SIGNPOST: Ukrainian car industry motoring

By bne IntelliNews January 31, 2007

Ben Aris in Berlin -

Ukraine is on its way to becoming one of the three largest car markets in Europe and is already the fastest growing. Car sales soared 40% last year to 371,019 units, surpassing Austria, Sweden, Greece, Poland and Portugal in terms of the number of cars sold. Ukraine is now ranked as the 9th biggest market in Europe, up from 12th in 2005.

With a population of 50m people, the country could end up as one of the top-three markets within a decade, after Russia and Germany. Russia was the second-fastest growing car market in Europe last year, enjoying a 20% rise in sales. And both Russia and Ukraine are well ahead of the soggy 0.7% increase in sales that Western Europe put in 2006.

"Boosted by rising disposable incomes, expansion of car-loan programmes and high dealer activity, Ukraine's car market growth in 2006 outpaced overall expectations set out in the beginning of the last year. As the domestic car market retains high growth potential, we believe that new car sales in Ukraine should rise by at least 20% in 2007," argue analysts at Foyil Securities in Kyiv.

Tastes are also changing - or at least the pockets of Ukrainians lusting after a new car are getting deeper. In 2005, the automotive market was dominated by cars costing about €10,000, but last year more expensive cars were in demand. In 2005, the ratio of foreign-made cars to those made in Ukraine was 50:50; in 2006 this ratio swung in favour of foreign brands for the first time to 68:32, according to the analytical group AUTO-Consulting.

Leading producers

All of Ukraine's carmakers are being buoyed by the same rising tide of sales. Production increases were about 30% across the board. Competition is not too heated, as the market is expanding so fast that companies' biggest headache isn't their rivals latest marketing gimmick, but how to expand production fast enough to keep up with orders.

Ukraine's biggest carmaker Eurocar is expecting sales to increase by half again this year to 31,500, up from the 21,390 units it put together in 2006. Most of the gains will come from the sale of international brands that the company assembles under license, the most popular of which is the company's Volkswagen range, for which production is expected to more than quadruple to 8,500 units this year. However, other international brands it assembles like Skoda and Seat will also rise dramatically to 21,500 and 1,400 units respectively.

"Eurocar accounted for 5.5% of the new car market in 2006. It increased sales of Skoda cars in 2006 by 65% year-on-year, selling 19,000 units. In October, Eurocar attracted a €22.5m syndicated loan to expand production," Concorde Capital says.

LuAZ (Lutsk Auto Plant) is the only listed Ukrainian carmaker and is 90% controlled by the Bogdan Corporation - a collection of 20 different businesses in diverse sectors. The plant mostly makes the Russian brand Volga saloon, which accounted for three quarters of the 40,294 cars that it assembled last year.

However, the firm also assembles South Korea's Kia (13%) and Hyundai (11%) ranges, which are good sellers. In addition, LuAZ's bus production was up by a third. The fastest-growing product in this segment is the light Isuzu truck, also assembled under license, which was up just under 60% over 2006, albeit from a low base of 225 units.

The other big Ukrainian automotive player is Motor Sich, which is planning to float about 5% of its GDRs on international markets, sometime in the next two months. Deutsche Bank has already been hired to organise the road show, which will start imminently.

The Russian truck marker Kamaz took the lead in the niche market for 16-tonne trucks and saw its sales rise 1.7-fold to 2,269 units last year, beating out its long-time rival, the Minsk Auto Plant (MAZ), from the top slot to take a 32.5% share of the market. And the Russian company reported a four-fold increase in its super-heavy KAMAZ-6520 trucks, which used activities such as mining operations, unloading 210 of these monsters.

Ukraine's biggest truck maker also had a good year. AvtoKrAZ plans to increase its truck output by 20% to 4,200 units in 2007, according to the company's general director Sergei Sazonov, who said in January the company would have been able to sell 5,500 trucks in 2007, but needs to unblock some production bottlenecks.

With the money rolling in on the home market, Ukrainian companies reversed the flow of investments of the last few years when the Bogdan Corporation teamed up with Zaporozhsky Automobile Plant to build a plant in Russia. ZAZ is a leader on the Ukraine market and includes two car production plants and 10 automotive components factories.

Construction was started in Nizhny Novgorod on a $300m assembly plant at the end of last year that will put together a variety of international and Ukrainian brands including: Ford's Chevrolet Lanos, Chevrolet Aveo and ZAZ's cars.

Bumps on the road

Despite the rosy prospects for car sales this year, all of Ukraine's producers are starting to feel the pressure. This year will probably be the last that they will enjoy the benefits of protectionist tariff policies.

Ukraine signed off on the last bilateral agreement clearing the way for Ukraine to join the WTO, probably in the second half of this year, say analysts. Carmakers are expecting membership to turn up the heat on competition, but not to a temperature they can't handle.

Import duties on foreign-made cars will fall from 25% to 10% under the terms of WTO membership that could come into effect on January 1, 2008 if WTO membership goes through in the first half of this year, otherwise the duties will fall the following year.

Bogdan Corporation's president, Oleg Svynarchuk, said this week he doesn't expects the lower import duties to necessarily translate into correspondingly lowering prices for imported cars and prices should remain as static. Other industry players agree, saying that the importers will probably leave prices where they are in an effort to reap bigger margins as their costs fall.

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