Duty Hike No Cure-All for Ailing Ukraine Auto Makers

VIENNA – The Ukrainian government introduces a special duty on imported new passenger vehicles with 1.0L to 2.2L gasoline engines.

The measure, intended to protect domestic producers, means an additional duty of 6.5% on cars with 1.0L to 1.5L engines and 12.9% for those with 1.5L to 2.2L powerplants on top of an existing 10% import duty.

The surcharge, which took effect April 13 for what is expected to be three years, also applies to Russian-made cars that were paying no import duty until now.

The additional import duty follows issuance of a report by the Ukrainian Interdepartmental Committee on International Trade. Local auto makers Bogdan Motors, Evrokar and ZAZ initiated the probe in June 2011. The commission’s decision was made in April 2012, but was only published last month.

Ukrainian new-car sales are struggling.After a record year in 2008, when about 623,000 units were delivered, sales in the country now are at half that number.

Last year only 217,581 cars were sold, a minuscule result fora country with 45.5 million residents.Hyundai was the market leader with 20,264 units, followed by ZAZ, Lada, Kia and Volkswagen.

“The main causes of the slow market recovery in the Ukraine are the halting recovery of the overall economy after the crisis of 2008, as well as the high cost of borrowing,” Oleg Omelnytskyi, director of the Kiev-based research company AUTO-Consulting, tells WardsAuto. “It has led to the fact that only 17% to 19% of auto sales are financed with loans.”

The shrinking market means lower sales for both imported and locally made cars, but the country’s share of imports has soared from 52% in 2008 to 90% in 2012. The Ukrainian government and local producers are hoping the higher duties will encourage global auto makers to establish production facilities in the country, but no such plans now exist.

The consequences for Ukrainian auto makers are serious.

The country’s largest car producer, ZAZ, has seen its output fall drastically, from 257,600 units in 2008 to just 41,500 in 2012 at its plant in Zaporozhye. The figures include a small number of commercial vehicles and cars assembled from semi-knocked-down kits in 2008.

ZAZ, which once had as many as 21,000 employees, now has only about 8,000.

Bogdan, which opened a plant with annual capacity of 120,000 completely knocked-down vehicles in Cherkassy in 2008, produced only 12,000 cars and 900 car-based light- commercial vehicles there last year.

The Ukrainian importers association VAAID, which is protesting the additional import duty, expects an average 7.8% price increase for cars with 1.0L to 1.5L engines, and 15.6% for cars with 1.5L to 2.2L engines.

However, Ukravtoprom, the association of Ukrainian auto makers, says the impact on prices of imported cars will be much lower. It should be noted that the country’s two major auto makers, ZAZ and Bogdan also are significant importers.

Some importers may attempt to circumvent the additional duty. Ford plans to increase imports of its top-selling models in the Ukraine, including the Fiesta, Focus, C-Max and new B-Max that are equipped with a new, 1.0L 3-cyl. EcoBoost engine. The actual displacement of the engine in the Ukrainian models, however, is 0.99L.

Bogdan already has said it will resume car assemblies at its Cherkassy plant this month, with plans to produce up to 15,000 units this year, about 25% more than last year.

Bogdan also will launch assembly of new models this year, but does not identify them. “In the second half of 2013, we plan to put at least two new car models on the assembly line which were not made in the Ukraine earlier,” Bogdan spokesman Sergey Krasulya told the UNIAN news agency.

Bogdan is assembling Lada and Hyundai models from CKD kits. The auto maker’s car portfolio includes the Lada 2110 sedan and 2111 wagon, two models not made in Russia for several years. The cars are sold under the Lada brand in the Ukraine and exported under the Bogdan badge to Russia and some other Commonwealth of Independent States markets.

Bogdan also assembles the previous-generation Hyundai Tucson SUV.

ZAZ, Ukraine’s largest car maker, also may add a new model. The company still produces the old Daewoo Lanos, badged as the ZAZ Lanos in Ukraine and ZAZ Chance in export markets such as Russia and Kazakhstan.

It also manufactures the previous-generation Chevrolet Aveo rebadged as the ZAZ Vida and Chinese auto maker Chery’s A13 known as the ZAZ Forza in the Ukraine. Both the Vida and Forza are exported to Russia, although the Forza is sold there by the Chery importer under a different model name.

Speculation within the industry is that ZAZ plans to produce a second Chery model.

“The declaration of intent does not allow me to talk about it,” Vakhtang Vasadze, deputy chairman of ZAZ’s parent company UkrAvto and son of UkrAvto head Tariel Vasadze, tells WardsAuto in an earlier interview.

“This project is being worked on intensely, but for the production we need export options,” he says. “We want these models to be located in high-volume segments. In the CIS countries, it concerns the segments B, C und SUV. More I can’t say.

“To start up production (of a new model), we need about a year from the time of the decision.”

Analyst Omelnytskyi is not impressed by the spotty positive news from ZAZ and Bogdan, nor does he consider the stiffer import tariffs a panacea. “The increase in customs duties on imported cars alone will not be enough to rescue the Ukrainian auto industry from its crisis,” he says.

One problem is the number of older models still built in the country. “Ukrainian factories only build models from the previous generation because they can only get licenses for these cars,” Omelnytskyi says. “They cannot obtain the rights to produce new models.”

Another handicap is the Russian scrapping fee introduced last September, which discriminates against vehicles imported to Russia from the Ukraine and other CIS countries.

Ukrainian leadership does recognize the need for a firm industry policy, Omelnytskyi says. “The policy should attract investors in the auto industry and other sectors. It should not just involve incentives but complete investment projects as well.”

 – with Eugene Gerden in St. Petersburg