Automobile Industry in a Russian economy


        This Report is about a case study on the Global Automobile Industry. The present situation, the trends, the economic conditions and its outcome are all explained in this report. However, in particular the case study is more about the automobile industry in Russia. Russia is well known as one of the world's superpowers besides the United States of America since 1945 until the country gone into break-ups in 1991. Russia is one of the fifteen union republics of the USSR or the Union of Soviet Socialist Republics or most commonly known as the Soviet Union. Russia is governed by the Communist Party.

        Russia was separated from the former Soviet Union in 1991 and it was the largest Republic in the Union. Due to political reasons, it was liberated from the Union. It would appear that Russia's economy has withstood a transition from 'Shock Therapy" to 'Consumerism'. We can find that the income levels have been rising and the economy has been growing since then.

        Ever since the liberation, the automobile industry of Russia faced numerous challenges and competitions. But, the industry's adventurous movements never stop and it progresses with no difficulties and becomes famous for its world-class service and also it earns a brand loyalty.

        PricewaterhouseCoopers made a study and according to them, the automotive market is one of the most dynamic sectors of the Russian economy. The study shows that it has increased in value by 27% over the last three years and it is expected to increase further. However, it is expected that a projection growth of local production of foreign brands may be increased by as much as 375% in the next seven years.

Trends in the Global Automobile Industry

        It is a well known fact that the automobile industry is one of the most important industries in the world. It affects not only the global economy but also the various cultures of the world. The industry provides jobs for millions of people around the world. It helps to generate billions of dollars in worldwide revenues, and provides the basis for a huge number of related service and support industries. When we look back we learn that the Automobiles revolutionized the transportation in the 20th century. It changed the way how people live, travel, and carry out business. The automobile business is developing at a very faster rate than before on a worldwide basis. Manufacturers of automobiles and parts are joining together. In the Meantime, all the biggest and the most successful automobile industry firms go global or gains international reputation. Globalization is the present trend and it is active throughout the automobile industry. It is very clear that the car dealership side is very large and the When we look at the car dealership side it is very clear that, the large, nationwide holding companies have obtained the best dealers in major markets. It is even very interesting to find that the used car business is expanding and booming up.

        The present advancement in the Information Technology sector, especially the e-commerce, is having strong and powerful effects on the car industry. Nowadays, the Consumers use the Internet to gather valuable information before finalizing an automobile purchase. There are several online sites for the consumers to obtain information. Online sites like Autobytel lead millions of car buyers toward specific dealers. At the same time, these sites also provide financing and finance in such way that makes low costs and improves the satisfaction among consumers. The present trend is that the automobile manufacturers are using the latest e-commerce procedure to control their supply series.

        There is no doubt that the automobiles have helped the rich and the poor alike for travelling and transport goods farther and faster, and it has helped to open larger retail areas for business. The automobile field has been also decreased the total cost of transportation by using ways such as mass production which means that making of several products at a single time, rather than one by one. It also does mass marketing - selling products globally instead of locally - and the globalization of production or assembling products with parts made worldwide.

        The records show that period 1886 - 1898, about 300 automobiles were constructed, but there wasn't real built industry. However, a century later, with the expansion of automakers and auto buyers, auto making have became the world's biggest manufacturing action. It shows that nearly 58 million new vehicles are built each year worldwide.

        Increased competition and globalization are the two related developments that usually happen as a result of important trends in the automobile industry. Tough competition urges the manufacturers and the consumers to enter with foreign markets in order to oversight their quality of brands, also their engineering, and the production costs.

        The data tells us that the "largest Three" U.S. automobile makers and companies: GM, Ford, and Chrysler are losing important market share to those foreign producers companies. Two main reasons for this decrease are due to the higher prices and grow of consumer request for indulgence. As known that the prices of the oil and some other raw materials have rise up, the production of the costs have also risen. Whereas automobile makers from all around countries face some similar challenges, and only U.S. organization have to discuss with labour unions. Also employee advantage costs, particularly those who are related to the healthcare, have been rising over the past years. As an example, between 1999 - 2005, GM's non-pension retirement benefits (mostly healthcare) rose at a compound annual rate of 10.6%. Automakers must also tackle consumer demand for better safety and electronics features. Customers want some features like side airbags, antilock brakes, and electronic stability programs (ESP), which apply pressure on each wheel to prevent drivers from losing control of their cars. Other trends in electronics include higher demand for global positioning systems (GPS) and premium sound systems.

        There is another threatening trend to U.S. automakers which is the increased foreign presence in the full-size pickup truck market. Vehicles such as the Toyota Tundra and the Nissan Titan are becoming more and more popular with American consumers. However, for the immediate future, it appears that the Big Three will continue to dominate this market, as they captured 91.4% of the market share in 2005.

The following manufacturers are considered the major firms of the Automobile Industry:

        General Motors Corporation - It employs a great number of 335,000 employees and it is one of the biggest automobile manufacturers globally. The main offices in Detroit, Michigan, but it have business and maybe manufacturing in around 55 countries out of the U.S. and Canada. GM owns other corporations that include Chevrolet, Pontiac, and Hummer.

        DaimlerChrysler AG - It's much spread out company. DaimlerChrysler produces mostly anything from sports cars to trucks. Their main office located in Stuttgart, Germany, and works in the Europe and United States.

        Toyota Motor Corporation - Toyota is very well known. It is selling automobile in over 170 countries. Their main office located in Toyota City, Japan, and they employ around 285,980 people.

        Ford Motor Company - This industry constructs and distributes automobiles in six continents. One of Ford Motor's brands that are well known includes Lincoln, and Mercury. It operates in U.S. and Europe, and their main office in Dearborn, Michigan.

        The "Big Three" - GM, Ford, and Chrysler - are considered to be the world leaders in revenue, however, in terms of net income, they are behind the Japanese manufacturers.

        No doubt, the automobile industry is a competitive industry. The industry's international trade patterns indicate that the strong group of organization and countries which will rule the world's imports, exports, and the production. Top five exporters in 1985 are still top five exporters in 2005. While the top five importers in 1985, only one of them are not in the top five currently. Germany and Japan are among the top two positions as exporters for over the past twenty years. While the US shows extraordinary consistency as an importer.

        An interesting trend to note in the auto industry is the absence of apparent diversity in the leaders (importers and exporters) of passenger vehicles. Lots of countries may become a bigger worldwide competitor in the field industry, this is due to high nature of the industry and as a fact that some of the large companies are ahead in the market share. But still, it's hard to imagine that a country like South Korea developes in a short time of twenty years.

        It is significant to have cooperation between the manufacturers in the industry. This is because; cost shipping of auto parts and the need of customer service is high. High cost of the shipping auto parts will also helps to stronger the vertical combination of auto industry.

Regulations of government are so important which lead the industry into a globalized manufacturing arrangement. The US and many countries, the government policies such as tariffs and taxes and on imports that make many foreign companies to arrange manufacturing in another countries in order to face the laws or to increase profitability.

To explain in detail, I have reviewed the facts and figures. In 2008, more than 70 million motor vehicles, including cars and commercial vehicles were produced worldwide. In 2007, a total of 71.9 million new automobiles were sold worldwide: 22.9 million in Europe, 21.4 million in Asia-Pacific, 19.4 million in USA and Canada, 4.4 million in Latin America, 2.4 million in the Middle East and 1.4 million in Africa. The markets in North America and Japan were stagnant, while those in South America and other parts of Asia grew strongly. Of the major markets, Russia, Brazil, India and China saw the most rapid growth.

        In the United States, about 250 million vehicles are in use. Around the world, there were about 806 million cars and light trucks on the road in 2007; they burn over 260 billion gallons of gasoline and diesel fuel yearly. The numbers are increasing rapidly, especially in China and India. In the opinion of some, urban transport systems based around the car have proved unsustainable, consuming excessive energy, affecting the health of populations, and delivering a declining level of service despite increasing investments. Many of these negative impacts fall disproportionately on those social groups who are also least likely to own and drive cars. The sustainable transport movement focuses on solutions to these problems.

        During the year 2008, with rapidly rising oil prices, industries such as the automotive industry are experiencing a combination of pricing pressures from raw material costs and changes in consumer buying habits. The industry is also facing increasing external competition from the public transport sector, as consumers re-evaluate their private vehicle usage. Roughly half of the US's fifty-one light vehicle plants are projected to permanently close in the coming years, with the loss of another 200,000 jobs in the sector, on top of the 560,000 jobs lost this decade. Combined with robust growth in China, in 2009, this resulted in China becoming the largest automobile market in the world.

        Among the top 20 motor vehicle producing countries, the top three countries are Japan, People's Republic of China and United States of America. They are considered to be the leading countries in vehicle production.

        Among the top motor vehicle manufacturing companies by volume in 2008, the top three motor vehicle manufacturing companies are Toyota, General Motors and Volkswagen.

        Among the top motor vehicle manufacturing groups, along with their different brands, are the Toyota Motor Corporation of Japan, General Motors Company of United States of America, and Porsche Automobil Holding SE of Germany.

Economic Transition of Russia from Command Economy to Market Economy

        The Union of Soviet Socialist Republics (USSR) or known as the Soviet Union was considered a socialist state from 1922 to 1991. It is also considered as one of the world's superpowers alongside with the United States. In 1956, it grew into 15 union republics governed by a Communist party and became then a model state. After dissolution of the Soviet Union, the 15 union republics became independent. Out of fifteen, eleven of them aligned to form a loose confederation known as Commonwealth of Independent States (CIS). Russia by then became an independent country and an influential member of the CIS and became the Soviet Union's successor in diplomatic matters.

        In June 1991, Boris Yeltsin became the elected president of Russia. On that year, Yeltsin announced that Russia would proceed with radical market - oriented reforms along the lines of 'shock therapy'. In June 1992, Russia became a full - fledged member of the World Bank Group. After seven months, the International Monetary Fund granted US $ 1 billion but with condition not to use it to finance budget deficit.

        Russia, after the dissolution, lifted price controls on 90% and 80% for intermediate goods. By the end of 1992, the budget deficit was 20% of the Gross Domestic Product much higher that 5 % projection. After the disintegration of the USSR, crisis on Russian economy was felt. It took the responsibility of settling USSR's external debts. The petroleum, metallurgy and some other state enterprise was privatized for a sum of US $ 600 million and the population plunged into poverty.

        There was an impeachment attempt to oust Boris Yeltsin in March 26, 1993 but it was not successful. Yeltsin took control again Russia. In the same year, Victor Stepanovich Chernomyrdin and Boris Fedorov formed a new government. They postulated the anti-crisis program to control inflation through tight and fiscal policies. The government controls money and credit emissions in three ways. One, allow the central bank to increase interest rates on credits by issuing government bonds. Second, partially financing budget deficits and, third, close inefficient state enterprise.

        In the year 1994, stability on finances was officiated by the Central Bank as it issued credits to enterprise at subsidized rates and in the year 1995, the government maintained its commitment to tight fiscal constraints. Pressure started to mount on the government. In this particular year, the state failed to address many obligations as well as the wages of most state workers. There were revenue shortages and it was blamed on a number of factors, but by 1996, Russian enterprises and regional authorities had established a strong pattern of non- compliance with tax regulations.

        The year 1998 saw Russia on the progressing stage and the inflation was brought under control. The Rouble was established and thousands of enterprises came under private ownership. Market-oriented laws were passed by then. In the same year, Asian Financial crisis affected the country. There is a sharp decline in Russia's earnings from oil exports which results to the exit of foreign investors.

        Later in August 1998, Russia plunged again to financial crises and inflation shot up by 84.5%. These negative impacts to Russia affected its external balances and public finances as well. Russia became especially prone to external shocks caused by cyclical fluctuations in the world market prices and a great demand for primary commodities. In the same year, lack of progress in coping with budget deficit led to IMF tension. Investors too are anxious about the aftermath of Asian crisis. There was another setback for Russia during that time which was the failure of Tokobank. Investors started to pull out the Russian GKO. The government failed to auction 75 % stake in the oil giant Rosneft.

        There was some relief in year 1999, the gross domestic output increased by 3.2%. This increase was achieved despite of potential turmoil and the resignation of President Boris Yeltsin. The increase was brought about by rise in value of Russian exports. Russia's strategy to profit from the favourable environment like: tripling of international oil prices, raising the monthly revenue from oil exports and raising the export surplus.

        However, on the negative side, the inflation rose to an average 86%, ordinary persons found their wages falling by 30% and their pensions by 45%. The GDP growth of 6.4% in 1999 increased to 10% in 2000. Legislation was passed in the year 2001 to bring certain changes with the investment sector. Russia gained its economic stability in despite of some challenges.

        In July 2002, The Government Concept of Automotive Industry Development came to existence. This new concept determined the goals, tasks and priorities in order to offer a package to combat the automotive conditions of Russia and it is applicable until 2010.

        In 2003, cumulative foreign investment increased by 50% or US $ 29.7 billion. Foreign Direct Investment rose by 69% or $ 6.8 billion. To sum up, Russia's overall extra in 2003 was $ 60 billion, up from $ 46 billion during 2002. The United States is one of the largest trade partners of Russia, and the exports raised by US $ 3 billion. In 2003, the US exports were machinery, meat, and electrical equipment. According to the World Bank, Russia's GDP in 2003 was $433 billion.

        In 2004, the country's GDP shot up to US $ 1.5 trillion making it the ninth largest economy in the world and the fifth largest in Europe. It is expected to become the second largest European economy after Germany and the sixth in the world in the near future. To have a promising economic development, a strategy should be maximized first.

        In the year 2005, the Russian economic growth was influenced by three primary factors. They were a continuing rapid expansion of domestic income and demand, improvement in the expectations of investors and growing competitive pressures from the real appreciation of the Rouble Russia. For year 2005, the Russian GDP was $ 1.589 trillion with the real growth rate of 6.4% and inflation rate was 11.0 %. There is a considerable progress in the Russian economy since liberalization.

Future of the Car Industry in Russia

        In an industrialized country like Russia, the automotive industry spearheads the manufacturing sector. This particular sector has a great impact on the stability of the economic and political development of the society. The automotive sector is also the largest consumer of products like metallurgical, petrochemical, machine tool and electrical industries.

        The automobile industry in Russia is a potential source of boosting the economy. In the year 2003, the ownership of cars increased to 152 vehicles per 1,000 inhabitants which is almost thrice the 1993 rate of 59. Another proof that the car industry of Russia is booming because of the annual car sales have increased from 800,000 in 1992 to 1.5 million in 2003. With the production of 120 million vehicles in the year 2005, as statistics Russia is classified as the thirteenth biggest manufacturer of vehicles in the world.

Another important fact is that since the opening of the Russian economy and the rise of in consumer spending, Central and Eastern Europe have become major sales markets of the automotive industry. Sales soar high each year in average around 7.3% to 3.4 million units in the year 2004.

        There is a great prediction that by the year 2014 around 2.3 million new cars expected to be sold in Russia. So by this development, Russia expected to be one of the most markets that is growing in the world after China. The study claims that between 2004 and 2014, each year will have 100,000 more new vehicles.

        In the Russian automobile market, top brands include from Ford motors, General Motors, Renault, BMW, Kia Motors, Hyundai and Scania Motor Corporation.

        In these circumstances, it is very clear that the car industry in Russia is a great potential market surpassing other countries that has the same business venture.

Opportunities and Competitive Challenges

        The Russian automobile industry shows a tremendous growth but there are two things required for its continued growth in the automotive market. Firstly, the automotive companies need to have a workable strategies and targeted management. Secondly, stabilizing the economic is a need, and also stabilizing the legal framework, to take advantage of low labour costs of the country and the size of its economy. Russia is capable to become one of the major automotive bases for the export of the vehicles and components if comparing it to the rest of the world. Russia has the ample supplies of many of the world's most valued natural resources especially to support a modern industrialized economy.

        In addition to all these remarkable facts, Russia also has a well educated labour force with a sound technical expertise. The only thing that experts or the economists have difficulty to achieve the accurate measurement of the Russian economy is due to their questions on the accuracy of the official Russian economic data. The government of Russia still fixes prices on some goods and services such as utilities and energy.

        There are also a few obstacles. For example, those business partners who wanted to invest in Russia encountered certain obstacles like: contradictory legislation, lack of law enforcement, widespread corruption, unpredictable political environment, and barter transactions, does not provide any specific tax or import duty relief to foreign investors. As more components are locally made, there will be higher taxes for imported components.

        In spite of all these challenges, transformation in the industry Russian car makers and suppliers are offering new opportunities. A study has been done by Ronald Berger, shows us that the co-operative work with foreign companies offer consumers a perfect opportunities of looking into international standards. Russian suppliers will become more efficient in production processes and can match up to today's quality standards.

        The Russian automotive sector needs to modernize across board. This is apparent from the large level of investments in Russia if compared to other countries. Regarding to Ronald Berger survey, the economy of Russia has to be improved further in order to link to the world car market. Some important applications have to be taken such as decreasing the import duties on the components to assemble vehicles and modules. Technical standards should be tightening for products as well. Also, investments agencies in Russia should attract more foreign investments. The same study also shows that around a million jobs will be created in a modern and international automotive competitive industry.

        A key element of the competition in the Russian motor industry is the ability to produce at low-costs which are lacked by most European and American carmakers. Russian carmakers geared their systems to produce highly complex high-value products.

        The Russian motor industry must therefore take measures to strive to maintain a fair share in Russian market, while radically expanding into the international market.


        The Russian automotive industry is growing at a fast rate and pace, and it is emerging as one of the most competitive and dynamic industries at the world level. Government initiatives and incentives are continually providing encouragement to the industry and attracting the foreign players to the market. These foreign auto giants are establishing their car assembly lines in the country and capturing the domestic market.

        Passenger car segment dominates the domestic market of Russia and it is expanding due to ever increasing disposable income and low interest rate. This will further act as an attractant for the foreign investors to invest in the automobile industry.

        There are expectations that more foreign auto giants will enter the market in the future to fill the demand and supply gap. At present, a large section of passenger car demand is satisfied by new imports and its share will grow in future as Russians are looking for latest technology and new designs. The commercial vehicle market will be dominated by the Light Commercial Vehicle (LCV) segment. The major part of this high demand will come from growing small- and medium-scale businesses, coupled with increasing income.

        I learn from all the above sources, facts and figures, that a great potential automobile industry in Russia is positive and inevitable. A great impact of automobile industry in Russia will become its share to the global automobile industry and world's business venture.

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