Ukraine is one of the fastest growing economies in Eastern Europe. Reflecting this growth, foreign direct investment into the country is on the rise – from January to September this year, FDI stood at USD 6.8 billion – nearly double of that last year. Automotive companies, always on the lookout for attractive manufacturing destinations, are not far behind. Most recently, the French Citroen is reportedly planning to set up a 50 million Euro assembly plant near the Ukrainian capital, Kiev.
Ukraine, until last year, had a volatile political situation as an erstwhile member of the Soviet Union. Since its independence in the early 90’s from the USSR, Ukraine has been dogged by political problems, elections this year saw two pro-Western parties that had led the peaceful Orange Revolution in 2004, forging a coalition government.
The Western world, especially the United States, has been urging Ukraine to speed up its economic integration with the European Union and soon – a move which will support its foreign trade.
Despite the political upheavals, Ukraine’s gross domestic product was 7.1 per cent last year and is expected to touch 13 per cent by next year. Its domestic market is one of Europe’s largest. It competes with the Czech Republic in terms of its business potential. Automotive companies have taken advantage of the country’s growth. Skoda Auto, for example, manufactures cars in Ukraine with its domestic partner Eurocar at an assembly plant in Solomonovo, near the Slovakian and Hungarian border. The plant has an annual capacity of 45,000 vehicles. The plant employs 700 people and in 2006, assembled 19,000 cars – mainly the Fabia and Superb models of the Octavia vehicles as well as Volkswagen and Audi cars. These cars are aimed at the Ukrainian market.
German automotive supplier Leoni and the Japanese auto supplier Yazaki Corporation have invested in Ukraine. Leoni set up a USD 50 million plant in Western Ukraine and Yazaki, a USD 40 million facility close by, in addition Flextronics Corporation, is building a USD 50 million plant to develop and manufacture automotive electronics in the country. Apart from Ukraine’s fast growth, the reason why the country is attractive in which to do business is its low costs. Labour costs are much lower than in other parts of Eastern Europe at less than USD 160 per month as compared to USD 400 in Poland. As the European Union expands, wages across the continent are going up exponentially. Plus the Ukrainian workforce is highly skilled and educated.
When Ukraine was part of the USSR, its local car manufacturing was restricted to Zaporozhye Automobile Plant or ZAZ, which made cars. Today, CJSC ZAZ is the largest local manufacturer of cars. The Lutsk Automobile Plant which manufactured cross-country automobiles, Lvov Bus Plant which made buses and Kremenchug Automobile Plant which made trucks. Post-independence, realization quickly dawned that the locally manufactured automobiles were sadly outdated. Modernizing these plants was considered unprofitable and imports of components and car sets helped the Ukrainian auto industry grow.
In the late 90’s Korean auto-manufacturer Daewoo signed a USD 1.3 billion contract with AvtoZAZ of Zaporizhia to jointly produce a minimum of 80,000 upgraded AvtoZAZ Tavria automobiles and 150,000 new Daewoo models annually over a seven-year period. Daewoo bought 50 per cent of ZAZ from the government. When General Motors took over Daewoo, GM was not very interested in ZAZ and local investors took stakes in the Ukrainian company. Today, ZAZ assembles the OPEL, Daewoo and Chevrolet brands. Nearly 65 per cent of its components are sourced domestically. The company is planning a USD 100 million facility that will manufacture 240,000 engines and gear-boxes annually and a USD 11 million unit for painting plastic parts. Also on the anvil is a USD 600,000 factory to produce car seats under license from KM&I.
Ukraine’s demand for automobiles is growing at a phenomenal rate. In 2006, demand went up by nearly 40 per cent. This local demand combined with low cost wages, makes Ukraine an attractive destination for automotive companies. InvestUkraine, an independent non-profit investment agency, acts as a coordinator between the government and investors. The agency is trying to put Ukraine on the global map as an investment destination through conferences and events. The agency has developed the final draft of a proactive FDI Attraction Strategy, a 3-year plan (2007-2010) that focuses its work on the following key strategic sectors – automotive and machinery, consumer electronics, ICT, and other industries.
“Given that increased prosperity is the ultimate measure of economic performance, InvestUkraine’s core goal is to maximize the flow of the type of FDI needed to most positively impact on sustaining increased prosperity for the regions of Ukraine. A key priority for InvestUkraine is to bridge the gaps in the economic disparities between the regions of Ukraine. Consequently, InvestUkraine through strong regional partnerships is committed to accelerating regional development through effective investment promotion and product development,” says the agency.
Automotive Industries spoke to Bohdan Danylyshyn, the Minister of Economic Affairs of Ukraine
AI: How important is the automotive industry to Ukraine’s industrial progress?
BD: It is common knowledge that one job in the automotive industry provides a further seven to eight jobs in industries such as metallurgy, petroleum, electronics, electrical engineering and machine-tool building. The importance of the auto industry in Ukraine has been recognized by the Verkhovna Rada and the Cabinet of Ministers of Ukraine. They set in place a number of regulatory and legal systems that facilitate investment in the industry.
Ukraine’s automobile market in 2000-2007 was intimately interconnected with developmental trends in the economy, its structural changes, growth in the population’s wellbeing, and a surge in the country’s defense capability and the necessity to improve technical conditions of the automobile fleet.
Taking into account the trends in development of the automobile market and the automotive industry in recent years and the expected growth in the effective demand of the Ukrainian population for motor vehicles, the volume of their sale on the domestic market is expected to reach about 800,000 automobiles and buses by 2015. Ukraine has a considerable export potential for automobiles and buses. While in 2006 the country exported 38,900 cars, this figure grew to 68,600 cars in 2007 – a growth of 76.4 per cent.
AI: What kind of support can automotive companies expect from the Ukrainian government if they want to invest in your country?
BD: Today Ukraine has vast possibilities for foreign investment promotion – the level of our people’s skills and education is extremely high, which means that scientific-technical and industrial potential is considerable. It should be noted that in Ukraine, all entities of investment activity, irrespective of their forms of ownership and business, are legislatively guaranteed equal rights in carrying out investment activity unless the law provides otherwise, the retaining of terms under which the investment was made, and the protection of investment.
AI: How safe is the investment climate in Ukraine for overseas investors?
BD: In Ukraine, foreign investors enjoy the same rights as domestic investors. To enhance protection of foreign investment, the 1965 Washington Convention on the Procedure of Settlement of Investment Disputes between the States and Foreign Nationals was ratified in 2000. The intergovernmental agreement – ‘On Facilitation and Mutual Protection of Investments’- has been signed along with 70 other countries. In January 2008, the Council of Investors was set up under the Cabinet of Ministers of Ukraine to ensure the formation of strategy and mechanisms of interaction of the bodies of state authority with representatives of foreign and domestic businesses and to establish a constructive dialog between the authorities and investors, as well as to introduce measures aimed at increasing the efficiency of state policy in the sphere of investment activity.
AI: Investors have been cautious in the past of Ukraine’s volatile political situation – what would you say to them?
BD: It should be emphasized that from the moment Ukraine acquires membership in the WTO, the Ukrainian side will fulfill all of its commitments undertaken within the framework of negotiations on accession to this organization. Active preparations are going on for the ratification of the Protocol by the Verkhovna Rada of Ukraine. Ukraine’s ratification to the WTO should go through by July 4, 2008 and 30 days later, the country should be a full-fledged member of the WTO.
Ukraine’s joining the WTO will open up new prospects for cooperation between the states. Another significant factor is that the country is working on integration into the European Union after its accession to the WTO. Ukraine is in talks with the EU on the establishment of a free trade zone. Active involvement in the international integration processes and the course towards European integration of the economy will require stable economic growth of our country.
Automotive Industries also spoke to Ihor Nikolaiko, Director of the Ukrainian State Agency for Investment and Innovation.
AI: What are some of the plus points of doing business in Ukraine for an automotive manufacturer?
IN: The actual development of Ukraine’s economy in 2006-2007 proved the ability of the business sector to solve problems arising in the process of production due to both increase in raw material prices and changes in taxation and administration of taxes. The intensification of economic processes in Ukraine largely depends on the effectiveness of the state investment policy and the availability of a favorable investment climate.
In the meantime, lack of domestic sources of financing to maintain steady economic growth, the need for experience of economically and technologically developed countries, and the necessity to expand production and raise the level of employment ultimately require the involvement of foreign financial resources.
The opportunity of conducting the Euro 2012 football championship in Ukraine will foster changes in the country’s business environment by lowering the administrative barriers and improving the investment climate; in fact, the entire economic map of the country may be changed due to changes in infrastructure, real GDP growth, and improvement of the international image of Ukraine.
AI: What kind of incentives does Ukraine offer automotive companies?
IN: In 2008, the government approved one of its most attractive privatization plans judging by the importance of entities offered for privatization. In particular, the list of economic entities whose state-owned shares are subject to priority sale as well as state-owned enterprises and open joint-stock companies that are subject to priority preparation for sale in 2008 includes share packages in the strategic and monopoly enterprises such as 67.79 per cent in Ukrtelekom and 99.5 per cent Odesa-based Port Plant 27 per cent of the six regional power generating companies.
AI: Please tell us how developed the automotive supplier industry is in Ukraine.
IN: By 2015 Ukraine will annually produce up to 500,000 cars, 45,000 trucks and 20,000 buses. Meanwhile, the production capacities that can be reached by 2009 will allow for production of about 400,000 cars, 18,000 trucks and 11,000 buses.
It can be concluded, therefore, that Ukraine will have to continue to maintain a high rate of constructing its own production capacities for automobile manufacture. The policy of attracting sizable investments must continue, which will require the creation of attractive conditions for investors. Special attention should be given to the truck market. Of 122,000 trucks registered in 2006, 115,000 were imported.
The industry received regulatory and legal support from the State, which enabled the production to grow starting from 2000. This increased the rate of employment of the Ukrainian population and the amount of revenues to the budgets of all levels. In 2000-2007, the production of motor vehicles increased nine-fold in Ukraine.
Furthermore, the production of motor vehicles of the Ukrainian make grew almost ten times. Thus, 380,000 cars were manufactured and assembled in 2007, which is greater by 42 per cent than in 2006, and 9,083 buses, which is greater by 19 per cent than in 2006.
AI: How would you describe Ukraine’s auto industry compared to the global auto industry?
IN: The priority development of the automotive industry as a science-intensive and integrating industry ensures the creation of new workplaces, implementation of high technologies, mastering the production of new quality materials and in general, proved itself well during the formation of the industry and the economy of Germany, Japan, Korea, Turkey as well as other countries. In Germany, for instance, the automotive industry ensures up to 10 per cent of the entire rate of employment. This formed the basis for creating a development strategy for the automotive industry of Ukraine.
Globalization of the world economy and European integration have posed a question to Ukraine about its own geopolitical positioning, because the correct answer will provide for successful economic development of the country and its ability to integrate into the global environment with maximum efficiency.