The adverse impact of the global crisis on the Russian automotive market was one of the most pronounced worldwide.

The car sector in Russia continues to cope with the fallout from country’s economic crisis. Experts nevertheless are optimistic and say that market recovery is around the corner. In 2009, sales of new vehicles decreased by 49 percent to 1.47 million cars. To understand the magnitude of the collapse of the Russian auto market, one should keep in mind that as recently as in the fall of 2008, the country was on the verge of establishing itself as the biggest car marketplace in Europe. The fall in sales continued even though the government instituted a program to provide auto loans to consumers. As of the end of 2009, only 70 thousand people have taken advantage of the government-provided financing arrangements.

In view of the situation, the Russian government has further decided to spend nearly USD 1.1 billion to help the auto industry in the current year, according to the Minister of Economic Development Elvira Nabiullina. On the basis of information provided by Rosstat, the production of cars in Russia fell some 60.4 percent during the first eleven months of 2009 year-on-year. The production of trucks went down by 67.3 percent in the same time period. The government’s low-interest loans to auto manufacturers did not allay the problems facing the car producers to any measurable extent. The government also imposed a 30-percent tariff on the importation of foreign vehicles. Though the efforts have not shown success in the short term, it is expected that these emergency programs will bring positive results in the future.

In March of 2010, the government began a scrappage program – analogous to the U.S. cash-for-clunkers deal. The USD 342-million program provided for giving people USD 1 750 if they brought in a vehicle that is 10 years or older and decided to buy a Russian-made domestic- or foreign-brand car. As of the program’s launch, analysts anticipated that it would create 200 000 car sales in Russia. In the spring of 2010, the government also launched a program designed to provide loan subsidies to spur auto sales. Most recent information relayed in news reports shows that sales continue to decrease, and some analysts are calling on the government to take radical measures to save the auto sector.

More importantly, even beyond the cash-for-clunkers program, the government would likely be moved to strengthen the actual cash position of the auto manufacturers. One of the more obvious candidates for governmental subsidies is the auto giant AvtoVAZ, which is itself an entity closely affiliated with the state. Domestic producers have struggled for a long while to compete with foreign brands. Inferior production methods and lower technical quality have traditionally been the limiting factors that constrained the development of Russian automakers.

The recession hit some companies harder than others. Izhavto, for example, was forced to file bankruptcy papers in August of 2009. The company was producing Kia brand cars, including Spectra, Sorento, and Rio, in addition to VAZ-2014 and Izh cargo vans. The auto manufacturer is presently engaged in negotiations with Hyundai, which is a sister company of Kia.

Even though Russia’s macroeconomic indicators are on the whole evidencing that a recovery has already begun, the reconstruction of the Russian auto sector will not be an easy task. It is also feared that the government’s emergency spending will not provide a long-range solution to the car industry.

The Association of European Businesses has expressed the view that the gains from Russia’s cash-for-clunkers initiative will be meager at best. The Association expects sales results for 2010 to replicate those seen in 2009.

Understandably, the ultimate task of all government-backed measures aimed at supporting the auto industry was to boost local production. In the years past, government efforts were generally successful, as the ten most popular cars sold in Russia in greatest numbers were manufactured inside the country.

The Association of European Businesses, however, has asked the Russian government to implement broader policies that would not only help domestic auto manufacturers, but also other carmakers active on the Russian market. According to the Association, the production of cars in Russia in 2010 will be only 1.4 million units. Business Monitor International gives an even direr forecast of 1.34 million cars.

Meanwhile, automakers in Russia have restored production. AvtoVAZ resumed operations after its plant in Togliatti was closed for two weeks. Kamaz, the largest producer of trucks, has also re-launched its production lines following a 17-day plant shutdown. In January of 2010, Kamaz produced 1 785 trucks working a four-day week.

Other car producers have also made plans to stop production and reduce expenses in order to remain viable. Thus, a plant of General Motors in St. Petersburg was idle for more than a month until July 2009. The Russian automaker GAZ still intends to lay off more than 7 000 employees at its plant in Nizhny Novgorod.

Even though prospects for the immediate future are dull, the Russian economy now gives signs of hope that the situation will improve in the future. However, although the economy returned to growth, the level of consumer confidence, an indicator that is absolutely critical for automobile sales – is substantially below the level where it was before the economic meltdown.

Experts recognize that the speed at which the rebound of the Russian car industry will proceed is dependent on the pace of the economic recovery. In this respect, many view 2010 as a critical year and expect that credit availability and demand for vehicles will improve. Russia’s earlier goal to become the biggest market for cars in Europe will not be realized until 2013. For these ambitions to be fulfilled, the per capital GDP needs to reach USD 18 800. Higher disposable incomes would lead to consumer spending. Sales over 5.75 million vehicles a year and a car ownership level of 21.8 percent would allow Russia to become the largest vehicle market in Europe.

For 2010, according to Business Monitor International, the growth of car sales in Russia will be only 2 percent. Consumer activity will continue to stay low until the second half of 2010. In real terms, sales of passenger cars will likely reach 1.98 million units, equaling in value to USD 67.2 billion. By 2014, it is estimated, that the sales of cars in Russia would go up to 2.88 million, totaling in value USD 115.7 billion. Local car production can be increased only through investment.

Industry and Trade Deputy Minister Mr. Andrei Dementyev has noted that investments in Russia’s car industry before the year 2020 are expected to be from USD 13.5 to USD 59.9 billion. These funds will come from the private sector, as well as from the government. According to Viktor Khristenko, Minister of Industry and Trade, Russia’s car production will likely reach 3 million vehicles in the year 2015. Russia has also prepared an investment strategy for the next decade to facilitate the development of the automobile production sector.

New mergers have also been proposed as suggestions of ways to restructure the Russian car-production sector. There have been proposals to unite Renault-Nissan and AvtoVAZ. Other plans call for inviting new foreign manufacturers to the Russian market.

The Russian automobile industry is also looking at the possibility of creating a giant state-owned auto-making conglomerate. The auto industry moved in the direction of following through with the new plan for centralization after the appointment of Mr. Sergei Kogonin, the CEO of Kamaz, to the board of directors of AvtoVAZ. The creation of a giant government-controlled automaker originated in August of 2010. Within the framework of the proposed merger, the shares held by Russian Technologies in Avtodizel (where the state company has a 30-percent stake), AvtoVAZ (25-percent stake), and Kamaz (36.8-percent stake) would be transferred to a new company under the name of Rosavto. The creation of a new entity is likely to allow better credit access for the embattled car markers. Also, officials believe that the move would boost the public’s confidence in domestic automakers. However, the creation of a unified car company will not be an easy task because foreign companies also own significant shares of the Russian auto industry. Renault has a 25-percent interest in AvtoVAZ, and Daimler holds a 10-percent stake of Kamaz.

The competition for the Russian auto industry will prove to be intense. Russian Technologies has been engaged in talks with Troika Dialog, a 44-percent stakeholder of Kamaz, with the view of increasing its own share in the Russian automaker by 13 percent. At the same time, Daimler has expressed an interest in increasing its share in Kamaz by 15 percent in an effort to prevent the state from taking a controlling stake in the automaker. The cost of the acquisition to Daimler would be around

USD 300 to USD 320 million. While Renault does not have immediate plans to augment its ownership share in AvtoVAZ, the company’s officials indicated that they may consider acquiring a controlling interest in the Russian car producer as early 2013 or 2014.

Thus, the Russian car industry is now at a crossroads – one choice portends greater state control and easy access to financing, while the other entails private ownership and improved efficiency. Both of these courses of development are attractive in view of the current market situation.

Commercial vehicles

Sales of commercial vehicles were affected as a result of economic problems in Russia. It is predicted that in 2010 sales of commercial transport vehicles will be approximately 250 700 units. This would represent a decline of 5 percent compared to 2012. The transportation of cargo by Russia’s carriers is decreasing as companies are reducing production. Even though Russia is a large country, the infrastructure facilitating nationwide transportation remains underdeveloped. The World Bank estimates that the share of cargo transported by trucks in Russia will rise to 41 percent this year. In 1992, only 13 percent of cargo in Russia was hauled by auto transport. In comparison, for the 15 countries of the European Union, the share of cargo transported by roadways was 72.7 percent in 2005. Long-distance shipments are ordinarily done by rail in Russia. The opening of the Trans-Siberian Highway in March of 2004 was a major development in facilitating a transition to greater use of freight trucks. Infrastructural development pushes up the demand for commercial vehicles.

Major limiting factors include reduced availability of commercial vehicles, especially trucks. The global market for commercial vehicles dropped significantly after the recession. In 2009, Daimler estimated that the European market for trucks would fall by 50 percent.

On the bright side, the biggest producer of commercial trucks worldwide wants to expand its presence in Russia. Trucks and trailers made by Russian domestic manufacturers do not conform to international standards. As a consequence, foreign freight forwarders are able to occupy a larger share of the market than their Russian counterparts. Recognizing the need for foreign-made trucks, the government lowered import duties on trailers to 5 percent and on semis to 10 percent.

Capital investment programs of major road cargo carriers have been substantially reduced or even eliminated. To the end of securing the funds for anti-crisis measures, Russia’s budget for 2009 was amended in a way that took out a large portion of earmarks for infrastructural projects. Even road maintenance funds were reduced. As of today, Russia has 933 thousand kilometers of roads, of which 754 984 kilometers are paved. The Ministry of Finance released a list of budgetary rescissions that eliminated road building and maintenance allocations by 50 to 100 percent in 21 regions, Moscow included. In 14 other regions, construction projects planned for the year were suspended.

The market of commercial vehicles has historically been dominated by Russian producers, namely GAZ, Kamaz, and UAZ. The increase of the national economy in the coming years will mean that new production capacities would have to be formed. A significant obstacle that needs to be overcome is that Russian truck manufacturers have a negative reputation for supplying outdated models that were designed to handle heavier volumes of cargo. These kinds of trucks are less popular now. Industrial customers often consider used foreign-made cars to be superior in quality to new Russian-brand vehicles.  

Low vehicle replacement rates are another problem. About 50 percent of cars and trucks in the Russian commercial fleet are older than 10 years. The introduction of more stringent regulations for emissions is expected to affect the existing situation.

Foreign investment is considered critical for the Russian market. Only a small percentage of trucks made in Russia in 2008 were assembled with the use of foreign components. The decision of the Russian government to lower the import duty on trucks will reinvigorate import activity.

Imports for the past year were allocated as follows: Scania – 32.2 percent, Volvo – 19.2 percent, Mercedes-Benz – 14.8 percent, Iveco – 14.4 percent, MAN – 8.5 percent, Tatra – 4.1 percent, Renault – 2.9 percent, DAF – 1.1 percent, Kenworth – 0.5 percent, Freightliner – 0.4 percent, other brands – 1.9 percent.

Competition

In 2009, top brands on the Russian market included AvtoVAZ – 349 490 vehicles, Daewoo – 51 414 vehicles, Ford – 88 977 vehicles, GAZ Group – 58 205 vehicles, GM Group – 141 695 vehicles, Hyundai –

74 607 vehicles, Kia – 70 088 vehicles, Nissan Group – 68 851 vehicles, PSA – 42 136 vehicles, Renault – 72 284 vehicles, Toyota Group – 75 131 vehicles, VW Group – 94 018 vehicles.

The government of Russia has made a promise to help out the nation’s car producers. The debt of Russian carmakers as of the end of 2009 totaled USD 3.3 billion, and the government is likely to intervene and save local producers. Nonetheless, the commitment of foreign manufacturers to the Russian market is still strong.

One of the strongest domestic manufacturers is AvtoVAZ. In 2009, its sales reached around 350 000 cars, though sales in October, November, and December did not get over 28 thousand vehicles a month. AvtoVAZ separated from some of its corporate units in preparation for selling them. The six subsidiaries that were separated from the main company give jobs to 30 000 workers and are responsible for steelmaking, assembly, and instrument production.

The Russian government is also looking at increasing the quotas for the production of complete knocked-down kits. A complete knocked-down is a full kit needed to assemble a motor vehicle. It is a common practice for automotive manufacturers, as well as bus and rail vehicle manufacturers, to sell “knocked-down kits” to their foreign affiliates in order to avoid high import taxes and/or receive tax preferences for providing local manufacturing jobs. The decision implemented by the Russian Ministry of the Economy, the Ministry of Finance, as well as the Ministry of Industry and Trade, authorize the production of 20 000 complete-knocked kits per each manufacturer.

Volkswagen may soon become the first foreign company ever to make it to the list of enterprises essential to the national economy compiled by the Russian government. Those 300 companies that would make it to the government’s list would be entitled to receive state support in the current market environment. Volkswagen aims to sell 300 000 vehicles in Russia in 2010. The company has a USD 510 million plant in the city of Kaluga that produces the manufacturer’s Passat, Golf, Jetta, and Tiguan models.

On the whole, foreign participants on the Russian market are now looking to increase in-country production. Sollers is intending to start a vehicles assembly line in Vladivostok. The company is working in consortium with Fiat, Isuzu, and Ssang Young Motor. The new plant would produce Isuzu trucks, the Fiat Ducato vehicle, Fiat commercial vehicles, as well as the SsangYoung SUV. The share of Sollers in the commercial SUV market in Russia is estimated at 12.5 percent. The company also has 15 percent in the commercial vehicle market in Russia.

The Iranian Company Kkodro has also expressed intentions to import to the Russian market a larger number of its Samand Soren vehicle. IKCO already supplies to the Russian market some Samand vehicles and the Peugeot 206 car, both of which meet Euro4 standards.

Auto manufacturers from South Korea report low results from their operations on the Russian market in the first eleven months of 2009. In 2008, Hyundai’s sales were 378 395 vehicles, and the company experienced a fall of 66 percent in sales year-on-year. Toyota’s sales also declined by 60 percent in the first half of 2009.  

Easier credit availability is expected to contribute to the recovery of the Russian auto industry in 2010, however, positive dynamics will be undercut by declining demand and low consumer activity. On the whole, in the long run, the Russian market still offers good opportunities. Existing national manufacturers account for roughly 66 percent of car output. The low rates of car ownership by the Russian population provide advantageous prospects. Over the course of several years, increasing incomes are expected to drive up the demand for higher-value imported cars.