Outlook for the Russian auto market

Russia’s new-car market grew at an average annual rate of 20% over the past five years to reach 2.8 million in 2008. But the global economic downturn has hit Russia hard, and analysts say new-car sales this year will plunge about 50% below year-ago volumes. Unit sales are likely to recover significantly by the end of 2009—and signal a stronger shift toward locally produced vehicles.

Ivan Bonchev, associate director of Ernst & Young B.V.’s CIS Automotive unit head in Moscow, comments.

How has the mix of passenger vehicles changed in Russia?

New-car sales growth during the past five years has been driven by foreign brands, whose volume grew about 50%. This was primarily because much of the Russian car park consisted of outdated domestic brands. As the country’s economy grew, disposable income increased and credit opportunities improved, so consumers began to switch their preferences to foreign brands. They also have gradually moved into higher price brackets.

In the first quarter of 2009, approximately half of total new-car sales in Russia were of imported foreign vehicles. About 19% of sales were locally produced foreign brands.

What about the used-car market?

Russia is very different from the rest of the BRIC countries in this regard. The others tend to be net exporters of vehicles, but Russia historically has been a major net importer of vehicles. The Kremlin saw this as an impediment to the growth of a domestic auto industry, and it implemented measures that have capped imported used-car volume at 300,000-400,000 units per year.

At the same time, Russia adopted legislation to attract foreign investment by carmakers. It eliminated duties on imported car parts to companies that committed to locally source at least 30% of their components in five to seven years. As a result, about 600,000 units of capacity have been added by foreign brands over the past two years. At least nine foreign carmakers now have capacity or are constructing plants in Russia.

How does that new capacity compare with demand?

By the time all this new capacity is in place in a few years, Russia should be able to satisfy internal demand with local production. The current economic downturn has hit Russia very hard and caused many foreign carmakers to reduce or suspend production at times. But none of them has canceled capacity outright. New government incentives, such as subsidies on consumer loans for locally produced vehicles, also encourage carmakers to continue their plans.

Russia’s long-term objective is to make Russia a net exporter of vehicles. The goal was to lower imports to 10% of total sales and export 30% of locally produced vehicles by 2020, but that timeline has been pushed back.

What is your outlook for new-car sales in Russia this year?

Last year’s market was 2.8 million new-car registrations. Analysts have been downgrading their forecasts for 2009, but they generally expect a 50% decline this year. This would return the Russian market to the volumes of 2005-2006, meaning roughly 1 million foreign-brand vehicles and 400,000-450,000 Russian brand units.

Another contributing factor is the increase in import duties on foreign-made new cars that began in January. Most foreign carmakers imported additional vehicles at the end of last year in anticipation of the tariff. But then the market collapsed, so now they have enough inventory to sell through this year and probably into 2010. The additional challenge is that consumer taste has shifted. Buyers who had been migrating to more expensive cars are now demanding simpler, cheaper and more economical vehicles.

So now importers are offering huge incentives on their existing stock. It’s difficult to tell what the market will do when these cars are sold out. Complicating the situation is the fact that most cars are imported in terms of American dollars but sold in rubles, which have lost roughly 30% of their value against the dollar this year.

When will the Russian auto market recover?

There are a wide range of estimates because of continuing uncertainty about when the global economy will begin to improve. The Russian market should recover to a pre-crisis level by about 2012, but the big question is how fast the Russian economy will improve and whether there will be a second downturn. In any case, the potential remains strong because the Russian market is not mature. The saturation point may be as high as 5 million-6 million units, and that level could be reached as soon as 2015.

For more information, please contact Ivan Bonchev at +7 495 755-9817 or ivan.bonchev@ru.ey.com.

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