Russian light vehicle production bouncing back
The fourth annual Logistics Leaders Russia conference took place this year in the Swissotel Conference Centre in Moscow. Ivan Bonchev, Director Ernst & Young Transactions, explained how light vehicle production was recovering from the downturn of 2009.
Before the downturn, from 2005 to 2008 Russian passenger car production was demonstrating a compound annual growth rate of 11%, reaching 1.470 million units in 2008. In the crisis year of 2009, production plunged by 59% to 596,000 units as new vehicle sales drastically decreased. Last year saw the figure rise by 103% to just over 1.2 million with the last four months of the year accounting for 510,000 units of that total.
The resurgence shows no sign of abating as 98,223 cars were produced in January this year, a year-on-year increase of 122%, albeit from a low base in January 2010.
The production of foreign brands has been increasing over the last three years and accounted for 52% of total car build in 2010. Despite the scrapping programme being designed to benefit locally-produced budget models, the growth in production of foreign brands in Russia in 2010 at 123% was higher compared to that of the local brands at 83%. According to Bonchev this was largely due to major, international OEMs recognising the potential of the Russian market and localising assembly facilities.
Bonchev referred to the short-run drivers of the market, firstly from a regulatory perspective. The planned budget allocation for scrapping incentives this year amounts to five billion roubles and the state programme of subsidised car lending will add a further 1.75 billion. Increased import duties on new vehicles will see consumers switch, albeit slowly, to locally-produced models.
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Other short-run drivers involve manufacturing issues. In January this year, Hyundai began full-scale production of its new budget-priced Solaris model designed specifically for the Russian market. Renault’s Avtoframos plant will start to operate at its full capacity of 160,000 cars this year. In 2010, the plant’s production volume was 87,000 units. The PSA and Mitsubishi factory in Kaluga will also ramp up its production in the first quarter of this year compared to 2010 as the plant only started to produce in April last year.
In the mid and long-run, Bonchev envisages a steady rise in light vehicle production driven by a pent-up demand for cars in a market with an aging car fleet and relatively low car density compared to more developed automotive markets. Planned state allocations to preferential car lending are budgeted at the level of 1.75 billion roubles this year, one billion next year and 0.5 billion in 2013. The major automotive manufacturers plan to increase production volumes and localisation ratios in order to comply with the requirements of the Industrial Assembly decree.
The procedure of Industrial Assembly was introduced in Russia in 2005 aimed at raising foreign investment and encourages step-by-step localisation of vehicle and component production. Six OEMs or alliances have recently signed memoranda of understanding under the new 166 Contract which offers lower import duties on components in return for increased local production. There have also been 400 memoranda of understanding signed by suppliers under the 566 Contract which offers similar benefits for sub-components. This, according to Bonchev, will add half a million units of new capacity to the current 1.5 billion.
The six new 166 projects will see the Ford/Sollers partnership’s capacities rise to 125,000 and 200,000 units respectively with a planned investment of 1.4 billion euros. The General Motors stable’s capacities will be 60,000 units at GM St. Petersburg, 200,000 at Avtotor, 100,000 at GM/AutoVAZ and 40,000 at GAZ. The amount of investment is not available. Volkswagen/GAZ will have capacities of 180,000 and 100,000 units respectively and, again, the planned investment level is not yet known. An investment of 1.9 billion euros between 2011 and 2020 will see AvtoVAZ/Renault/Nissan capacities reach one million, 160,000 and 50,000 respectively and Fiat and Magna will each have the ability to produce 300,000 vehicles with as yet unknown investment levels.