Bulgaria Autos Report Q3 2008

Bulgaria's bid to become a car-producing nation faces significant hurdles, according to BMI's new Bulgaria Automotives Report, as the newly created Litex Motors' plan to assemble Chinese brand cars faces more stringent EU safety regulations.

Litex Motors plans to assemble cars from imported completely knocked down (CKD) kits under licence from China's Brilliance in the city of Lovech and distribute them on the Bulgarian, Romanian and Greek markets. No immediate information was available on the production capacity or the launch date. BMI believes that Bulgaria, with a skilled, low-wage labour force and well-situated geographically, is an ideal location for a car assembly operation. So far Chinese brands have limited popularity in Europe and their models have struggled to meet European regulations. Tighter EuroNCAP safety rules, due to be introduced in 2009, are certain to delay the launch of many Chinese models on the EU market.

Nevertheless, Chinese carmakers are determined to break into the EU market, targeting the Balkans region, where sales growth is particularly strong in the budget segment. BMI is confident that Chinese carmakers will overcome the regulatory hurdles and will also take a significant share in the Balkans market if a Bulgarian plant is established. The local market is growing rapidly, but in itself will not be enough to sustain local production, requiring an export-oriented strategy. Given the size of the target market, BMI expects initial production to be no more than 40,000 units per annum and probably closer to 20,000 units, making the assembly line small scale. In order to be sustainable and profitable in the long term, Litex Motors would need to achieve output of around 100,000 units, which would mean expanding its market to the rest of Central and Eastern Europe.

The Bulgarian car market grew 24.3% y-o-y to 18,687 units in the first four months of 2008, according to the Union of Car Importers in Bulgaria (SVAB). Meanwhile, truck and bus sales grew 90.4% to 1,432 units. Growth in the Bulgarian market indicated that rising fuel prices and the global credit crunch had no impact on demand for vehicles, with Opel and Toyota leading the market with shares of 12.3% and 10.5% respectively. The results indicated that competition between brands is fierce, with Toyota knocked off the top spot it enjoyed in the same period of 2007 and Opel accelerating its sales volumes. On the commercial vehicle market, Iveco led sales with a 38.5% market share, followed by Mercedes with 28.7%.

Most Bulgarian car importers forecast annual new car sales growth of 17-23% over the next five years.

Toyota Balkans has delivered the most optimistic forecast, with 30-45% annual growth, leading to up to 110,000 car sales by 2010. Given the performance seen in the first four months of 2008, BMI believes annual automotive sales will grow by 28.3% y-o-y in 2008, assisted by the rapid growth in commercial vehicle sales volumes. The car market will grow by around 20%, while the commercial vehicle market will grow 60%, according to BMI's projections. However, growth rates are likely to diminish in the rest of the forecast period due to a downturn in GDP growth, although this should be mostly counter-balanced by declining real interest rates and falling unemployment. By 2012, BMI expects automotive sales to exceed 114,000 units. In comparison with other countries in Central and Eastern Europe, this is still low in per capita terms.

Bulgaria scores 40.3 points (out of a theoretical maximum of 100) in the BMI automotive business environment rating this quarter, a 1.2 point rise over the previous quarter due to better than expected sales results in the first few months of 2008 and an improvement in the country's risk profile. This means Bulgaria lies 4.2 points behind Serbia and 1.2 points ahead of Croatia. This market's stronger areas include a highly competitive environment and low market risk. Areas of particular weakness are the regulatory environment and the lack of assembly facilities. BMI expects the country's score to improve in the long term if the proposed car assembly plant gets under way. Much depends on the capacity and scheduled start-up, which are at present unknown.