Delegates at a Frost & Sullivan (F&S) seminar in London yesterday heard that the Russian automotive market has very good growth prospects, but also that the industry faces some structural difficulties arising from its poorly developed supplier sector, writes Dave Leggett.

The automotive market in Russia is expected to continue to develop rapidly on the back of strong economic growth, rising consumer demand and the increasing availability of locally assembled Western car brands.

F&S forecasts that the Russian passenger vehicle market will increase from 1.8m units in 2006 to 3.2m units in 2012 representing a CAGR (compound annual growth rate) of 9.5%.

New car demand will also be fuelled by the replacement of old vehicles. Some 51% of the Russian vehicle fleet (estimated at 32.5m units) is over ten years old and Bosch forecasts that replacement demand could account for around 16m vehicle sales over the next ten years.

New demand in line with economic growth projections could account for a further 17m units, Bosch says, leaving a 33m influx of new vehicles – an average of 3.3m new vehicles a year.

Fears that investments in Russia’s automotive sector could be jeopardised by political uncertainties and increased state involvement along the lines of developments in the energy sector were played down.

“There are some concerns and Vladimir Putin is taking a more dictatorial position in the way he runs the economy, but I really don’t believe that the changes will happen in a way that will tremendously and drastically change the political and economic growth situation that has been set in place,” said F&S analyst Franck Leveque.

Some delegates expressed the view that industrial interference from the government has been confined to sectors seen as of national strategic significance, such as power and energy, with aerospace possibly next in line.

Foreign Direct Investment (FDI) in the Russian automotive industry is recognised as a key driver of its development and state firm Rosoboronexport’s interest in AvtoVAZ is simply designed to stop the giant Russian maker from disappearing and the huge social problems that would result, according to Alastair Kitson of GKN Driveline.

“No foreign maker wanted it and it’s a very special case because the break-up of AvtoVAZ would cause such social problems,” he said.

Delegates also heard that European brands led by Renault are expected to have the highest growth rate in the period to 2012.

Chinese automakers are also entering the market with low-cost product and could account for 5% of the Russian car market by 2012, according to F&S.

“Chinese OEMs are using the Russian automotive market as a start-up platform in targeting Western automotive markets,” said F&S analyst Andriy Ivchenko.

“This way they will be able to adjust their product lines to reach a certain standard in quality and safety and then slowly penetrate more developed markets,” he said.

However, delegates also heard that Russia’s poorly developed supplier sector is proving a barrier to some Tier 1s who want to invest in Russia but have difficulty finding good quality Russian suppliers in material areas like steel.

Problems stem from relatively low volumes and a lack of willingness from local firms to invest in plant to produce at acceptable quality, making local sourcing problematic.

Dave Leggett