Russia’s new car market is one of the fastest growing in Europe and is set to outgrow Germany by 2020, although the crisis in Crimea is likely to hamper overall growth in 2014. Nevertheless, some of the producers outsourcing locally-produced components could even benefit from the plummeting rouble. The long-term industry outlook also remains positive as first-tier suppliers are planning investments in Russia in order to improve the component supply chain.
Plummeting Rouble Impacts Motor Vehicle Supply Chain
Russia is one of the most dynamic new car markets in Europe. New vehicle registrations in Russia recorded a CAGR of 18% over 2009-2013, reaching nearly three million cars in the latter year. Industry representatives predict that this growth momentum will continue and new car sales in Russia will reach four million units in 2020, overtaking Germany as the largest new car market in Europe.
Over the last two years car producers have invested around €7.6 billion in Russia’s car industry. Under rules that were set in 2011, car producers are subject to low or no import tariffs if domestic car production capacity has reached at least 300,000 units annually.
However, the crisis in Crimea is threatening Russia’s economy. Growing political tension and possible economic sanctions have resulted in the rouble plummeting to record lows against the euro. Executives at Ford, Renault and Volkswagen have a keen interest in Russia and are monitoring these developments closely. However, the impact on car producers could be different as some are more resilient than others in Russia.
The Most and Least Vulnerable Car Producers
The Renault-Nissan-Avtovaz alliance is the least vulnerable car maker in Russia’s turbulent new car market. In fact, the alliance is expected to profit from the weakening rouble, which is benefiting local producers. Unlike other European producers, Renault benefits from a high level of local sourcing, with nearly 100% of the components used in its Russian-assembled cars being locally produced. The alliance accounts for around 30% of Russia’s new car sales. Renault and Lada managed to sell more than 650,000 new cars in Russia in 2013.
Volkswagen Group is also one of the major players in Russia’s new car market. The company invested around €1 billion in Russia over the 2006-2013 period and accounts for 11% of the country’s new car market. Despite that, the weakening rouble and ongoing political tension might have negative consequences on the company’s results as Volkswagen imports around 40% of the components used in its car production in Russia.
However, the CEO of Volkswagen Group, Martin Winterkorn, has announced that the company is continuing to invest in Russia and plans to improve its component supply chain. For example, Volkswagen is expanding its factory in Kaluga and will start producing 150,000 engines annually from 2015. This could significantly improve Volkswagen’s supply chain in Russia, one of the most dynamic markets for the German company.
Ford is another Western car producer with a key interest in Russia. However, it is also one of the most vulnerable car producers amidst economic and political turmoil. The company increased its Russian-produced range of models from three cars in 2011 to seven cars in 2013. Ford managed to sell more than 100,000 new cars in Russia in 2013 and accounts for 4% of Russia’s new car market.
However, the weakening rouble and a high level of component outsourcing have had a negative impact on the company’s car operations in Russia and have hampered production. This has forced the company to search for new suppliers and Ford is now working with its partner Sollers in order to increase localisation of car parts.
Economic and political turmoil as well as declining consumer confidence will negatively impact new car sales in Russia, and all industry representatives agree that new car sales will fall in 2014 (a decline of 5% is predicted). However, the long-term prospects for Russia’s car industry remain very positive.
First-tier component suppliers such as Bosch and Visteon have already planned their investments in Russia. Bosch is building its second Russian production plant in Samara. The company plans to invest €40 million and finish construction by 2015. Visteon also strengthened its position in Russia in 2013 when it increased its stake in Russia's Avtopribor (one of the leading cockpit electronics suppliers in the country) to 69%.
The Crimean crisis is expected to further encourage manufacturers to invest in Russia and improve their component supply chain. GKN Driveline (a supplier of driveline components), transmission components producer Getrag and TRW Automotive (a supplier of passive safety components) are among companies considering investment in Russia.
The Customs Union of Armenia (expected to join in mid-2014), Belarus, Kazakhstan and Russia could also drive investment in Russia’s car industry. The creation of a Customs Union would add an additional 30 million potential consumers to the existing 143 million in Russia. Because of the import rules of the Customs Union, cars from non-member states are subject to an import tax and other non-tariff measures. As a result, component producers in Russia would have a competitive advantage over their foreign rivals. Euromonitor International forecasts that car production in Russia will achieve a CAGR of 12% over 2013-2018.
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