New cars market and the industry in general saw the biggest drop in history. There is not a single other industry that shrank 90% in two crisis years, Andris Kulbergs, President of Latvian Authorized Automobile Dealers Association (LAADA) told in an interview to the news portal BNN.
He also stresses that Latvian car park is becoming the oldest in the European Union (EU), with the average age of a Latvian car that can pass a technical inspection accounting for 12.5 years. The average is 7 years in EU, 8.5 years in Estonia and as little as 2 years in Luxembourg.
What are the recent key events in your industry?
One of the most important trends is that there are more leasing deals in the total number of cars registered this year. Leasing companies financed 62% of the new car park in August, which brings us close to maximum hit in 2007 – 88%. It is a prerequisite for the new cars market to grow and the industry in general to show stability in future.
Another key event is joint fight voiced by car dealers who want that public institutions’ tenders on vehicles supply meet all the principles of fair competition. They want tax payers money being used as efficiently as possible.
Do you lack qualified workforce?
Yes, indeed. We lack skilled mechanics, especially electricians, car diagnosis specialists and professional auto body painters. Many qualified workers have emigrated to other EU member states to seek for better income. This leads to serious workforce shortages in car trade and repair industry. Because of these circumstances, there are also inadequate claims for higher remuneration, which simply cannot be compensated with price corrections due to the poor purchasing power.
What changes would you like to see in the Latvian legislation?
What matters the most for the industry is the dramatic disproportion among the Baltics in terms of transport taxes and duties. Certain positions differ as much as 24 times. Three-year taxes and duties account for LVL 550 in Latvia, LVL 161 in Estonia and LVL 40 in Lithuania, which is 14 times less. Upon registering a vehicle for the first time, a car owner in Latvia pays LVL 360 in taxes and duties. The sum totals LVL 125 in Estonia and LVL 15 in Lithuania, which is again 24 times less. This disproportion is having a negative impact on Latvian competitiveness on the Baltic scale and even among the leading Latvia-based companies. It is much cheaper to register a car in other Baltic states, so Latvian State Treasury misses out on significant funds.
I would also like to see a clear and strategic tax policy directed towards restoring the public car park, which is about to become the oldest in the EU. The average age of a Latvian car that can pass a technical inspection is 12.5 years. The average is 7 years in EU, 8.5 years in Estonia and as little as 2 years in Luxembourg.
How did the crisis affect the industry?
New cars market and the industry in general saw the biggest drop in history. There is not a single other industry that shrank 90% in two crisis years. The sector shrank 41% in 2008 and 81% in 2009.
Sales dropped down to 1997 levels during the crisis. Now we are back to 2003 sales. To reach 2007 peak levels, we still need some 7-10 years of economic development.
Car industry kept posting losses also in 2010. Certain stabilization and first profit came only with 2011. Due to the consolidation, both jobs and salaries were cut significantly.
Total losses of the sector hit record high in 2009 – more than any profit profit posted by all LAADA members taken together. Losses occurred because of sales below cars prime costs, so that there would be funds to settle accounts with banks. It was completely impossible to cut spending as fast as the market drop.
If comparing to 2007 performance, Latvian new cars market shrank nine times in two years of the crisis. Many car dealers and importers had created stocks based on an upward market outlook. Ninefold drop meant extreme steps to get rid of inadequately huge stocks in face of the purchasing power that has still remained. Selling these stocks meant 20-40% losses per car. The second year of the crisis, 2009, was an extreme survival test for car dealers.
The financial crisis practically eliminated the middle-class, which no longer could afford anything additional, not to mention a new car. Consequently, small cars segment fell dramatically, while Premium class sales did not drop that significantly, because the wealthy could still afford a new car.
What is your opinion on the government’s policy to boost the economic situation?
The most soaring issue in Latvia and car services in particular is the huge proportion of shadow economy, which hits as high as 90%. The leading insurers have switched to low-cost services, which are provided by companies that dodge taxes. So such businesses can ensure dumping prices what official dealers cannot.
There is no national-scale action directed towards fighting corruption and shadow economy, which is crippling the competition. Neither are public tenders oriented towards companies that are paying taxes decently. The state should ask for the State Revenue Service’s issued document to see that the particular company has paid taxes for at lest a period of three years. Unfortunately, it is exactly tax-dodging “schema” companies that win in public tenders.