Case Study: Automobile Industry in Russia
1- Explain the trends in the global automobile industry, with particular focus on the car industry
Basically, theautomobile industry is the industry which designs, develops, manufactures, markets and sells themotor vehicles to the whole world. In 2008, automobile industry produced more than 70 million motor vehicles worldwide which include cars and commercial vehicles. Brazil, Russia, India and China (BRIC) are the main leading countries in the production of automobiles. Assuming that from 2007 to 2015, Brazil's contribution to global car assembly growth will be 6%, Russia's will reach 12%, and India and China will contribute 15% and 31%, respectively.
By 2015 the contribution to the global sales increase will be around 20% in quantitative terms by Russia. Also Russia will contribute over 30% to automotive sales growth in BRIC countries in monetary terms.
According to estimated figures obtained in 2007 about 71.9 million new automobiles were sold worldwide:
22.9 Million =>Europe 21.4Million => Asia-Pacific 19.4Million =>USA and Canada 4.4 Million =>Latin America 2.4 Million=>Middle Eastand 1.4 Million=>Africa
Whereas the markets inNorth AmericaandJapanwere not that much busy, while inSouth Americaand other parts ofAsiaboomed strongly. On the other side (CRIB) meansRussia,Brazil,IndiaandChinahad the most rapid growth in automobile industry.
In the United States about 250 million vehicles are in use whereas, in 2007, there were about 806 million cars and light trucks on the road, around the world. These numbers are increasing rapidly, especially in India and China.
With rapid increase in oil prices in 2008, the automotive industry experienced the raw material costs and the price of changes in consumer buying habits. The industry also faced external increasing competition from the public transport sector, as consumers started re-evaluating their usage of private vehicles. Approximately, half of the US's fifty-one light vehicle plants are raised to permanently close in the coming years.
In 2009, China with the strong and healthy growth in automotive industry is going to become not only the largest automobile producer but also the market as well in the present world.
2- Briefly discuss the economic transition of Russia from a command economy to a market economy.
In 1991, when Soviet Union of Russia collapsed It started trying to develop a market economy and achieved continuous growth in economy. Russia is a largest country all over the world by land mass and is that much large that is almost double than second largest country Canada. After get separated from Soviet Union Russia join 11 countries of USSR and made CIS. In October 1991, When Yeltsin accepted the United States and IMF recommendation and announced that Russia from now would proceed with supporting change, market-oriented reform along the path of 'shock therapy'. This decision of Yeltsin resulted in collapse of economy with millions of people fell in corruption, poverty and crime spreading activities. In 1998-99 economic crisis hit Russia very badly. It finally resulted in the removal of Soviet price controls and again started following the 1998 Russian financial crisis.
The largest state enterprises were privatized by President Boris Yeltsin privatized to insider for very less price than actual price. Many Russian people that he is doing some sort of fraud with them but it has really significant effect on the economy. In 1998, difficulties in implementing reforms at raising government revenues and a dependence on short-term borrowing to finance budget end to a serious financial crisis. A loss of investor confidence due to the Asian financial crisis and the fewer prices for Russia's major export earners led it to financial problems.
Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid decline in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.
Since last 10 years after the crises of 1998-99, Russia is growing at constant rate of about 7% of GDP rate. One of the reason that it is growing is no price control over 90% of consumer goods and 80% of intermediate goods. One other reason is that continuing expansion of domestic market and income also. Main nations who import from Russia are china, Korea, USA, Japan, Ukraine, France and Italy. Main export partners are Germany, Italy, China, Ukraine, and Netherlands.
Environment for Investment in Russia was gradually improving since 2000. There were more and more foreign companies were coming to Russia for business. The gross domestic product is growing so rapid, as it was 7,305,600 in 2000 and become 39,952,177 in 2008, which shows 500% of hike. The sector which contributes highest in GDP of Russia is service sector. Service sector contributes about 56% in overall GDP. The second largest sector is industry with 39%.
When Putin was prime minister of Russia, the economy saw the GDP double. This put Russia on 11th place in the world from 22nd. With an average growth rate 7% over 10 year period, Russia becomes 6th largest economy of world. In 2008 Russian GDP was US$11,339 per individual, which makes Russ0ians 57th richest on the basis of purchasing power and nominal as well.
When Putin was in his eight year as PM, Russian industry grew by 75% of growth, international investment was increased by 125% and real estate and agriculture production also increased. Real income per person increased more than double and salary became 640$ from 80$ about 8 times more. Even Russia's economy was so strong; the World Bank noted some challenges like diversification, encouraging the growth of medium and small industries, making of human resources.
But inflation was remained the same problem as before, even the real growth of country. The oil export and income increase due t oil prices hike in 2008. But the big sectors for export and of which income is more are raw material and fertilizer. Still the export is only 8.7% of the whole GDP as compare to 2000 in which was 20%.
The downward side of Russian economy is the growth of Russia is still depended on few sectors, and also the benefits were not distributed all over the society. About third part of the population of Russia was living below poverty line.
Due to the global crisis 2009 year became a very difficult year for Russia. Despite of straight growth, there were losses in output and increase in unemployment and sharp rise in poverty. But the Russian economy, will gain its growth again by higher oil prices and stronger global demand. In 2010, it would grow continuous at low base by 2%. The main threat is weak demand in domestic market. On the policy front, Russia faces difficult fiscal, financial, and social challenges to sustain the economic recovery and cushion the social impact in a more constrained, post crisis world. The new environment provides an opportunity to accelerate structural reforms that can raise productivity and diversify the Russian economy.
3- What is the future of the Russian car industry? It is Potential? What are the nations of business interest in the auto mobile industry?
According to one of the research's report - Russia is booming an Automobile sector. The automotive industry of Russia is growing very rapidly and coming out as one of the most successful and energetic industries in the world. The government new action and interest making the industry popular worldwide and attracting the foreign auto players to the automobile market. These foreign auto players are trying to establish their own car assembly lines within the country and capturing the home market.
Due to the low interest rates and increase in disposable income the automotive industry of Russia is expanding day by day that is attracting and capturing the foreign investors to invest in the automobile industry. It is expected that more foreign auto players will try to enter in this market in the future to fill the supply and demand gap. As Russia automotive industry is looking for new designs and latest technology, a massive amount of passenger car demand has been satisfied by new imports and hopefully in future, its share will grow up to most extent. By the Light Commercial Vehicle (LCV) commercial vehicle market will be the most important segment. The major source of this high demand will come from growing small scale and medium scale businesses and some part with increasing income.
It is expected that by 2014, about 60% of all new car will be sold in Russia, by international car makers. The reason is after its entry into the WTO its market is forced to open. The preferences of consumers of Russia are converting to towards the global standards and people are becoming rich. It is also expected that by 2014 about 1.4 million new cars will be sold by international producers in Russia. Out of 1.4 million about 800 000 will produced in Russia while the remaining will be imported from the other countries.
It has been forecasted that by 2012 about 5.9 Million units of passenger cars will be sold in Russia, during 2008-2012 it seems to be appear that the commercial automotive market is rising at a CAGR about 14%. To attract the foreign auto players Russian government has started making Greenfield sites. It is also seems to happen that by 2012 the stock of passenger car per 1,000 people will cross to 300 Units.
In 2003, Russian ownership of cars increased to 152 vehicles per 1000 inhabitants, this is almost thrice the 1993 rate of 1959. Annual car sales in Russia have increased from 800,000 in 1992 to 1.5 million in 2003. Based on the statistics of the first quarter of 2004, market analysts concur that the growth trend will continue and seems to be increasing household incomes are creating a demand for cars.
Unlike heavy machine-building industries, the demand for cars and light commercial vehicles remained relatively stable before and after the implementation of market reforms in 1992.
In 2005, when vehicle manufacturers suffered because they purchased low quality components at inflated prices they understood that in order to maintain strong sales of domestic vehicles they must provide better quality at competitive prices. This global could be achieved only if local assemblers used modern components, this can be done by importing or producing in Russia, under license from well-known foreign manufacturers.
According to the current forecast of analyst that the turnover in the Russian car industry would be approximately double by 2010.
The 'Government Concept of Automotive Industry Development up to 2012' really encourages the partnerships among foreign and Russian automotive companies. According to a survey done by Emstand Young, a majority of foreign manufacturers have opted for joint ventures with Russian partners.
Since the economy of Russia opened up and the spending of consumers increased, Central and Eastern Europe have become most important sales markets for the automobile industry. In 2004 alone an annual average of 7.3% to 3.4 million units in the region. To attract the number of automakers and suppliers, low labour costs, attractive general conditions and a highly qualified workforce have combined together.
After China, Russia is expected to be one of the most rapidly growing markets in the present world that is due to an estimated increase in annual sales of one million vehicles within the next ten years from 2006 onwards.
The foreign players which are present in the Russian automobile industry are General Motors, Renault, Hyundai, BMV, Ford Motors, Scania Motor Corporation, Kia Motors.
4- What are the opportunities and the competitive challenges Russian auto players could face in the wake of the current boom in the industry?
There is no doubt that Russia has ability to become a major automotive base for the export of components and vehicles for the rest of world. The Russian automotive market required two things for its growth from which first, there should be targeted management and strategies need to be workable for automotive companies. Secondly, in order to take the advantage of size of economy and the country's low labour costs, Russia has to stabilize its economic and legal framework.
Foreign companies with joint uncertainties in the Russia look at the several things which block to invest money and establish their businesses in Russia, mainly in automotive sector. These big barriers are legislation barter transactions in the Original Equipment Manufacturers market, wide spread corruption, lack of law enforcement and an unpredictable political environment. The foreign investors do not get any specific tax or import duty relief in manufacturing automotive components by the Russian federal legalization.
According the survey of the companies, it is believed by 72% that Western companies need to stick in modernizing the Russian suppliers. This joint risk could benefit Russia from both sides. On one side Russians suppliers will become better in processing products and can co-op with today's quality standards. On the other side, there will be open access to existing market structures, local authorities and Russian customers by the international partners.
The Russian department of automobile has to be modernizing in this sector. As this is obvious from the high level of investment as compare to other countries. According to the calculated figures, in 2002 Germany invested about 2,343 EUR on every car it made, while Russia invested only 465EUR per car. Same as other countries like Poland invested 1606 EUR, Czech Republic invested 1922 EUR and Slovakia Invested 1190EUR per vehicle. Whereas amount spent on research and development by the Russian manufacturers were less than 1% of their sales.
Russia has to improve its economy to connect to the world car market. For the boom in automotive industry Russia has to lessen the import duties on those components which are used for assembling vehicles and modules. It should stop its technical standards for products. Russia should attract more foreign investment which could be possible by the means of investment agencies or special economic areas.
Russians auto players need to produce modern vehicles with strong machinery and the parts as well. The challenge for Russian's auto players in the Russian motor industry is that they should have ability to produce automobiles at quite low costs to lead by most of the European and American car makers. Russian's car makers made an attempt to flee from the price cost reduction, which directed them towards highly complex systems and high value
This Frost & Sullivan research service titled Russian Automotive Market Outlook in 2008 - 2010: Impact of Economic Slowdown on the Future of Auto Sales and Production provides an overview of the effects of the economic slowdown on the automotive market in Russia and offers projections for 2009 and 2010. The research explains the current trends in terms of vehicle production and sales across the passenger cars, commercial vehicles and buses segments in Russia.
Sales of Light Vehicles to Boost the Russian Automotive Market by 2010
Issues such as production overcapacity, high inventory and low profitability, triggered by the economic slowdown, have affected the Russian automotive market. However, sales of light vehicles are expected to facilitate the recovery of this market by 2010. Although the recovery period is expected to be challenging and cumbersome, the upturn of the financial sector, the Russian Government's support for the country's automotive market and enhanced consumer expectations are poised to lead to market sales recovery. 'Low credit availability and the frozen or falling disposable income of Russians are pushing down automotive sales in Russia, which is expected to contract at a compound annual growth rate (CAGR) of around 9 per cent between 2007 and 2010,' says the analyst of this research. 'Russian commercial vehicles manufacturers are likely to be more affected by the economic crisis than passenger car manufacturers, as the economic slump evolves and penetrates further into other sectors of the Russian economy.' Only combined efforts by Russian original equipment manufacturers (OEMs), the Government and financial institutions will boost market sales in the light vehicle
Even those who could once afford a Porsche or Hummer tame their appetite when credit gets tightened. With GDP down more than 9% and unemployment still rising, car sales are down 52% in the year to October, and, unsurprisingly, the ostentatious urge for up market foreign marquees, which became a hallmark of the boom years, has given way to degree of automotive austerity on the part of the Russian buying public.
Automotive Expert, Igor Marzharetto says a key driver of the sales slump has been the end of easy automotive loans. The credit crunch which drove the global economy into recession saw a mainstay of Russian middle-upper car market nearly vanish.
"The structure of sales has changed. The segment of cars priced from $20- 40 thousand suffered most because it was popular among Russia's middle class which used loans to buy cars. With the collapse of the lending market, sales tumbled."
Further eroding the urge to buy was the Ruble devaluation at the end of 2008 which made imported vehicles nearly 30% more expensive, and even as the Ruble has rebounded unemployment mounted and the recession deepened. Also trimming the urge to buy an import was a tariff hike.
Car prices fell by 20% in the first half of the year, as dealers responded to the demand collapse with massive discounts. At the same time, in order to bolster the domestic car making sector the government offered subsidies on loans to buy Russian-made cars priced under $20 thousand.
That's helped create a market where no frills looks good, and low, or even ultra low, cost motoring is in vogue. Forecasts that it will remain in vogue has carmakers changing their priorities also.
International car producers working in Russia are now busy developing low cost cars. Volkswagen recently showed Prime Minister Putin its new low-end model which will come off the production line next year. Korea's KIA, together with Izhavto also wants to catch up according to Han Chang Kyun, President of Kia Motors Russia.
"The Russian market is changing for coming generations. Russian customers are very reasonable in choosing cars- they're more focused on the value of money. Even in the near future this trend will continue and that's why we're considering a new model at Izhavto plant."
No broad recovery in demand is expected until 2011. Analysts say lack of cash is not to blame but rather people's confidence in a stable future that's suffered more than their wallets.
Products. In April 2005, to promote setting up assembly plants by foreign car makers and bring in OEMs, the Russian government proposed an 'industrial assembly' rule. According to this rule, a declared amount of auto components can be imported at either import tariff of zero or 3%-5%. But the positive aspect of this rule which came up is rise in income levels and emerged the middle class to sell low cost cars roughly priced at US $7000.
Russian auto players should keep this in notice that China and India have high potential sales volume while Russia cannot provide that. But the sales potential of Russian market is same as Germany, France And combined Netherlands. If Russian car makers maintain a fair market share then this volume is sufficient to maintain a viable motor industry. It is obvious that the low cost production base and a possible on modern technology and design but low cost volume products can open a vast export market which could be quite larger than the current exploited. At present, global exports of the Russian motor industry focus on traditional allies or on the under developed countries. Therefore, the Russian motor industry should strive to maintain a fair share in the Russian market, while expanding into the international market in a supportive manner.
For the sake of current boom in the automobile industry, Russian automobile industry has to face many issues, which include improving process quality and product quality as well, management of global sales and distribution, product development and innovation, after market management and controlling of fixed costs.
MOSCOW, Nov 11 (Reuters) - The Russian car market is Suffering from a lack of consumer confidence as the global Financial crisis spreads to auto loans, research company Nielsen Said on Tuesday.
Every third car owner in the country - 31 percent - claims To delay replacement or purchase of a car because of the current Economic situation, Nielsen said in a research note called back To the Nineties. "It is very likely that in 2008 the Russian automotive Market which has been enjoying fabulous growth - by 35 percent
In 2007 - will show slow down for the first time in the past few Years," said Olga Belova, a research director at Nielsen Russia. Russia was on course to become Europe's largest car market This year after a decade of an oil-fuelled economic boom, but Sales figures have dropped sharply in the past three months as The crisis forced banks to reduce cheap retail lending. The latest, October, data compiled by the Association of European Business in the Russian Federation showed on Tuesday That the growth of foreign car sales in Russia slowed to its Lowest annual pace since January 2007 [ID: nLB293352]. The best sold foreign model, according to AEB, was the Chevrolet GM.N Layette, a locally assembled model. Among the major reasons for the lack of consumer demand for cars in October was the auto loans crisis in Russia, Nielsen Said, as banks had to halt their car loan programmers or tighten The terms and raise rates.
"Auto loans were one of the key drivers of the Russian Automotive market sales... Now consumers have to cope on their Own or find other additional financial sources to buy a car," Said Yaroslavl Zaytsev from Nielsen's online project Autocross. "There is a big possibility that until (the) auto loans Market in Russia recovers, it is very likely that the automotive Market will return to the nineties when everything was bought on Hard cash," he added. The negative trend is clear, but Russian consumers are far From being panicked. Almost half of the respondents of the Nielsen survey said they had already bought or still planned to Buy a car despite the financial turmoil. (Reporting by Olga Borodino; editing by Simon Jessop)
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