Ukrainian Auto Makers Suspend Production to Avoid Russian Fee

VIENNA – ZAZ and Bogdan Motors, Ukraine’s two major auto makers, suspend vehicle production to avoid a scrapping fee introduced in Russia earlier this year.

The fee, which was launched Sept.1, especially hurts the two manufacturers as they try to cope with a weak domestic market and depend on Russia as their main export destination.

To avoid the scrapping fee, ZAZ pushed up production to increase the number of cars available for export to Russia before the extra charge took effect. The auto maker even kept the assembly line rolling through the holidays.

“We are prepared, because we currently have adequate stock in Russia,” Vakhtang Vasadze, deputy chairman at ZAZ’s parent company UkrAvto and responsible for car sales and dealer- network development, tells WardsAuto.

Bogdan increased its Russian stock prior to Sept. 1 as well.

The two Ukraine auto makers have no plans to build cars at least through December, because their sales in the domestic market and in export markets other than Russia are small. However, the situation could become critical if no solution can be found for the scrapping-fee issue.

Russia introduced the fee primarily to offset the impact of its entry into the World Trade Organization. Forced to lower import duties on cars as it joined the group, the government created the fee as a way to make up for the lost revenue.

The scrapping fee is directed at imported vehicles and is based on cubic capacity as well as the category – whether it is a passenger car or SUV. As a result, some imported cars are less expensive, while others are more costly.

There is no fee for locally produced vehicles, but the auto makers must provide guarantees they will arrange for the recycling of the car.

However, Ukrainian auto makers pay no import duty in Russia under an existing free-trade agreement. The same is true for Russian vehicles exported to the Ukraine.

Therefore, the scrapping fee is a significant handicap for Ukrainian-made vehicles compared with most other imported cars. This is even more important in the low-cost segment of the market in which the Ukrainian cars are offered.

ZAZ says the scrapping fee makes up about 10% of the price of its Chance model.

As a reaction to the Russian measures, the Ukrainian government plans its own scrapping fee. In fact, earlier this year it announced intentions to introduce a fee that only would apply to Russian-made vehicles, but the directive currently is not in effect.

Meanwhile, the two governments are in discussions to find a mutual agreement. Both are considering signing an agreement stipulating their scrapping fees will not apply to vehicles made in one another’s country.

“We are hoping to find a common basis in view of the existing free-trade agreement,” Vasadze says. “In the case that it won’t come to a mutual agreement, the Ukraine will also protect its market. But I don’t want to anticipate anything as the discussions are still under way.”

ZAZ is selling the Chance small car, based on the old Daewoo Lanos and the previous-generation Chevrolet Aveo, badged as the ZAZ Vida through its distribution company in Russia. The portfolio also includes a light-commercial-vehicle version of the Chance.

The auto maker says it sold  9,127 ZAZ-badged vehicles in Russia this year through October, down 45.5% from like-2011.

In addition, Chery Bonus sedans and Very hatchbacks manufactured by ZAZ are shipped to the Russian importer of China’s Chery-brand cars.

Bogdan exports to Russia its 2110 sedans and 2111 wagons, which are based on old Lada models, as well as a car-based light-delivery van.

Bogdan sold 6,688 vehicles to Russian customers between January and October, down 5.4 % from like-2011.