Russian car sales to recover to pre-crisis levels by 2014
Such is the opinion of Boris Firsov, Partner at Roland Berger Strategy Consultants, who addressed the Logistics Leaders Russia conference in the Swissotel Conference Centre Moscow.
Firsov pointed out that Russian car sales follow the economy and consequently tumbled from 2.7 million units in 2008 to 1.4 million in 2009. He predicts steady growth over the period 2011 to 2014 with annual volumes of 1.9, 2.1, 2.5 and 2.8 million units in this period. He then predicts further growth to 3.2, 3.4 and 3.5 million units in the three years to 2017.
Firsov sees foreign OEMs as the big winners over this period and contrasted 2010 and 2017 as follows:
In terms of market segmentation, Firsov pointed out that the C segment in Russia is currently the largest but that this is partly due to artificial reasons. High-volume Lada Classic models are formally accounted for under this segment, however their size and price are more fitting to the B segment. J D Power also counts all small SUVs, such as the Chevrolet Niva, which are built on C segment platforms as belonging to that segment. The end of production of the Lada Classic will see C segment volumes drop from 58% of the market in 2010 to 36% by 2017.
Firsov predicts passenger car production to increase by 12% to 2017 with growing localisation of foreign OEMs. Over the same period, he forecasts that full scale assembly will rise from 65% to 85% with CKD falling from 21% to 13% and SKD dropping from 14% to 2%.
According to Firsov, commercial vehicle sales trends will mirror those of passenger cars with the market expected to reach pre-crisis levels by around 2014 and European OEMs the big winners. In segmentation terms, light commercial vehicles form the largest segment in Russia with local brands GAZ and UAZ having over 50% of the market. This will change when local assembly of foreign light commercial vehicles ramps up. Medium-duty trucks form a marginal segment with the major share held by Russian brands GAZ and ZIL. Russian and CIS brands (MAZ) currently have almost a monopoly in heavy trucks, something which will change when Volvo and Skania projects ramp up.
Commercial vehicle production is expected to grow at 14% a year until 2017 with most vehicles produced entirely rather than being assembled from knock-down.
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Government Decree 166 has induced foreign OEMs to build plants in Russia, but Firsov pointed out that localisation only started when the market achieved the required size. Decree 166 allows a 1%-2% tariff on imported components for 7-8 years if the company succeeds in reaching the required localisation level, in order to promote local production and increase local employment. It is, however, valid only for car production.
The duration of the validity is eight years for Greenfield projects and seven years for Brownfield with a minimum production capacity of 25,000 units a year. There is no regulation on actual production output. The required manufacturing content is welding, painting and assembly for all models, 30 months after the start of production for Greenfield projects and 18 months for Brownfield. Local content requirements are 10% within 24 months, 20% within 42 months, and 30% within 54 months after start of production.
The application of Decree 166 could expand profit in the short term if the investor meets the required localisation level. In addition, it shortens the payback period of initial investment which makes the initial decision easier. It is also an opportunity to gain initial experience before moving to full local production.