Kazakh Car-making Industry Is Stumbling Over Problems

Kazakhs cars to be cheaper for Uzbek customers

An attempt to diversify Kazakhstan’s oil-based economy through a big expansion of the car assembly industry is stumbling over problems caused by low energy prices, which have hit economic growth, dried up funding and weakened local purchasing power.

A short-lived surge in car imports from Russia has also hit demand for locally produced vehicles, adding to doubts over the country’s ambitious plans, which include the construction of a large car-assembly plant in the eastern industrial city of Ust-Kamenogorsk, announced in 2013 by Kazakhstan’s Bipek AziaAvto and the Russian carmaker AvtoVAZ.

The Kazakh company told the Nikkei Asian Review that it was pressing ahead with the project in spite of difficulties in the economy and a slowing car market. Bipek AziaAvto has invested $55 million in the project’s first stage, due for completion in 2018 with an annual capacity of 60,000 Lada cars to be priced from $5,000 to $12,000. The plant’s full design capacity is 120,000 cars a year, at a total cost of $380 million and with projected completion in 2020.

The company plans to export to Russia’s Siberian region, neighboring central Asian countries, Mongolia and the Caucasus, Bipek AziaAvto said. Part of the logic behind the plant is that AvtoVAZ’s vehicles appeal to Kazakh motorists for historical and financial reasons. Nearly three in 10 new cars sold in Kazakhstan are Ladas, made by the Russian company and assembled locally.

“Lada is cheap and spare parts could easily be found in any auto parts shop,” said Kuanysh, a 55-year-old driver from the western oil city of Aktobe, explaining his choice of a Lada car. “Maintenance is cheap too, and I can even do the repairs myself and fix Lada’s problems.”

Other Kazakh motorists echoed Kuanysh. “The car is cheap and I drive it around my village without worrying about damaging it,” said Azat, 35, pointing to the poor condition of Kazakh roads outside major urban centers.

Kazakhstan’s car industry took root in 2002 when Bipek AziaAvto started to assemble Lada and Skoda cars. The company, now the country’s largest car trader and producer, was set up and is owned by Anatoly Balushkin, a Kazakh businessman. It now produces 28 models of Skoda, Chevrolet, Lada and Kia cars, while its rival AllurAuto produces Ssangyong, Toyota, Geely and JAC vehicles. However, production and sales of domestically assembled cars are plummeting.

Domestic new car sales fell by 40.4% to 97,446 cars in 2015, and by a further 59% to 21,964 cars in the first six months of 2016 compared with the first six months of 2015. Vehicle production dropped by 66.5% to 12,400 in 2015, and fell another 55% to 3,772 units in the first six months of 2016, compared with the same period a year earlier.

The main reason for the slump was the government’s unwillingness to devalue the tenge, the Kazakh currency, which strengthened against the Russian ruble in 2014 and 2015 as the oil price fell sharply and Western sanctions against Russia started to bite.

The tenge remained strong against the ruble until August 2015, when the Kazakh authorities finally allowed it to float freely. The strong tenge meant that comparable goods could be bought in Russia for slightly less than half the price in Kazakhstan, in dollar terms, encouraging Kazakhs to import from Russia instead of buying locally.

Protectionist moves

The authorities estimate that Kazakh citizens spent rubles totaling the equivalent of $2.8 billion (in addition to euro and dollar expenditures) in Russia between October 2014 and April 2015, including buying more than 230,000 new and used cars.

Large-scale imports of cars by individuals from Russia stopped after a near-40% devaluation of the tenge and the introduction of measures to protect the domestic industry, including cheap loans to consumers buying locally assembled cars and a recycling duty that raised the prices of Russian cars by about $2,000, making them less competitive.

However, Kazakh car industry watchers continue to question the feasibility of the proposed new assembly plant, which could produce 120,000 new cars a year for a market that can hardly sustain demand for 100,000.

Pavel Kim, editor-in-chief of Almaty-based kolesa.kz, an online car publication, said: “At the moment there exists every reason for doubting the feasibility of such a high capacity, but at the end of 2013 when the construction of the plant started this figure seemed quite justifiable.”

A bulletin published by the Association of Kazakh Auto Business in October questioned whether the Kazakh plant was needed, claiming that AvtoVAZ’s existing plants are underutilized according to the company’s own estimates.

Compounding the industry’s problems, Kazakhstan’s annual economic growth rate fell from 6% in 2013 to 4.2% in 2014 and 1.2% in 2015. According to official statistics, the economy expanded by a meager 0.1% in the first six months of 2016. The slowdown has further reduced the population’s purchasing power.

But Kim shares the project participants’ optimism that cars produced by the plant in the $5,000-$12,000 price range will continue to be in demand in Kazakhstan and neighboring countries. “Lada cars remain competitive in the country because they simply don’t have competitors from other producers in the low-price segment, and this is their key selling point compared to cars produced in Europe or Asia,” he said.

Financing for the full $380 million scheme remains unresolved. In March 2016 Dmitry Pankin, chairman of the Russia and Kazakhstan-led Eurasian Development Bank, floated the idea that the bank might provide $132 million for the project. However, Pankin later told Russian media that before committing to providing funds he wanted the Russian company to explain how and where it was going to sell Kazakh-made cars given that it was underusing the capacity of its Russian facilities.

The bank said: “Negotiations are under way between the parties at the moment. The final decision on the bank’s involvement in the project has not yet been adopted.”

Bipek AziaAvto has also sought help from the Kazakh government, but with few results so far. A request made in June for $90 million from the Baiterek holding company, which manages Kazakhstan’s development institutions, remain unanswered.

However, with global oil prices trading significantly above the government’s budget planning assumption of $35 a barrel and the country’s energy production expected to recover following a relaunch in October of the problem-plagued Kashagan field, the government may again become flush with money to fund its car ambitions. “Time will tell whether the plant will achieve the project capacity of 120,000 cars a year,” said Kim.

NAUBET BISENOV, Contributing writer