In this month’s management briefing, Mark Bursa reviews developments in Russia’s automotive market and industry. In this first part, he looks at the current market position.
There’s no doubt that the auto industry is expecting the lion’s share of its mid-term growth to come from the BRICs. But the four BRIC markets do not present a consistent picture. China and India have shown stable and consistent growth that has been relatively unaffected by the global economic downturn. Brazil, with its abundant raw materials, appears to have a more stable market than in previous years.
But Russia has been the most rickety of the BRICs, with a volatile market that has struggled to establish the sort of explosive acceleration in sales that we have seen in China over the past 10 years. More than two decades have passed since the collapse of the old Soviet Union, but stability has been hard to achieve.
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As recently as 2008, it appeared that the Russian car market was finally on track for major expansion. The market was heading towards 3m units a year, and analysts believed it would eclipse Germany’s to become the world’s fourth largest. But when the economic crisis hit in the second half of the year, it caused something of a perfect storm in Russia.
The crisis led to collapse in the energy prices that had been driving the Russian economy. International banks reduced their exposure to East European wholesale credit markets, and that meant finance for car sales in Russia quickly dried up. Russia’s GDP contracted by 7.8% in 2009, and the new car market halved in 2009 to 1.4m units.
Local manufacturers, especially market-leader AvtoVAZ, faced catastrophe. Vehicle production in Russia in 2009 fell off a cliff as manufacturers struggled to shift unsalable stocks. In total, Russian car production tumbled 60% to 722,431 units.
But in 2010, the market recovered as rapidly as it collapsed. The economy grew 4% in 2010 but although the Economy Ministry expects GDP to rise in 2011 and 2012, it will be at a slower rate than before the recession: 4.2% this year and only 3.5% in 2012. Growth averaged almost 7% from 1999 to 2008.
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By GlobalDataThe full-year 2010 new vehicle market was more impressive than overall economic performance, with sales reaching 1.9m units, of which 1.76m were passenger cars. And in the later months of the year, monthly sales were running at an annual rate of 2.4m.
Scrappage scheme success
The 2010 car sales recovery was propelled by a Government-supported scrappage scheme – known as “roubles for wrecks”. And there are probably few places where scrappage is more welcome, given the vast numbers of rusting Ladas and crumbling Volgas on the roads.
Under the scheme, introduced in March 2010, a discount voucher of 50,000 roubles (about USD1,700) per vehicle was offered in return for scrapping a “clunker” built before 2000. This prompted a rapid recovery, with 200,000 scrappage vouchers issued by June. The scheme sensibly applied only to cars produced in Russia – exports were excluded. A further 200,000 vouchers were issued in 2010 and a further 100,000 are expected to be issued in 2011 before the scheme runs out in September.
Further support has come from a loan subsidy scheme. Again, this applied only to locally built vehicles. It was launched in 2009 and runs until out to 2013. Under the scheme, two-thirds of the central bank refinancing rate is refundable to the customer. Further state, federal and regional government purchase subsidies are also in place, and are likely to continue into 2012.
These are intended to propel the Russian car market back to the level of the 2008 peak of 2.7m units by 2014, and analysts believe that new initiatives will make this target achievable – and surpassable going forward.
Strong mid-term growth forecast
Consultants PriceWaterhouseCoopers forecast 2011 car sales in Russia will grow by around 20%-25% as the scrappage scheme continues to aid buyers and consumer spending grows. The Association of European Businesses (AEB) in Russia forecasts that sales in 2011 will rise 17% to 2.24m.
JD Power and Associates takes a similar short-term view, forecasting the 2012 passenger car market to hit 2.2m units, but the analyst believes a combination of Russia’s relatively low car ownership levels (around 250 cars per 1,000 people, compared to 500-plus in Western Europe) and rising income levels will reduce the likelihood of a sharp post-incentive West European-style medium-term fall in the Russian car market.
In effect, the scrappage scheme is benefitting owners of older cars, but is encouraging replacement of “clunkers” with low-cost models. There is evidence to support this, with AvtoVAZ claiming strong sales for the classic Fiat 124-based Zhiguli model under scrappage, as when incentives are taken into account, the cars can be bought for around USD3,000.
After the scrappage scheme ends, growth will be driven by more affluent buyers buying newer cars, probably foreign-brand cars. Indeed, JD Power forecasts that the Russian light vehicle market, including light commercial vehicles, will reach 3.6m units by 2016.
Boston Consulting Group adds that Russia could become the world’s sixth-largest auto market in 2020, with 4m sales a year. The nation is currently the world’s 10th-largest car market.
Growth forecast will encourage local production
Since the fall of Communism, Russia’s auto industry has battled to preserve its existing, former state-owned automakers, while simultaneously encouraging new investment from foreign automakers.
Ideally, the Russian authorities would like to see partnerships and Joint Ventures between global OEMs and Russian manufacturers, but this has not always been easy to achieve. In the 1990s, major deals were signed that would have seen Fiat invest heavily in the second-largest automaker, GAZ, while General Motors announced plans for a major investment deal with AvtoVAZ.
But the late-‘90s Asian economic crisis saw the EBRD-backed Fiat deal fall through, while the GM-AvtoVAZ talks led only to the creation of a downscaled investment in the Lada Niva 4×4. By and large, the Russian automakers have had to struggle on alone, updating older models to stay in the game.
The exception has been Renault, which invested in the Moscow-based Avtoframos JV, based in a former Moskvich factory, and later took a 24% stake in AvtoVAZ. This has not been an easy business to turn around, but the Renault-Nissan alliance is well placed in Russia as a result of these deals.
Other manufacturers have chosen to set up their own manufacturing plants. Ford has been a notable success, opening a major factory near St Petersburg in a former military equipment facility, while other manufacturers have followed Ford’s example and moved into the St Petersburg region, among them Nissan, GM, Toyota and Hyundai.
However, the expectation that the Russian market will finally start to grow at a respectable rate means the picture is much rosier for the likes of GAZ and the number three local automaker, Sollers, both of which are now setting up major production deals with foreign OEMs (GAZ with Volkswagen; Sollers with Ford). Other local automakers, including KamAZ and Avtotor, also appear to have deals in place.
Still to come later this month…
Part 2 – Production developments and components issues
Part 3 – Manufacturer alliances
