Help for the Engineering Industry
From 9 to 10 October, Astana hosted the 2nd Kazakhstan Engineering Industry Forum. During the event, officials focused on progress in the work of the government on the engineering industry development, and business representatives discussed the industry’s problems sharing their concerns about its prospects in the EEU and the WTO.
Focus on Mechanical Engineering
The growth of engineering industry observed in Kazakhstan in recent time shows that this “once-forgotten” industry is getting a second wind. An indirect evidence of this was the number of delegates to this Forum – they were more than 700 participants from 19 countries, and its programme – only on the first day of the event 6 round tables were held on separate segments of mechanical engineering. The main outcome of the Forum was the signature of 5 memoranda on cooperation between Kazakhstan and foreign companies.
According to tradition, the Forum opened with formal greetings. This time it was the Prime Minister of Kazakhstan Karim Massimov, who opened the Forum; he noted that the domestic engineering industry every year demonstrates its steady growth. Over the period of the first five-year industrial plan the production in this industry has more than doubled, and at the end of year 2013 it had reached 854 billion KZT.
The most noticeable results are in the energy and railway segments including production of locomotives and passenger trains. In addition, growth was observed in the automobile manufacturing industry: output of buses, trucks and cars has substantially increased.
Today many well-known machine-building brands operate in Kazakhstan. Moreover, Mr. Massimov pointed out, some of them are in the process of making decisions on opening new plants. "In connection with the amendments to the Investment Act, the government is working with potential investors, and in the near future we hope to see new project investment agreements concluded".
It is telling that 6 of the 14 sectorial priorities of the second five-year plan fall into mechanical engineering, which, according to the Prime Minister, should serve as locomotive in the next round of Kazakhstan’s industrial development. Therefore, the state now pays attention to and supports the sector more than ever.
Government help is provided for those who help themselves
However, the head of the government has clearly indicated that, while the state intends to lend support machine builders still have to use their own resources. And this is due to the fact that the global market is entering a cycle of low price for energy and basic commodities. In such circumstances, Kazakhstan, like many other countries, where economy and budget depend on the cost of raw materials, will have much less opportunities. "As the mechanical engineering always depends on consumption of goods, we need to be ready for some possible decrease in demand in our countries. And you have to take this into account when arranging your strategies, looking for reserves inside your company in order to boost work efficiency and reduce incremental costs."
The Prime Minister drew attention to the fact that today no manufacturer can turn out products using exclusively its own resources. "All the big high-tech companies are parts of value chains, and they cooperate with other companies around the world. And this is the way of manufacturing the best products. In order to be able to collaborate with other manufacturers, our economy requires to be part of the global one."
In this regard, he noted that establishing the Eurasian Economic Union, on the one hand, will allow organizing partnership between companies in the participating countries, and, on the other hand, will provide an opportunity to expand markets for domestic companies.
Moreover, Kazakhstan is at the final stage of negotiations on joining the World Trade Organization. According to Mr. Massimov, it is of the utmost importance, since foreign investors need to be assured that the Republic abides by the WTO’s rules of the game.
All these factors will require, first, changes in the government macroeconomic policy and, second, a closer links with the business community. "In the light of the changed macroeconomic situation under instructions of the President the Government of the Republic is preparing a plan of specific measures aimed at lending support to local entrepreneurship including mechanical engineering under the WTO rules."
The next speaker, Aset Issekeshev, Minister for Investment and Development, supplied statistical data on the automobile manufacture industry and provided details about the government's plans in this area. According to him, in 2014, the automotive industry share of the mechanical engineering industry grew up to 18.3%, which is 4 times more than in 2008. Only in 2013 domestic enterprises produced more than 37 thousand cars, which almost 2 times higher than in 2012 and 11.6 times higher than in 2008. Over the last four years the value of production have grown by 12 times – from 13.5 billion to 156.5 billion KZT.
At the same time in the next five-year plan the government will focus on priority development of the six most competitive segments. They are manufacture of automobiles, electrical equipment, agricultural and railway equipment, and equipment for mining and metallurgy, oil refining and oil and gas sectors.
According to Mr. Issekeshev, this concentration is caused by the current stagnation processes in Europe, and the decline in growth of the machine-building industry in China and Russia. "All this leads to increased competition in the machinery products market and to the need of setting priorities in sectoral industrial policy."
Speaking about the prospects becoming available through establishing the EEU and the Kazakhstan’s joining the WTO, the Minister stressed that these potentials can be realized only if the competitiveness of enterprises is improved and business applies the customer-oriented approach.
What does the EEU brings us?
Regarding regional integration, Vladimir Maltsev, the Director of the Department of Industrial Policy of the Eurasian Economic Commission, stated that it would make it possible to establish a common market, to enlarge market, and therefore will expand the production capacity of domestic producers.
"Thanks to the removal of internal barriers to movement of people, goods, capital and services, the external trade of Kazakhstan are on the increase, interregional processes’ growth picks up. So, the Kazakhstan border regions became one of the leading partners for many regional units of the Russian Federation such as Tatarstan or the Sverdlovsk and Chelyabinsk Regions – indeed the trade turnover between each of these regions and Kazakhstan exceeds $1 billion."
The speaker also recalled that the CU participating countries have already unified a number of industrial policy tools by turning over their regulation to the supranational level. For example, the agreement on unified rules in industrial subsidies adopted on December 9, 2010 establishes the concurrent conditions for this tool. This refers to the industrial complexes subsidy ban in the case when it significantly distorts the competitive environment in the CU market and damages a specific industry of a member state’s national economy.
In addition, great emphasis is placed on industrial upgrading of the CU member countries, which involves considerable financing. So, in Russia the amount of annual investment in machinery and equipment is of $150 billion, in Belarus it is about $20 billion, and in Kazakhstan $14 billion. As explained by Mr. Maltsev, the commodity structure analysis shows that in mutual trade this category (along with vehicles) ranks second accounting for 20% of the total.
However, the decrease in turnover observed in recent years in our countries shows the necessity of deeper integration cooperation between business structures within the SEA, as well as creation of conditions for increase in production competitiveness and its subsequent access to third countries markets.
To address these issues, the participating countries intend to establish a Eurasian Engineering Centre for machine tools, which will be responsible for the development of technological and managerial solutions in this area, as well as for their practical implementation in industrial enterprises.
Barriers to Development
Albert Rau, the Vice Minister for Investment and Development, drew attention to the fact that the main barrier to the development of the domestic automobile industry remains lack of domestic components production and testing bases. At the same time, low localization level is the main problem, when the Kazakhstan’s goods enter the export markets. In order to solve this problem, the Ministry of Investment and Development intends to bring the world's key producers of automobile components to the Kazakhstan market through Kaznex Invest.
Also he believes that to create equal and mutually beneficial conditions for vehicle certification within the CU our country should have its own adequate certification body and technology testing centre. According to the plans of the MI&D, it will be able to provide a range of services for test and evaluation of wheeled vehicles.
In this regard, the government is ready to support businesses in the creation of a testing laboratory in the form of reimbursement of 50% of the costs on a grant basis. The public policy will focus mainly on support for large-scale production projects, increased levels of localization and creation of technical regulation infrastructure.
In particular, concessional loans will be provided to construct facilities and infrastructure. In addition, there is financial leasing available at preferential rates for the purchase of technology, logistic and auxiliary equipment.
In turn, Anar Makasheva, the Marketing Director of Astana Motors, presented a number of ideas on how to create a much needed component base. She recalled that the Treaty establishing the EEU stipulates uniform conditions of industrial assembly, according to which all Kazakhstan enterprises working in this mode should reach the localization level of 50% by the mid-2018.
Ms. Makasheva believes that this threshold is within reach by using the global experience and cooperation within the Customs Union. “Development of automobile component base takes place where there is some economic incentives in the form of a favourable investment climate, labour availability, market capacity, etc. Usually, production of components is in the immediate vicinity of a plant manufacturing cars." However, many world auto manufacturers do not develop and produce their own components, and outsource this segment in full to specialized companies that have relevant long experience.
With regard to Kazakhstan realities, lack of local companies capable to manufacture specific components in proper amount and under adequate conditions remains one of the main problems of localization. This is due to several factors. First, the lack of capacities at auto parts suppliers. Second, their remoteness from auto assembly plants. And third, high OPEX. Therefore, the Astana Motors’ representative considers that it is necessary to search for and attract foreign partners.
The tariffs differ
Erzhan Mandiyev, the Director General of JSC Asia Auto, drew the attention of the Forum participants to the experience of auto manufacturers in other developing countries. For example, in Korea, Poland and Argentina requirements for automobile components volumes of release and localization level combined with their imports benefits serve as a universal approach to the automobile industry development ensuring the mutual obligations of a state and an investor.
However, experience shows that even adjusted conditions of industrial assembly do not provide guarantees of successful industry development. "A crucial element, as we understand it, is protection of the domestic market from foreign pressure. And even on this point we find substantial differences of the domestic industrial assembly mode and experience of successful auto manufacturing countries". According to the speaker, among all the states, which in the last decade aimed at developing their own automotive industry, Russia, Kazakhstan and Ukraine have the smaller level of customs tariff on import of new cars. "At the development stage of the automobile industry, Malaysia defended its market by means of 50% duty, Brazil -– 70%, Thailand – 80%, Uzbekistan – over 90%. In India and China import tariff was at the initial stage of 135% and 200%, respectively. In Indonesia it was 240%, and in the Republic of Korea imports were not possible in principle.”
For comparison: within the CU duty rate is an average of 30%, and in Ukraine it is even 25%. According to Mr. Mandiev, such tariff protection level is too low for successful countries-manufacturers. "I must say that the fact of finding Kazakhstan and Russia in the same group as Ukraine worries me very much, because regulation of the automotive market in that country could serve as an example of inconsistency and uncertainty in the industry development." Excessive Ukraine’s compliance with the WTO requirements has resulted in a steady, albeit low (within 10%), changes of customs rates. As a result, such a large company as UkrAvto, was forced to turn to imports of finished cars, then back to their assembly. According to Mr. Mandiyev, such a "depressing story” is extremely undesirable for Kazakhstan. And this must be taken into account when considering conditions of joining the WTO.
He also drew attention to the fact that the customs tariff existing in our country cannot be compared with the Russian defensive duty. “Our tariff is a misleading figure, since the products of Russian car industry come to the republic on a duty-free basis and takes more than a half of the market. Within the framework of agreements between CIS States Uzbekistan’s producers also have the right for duty-free access to our market. Of course, the free access of the automobile industry products to the markets of the allied countries is one of the principles of the common customs territory. But imagine that in Korea despite the protective tariff, say, Japanese cars would be imported in a quantity equal to 55% of the market. Then the Korean auto industry in its current form simply could not have developed".
In this regard, according to Mr. Mandiev, compensating measures are required to neutralize the effect of imports within the common customs territory. For this purpose he suggested to use subsidies for transportation that in Kazakhstan is not less relevant than for the eastern part of Russia.
The WTO’s Threats
The speaker then complained that the first five-year plan of the FIID state program subsidizing car loans was provided, but the initiative remained on paper. In the meantime, our northern neighbour launched the next stage of a recycling program. As you know, the previous initiatives supported by favourable auto credits brought significant revenue to the Russian budget. Early in this year, the Russian government approved 5 types of new automakers subsidies totalling 270 billion roubles, which will be valid during the 2014–2016 periods.
Another overriding priority of the state regulation of the industry is to avoid the manufacturers’ "cannibalism" and to clean up the market soil from weeds. "It would seem that uncompetitive producers will not survive itself. But over the years in the "neither dead nor alive" mode, 2–3 such enterprises can together take away a significant portion of the market from a successful manufacturer, impeding it to reach the desirable level of output and disrupting its localization plan.
The speaker cited as an example the fact that as of today Kazakhstan has concluded 21 industrial assembly agreements, 17 of which are in the narrow sector of light commercial vehicles. This figure, in his view, is the reason for doubt about these projects viability, since the industrial assembly agreements signed by Kazakhstan investors assume that project capacity and level of localization will be reached by 2017–2019.
"We cannot expect that by using only a small part of the tools used by our predecessors we will achieve their results. One might say that the mentioned measures were relevant in the 1960's, 1980's, 1990's, however even today the WTO members hold a "hawk" position in the automobile industry. Finland, for example has cancelled the 30% tax on imported used cars only in early 2000's, and by judgement of the European Court of Justice. In Jordan, operation of vehicles older than 10 years in private hands is prohibited. In Portugal, a used car registration tax is up to 55% of its price."
Such protective measures, he said, are also established in Hungary, Turkey, Chile, Mexico, Indonesia, the Philippines, Thailand, Brazil, Uruguay, Venezuela, Malaysia, Argentina and Singapore, which, incidentally, are members of the WTO. "Those are, you see, substantial reasons to think once again on the conditions under which Kazakhstan will join the WTO. The current agreement obliges Russia and in the near future also Kazakhstan to reduce the already low import protection down to symbolic 15%, which is incompatible with the manufacturing development," the expert said.
Based on this and other presentations at the Forum we can state that the domestic mechanical engineering has to pass the maturity "test drive". In addition to the fact that Kazakhstan needs to solve internal problems related to the shortage of skilled professionals, lack of serious scientific and technology base and components, machine builders will face serious challenges in terms of EEU and WTO. However, these difficulties should not stop them because a powerful machine manufacturing industry is a required attribute for the economy of a modern developed nation, which Kazakhstan is aiming to be.