Heeding Daewoo's demand, Ukraine bans imports of older used cars, decrees tariff (03/01/98)

Heeding Daewoo's demand, Ukraine bans imports of older used cars, decrees tariff

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Ukraine has responded to a demand by a large South Korean automobile manufacturer and on February 16 decreed a ban on the import of any foreign-produced car that is more than five years old and a heavy tariff on all used cars with a value of less than $5,000 entering Ukraine.

The decree issued by the Cabinet of Ministers, which is to go into effect on April 1, is widely believed to be a response to a stipulation made by the Daewoo Motor Co. of South Korea when it agreed in September 1997 to produce automobiles in Ukraine.

However, the decree does not refer to Daewoo in explaining the decision. The decree stated that a ban on old cars will spare Ukraine problems associated with dilapidated vehicles and help the ecology.

Explanatory notes issued along with the draft decree at the February 17 Cabinet of Ministers session read, "According to independent experts predicting trends in the international automobile market, one of the most basic differences between the automobile markets of Eastern and Central Europe and Southwestern and Western Europe is that the former has become the largest wastebasket for old automobiles in the world."

The notes explain that Ukraine does not yet have the repair garages and parts suppliers needed to allow individuals or firms to properly repair and rebuild old imported cars.

It also states that old cars are generally not equipped with air pollution control devices and only contribute to the deterioration of air quality and the ecology.

The government has said that the decree will help re-invigorate a dormant Ukrainian automobile manufacturing industry. "Imported cars in use are markedly less expensive than new cars, and this has caused the development of unfavorable conditions for the development of a national automotive industry," stated the explanatory notes issued during the Cabinet meeting.

The only automobile manufactured in Ukraine today is AvtoZAZ's Tavria, which costs about $4,000 new, but is considered of inferior quality.

The decree will fulfill a key demand that Daewoo made in September 1997 when it signed a $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. At the time Daewoo had stated that it wanted an import tariff of $5,000 on used cars imported into Ukraine to restrict foreign imports.

Last year, Ukrainians imported 220,000 automobiles, according to the Ministry of Statistics.

Besides the restriction on auto imports into Ukraine, the South Korean automobile manufacturer also had asked for tax breaks, which the Verkhovna Rada granted in September by passing a law allowing a 10-year tax shelter on profits to foreign automobile manufacturers investing a minimum of $150 million in joint production ventures with Ukrainian firms.

The Daewoo-AvtoZAZ effort is expected to produce 250,000 to 300,000 automobiles annually and generate income of $2.2 billion, of which $180 million to $200 million would end up in government coffers. The government has calculated that the re-invigoration of the automobile industry in Ukraine will spur the development of a supplier-base of approximately 100 smaller firms generating an additional $711 million in business annually.

The effort will create almost 20,000 jobs at the AvtoZAZ auto plant, according to government estimates, and could produce nearly 100,000 jobs nationwide.

If Daewoo invests the total sum it has promised, it will be the largest foreign investment in Ukraine to date. The total sum of foreign investment through the end of 1997 stands at $2 billion.

Even though the numbers seem to add up for Ukraine's downbeat economy, foreigners, especially the European Union, have criticized Ukraine's accommodation of Daewoo's demands. The European Union has said that the ban on imports could lead to problems for Ukraine in joining the World Trade Organization, on which Kyiv has set its sights.

Auto importers and dealers in Ukraine's capital had mixed reactions to the ban on imported cars.

Andriy Hnytetskii, sales manager of Honda-Kyiv said, "We look at it in a positive way, because it will employ Ukrainians."

But FakilAvto, the official Opel dealer in Ukraine, said through its assistant director, Ruslan Radchenko, that it was not a good decision. "We believe that a 10-year-old Opel is of much higher quality than a new Tavria.

Meanwhile, Mikhail Bondarenko, general sales manager of Winner Ford, explained that the new law will not affect his sales. He added, however, that he does not believe it is a good deal for Ukraine "We believe that a low-quality car is being forced on Ukraine. Daewoo is a bad example of an automobile. I, as a Ukrainian would like to own a high-quality car, a Ford or a European car, not a Daewoo."