Overview of Russian New Car Market Part 1: Insights and Forecasts for Russian Car Industry

Russia was predicted to be Europe’s largest new car market in 2020, although adverse economic conditions sent new cars sales plummeting 15% in 2014. This had a negative impact on carmakers, which experienced shrinking profit margins, but still remain committed to staying in the Russian market. Even though new car sales are expected to stabilise in 2016, the car industry will experience a turbulent future as fundamental problems still remain in the Russian automotive industry.

Promising market no more

Russia is the largest new car market in Eastern Europe, accounting for 66% of Eastern European new car sales in 2014. Due to rapid expansion over the past five years, Russia was predicted to overtake Germany as Europe’s largest new car market in 2020.

However, as economic downturn and Western sanctions hit the country, such forecasts collapsed. Due to the adverse economic conditions, new car sales in Russia plummeted by 15% to 2.5 million units in 2014, the worst result since the 2009 crisis.

Manufacturers of budget cars, such as Chevrolet, Ford, Lada or Renault, were hit hardest. For example, the volume sales of Russian new car market leader, Lada, fell by 15% in 2014. Volume sales of Ford and Chevrolet fell by 38% and 29%, respectively, in 2014, with the two brands being the worst performers in the Russian new car market.

Falling new car sales indicate trouble for the overall Russian automotive industry, which remains heavily domestically orientated, with exports representing a negligible 7% of production in 2013. This also indicates bad news for foreign carmakers, which have invested around €7.6 billion in Russia since 2011.

Carmakers determined to stay despite shrinking profits

Due to weak demand and negligible exports to offset losses in Russia, car production declined for the second consecutive year in 2014. Production of commercial and passenger vehicles shrank by 13% in 2014, to 2.2 million units.

As a result of falling production volumes, carmakers in Russia faced overcapacity, which inflated production costs. Moreover, devaluation of the rouble exacerbated the situation further, inflating the cost of imports and other variable costs. Foreign carmakers were worst hit, as Russian producers were cushioned by the higher proportion of domestic components used in their car assembly operations.

Russian automotive industry profits stood at US$2.6 billion in 2014, down by 22% after the impressive growth observed in 2010-2012. The profitability of the industry was 6%, a rather unimpressive result in comparison to the 8-10% seen in Western Europe and the US.

Due to high levels of uncertainty and shrinking profit margins, General Motors (GM) was the first foreign manufacturer to withdraw from Russia, taking a loss of US$600 million in 2015. However, other carmakers have so far been willing to stay in Russia and accept possible losses. The reason for that is rather simple – it is easy to exit Russia now, but it might be more complicated to re-enter in the future.

Chart 1. Profits of Russian Automotive Industry, 2009-2014

Russian-Cars

Source: Euromonitor International

New car market expected to stabilise in 2016

It is difficult to make forecasts given the fast-changing business environment in Russia, although industry experts expect that the Russian new car market will decline by 25-35% in volume terms in 2015. However, RUB5 billion in state support and new car leasing rules for new car purchases are anticipated to soften the fall, and the market is expected to level out in 2016.

Looking in the long term, new car sales are expected to even out, helped by the stabilising demand for upmarket vehicles. However, while sales of new cars in Russia are expected to reach 3.3 million units in 2020, this will be far lower than the four million units previously anticipated.

Turbulent future expected for the car industry

The car industry is likely to experience a more turbulent future. The industry’s production value is forecast to register a 5% CAGR to 2019, although growth will be largely driven by soaring production prices.

Investment data will also not show any improvement in the near future. The car industry’s investments in construction and appliances grew by 3% in 2013, below the industry’s overall growth rate. Given the fact that it takes several years to launch new production facilities, no significant expansion in the industry is expected in the near future.

In addition, fundamental issues in the Russian car industry, such as a fragmented supply chain, overcapacity, complicated logistics and low production volumes, will remain. To be cost-competitive, a plant needs to produce 200,000-400,000 units per year. However, very few plants in Russia exceed production capacity of 200,000 units.

Table 1. Annual Production Capacity at Russian Car Plants

Company Location Annual Production Capacity
Hyundai-Kia St Petersburg 200,000
GM* St Petersburg 98,000
Ford St Petersburg 125,000
Ford Yelabuga, Naberezhnye Chelny 200,000
PSA Peugeot-Citroen Kaluga 125,000
Renault-Nissan-Avtovaz St Petersburg 50,000
Renault-Nissan-Avtovaz Togliatti 350,000
Renault-Nissan-Avtovaz Moscow 160,000 (est)
Volkswagen Kaluga 225,000

Source: Euromonitor International from company data, Association of European Business

Note: *production capacity before GM exited Russian market

Carmakers operating in Russia will also face new regulations. There are plans to make carmakers use locally produced engines in at least 30% of the vehicles made in Russia by 2016. This means that, in addition to the uncertain demand in the Russian market, low profitability levels and other fundamental problems in the industry, carmakers are likely to face yet another hurdle. Even though most foreign carmakers remain committed to their expansion plans in Russia, mounting losses could change this position and more exits like that of GM might be seen.