It may be one of the so-called BRIC economies, but Russia has suffered more than most in the global economic downturn that followed the international financial crisis a year ago. Severe recession has decimated the car market in 2009 and ushered in financial crisis for its domestic manufacturers. Will things get better in 2010? Mark Rowe reports
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Showrooms full of Bentleys and Ferraris continue to grace Moscow’s most salubrious boulevards, in a display of purchasing power that suggests global recession is a world away. The reality is somewhat different: the mainstream Russian car market has taken a swinging blow from economic collapse, its fortunes plummeting almost overnight.
In 2008, Russia sold 3 million cars, double the figure for 2005. But since then the news has been unrelentingly dismal, and has led to a few predictions – that Russia would sell 5 million cars a year by 2012 (Ernst & Young) and sales would grow 12% year on year until 2012 (Credit Suisse) – being hastily shredded.
According to analyst Autostat, based in Togliatti, the home of Lada, 728,000 new passenger cars were sold in Russia during the first six months of 2009 – 691,000 fewer than in the same period of 2008. Year-on-year sales of passenger cars and light commercial vehicles dropped by 54% in August, and by 52% in September and October. Lada production dropped by 44% in the first 10 months of 2009, compared with 2008.
According to Russia’s ministry of finance, the total debt of Russia’s car industry has reached US$3.3bn (EUR2.2bn). Russia’s two car giants, AvtoVAZ (which produces Lada models) and GAZ, have been hit harder than anyone. In 2009, Avtovaz, which retains 25% of a shrunken domestic market, cut production from 800,000 vehicles to fewer than 350,000, cut 28,000 jobs and reported a loss of US$668m (EUR443m) in the first half year – on top of pre-existing debts of almost US$2 billion (Euro 1.3 billion).
In a statement issued to the media, Igor Komarov, president of Avtovaz, has warned that job cuts are inevitable but that he hoped these could be achieved by natural wastage and a recruitment freeze. In the short term, Avtovaz will cut back on the range of models it produces but hopes to produce 450,000 cars in 2011.
The most recent setback for Russia’s car industry came in November, when General Motors unexpectedly pulled out of its proposed sale of Opel to a consortium involving Russia’s Sberbank and GAZ (as a non-equity industrial partner) – a move that would have helped invest updated technology into the industry, and GAZ in particular. GAZ, owned by the aluminium magnate Oleg Deripaska has announced it was to cut 14,000 jobs in the last two months of 2009.
Smaller Russian companies have fared no better, as they are usually overlooked when the state decides to issue bail-outs to the larger players. “Izh Auto and Tagaz are in an even worse situation, there’s no support for smaller companies and those that manufacture parts and components,” said Sergei Udalov, deputy director of Autostat. “Government support is focussed on the bigger companies.”
Signs of life do exist in the wider market. Volkswagen (VW) will in 2010 finish a complete-cycle production-line for six VW and Skoda models at its EUR570m Kaluga plant. VW plans to produce 150,000 cars a year at the plant. While the market for Russian-made foreign brands also declined in the first half of 2009 compared to the same period in 2008 (from 290,000 to 190,000, or a 34% drop, according to PricewaterhouseCoopers (PwC), and increasing their share of the market from 18% to 26%), this was less steep than the decline in domestic production.
Analysts believe the worst of the storm may be passing and that Russia’s market may become buoyant more quickly than gloomy forecasts suggest. Based on the results of the first six months of 2009, PwC reported that Russia was rated fifth in terms of new car sales among the European countries and said that the market could recover to pre-crisis levels by 2011.
Ralf Kalmbach, a motoring analyst with Roland Berger consultants, believes the market could pick up and see Russian production of 2 million cars in 2010 and 3.6 million by 2020. But even under pessimistic scenarios, he believes the industry will produce at least 3 million cars by 2020. Mr Kalmbach urged the Russian government to set up a masterplan to oversee the direction of recovery for AvtoVAZ and GAZ. “The current figures look bleak,” he said. “But Russia will soon be one of the car industry’s biggest growth markets.”
However, Autostat was more cautious. “The picture is still very weak,” said Mr Udalov. “It’s very far from being OK. Some companies, such as GAZ and Kamaz have shown more positive results lately but we can’t say that about the wider industry. Next year (2010) will be much the same and as weak as this year. There won’t be much change.”
The Russian government now holds weekly meetings to oversee attempts to stabilise the car sector. A rebate scheme – dubbed “roubles for wrecks” – will see the Russian trade and industry ministry give US$1,500 (EUR994) to drivers who exchange a 10-year-old car for a new, greener and Russian-built vehicle.
According to KPMG, around 50% of Russia’s 30 million car fleet could be eligible for exchange under the programme. Other projects to boost domestic production (which also includes foreign cars made in the country) include raising import duties for new foreign vehicles to 30% and dramatic state bailouts – AvtoVAZ received an interest-free loan of US$804m – and creating more manufacturing capacity for spares within the country. These steps have led to – or coincided with – positive news.
In 2010, GAZ will begin work on the first Russian plant to produce medium-duty diesel engines that conform to international quality standards. The factory at Yaroslavl will create around 1,500 highly qualified jobs, mostly for retrained GAZ employees. A spokesman said this approach would “help reduce social tension at the company’s plants during the financial crisis.”
Manufacturers are also seeking to make it easier for Russians to obtain loans to purchase vehicles. PwC reports that many Russian and foreign carmakers, together with partner banks, launched their own loan schemes with reduced rates, lowering first instalment amounts.
Yet even analysts are unsure how matters will unfold: in its half-yearly automotive market report, PwC admits that “it is extremely difficult to reliably predict even the next six month’s sales.”
“The key is to increase partnerships with foreign companies and to participate in the global chain of supplies,” said Mr Udalov of Autostat. “The quantity of Russian cars is still low, much lower than in Europe or the US. Foreign car producers see that Russia remains a big market for car dealers. If the economic situation improves it will take three or four years and then the market will be stronger.”
Mark Lowe
See also:
FRANCE: Russian support triples for Avtovaz restructure
RUSSIA: Car sales down 52% in October
