Russia industry will need to hold its nerve on long road to recovery

Russia industry will need to hold its nerve on long road to recovery

News of yet another calamitous plunge in Russia vehicle sales may come as no surprise to some, but the February drop of 38% in cars and LCVs is nonetheless one of the steepest yet recorded. 

That data also arrives just in time to provide the backdrop for next week's Russian Automotive Forum (RAF) in Moscow and will give real food for thought to the hundreds of delegates from OEMs, suppliers and politicians, who may well have to look at an environment forecast to continue to fall for some time yet.

"The market is entering a very difficult phase now and February is only the beginning," says AEB Automobile Manufacturers Committee (AMC) chairman, Joerg Schreiber.

"Industry sentiment is the next few months will be extremely difficult and the market bottom has yet to be found. Good news from the macroeconomic side, such as the recent stabilisation of the Rouble, raises hopes for an improvement in the longer term.

"Until then however, market participants will need patience and a long breath." 

As a tentative ceasefire in Eastern Ukraine continues to hold, weather in the Russian capital is currently showing a balmy 5°C, but the political temperature has been in the deep freeze for some months now, with tensions surrounding events there and the annexed territory of Crimea, trickling down to intense Rouble pressure, inflation and tumbling oil prices

With that in mind, the RAF posted this interview I had at last year's event with Volkswagen Group Rus general director, Marcus Osegowitsch and it's interesting to look back at some of his predictions from March, 2014.

Here's a snapshot of what he told me in Moscow: "2013 was a difficult year, but if you look into the base state of the market it started in 2012 being more difficult," he said. "2014 is a very tough one to predict...it is further deteriorating in 2014 certainly.

"In general the [Sochi Winter] Olympics gave a positive push, but the economics is weakening, despite the high oil price by the way, which is astonishing. And one of the reflections of that weak economy of course you see in the exchange rate, which is to the Euro depreciating 25%.

"Most of the automotive companies, we are still heavily dependent on a global network of supplies, which is in Euros and Dollars. All this network of supplies has became 25% more expensive.

"Now eventually, we have to price that into the market and that will further deteriorate demand."

Osegowitsch's crystal ball has proved mostly right and his use of word "astonishing" to describe his incredulity at 2014's sky-high oil price was remarkably prescient given its spectacular descent to virtually halve at around the US$50 mark.

That in turn is presenting The Kremlin with a tough dilemma as it wrestles with shrinking till receipts from its copious reserves of energy and the need to shake the Russian economy from its present torpor and, specifically for the auto sector, making cash available for potentially cheaper credit and an extension of the scrappage scheme.

The need for such stimulation - even if it does act as an artificial accelerator of future demand - is starkly clear when looking at one gloomy prediction from Ernst & Young CIS Automotive Group Head, Andrey Tomyshev, in Moscow, who told me previously the market could plunge by up to 40% this year to reach depths last seen in the 2009 crisis.

Those figures from the AEB show February sales of new cars and light commercial vehicles in Russia decreasing by 37.9% compared with the same period last year, or by 78,228 sold units and amounted to 128,298 cars.

This year 243,826 cars have been sold, but currency depreciation, capital flight and high interest rates have combined to dampen the market, although the situation has presented opportunities for domestic producers and suppliers.

"As far as a total year forecast for 2015, sales could decrease to the bottom, which we observed in the 2009 crisis," added Tomyshev.

"Sales dipped to 1.5m units - I think this target is quite realistic for this year. I think we will not return to annual sales in [their] historical maximum in 2012 - it will not return to these figures until the end of the decade - 2.8m/2.9m units by 2020 - even after."

Osegowitsch also came extremely close in his predictions for the whole of 2014 with his figure of "2.3m-2.4m...if the rest of the environment keeps stable," but unfortunately the waters have become decidedly choppy with West and East showing no sign of reducing their political rhetoric. 

Schreiber described last year's overall 10% drop as "disappointing," adding expectations for this year are even lower.

"Our forecast for the total market of PC and LCV is 1.89m units, equivalent to a 24% contraction of the market on a year-on-year basis," he said.

This year's conference has never perhaps been more apt, with unprecedented challenges for the automotive sector set against an equally unpredictable set of political unknowns.

Suppliers and OEMs will meet face to face with a sprinkling of Kremlin politicians also due to speak, which will provide an opportunity to take the Moscow temperature in a market which has never seemed so volatile.

Will Russia itself clamp down on foreign OEMs as it looks to flex its not inconsiderable muscle in a bid to out arm-wrestle the West or will it view a stampede to the exit by overseas automakers and suppliers as adding unwanted fuel to the fire?

The last word to Osegowitsch from last year, but it equally applies now: "Of course we don't know what is happening in this East-West confrontation now," he said.

"We hope it will die down pretty quickly, but if that tensions rises, it might come worse with the exchange rate and with the total market."

There is perhaps light at the end of the tunnel with Schreiber's Rouble stability comments, but the industy is going to have to hold its nerve and stay for the long haul.