Cars in Russia
Crisis? What oil crisis?
Jun 5th 2008 | MOSCOW
From The Economist print edition
High oil prices may be causing pain for carmakers in America, but they have helped
create a booming market in Russia
EPA
THIS week the death-knell sounded for America's love affair with pick-up trucks and
sport-utility vehicles (SUVs). General Motors (GM) announced a 30% fall in car sales in
May, compared with a year earlier, as high fuel prices prompted Americans to shun its
gas-guzzlers for smaller, more frugal vehicles. Ford posted a 19% drop, and sales of its F150 pick-up fell behind Toyota's Camry and Corolla for the first time. Most telling was
the 62% fall in sales of Hummers, GM's hulking military-style SUVs. GM announced
plans to close four truck factories and a “strategic review” of the Hummer brand. Total
car sales fell for the third month in a row.
But there is one country where the high oil price is powering the expansion of the market,
rather than painful restructuring. Thanks to abundant natural resources, Russia's economy
has grown by an average of 7% a year for the past decade. Real disposable income has
nearly doubled in the past five years and is growing by more than 10% a year. That
means a lot of Russians can suddenly afford to buy cars.
Car ownership, at about 200 per 1,000 people, is still very low by developed-world
standards. (In most of western Europe it is over 500, and in America it is around 800.)
And although average incomes are lower than in the West, so is consumer debt. Heidi
McCormack, GM's head of business development in Russia, says that compared with
other markets, burdened by debt and oil prices, “Russia is still magically isolated.”
The growth and size of the Russian market has confounded every forecast. In 2007 sales
of new cars grew 36% by volume and, reflecting the steadily increasing buying power of
customers, 57% by value. Sales of passenger vehicles exceeded 2.7m. Eduard Faritov, an
analyst at Renaissance Capital, an investment bank, thinks Russia could outstrip
Germany as Europe's biggest market this year, with sales reaching around 3.3m. By 2012
Russians will be buying more than 5m new cars a year, of which nearly 90% will be
foreign brands, predicts Ernst & Young, a consultancy.
Sales of Russian brands have stayed flat for
the past few years—hovering between
750,000 and 800,000. All the growth has
been met by the foreigners, observes Nigel
Brackenbury, head of Russian operations at
Ford, the first foreign carmaker to set up its
own factories in the country. With its big
dealer network, it has done well: a decade
ago Ford sold fewer cars in Russia in a year
than it now sells in a week.
Foreign cars are sold through glitzy
showrooms such as those at Major City, a
“dealer village” on Moscow's outskirts.
While waiting for their new cars, customers
can pop into the on-site cinemas, check email on a bank of computers, munch freshly made snacks or get their hair done. Russian
brands have been left in the dust. As one of the dealership's managers puts it: “Selling
Russian cars is different. You just need someone to count the money.”
Domestic producers have found it hard to compete, first with imported second-hand cars
and more recently with new imports and foreign brands made in Russia. In 2002 nearly
500,000 cars sold were used imports—mostly brought in from Germany and Japan. That
represented 44% of the market by value. Even quite elderly Volkswagens and Toyotas
offered far superior quality to the locally produced Ladas, made by AvtoVAZ, or the
Volgas, made by GAZ. In an attempt to help the domestic carmakers, in late 2002 the
government slapped a 25% duty on imported used cars.
But the local firms failed to take advantage of the breathing space. As the sale of used
imports fell, new imports took their place, amounting to 48% of the market by value in
2005. The government's response was not to raise import duties again, but to pass a
measure intended to persuade foreign makers to revive the Russian car industry by setting
up local assembly plants.
The terms were simple: to qualify for relief from import duty, foreign carmakers had to
build a factory with a capacity of more than 25,000 vehicles a year—a minimum
investment of at least $100m. Within five years of production starting, the local content
in each car had to reach 30%. Unlike in China, firms did not have to establish
partnerships with local producers.
This triggered a scramble by ten of the world's biggest car firms to build factories in
Russia. Investment plans already announced suggest that new capacity could reach 1.6m
units by 2012. Renault is building Logans near Moscow at a revived Moskvitch facility,
and Volkswagen is constructing a factory in Kaluga, 110 miles south-west of Moscow.
But most firms are setting up around St Petersburg, following the lead of Toyota and
Ford, which has just announced an increase in capacity to 125,000 cars a year. They will
soon be joined by General Motors, Nissan, Suzuki and Hyundai. St Petersburg's
popularity is down to its ice-free port, rail links and well-educated workforce—and the
can-do approach of the governor, Valentina Matviyenko, Russia's leading female
politician.
Where does all this leave the domestic carmakers? In 1990 they built 1.2m passenger
vehicles, but last year they sold just 756,000. AvtoVAZ, which makes more than 90% of
the Russian-brand passenger cars, is the most exposed. Its Ladas still sell in provincial
Russia because there are lots of dealers, the cars are cheap and there are few alternatives.
The main threat to Lada comes from very cheap Chinese cars. So far the authorities have
refused the likes of Chery and Great Wall permission to set up in Russia, but such
discrimination may not be sustainable. A further threat is that the dynamics of the usedcar business are about to change again. If, as expected, the 18% VAT on used cars sold
by dealers is abolished, Lada's price advantage will vanish.
AvtoVAZ's main hope lies in the 25% stake recently acquired by Renault for $1 billion.
Renault's managers started arriving in March, and its boss, Carlos Ghosn, will be one of
three Renault executives on the AvtoVAZ board. With its experience in turning round
Nissan and making automotive alliances work, Renault is the ideal partner for AvtoVAZ.
Yann Vincent, the newly installed operations chief, says the priority is to bring new
Ladas to market, based on Renault platforms, by 2010.
Another local producer, Severstal-Auto, has sensibly decided that rather than taking on
foreign car brands, it will instead specialise in small vans and trucks, demand for which
will be driven by the fast-growing retail sector. Severstal already has a joint venture with
Fiat to produce its Albea and Linea saloons, and in May Vladimir Putin, the prime
minister, drove the first Fiat Ducato van off the firm's new production line in Elabuga, a
“free economic zone” in Tatarstan. Severstal also makes small and medium-sized Isuzu
trucks.
Nikolay Sobolev, Severstal's finance chief, adds that a further twist to the strategy is for
Severstal to build a dealer network to sell high-margin services, such as adapting its
vehicles for school and hospitals, providing full-service leasing arrangements and
offering credit terms with local banks. Domestic firms that understand their customers
and identify profitable niches can still prosper. But when it comes to car-buying,
normally chauvinistic Russians seem only too happy to leave their patriotism at the
showroom door.