Manufacturing of motor vehicles dropped 28 times in August

Photo: Aleksey Solodunov

After a significant reduction in vehicle production at the beginning of summer, Ukrainian carmakers went into a steep dive by the end of the summer. Only two of four Ukrainian automakers worked in August and together they produced less than two hundred passenger cars. Experts are cautious in forecasts: not all manufacturers will survive the crisis and improvement of the situation can be expected no sooner than next spring.

Data from the UkrAvtoprom Association of Automobile Manufacturers shows that last month the Zaporizhzhya Automobile Building Plant (ZAZ), the Ukravto Corporation and the Eurocar Corporation produced a total of 189 vehicles. Other manufacturers did not operate at all: the Bohdan Corporation stopped production in June and the Kremenchuk Car Assembly Plant shut down in late July. In August 2013 the companies produced 5,268 passenger cars. This is almost 28 times more than in August 2014. Despite that after the reduction of special duties and cancellation of the recycling tax on foreign vehicles, it has become more profitable to import finished cars to Ukraine and sell them here than assembling them in our country. Until recently the domestic auto industry has been able to hold its position: in January – July Ukrainian plants produced 22,904 cars, which was 7.3% more than during the same period last year, but based on the results of 8 months production dropped by 13% compared to January – August 2013.

Pebble market

Senior analyst at the Art Capital Investment Group Oleksiy Andriychenko says the main reason for reduction of the number of produced cars and shutdown of production is the low demand due to the uncertain economic and political situation in the country. Director of Marketing and Industrial and Economic Analysis Department at the UkrAvtoprom Association Heorhiy Ovsyannikov agrees with him: “The market is depressed and nobody is prepared to work for the warehouses”.

Andriychenko elaborates: ZAZ and Bohdan produce low-cost vehicles usually bought by less wealthy people. “And in a situation of financial instability they prefer to delay purchases of vehicles until better times,” explained the expert.

The decrease in production was influenced not only by the problems with sales in the east of the country and closure of the Crimean market, but also by the general decline of the economy, which led to devaluation of the hryvnia. The domestic market hit rock bottom back in May, when only 3,000 vehicles were sold in Ukraine (including imported cars), which is five times less than in the same period last year.

But in August the domestic market of passenger cars continued to fall year-on-year: the companies managed to sell more than 6,600 passenger cars (including imported cars), which is 74.7% less compared to August 2013. And based on results of the first eight months, the sales by dealers were half of the volume last year, when they sold nearly 142,000 vehicles, reported the AUTO-Consulting Information and Analytical Group.

At the same time, export markets were closed to Ukrainian automakers even earlier. The main customer – Russia –bought only 100 cars in the first half of this year. Another buyer – Kazakhstan - refused to buy car assembly sets from ZAZ. Today, this company is able to sell only car assembly sets to Egypt and a few hundred finished cars a month to Uzbekistan.

Short-term plans

A representative of Eurocar said in a conversation with Capital that there were no plans to stop production at the plant for now, but only on condition that the sales dynamics would not decline. The company still hopes for a recovery in demand on the domestic market.

Andriychenko says Eurocar is in the most favorable situation compared to other manufacturers: “This company is the farthest away from the combat zone and produces relatively promising models of Skoda, which so far are the easiest to sell in the low-price segment”.

Marketing Director at the AIS Group of Companies Serhiy Borovyk believes the main reasons for the drop in production over the first eight months of 2014 are the devaluation of the hryvnia, which sparked a rise in prices of cars, the military operations in eastern Ukraine, the annexation of Crimea and the deterioration of the social and economic situation in the country in general. “The situation in August, including the shutdown of most plants, is the logical result of the influence of all the aforementioned negative factors,” he said. Borovyk added that AIS stopped production of Geely and SsangYong at the KrASZ for an indefinite period in August and resumed their imports. “We will be able to consider the possibility of resuming production after stabilization of the political and economic situation in the country and on the market,” he stressed.

The press office of the Ukravto Corporation reported that it adjusted its production plans: until October 15 ZAZ will work and produce cars, depending on the needs of the market. From November 2014 till January 2015 production will be suspended: “The core production will be frozen, but ZAZ will continue to produce car assembly sets for GM Egypt and the export of cars to Uzbekistan and Belarus. The plant will operate at a minimum capacity of six vehicles per hour”.

Vague future

Andriychenko believes that the situation in the Ukrainian automotive industry may get even worse. He believes there are two prospects: further decline in production up to the full stop of assembling facilities or government support, in particular, due to placement of orders of a defensive nature. “The state could order some buses for the military. In addition, these days vehicles for the military are being re-equipped by volunteers at car repair shops, so if even they can armor the cars, it would be much easier for the car assembly plants to establish such a process,” said the expert.

A representative of Eurocar said in a conversation with Capital that the Ministry of Economic Development and Trade has a project of development of the motor industry by 2020 approved by other ministries, which “provides a number of measures aimed at encouraging production”.

At the same time, Andriychenko believes that government encouragement of consumer demand for civilian vehicles is now unlikely, “because we have major problems with the budget”.

Experts are not willing to predict the fate of the automotive industry for the long term. Ovsyannikov says not all the manufacturers of passenger cars will be able to survive the crisis, but he declined to identify which of them have a better chance of staying on the market. It will be easier to survive the crisis for companies with export potential, as they will be able to compensate for problems on the domestic market, he believes. “The fate of the country is the most important factor currently affecting the automotive industry: how can you predict the rates of production of cars in Ukraine in a year or in two years, if we cannot clearly answer the question about the territorial size of the Ukrainian market,” said Ovsyannikov. “After all, Crimea and the Donbass accounted for 25% of the Ukrainian market. It will only be possible to predict the volume if we find a starting point”.