Uzbekistan to cut car output amid falling exports, remittances

By bne IntelliNews November 4, 2015

Olim Abdullayev in Tashkent -

Collapsing car sales in major export markets have, to the delight of many Uzbeks, meant a flood of cars unsold abroad coming on to the local market. To prop up car prices, which are also being hit by falling remittances from Uzbek migrant workers abroad, and keep the domestic automotive industry alive, a crucial sector for the country’s stressed economy, the Uzbek authorities are cutting car production. But to many this is merely a short-term fix. 

“The time of Uzbek cars has passed, as they cannot stay popular with Russian drivers permanently because they have become conceptually obsolete and there are many different cars on sale in Russia,” a Tashkent-based analyst, who requested anonymity, tells bne IntelliNews.

The recent flood of cars unsold abroad entering the Uzbek market has briefly changed the paradoxical situation in the country where locally-produced cars made by GM Uzbekistan, the monopoly car maker that is a joint venture in which General Motors holds a 25% stake and the Uzbek state the rest, traditionally were sold at higher prices than abroad, and used cars cost more than new cars.

Local observers believe that the discrepancy in new and old car prices and long waiting times for car deliveries after making down-payments have allowed GM Uzbekistan, which mostly exports Nexia and Matiz cars under the Daewoo brand, to fund the production of the cars with the buyers' money.

But the new situation seen since the summer has broken this pattern, so the car producer now has to find new schemes to fund production. The solution it seems to have come up with is to cut production to artificially boost demand.

According to Russia’s Association of European Businesses, sales of Uzbek-made cars fell by 51% on year to 15,498 units in Russia in the January-September period, drastically down from the peak of 92,778 units hit in 2011. The decline is partly attributed to Russia's introduction of a recycling duty on imported cars following its accession to the World Trade Organization (WTO) in 2012; this levy drove up the price of Uzbek cars on the Russian market, making them less competitive. Exports of Uzbek-made cars to Russia have also been hurt by the overall 33% drop in demand for cars in Russia due to the recession there caused by the fall in the oil price and the Western sanctions.

Sales of Uzbek cars in the second largest export market of Kazakhstan have also dropped, by 66% to 2,059 in January-August, according to the Association of Kazakh Auto Businesses. The fall in the Kazakh market is explained by a flood of cheap imports from Russia caused by the weakness of the Russian ruble against the Kazakh tenge. To stem the flood, on August 20 the Kazakh government abolished the national currency’s trading corridor to allow it to float freely, which caused the value of the tenge to slump by nearly 30%.

The falling exports to Russia and Kazakhstan have flooded Uzbekistan’s domestic market with cars, making it easier for long-suffering local motorists to get hold of new cars. In the past, as bne IntelliNews has written, the Uzbek authorities released a limited number of cars onto the domestic market in order to maintain high prices for locally manufactured cars. They have also adopted high import duties and levies that make car imports prohibitively expensive. As a result, the price of a locally produced car in Uzbekistan used to be higher than the same car in foreign markets, and the price of a used car was higher than that of a new car (by law, motorists are allowed to sell new cars only after a year from the date of purchase). On top of this, buyers had to wait for up to a year after paying for most of the car to get delivery.

This is true for the best-selling and most sought-after Nexia and Matiz cars, which are at the lower price range of GM Uzbekistan’s product line. There tend to be less problems with getting hold of the higher-end cars and SUVs, which consume far more fuel than cheaper cars. “There is no demand for those expensive cars, because they consume a lot of fuel and many motorists don’t like paying a lot for fuel, given we have fuel shortages regularly every two or three months,” the Tashkent-based analyst tells bne IntelliNews.

Bargain buys

The lack of demand for Uzbek cars in the export markets, combined with falling remittances and a weaker national currency, the Uzbek sum, briefly eased the situation with purchases of new cars in dealerships and pushed the prices of used cars down in Uzbekistan. “Prices are falling and cars are much cheaper now and they are no longer more expensive at the market than in a dealership,” a buyer in Tashkent’s Sergeli car market told bne IntelliNews during the summer. “Dealerships sell cars for sums, while cars are sold for dollars in markets. Because of the higher exchange rate, cars are cheaper in dollar terms in the market.” The slump in car prices reached about 40% this summer, the car buyer noted.

There are three reasons for the situation briefly seen in summer, the analyst explains. “One reason is that the plant is churning out cars like before, but there are no export markets to sell them, so the domestic market is getting saturated,” he says. “Another reason is the dollar’s exchange rate has gone up, so people do not have money or do not want to pay a higher price in sum terms for a car. And the third reason is our labour migrants are sending less money from Russia, so the purchasing power of some population groups is falling.”

The exchange rate of the sum has fallen by nearly quarter in value against the dollar on the black market from UZS4,300 in the summer to UZS5,400 at the moment. The official exchange rate, set by the Central Bank of Uzbekistan, is a wildly implausible UZS2,663 against the dollar.

The Russian economic difficulties also mean that there are limited employment opportunities for millions of Uzbek migrant workers in Russia. This has led to a fall in remittances that Uzbek labour migrants send through transfer systems such as Western Union by nearly 16% on year to $5.6bn in 2014 and by 55% on year to $1.15bn in the first half of 2015, according to the Central Bank of Russia.

This is bad news for an industry, consisting of about 200 companies, which directly employs more than 25,000 people and is a major component of the country's GDP. The government says the economy is growing by 8%, but analysts believe that behind the scenes the Uzbek economy, like its peers in the region, is struggling in the face of falling commodity prices.

So with the aim of maintaining demand for locally manufactured cars and propping up prices, in March the Uzbek government adopted a programme to “ensure structural reforms, modernisation and diversification of production” in 2015-2019, under which GM Uzbekistan would see its output cut in 2015 and over the next two years.

Under the programme, the production of cars will fall to 219,000 units in 2015 against 245,700 in 2014, but slightly increase to 228,600 in 2016 and to 247,500, a level comparable to 2014. The output should increase further to 268,000 in 2018 and 280,600 in 2019, according to government plans.

In addition to cutting the overall output, GM Uzbekistan has been cutting the production of Nexia and Matiz cars, thus artificially creating demand for more expensive cars. Tashkent has long been abuzz with rumours that the Uzbek carmaker will scrap the production of cheaper, more economical models like Nexia, Matiz and Spark altogether.

bne IntelliNews' recent visits to the Sergeli car market showed that the situation observed in summer had started reversing by autumn, with one-year-old, well-maintained Matiz and Nexia cars costing $500-1,000 more than new cars in dealership. “One has to wait for the deliveries of Nexias in dealerships for much longer than they do for other newer models,” a car seller explained to bne IntelliNews. “Another reason is that fewer Nexias are produced now than in the past.”

Dealerships in Tashkent say that they will deliver cheaper cars within “days and weeks”, not months like in the past if they have Nexia and Matiz cars in stock. But they say they don’t know when exactly these cars will be supplied to them. By contrast, the more expensive Malibu, Captiva or Orlando cars fill the showrooms and can be got hold of almost immediately.

When there was high demand and long waits for Uzbek-manufactured cars, GM Uzbekistan and local commercial banks entered agreements to sell new cars on loans, a manager at a Kapital Bank branch in Tashkent told bne IntelliNews. “However, it has now stopped providing cars for loans unilaterally without giving any reason,” the manager complained. However, people on the ground expect the sales of cars on loans to resume again “soon”.

The cuts in production could be a response to falling exports, or a solution to the producer’s problems with funding the production, local observers suggest. “The situation when used cars started costing more than new cars may be repeating again because we already had a precedent,” the Tashkent-based analyst says. “It might be just the production of popular cars was cut significantly and is going to be scrapped altogether in order to open up the market for more expensive cars. Or it could be GM Uzbekistan just resorting to old funding schemes,” he concludes.

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