Until now, the Ukrainian car industry manufactured only the nimble ZAZ Tavriya and clumsy KrAZ cars (as well as the luxurious Daewoo Lanos, Nubira, and Leganza models being a symbol of the ambitious investor’s unlucky attempt to enter the market of the co
A RISING STAR ON THE UKRAINIAN AUTOMOTIVE MARKET
Until now, the Ukrainian car industry manufactured only the nimble ZAZ Tavriya and clumsy KrAZ cars (as well as the luxurious Daewoo Lanos, Nubira, and Leganza models being a symbol of the ambitious investor’s unlucky attempt to enter the market of the country with poor population). However, starting from 1999, Ukrprominvest concern became prominent in the country’s automotive industry. Before that, the concern got engaged in a shipbuilding program (mentioned in issue 3’2000 of Ukrainian Market Review), launched confectionery production at four Ukrainian factories, and began to render passenger and cargo transportation services in a number of Ukrainian cities.
There is no business without production
Oleg Svinarchuk, vice-president of the concern, considers automotive business to be one of the eldest directions of Ukrprominvest activity. As early as in 1992, the concern’s division began to supply Russian-made trucks and GAZ Volga cars to Ukraine and render services to the cars sold. Today, out of the nearly 35,000 Ukrprominvest employees, around 4,000 work with the car industry.
GAZ was the first Ukrprominvest’s Russian partner in the automotive business. Later, the concern began to supply Ukraine with cars assembled in Moscow, Izhevsk, and Pavlovo. It also managed to buy up the Ukrainian service network from AZLK.
However, despite the constant sale growth (Ukrprominvest sold 8,500 cars and trucks in Ukraine in 1999), the business logics brought the concern from trade in cars to their manufacturers as early as in 1994. O. Svinarchuk notes that, "There is no development of business without production. It yields more stability to the firm than simple resales do".
Assemblage of KamAZ trucks for the Ministry of Defense of Ukraine was the first Ukrprominvest’s production project. The concern had to purchase chassis in Naberezhniye Chelny and engines in Yaroslavl. In Kiev engines were put on chassis in accordance with a special technology worked out by the concern’s experts.
THE UKRAINIAN STYLE OF VAZ Zhiguli
In 1999, Ukrprominvest reached an agreement with Volzhskiy Automobile Works (VAZ) to launch assemblage of its cars in Lutsk Automobile Works (LuAZ). It was the first project of VAZ on the Ukrainian market, where Russian car producers have traditionally held the first lane (around 75,000 cars are annually sold in Ukraine, 50,000 of them being VAZ models and another 5,000 UAZ cars).
Execution of this project has become possible only in 2000, after the concern purchased an 81.11% interest in LuAZ at this year’s April tender.
Ukrprominvest purchased the works when it was in a difficult financial situation. Production had been idle for four years, during which accounts payable to creditors and the State budget, and debts to employees for wage payments had been piled up. LuAZ’s balance-sheet losses reached UAH 4.2 mln., profitability of production dropped to -78.2%, and sales yielded only UAH 3.2 mln.
Remembering the better times, when up to 20,000 LuAZ and Volynyanka cars were built in Lutsk every year, the concern decided to bring recovery to the works. Accounts payable are planned for payoff within four years. According to the special schedule, the maximum return payments will be made in 2001. An agreement with Volyn Regional State Administration provides that a portion of arrears will be restructured for the period of several years.
The key factor here is that the industrial investor was able to revive production of the enterprise, which is a sign of promising prospects for LuAZ. Since the beginning of 2000, around 500 VAZ-2193 have been already assembled at the works and 20 cars are made daily from components supplied from Russia. On the whole, around 4,000 VAZ cars are scheduled for assemblage in 2000.
It is worth mentioning that one Ukrainian-made VAZ is priced USD 200 cheaper than the same car constructed in Russia at the expense of lower transportation costs and customs duties.
O. Svinarchuk noted that the concern’s management is planning to reduce the price for cars constructed in Ukraine, because it is the only way to sell some cars to Ukrainian buyers, who mainly have modest incomes. However, it is possible to lower product costs only through localization of production in Ukraine and making use of the local markets for car components and labor. Ukrprominvest managers have been able to increase the share of Ukrainian-made components in LuAZ-assembled VAZ cars to 30% so far.
As the vice-president of the concern noted, although even in such a 100% genuine German car as Mercedes only half of the components are made in Germany, localization of VAZ production in Ukraine is still very important for the country’s economy. Car building is unable to survive without allied industries. According to the information with the State Committee for Industrial Policy of Ukraine, there are seven employees of allied industries per one worker engaged in car making. Taking into account this figure, Ukrainian automotive industry is capable today of giving jobs to more than half a million people.
To confirm this fact, production recovery of LuAZ revived operation of machinery-building, electrical-engineering, glass-making, and technical rubber-making enterprises located not only in Volyn region, e.g. Polymer, Elektrotermometriya, and Kovelselmash, but also in other regions of Ukraine, e.g. Melitopol Engine Building Works, Lvov Hydromechanical Works, and some others.
OUTLOOKS FOR Ukrprominvest assembly lines
In addition to VAZ cars, the concern has renewed manufacturing of various modifications of the traditional Volynyanka model at LuAZ (1,200 cars are scheduled for construction in 2000, whereas only 27 such mini-jeeps were manufactured in 1999).
Assemblage of Russian UAZ cars in four modifications has also been launched. Their output will total 1,100 cars until the end of 2000.
As regards VAZ cars, their model range will be expanded owing to the most popular VAZ models, such as VAZ-2104, VAZ-2107, VAZ-21099, and Niva.
Car output at the Lutsk works will go up to 10,000 VAZ cars, 5,000 LuAZ cars, and 200 UAZ cars in 2001. On the whole, the results of Ukrprominvest’s five-year activity should be as follows: the total car output of 180,000 items, including 140,000 VAZ cars, 28,000 LuAZ cars, and 12,000 UAZ cars.
Another project started by the concern, namely Bogdan small-size urban bus, has been developing at Cherkassy Car Repair Works since 1999. 150 such buses are scheduled for construction in 2000. The bus has been created on the basis of South Korean ISUZU trucks. However, only a few modules have been left from the original truck, whereas most of the primary details are made in Ukraine. This explains the fact that Bogdan is priced 30% lower than its Polish or Turkish rivals.
Beginning 2001, Ukrprominvest plans to launch a radical reconstruction of LuAZ manufacturing facilities. Brand-new USD 25 mln. finishing production will be constructed. The reconstruction will also concern the welding production (USD 5 mln. will be spent on this purpose). O.Svinarchuk emphasized that in order to keep up product’s competitiveness at a high level, the enterprise has to constantly renew its production. Along with that, "taking into account the existing tax rates, the concern is almost unable to bring this project to life independently, without any assistance".
Vice-president of Ukrprominvest concern mentioned that the future of the Ukrainian automotive industry will highly depend on changes in the country’s legislation. Under the constantly changing business environment in Ukraine and the heavy tax burden, it is impossible to speak about state encouragement of domestic producers.
Thus, entrepreneurs have recently been taking steps to amend the legislative regulation of the Ukrainian business on their own. Ukrprominvest has initiated a number of bills on lowering of various taxes and duties for domestic producers. These drafts are now considered in the Ukrainian parliament and government.
"Industrial growth will not be possible until normal conditions for producers are created. Nobody can help us here – neither the West, nor the East – but ourselves", Oleg Svinarchuk, vice-president of Ukrprominvest concern, noted.