Not Your Father’s Gulag: Russia’s Car Market Shapes Up
February 15, 2010 by Nicholas Fay
Auto manufacturers are drawn to emerging markets for a number of reasons. Manufacturing is generally cheap in these countries, and this combines with economies of scale to allow for lower vehicle production costs. In general, countries with up-and-coming economies are a breeding ground for consumption spending. The new middle class is eager to get their hands on a means of transportation, as well as seeking out new status symbols. Overall, nations with developing economies are excellent places to produce goods while exporting said goods, as well as selling them locally. The BRIC (Brazil, Russia, India and China) countries are the leaders in today’s emerging markets, and are ideally suited for auto manufacturing.
Russia has one of the most interesting histories when it comes to the market for cars and auto manufacturing. When Russia’s economy began to recover in the late 90s, the population was eager to gain motorized independence. Due to the horrible aftertaste left in consumer’s mouths, domestic automakers had a hard time selling any vehicles. Instead, people turned to used imports to satisfy their cravings, buying up nearly 500,000 pre-owned vehicles in 2002. One of the main reasons that old imports outsold new domestics was that old VWs and Hondas were just as modern as the vehicles being offered by Gaz and AutoVAZ. The government didn’t exactly enjoy seeing the domestic manufacturers struggling during the economic boom, so they took action.
At the end of 2002, the Russian government added a steep value added tax (VAT) and import duty to any foreign car sold within the country. For a short time, this band-aid stuck, and the domestic automakers started to recover. Unfortunately, new imports made up for roughly 50% of all new car purchases just three years later, even in the face of the additional cost associated with the purchase. Once again in 2005, the government wasn’t happy at the state of the domestic auto industry. However, this time they held the local automakers responsible for their failure, and offered an incentive for foreign manufacturers. Essentially, rescinding the import duty was the motivation for assembling vehicles inside the country at the cost of building a factory with a minimum production capacity of 25,000 vehicles per year, a $100 million investment and 30% local parts content of the vehicles within five years
Two of the first foreign automakers to take advantage of the incentive were Ford and General Motors. Soon after, more foreign auto groups joined the fray to establish a manufacturing presence in Russia. Recently, BMW announced that it will begin producing the 7-series in the country again, after they halted production in 1999. Additionally, there are reports that the 535i will be produced and sold in Russia as well.
Currently, BMW manufactures the 3-series, 5-series, X3, X5 and X6 in Russia, with total vehicle production exceeding 7,000 units and total BMW sales of 16,365 vehicles, according to Edmund’s InsideLine. On February 11, Fiat signed a deal with Stollers to create a new, joint-venture automaker. According to Bloomberg, the group expects to produce 500,000 vehicles a year in nine model ranges and export roughly 10% of the total production. The agreement has been valued at roughly $3.3 billion, and is backed by loans from the Russian government.
For the time being, it seems as if the domestic auto market in Russia has drastically improved. Not only are foreign cars cheaper than they have been in recent years, a large number of them have been produced in the country. Additionally, the country has not suffered due to the foreign invasion. Stollers currently employs 25,000 Russians and just opened a new manufacturing center in December, Bloomberg reports. The deal with Fiat should drive the market for manufacturing jobs higher, with additional work generated when additional plants are needed in the future.
If Russia can bounce back from their recession quick enough, Europeans may soon be driving cars with the label “Сделано в России.”
Source: The Economist – “Selling cars in emerging markets”
