RS Market breakdown The Russian automobile market in 2012 is showing slow, but steady growth

The Russian automobile market in 2012 is showing slow, but steady growth

© RIA Novosti, AndreyHolmov
Lada Priora model o nthe Avto VAZ assembly line in Togliatti
Lada Priora model o nthe AvtoVAZ assembly line in Togliatti

The auto industry is one of the priority sectors in the Russian economy. The government heavily finances the industry in all ways possible (starting with utilisation programmes and ending with giving foreign producers certain allowances) and this has helped the market hit the ground running after the crisis.

According to statistics from the Association of European Business (AEB), in 2011 sales of new cars and commercial cars (excluding heavy trucks) in Russia exceeded 2.65 million units—this is 39% higher than the 2010 figure. Thus, the Russian market was the fastest-growing in the world in terms of growth rate. Germany took 2nd place with an 11% growth rate, while the USA was 3rd with 9%. At the same time the Russian market is still significantly lagging between these two countries “in physical terms”. In monetary terms the market boost looks even more impressive: according to PricewaterhouseCoopers (PwC) data, growth reached almost $60 billion (a 70% hike).

Experts point out that the market has not completely lived up to its potential yet; in 2012 further growth is expected. Experts cannot seem to agree upon the exact numerical value of this growth, but there is no doubt that the market will be steadily expanding

The AEB forecasts an increase in new car and commercial auto (excluding heavy trucks) sales by 8% this year—a jump up to 2.85 million units. However, it is worth pointing out that over the past four months of this year the market grew by 18%--880,540 thousand cars were sold in the Russian Federation (AEB statistics). David Tomas, the chairman of the AEB auto producer committee, believes that two factors mainly contribute to this growth—people in the country are lacking personal automobiles (1 car for every 4 people) and a lot of cars are outdated.

Stanley Root, the automobile market service director, claims that in 2012 in the best case scenario the market will increase up to 2.8 million cars, in the worst case scenario the market will remain unchanged or even fall by 8%. In the short term only a surge in car loan rates (mostly for automobiles part of the concessional lending programme) can make that statistic worse. One should also understand that almost half of budget cars are bought on credit.

People in the country are lacking personal automobiles (1 car for every 4 people) and a lot of cars are outdated. Almost half of budget cars are bought on credit

Auto producers have their own predictions for this year. Aleksei Kalitsev, sales director for the company “Hyundai Motor CSI”, stated that Hyundai is planning on selling 20% more cars in the Russian Federation (based on last year’s statistics, the company sold 149,000 automobiles). He noted that if the market keeps up the pace it set in the beginning of the year then the overall sales volume on the Russian market for this year will be 2.8-2.9 million cars.

The Head of Nissan Motor in Russia, Francois Goupil de Bouille, said that the company is intending on bumping up sales in the Russian Federation by 10%, bringing them up to 200,000 machines. Based on Nissan estimates, automobile sales in Russia may hit a mark of 3 million new cars.

Key events and deals

The main event in 2011 in the auto industry was when Russian governmental authorities and numerous large foreign and Russian companies signed an agreement about establishing a new system for manufacturing assembly. According to the new rules companies are supposed to keep at least 40% of their automobile production within Russia. Also they should manufacture engines and transmissions in Russia. Sollers-Ford, Volkswagen, Fiat, Mazda, GM and consortiums of “AvtoVAZ”, Renault-Nissan, “Izhavto”, KAMAZ and OAG signed these agreements. According to The Ministry of Economic Development and Trade of the Russian Federation, investments as part of these agreements will amount to more than $5 billion, while 2 million automobiles will be manufactured a year.

The American corporation Ford and the Russian automobile company Sollers entered into the biggest agreement in the industry in June of last year when they signed a contract about forming an equal joint venture company with a capacity of 350,000 cars a year. An estimated 74.5 billion roubles a year (up until 2020) are to be invested in this project (41.1 billion roubles of which are to be spent on developing production capacities).

Initially Sollers was planning on forming a joint venture company with the Italian corporation Fiat (they even signed a memorandum of cooperation in 2010), but the companies cut off negotiations in the middle of February 2011. Earlier Sollers’ production facilities manufactured “older models” of the Fiat Ducato. In September of 2011 Sollers signed a contract with Fiat about transferring sales and service rights to the Italian brand’s automobiles in Russia (to be effective starting on January 1st, 2012).

At the end of October 2011 one of the largest eastern European automobile production facilities “AvtoVAZ” closed a deal regarding the acquisition of the bankrupt “Izhavto” facility in Udmurt for 1.7 billion roubles. The production facility pretty much became a subsidiary company of the “automobile giant” from Tolyatti and from now on will manufacture cars under the brand names Lada, Renault and Nissan. Originally the South Korean company Hyundai Motors showed its interest in the factory (they even signed a memorandum of understanding with the government of the Udmurtiy republic). This Korean business were planning on manufacturing a few hundred thousand Kia and Hyundai automobiles a year in Russia. However, in December of 2011 Sberbank, “AvtoVAZ” and the government corporation “Russian Technologies” signed a memorandum of understanding for the long-term development and modernisation of the factory. “AvtoVAZ” committed itself to investing 7 billion roubles in the project over the course of the next few years.

In February 2011, after breaking off the deal with Sollers, Fiat signed a letter about its intention to form a joint venture company with Sberbank (80% of company will belong to Fiat and 20% to Sberbank). An agreement about constructing a factory with full –cycle production and a 120,000 car yearly capacity in Russia’s “northern capital” is to be signed at the St. Petersburg International Economic Forum. Fiat-Chrysler (Chrysler Group in which Fiat owns a 58.5% stake will also take part in this project as an investor) investments in constructing a factory for off-road vehicle Jeep production could possibly amount to €850 million.

It April it became known that the company “Avtotor Holding” from Kaliningrad jointly with the Canadian company Magna will form an automobile cluster with a yearly capacity of 350,000 cars in the Kaliningrad region. Production facilities of “Avtotor’s” current partners (BMW, GM, Kia) will join this exclusive group. A relevant agreement is to be signed by the regional government in the near future. 21 new factories are to be built (6 of them being total cycle automobile factories and 15 being auto parts factories). €2.5 billion will be invested in the industrial part of this project and another €500 will be put towards the civil part. The companies will form a joint venture on the basis of OOO “Magna Nizhniy Novgorod 2” for further cooperation with Magna. “Avtotor” can use the “dormant” agreement from 2008 (with less strict rules) about industrial assembly. This will allow the Russian company to maintain its customs privileges after 2016.

In the beginning of May the alliance Renault-Nissan and “Russian Technologies” declared that they agreed to form a joint venture company for buying the majority stake in “AvtoVAZ”. The deal will “set the alliance back” $750 million (Renault is going to invest $300 million in the project, while Nissan will invest $450) plus the $1 billion already spent on purchasing the production facilities’ stake. The alliance will receive a 67.13% stake in the joint venture. “The whole joint venture will own 74.5% of “AvtoVAZ’s” shares. In exchange “Russian Technologies” agree to stretch out the payment period for the credit-free 46 billion roubles ($1.56 billion) loan to 20-30 years for the “automobile giant”. The deal is to be closed in 2014. However its details are subject to change since the signed agreement is merely an intent declaration without any legal force.

Knocking on WTO’s door

Another key event for the Russian automobile industry was the wrapping up of negotiations regarding Russia’s accession to the WTO. By joining this organisation, now Russians will pay a 25% customs fee for new imported vehicles and this “payment” will stay at the same level for the next 3 years. From 2014-2017 this 25% fee will gradually be evenly reduced each year down to %15.

Used cars (from 3 to 7 years old) will receive an even less significant “discount”. Upon joining WTO Russian consumers will only have to pay a 25% customs fee as compares to the current 35%, eventually this fee will drop to 20%.

As for foreign used cars older than 7 years, prohibitive duties will remain unchanged (meaning that they practically cannot be imported).

A decrease in the customs specific rate will accompany these other changes. Currently this rate is €1.2-2.8 per cubic cm. for an engine. Ultimately, once this procedure becomes finalised the customs specific rate for used automobiles aging from 3-7 years old will be €0.7-1.6. For automobiles older than 7 years the current prohibitive duties ranging from €2.5 to 5.8 per cubic cm. for an engine will remain unchanged.

Now that Russia has joined WTO automobile companies which have built factories in Russia will receive compensation for doing so, but the compensation logistics have not been worked out yet

Fiercer competition, but no price drop

Experts agree that after Russia’s accession to WTO competition in the automobile industry will intensify, a rich product assortment will appear which will play into the hands of the final consumer.

But this does not mean that any radical changes in import or price levels are foreseen in 2012.

Customs duties will gradually decrease while new automobile and fuel prices (and as a result, transportation expenses) will rise, therefore it is unlikely that purchasing an automobile is going to become more profitable for Russians.

Leonid Kostroma, the director of PwC analysts department in Russia, is not exactly expecting there will an increase in foreign used car imports. Based on his estimates the customs rate decrease from 35% to 25% will lead to no more than a 7% decrease in final automobile cost.

In the future there is a good chance that used cars will flood the market and there will be a shift in the market towards South Korean and Chinese producers.

It will be particularly interesting to see what happens with Russian brands. Bruno Anselena, the director general of Renault in Russia, believes that the demand for Russian-made cars may fall dramatically (up to 20% in the long-run) due to this decrease in customs fees. He thinks that if there is an abundance of affordable cars Russian will prefer a used, but solid foreign brand over a new, but not very reliable and lower quality Russian-made car.

A fair amount of automobile market analysts agree with this thesis and they suggest that the share of domestic “automotive equipment” on the local market will decline from 65% to 45% over the next 4 years. At the same time the internal domestic used car market will grow by 15% in 2013, while this figure will jump to 30% in 2015. That is to say that a customs fee reduction may lead cause the domestic car market to age and the number of automobiles manufactured in the country to take a dive.

Even The Ministry of Economic Development and Trade believes that after joining WTO Russian car production (excluding heavy trucks) may decrease by 58% by 2014 (relative to 2010 production levels), while truck production will fall by 98%.

The new market conditions are a great motivating source for local production facilities. Over the 7-year transition phase the domestic auto industry should learn to hold its own. The main issue boils down to whether or not local production facilities will be able to completely restructure and reorganise to guarantee good quality products while keeping expenses at a minimum. If not, then the local market shall face the awful doom that struck the Polish market. After Poland joined the WTO in the beginning of the 90’s the majority of automobile factories shut down because they could keep up with the incredible flow of new and used cars from the West.

Mariya Zakharova,
RIA Novosti correspondent
Special for Russian Survey RS

FYI from RS:

Based on 2011 statistics “LADA” brand automobiles (AvtoVAZ) head up the list of the most popular cars in Russia. AvtoVAZ has consistently established itself as a leader in the market and is not planning on going anywhere soon. The following brands also made the TOP-10:

  1. LADA
  2. Renault
  3. Chevrolet
  4. Kia
  5. Nissan
  6. Hyundai
  7. Toyota
  8. Ford
  9. Daewoo
  10. VW

The German trio (Mercedes-Benz, BMW, Audi in that order) are buried in the 20’s in this ranking. This is largely due to the cost of these cars (starting at a little over1 million roubles). Honda, Lexus and Land Rover are also in the 20’s. Volvo is 30th. Mostly Chinese brands are in the 30’s. Dodge (50th) and Chrysler (51st) round out the list.