Frost: Russian Auto Market to be Third Largest Worldwide by 2012

January 29, 2009 // Published as a news service by IHS

As experts predict a continuation of the economic recession into the beginning of 2009, industry stakeholders are closely watching the Russian automotive market's performance.

Dmitri Medvedev, president of the Russian Federation, acknowledged that the crisis is spreading from the financial sector into other sectors, including the automotive industry.

Recent analysis from October 2008 to November 2008 showed a 19.3% drop in sales of new foreign passenger cars. In response to this, analysts said the government is rethinking its lending policies, automobile import policies and import tariffs, while major Russian manufacturers are restructuring the number of work days in a week and reducing its workforce.

"As soon as the Russian banking sector overcomes months of financial turmoil and automotive loans are available again for Russians, then sales of passenger cars are expected to revive their growth, however, most likely, at a slower pace," said Andriy Ivchenko, industry analyst at Frost & Sullivan.

Before the recession hit, the Russian economy was fertile for investment. By the end of 2007, Russia ended its ninth straight year of growth, averaging 6.9% annually since the financial crisis of 1998. In 2007, foreign investments in the Russian economy amounted to $27.80 billion, of which $353.0 million was invested in the automotive and transportation machine-building sector.

The problem for the automobile industry is rooted in the lending policies of financial institutions and banks in Russia and the rest of the world. Analysts said these lending policies are being revived, but only after taking a toll on Russian and foreign automakers alike.

"Given the fact that more than 45% of the passenger car sales in Russia were financed through bank loans, the financial crisis in Russia forced the banking system to almost put on hold all new automotive loan applications for Russians," said Olha Kryvetska, research analyst with the automotive and transportation practice at Frost & Sullivan.

This new slump in demand for cars forced the hand of many Russian and foreign manufacturers, namely Gorkovsky Avtomobilny Zavod (GAZ), Avtovaz and Kamaz. Last November, GAZ announced its decision to institute a three-day working week in response to decreasing demand for vehicles. A month earlier, Kamaz, known for its heavy commercial vehicles, cut its work week to 32 hours, and is also cutting its workforce by 10%.

Analysts said even though most of 2008 showed a slight reduction in sales (only 2.6% compared to last year), Avtovazâs Lada Priora has shown a positive trend, increasing its sales drastically in 2008.

In addition, foreign original equipment manufacturers (OEMs), such as Renault, Ford and General Motors (GM), are amending their production plans for January 2009 in Russia and delaying their production of new models.

Finally, the government is starting to act in an effort to keep the industry afloat. The main change is the restructuring of import policies of used vehicles, prohibiting the importation of cars older than five years. Currently, the system allows for cars no older than seven years.

The other key adjustment is to increase import tariffs. Russia is hopeful that this move will reduce the volume of imports and, in the long term, gradually accelerate the development of foreign assembly in Russia.

Once the Russian automotive industry is strengthened, through new lending policies, import tariffs and the stimulation of foreign assembly, analysts said the future of this industry looks bright.

Source: Frost & Sullivan.