Car making of Ukraine (2007)

The car market of Ukraine, which several years ago was miniscule, has skyrocketed over the six years (since 2003) and turned not only into the most prospective market of Eastern Europe, but is also gaining leadership positions in Europe as a whole.

By results of 2007, new car market in Ukraine stepped another two positions up in the European rating and now ranks the 7th with the result of 542 ths. cars. Back in 2005, Ukraine was in the 12th place by market volume in Europe, in 2006 – it was already the ninth largest, and over 12 months of 2007 it managed to oust Belgium and the Netherlands, having reached another record-high position.

The reasons for such a rapid advance of the Ukrainian market in European rating are the same – growth rates exceeding all possible barriers: hence, by results of 2007 new car market of Ukraine expanded by 46.2%. To compare – all-European market (including markets of Ukraine and the Russian Federation) added only 5.4%.

In 2007, aggregate volume of Ukraine’s new car market outran 542 ths. cars (by results of 2006 – some 371 ths. cars). One should keep in mind that Ukrainian market is undergoing physical expansion (in terms of volume), and more, it is also gaining quality. In the last couple of years, the market structure has crucially changed; meanwhile, even within a year one would say the changes were notable and even rapid, despite stereotypes among potential customers tracing back to 1990s. Hence, in 2007, the traditional leaders of the Ukrainian market – cars engineered in the CIS (foremost – models, which are at least a decade old and produced by Russian AutoVAZ) for the first time in the Ukrainian independence period have lost their leadership. While by results of 2005 the ratio between CIS-made cars and foreign models was some 50:50, in 2007 bursting sales of foreign-made vehicles increased their portion in sales up to 68-70% (VAZ cars produced in the CIS contributed only 20-22%). In particular months, VAZ vehicles have lost their leadership in sales: hence, in December 2007 CHEVROLET cars became sales leaders in Kiev and were followed by MITSUBISHI, whereas VAZ was only third in the top three. It should be noted that “foreign brands” relate not only to cars engineered beyond Ukrainian (and CIS) borders, but also to vehicles engineered in Ukraine out of imported vehicle sets.

At the same time, another typical feature of Ukrainian market is gradual turning from cheap outdated cars to more expensive vehicles. Till now, budget cars segment used to be the most popular among consumers, but over 2006-2007 the segment frames have changed. While the best selling cars were priced up to USD 10 ths. previously, now the leadership belongs to vehicles in price range USD 10-15 ths. It is reasoned by quality growth of car market in Ukraine, as well as turning to more modern technical articles, ensured by growing population income and (even to greater extent) access to auto credits.

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 40-45% more new cars yearly. Meanwhile, market saturation is not an issue, as Ukraine hardly reaches 150 cars per thousand people, compared to Russia’s 180-190 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 vehicle 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. A lot of auto repairing plants imported dissembled cars foremost – of Russian origin, to assemble them further on.

From year to year, Ukraine’s car making keeps growing, though one should admit that auto assembling enterprises are now the industry’s cornerstone. Production of cars in full cycle is still less profitable than assembling, which results in narrowing range of cars engineered through full cycle. Over 2007 gross volume of automobile vehicles production in Ukraine amounted to some 403 ths. pcs, having outrun the previous year output by 38%. To compare with – growth rates of production in 2005-2006 were not over 30%, which suggests that growth tempos are speeding in the industry. At the same time, sales are growing even faster than domestic production, which suggests significant potential (from demand point of view) for further production rise.

Production structure shows both positive and negative trends: the portion of large joint assembling is gradually lowering, and as soon as in the next 2-3 years it can drop below 50%, giving leadership to CKD (component knocked down) assembling. At the same time, the portion of full cycle production is also falling and is now accounting for less than 15%. The agreement by Bogdan corporation on launching of small joint assembling of Russian cars at Bogdan’s new production facilities is a bright example of the tendency.

CJSC ZAZ remains the largest car producer in Ukraine, which in 2007 almost ceased production of own cars and turned all attention to assembling of cars out of imported vehicle sets. By results of 2007, ZAZ produced over 282 ths. cars, and in the last 5 years (2003-2007) the company reached almost a 5-fold increase in production volumes (in 2003 the plant produced nearly 50 ths. cars).

It should be noted that production growth was only accomplished with assembling of cars out of imported vehicle sets. Production of local design cars (Tavria and Slavuta) is being partially shut down: hence, by results of 2007 out of 282 ths. cars engineered by AutoZAZ, Slavuta cars account for just 21 ths. Hence, one can suggest that no car created by domestic engineers will be produced in Ukraine in the short run.

Slavuta cars used to be produced in Zaporozhye – mostly out of Ukrainian components. The rest of cars are being assembled of imported aggregates and joints. The main partner of CJSC ZAZ is GENERAL MOTORS, including its structural sub-department GM-DAEWOO, which have signed with the plant the agreements on assembling of cars produced under trademarks OPEL, DAEWOO, and CHEVROLET with the plant.

It should be noted that Zaporozhye Plant has been successfully selling its output at CIS markets: hence, by results of 2007, the volume of LANOS cars export outran 60 ths. cars. The Russian Federation remained the dominating sales market.

In 2007, traditional leader of the Ukrainian car market, – VAZ trademark, – undertook serious attempts to keep on leading: it expanded rather popular family of LADA 1118 (known in Russia as LADA Kalina) and promoted new family LADA 2170 to the market. All these steps, however, helped keep rather precarious leadership: by results of the year the Russian trademark accounted for less than 25% of the Ukrainian market and has even lost leadership in some regions already. For the trademark, which used to control more than 50% of the market, such a situation shows recent irreversible trends of the market. For the latter, in general, it means a turn towards higher quality and more expensive cars.

It should be mentioned that VAZ vehicles at the Ukrainian market are mostly represented by automobiles assembled in Ukraine out of Russian vehicle sets. Under current conditions – after cancellation of preferences for domestic assembling enterprises and joining the WTO (which suggests lowering of import tariffs in the future) – Ukrainian assemblers of outdated Russian cars will lose competition not only to European and Japanese producers, but also to Korean ones proposing higher quality and more modern vehicles, as well as to Chinese companies, who are ready to propose the most of additional equipment for the least price. Meanwhile, most of Ukrainian enterprises are undergoing re-qualification, as assembling of Korean and Chinese cars becomes more popular.

One of the largest enterprises specializing in assembling Russian vehicles is Kremenchug Automobile Assembling Plant (KrASZ) of AIS corporation. Yet, even this enterprise in 2007 kept expanding the range of Korean and Chinese cars produced: Korean SSANGYONG car was joined with Chinese GEELY and GREAT WALL, gross production volume of which came to some 7 ths. cars over 2007.

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. The information is currently available about possible construction of new production facilities to reach annual output of 250 ths. cars.

Corporation Bogdan is one of the largest automobile producers in Ukraine. It was established in 2005 in order to implement large-scale investment projects aimed to create Ukraine-based facilities for production of miscellaneous auto transportation means. The corporation currently consists of 20 companies, which include Bogdan Automobile Plant (former Lutsk Automobile Plant), Hyundai Motors Ukraine, and others.

Today Bogdan Corporation is one of the most dynamic companies on vehicle market of Ukraine. The Corporation has reached the goal – to be converted from car seller into producer. In the 2 years of the company’s business, it started implementing construction projects for plants that manufacture cars and re-oriented production grounds in Lutsk from car production to bus engineering. In the middle run, these steps helped the Corporation considerably improve its situation on the market: the plan of strategic development for Bogdan Corporation till 2010 foresees increase of production volumes 6.9 times as compared to 2005 – up to 269 ths. units.

For today, investment project of new automobile plant construction in Cherkassy is at the final stage. The plant has annual project capacity exceeding 120 ths. cars and should be put to service already in 2008.

Bogdan Corporation plant, which is being built in Cherkassy, will be specializing in engineering of new models of Russian cars: originally – Kalina, and further on – prospective models Priora and Project C. The new enterprise will not only assemble VAZ cars out of sets, but will also be able to weld the bodies. Pursuant to information of the plant, Russian AutoVAZ has concluded the first agreement in its history with a foreign company (with Bogdan corporation in this particular case) including not only assembling of cars from components, but also body welding, that is a step forward full-scale production.

However, the potential of VAZ brand on the Ukrainian market is almost exhausted; therefore, besides to Russian VAZ cars, further cooperation with Korean companies is quite promising. It includes production of KIA and HYUNDAI cars. In the future the company plans to expand models of assembled cars, including KIA C’EED model, which is the most promising project to increase the share of Korean companies on the European market. Companies pin hopes on accomplishment of this project.

Having turned down long-term plans of LuAZ domestic off-road vehicle rebirth, Bogdan Corporation decided to focus its attention on assembling of cars under trademarks VAZ, KIA, and HYUNDAI.

Gross production of the cars over 2007 was 53,919 pcs, which showed a 33.6% rise versus 2006 results.

VAZ vehicles remain the cornerstone of the company’s assembling program at the moment, but prospective projects of assembling LADA 1118 and LADA 21170 cars have not yet been reflected by the production statistics: in the 12 months of 2007 output of VAZ vehicles reduced by 36.3%. Meanwhile, production of Korean cars went times up: KIA – 3.4 times, HYUNDAI – 3.7 times.

Besides to active performance of the Corporation on the domestic market, it will also carry out activities on the overseas markets. It foresees continuous growth of bus exports. Strategic development plans of the corporation also include export supplies of trucks and cars.

Fulfillment of the projects aimed at new automobile plants construction and developing of current facilities demands considerable investments. Drawing of investment resources in order to expand and modernize production facilities, increase the range of the products, explore new sales market, and create efficient commercial and servicing network – is one of the top priorities at the company. Besides to domestic market, notable attention is paid to foreign borrowings: hence, in January 2006 Lutsk Automobile Plant entered Frankfurt and Berlin exchanges with Private Placement product.

Currently enterprises of Bogdan Corporation employ 5,400 people. Thanks to investment projects implemented by the corporation, the number of employees at all of its companies will grow by 8 ths. – up to almost 14 ths. staff employees.

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. The first stage of the company capacities’ increment took place in 2006. Further on it is planned to produce 120,000 cars per year.

According to expert estimates, in 2007 Eurocar company produced some 23 ths. SKODA cars, which is by 21% higher than the figure of 2006. Taking into account production of other cars under VOLKSWAGEN Group trademarks (VOLKSWAGEN and SEAT), gross output by results of 2007 is estimated at the level of 30 ths. cars.

Production of trucks in Ukraine, as well as engineering of cars, 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. In 2007, export of KrAZ vehicles outran 2,900 units, which was a 45% rise versus results of 2006. KrAZ has considerably boosted supplies of its output to the CIS: in 2007, 2,118 vehicles were shipped to consumers in the Russian Federation, 287 – to Kazakhstan, and 110 vehicles – to Turkmenistan. AutoKrAZ Holding Company strengthened positions in Iran, Ghana, Poland, Egypt, and Vietnam. KrAZ vehicles were again supplied to Macedonia, Afghanistan, Equatorial Guinea, Nigeria, Cuba, and other countries.

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 2007, AutoKrAZ Holding Company strengthened its positions on the domestic market having sold 1,334 cars, which was 17% more than in 2006.

In 2007, 4,206 vehicles left the conveyor belt, including 3,255 pcs. with engines corresponding to Euro-2 requirements. Improvement of environmental safety of KrAZ vehicles will help overcome the main obstacle for Ukrainian trucks entering the markets of developed countries. Over 2007 production of KrAZ vehicles, which meet Euro-2 requirements, increased 2.3 times.

Assembly of trucks in Ukraine is also represented by smaller trucks (vehicle sets 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, 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 which was renamed in 2006 in the Plant of Municipal Machinery meaning widening of production range. 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.

The market of large buses in Ukraine is directly connected with state and municipal orders paid by budgets of different levels and seriously curtailed in 1990s. Private carriers appeared on the market simultaneously with stopping of buses procurement for municipal companies. Minivans and small buses became the main fixes assets for them. It reasoned boom on the market of small buses lasted till the beginning of 2000s. Stabilization of financial situation in the state over the last few years resulted in return of solvent demand for large buses, especially in the capital city and large cities.

The largest producer of small buses in Ukraine is BOGDAN Corporation, which annually confirms its leadership positions in domestic bus production. Having launched the manufacture of small city buses based on ISUZU engines and chassis at the corporation’s plants back in 1999, today the Corporation manufactures buses of all types: from extra small to super large ones.

In 2007 Bogdan Corporation managed to reach production growth up to 3,251 buses, which was 21% more than in 2006. The increase was accomplished not only with domestic sales: exports supplies accounted for almost 40%, or some 1,300 units, within gross volume over 2007.

A special attention should be paid to the fact that Corporation Bogdan together with UkrAvto company (owning Zaporozhye Automobile Plant) implements an investment project to construct car assembling plant in Russian Federation. The plant with a tentative value of USD 470 mn would produce 25,000 cars and buses per year (the first stage of the plant). Then it would be expanded up to 160,000 cars.

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

General dynamics of the industry’s development in 2007 gives optimistic forecasts. According to experts’ opinion, in 2008 car production in Ukraine will keep on rising, although growth tempos may somewhat slow down due to saturation of the local market. The promising growth in the future is also proved by the fact that imports of automobile industry’s output significantly outran export shipments.

Over 2007, export of goods manufactured by the industry for the first time in the history of independent Ukraine outran – by expert estimates – USD 1 bn. Meanwhile, import somewhat reduced growth rates, though also reached another record-high level of USD 7,700 mn.

Export growth rates outrun the tempos of import increase, and yet the lag between import and export is not reducing. Ukrainian market remains dependent on car imports.

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.