Russia Autos Report Q1 2008

In 2007, Russia's car density stood at 228 per 1,000 adults, which is little more than a third of the Western European level. Rising affluence will see Russia catching up, making it the largest automotive market in the region by 2012, according to BMI's latest Russia Automotive Report.

Rising income in middle-class households has led to increasing demand for better quality cars, a trend that has put Russian-owned producers at a disadvantage compared to foreign car manufacturers. Russian autos firms are, therefore, looking to form commercial deals - joint ventures and producing vehicles under licence - to modernise car production.

BMI estimates that automotive sales rose 44.6% in 2007 to 2.99mn units, including a 50.0% rise in car sales to 2.70mn units and an 11.5% rise in commercial vehicle sales to just under 295,000 units. Foreign brands are securing a larger size of the Russian market, due in part to an increase in their production activities in Russia. Foreign firms with a manufacturing presence in Russia are set to see the highest sales growth rates. In contrast, Russian producers will see more moderate sales growth. There is a sense of gloom hanging over domestic producers. In the first 10 months of 2007, AvtoVAZ's Russian sales amounted to 542,500 units, up just 2.2% y-o-y. This does not bode well for its target of 1.0-1.2mn units by 2012 and it will rely increasingly on tie-ups with foreign autos majors to reach its goals. Given current trends, the market share of Russian carmakers is expected to fall to around 25% by 2012, or just 1.36mn units. This would equate to a 50% rise in sales of Russian brands over 2007 levels, compared to a 125% increase by foreign brands.

Autos majors have been lured to Russia by a mixture of tariff reductions on imported parts and machinery and booming demand for foreign-branded cars. Foreign brands, including domestically-manufactured cars and imports, represented around two-thirds of sales in 2007, up from just 7% in 2001. The rush to invest comes ahead of Russia's entry to the WTO, which will prevent the government from offering incentives such as the waiving of tariffs.

In Q307, Russian Economic Development and Trade Ministry officials announced six new projects involving foreign car makers to assemble passenger cars in Russia, ahead of a moratorium on assembly agreements. The total investment of the projects is worth US$1.7bn and includes a joint venture between GM and GAZ to assemble low-cost cars, a new production line for Opel models and a plant for the assembly of SsangYong crossovers. BMI expects that by 2012, output should be more than double the level achieved in 2007, but this will still not be enough to satisfy domestic demand.