Ukrainian carmakers suspend production due to declining demand

There is no sense for carmakers to operate, as their products will only be stocked up in warehouses.

Photo: Unian

The AIS Corporation, one of the major carmakers of Ukraine, decided to suspend the assembly of cars at the Kremenchuk Car Assembly Plant (KrASZ) starting from August. Car manufacturing in Ukraine is taking a serious nosedive: in June 2014 output volumes dropped by a record 71% compared with May. The drop in demand is due to the complicated political and economic situation in the country and the fact that domestic carmakers have lost their edge over importers.

Summer slowdown

KrASZ Director Mykola Chernysh announced to the press that the plant will shut down its operations. Deputy Director for Marketing Serhiy Borovyk confirmed this information to Capital. Representatives of the plant explain the shutdown of production by the decrease in demand on the car market by more than twofold and the lack of government support of domestic carmakers. “Today, it is more profitable to import cars than manufacture them and the catastrophic decline of the market volume only aggravates the economy of domestic production,” said Borovyk.

Although AIS is considering the possibility of renewing assembly in the future, for the time being the company decided to downsize the staff of KrASZ by 50%. “Further production plans and development plans for the plant will be formed after the situation on the car market stabilizes,” said Borovyk. At this point, the corporation plans to import already finished models of Geely and SsangYong, which were earlier assembled at the plant in Kremenchuk. This is not the first time production at the plant has been put on hold. On June 11 Capital wrote that KrASZ turned off its conveyers until June 19, which is why the output statistics in June were not so impressive. Indeed, in June the production of automobiles fell by 86.4% to 140 vehicles compared to May.

Not the only one

In addition to that, other carmakers are experiencing similar problems. At the Zaporizhzhya Car Plant (ZAZ) output in June dropped considerably compared with May – by 62.4% (to 718 vehicles). Press service of the UkrAVTO Corporation (which controls ZAZ) told the publication that the decrease in demand was the main reason for the reduction of output: “You can see what’s going on in the country. There is no sense in working for products to be placed in a warehouse. That is why production plans have been changed in response to the current situation.”

However, UkrAVTO did not wish to discuss how exactly their plans would be adjusted. “It is difficult to speak about plans until the end of the year as the situation changes by the day,” said a representative of the company’s press service. Moreover, he added that another problem arose in addition to the low demand. “Suppliers of Zaporizhzhya’s plant worked in problem territories and naturally the supplies of spare parts and components decreased. The company has warehouses with a reserve of spare parts and components, but if the situation does not stabilize, it will affect the production starting from September-October,” the source believes.

According to the association of carmakers UkrAvtoProm, other manufactures registered a decline in indicators: in June production volumes of Eurocar fell 61.2% compared to May (153 cars were manufactured), while the Bohdan Corporation did not produce any cars in the same month.

Running on empty

According to UkrAvtoProm, a total of 1,009 cars were produced in Ukraine in June, which is 3.5 times lower than in May. Compared with June of last year, production dropped four times. Be that as it may, based on the results of six months of the year the results of carmakers are higher than in the same period of 2013 – in H1 2014 output volumes amounted to 22,561 vehicles, which is one third higher than last year’s indicators.

Nonetheless, the trend towards a decline is looking downward: in March car production volumes exceeded those in February by 3.7%, while in April they fell by 16.8% compared to March, in May – by 20.2% compared to April and in June production decreased by 71.4% compared to May.

Marketing and Industrial Economic Analysis Director of UkrAvtoProm Heorhiy Ovsyannykov told Capital that the reason for decrease in car production was the absence of consumer activeness on the market. Loss of the territories (occupation of Crimea and military conflict in Donbas) and the decrease in car exports contributed to the situation. “Export is approaching zero, as Russia was the main market. In the past Russia accounted for 90% of car exports. Today, it is less than a third,” he confirmed. Ovsyannykov said that Russia exempted its manufacturers from the scrappage fee back in 2012. But due to the pressure of the World Trade Organization, they decided to pay the fee, while Russia was compensating it through government programs.

Senior analyst at ART Capital Oleksiy Andreychenko believes that the decrease in production was due to many problems that carmakers are experiencing at the moment – from low demand due to the fear of war to disruption of supplies.

“In June, output volumes hit their 10-year minimum for this time of the year. Three of four carmakers basically suspended production. In the beginning of the summer ZAZ and KrASZ announced they were experiencing problems with supplies of components and spare parts due to the military actions in the eastern regions of the country. The Kremenchuk plant later added difficulties with import of components to their list of problems,” specified the expert.

The analyst believes that all domestic carmakers and importers are suffering from the low demand for cars. “The low demand is due to political and economic risks, including the risk of hryvnia devaluation. Not many people would dare to buy a new car, anticipating that a war may break out any time soon. In addition to that, people’s incomes are also on the decline, which means they are spending less money,” said Andreychenko.

Nothing good is on the horizon

Ovsyannykov does not expect the decline in car production to stop soon. “In case of emergency, it requires strong medicines to keep the organism alive. However, all medications have been cancelled for the Ukrainian car industry, which is why production volumes will continue to slide. There is no optimism, because there are no instruments for reviving the situation on the market. Today, it is more profitable to import cars than to manufacture or assemble them,” he said.

Andreychenko believes the critical situation in the industry will most likely lead to a situation where carmakers will try to lobby for new measures of government support of the automotive industry in Ukraine. However, he doubts that the government will agree to trade barriers for imported vehicles. “Most likely, the government will be able to stimulate the demand for Ukrainian-made cars via discount certificates for the buyers of domestically manufactured automobiles, possibly in exchange for old vehicles,” he says.