Ukraine's German factories left ticking over on the EU border

Ukraine's German factories left ticking over on the EU border
Eurocar assembly line in Uzghorod, Ukraine
By Fabrice Deprez in Solomonovo June 15, 2018

Twenty kilometres from the Carpathian city of Uzghorod and barely 2km away from the Slovakian and Hungarian borders, in what used to be a deserted swamp, the Eurocar plant stands mostly silent. Ten years ago, 1200 people worked here, assembling Skoda cars for the Ukrainian market. Today, after two economic crisis, a change of government and a war with Russia, production has been drastically cut; about 250 people go to work at the plant each day now.

Ukrainian’s westernised car sector is a well-kept secret and epitomises the challenges the country faces when it comes to modernising its industry. The assembly line, modern and up to all European standards, is still operational, but only a couple dozen workers occupy the large hangar. At its peak, the plant was capable of producing more than 4000 cars a month. In April, only 615 cars came off of the assembly line.

Still, there is a silver lining: according to UkrAutoProm, an association of Ukrainian auto manufacturers, the total number of cars produced across the country in April was also 615, making Eurocar the sole automobile producer in Ukraine. “We have the capacity to produce more once demands picks up. We are ready,” Volodymir Litvin, head of the SKD department, told bne IntelliNews.

Since the early noughties, German companies involved in the automobile industry (or, in the case of Eurocar, Ukrainian companies with German investment) have rushed to Western Ukraine to take advantage of the low cost of labour and the country’s advantageous geographic position. Some, like Eurocar, have been looking to tap into a promising Ukrainian market, which peaked in 2008, when locals bought more than 600,000 cars (analyst expect that number to reach 100,000 this year).

Other German companies focused on the production of automotive car parts that are then sent to Western countries for final assembly. Nearly all of them kept investing in Ukraine despite the crisis, but experts say that the political context and continuing conflict in the East has kept many potential investors at bay.

Cheap labour on Europe’s doorstep

Leoni, a German cable and harnessing manufacturing firm, arrived in Ukraine in 2002, just as the first cars were rolling off of the Eurocar assembly line. In 2005, Kromberg & Schubert, which produces electric cables for companies like Daimler, BMW and Volkswagen, inaugurated a factory in the Volyn region, which borders both Poland and Belarus.

According to estimates from the German Chamber of Commerce, the German automotive supply industry employs up to 30,000 people in Western Ukraine, and has become the main target of German investment in the country.

Eurocar’s path in Ukraine has been a rocky one. Back in 2002, up to 60% of the production was expected to be for the Russian market, Eurocar’s general manager told bne IntelliNews. And until 2008, the plant produced cars not only for Skoda but also for Volkswagen, Audi and Seat.

Just like other German companies, Eurocar choose Western Ukraine for two main reasons: cheap labour and proximity to Europe. Average monthly wage in the Zakarpattia region, where Eurocar is based, is around UAH7,000 ($270), about 3 times less than in Poland.

Meanwhile, the border with Slovakia can literally be seen from the plant and the railway that crosses it uses a European gauge, cancelling the need for time-consuming transhipping at the border. “When it comes to logistics, Eurocar is in a very comfortable position,” Igor Topchiy, the company’s head of HR, says.

For German companies investing in Ukraine, relations with local authorities is also a key consideration, a Leoni spokesperson told bne IntelliNews. According to Eurocar’s general manager, one deciding factor in the decision to set up a plant in the Uzghorod region was the implantation of a special economic zone, which gave the company preferential tax treatment. “However, in 2005, the government of Yulia Tymoshenko cancelled the law that gave us this preferential treatment, though we had been given guarantees that the law would not be changed for the next 30 years,” Igor Tsarenko said.

At around the same time, German automobile companies started building factories in Russia, leaving Eurocar with only the Ukrainian market. In 2008, it was decided that the plant would only make Skoda cars. The 2009 and 2014 economic crisis was a big hit too, with German investment in Ukraine dropping from more than €5.5bn in 2011 to €1.6bn today. In that time period, Eurocar was forced to lay off the majority of its workforce.

The move to Central Ukraine

The company is still waiting for the storm to pass, though its general manager expects demand to pick up in the next five years.

This does means that Eurocar is, for now, not affected by one issue that has been worrying many German investors: growing labour shortage. “If I had to hire 1000 more people right now, I don't know where I would find them,” Tsarenko said. It is not an issue for him, as the plant currently needs only about 150 people to function, and has held on to an additional 100 people in preparation for an expected future growth.

The situation is different for German investors looking to expand, or to set foot in the country. “We have some projects from new companies but for now most of them are only looking, because the big challenge in Ukraine is the outflow of workforce,” Alexander Markus, chairman of the German-Ukrainian Chamber of Industry & Commerce, told bne IntelliNews. As millions of Ukrainians leave to find work in Poland and neighbouring countries, German investors are finding it more and more difficult to find labour for plants that could employ several thousand people.

Those already involved in Ukraine keep investing, with both Leoni and Kromberg & Schubert opening new plants after the 2014 revolution. Leoni’s spokesperson told bne Intellinews it was planning to expand their facility in Kolymya to reach up to 5000 employees by 2021. With workforce becoming scarcer in the Western part of the country, companies are now moving to Central Ukraine: Kromberg & Schubert’s second plant was opened in 2016 in the Zhytomir region, 400km east of the Polish border.

But German companies not already operating in Ukraine are still hesitant, according to Markus, because of a perceived lingering political risk and fears about corruption: “Ukraine is competing with countries such as Moldova and Macedonia, and it’s not always winning. The country needs to sell a better story to outside investors”