Global Finance: Everything Old Is New Again
Unlike the auto markets of Europe and North America, weighed down as they are by sluggish sales, stagnation, overcapacity and plant closures, the Russian auto market is expanding at a healthy pace, thanks to soaring oil prices, rising capital investment and foreign direct investment and consumer spending that’s outpacing the rate of GDP growth.
During the first six months of 2008, car sales in Russia rose 41% compared with the same period in 2007. According to accounting firm PricewaterhouseCoopers’ report, Is Russia the Largest Car Market in Europe?, published in July, “If the market growth rate remains at the same level in the second half of the year, sales in Russia will exceed sales in Germany in quantitative terms and may reach 3.6 million to 3.8 million cars.” Furthermore, during the next eight years, Russia could more than double its domestic car output. Other analysts predict sales of around $100 billion by 2011.
Accounting firm Ernst & Young’s recent report, The Russian Automotive Market, there are more than 250 banks in Russia offering a variety of car financing schemes. “The growth rate of the consumer credit market considerably outpaces car sales growth. While in the U.S. up to 90% of private car sales are financed by credit (80% in Europe), in Russia just over 30% are non-cash sales,” the report stated. Daniel Brett, a London-based auto sector consultant, said “car loans for non-Russian brands is estimated at around $23 billion in 2007, with a further $11 billion for Russian brands, and is climbing every year.”
The lucrative Russian car loans market is drawing in the foreign auto majors and their captive banks. In 2007, Toyota Motor Corp. became the first major to offer financial services through its Toyota Bank subsidiary and others are following. “The rate of interest varies, with loans in rubles offered at a premium of up to two percentage points above hard currency loans,” said Brett. “But the margin above the central bank’s refinancing rate is very slim and in real terms are close to zero. This is testament to the high level of competition within the automotive finance market.”
However, the increasing availability of auto financing is likely to lead to a rise in auto prices. “The Russian consumer can now afford more expensive cars. This shifts demand from lower-priced Russian models to more expensive foreign alternatives ….The average price of a sold car will climb by 20% to 30% by 2011,” said Gairat Salimov, an auto analyst.
Though “car ownership rates are still low,” Brett said, “per capita income is set to more than double by 2012, reaching the kind of levels seen in Spain or Greece. As a result, the market can expect to see a rise in car ownership from around 20% to around 35%. By then, the total size of the Russian car finance market will be over $75 billion per annum.”
Rising disposable income, ready availability of credit and the growing number of foreign car dealerships has led to a dramatic rise in foreign car sales. “Toyota, Nissan, Kia, Lexus, SsangYong and Subaru already sell more cars in Russia than in any other country in Europe. Mazda and Suzuki could be next,” the BBC reported recently. “In many parts of Russia, multi-marquee showrooms are commonplace. Dealers stock broad ranges of brands, and it is evident that foreign ones are taking over.”
Earlier this year, Korea’s Hyundai Motor Co. announced that it expected to sell more than 100,000 cars in Russia this year, 54% more than in 2007. Denis Petrunin, managing director of Hyundai Russia, said, “Around 2010, the market will see saturation. This is connected to the fact that all the manufacturers are planning to put new factories into operation at around the same time… So while the demand is growing steadily, the supply will see a sudden spike.”
Global auto giants like General Motors Corp., Ford Motor Co., Toyota, and Suzuki Motor Corp. are eager to invest in a country where costs are relatively low and demand is soaring. According to a BBC report, “St Petersburg [is] emerging as Russia’s, perhaps even Europe’s, version of what Detroit used to be for the U.S.”
Auto giants are eager to forge partnerships with Russian automakers. In 2004, General Motors started assembling cars at the plant of its partner Avtotor. The Kaliningrad plant produces the Cadillac, Hummer and Chevrolet brands. In 2007, GM announced it will triple investment in a new Russian assembly plant in Shushary on the outskirts of St. Petersburg. “Russia is the largest market for Chevrolet in Europe,” declared Carl-Peter Forster, president of General Motors Europe.
In 2006, Gorkovsky Avtomobilny Zavod or GAZ, manufacturer of the Volga and the country’s second-largest automaker after AvtoVAZ, announced plans to invest $150 million in two new cars, based on older-generation Chrysler models. GAZ bought licenses and equipment to produce Chrysler Sebring and Dodge Stratus sedans under its own brand in Russia. GAZ bought DaimlerChrysler’s old Dodge Stratus assembly and brought it to Nizhny Novgorod. “The models will be restyled and adapted to Russian roads,” GAZ promised. The company scrapped plans to discontinue making Volgas and may even sell the Stratus-based products under the Volga brand.
AvtoVAZ, Russia’s largest automaker, also plans to go on producing its signature brand, the Lada. In March 2008, Renault SA announced that it was purchasing 25% of AvtoVAZ. The goal of the $1 billion deal is production of a revamped Lada. The idea is to combine foreign quality with traditional Russian ruggedness to make a car that would undercut foreign brands on price. “The deal,” the BBC reported, “will elevate the Renault-Nissan-Avtovaz alliance to the number three slot globally after General Motors and Toyota.” The Lada will become the “people’s automobile”, said Sergei Chemezov, head of the state holding company Rostekhnologia, which owns the remaining 75% of Avtovaz shares.
—George Szamuely
