"Decree 166 is absolutely entrenched."

"Decree 166 is absolutely entrenched."

William King is a senior advisor, head of automotive sector in the CIS, Ernst & Young Moscow. He re-joined the firm in February, 2013. King joined Ernst & Whinney in 1985 and became a partner in Ernst & Young in 1991. He moved to the Detroit office in 1994 to lead a global transformation programme for a Detroit based OEM.

King specialises in the global automotive industry and has served as global coordinating partner for a number of automotive OEMs and suppliers and talked to Simon Warburton concerning the opportunities in the Russian market.

j-a: There has been much discussion in Russia concerning recycling and its implications, with the European Union taking a strong stand. What's your view?

WK: If you look at the average of the car parc in Russia, it is 12 years and [there are] 38m vehicles in it. If you drive around Russia you see a lot of interesting vehicles - they are scrap.

Russia is looking to become more and more green and the vehicle is nearly 100% recyclable. If you can set up the infrastructure - which is behind western countries - if you can take that scrap and recycle it - it makes a lot of sense.

It is an education process - more [of a] cultural change. Russia is a young country and so some of those [procedures] are not standard. It is like smoking - next July they implement no smoking in pubs and restaurants.

j-a: What is the implication for Russian companies?

WK: It is a long tail item however, that is many years out, and the net impact for domestic producers will be the revenue value of the scrap from recycling should more than cover the cost. Obviously, there will need to be processes developed to track and manage recycling verification over that time period. 

The Duma has not yet passed the 'equalising' measure on recycling or utilisation fee for domestic producers. They went on summer break before they did so, but producers are assuming it will be similar. 

j-a: Russia has been witnessing a tailing off in sales - when did that start and what is your estimate for the future?

WK: The trend started [in] August last year when there was a declining rate of increase and in March it went negative. On a month-by-month basis, it went up through the first half of 2012, but there was a declining rate of increase.

It is just a continuation of a trend. People are concerned about the general macro-economic conditions - it is slowing growth and disposable income - there is rising inflation.

It is 7.5% - in reality it might be closer to 10%. Local economic issues make consumers and small businesses uneasy. Part of it is buyers are taking a more of a wait and see attitude.

The Russian [automotive] consumer is smart. There has been some fairly aggressive discounting with 10%-12% off a list price - people may be holding off a little bit to get a better deal.

j-a: Despite those challenges, is Russia still an attractive place to do business for overseas automotive OEMs?

WK: You have to be in it for the long-haul. Rising income, middle class increase and [a] much broader base of people to be able to buy vehicles [are all factors].

Ownership ranges from 240-270 [vehicles] per 1,000 - compare that to Germany with 550 and even Poland with 430 - there is lots of room for growth. The size and age of the existing car parc of 12 years old - [there is] a wonderful opportunity for replacements.

j-a: To what extent are OEMs involved with Russian dealers?

WK: For an OEM, they can do a much more effective job of making the customer experience with the dealers, positive. Here it happens sometimes and sometimes it does not.

j-a: How easily available - or otherwise is access to credit in Russia and is the government helping that situation?

WK: If you look at the number of people that use credit, it is around 40%, if you compare that to the UK or US, it's much higher at 60% -70%. The good news is with this [government] interest rate subsidy, that [credit access] should happen a little bit. The credit has been introduced as an 18 month programme.

It is targeted at a vehicle that is RBL700,000 (US$21,500) - an economy D-platform vehicle. Nineteen of the best-selling 25 vehicles or 45%-50% of the market are eligible.

You have to come up with 15% down. With a refinancing rate of 8.5%, 5.5% is subsidised. [Credit advertising] is certainly in some of the broadsheets [newspapers] here. The other thing that would really boost it is the recycling incentive.

If the government implements scrappage, the market could [go] back to level.

The economy is slowing down here - when you consider the investment some of the western automakers have made, they would be pretty disappointed if sales continued the way they are.

j-a: How does the Russian government look at the automotive industry - is it viewed as a key sector in the economy?

WK: The Russian government does view it as critical - we have to have that core industry. It is not just big OEMs - you have to have the whole supply chain trying to build capability with lower tier suppliers.

There are around 600 companies from a supplier component point of view. There are about 10-15 of those that could survive as Tier 1 and around 45-60 that must have some kind of joint venture, investment or licencing in order to be able to compete effectively.

That leaves around 500 that could go into lower Tier [s] or go away - the social cost could be huge.

j-a: Will the Decree mandating localisation in Russia continue for the foreseeable future?

WK: Decree 166 is absolutely entrenched and from the OEM point of view, the government provided a lot of incentives. Progress is being made.

j-a: To what extent can you see some of the safety initiatives envisaged in Europe such as lane departure warning or assisted braking, taking root in Russia?

WK: As we have domestic products which are foreign-owned, it is not a huge problem to bring in these standards. The Russian government is eminently practical and they will implement standards that will make a difference to people. They are going to harmonise those standards which make sense to do so.

j-a: Could OEMs make more of an effort outside the traditional centres in Russia?

WK: OEMs could focus more on the regions - 20% is based outside Moscow and St Petersburg. Some OEMs are doing a much more effective job and are getting some success there - some regions are wealthy with raw materials.

The EU recently launched its first ever World Trade Organisation (WTO) challenge against Russia since its recent accession to the global body, in a dispute it maintains is based on what amounts to an import tax on foreign vehicles. However, given the State Duma recently broke for its summer recess, the issue may be temporarily on the back burner.

A statement from the EU noted it: "Supports and encourages all countries to take appropriate environmental measures, including those that deal with end-of life vehicles. The EU itself has adopted relevant legislation on this (see Directive 2000/53/EC of the European Parliament and of the Council of 18 September 2000 on end-of life vehicles).

"However, the EU strongly believes the aim of Russia's so-called "recycling fee" is not to help the environment but discriminate arbitrarily and unjustifiably against imported vehicles.

"The EU's own measures to deal with end-of life vehicles show that environmental objectives can be achieved very effectively without applying the sort of high and discriminatory fees imposed by Russia."

Auto market intelligence
from just-auto

• Auto component fitment forecasts
• OEM & tier 1 profiles & factory finder
• Analysis of 30+ auto technologies & more