernight. It takes time. But the productlines must move into the aftermarket.That’s really where we want to be.

There are loads of things we’ve got up oursleeve that we can’t discuss at themoment. It’s all very exciting. It’scommercially sensitive information and ifwe let out too soon, we may lose some ofour initiative n

Fund Continued from Page 13

© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 21

Romanian Automotive DistributorsCEAR™Auto Italia

Fiat cars and LCVsHerbert Stein

Managing DirectorTel: [40] 1-2505030Fax: [40] 1-2505173

Auto RomMercedes, Porsche

carsC. Gala

Managing DirectorTel: [40] 1-6654641Fax: [40] 1-3128623

Automobile BavariaBMW cars

Michael SchmidtManaging Director

Tel: [40] 1-7910828Fax: [40] 1-7910975

Automotive TradingServices

Citroen cars & LCVsAnca Brebeanu

Managing DirectorTel: [40] 1-6506180Fax: [40] 1-3129594

Brimex MotorsChrysler, Jeep

vehiclesHoratiu Ionescu

Managing DirectorTel: [40] 1-3233623Fax: [40] 1-4105155

Car & TruckVolvo cars and trucks

Petru CroitoruManaging Director

Tel: [40] 1-3111310Fax: [40] 1-3120836

Carpati MotorHonda carsDan Guta

Managing DirectorTel: [40] 1-3124790Fax: [40] 1-3124674

Civati TradingIndustries

Toyota cars and LCVsM. Ionescu MuscelManaging Director

Tel: [40] 1-2115047Fax: [40] 1-2115089

Compexit TradingSkoda cars

Razvan RottaManaging Director

Tel: [40] 64-426619Fax: [40] 64-426958

Daewoo Auto TradingDaewoo cars

Ioan BanManaging Director

Tel: [40] 1-2100156Fax: [40] 1-2100166

Daperom Grup AutoPeugeot, Dacia cars

and LCVsPaul Schiaucu

Managing DirectorTel: [40] 48-633043Fax: [40] 48-215666

Eurial InvestPeugeot cars and

LCVsGheorghe Utii

Managing DirectorTel: [40] 1-3128296Fax: [40] 1-3128434

Gest ImpexSuzuki cars

Fouad KaramManaging Director

Tel: [40] 1-3123512Fax: [40] 1-3127016

HCS RomtradeOpel cars

Mihai ParascanManaging Director

Tel: [40] 1-3128541Fax: [40] 1-3128558

Hyundai AutoRomania

Hyundai cars andLCVs

Dan GheorgheManaging Director

Tel: [40] 1-2228970Fax: [40] 1-2227086

IPSORenault cars and

trucksEmmanuel JoubertManaging Director

Tel: [40] 1-2303402Fax: [40] 1-2301875

IVECOIveco LCVs, trucks,

and busesCristian Helvig

Managing DirectorTel: [40] 1-2115047Fax: [40] 1-2115089

Midocar srlAudi, Volkswagen car

and LCVsSilviu Preoteasa

Managing DirectorTel: [40] 1-4103735Fax: [40] 1-3122804

Mitsubishi Corp.Mitsubishi cars

Titu ChebapManaging Director

Tel: [40] 1-2241827Fax: [40] 1-2241809

Nissan RomaniaNissan cars and LCVs

Paul BadeaManaging Director

Tel: [40] 1-2103567Fax: [40] 1-2103568

Porsche RomaniaVolkswagen, Audi,

Skoda cars and LCVsFranz Fruhwirth

Managing DirectorTel: [40] 1-2314289Fax: [40] 1-2314293

Romcar S.R.L.Ford cars and LCVs

Viorel NiculescuManaging Director

Tel: [40] 1-3129109Fax: [40] 1-2123665

SsangYong MotorsRomania

SsangYong carsDan Iordache

Managing DirectorTel: [40] 1-2320265Fax: [40] 1-2112992

Toyo MotorToyota cars and LCVsTadaharu MiyakoshiManaging Director

Tel: [40] 1-3112539Fax: [40] 1-3124794

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22 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

• Auto Plastics Review• Interview With Dana’s Perfect Circle• More Supplier Lists• Czech Republic Tax & Customs Update• Poland Sales and Production Statistics• Quality Improvement Lesson 5• Bulgarian Sales & Production Review• Lucas Takes On The Czech Republic• Measure Your Company’s Intellectual Capital

FUTUREISSUES

Chrysler Saves $20 Million Per AssemblyPlant With Virtual Manufacturing SystemNew Product Review

Builders and operators ofassembly plants in CentralEurope take note. Chrysler

Corporation appears to have found abetter way to build a car assembly plant.

Chrysler, in partnership with RockwellAutomation, Dassault Systemes,Deneb, and Progressive Tool &Industries, announced in May 1998that they have jointly developed a next-generation digital manufacturing systemthat will save millions of dollars andshave months in the development timeof passenger vehicles.

Chrysler’s system, Control ProgramGeneration and Analysis (C.P.G.A.),replaces the lengthy programming ofcontrol code to operate each workcellon the plant floor, thus shortening thelaunch time of manufacturing facilities.

“The C.P.G.A. technology will reducethe time it takes to program a typicalworkcell by thousands of hours, shavetwo to four months off the developmenttime of passenger vehicles, and saveupwards of $20 million per assemblyplant,” said Chrysler’s FrankEwasyshyn, vice president of AdvanceManufacturing Engineering.

“The system will also more readilyidentify and eliminate process variationin the build process for better vehiclequality, and improve communicationamong manufacturing, engineering, andsupplier personnel.”

The new system provides an integratedenvironment for tool process, vehicledesign, and the automated generation ofplant equipment diagnostics and controlcode. In addition, the system allows thesharing of process information for thegeneration and validation of controlprograms prior to tooling constructionin a vehicle program.

C.P.G.A. builds upon the DigitalManufacturing Process System(DMAPS), which Chrysler introducedwith Dassault Systemes in 1995.DMAPS is now a fully computerized

end-to-end product and processmanagement system which enablesChrysler to design, construct, and run a“virtual manufacturing process.”

C.P.G.A. further develops machine logicdigitally within the system — therebyeliminating the end-line programmingneeds — so workcell control logic isdefined much earlier and automatically.Controls engineers can then concentrateon other value-added areas of themanufacturing process rather thanmanual programming tasks.

In addition, C.P.G.A. is an integral partof the CATIA computer aided designsystem which Chrysler first used in1984. CATIA 3D models have replacedengineering drawings and allows for anintegrated design. This allows designersfrom different disciplines to betterunderstand how their parts relate toother parts during the design of thevehicle.

“The generation of control code is thelast step in integrating all the virtualmanufacturing advances we’ve madeinto one system and allows for seamlesscommunication to workcells on the plantfloor,” said Ewasyshyn. “It alsoprovides for the automatic generation ofdiagnostics and the verification ofcontrol code prior to the construction ofany tooling. By stretching theimagination, we’ve taken the virtualworld almost to its limits.”

C.P.G.A. captures product, process, andresource models in a common CADenvironment, which allows the data tobe shared among all stages of vehicledevelopment. Control code anddiagnostics are then generated from thegiven sequence of operations defined inthe particular process model along withthe tooling elements in the designmodel.

An important element is that the systemenables Chrysler engineers to programits manufacturing processes consistently,thereby reducing and even eliminatingprogramming errors. This allows all

manufacturing facilities across theorganization to operate on standardizedand optimized control code.

“A key feature is the creation of acentralized and consistent database ofprocess knowledge that our engineerswill tap into,” said Dan Vandenbossche,manager of Chrysler’s ManufacturingTechnical Support.

“This capture of best practices across allof our manufacturing facilities willimprove the knowledge base of plantpersonnel and process and tool designengineers, and benefit future productlaunches.”

The validation of control code in a virtualworld rather than on the plant floor willgreatly reduce workcell verification, thusshortening the launch time ofmanufacturing facilities. The generateddiagnostic rules and graphicalrepresentation of fault locations will alsoimprove machine operating cycles once aplant is launched.

The effort to develop computer generatedprogrammable codes began betweenChrysler and Dassault Systemes, Deneb,Rockwell Automation, and PICO in mid-1996. C.P.G.A. will be moving from thedevelopment stages into productionapplications over the next 12 to 24months n

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24 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

Company: Audi Hungaria Motor KftLocation: Gyor, HungaryContact: Peter Lore, Public RelationsBusiness: Engines, Car Assembly

Audi is obviously pleased with itsdecision to build engines in northwesternHungary. The engine plant, producingsince August 1994, is now thecompany’s most important enginebuilding facility. By the year 2000, Audiexpects to produce 4,000 engines a day.And in April 1998, Audi expanded itsoperations in Hungary with the start ofassembly of the TT Coupe model.

Audi’s car and engine factory is locatedin the city of Gyor, halfway betweenBudapest and Vienna. When searchingfor a suitable site for its new plant, Audilooked at 180 locations throughoutEurope and chose Gyor. AudiHungaria Motor Kft. was founded inFebruary of 1993 as a fully-ownedsubsidiary of Audi AG .

The Plant

The plant is located in a customs freezone on a 480,000 sq. meters site. Theengine building takes up 110,000 sq.meters of this area, and within the enginebuilding, car assembly operations cover35,000 sq. meters of space.

According to Peter Lore, AudiHungaria’s spokesman, there are “noconcrete plans” for the remaining unusedspace at the facility in Gyor.

Back in 1994, some 200 workers helpedproduce 750 four-cylinder, five-valveengines a day. Today, 2,600 unionizedemployees churn out 2,500 4-cylinder,1,000 V6, and 100 V8 engines a day.The engine plant runs 3 shifts a day, 7days a week.

Since April, TT Coupes have been addedto the factory’s menu, and production ofTT Roadsters will soon follow. Total carassembly capacity is 30,000 units —10,000 TT Roadsters and 20,000 Coupes.“This year we are planning to produceabout 10,000 units, just Coupes,” saidMr. Lore.

The car assembly plant currently operateswith one shift and employs 360 workers.“By November, we will have 3 shifts,”said Mr. Lore.

By the year 2000, employment in Gyorwill hit 3,000 workers, with Audi’s totalinvestment topping DM 841 million($480 million).

Logistics

In 1996, shipments of materials andengines between Hungary and Ingolstadt,Germany were switched from road to rail.Components and blanks destined for theGyor engine plant are batched inIngolstadt and transferred to Gyorovernight by rail.

Thus, components leaving Ingolstadt in

the evening can be processed and usedthe next morning in Gyor. After thecomponents are machined andassembled, the completed engines areshipped back to Ingolstadt by rail.

“We have two trains for the engine plantand we will have 2 trains for the carassembly operation by the end of thisyear,” said Mr. Lore.

Engines built in Gyor are used in Audi,Volkswagen, Skoda, and Seat cars.

The Workers

As in most of today’s leanmanufacturing operations, thehierarchical structure at the Audi engineplant is flat and decision making isdecentralized. Workers are organizedinto teams and are empowered to maketheir own decisions. Performancetargets and procedures are set jointly bythe workers and management. Insidethe factory, target and currentproduction levels are displayed onpanels where all workers can see them.

There are two reporting levels at thefactory between the plant managementand production teams — the ProductManager and Area Manager. There isonly one reporting level inadministration.

Worker pay at the engine factory isbased on a standardized, performance-based remuneration system whichincludes a basic wage and a variablecomponent tied to individualperformance n

Audi Assembling Engines & Autos in HungaryCompany Spotlight

Sales (Units) YTD April

1992 1993 1994 1995 1996 1997 1998 % Change vs ‘97

————— Passenger Cars —————Local Production 144,748 170,549 199,724 206,284 260,265 337,467 100,229 24.62%Import 54,531 71,059 50,558 58,754 114,347 140,493 37,296 -25.72%Total 199,279 241,608 250,282 265,038 374,612 477,960 137,525 5.27%

————— Commercial Vehicles —————Local Production 19,665 18,475 21,413 28,076 43,207 43,086 9,988 -11.23%Import 3,250 5,497 2,542 3,870 7,586 12,217 2,378 25.09%Total 22,915 23,972 23,955 31,946 50,793 55,303 12,366 -5.98%

Source: SAMAR, s.c.

Sales of New Cars and Commercial Vehicles in Poland

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© Central European Trade & Marketing, L.L.C. 1998 http://www.cear.com ™ CENTRAL EUROPE AUTOMOTIVE REPORT™ • July 1998 25

Romanian New Vehicle Sales (in units)1998 1st Q 1997 1st Q % Change

Passenger Cars 27,083 23,991 12.88%Light Commercial Vehicles 6,106 4,043 51.02%Commercial Vehicles (3.5-7 ton) 251 141 78.01%Commercial Vehicles (over 7 ton) 403 216 86.57%Buses 143 201 -28.85% Up to 15 places 54 58 -6.89% Over 15 places 89 143 -37.76%TOTAL 33,986 28,726 18.31%

Source: APIA

Romanian New Vehicle Sales (1 st Q)

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Passenger Cars Commercial Vehicles

Make Volume Market Share Make Volume Market ShareFIAT 44,223 32.16% DAEWOO MTR. 3,121 25.24%DAEWOO 38,126 27.72% DAEWOO 2,662 21.53%GM - OPEL 10,558 7.68% CITROEN 1,252 10.12%SKODA 6,658 4.84% MERCEDES 1,011 8.18%RENAULT 5,344 3.89% VW 807 6.53%FORD 5,134 3.73% FIAT 696 5.63%VW 4,339 3.16% SKODA 672 5.43%TOYOTA 4,308 3.13% FORD 448 3.62%HONDA 4,284 3.12% PEUGEOT 428 3.46%SEAT 3,394 2.47% IVECO 332 2.68%

Source: SAMAR, s.c.

Best Selling Brands in Poland (YTD April 1998)Ranking By Retail Volume

26 July 1998 • CENTRAL EUROPE AUTOMOTIVE REPORT™ http://www .cear.com ™ © Central European Trade & Marketing, L.L.C. 1998

Country 1998 1997 % Change1 Germany** 971,900 869,320 11.82 Italy** 716,500 617,672 16.03 U.K. 622,600 550,486 13.14 France 460,200 406,897 13.15 Spain** 272,000 239,016 13.86 Netherlands** 167,800 159,052 5.57 Poland* 137,525 130,635 5.38 Belgium 136,500 122,862 11.19 Austria** 80,000 75,472 6.010 Switzerland** 69,100 68,688 0.611 Portugal** 58,800 55,577 5.812 Sweden 58,300 51,411 13.413 Ireland** 56,400 51,180 10.214 Greece** 44,900 41,005 9.515 Denmark** 40,400 39,300 2.816 Finland 34,200 30,292 12.917 Norway 27,000 29,703 -9.118 Luxembourg 9,900 9,602 3.1

*Grey import not included** Provisional figures

Source: SAMAR, s.c.

New Car Registrations Growth in Europe (YTD April)

Passenger Cars Light Commercial Vehicles Medium Commercial Vehicles

Make Units % Change Make Units % Change Make Units % Change’98 v ’97 ’98 v ’97 ’98 v ‘97

Daewoo Tico 13,171 89.37 FSO Polonez Truck 2,585 -18.69 Daewoo Lublin 2,675 1.06PF 126 11,136 -19.09 Citroen C15 712 -23.61 Mercedes Vito 804 118.48Daewoo Lanos 10,380 - Skoda Pick up 672 111.99 VW Transporter 559 115.00Fiat Cinquecento 9,902 -35.22 Citroen Berlingo 417 13800.00 FSC - Zuk 446 -49.38Fiat Siena 9,681 - Fiat Uno Van 414 -18.34 Ford Transit 370 -35.76Opel Astra 6,198 32.86 GM - Opel Combo 220 -19.12 Iveco Daily 332 114.19FSO - Polonez 5,938 -51.40 Peugeot Partner 166 -25.23 Mercedes Sprinter 207 100.97Skoda Felicia 5,723 21.15 Fiat Cinquecento Van 125 -89.80 Peugeot Boxer 206 171.05Fiat Punto 4,638 0.41 VW Caddy 83 -44.83 Kia Ceres 163 94.05Fiat Uno 4,474 -32.16 FSO Polonez Cargo 77 -25.96 Fiat Ducato 157 -48.86

Source: SAMAR, s.c.

Best Selling Models in Poland (YTD April 1998)

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