Temporary – hopefully – tensions aside – Russia still has enormous potential to grow and almost double its current predicted volume of between 2.3m and 2.4m units this year according to some estimates.
True, turmoil in Ukraine and Crimea, that is seeing Moscow turn head-first into the wind against Washington and its European allies, represents uncertainty and nervousness.
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But as I heard Deputy Minister of Trade and Industry of the Russian Federation, Alexey Rakhmanov, say on the sidelines of this week’s Automotive Forum in Moscow, the domestic stock market is taking a more robust view.
He’s a politician of course – but noises off at the conference suggest he knows what he’s talking about – I don’t think he was spinning for the media when he said: “The stock market reacted favourably on Monday (17 March) – we know all we are doing is to build full sustainable businesses in every segment.”
What is of concern is what is happening to exchange rates, with Ford of Europe chief, Stephen Odell, recently noting the rouble has depreciated 12% against the Euro during the past 12 months alone.
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With so many parts currently imported into Russia, that could have a not insignificant impact on component and final product cost, hence the renewed emphasis from politicians on the importance of localisation.
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By GlobalDataOdell estimates local content was 35% last year, but could reach 60% by 2018, while the Russian government is setting an even more ambitious target of 80%.
“Our goal is to have 80% of vehicles manufactured in Russia – we are getting there slowly,” said Rakhmanov at the conference. “This means investment conditions we have provided to Russian and foreign companies have proved effective.”
However, the Trade Minister made clear the Russian government needed to do far more in the commercial vehicle sector – always a bellwether of the economy noting the “lion’s share” of last year’s 6% drop was in that sector.
“The lion’s share of the downturn was in commercial, probably because we provided no government support in the segment,” he said. “At the same time, production remained at the same level.”
Intervention is not a state of mind Russian politicians appear embarrassed about – quite the contrary they are prepared to stimulate the market in ways that can potentially benefit domestic as well as foreign automakers.
Indeed, Rakhmanov also pointed out the US$238m of potential loans available for car manufacturers in a four-year programme that was launched last April and which has seen 276,000 models sold using the scheme.
“We think sales on credit are an important signal to the market, but we should not overheat it so it becomes risky for car companies and bankers,” he said. “There is money available and we are missing the opportunity.
“We think the time has come where this project can be effective developing Russian vehicles using localised parts.”
I spoke to newly-appointed AvtoVAZ CEO, Bo Andersson this week at the RAF conference and apart from losing no time in coming into the Russian automaker with the same zeal he applied as head of GAZ Group until only recently, he also backed the local content goal.
“In the last five years, the foundation has been laid for 80% of the product is produced in Russia,” Andersson told me. “All our executives have three suppliers each and they need to report on their business and what they have heard – they are not negative processes.”
Andersson will have a sympathetic ear in the Russian government with Rakhmanov insisting there were “serious goals ahead of us” for localisation that would become a “top priority,” although he concedes there is some way to go.
“It is very important for us, especially when you see what is happening with exchange rates,” said Rakhmanov. “It is very important local parts and materials are used as much as possible. Unfortunately, the situation is not very encouraging at the moment.”
There is no endless pot of money clearly, but the Russian administration is prepared to endorse 80% localisation together with loan stimulation, particularly in the commercial sector.
Such a push means there could be genuine opportunity in this vast country, that could yet see it become Europe’s largest automotive market.
