From import to assembly: Azerbaijan stakes on local auto industry Caliber.Az review

For the fifth year in a row now, Azerbaijan has been consistently implementing projects to localize auto manufacturing in the country's industrial districts. The cooperation that started with the Iranian auto industry, and the development of the domestic assembly cluster continued with the creation of a joint venture with Uzbekistan as part of the emerging Turkic Automotive Industry Conglomerate.

In particular, in early May, the foundation of a new joint car assembly plant was laid in the Hajigabul industrial district. Amendments to the Tax Code (TC) approved by Azerbaijani President Ilham Aliyev recently became a logical continuation of these efforts, exempting the import of equipment, and components from VAT, as well as the entire cycle of making cars in the country.

It so happened historically that all automobile enterprises created in the USSR were built outside of Azerbaijan. The only exception was the Baku Automobile Plant, launched in 1969 (after privatization in 2005 - Bakiavtomobilsanaye OJSC), which produced cargo vans, based on which simple small-seat buses were assembled in the early 1990s.

In the new century, with the beginning of the implementation of large-scale projects for the socio-economic development of the regions, and the formation of new agro-industrial enterprises, it was decided to organize in the country its production of trucks, tractors, and other heavy vehicles. As a result, for about a decade and a half, various modifications of MAZ, KamAZ, Ural trucks, as well as Belarus tractors and a wide range of mounted agricultural machinery from components of Belarusian and Russian enterprises have been assembled at the facilities of the Ganja Automobile Plant (GanjaAZ).

These projects turned out to be very successful largely because they were supported by large orders from the state-owned OJSC Agroleasing, utility and construction organizations, several state-owned companies, and law-enforcement agencies. And over the past three years, Ganja equipment has been actively used in large-scale construction work as part of the revival of the Karabakh region. In May 2023, GanjaAZ further expanded its production potential by signing an agreement with the well-known Italian company SDF on organizing a joint assembly of German-designed tractors.

However, unlike trucks and tractors, which have relatively high sales opportunities due to government orders and the needs of the agricultural and corporate segments, the production of passenger cars mainly depends on market consumer demand in the retail segment. Moreover, long-term international practice confirms that the profitability of SKD (screwdriver) assembly is ensured if production volumes reach 8,000-10,000 vehicles per year. If we are talking about a deeper localization of production (stamping of body parts, manufacturing of other components), then the profitability of the project is possible only with the annual assembly of at least 30,000 cars.

The needs of the Azerbaijani car market, which has gone through several periods of ups and downs, at the beginning of the new century were limited to imports of 30,000-40,000 cars a year. Actually, due to the narrowness of the domestic market and very small production volumes, all attempts made about 20 years ago to organize the assembly of passenger cars in our country ended in nothing. In particular, the idea to organize the assembly of small cars of the Oka brand in 2004 and off-road vehicles of the Ulyanovsk Automobile Plant (UAZ) in 2005 at the GanjaAZ facilities was not crowned with success.

In two years, the Ganja enterprise assembled about 1,000 Russian cars of various modifications in total, and then these projects were curtailed due to their low profitability. The attempt made in 2005 by the Evsen Group holding and the Iranian company Iran Khodro to arrange the assembly of AzSamand cars based on Iranian and French components in Shamakhi turned out to be unsuccessful: the global crisis of 2008 and the decline in market demand led to the termination of this undertaking.

The only more or less successful project to localize car assembly was implemented in 2010 in the Nakhchivan Autonomous Republic (NAR), where low-cost passenger cars were assembled at the NAZ-Lifan plant from inexpensive Chinese components. However, this initiative did not achieve significant commercial success: the plant kept afloat thanks to the use of small Lifan cars as taxis in the NAR, as well as government orders - Chinese cars were actively purchased through the Ministry of Labor and Social Protection of the Population for the needs of war veterans, disabled people, etc.

But in the "fat" years of 2004-2014, the capacity of the domestic car market began to grow dynamically, and gradually the average annual import volumes approached 100,000 cars. During that blessed period, the expansion of automobile imports was facilitated by the steady growth in the purchasing power of the population, based on the strong manat, whose exchange rate was higher than that of the US dollar for many years. However, for the same reason of the strong manat, it was much more profitable for entrepreneurs to import finished cars from abroad than to establish troublesome, with very high costs, production within the country.

The situation changed radically during the global energy collapse of 2014-2017, when, as a result of falling oil prices and a two-fold devaluation of the national currency of Azerbaijan, prices for imported cars almost doubled.

The domestic car market, which is mainly oriented towards imports, faced new problems in 2021-2022: imported inflation and other post-pandemic realities in the global market resulted in a rupture of logistical ties between suppliers of spare parts and assembly plants, there was an acute shortage of microelectronics, steel and non-ferrous rolled products, polymer materials, other components, and auto parts rose sharply in price. Naturally, all this went into the cost of global auto production and, together with the increased cost of transport logistics, in two years led to a significant rise in the price of new European, American, Japanese, Korean, and other imported cars.

This trend is clearly demonstrated by the statistics of the State Customs Committee (SCC) of Azerbaijan: in the first half of 2023, imports of cars to the republic amounted to 48,373 units with a total value of over $753.3 million, with an increase (in price terms) by 63.4%. Three years ago, a significantly larger number of cars were imported into the country for a comparable amount. It should also be taken into account here that more than two-thirds of all imports have been accounted for several years now by second-hand cars, which are also becoming more expensive, not to mention even higher rates of growth in prices for new cars, even in the most affordable budget “B” class.

All these negative processes have been accumulating since the crisis of 2015, and at a certain stage, the rise in the cost of importing cars played the role of a trigger that launched the second wave of the process of localization of car assembly enterprises in Azerbaijan. The first successful project was launched in 2018: Azarmash OJSC launched the production of a line of Khazar brand cars in the Neftchala industrial district. The vehicles here are assembled from units supplied by the Iranian partner IranKhodro OJSC.

Following, in September 2021, in the Hajigabul industrial quarter, the production line of the joint venture (JV) SamAvto LLC created by Azarmash and Uzbek JSC UzAvtoSanoat was launched: at the first stage, the assembly of such models as Chevrolet Nexia and Chevrolet Cobalt started here.

Within the framework of the second stage, the range of models and the level of localization of the production of the Azerbaijani-Uzbek project will further expand, in connection with which, in May 2023, a groundbreaking ceremony for a new plant with a design capacity of 30,000 vehicles per year was held in Hajigabul. Investments in the construction of the plant are estimated at AZN 88 million, and instead of an SKD "screwdriver" assembly, a more complete production cycle will be carried out at the new enterprise, including body welding and car painting.

The efficiency of these initiatives is clearly evidenced by the statistics of the first half of 2023: according to the State Statistics Committee, 1,744 units of cars were produced in the country, which is 65% more than in the corresponding period last year. For comparison, 2,049 passenger cars were assembled in the republic for the entire last year. It is expected that shortly the volume of car production in Azerbaijan will reach 5,000 units per year, and then, after the commissioning of new assembly facilities, it will gradually increase to 30,000 or more annually.

To support these processes, President Ilham Aliyev recently approved amendments to the Tax Code, according to which, from May 1, 2023, for 10 years, the production of cars, as well as the sale of locally assembled cars in retail, are exempt from VAT in the country. Moreover, until January 1, 2031, imports of raw materials, components, and spare parts necessary for the assembly of cars are exempt from VAT.

This list includes engines, gearboxes, body and interior elements, lighting fixtures, candles, and other electronics, tires, and glass, in a word, almost all components and elements used in the assembly. Thus, with the abolition of VAT on imports of components, car assembly in Azerbaijan will become cheaper by about 18%, which will create a considerable competitive advantage over the import of finished cars and at the same time stimulate buyers' demand for local products.