Asia Avto: Why Assembly Built on a Customs Duty Break Did Not Survive the Devaluation

I came across the financial statements of Asia Avto posted on KASE (the Kazakhstan Stock Exchange) by chance today.

On the whole, the 2015 results are what one would expect against the backdrop of the sharp weakening of the ruble, the devaluation of the tenge and a decline in demand.

The statements allow only a fairly superficial review, and it is hard to carry out an in-depth analysis.

The key question is to understand the reasons for the company's current condition and its prospects.

The entire business was based on customs duties, which are high for new cars but very low for spare parts. Accordingly, the difference, and the margin of a wholesale trader, is what the plant earned.

The business scheme is fairly clear and simple in stable conditions: import large assemblies (semi-knocked-down kits), assemble them at the plant and sell them on the Kazakhstani market. In such conditions, localization of production can reach 10–15 percent at most.

In Russia, for example, foreign-brand cars are assembled quite successfully and localization reaches 40–60 percent, meaning that half of the car is made from Russian components. That is why the weakening of the ruble allowed Russian producers to adapt quickly to their domestic market and, at the same time, to capture our markets.

After the sharp collapse of the ruble, Russian cars, priced in rubles, flooded the Kazakhstani market and our producers came to a halt. Sales were sluggish and were sustained only by government programs.

After the currency depreciation, sales did not grow, because the market was saturated, incomes fell and people began to save. The secondary car market contracted sharply and became a competitor to our new cars.

At the same time, Asia Avto's foreign-currency liabilities increased, sales fell threefold and the cost of production doubled. This, naturally, took its toll.

For the year, the company's net loss was KZT 22.2 billion. Overnight, the company went from being profitable with substantial capital to being loss-making with negative capital.

Naturally, a business model based not on value added but on savings on duties could not last long.

In this situation, what needs to be developed is precisely the localization of production, which is a very difficult but important task in the automotive industry.

Given that we are in the Customs Union, it would probably have made sense to orient toward Russian localization; perhaps that would have reduced the risks.

In the current situation, even with additional government funds allocated for preferential lending, all of this will have virtually no effect.