RE-ESTABLISHING PRICE BALANCE

Car prices follow a rising trend in most countries following the post-pandemic period. Experts believe this is due to monetary inflation caused by huge liquidity injections into the US and EU economies in 2020-2021. Car manufacturing has suffered severe pressure due to a shortage of semiconductor components, while the Western sanctions have not only halted assembly lines in Russia, but also intensified the energy crisis, causing higher prices for rolled steel, polymer units and other components, hence further disintegrating the industry. Today across the CIS space only Central Asian countries continue the successful development of their automotive clusters, with Uzbekistan leading the way and planning to create a Turkic Automotive Industry Conglomerate together with Azerbaijan and Kazakhstan.

Car becomes a luxury?

After two years, the crisis in the global automotive industry continues and it is highly likely that negative trends will dominate in 2023 too. According to research by the German automobile club ADAC, the marked increase in new car prices in Europe and America has been going on for five years now, having increased significantly in the last two years. In 2017-2022, the price of new cars (especially budget models) have increased by an average of 19%, with recent price increases significantly outpacing the average annual rate of inflation in the US and EU. While in 2017 the average cost of a new medium-sized car in Germany was €44,900, in 2022 it was already close to €54,000. The price increase had the greatest impact on car sales in the EU: in January-November 2022 there was a 6.1% drop from previous figures to 8.4 million units.

In addition to the global pressure of imported inflation triggered by the liquidity injection into the Western economies during the 2020 recession, the disruption in the supply chain of components from China and South East Asia, a fire at Japan's Renesas plant—the leading chip supplier, as well as the manifold increase in transportation costs have contributed to carmakers' costs significantly. A shortage of semiconductor chips continues to affect car production in Germany, the rest of the EU and the US and is likely to remain a problem in 2023 as well.

The situation for car manufacturers in Europe and several other regions of the world has deteriorated further since February 2022, as the war in Ukraine resulted in the destruction or shutdown of numerous supplier companies in that country. Also, anti-Russian sanctions imposed collectively by the West have suspended the global sales of millions of tonnes of Russian steel and aluminium rolled products, copper cables, various plastics and other raw materials used in car production.

Banning of cooperation with Russia has also affected the prices of new cars in the former Soviet Union. For example, in March-December 2022, almost all car assembly plants in Russia have been suspended with the leading car giants of Europe, the US and Japan. South Korea has followed the same path, with Hyundai and KIA recently announcing the suspension of car assembly in Russia.

The situation is getting worse because even in the best years the level of localisation of component production in Russia did not exceed 15-20%, and the most complex units—engines, gearboxes, chassis components and almost all electronics—had always been imported. Yet Russian manufacturers had been largely dependent on international supplies of metal and plastic body components, interior elements, etc. Therefore, today it is impossible to restore the production cycle without losing quality. All official deliveries of components from global brands have ceased, while the number of ‘shadow dealers’ from few countries, which are not afraid of the Western sanctions and are ready to support the Russian car industry, is insignificant. In fact, these are mainly Chinese and Iranian carmakers. But even in this case the process of production reorientation to new car models and other assembly technologies will take a long time. So far Russian experts expect the production volume at less than half a million cars by the end of 2022 which means a nearly five-fold drop in assembly volumes. The Russian market is now experiencing an acute shortage of mass-produced budget models, not to mention the fact that Russia has been permanently ousted from the list of car exporting countries.

Resisting external negativity

All these factors (higher production costs in the EU, the US, Japan and Korea, as well as the suspension of assembly lines in Russia) have a very negative impact on the vast post-Soviet car market, increasing the prices of new cars significantly. We can feel the consequences of these processes in Azerbaijan too. According to the State Customs Committee (SCC), in January-November 2022 imports of cars in Azerbaijan reached 61,600 units (-19.3% in comparison with previous figures). However, the total value of these imports increased by 5.4% - over $743 million. In other words, fewer cars were imported into the country, but they became significantly more expensive.

This applies not only to new cars, but also to the second-hand segment, with vehicles imported to Azerbaijan mainly from Korea, Japan and Europe. Since the beginning of 2022 the prices of used budget models have increased on average by 5-10%. In addition, due to the suspension of assembly of foreign cars in Russia, the import of Russian cars to the local market has stopped too. Narrowing of foreign supplies in any market boosts prices, which is inevitable. But it also indirectly affects the dynamics of domestic production.

The global rise in the price of components and assembly units has had a negative impact on Azerbaijan’s car assembly industry. According to the State Statistics Committee, in January-November 2022 Azerbaijan assembled only 1,812 cars, which is a 10.7% decrease in production compared to 2021. For comparison, in 2021 car production in Azerbaijan was more than 2,000 units (+4.8% compared to 2020).

There are currently three registered passenger car manufacturing companies in Azerbaijan: Azermash JSC in the Neftchala Industrial Quarter producing a wide range of Khazar cars since 2018 based on assembly parts supplied by Iranian partner IranKhodro JSC; NAZ-Lifan in the Nakhchivan Autonomous Republic (NAR) operating since 2010 to assemble low-cost passenger cars from affordable Chinese components. There has been no recent information about the plant’s activities and production volumes. In the past, a large portion of Lifan cars were used as taxis in Nakhchivan, as well as purchased by the Ministry of Labour and Social Security to further presented to war veterans, people with disabilities, etc. But the project has been less successful commercially than expected.

The best success, however, was recorded after the launch in September 2021 of the joint venture SamAuto LLC in the Hajigabul industrial quarter based on the agreement between Azermash JSC and UzAutoMotors JSC. The first stage of the project will see the assembly of Chevrolet Nexia and Chevrolet Cobalt models. In the second stage, these will be Chevrolet Damas and Chevrolet Labo. The total annual production capacity of the plant will be up to 5,000 units. Chevrolet Onix and Tracker models will be added to the production list in the future.

In the medium term, the total annual volume of passenger car production in Azerbaijan is planned to reach 7,000 units. In order to support the industry, the import of components and spare parts for the industrial assembly of cars will be exempt from customs duties for 7 years. The idea is to make production cheaper, making local cars more competitive on the domestic market, and contributing to the export opportunities of Azerbaijan in the future.

Beneficial cooperation

The most important thing for the relatively weak domestic automotive industry is to ensure a high level of cooperation with suppliers of components and to fine-tune the logic of deliveries so that the assembly lines do not depend on the deficit of complex and electronics-intensive assemblies. Cooperation with Uzbekistan, the second most developed country with automotive industry in the post-Soviet space after Russia, seems optimal. Uzbekistan has an ideal level of localisation of manufacturing, that is—all body parts, interior accessories, engines and other complex components are manufactured locally. Consequently, the cost of production is comparatively low, with the delivery cost of assembly parts to Azerbaijan remaining low.

These factors, as well as Baku's and Tashkent's intention to expand industrial cooperation, have contributed to the rapid launch of automotive projects.

Thus, during the talks held on December 24 between Azerbaijan’s Economy Minister Mikayil Jabbarov and Uzbekistan’s Deputy Prime Minister and Minister of Investment and Foreign Trade Jamshid Hojaev, it was reported that the two countries were working on financial and technical aspects of five major projects worth over $700 million and reached an agreement on the establishment of a working group for coordination of activities. Then Azerbaijan and Uzbekistan signed a memorandum of understanding to create a joint investment fund. Baku and Tashkent identified the most important joint investment projects as the development of cooperation in car production.

Reportedly, there is also a new initiative by Uzbekistan, which plans to create, together with Azerbaijan and Kazakhstan, a Turkic automobile industry conglomerate that would cover the markets of the three countries with overall population of about 65 million people. Incidentally, Kazakhstan is the third largest post-Soviet state by the capacity of its automobile industry, which manufactures mainly Chevrolet, Hyundai and KIA brands. In January-November Kazakhstan produced 99,200 vehicles of all brands, which is 24.9% more than in 2021. The creation of the conglomerate will help Kazakhstan to further increase the volume and range of production. In particular, during the Uzbek-Kazakh business forum held on December 21 in Tashkent, the parties signed several agreements on car production, including the supply of Chevrolet assembly kits to Kazakhstan for $500 million.

In general, the idea of the conglomerate envisages the increased cooperation between Uzbek company UzAuto Motors, Azerbaijani Azermash and the largest car manufacturer in Kazakhstan Sariarka Avtoprom LLP. These companies have been assembling Chevrolet cars from Uzbek components for several years. Establishment of the conglomerate will help expand existing facilities and increase supply of components. In the long term, the countries' involvement in the conglomerate will help to pursue a balanced pricing policy, strengthen horizontal ties in the machinery industry of the three countries and expand the localisation of production.