Kyiv's traffic jams and cars signal a new reality in Ukraine (06/08/03)

Kyiv's traffic jams and cars signal a new reality in Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Less than a decade ago, a traffic jam even in this city of nearly 3 million was a novelty. A relatively modest number of cars cruised the streets of the capital, mostly pollution-spewing Soviet-era Lada, Moskvych and Volga models.

Today, the scene has changed quite dramatically. Traffic on the streets of the city center of Kyiv barely inches forward during business hours. On a Friday afternoon, it can take more than 30 minutes to travel the Khreschatyk, a one-kilometer stretch of road considered the city's main thoroughfare.

The city has simply filled up with cars. People are buying new and used automobiles in ever greater numbers. But what is most striking is not so much the number of vehicles as the variety found in Kyiv today - and throughout Ukraine, for that matter.

The Soviet (now Russian-made) Lada and Volga models remain, but they are much less apparent. Czech-made Skoda, German-made Volkswagen, Opel, Audi, BMW and Mercedes Benz automobiles, as well as models by Datsun, Nissan and Lexus made in Japan have displaced them to a large extent as the purchasing power of Kyivans has increased and banks have become comfortable with extending loans to automobile purchasers.

A recent surge in sales of imported cars has now been followed by the move of European car manufacturers into the Ukrainian market. Ukraine's auto industry, never much to speak of in the first place, has shown strong growth recently after a decade spent in the doldrums, with several of the European carmakers having announced in the last five months that they will begin doing final assembly in country.

The latest foreign automobile manufacturer to do so was Spain's little-known Seat, which produces a cousin of the Volkswagen. On May 21 the Spanish carmaker announced its intention to move into the Ukrainian market. It joins a host of other foreign manufacturers already here, including many of the largest corporations in Europe, among them Volkswagen, Opel and Daimler Chrysler, as well as Skoda and Daewoo.

An essential part of the reason these corporations have decided to make the move into Ukraine is that the auto manufacturing set realizes the economic potential contained within the country's population of 48 million and wants to prepare itself to harvest the treasure trove of potential auto buyers. No less important, by hauling in partially assembled car components and doing final assembly in plants located throughout the country, foreign car manufacturers bypass legislation that slaps on hefty value-added taxes and import tariffs, which can hike the cost of a car by nearly 30 percent.

Nonetheless, these moves remain risky. Simply entering the country market gives these firms no guarantees that car sales and market shares will increase, even if unit prices for their products decrease.

Volodymyr Punchak, 53, who has owned several Ladas over the years, greatly admires the elegant Mercedes Benz and husky Toyota Land Cruiser models that are plentiful in Kyiv. However, when it came time to purchase a new car he opted for the economical ZAZ Daewoo Lanos, produced since 1998 at the single plant of the Zaporizhia Auto Works (ZAZ) in joint production with the Daewoo Corp. ZAZ once was Ukraine's only automobile manufacturing plant and home of the country's only homegrown product, the Zaporozhets, today called the ZAZ- Daewoo Slavuta.

Mr. Punchak picked the Lanos, which goes for just over $7,000, because that is what his budget realistically allowed.

"I would love to own a jeep, the Toyota Land Cruiser or an American car, but the Lanos is what I can afford," explained Mr. Punchak, who will wait six weeks to receive his new car as back-orders are processed.

Nonetheless, even the economical Lanos is a step up for most Ukrainian car buyers, who are more accustomed to paying anywhere from a couple of hundred dollars to a couple of thousand dollars, but little more, for used vehicles. They remain the most popular types of vehicles sold in the country.

Ukrainians, however, also keep buying the Russian Lada, the cheapest automobile sold in Ukraine with a sticker price of some $5,000. The Lada, the dominant passenger vehicle in the Soviet era, remains the new car of choice in Ukraine, with a market share of 50 percent.

Increasingly, however, foreign cars have made inroads, with Daewoo, Skoda, Volkswagen, Toyota and Nissan following the Lada in registered sales over the last four months in a recent survey conducted by a Kyiv consulting firm. And that is an important reason behind the decision to move manufacturing operations, at least in part, into Ukraine.

"A core reason for this situation is the fact that economic indicators are truly on the rise and consumers are living better," explained Oleksander Ryabukhin, assistant general director of Inter Car, an importer of Volkswagens into Ukraine.

However, Mr. Ryabukhin noted that the most recent spike in import car purchases also coincided with reports in the mass media that Ukraine would again raise import tariffs in the near future to stimulate much-needed budget revenues and to deflate demand for imported products.

"Consumers who planned to buy cars in the near future are now attempting to do so as quickly as possible, to get them for the cheaper price," explained Mr. Ryabukhin.

It is the ability to produce a car more inexpensively in a market that has a huge potential that has led the European car manufacturers to Ukraine.

Volkswagen joined a growing list of carmakers in Ukraine on April 10 when it announced that it was shifting its priorities and would concentrate on producing its Golf, Passat, Bora and Polo models for sale in Ukraine in country, with production expected to begin in July of this year. Last year the Czech firm Skoda, which is wholly owned by Volkswagen, led the German giant into the Ukrainian market when it began assembling two models at a plant in the small town of Solomonovo in Zakarpattia Oblast, producing 2,010 vehicles in its first year.

A week before the Volkswagen announcement, another German firm, Adam Opel AG, signed a five-year agreement for a joint venture with AvtoZAZ, to assemble Opel's Astra, Vectra and Corsa model lines in Zaporizhia. Opel expects 4,000 to 4,500 vehicles to roll off the ZAZ assembly lines this year, with up to 20,000 vehicles in final assembly here within two years, according to Opel spokesman Richard Colcomba. By manufacturing in country the company hopes to save Ukrainian buyers 8 percent to 10 percent off the current sticker price for an imported version of its product.

The grandfather of foreign automobile manufacturers in Ukraine is Daewoo Motors, the South Korean conglomerate that is now bankrupt. Its Ukrainian operations, begun in 1998 also in conjunction with AvtoZAZ, never added up to much, although it did initiate production of the new Slavuta.

In January of this year, a Swiss investment firm, Hirsch and Cie, acquired Daewoo's Ukrainian assets, after such international multinationals as General Motors, Daimler Chrysler and Ford backed away from proposals offered them. The secretive and little-known Swiss firm, which many here suspect is simply a front organization for a Russian investor, entered into a joint agreement with UkrAvto, the company that owns 80 percent of AvtoZAZ, to continue to produce the current Daewoo model line at the ZAZ plant.

A key part of the agreement was that Hirsch and Cie could withhold investment until production hit 50,000 units. However, with the current boom in Daewoo popularity, that time may come sooner than they had expected.

AvtoZAZ-Daewoo originally projected sales of 40,000 units in 2003, but with delivery of its popular Lanos currently backlogged by at least a month, it could exceed planned production considerably before the year is over.

Maryna Yakovleva, assistant director of marketing and purchasing for EvroCar, which is the Ukrainian partner for Volkswagen operations in Ukraine, said that Daewoo has suddenly become popular because it is a recognizable and well-known model that has been on the Ukrainian market for some time. But she underscored that the most important reason for its current popularity lies in its inexpensive price tag in combination with Ukrainian import quotas that have been placed on Russian-made automobiles such as the Lada as part of the economic war that is continuing between Kyiv and Moscow.

"The production of [Ladas] in Ukraine (assembled in Rivne) cannot compensate fully for what the market demands, so a niche opened in this price range for the Lanos, which fits there nicely," explained Ms. Yakovleva.

Yet, Ms. Yakovleva said that as Ukraine's standard of living continues to rise and consumers find more money in their pockets, the more expensive European car made in Ukraine will come to dominate the market.

"People here also give priority to new models that have quality, give them comfort as well as various options and are built to last," Ms. Yakovleva said.

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