* Russian new car sales stuttering after 3 years of strong
* Analysts question long-term health of industry
* Low car density, aging fleet should drive sales, execs say
By Megan Davies
MOSCOW, Dec 23 A year of disappointing auto
sales in Russia has dealers and carmakers worried that a
once-red hot market that was set to become Europe's largest may
have slipped out of gear.
Stuttering economic growth, unhelpful demographic trends and
a coming increase in car capacity could dampen one of the few
bright spots in a global market that is under pressure.
In a Moscow showroom of dealership Premium Motors, packed
with budget models such as Russian-made Ladas and Chevrolets, a
dealer bemoaned the lack of customers. "In October and November
- sales were bad ... there were few people," he said.
A few doors down, a dealership selling more expensive
imported Volkswagens was finding it equally hard. "Maybe people
... need to save money instead of buying a car," said a manager.
Asked about the outlook for next year, he said: "Nobody knows.
In a traffic-clogged city peppered with Porsches
and Maseratis - trademarks of the super-rich who
profited personally from Russia's resource wealth - it is the
middle class who provide the bread-and-butter sales.
Yet after three years of double-digit growth as Russia
recovered from the 2008-2009 economic crisis, sales so far this
year are down around 6 percent according to the Association of
European Businesses, a Moscow-based lobby group that counts
major auto makers among its members.
Auto executives, resolutely bullish that Russia's rising
middle class will support sales long-term, do not predict
another crisis, but are worried about an extended contraction.
"We are certainly concerned in the short term," said Ted
Cannis, chief executive of Ford Sollers, a joint venture between
Ford and Russian carmaker Sollers, who sees the
fall as a short-term trend. "It's not a crisis, but it's
certainly not going in the right direction."
The stakes are high for automakers, which are investing
billions into Russia and striking alliances with local players.
GM took a longer-than-normal summer shutdown at its
St Petersburg plant partly due to lower sales, while Ford's
plant there that produces the Ford Focus reduced output in
August and September.
The models that have seen sales falls this year are compact
cars such as Ford's Focus, GM's Chevrolet Cruze and Renault's
Logan. In contrast, sport-utility vehicles and premium
models such as BMWs and Daimler's
Mercedes-Benz have seen sales hold up.
Russia's largest carmaker Avtovaz has had mixed
fortunes. Sales of its top-selling Lada Granta sedan, which
starts at 279,000 roubles ($8,500), are up 43 percent this year,
but its pricier Prioras and Kalinas have suffered sharp falls.
"What we see is not total depression, there is significant
interest to the market," said Oleg Lobanov, acting CEO of
Avtovaz, which is betting on new models for the firm's success.
"If this continues the competitive advantage is to those who can
react fastest, in a more proactive way."
An economic slowdown has been compounded by the effects of a
slide in the birth rate that followed the disintegration of the
Soviet Union in 1991. As a result, fewer people are reaching the
age at which they would buy their first car.
A fall in 2009 car sales during the crisis means there are
now fewer drivers eager to replace 3-4 year-old cars. And
dealers overstocked in 2012, analysts said, leading buyers to
hold off this year in the hope of snapping up a bargain.
Although the AEB lobby group expects sales to steady in 2014
it is concerned the slide may continue. Market analyst firm
Autostat predicts a 5 percent fall in 2013 and sees a long-term
"What we project next year is more or less a stabilisation,
we think the negative trend will lessen and stop," said John
Stech, president and CEO of Volvo Cars in Russia, a Swedish firm
owned by China's Zhejiang Geely. "I'd like to say
there's a glimmer of hope towards the end of 2014."
Automakers have long been bullish about Russia, predicting
that a low car density, an old fleet and a rising middle class
will lift sales past Germany's this decade to make it Europe's
"One of the critical factors in car buying is the health and
state of the middle class and in Russia you have approximately
25 percent of the population which falls into the middle class,"
said Volvo's Stech.
The average age of a car in Russia is 11.8 years versus
seven years in Europe, according to consultancy firm EY. Car
ownership levels, at 260 cars per 1,000 Russians, are far below
the 532 per 1,000 in Germany.
Yet VTB analyst Vladimir Bespalov reckons that
Russia's car ownership ratio is in line with its economic
development. Growth is unlikely to outperform in the years ahead
and the population will be stable.
"All else being equal, this largely undermines the catch-up
story," he said in a recent research note.
While the slowdown is less severe than the collapse caused
by Russia's 2009 slump, a stagnant economy would leave Russia
with excess production capacity, intensifying competition.
Bespalov estimates total auto production capacity will rise
to 3.6-3.7 million by mid-decade "which significantly exceeds
our projected market size". Surplus cars are unlikely to find a
ready export market as Russia has a long way to go to establish
itself as a competitive global production hub.
Sales of new cars in 2013 are expected to be around 2.75
million to 2.8 million according to the AEB.
CAP IN HAND
Russia launched a subsidy scheme for car purchases on credit
in July, but it is due to end in December. More could be done,
argue industry bosses.
"What would really accelerate (sales) is if a (cash for
clunkers) scheme were introduced," said William King, CIS auto
sector leader at EY. "That would bring the market right back."
President Vladimir Putin - previously prime minister -
supported the industry after the 2008 financial crisis with a
"cash-for-clunkers" scheme giving drivers of old cars rewards
for trading them in.
Putin also promoted Russia's auto industry by driving a
yellow Lada Kalina across Siberia in 2010. Putin, who uses an
armoured Mercedes-Benz S Klasse Pullman on a daily basis, bought
a Lada Niva in 2009.
Another problem for automakers and customers is the
double-digit interest rates charged on car loans.
Only about 30 percent of retail car sales are financed by
credit, said Natalya Alymova, head of retail loans at
state-controlled lender Sberbank, although she said
average rates of 13-16 percent on the bank's auto loans were
Rates are higher than in countries such as the United States
"because the funding cost is much higher," Alymova said. "The
funding cost forms the major part of the interest rate."
The financing costs contribute to a high relative cost of
owning a car in Russia - 304,779 roubles ($9,300) a year versus
223,445 roubles ($6,800) in the U.S. according to research from
PWC. Insurance is costlier in Russia, although fuel is cheaper.
The double-digit interest rates on auto purchases are far
higher than in the United States where the average rate is
around 4 percent according to Bankrate.com.
"Who wants to pay these interest rates? Nobody," said Joerg
Schreiber, chairman of AEB's Automobile Manufacturers Committee.