Global Insight Perspective | |
Significance | The first signs are emerging that the booming Russian passenger car sales may be starting to slow as a result of lower August growth for foreign passenger car manufacturers while Russia's biggest passenger car manufacturer AvtoVAZ has struggled to maintain sales growth into 2008 as a result of an ageing model line-up. |
Implications | While the Russian economy has displayed very strong fundamentals in recent years it has still been affected by the global economic crisis, which saw the Russian stock exchange post record losses last week before bouncing back. Other geopolitical factors such as the conflict in South Ossetia will also potentially combine to slow growth. |
Outlook | The Russian passenger car will remain one of the most dynamic and fast growing major global passenger car markets for the foreseeable future. However, uncertainty over global economic conditions and the increasing high sales base generated by accelerated growth in 2006, 2007 and the early months of 2008 will become increasingly difficult to sustain as a result. |
Are the Brakes on Russia's Sales Growth Juggernaut?
While Russia's passenger car market is still by far the fastest growing major passenger car market in the world, there are signs that the huge growth that the market has generated in the 2006, 2007 and the first eight months of 2008, is starting to slow. While the Russian economy has posted immensely strong fundamentals in recent years with GDP growing by seven times since 2000, the economy is structurally reliant on oil and gas revenues. The recent falls in oil prices contributed to last week's shocks to the stock market which were precipitated by the wider global financial crisis. This led to record losses in the Russian stock market, with the MICEX incurring its biggest ever one-day loss on Tuesday of 17%. This was a 57% fall on the record high it achieved on 19 May and caused the market to be temporarily suspended by the Russian authorities, following concerns over oil prices and political risk. However, the market rebounded to a record high on Friday following a US$20 billion bail out of distressed blue-chip stock from Russian President Dmitry Medvedev. However, such volatility in the markets is a symptom of uncertainty in Russia's investment community. This has the potential to filter down and lead to a serious undermining in consumer confidence.
While in the first half of 2008, Russia's passenger market actually built substantially on the 30% year-on-year (y/y) growth rates it recorded for 2008. In the first six months of the year it posted highly impressive growth of 51.2% y/y. This equated to sales of 1,421,922 million units, in comparison to the figure of 940,254 units that were posted last year. However, the majority of this growth has been fuelled by booming foreign passenger car sales. After the first seven months of the year foreign passenger car sales had risen by an average of 46% in the YTD. However, in August this figure fell to 23% (see Russia: 12 September 2008: Russian Foreign Passenger Car Sales Rise 23% in August) which was well short of the previous growth figure, even when seasonal factors were taken into consideration. Meanwhile, Russia's largest passenger carmaker AvtoVAZ, which is still the biggest selling group in overall terms in Russia despite declining market share, has faltered badly in recent months. In the first half of 2008, AvtoVAZ saw sales growth slow 18.7% to 331,964 units, compared to a 25.1% growth rate recorded last year. However, the company's sales have tailed off to such an extent in recent months that this combined YTD growth rate actually fell to just 2.8% between August, with AvtoVAZ actually recording y/y monthly declines in sales throughout June, July and August.
Outlook and Implications
Russia is still expected to post record full-year sales growth for 2008 in terms of passenger car sales, with Global Insight currently forecasting a 32.2% y/y growth rate. This forecast takes into account an anticipated slight slowdown in the remaining months of the year, which would tally with what appears to be currently happening in the market. However, it appears that the Russian economy is less isolated from the difficulties currently being experienced by the global markets than was perhaps previously anticipated. The economy is also overly reliant on the energy sector and this reliance will not sustain the growth that has been generated in the market in recent years, especially if there are further falls in oil prices. In addition, the kind of accelerated growth rates generated by the market in 2006 and 2007 and the early months of 2008, will become impossible to maintain as a result of higher sales base rates implied by a significantly enlarged market. However, the foreign OEMS that have pinned hopes of generating significant growth in Russia will be hoping and praying that any further economic instability in Russia does not end up badly afflicting their operations in the market.