Ukrainian Auto Industry Has Nowhere to Go But Up

Ukraine’s automotive industry sector is in free fall, but its long and maybe medium-term outlook looks rosier.

Last year the country’s auto industry produced just 25,941 automobiles and 2,810 commercial vehicles, down 43% from 2013, according to International Organisation of Motor Vehicle Manufacturers statistics. That followed a year-over-year drop of 33.9% from 2012, when

76,281 vehicles were manufactured.

Ukrautoprom, the Association of Ukrainian Vehicle Manufacturers, says matters have worsened this year: Sales of new autos in March crashed 480% year-on-year to 2,259 units, the lowest level in 15 years. Production of autos, meanwhile, dropped 94% to 1,485 vehicles between January and April.

Toyota sold the most autos in March, but across the country – excluding the eastern region and Crimea – this amounted to just 175 vehicles, six times fewer than March 2014. Other automakers had similar, if slightly lower figures: Renault (173), Volkswagen (151), Czech Republic-based Skoda (140) and South Korea’s Kia (118).

Elena Petrashevich, an export specialist at automaker and distributor Ukrainian Automobile (UkrAVTO), says the country’s auto sector faces a “perfect storm” of problems.

“The main reasons for the fall are political and economic instability, inflation, loss of export markets, the hostilities in the east of Ukraine and the Russian seizure of the Crimea,” she tells WardsAuto.

The Ukrainian government must do more to protect the industry, according to Petrashevich. “All countries in difficult economic times take every effort to support and protect their own industries and basic industries,” she says.

“There is a need first of all to stabilize the economic situation in the country and the cessation of hostilities. Only then can we talk about specific plans and actions for the removal of what are very serious conditions.”

SUBHEAD: From Exports to Supply Chain, Conflict With Russia Costly

The conflict with Russia has hit Ukraine’s industrial base of auto manufacturing in the east of the country. The country’s largest auto plant, ZAZ in Zaporozhye, which remains under the control of the Ukraine government, announced production cutbacks in July 2014, though it remains unclear if this has resumed. Media reports suggest the company has moved between closure and a 3-day week, but the company has denied this.

ZAZ cites the crash of the Ukrainian currency and the conflict with Russia for its problems. “In terms of collapse in sales of new cars in the market of Ukraine and the stop of exports to Russia, there was no economic feasibility to produce cars,” the company says in a statement.

ZAZ also says it cut auto prices 15% in May in a bid to boost sales.

Petrashevich identifies 11 companies in the Luhansk region that has been directly affected by the conflict, and partly controlled by pro-Russian rebels, including manufacturers that produced auto tires, radiators, tools and springs. “It's almost impossible for manufacturers to find new suppliers at short notice,” she says.

In response to the annexation of Crimea, the Ukrainian government last year prohibited the supply of cars and spare parts to the region, as did major U.S., European and Japanese automakers.

In May the Ukrainian company AvtoKrAZ, based in Kremenchuk, southeast of Kiev, which produces heavy vehicles such as log and dumper trucks, switched to suppliers of European countries and abandoned all sourcing of parts from Russia. Instead, the company has ordered engines from the Minsk Motor Plant in Belarus, along with sources from Germany’s Deutz, U.S.-based Cummins, Daimler, Fiat, China’s Weichai, Ford and Toyota.

AvtoKrAZ also has sourced electrical equipment from Poland and Belarus and bearings from Poland, Turkey and India and sheet metal from Poland, the Czech Republic and China. As these changes have taken effect, AvtoKrAZ reports a 20.5% increase in output in the first half of 2015 compared to year-ago.

Meanwhile, the Poltava Automobile Unit Plant, a brake-supplying strategic partner of AvtoKrAZ, reports a 31% increase in first-half sales.Exports from the Poltova-based company, whose headquarters is in Central Ukraine and under government control, accounted for 72% of sales, with deliveries to Belarus rising 18% year-on-year, along with increases in sales to Poland and Kazakhstan.

There also may be long-term hope for the wider auto industry.

A recent Frost & Sullivan report suggests Ukraine’s automakers eventually may enjoy a moderate uplift in fortunes. The study says emerging middle classes in countries such as Kazakhstan, Uzbekistan, Ukraine, Azerbaijan, Belarus, Kyrgyzstan, Turkmenistan and Tajikistan will create a demand for more and updated cars.

Geographically and with its historically high production base and limited manufacturing elsewhere in the region, Ukraine would stand to benefit from this trend.