The further weakening of the already collapsed value of the rouble is set to cause further pain for the foreign OEMs trying to operate in the bearish current Russian market.
IHS Automotive perspective | |
Significance | The Russian light vehicle and passenger car market is continuing to suffer accelerated declines and there is little good news on the horizon as foreign OEMs manufacturing cars in the country suffer from the weak rouble and the high cost of imported parts. |
Implications | The need to import a high degree of content has been a perennial issue for foreign carmakers manufacturing in Russia and this has further eroded the competiveness of foreign brand offerings in Russia. However, the percentage of locally manufactured cars as the overall portion of cars built has actually increased as the cost of imported completely built units (CBU) has risen at an even higher rate. |
Outlook | There is likely to be a slight moderation of the rate of monthly sales declines in the second half of the year as a result of lower base comparisons as the market deteriorated in the second-half of 2014. However, there will be little respite for any OEMs involved with a serious involvement in the market, while dealers are also feeling significant pain, and it remains to be seen if any other carmakers follow GM in taking the nuclear option and withdrawing from the market altogether, with LV sales set to fall 35% y/y this year to 1.61 million units. |
The Russian passenger car market and light-vehicle market in general is suffering a crisis that has been precipitated by a perfect storm of macro-economic circumstances that have hit Russia in the last 18 months, which has included the collapse of the value of the rouble, falling receipts from the country's oil and gas reserves and sanction from the US and the European Union (EU) over Russia's support for rebels in Eastern Ukraine. In particular, the foreign carmakers that have manufacturing facilities and assembly facilities in Russia have been hit particularly hard, with the cost of imported components having increased as a result of the weak rouble. While a weaker domestic currency usually makes exports more lucrative this has no real benefit for the foreign OEMs, or indeed domestic producers such as AvtoVAZ or truck-maker KAMAZ as the vast majority of Russian vehicle production is sold within the country itself. The Russian government has launched initiatives as part of the Decree 166 automotive industry policy in order to increase domestic and overseas investment in the country's supplier base which has been weak and underdeveloped in comparison to other industrialised economies as a result of the legacy of Russia's Communist-era command economy. Given the current state of the Russian economy and the light-vehicle market, and the investment lead times on supplier base, this is unlikely to change any time soon, with the highest-value components such as electronics, engines and suspensions parts still being mostly imported.
Despite the disadvantages being faced by foreign OEMs manufacturing in Russia, the percentage of the overall sales base of cars being manufactured in Russia has increased. This is because completely built up (CBU) imports from foreign OEMs are also even more expensive as a result of the weak rouble. Data from the Russian analytical agency showed that the percentage of domestically manufactured cars as part of the overall sales mix increased by 9.2% y/y to almost 78%. Unsurprisingly, AvtoVAZ and Lifan had a 100% of the cars they sold in Russia are manufactured with Opel (99,7%), Ford (98,9%), Kia (98,6%), Chevrolet (98,4%) and Renault (98%) also having a very high percentage of locally manufactured cars being sold in the market. The lowest figures recorded by OEMs for locally manufactured cars sold in the market included Mitsubishi, Toyota, Chery, Infiniti, and Audi which all had locally assembled sales percentages of around the 50% mark.
Outlook and implications
In the last few weeks the Russian passenger car market's operating environment has deteriorated even more as a result of the further weakening of the rouble. Towards the end of the second quarter, there were signs that currency weakness was perhaps starting to alleviate slightly, which would help foreign OEMs manufacturing and importing into Russia. However, instead the rouble has dropped another 15% against the dollar since the beginning of July. This in turn is adding to the pressure, particularly on foreign OEMs, but also local manufactures to revise their price lists upwards which will further erode the competiveness of their vehicles in an already very weak market place. In 2012–13, the rouble was trading at around 30 to the dollar, whereas now the current rate is about 65. Job and salaries are being cut in Russia and food price inflation is currently running at about 20% according to a recent Reuters article. This leaves little money for most ordinary Russians to even think about big ticket purchases such as passenger cars. According to Autostat, average car prices have risen by 18% in the last six months to now stand at RUB1.16 million (USD18,420). These numbers are hardly conducive to encourage foreign component companies to invest in Russia which would at least alleviate the dependence on foreign OEMs on imported parts and any concerted recovery in the Russian economy will be slow to take place while Russia remains subject to sanctions as a result of its support of the Eastern Ukrainian rebels and the government appears unwilling or unable to enact a much-needed widespread restructuring of the economy. While there appeared to be some respite in terms of July's sales decrease, which was at 27.5% for the combined light-vehicle market in comparison to the combined 36% y/y decline for the first seven months. However, for the full year IHS Automotive forecasts that sales will fall on the current running rate, with a 35.6% y/y decline to 1.61 million light-vehicle units. A modest recovery will begin next year with 1.64 million units with a rise to 2.65 million units by 2020. However, this will remain significantly below the market peak in 2012 when sales hit 2.95 million units.