Russia’s new car market, once forecast to overtake Germany and become the largest in Europe, is now in freefall. With sales plummeting by 14% in 2014 and expected to again record a double-digit decline in 2015, dealerships and automakers are struggling to innovate and are in talks with the government about support to be provided in the form of leasing subsidies and a “cash-for-clunkers” programme.
Taste for luxury not enough to avoid decline
Although new car sales in Russia declined in 2013 and 2014, sales of imported luxury automobiles were relatively resilient. Luxury car sales boomed in December 2014 as Russians rushed to convert cash into other assets and shield it from inflation, but, nevertheless, only accounted for well under a tenth of sales in volume terms.
Relatively robust demand for luxury vehicles persisted well into 2015, indicating a deeply ingrained view of cars as status symbols among high-income Russians. Even with deepening recession, Russian consumers were more willing to cut back on other expenses or switch to a smaller model than to abandon luxury brands and purchase a more economical car.
Russians’ taste for imported luxury was not sufficient to offset the downfall, though. As the rouble nearly halved in value during 2014, international motor vehicle manufacturers and distributors accumulated a loss of over US$800 million during November and December 2014 alone. General Motors, Audi, and Jaguar Land Rover were the first to halt sales to prevent further losses, but the remaining automakers were reluctant to exit the market, fearing a loss of market share and being left behind once the market rebounds.
Does leasing offer hope for Russian car sales?
Leasing of automobiles accounted for nearly half of the market value in 2013 and was growing at a double-digit rate in both 2013 and 2014, while total car sales declined. The increasing popularity of leasing was spurred, in part, by inflation squeezing buyers’ purchasing power, but also by changes in Russia’s legislation and tax rules, which made leasing more attractive financially as of 2014.
The government itself prescribed leasing as a cure for declining automobile sales. Over 2013, RUB8.6 billion was spent to subsidise 75% of interest rate payments for new car buyers. The cure worked – both by slowing sales decline, and by returning a total of RUB28 billion in taxes on new car purchases. However, an interest rate hike of six percentage points to 18% in 2015 wiped out the subsidy, causing the government to rethink its approach.
In early 2015, with new car sales still declining at an accelerating pace, the government announced an extension of its trade-in programme for another year – meaning customers will continue to be able to trade in their old car for a sizeable discount on a new car purchase. The amount of money dedicated to the programme nearly doubled, from RUB12.9 billion spent over 2014 to RUB10 billion dedicated for just the first half of 2015. However, the growth in funding becomes less impressive after taking into account Russia’s rampant inflation, which peaked at 17% in 2015.
New leasing rules are anticipated to emerge, aiming to maximise customer convenience and altering the mindset from that of ownership to consumption – a trend observed not only in Russia, but around the world. In 2015, the Association of Russian Automobile Dealers was discussing with the Russian government ways to offer leasing contracts whereby the client would pay a single monthly fee, including car payments, costs of servicing, insurance and repairs. Moreover, the customer would be able to easily change his or her car for a new one at the end of the lease period, thus encouraging a car-switch every two to three years.
Murky prospects despite government intervention
The prospects for Russia’s new car market are complicated. The industry is struggling to come up with innovations and is pushing the government to intervene, as a forecast 30% decline in sales during 2015 could result in an equivalent percentage of Russian car dealerships going bust. However, the market is projected to level out in 2016 and then reach 3.3 million units in 2020.
Government-subsidised leasing is widely considered as a way out, but may turn out not to be the panacea it is built up to be. First of all, economic sanctions imposed by the US and Europe on Russia are key contributors to rising costs and worsening access to capital. With no resolution of the Ukraine conflict in sight, there is no guarantee that the government’s leasing subsidies will not be erased by another hike in interest rates.
Another downside risk is that generous government spending may dry up, in line with reduced oil revenues and ambitious (and costly) militarisation plans. In this case, the extensive leasing plan may leave dealerships exposed to a pool of consumers defaulting on their contracts in response to a spike in payments.
On a brighter note, strengthening of the rouble and government programmes seem to be working in terms of levelling out the decline. For example, Toyota Motor Corp, Mitsubishi Motors Corp, BMW AG and General Motors Co have announced discounts on new car prices, while Ford Motor Co cut prices outright in mid-2015, indicating the period of rampant depreciation of the rouble is over and car retailers are now more confident about the future.