From roller coaster to resurgence – Russia’s auto industry to recover in 2017

While Russia’s automotive market has been in free-fall for longer than expected, those that ride it out may soon see the rewards, writes Oleg Malyshev, Partner, Deals Leader at PwC Russia

While the population of Russia totals 146.5 million, only 280 people out of 1,000 inhabitants own a car, which is far below the 600 cars per 1,000 people in Western Europe. With rapidly developing demand there is good long-term growth potential for the Russian automotive market, and the automotive industry retains very strong influence and importance in the Russian economy. The government sees the industry as crucial to maintaining employment of a highly skilled engineering workforce, which can play a key role in moving the economy from dependence on extractive industries towards adding value through manufacturing.

Meanwhile, the Russian automotive market is extremely volatile and difficult to predict. In 2009, car sales dropped far more than in any other market in the world – by about 50%. In the following three years there was significant growth thanks to government support and strong unfulfilled demand. In 2011, car sales increased by 40% and the Russian car market performed better than any other major market. Starting from 2013, car sales began to decrease due to a worsened macroeconomic environment, and in 2015, sales decreased by 37%. Sales are expected to stay weak in 2016, with PwC data forecasting a 14% decrease year-on-year (see Graph 1). To a certain degree, car sales in Russia are a bit of a roller-coaster ride.

New passenger car sales in Russia and growth rate year-on-year, 2009-2016


Taking a closer look at the first eight months of 2016, new passenger car sales in Russia fell by 16% in quantitative terms and accounted for 828,000 units. The new imported car segment saw a 29% plunge in sales, while sales of domestic brands and locally assembled foreign cars declined by 10% and 12% respectively (see Table 1). Meanwhile, the average weighted car price in Russia’s automotive market increased in all of the segments listed above. Thus, the average weighted price of a domestic passenger car rose by 17% between January and August 2016 compared to the same period last year, whereas foreign cars (both locally assembled and imported) went up 19% in price. Overall, the average weighted price of a new passenger car in Russian Roubles rose 18% in the first eight months of 2016.

The increases seen in the average weighted car price across all segments was largely driven by further weakening of the Rouble against other major world currencies. In Rouble terms, the car market shrank by only 1% in the first eight months of this year, but in US dollar terms it contracted by 16%. This was also a result of the year-on-year shift in average FX rates from US$1.00/Roubles 58.10 in 8M 2015 to US$1.00/Roubles 68.70 in 8M 2016.

Table 1 - The new car market in Russia between January-August 2016
Source: AEB, PwC analysis

In such a challenging environment, some players appear to be more successful than others. Among them are OEMs with localised assembly operations, those introducing new and upgraded models, especially in the crossover and SUV segments which are still the most attractive for Russian motorists, and those with intelligent pricing policies with a view to current economic uncertainty. In addition, many car dealers have managed to adapt to the new realities and are now expanding in those segments less affected by the crisis. One such segment is the used car market, which outpaced the new car market in cash terms in 2015. As Internet and distribution technologies develop and the market becomes more transparent, the used car market will remain an important component for car dealers’ business in 2016 and beyond.

Over the last few years, the Russian government has been playing an important role in stimulating demand and supporting local manufacturers by implementing various incentive programmes. Among them are subsidised car loans, car leasing and car fleet renewal programs. Overall, the Russian government allocated around Roubles 90bn to support demand in the domestic automotive market during 2015-2016. Besides implementing different incentive programmes, the Russian government has also been implementing policies to stimulate the localisation of production. The government provides specific preferences to investors in exchange for the requirement to increase the localisation ratio to at least 60%. It effectively obligated manufacturers to establish operations in Russia from the ground up.

Currently, market development is almost exclusively fuelled by demand for foreign brands. The market share of cars made in Russia in total production volumes increased significantly from 47% in 2009 to 77% in 2015 (see Graph 2). Due to reduced demand in the car market over the last few years, OEMs in Russia have had to reduce their production of new cars. Thus, in the first eight months of 2016, the production of new passenger cars fell 13.5% year-on-year. Production of domestic passenger car makes and models saw a greater decline (21%) than the drop-off in production of foreign makes (11%).

Graph 2. Share of cars made in Russia in the total sales volume

PwC forecasting projects a 10% reduction in passenger car production in Russia by 2016, reaching 1.1 million units. In subsequent years, it is expected that there will be a gradual restoration of production volumes, which may reach 1.7 million units by 2020, barring any external shocks.

Open source information shows that the current production capacities of domestic Russian and localised foreign vehicle manufacturers are about 3.1 million units per year. In the next five years, production capacities are expected to increase by 0.2 million units due to the anticipated commissioning of two Chinese automotive plants: a Great Wall Motors plant in the Tula Region, with capacity for 150,000 cars per year, and the Lifan plant in the Lipetsk Region, which has capacity for 60,000 upa. Given vehicle manufacturers’ current plans to boost production capacities in Russia and current market projections, capacity utilisation is expected to reach 52% by 2020 (see graph 3).

Projected production of passenger cars in Russia, 2016-2020

As can be seen in Graph 3, only 35% of installed production capacity is currently being utilised,  stimulating local producers to search for alternative markets. Exports could also partially help to put idle production capacity to work. In 2016, the Russian government introduced export subsidies as one of the state incentive programmes for the first time. These subsidies aim to reduce the cost of logistics, finishing and certification of vehicles. So far, Roubles 3.3bn have been allocated for these purposes. The Russian government expects to increase the share of exports in total automotive production in Russia to 25% by 2025. The main exporters will be the domestic manufacturers, namely AvtoVAZ, KAMAZ, UAZ and GAZ, and several foreign manufacturers.

Looking ahead to the development of the Russian automotive market, several factors need to be taken into account. In the short term – up to the end of 2017 – the major factor is the oil price trend, which will largely determine the fluctuations in the population’s disposable income and consumer expectations, which are both key passenger car demand factors. In the long-term, the development of the market will be influenced by more fundamental indicators such as projections for the level of car ownership. PwC’s forecast for the new passenger car market is based on the financial factor model, which takes into account a combination of short-term and long-term factors.According to PwC’s current forecast, Russia’s new passenger car market is expected to begin recovery in 2017. By 2020, total new car sales may reach 2 million units (see Graph 4).

Forecast for the new passenger car market in Russia in 2016-2020, million units

Looking closer at the light commercial vehicle (LCV), truck and bus markets, they remain sensitive to the economic situation and have been in decline due to the weaker business activity of small and medium-sized enterprises and lower cargo traffic, as well as a downturn in the construction industry. In 2016, total sales of LCVs are expected to decrease by 4% to 88,000 units. However, starting from 2017, a market recovery is projected. Government support programmes have partially compensated for the dampening effect that economic factors have had on the LCV segment. As for the truck segment, total sales are expected to decrease by 6% to 48,000 units in 2016. However, despite lower sales in 2016, pent-up demand should have a positive impact on the truck market in the near future. Total sales in the bus segment are expected to decrease by 6% to 8,500 units in 2016, but demand from public sector entities combined with government support measures will help ensure sales stability here.

In conclusion, despite short-term difficulties, the long-term prospects for the Russian automotive market remain sound. There is a significant amount of unfulfilled demand and there has been tremendous investment in infrastructure within factories and within retail networks. The Russian car fleet is also very old – the average age of a passenger car is 12.5 years – and a renewal of the market is currently taking place. Therefore, in the short-term, there may still be some negative factors to occur and industry players will need to make certain adjustments, but in the long-term the Russian automotive market has good prospects.