Machine Building of Kazakhstan: Challenges and Growth Prospects
Ardak Tashenov, Head of strategic analysis and analytical monitoring control of EDB
In December 2012, Eurasian Development Bank, together with the Institute of Economic Forecasting of Russian Academy of Sciences (RAS) prepared industry overview “Development of machine – building in state-parties to the Eurasian Development Bank (EDB)”. This article presents the main conclusions of the research relating to the analysis of the condition and prospects of development of the machine building complex of Kazakhstan.
Machine building is a key sector of the economy of any industrialized nation. By producing all kinds of equipment, machinery, machine tools, devices, as well as goods for the population, machine building ensures the stability of agro-industrial complex, energy and mining sectors, transportation and other key sectors of the economy.
Sustainable development and reliable operation of machine building in many respects determines the energy intensity and material requirements of the economy, labor productivity, level of ecological safety of industrial production and, ultimately, the economic security of the country.
Today Kazakhstan is characterized not only by the presence of abundant natural resources, but also with quite a developed industry. According to the III quarter of the year 2012, the percentage of the industry accounted for 32.2%, including mining which accounted for 18.5% and 11.5% for the manufacturing industry in the GDP structure of the republic. However, the historically established structure of the economy dominated by the commodity sector made Kazakhstan dependent on imports of high processing products, in particular from machine building, the need for which is increasing every year.
State of the industry
At the moment, the machine building segment in Kazakhstan produces only 0.6% of gross value added (GVA). The same indicator is equal to 2.9% in Russia. However, this is relatively small compared to the countries leading in the production of machinery products. Thus, in Germany it accounts for 8.1% of GVA, in Japan – 7.2%. It is noteworthy that in Belarus the figure is comparable to the German or Japanese, reaching 7.1%.
Such a state of affairs stems from the fact that after the disintegration of the Soviet Union, which was accompanied by a breakdown of economic relations, Kazakhstan experienced a sharp decline in production volumes. Machinebuilding was in a deplorable state, the signs of recovery in the industry appeared only in the early 2000’s.
GVA dynamics of machine building in Kazakhstan was characterized with a high growth rate in the years of 2006–2007, declined indicators in the years of 2008–2009 and with renewed positive trends in 2010. As a result, in 2010, the real value of GVA manufacturing machinery and equipment surpassed the figures of 2006 by 55%, electrical equipment, electronic and optical equipment – by 24% and transport equipment – at 117%.
In 2011, Kazakhstan’s machine-building continued growth in production volumes. Thus, the physical volume of production from machinery activities compared to the year of 2010 increased by 17%. The leaders here were the manufacture of motor vehicles, trailers and semi-trailers – increase of physical volume output by 63% and other vehicles – increase by 29%.
If we talk about the machine-building structure of Kazakhstan as a whole, then today it is dominated by production of products for mining and smelting and gas and oil sectors, which satisfies the domestic demand in these industries.
In the year 2011, the machine-building production (excluding products by activity “repair and installation of machinery and equipment”)in monetary equivalent was 278.2 billion KZT ($1.9 billion), or 1.7% of the industrial production (see table 1). Production of machinery and equipment accounted for 27.8% of the entire machine-building production, electrical equipment, electronic and optical equipment 31.3%, and transportation vehicles and equipment 40.9%.
In the year 2011, there were 8.2 thousand automobiles, 0.9 thousand auto trucks, 330 thousand televisions as well as 66 thousand washing machines (see table 2) produced in Kazakhstan.
Analysis of import and export
Domestic demand for machine-building products in Kazakhstan depends heavily on imports, which satisfy 92.1% of the total consumption.
Thus, for instance, in the year 2011 trade balance of machine-building products was negative and amounted to – $13.2 billion. Kazakhstan is a net importer of this product on all types of economic activity. At the same time exports of machine-building products of the republic was equal to only $0.7 billion, of which $0.35 billion was on equipment, $0.29 billion – on electronic equipment, $0.06 billion – on transportation vehicles.
In turn, the most significant articles of Kazakhstan’s import in the year 2011 were electronic components, equipment for radio, television and communication – $1.8 billion, electrical machinery and electrical equipment, as well as railway rolling stock – at $1.5 billion, respectively.
According to forecasts, the economy of the republic will dynamically grow in the coming years, and, consequently, the demand for machinery products will increase. However, the volume of production of Kazakhstan’s machinebuilding is relatively small at the moment, and in any case it is not in a position to fully meet the demands of local consumers. Therefore, the massive import substitution in conditions of economic growth in Kazakhstan is unlikely, and moreover, in many respects it is impractical, since the creation of new machine building sectors will require enormous resources.
Export of Kazakhstan’s machine-building products is small: in the year 2011 it was equal to 0.4% of the GDP (the lowest indicator among the EEA countries) and oriented towards the Russian market. And although it is difficult to expect multiple increases yet for some product groups (bearings, electrical equipment) in view of the creation of a common economic area, one can predict rising export flows.
The industry is characterized by the predominance of automotive assembly plants, rail, and agricultural machinery.
The engine of the future growth of Kazakhstan’s machine building complex is its transport segment. New enterprises on industrial car assembly, electrical locomotives and diesel locomotives as well as aircraft production are growing in number in the country. In the near future the increasing power of railway machine building must solve the tasks of completing and renewing rolling stock fleet.
Problems and prospects
Meanwhile, there are systemic problems in the industry, which, in our view, cannot be completely solved even in the medium term. The most serious of them – lack of facilities for the production of component base, adequate lines collected in the country. For example, only the sole national operator of the railway industry – Joint Stock Company ”Kazakhstan Temir Zholy” require spare parts for 2800 points, only 500 of which are covered by local producers.
The second major problem is the lack of capacity in the key for all segments of the machine building industry: machine-tool construction. It should also be noted that the degradation of machinery and difficulties with the supply of parts for assembly plants is inherent in machine building of all CIS countries.
Another key problem for development of the industry is the lack of available funding. As a result, machine-building enterprises often do not have the opportunity to invest in expansion or modernization of production, which is leading to technological backwardness and low labor productivity. Therefore, improving the financing system of machine building, including through the development of institutions, can drastically improve the state of the industry.
High transportation costs and energy intensity of production also have a negative influence on the activities of the enterprises that lead to low profitability and price competitiveness of their products. High amortization of fixed assets, outdated equipment and technology do not ensure the profitability of the production.
Accession of the largest economies of the region, Russia and Kazakhstan, into the WTO will lead to increased competition in the market between local and foreign producers. By itself, such competition can have a positive impact, however, if we take into account the problems described above, the state of certain sub sectors of machine building complexes may seriously deteriorate.
Problems can arise even among foreign machine-building companies that have enterprises in the CIS countries for industrial assembly, production of separate units and accessories. Launch of these enterprises were economically justified in the context of high import duties on importation of finished products. In the event of the inevitable decline of such duties, the deployment rate of industrial assembly plants and further production localization in the countries of the region can drastically decrease.
On the other hand, while entering into the WTO provides for transitional periods to change customs tariffs on machine-building products, which will implement the necessary measures to limit the negative consequences of this step.
Going back to Kazakhstan's realities, it must be noted that the growth of the well-being of the population, coupled with its relatively low security for passenger cars and durable goods, will “warm up” demand for products of those machine building sub sectors that has oriented to the consumer market (this process has been going on for several years). At the same time the need for renewing the capacity of various sectors of the national economy will stimulate demand for investment products of machine building.
Table 3 shows the SWOT-analysis of the current strengths and weaknesses of the industry, potential opportunities and threats that are grouped according to their source (internal condition of machine-building or external to its environment).
Analysis of the industry’s export and import has shown that in the short and medium term, it is unlikely to take a strong position on the world market. Kazakhstan should also expect an increase in imports of certain types of machinery products.
Nevertheless, addressing the underlying problems of development can increase its export potential and decrease dependence on imports, and due to the fast-growing domestic demand for machine-building products, it will be worthwhile for enterprises to concentrate on the domestic market.
One of the most important and real possibilities of machine building development in modern conditions is cooperation between CIS countries. This will support increase in production and export of products, attraction of investments and introduction of new technologies.
Thus, for example, in Kazakhstan there has recently been developed the production of transportation vehicles (railroad, automobile), including in joint ventures with Belarusian and Russian companies, supplying products to the common market. Thus, since the year 2003 ASIA AUTO JSC produces Russian automobiles VAZ in Ust-Kamenogorsk. KAMAZ-Engineering JSC of Kokshetau is a joint Kazakh-Russian project on model line manufacture of automobiles KAMAZ. Agromash Holding JSC based in Kostanay jointly with Russian companies manufactures various engines and agricultural machinery.
At the end of 2012, electro wagon building plant Elektrovoz Kurastyru Zauyty Ltd was launched in the Industrial park of Astana with the participation of President of RK Nursultan Nazarbaev. In accordance with the credit agreement, EDB has opened a credit line for 10 years in the amount of 10 billion KZT (more than $66 million). Elektrovoz Kurastyru Zauyty is a joint venture between Kazakhstan Temir Zholy JSC, French corporation Alstom Holdings (one of the world's leading manufacturer of machinery and equipment for railway transport) and Transmashholding JSC (the largest Russian company in the field of transport machine building). Elektrovoz Kurastyru Zauyty will produce four-, six-, and eight- axle electric locomotives with asynchronous traction motors, designed for both freight and passenger rail transport. Components for their manufacture will be delivered by Alstom Holdings and Transmashholding. The annual capacity of the plant will be about 100 sections of electric locomotives. And although they are primarily intended for the growing needs of Kazakhstan’s railroads, it is expected that up to 40% of the plant production will be exported to the CIS countries.
Over the past two years, Kazakhstan organized 12 enterprises assembling Belarusian machinery. Machinery and equipment which are assembled in the republic today BELAZ, MTW RUE, Gomselmash JSC, Minsk motor factory JSC, MAZ JSC, Mogilevliftmash Factory RUE, Bobruyskagromash JSC and Belkard JSC.
Thus, within EEA development prospects Kazakhstan’s machine building have increased due to more favorable conditions for the creation of new industries and capacious market openings needed for economically viable large-scale production of machinery products.
*Eurasian Development Bank (EDB) – international financial organization. Its member states are Russia, Kazakhstan, Belarus, Tajikistan, Armenia and Kyrgyzstan