Russia Autos Report Q4 2008

The Russian automotive market is bucking the global trend, with impressive levels of growth in H108 prompting BMI to forecast sales of 3.82mn units in 2008, up 27.4% year-on-year (y-o-y), in its latest Russia Automotives Report. BMI believes that the Russian market is set to become the largest European market by 2012, with sales at 5.89mn units, an upwards revision from the 5.38mn units forecast previously. Household consumption growth has remained robust through the decade and we expect this trend to continue going forward as private wealth continues to balloon alongside strong overall economic growth. Per capita GDP in Russia is forecast to firmly enter middle-income territory within our five-year forecast period, reaching US$23,000 by 2012, an impressive ten-fold increase from the US$2,369 level seen 10 years earlier in 2002.

Foreign manufacturers such as Volkswagen (VW), Toyota and General Motors (GM) have moved to take advantage of the growing preference for foreign-brand vehicles on the Russian market and have announced plans for production facilities in the country. BMI research shows that those foreign manufacturers with a local production presence have reported better sales than those that do not. Based on current output, projected demand growth and capacity expansion, BMI forecasts 12% output growth to 2.23mn units in 2009. By 2012, output should reach 3.34mn units, an 87% increase over 2007, but this will still not be enough to satisfy demand and Russia will remain a net importer of vehicles. Given current trends, the market share of Russian carmakers is expected to fall to around 25% by 2012, or just 1.47mn units. This would equate to a 63% rise in sales of Russian brands over 2007 levels, compared to a 280% increase by foreign brands.

The Russian car market will suck in imports as domestic supply fails to keep up with the pace of demand over the next five years, leading to a large automotive trade deficit. Imports are set to almost double over the forecast period, totalling 2.76mn units by 2012. In our view, annual import growth will slow over the forecast period up to 2012 as more domestic capacity comes onstream. BMI expect slower progress in exports, despite Russias desire to become an automotive exporter. BMI believes that Russian-branded cars will struggle to compete on export markets, while foreign brands will take a larger share of the domestic market. By 2012, exports are likely to remain well under 300,000 units.

Supporting BMIs forecasts, recent months have demonstrated that autos majors continue to regard Russia as pivotal to their global growth strategies, not least Renaults acquisition of a major stake in national carmaker AvtoVAZ in April. In June 2008, Hyundai announced that it would establish a US$510mn manufacturing plant at near St Petersburg with a capacity of 100,000 units per annum from H2 2011. With the aim of strengthening its position in the Russian market, in June 2008 Italian car manufacturing giant Fiat signed a joint venture with Russia's Sollers. The agreement includes increasing the production capacity at their existing Tatarstan facility for the manufacture of up to 50,000 Fiat Linea sedans, the production of which is to start later in 2008.

BMIs optimism has an impact on Russias score in BMIs automotive business environment rating, which is a relatively high 69.5 points (out of a theoretical maximum of 100). The Russian economy proves to be stable and robust, environmental regulations continue to move towards Euro standards and foreign brands continue to advance their market share. This markets stronger areas include its market size and its strengths in production. Areas of particular weakness are the general regulatory environment and the countrys overall economic structure. Russia has great potential for increased vehicle ownership, with a credit boom helping to raise car purchases over the forecast period.