Ukrainian machine-building enterprises struggle to find alternatives to CIS markets – study

Ukrainian machine-building demonstrates a slow recovery in production and sales compared to other sectors of the economy. One of the reasons is that companies have not been able to find a replacement for traditional sales markets in the CIS countries due to barriers to entering Europe. In general, machine builders lack new orders compared to other companies.

However, the industry has recently become more optimistic. In particular, in terms of production growth. This is expected by 50% of respondents of the Institute for Economic Research and Policy Consulting (IER), according to its sectoral analysis for August 2024.

In general, the IER points to several factors that may indicate a crisis in the industry. LIGA.net has selected the most interesting findings from the study.

Ukrainian machine-building is recovering more slowly than other industries

The IER conducts quarterly surveys of enterprises in various sectors of the Ukrainian economy to determine indicators of the business climate and situation: production, sales and exports, expectations for the next three and six months, etc.

In the August survey, the IER interviewed 458 Ukrainian enterprises in different regions of Ukraine, including 37 machine-building companies.

The machine-building industry suffered more than other sectors of the economy after the outbreak of full-scale war, and subsequently recovered more slowly. Thus, the index of Ukrainian enterprises' assessment of their financial and economic situation in June 2022 was -0.38, while the same indicator for machine-building companies was -0.62.

Until February 2024, machine builders continued to assess their financial condition worse than other Ukrainian enterprises. But starting in the spring, both indicators went into the black for the first time and in July-September were close to 0.2.

In August, machine-building enterprises improved their estimates of production and sales slightly, but not significantly. However, they lowered their estimates of exports.

• Their index of production changes in August was 0.03, compared to 0.02 in July and 0.15 in June. Among the respondents, 32.4% increased production, 29.7% decreased it, and the rest did not change it.
• The index of changes in sales in August amounted to 0.05, while in July it was 0, in June – 0.15, and in May – -0.05. In general, machine building demonstrated lower sales growth rates compared to the entire manufacturing industry. The share of companies in the industry that increased sales in August 2024 was 35.1%.
• The August index of changes in exports of machine-building enterprises showed a decrease (-0.22), while on average in Ukraine, exports increased (0.09). 40.7% of machine-building exporters reduced exports, while only 18.5% increased them.

"This situation demonstrates the existence of barriers to the resumption of machine building exports. The problem, in particular, may be the issue of market access through certification to enter the European and other Western markets, as many enterprises in the industry used to focus on the CIS markets, etc.", the IER concluded.

Machine builders' forecasts for further exports were also more negative. In August, the index of expected changes in exports from industry representatives amounted to 0.17 (at the national level – 0.32). At the same time, the index of expected changes in sales is 0.47 (the highest since the summer of 2023), and the index of production expectations is 0.43. Both of the latter indicators are ahead of the respective average estimates for all sectors of the economy.

"In August 2024, 50% of industry representatives expected an increase in production over the next three months, and only 6.7% expected a decrease (38.2% and 4.8% at the national level, respectively)," the study said.

What prevents the machine-building industry from increasing exports

In August, the European Union remained the main export destination for machine-building enterprises. 73.9% of respondents sent their products there. However, companies in other industries were more active in exporting goods to Europe, accounting for 85.7% of all respondents. Another 4.3% exported to the countries of the European Free Trade Association (Norway, Switzerland, Iceland, and Liechtenstein).

"Many enterprises in the industry continue to export to the countries of the Eurasian Economic Union (except Russia and Belarus) – a total of 17.4% of respondents, which is more than twice as high as for other industries," the IER study notes.

Other important destinations for machine-building include Moldova (17.4%) and Turkiye (4.3%). At the same time, there are no companies exporting to China, the IER noted.

However, in general, companies are moderate in their assessment of non-tariff barriers to exports. They occur "sometimes," "occasionally," or "never." However, machine builders are more likely to fail customs control on more than one occasion. Surveyed representatives of the industry are three times more likely than the country as a whole to say that they have often failed to do so in the past 12 months (16% vs. 5.8%).

The responses of machine builders to the main barriers to exports did not differ from those of other sectors. The first place is occupied by queues at the border. The second most common reason is the long wait for export clearance. The third is a large number of permits.

What are the signs of a crisis in the machine-building industry?

In August, power outages were the biggest obstacle to business for the manufacturing industry in general and machine-building in particular.

However, according to machine builders, they suffered less from this than other industries. For example, in August, these companies lost an average of 12% of their working time due to the outage, which is the lowest figure among the surveyed industries.

"Being in crisis, the machine-building industry could feel less of the power outages that had a more significant impact on the production growth rate in the summer of 2024 in other industries," the IER points out.

The problem of labor shortages became more acute for all enterprises in 2024 and reached a record high of 62.4% in August. But for machine-building, it is slightly less relevant (51.4%). At the same time, the problem of "dangerous work" is more often cited, which is likely due to the fears of machine-building enterprises that may be targeted by enemy attacks due to the production of military or dual-use goods.

One of the clear indications of the crisis in the industry is the indicator of new orders. Machine builders have them on average for the next 3.2 months, which is three times less than other companies (7.1 months). This may be one of the reasons for the low production indicators, according to the IER.

"Most companies in the industry have orders for short periods. In particular, only 5.9% of respondents have orders for 12 months or more (18.7% of all respondents)," the IER study says.

More pessimistic than in Ukraine as a whole are the enterprises' forecasts of their financial and economic activities for the next periods. In August, the index of expected changes in this indicator in the industry amounted to 0.25, and in general among all respondents – 0.3.

Machine-building enterprises demonstrate a high level of uncertainty – 18.9% of them cannot predict their activities for the next six months. At the same time, planning problems have become more acute in other sectors of the economy due to power supply restrictions. Overall, 20.3% of enterprises in Ukraine were unable to forecast their activities in August, compared to 15.4% in June and 21.9% in July.

Machine builders are slightly better at planning for the next two years. 27% of the sector's representatives were unable to predict their activities in this perspective, compared to 32.2% in Ukraine as a whole.

However, among machine builders who predict their work in the next two years, estimates of its contraction are much more common (11.5% vs. 4.7% among all respondents).