Why did Nurlan Smagulov decide to build the Hyundai plant in Kazakhstan?

Photo: press service archive

Nurlan Smagulov

As Forbes.kz has already reported, President of Kazakhstan Nursultan Nazarbayev met with the owner of Astana Group Nurlan Smagulov on February 7, 2019.  At the meeting, the businessman reported to the Head of State that Astana Motors had started construction of a new plant for producing Hyundai cars in Almaty. Nurlan Smagulov provided details on February 13 at the meeting with the journalists.

Why does Astana Motors need production?

Our company has operated for 27 years, and almost all the time we have been asked a question why we do not manufacture cars. Six years ago we built our first plant, which assembled the Hyundai trucks and buses. We organized a stacking assembly there with welding and painting. We have achieved 51% localization when producing the Hyundai County buses, and we even export these vehicles to Russia, Belarus, and Tajikistan. So, we have got the first experience in car manufacturing.

Everything is different and much more complicated when we talk about cars. It requires much more responsibility. We used to assemble our Hyundai vehicles at Agromashholding in Kostanay. But due to some changes in the market, we have decided to build a plant and produce cars ourselves.

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What are these changes?

First, Hyundai has become a very popular brand not only in Kazakhstan but also in the CIS; it came second in terms of sales in Kazakhstan and Russia. The demand for it is growing: last year we sold almost 9 thousand cars of this brand. Currently, the Hyundai plant in St. Petersburg that supplied spare parts for Agromashholding began having out-of-stock situations, and it could no longer supply us with spare parts in large quantities. The plant offers stamping dies (molded metal sheets for doors, car bodies, etc.) instead of spare parts.

Second, it is important for us to get a Kazakhstani production certificate with 51% localization; it will enable our company to export cars to Uzbekistan, Kyrgyzstan, Tajikistan, and other Central Asian countries. We will not have access to the market of the Russian Federation, but Ukraine can be a very attractive market for us.

Third, we have grown mentally; we want to be more than just importers of passenger cars; we are ready to invest our knowledge and experience in such large projects as an auto plant. Hyundai Motor supported us; we signed a license agreement with it. The parent company shares its intellectual product with us and gives us engineering documentation. The Hyundai Engineering Division will provide us with equipment and monitor quality of production.

Why is the Russian market inaccessible for Hyundai vehicles produced in Kazakhstan?

Hyundai Motor itself will not let us enter the Russian market. They already have a large plant in St. Petersburg for 250 thousand cars per year (Hyundai and Kia). In addition to it, they have an assembly line in Kaliningrad. For this reason, these plants will supply the Russian market. And we cover the Central Asian market. It is a division of the auto manufacturer itself in order to eliminate dumping between the distributors.

All auto manufacturers divide markets, and it is a civilized approach. We cannot sell cars where we want because the manufacturer provides details about an exact supply chain and prices.

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When will the plant be launched?

Our plant will be built in the industrial zone next to HES-2 in Almaty. The soil is not very good because it is the loam soil. Therefore, we will have to build the plant on stilts. On the other hand, there is an available line network.

We start building the plant in April 2019, and we are now preparing documentation and agreements. We will build the plant’s workshops by the end of 2019 within nine months. As for production, we will start SKD assembly in January 2020, and we will begin complex assembly of the Hyundai Accent and Hyundai Creta vehicles in the middle of next year.

As for financing, 20% will be our own funds (it is a requirement of any financing institution). The remaining 80% is borrowed. (The total investment is 25 billion tenge. – V.B.) We negotiate for a loan with DBK, Mr. Zhamishev (Chairman of the Bank – V.B.). We have negotiations with the government to get its support in our exports to neighboring countries. Moreover, Uzbekistan supplies its vehicles to Kazakhstan.

We will produce 30 thousand vehicles a year during the first stage. Half of this quantity is for Kazakhstan, and the remaining part is for neighboring markets. Later we are going to produce 45 thousand vehicles.

There will be another production site (a plant of automotive components where plastic, glass, seats, and attachments will be produced) next to the plant. We will not produce the components, we will only create conditions, build shops, place orders, and invite SMEs to produce components for us. All plants in the world follow this practice. Many investors have got interested. Korean businessmen started negotiations, confirming that they can produce plastic, glass or some other components.

We will create 700 workplaces. Each workplace will “cost” $ 85,000, and output per employee will be $ 640,000. In other words, we will have technology intensive and well-paid work.

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How will a pricing of a Hyundai vehicle produced in Kazakhstan be set?

At the beginning, a vehicle’s price will be pegged to a foreign currency because of high share of foreign components. A price will be largely pegged to the ruble: metal will be supplied from Russia, and Hyundai is also building an engine factory in St. Petersburg. We strive to eliminate pegging to the Korean won and the American dollar. We need localization for stabilizing cars’ pricing but not for getting preferences.

At the initial stage, cars will not be cheaper; it is impossible because there will be a currency component even in our localization. For example, equipment for a new plant will be supplied from Japan and Korea. It will not be bought for tenge. And we will need to earn and give this money back. There will be exchange rate arrangements for components from St. Petersburg. As for kits from Russia, we have now negotiations on switching to the ruble zone. We see some progress in this matter.

In short, the biggest challenge for the future is to stabilize prices and eliminate dependence on currency.

What will be the assembly quality?

A Korean construction company will build the plant, and the architects will be from this country as well. Foreign companies will handle delivery and installation of the equipment. Hyundai Engineering will manage the whole project. So, all standards of the parent company will be met.

We will follow the trend and produce all new models in the world. As soon as a new model is launched, we will pay the cost of changing the assembly line (a line costs $ 3 million).

What about staffing issues?

We faced this problem a long time ago when we opened the first auto assembly plant. For this reason, we have created the Academy of Astana Motors where we recruit young people: current and former students whom we train in our company. We also organize courses for middle-level engineers in our plant. And we will send the employees involved in the production to similar plants, for example, to the plants in Vietnam, Algeria, and South Korea.

How will you build relationships with a parent company, i.e. Hyundai Motor?

They do not invest in the plant. We finance the whole plant ourselves, and we buy all equipment ourselves according to Hyundai Motor’s recommendations. They will only help us in setting up the process. Their main businesses are seven main plants in the world, and they focus on them. But they will cooperate with us because they own the brand, and they are responsible for it by giving us a right to provide a warranty. In return, our partners receive sales volumes and presence increase in the market.

What about ambitions?

It is a commercial project for us. We need to achieve 51% localization in order to start exporting. It is not a fast-payback project for sure; it is a strategic, long-term project that is aimed at achieving a good standing in the regions. We watched our colleagues for a long time; we saw strengths and weaknesses. We have understood that the plants should not be large in size; we needn’t produce hundreds of thousands of cars per year. Therefore, we build a small flexible manufacturing plant with an area of 30 thousand square meters in15 hectares.

The plant is a commercial project with an ambition in it. It is the company’s commitment if you like.