The Russian government has announced a subsidy package to help make up for the shortfall in demand across the country's car plants.
IHS Automotive perspective | |
Significance | The Russian government has announced yet another support measure to prop up the ailing automotive industry with a RUB10-billion subsidy programme to directly help struggling manufacturers, while some OEMs have responded to GM's announcement that it is to almost completely withdraw from the Russian market by saying that they will stay the course. |
Implications | This is the latest measure that the Russian government has introduced in an effort to stimulate a light-vehicle market that fell by 32% in the first two months of the market as the combined effects of the collapsing rouble, sanctions and falling oil and gas. OEMs with manufacturing investments are particularly suffering. |
Outlook | The macroeconomic fundamentals are simply not there to underpin any kind of recovery or boost consumer or investment confidence and it remains to be seen how long the Russian government will continue with policies that are merely sticking plasters in the face of economic chaos. It remains to be seen if other OEMs follow GM's example but the recovery will be long and slow and with a further sales fall forecast for 2015 this cannot be ruled out. |
The Russian government has announced a new RUB10-billion (USD167-million) subsidy programme in an effort to support the many carmakers that are having to idle plants and halt production as a result of the current dramatic slowdown in the Russian passenger car market. According to a Reuters report, the government issued a statement to explain the rationale behind the financial support programme for manufactures. It said that in addition to lower sales, carmakers' margins have fallen by 10–15% as a result of the collapse of the rouble, which has increased the cost of imported components, as well as higher metals prices. The statement said, "Most carmakers currently work with a minimum profitability level... [The] budget allocation of 10 billion roubles will allow [them] to utilise additional production capacity in the first quarter in the amount of around 110,000 vehicles and preserve jobs." This announcement is in addition the renewal of a previously successful subsidised loan scheme for automotive purchases and the vehicle scrappage programme, which was renewed in January.
In addition, a number of OEMs have reiterated their plans to stay the course in Russia despite the announcement from General Motors (GM) yesterday (19 March) that it plans to withdraw from Russia as a volume carmaker, in a market where the company sold more than 300,000 units per annum at one point. Instead GM will reconfigure its presence in Russia for the Opel brand and mainstream Chevrolet models by the end of 2015. The Chevrolet brand will only remain present in the Russian market in the form of the Camaro, Corvette, and Tahoe. GM will also continue to sell imported Cadillacs in Russia. Production at the GM plant in St Petersburg will end in mid-2015 and the plant will be idled (see Russia: 19 March 2015: GM withdraws Opel, mainstream Chevrolet models from Russian market). However, according to a Bloomberg report the likes of the Volkswagen (VW) Group, Renault, Ford, Nissan, and Toyota that intend to retain a sizeable presence in Russia stand to lose money on every vehicle they sell. Vladimir Mozhenkov, chief of the Russian Association of Automobile Dealerships said that foreign carmakers could stand to lose up to USD2,000 on each vehicle sold. Commenting on GM's strategy he also said, "It's easy to abandon the market, but not easy to come back." However, it appears that such is the untapped potential in the Russian market that most global OEMs will look to maintain operations as cost-effectively as possible until the recovery begins, which is not forecast to be until 2016 at the earliest.
Outlook and implications
The current slump in the Russian market is particularly bad news for those working on the production lines at the many plants that have been built by foreign OEMs in the last 10 years, as well as those employed by dealerships that are facing lower footfall and sales volumes. Mozhenkov said that if the market collapses by 25% y/y this year around 25% of Russia's dealerships could close, causing as much as 80,000 people to lose their jobs. One of the first foreign OEMs to establish a manufacturing presence was Ford with the plant at St Petersburg that it established 10 years ago. Mozhenkov said that Ford is in a "very bad situation" because it "chose the wrong price segment", which is causing Ford dealers to close or switch to other brands, including Chinese OEMs. However, Ford is taking the opposite strategy in Russia to its main rival GM, with plans to launch six new models in the next few years, including the Escape sport utility vehicle (SUV). However, the manufacturers' support scheme is a drop in the ocean in terms of what is needed to support the manufacturing industry and one has to question the logic of keeping plants open and manufacturing cars that no one wants to buy. It is likely to lead to further stockpiling and an even more accelerated decline in margins. IHS Automotive forecasts a decline of 26.8% y/y in the passenger car market in 2015, taking volumes down to 1.68 million units.