Automobile sales in Ukraine that have increased substantially since 2002 are now rapidly falling as a consequence of the economic downturn in the country. Current estimates show that the upward trend in sales can resume again in 2011.

Before the economic collapse, the Ukrainian car market was the seventh largest in Europe. Among the countries of Eastern Europe, Ukraine was in the second place after Russia. The per-capita rate of vehicle ownership in Ukraine was comparable to those in other markets with higher gross domestic products, including Brazil and Turkey. In those countries, per-capita ownership of vehicles was 33 percent lower than the figure for Ukraine. Still, even while the number of automobiles in Ukraine increased twofold since the country gained independence, the total number of cars in Ukraine is small in relation to other countries in the region. Significant opportunities are available for expanding the market.

Experts calculated that there were 158 automobiles per 1 000 people in Ukraine as of 2008. In Russia, that number stood at 213, and in Poland at 399. The low figures evidence a general trend that has persisted since the Soviet era, when the number of vehicle owners in the country was only 25-40 percent of what it was in the countries of Eastern Europe and 15-20 of the totals for Western Europe. Another limiting factor was the relative inaccessibility of consumer lending to most Ukrainian people. 

According to estimates made three years ago, automobile production accounted for 2.5 percent of Ukraine’s GDP. Domestic production expanded by more than 40 percent in 2007 and continued to grow during the first months of 2008. As a consequence of the economic downturn, however, production dropped sharply in October of 2008. Altogether, based on the information provided by Ukraine’s Association of Car Manufacturers, total production in the country rose by only 6 percent in 2008. A little over 423 300 vehicles were produced. Demands for transportation-related services and automotive equipment similarly declined. In the first two months of 2009, this sector witnessed a 50.7 percent drop. Automobile manufacturers cut production and terminated workers in large numbers. There are signs that employee reductions may still continue.       

The exponential growth of production taking place in Ukraine prior to the crisis was in large measure fueled by the government’s efforts to support local manufacturers and to resist imports. Among the state’s measures adopted to strengthen the position of domestic manufacturers were tax and investment incentives, a duty free regime for the importation of automotive parts, and an exemption from the value-added tax. Also, profits derived from the sale of automobiles that were earmarked for reinvestment in the industry were free from taxation.  

Ukraine’s becoming a member of the World Trade Organization in May of 2008 requires the country to limit its support for the local producers and to create competitive market conditions. Car industry interest groups were not successful in blocking legislation lowering the tariffs on imported vehicles from 25 to 10 percent as of January 2009. The increase of the tariff to 13 percent in February of 2009 took place in response to the severe economic realities of the recession. The State Customs Service reported that only 23 500 cars were imported into the country during the first quarter of the current year, demonstrating a drop of over 70 percent.

Ukraine’s membership in the WTO allowed the country to begin discussions with the European Union to reach a new free trade agreement. The success of these talks would require further trade liberalization on the part of Ukraine. At the same time, greater economic opportunities would become available to Ukrainian exporters. The market for low-cost vehicles in Europe is looking to be very attractive to domestic manufacturers.  

Currently, Ukraine’s exports of automobiles go mostly to other countries of the former Soviet Union. Ukrainian automakers also have several clients in the Middle East.

The number of private owners of automobiles in Ukraine has been steadily on the rise in the last few years. As of 2007, the figure was estimated at 6.7 million. The increase was indicative of rising demands and a healthy expansion of the economy. Compared to statistics for 2001, the size of the economy increased by more than 150 percent, while real wages went up two times since 2002. In spite of the increases, average earnings are not as high as in other neighboring countries, creating a limiting factor for automobile sales.

In 2008, locally-produced vehicles accounted for 64 percent of the market. The mean age of cars driven in Ukraine is 13 years.

Demand

The Ukrainian market witnessed a period of significant growth from 2003 to 2007. During this time, car sales rose by close to 35 percent every year. As a consequence of Ukraine’s economic collapse in 2008, the resulting increase of sales for the year was only 15 percent. The dramatic fall in auto sales in the first three months of 2009 brought the figure even lower. From January to March, only 45 000 cars were sold in the country. Current estimates show that the decline of the automobile market will continue during 2009. 2010 may see a modest growth in Ukraine’s car market. Credit is not likely to be freely-available during this period of time. Forecasts indicate that the industry will experience a 55 percent fall in 2009 and a further 6 percent decline in 2010. While expansion is expected to restart closer to the end of the forecast period, its pace is unlikely to return to previous levels.  

The opportunities in the automotive sector are at the same time constrained by the country’s underdeveloped infrastructure. Roads constructed during the Soviet period are in dire need of repair. Western-style highways are practically non-existent. Other smaller roadways have similarly deteriorated throughout the past decade. It is very difficult to drive across the country in an automobile. The number of gas stations and service facilities for cars is small compared to what is considered standard for Central and Western Europe. The prospects for modernizing the road infrastructure of Ukraine have become better as a result of Ukraine’s hosting of the Euro 2012 football championships. Still, in the current economic climate, the allocation of substantial funds to road construction does not seem probable. 

The limitations on importing used cars into Ukraine were lessened upon the country’s accession to the WTO. The prohibition on importing automobiles older than eight years and trucks older than five years was lifted in the summer of 2008. At the same time, the government does not believe that the removal of importation barriers will result in the rapid influx of older used cars into the country because registration fees for such vehicles are very high.

Consumers

About one third of the cars sold in Ukraine are in USD 10 to 15 thousand range. The second 33-percent bracket is composed of vehicles in the range of USD 15 to 33 thousand. The average monthly income in Ukraine is USD 340. The mean annual earnings per capita in 2007 totaled around USD 2 600. The wages rose by more than 250 percent between 2002 and 2007. The actual increase of the salaries from 2003 to 2007 stood at 17 percent. In 2008, however, largely due to the rapid inflation and the general economic decline, wages increased by only 7 percent. As for what should be expected in 2009, analysts suggest that mean incomes will drop by 9 percent. In 2010, the decrease will probably be 2 percent.    

Brands

In 2006, Ukraine adopted Euro2 environmental standards for vehicles sold in the country. The imposition of these requirements helped promote higher quality standards for domestic cars and also limited the imports of C.I.S.-made vehicles into Ukraine. The activity of major multi-national car manufacturers on the Ukrainian market has been very intense in the last several years. The share of non-C.I.S. vehicles from 2005 to 2006 rose from 50 percent to 68 percent. The trend persisted throughout 2007 and 2008. The market share of Russian and Ukrainian cars, however, is expected to increase in 2009 and 2010, as fewer consumers would be willing to purchase more expensive automobiles.    

Russian automobile brands – and in particular AvtoVAZ – continue to enjoy great popularity on the Ukrainian market. In 2008, AvtoVAZ accounted for 17 percent of all cars sold in the country. The second most sought-after brand in Ukraine is Chevrolet (General Motors). It had an 8.3 percent share of the market. Hyundai and Daewoo took 8.1 percent and 7.3 percent respectively. These manufacturers have local production facilities. Mitsubishi and Toyota closely followed with 7.2 percent and 5.2 percent. Cars produced domestically at the Zaporizhzhya Automobile Works were in seventh place according to 2008 estimates. Their share stood at 5.2 percent. Other leading brands include Skoda (Volkswagen), Chery, and Kia.

The number of new automobiles bought at licensed dealerships has been increasing from year to year. Unregistered dealers operating in the shadow economy have gradually been disabled through higher taxes and customs duties. Registered dealerships could also offer better financing arrangements and extra service plans.

The availability of consumer financing and access to lenders of the automakers themselves fueled the industry’s expansion. By 2007, the volume of financing extended for the purchase of cars by Ukrainian banks increased by 55 percent to USD 6.6 bln. More than 70 percent of automobile purchases were made with financing arrangements. The financing rate ranged from 10 percent to 14 percent. With the tightening of the credit market in the country, the availability of financing for automobile purchases is constrained. Analysts predict that in a few years Ukraine’s market of used cars may become saturated with automobiles purchased through the use of loans that consumers were not able to handle during the recession.