Modern economic POTENTIAL OF UKRAINE

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Car making

The car market of Ukraine, which several years ago was miniscule, has skyrocketed over 2003-2005 and turned into one of the most promising markets in Eastern Europe. Moreover, the Ukrainian market is striving for the top volume position in Europe as a whole. As of 2005, 265.5 ths. new cars were sold in Ukraine, which is 12^th in volume in Europe. If growth rates such as the 25% registered in 2005 continue, Ukraine’s new car market could become one of the largest in Europe. World-leading car producers are already paying more attention to Ukraine, and recognize its potential in the market. Indeed, while the markets in developed countries have stagnated, Ukrainians are buying 20-30% more new cars yearly. Meanwhile, market saturation is not an issue, as Ukraine hardly reaches 120 cars per thousand people, compared to Russia’s 160 cars per thousand.

Before the country became independent, cars were produced by Zaporozhye Automobile Plant (ZAZ; Zaporozhye); specialized cross-country automobiles – by Lutsk Automobile Plant (LuAZ; Lutsk); buses – by Lvov Bus Plant (LAZ; Lvov); and trucks – by Kremenchug Automobile Plant (KrAZ; Kremenchug).

In the 1990s, the companies realized that most vehicle models engineered in Ukraine were outdated and did not correspond to the demand of potential consumers. Modernization at car making enterprises and the re-orientation toward the production of modern car models in the 1990s turned out to be less profitable and more expensive than assembling cars from imported components. The preferences granted to importers of devices and car sets further contributed to the booming car assembling business.

The number of enterprises which actively launched car assembly lines for cars from foreign sets was counted in the dozens. At first they focused on mostly large-unit assembling. Many auto repair enterprises also used to import knock-down vehicles, foremost – of Russian origin, to assemble them further on.

The volume of car assembly and production has maintained rapid growth in 2005. According to available data, gross volume of production and assembly of cars in 2005 was over 210 ths. cars and bus output in 2005 added another 4 ths. vehicles. Production of trucks (unit assembling excluded) totaled 3,571 vehicles. To compare – production of cars in 2004 totaled some 180 ths. vehicles. Output of automobiles over the year rose 22.8%.

The largest Ukrainian car producer is CJSC ZAZ, which specializes in unit assembling and car making simultaneously. In 2005, the Zaporozhye-based plant produced 148,163 cars, a three-fold increase in production over 2003-2005.

Table 1. Production of automobiles by Zaporozhye Automobile Plant according to results of 2005, pattern by classes and models

Tavria and Slavuta cars are engineered in Zaporozhye mostly out of Ukrainian-made components. The rest of cars are assembled out of imported aggregates and units. ZAZ’ main partner is GENERAL MOTORS, including its structural department GM-DAEWOO, which entered into an agreement with ZAZ to assemble cars produced under the OPEL, DAEWOO, and CHEVROLET brands.

Ukrainian market needs cheap “people’s” cars. At this stage of Ukraine’s car industry, the Tavria car made by Zaporozhye plant fits this role. However, this car calls for a serious upgrade, perhaps with foreign partners as well. One of the most recent projects of the company was the signing of an agreement with DAIMLER-CHRYSLER, following which CJSC ZAZ commenced large-unit assembly of MERCEDES-BENZ cars at its production facilities in Ilyichevsk (Odessa region), where the company has its automobile assembling plant.

Compared to 2004, the volume of production and assembly of cars by CJSC ZAZ increased in 2005 by 17.6% (output in 2004 - 126 ths. vehicles). In the future, the rate of car production rise will stay stable, since the company plans to strengthen its on foreign markets, with the Russian market foremost

Russian-made cars enjoy traditional demand on the Ukrainian market, which is only explained by the prices for these cars. The state attempted to protect domestic car producers through applying customs duties upon car imports; yet, it only led to the boom in car assembling from sets of Russian origin. One of the largest enterprises specializing in assembling Russian vehicles is Kremenchug Automobile Assembling Plant (KrASZ). In 2005, the plant assembled 19,328 automobiles.

Table 2. Production of cars by Kremenchug Automobile Assembling Plant – results of 2005, by-class pattern

Assembling Russian vehicles remains the most important business for the plant, though the enterprise also entered into cooperation agreements with Chinese and Korean automobile producers.

Compared to 2004, KrASZ increased its output of automobiles by 3.4% in 2005. The company still has facilities to expand output (annual production capacities at the plant are estimated at 45 ths. vehicles), hence in the future cooperation with foreign partners can turn more intensive in order to raise the volumes of cars assembled.

In the beginning of the new century, Lutsk Automobile Plant almost ceased its own production of cars and shifted to large-unit assembling of cars out of Russian auto sets. The enterprise intends to invest the means received from this assembly into the production of its own car model – the LUAZ-1301.

The strategic decision to restore the production of Ukrainian cars has been taken, but the market potential is not yet estimated. Therefore, in October 2005 the enterprise commenced large-unit assembling of cars under the KIA and HYUNDAI trademarks. In the last three months of 2005 only, the plant assembled more than a thousand of cars out of Korean car sets.

The total output of cars in 2005 was 30,690 vehicles, which was 39.4% more than from the results of 2004.

Table 3. Car production by Lutsk Automobile Plant – results of 2005, by-class pattern.

The VAZ-2109 is presently the cornerstone of the enterprise’s assembling program; yet, in the future it will be gradually replaced with contemporary Korean cars. At this stage, the active export of cars is not in the company’s plans, and partnership with foreign partners will mostly embrace production cooperation – that is, assembling of cars from imported components.

EUROCAR company (Zakarpatye region) is currently the only large-scale car assembling enterprise in Ukraine which does not assemble Russian cars. Eurocar is a Ukrainian enterprise to which Volkswagen Group (Skoda AUTO a.s.) supplies technological equipment, licensing documents, and strict quality control. In this project, a new automobile assembling enterprise at the Zakarpatye free economic zone was constructed for large-unit assembling of SKODA cars. Annual production capacities are 15 ths. cars. Further on, the company plans to expand the portion of Ukrainian components in end output.

In 2005 EUROCAR claims it produced 11,200 cars, which was 26.3% more than in 2004. In 2006 the plant is expected to work at 95-100% of capacity.

Production of trucks in Ukraine, as well as engineering, includes production itself and large-unit assembling. Production only is represented by an automobile industry giant of the USSR – Kremenchug Automobile Plant (presently AutoKrAZ Holding Company). The company specializes in the engineering of heavy trucks, including cross-country trucks and various special machinery upon the chassis of KrAZ vehicles (tank trucks, concrete mixers, drilling systems, cranes, etc).

Till recently, AutoKrAZ Holding had been the largest exporter of motor vehicles in Ukraine, since its vehicles earned an excellent reputation in the most complex climatic conditions. Throughout 2004, AutoKrAZ Holding exported more than 1,209 trucks, and all of the shipments were bound for Iraq. In 2005, the export of KrAZ vehicles grew to 2,751 automobiles, with a total value exceeding USD 80 mn Kremenchug Automobile Plant boosted supplies of machinery to the CIS 1.2 times (in 2005, 1,090 KrAZ vehicles were shipped to consumers in the CIS, including more than 700 to the Russian Federation). The main buyers of KrAZ devices in Russia are machine building plants which engineer special equipment for oil and gas industry; and 43% of Russia-bound machinery exports were chassis. Dump trucks accounted for 34%, and truck tractors – 15%. Large lots of KrAZ equipment headed to Kazakhstan and Turkmenistan (more than 130 vehicles to each country). Supplies to non-CIS countries contributed around 53% to gross exports. In 2005, KrAZ vehicles were shipped to Angola, Burma, Egypt, Sudan, Syria, Pakistan, and other countries. The company has serious projects for the Latin American market. Stronger positions in world sales markets are shown by winning of some serious tenders: because of its technical and service advantages, KrAZ vehicles were chosen by the militaries of Egypt and Syria, oil and gas companies in Ukraine, Uzbekistan, and Turkmenistan, as well as domestic companies involved in road building, construction, and mining industries.

The company does not restrict its activities to export only, but focuses on domestic market as well through the development of new models according to the requirements of key Ukrainian customers: construction and industrial companies. In 2005, AutoKrAZ gained a stronger foothold in the local market having sold 737 automobiles, which was 1.7 times more than in 2004.

In 2005, the company boosted production volumes 1.6 times over 2004. Output totaled 3,571 cars, including 204 cars with engines which meet Euro-2 requirements. The improvement of the environmental safety of KrAZ vehicles will help the company overcome a key barrier in the way to markets of developed countries. Besides trucks, KrAZ engineered 102 units of specialized vehicular machinery.

Truck assembly of trucks in Ukraine is also represented by smaller trucks (machine compacts supplied by Gorkiy Automobile Plant), as well as a projected partnership for assembling more contemporary small trucks, foremost of Chinese origin.

UkrAUTO Corporation, which owns Zaporozhye Automobile Plant, commenced large-unit assembly of Chinese trucks from the DONGFENG mark at the facilities in Ilyichevsk. Low prices, which are traditional for Chinese machinery, accompanied with relatively modern technological solutions may bring these trucks into market-leading positions. According to available data, from 17 to 20% of the Ukrainian market of new commercial automobiles and cars already belongs to Chinese trademarks.

Buses in Ukraine have traditionally been engineered by the Lvov Bus Plant. Its experience in bus engineering (the vehicles were recognized one of the world best at international exhibitions in the 1960s) and production technologies failed to garner the enterprise with a stable portfolio of orders in 1990s. Limited demand for its large municipal buses forced the plant to run a fundamental production upgrade.

Although the plant engineered the pilot model of a small bus, it preserved its focus on large municipal and tourist buses. Production was especially encouraged by the signing of agreements to supply buses to community motor transportation enterprises, including Kiev’s.

Thanks to a stable portfolio of orders, the plant manufactured almost 1.5 ths. bus vehicles over 2005.

While effective demand for large buses has only been growing in the last 3-4 years, the explosive increase in the market segment of small buses and microbuses started back in the second half of 1990s.

The largest producer of small buses in Ukraine is BOGDAN Corporation, which launched the manufacture of small city buses based on ISUZU engines and chassis at the corporation’s plants back in 1999. In 2005, BOGDAN Corporation reached production growth up to 2,185 buses, which was by 65% less than in 2004. Production rise can be attributed not only to domestic sales: in 2005 exports accounted for 26.5% in aggregate sales volume, or 458 vehicles.

Besides BOGDAN Corporation, small bus assembly in Ukraine also involves Borispol Auto Plant, ANTO-RUS auto assembling plant of Kherson, and some enterprises re-fitting Russian vans for the needs of local carriers.

Seen from the results of 2005, the general development in the industry is encouraging. Experts forecast that Ukraine’s car production will continue to grow in 2006, although growth rates may slow somewhat because of saturation in some segments of the domestic market and an unfavorable fuel market). Prospects for further increase also derive from the fact that automobile imports to the country are way ahead of export supplies.

Experts estimate the export of goods manufactured by the industry in 2005 at USD 330 mn, while imports reach as high as USD 2,900 mn.

Import and Export dynamics in the Ukrainian automobile industry in 2001-2006, in financial terms, USD ths.

The expanding gap between import and export volumes suggests that demand for automobiles is much higher than supply by national producers. Consequently, the outlook for rising production of cars by Ukrainian enterprises is limited not so much by market capacity, but rather by the lack of additional resources to invest in expansion of production capacities.

Under these conditions, the development of automobile industry in Ukraine directly depends on the entry of serious foreign investors. This will benefit the industry not only with financial capital, but also with new technologies essential in car making.

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