Investment flows into auto business amid growth

Better access to loans and other factors have continued driving up new car sales this year, while Ukraine's automobile manufacturers are increasingly tapping into Western capital markets to fund bold expansion efforts.

According to Kyiv-based auto industry consultancy Auto-Consulting, 272,000 new cars were sold in the first nine months of this year, a 42 percent increase year-on-year.

The rising demand for new cars has Ukraine's leading automobile manufacturers, which mainly assemble cars from imported kits, seeking ways to boost production in Ukraine. They are also seeking opportunities to capture market share abroad by exporting cars or by launching production on foreign turf.

Take, for example, Eurocar, which assembles German Volkswagens and Czech Skodas from imported car kits at a facility in Transcarpathia Region. The company announced Oct. 23 that it had inked a $28 million syndicated loan with a maturity of seven years. The loan was provided by three banks with German roots: HVB Munich, HVB Ukraine and DEG.

"The loan will be poured into the construction of new plant facilities, the acquisition of new equipment and to develop infrastructure," Eurocar said in a statement.

Eurocar, which posted a turnover of $262 million last year, assembled 16,521 cars in the first 10 months of this year, about 5,000 more than in 2005. The company assembled 14,921 Czech Skodas, 1,066 German Volkswagens and 64 Italian Siats.

Eurocar launched auto assembly operations in late 2001 at a $19 million facility at Solomonovo, a small town on Ukraine's border with Hungary and Slovakia.

The facility currently assembles using ready-made car kits. The process involves installation of tires, engines, seats and other parts, allowing the company to sell cars at prices lower than imports by avoiding a large share of duties slapped onto finished cars upon import.

Bold expansion plans are also underway at Ukraine's other two auto producers, Zaporizhya-based ZAZ, which specializes in assembling Korean Daewoo cars, and Bogdan Corporation, which produces Russian Ladas and buses from imported Asian parts.

Both have expressed interest in raising hundreds of millions of dollars on international markets through various financial instruments to fund expansion of production.

As part of an effort to streamline its operations, Bogdan relocated its passenger car manufacturing from Lutsk Region to a site in Cherkassy Region, where its buses were produced earlier. Meanwhile, bus manufacturing has been relocated to Lutsk.

Bogdan's spokesperson Serhiy Krasulya said the relocation strategy at his company is intended to "improve overall logistics" and should fully be completed by 2008.

What's more, Bogdan and ZAZ are reported to be holding talks on joint participation on the construction of a $300 million production facility in Russia.

ZAZ expects to boost automobile production this year to 190,000 from 148,160 churned out last year and 125,970 produced in 2004.

In the first half of this year, Bogdan's subsidiaries increased production of passenger cars by 86.84 percent year-on-year to 22,097 and buses by 64.92 percent to 1,199.

The WTO factor

Ukraine's auto manufacturers are currently in a transitional phase, seeking to expand operations at their Ukrainian facilities and to adapt to changes expected in line with Ukraine's plans to join the World Trade Organization - a move which will require the lifting of import duties on cars.

Eurocar plans on expanding its production facility in Ukraine, enabling it to take more of a role as a manufacturer of cars rather than just an assembler. Lower labor and energy costs in Ukraine are seen as cost-cutting advantages to producing cars in Central and Western Europe. These advantages could open the prospects for assembling cars for European markets in Ukraine, said Eurocar Spokesperson Olena Havinska.

"All cars [produced by Eurocar] are being sold exclusively in Ukraine currently, but Eurocar has set a goal to start exporting cars," she added.

Havinska said that Eurocar hopes to use funds from foreign borrowings to increase its role in the auto manufacturing process to 50 percent by the end of 2007.

Bogdan's Krasulya, however, expressed concern about the consequences Ukraine's auto industry will face if the country completely lifts import duties on finished cars in connection with plans to join the WTO. Lobbying efforts against the lifting of protection barriers in parliament by the auto industry have played a major role in delaying the passage of legislation required for Ukraine's WTO membership aspirations.

"It's possible that neither Bogdan Corporation nor Eurocar will receive their return on investment [on these bold expansion projects] if Ukraine enters the WTO without leaving legislation in place to protect national automobile producers," Krasulya said.

"Ukraine's automobile market has shown an approximate annual growth of 30 percent during the last three years. But if the world's giant automobile producers enter the market [en masse] any time soon [by launching their own production facilities or flooding Ukraine with imports,] the country's manufacturers will have no choice but to leave the market," Krasulya added.

by Ihor Eros, Kyiv Post Staff Writer
Nov 09 2006