Coopers study on Automobile Industry in Russia

Case Study: Automobile Industry in Russia


According to the Prince water house Coopers study, the automotive market is one of the most dynamic sectors of the Russian economy. It has increased in value by 27% over the last three years and it is expected to increase all the more A projection growth of local production of foreign brands will increase by as much as 375% in the next seven years.

In line with the statement above, a sample case study will be analyzed for the purposes of knowing the conditions of the Global Automobile Industry its scenario, trends, economic impact, and its implication to the business world. More significantly, the case study focused on the case of Russia. This country is considered as one of the world's superpowers alongside with the United States from year 1945 until its break - up in 1991. Russia is one of the fifteen union republics who belongs to the Union of Soviet Socialist Republics (USSR) or commonly known as the Soviet Union. It was a model state governed only by the Communist Party.

Russia was the largest Republic of the former Soviet Union but it was dissolved in 1991. It was liberated from the Union and has been liberalizing ever since then. For Russia, economy has withstood a transition from 'Shock Therapy" to 'Consumerism'. Income levels have been rising and economy has been growing.

The report provides exhaustive and extensive research on the burgeoning automobile industry of Russia. It defines the market structure and growth, discusses the market drivers, analyzes the future growth areas, and studies the various parameters of the market.

Global Automobile Industry: Overview

Automobiles revolutionized transportation in the 20th century, changing forever the way people travel, trade, and do live. The automobile manufacturing is evolving rapidly on the foreign market. Car and parts manufacturers are merging to obtain a desired output that conforms to the world market and based on the customers demands and wants at the same time.

On the other hand, all of the biggest and almost successful vehicle industry firms have become totally universal in nature and it really quite an impact on both cultures and economy of the world. It provides jobs for millions of people, generates billions of dollars in worldwide revenues, and provides the basis for a huge number of related service and support industries.

On the automobile dealership side, gigantic, nationwide most successful companies have got the best merchants in main markets. Even second hand car business is being considered by national chains. The automobile changes the lives of people that make things much easier than expected by means of travel and transportation much farther and faster, and has opened a huge range of areas in market for commerce and trade. The auto industry absolutely decrease the overall cost of transportation by using techniques like mass production, mass marketing, and globalization of production (assembling products with parts made from other countries in the world). From 1886 to 1898, about 300 cars were built, but the auto business was not known yet. A century later, with auto makers and buyers it strengthens worldwide, automobile production became the world's main industrialized activity, with over 58 million new vehicles built yearly in the rest of the world.

At this point, automobile producers are using the latest in e-business methods to further improve their supply chains and fill their inventories as accurately and appropriately as expected.

As being mentioned earlier, The "big three" U.S. auto makers are losing market share to foreign producers . Why? For two reasons:

  1. The higher of production cost which effected by the oil price and raw materials which going up .
  2. The increase of consumer demands for luxury.

While automakers from all other countries are faced with these obstacles, only U.S. firms have to deal with labor unions. In the past few years, worker benefit costs sharply increased, especially those associated to healthcare. For instance, from 1999 to 2005, GM's non-pension retirement profit for mostly healthcare increased at a compound annual rate of more or less 10.6%.

Automakers must also concern for the *clients demand for better safety and electronics features. Clients for instance require side airbags, abs brakes, and electronic stability programs (ESP), which apply pressure on each individual wheel to prevent drivers from losing control of their cars. Other trends in electronics include higher demand for global positioning systems (GPS) and high quality sound systems. The threatening is optimized on U.S. automakers by the increasing foreign presence in the full-size pickup truck marketplace. Cars such as the Toyota Tundra and the Nissan Titan are becoming more and more popular with American clients. On the contrary, for the direct future, it appears that the Big Three manufacturers will continue to control this market, as they captured 91.4% of the market share in 2005. The following are considered the major firms of the Automobile Industry: General Motors Corporation - Employing an enormous 336,000 people, GM is the largest vehicle maker worldwide. It is headquartered in Detroit, Michigan, but it has operations in approximately 55 countries outside the U.S. and Canada. GM owns other producers, including Chevrolet, Pontiac, and Hummer. DaimlerChrysler AG - A spreader company, Daimler Chryslers manufacture everything from sports cars to heavy duty trucks. It is headquartered in Stuttgart, Germany, and primarily operates in the U.S. and Western Europe consecutively.*

After examining the trends in production, it is clearly to be seen of what an vehicle industry has, to enlarge globalized with many firms setting up manufacturing firms in foreign countries. However, after comparing the export, import, and production data close to the year 2000, it is also obvious that the locations of these outsourced manufacturing plants are linked directly with the location of large markets - notably the US.

In 2007, a total of 71.9 million new cars were sold worldwide: 22.9 million of them sold in Europe, in Asia-Pacific 21.4 million cars, in USA and Canada 19.4 million cars, in Latin America 4.4 million cars, in the Middle East 2.4 million cars and in Africa 1.4 million cars. Most markets in Japan and North America faced a dip in the sales, while those in Southern America and other parts of Asia grew strongly. Of the major markets, Brazil, Russia, India and China saw the most growth rate.

Nearly 250 million automobiles are in use in the United States. Internationally, there were about 806 million vehicles and pickups on the road in 2007; they burn over 260 billion gallons of gasoline and diesel each year. The numbers are rising quickly, especially in china and India. According to the experts, urban transportation systems based around the car have showed unsustainable, consuming extreme energy, affecting the health of populations, and bringing a declining level of service even with increasing investments.

Much negative impacts fall excessively on those social groups who are also least likely to own and operate cars. The sustainable transport movement focuses on solutions to these problems. In 2008, the quick increase in oil prices, industries such as the automotive business, are experiencing a combination of pricing pressures from raw material costs and altering in customer buying habits. The said industry is also facing increasing external challenges from among the public transport sector, as clients re-evaluate their private car usage.

It is nearly half of the US's fifty-one light vehicle plants are projected to eternally close in the years to come, with the loss of another 200,000 jobs in the reigon, on top of the 560,000 jobs lost this decade. Combined with growth in China, in 2009, this resulted in China to be the biggest automobile market in the world.

Economic Transition of Russia

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. By this time the socialist and communist were in the eastern wing by Soviet Union '' USSR '',and the capita or radical party was in the western wing by United State before the first gulf wave. Gorbachev regime failed to in stabilizing the macroeconomic and economic restructuring

  • The mean transition from central planning to a market - based economy.
  • The macroeconomic stabilization implementing fiscal and monetary policies that promote economic growth in an environment of stable prices and exchange rates.
  • The economic restructuring required establishing the commercial and institutional entities (Bank - private property - and commercial legal codes ) . Which permit the economy to operate efficiently.

To reach these calls opening domestic markets to foreign trade and investment thus link up the economy with the rest of the world , was an important aid

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 government announced that Russia would proceed to attack the problems of macroeconomic stabilization and economic restructuring and 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.

In 1993 victor Stepanovich Chernomyrdin and Boris Fedorov formed a new government . they postulated the anti - crisis program . it control inflation , they controls money and credit emissions in three ways :

  1. Allow the central bank to increase interest rates on credits by using government bonds .
  2. Partially financing budget deficits .
  3. Close in efficient state enterprise .

And 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. This crisis lead to economic collapse with millions being plunged into poverty and corruption and crime spreading rapidly.

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.

An impeachment attempt to oust Boris Yeltsin in March 26, 1993 has not materialized. 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 1994, stability on finances was officiated by the Central Bank as it issued credits to enterprise at subsidized rates.

In 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.

Revenue shortages were blamed on number of factors, but by 1996, Russian enterprises and regional authorities had established a strong pattern of non - compliance with tax regulations and police service was not able to nab violators.

In 1997, Russia was now progressing and the inflation was brought under control. The Ruble was established and thousands of enterprises came under private ownership. Market - oriented laws was passed by then. The same year when 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.

In August 1998, Russia plunged again to financial crises and inflation shot up by 84.5%. This negative impact 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.

Russia's strategy to profit from the favorable environment like: tripling of international oil prices, raising the monthly revenue from oil exports and raising the export surplus. On the negative side, inflation rose to an average 86%, ordinary persons found their wages falling by 30% and their pensions by 45%. GDP growth of 6.4% in 1999 and increased to 10% in 2000.

In 2001, the Duma passed a legislation to bring positive changes within the business and investment sector. Russia gained its economic stability 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. Industrial output in 2003 grew by 7% compared to 2002. To sum up, Russia's overall trade surplus during 2003 was $ 60 billion, up from $ 46 billion during 2002.

Russian economic growth in 2005 was influenced by three primary factors. 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 Ruble 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.

Comparing year 2006 and 2007 the auto sales rose 35%,while Gross Domestic Product 'GDP' increased by less than quarter of that which took Russian market from the fifth largest passenger car market in Europe into the third place after Germany & Italy. According to European Bank For Reconstruction Development 'EBRD' 2006 strategy invented in the automotive sector. because of the need to improve the environmental standards of cars on Russian roads , and also a competitive , restructured auto industry could contribute much more to Russia`s GDB . Austria and Switzerland have around 550 cars per 1000 inhabitant comparing to Russia which has 188 car per 1000 . So there is a plenty of room for the sector to continue growing in Russia .

The big auto makers in the world with the European Bank Reconstruction Development ' EBRD ' finance car establish assembly facilities in several Russian cities Like St. Petersburg - Moscow - Togliatti - Kaliningrad instead of importing cars into Russia .

Why the auto makers doing this ?
  • Well Because of :
  • The strong Rubles .
  • Consumer are Demanding new cars.
  • Avoiding the 25% customs duties on imported cars .
  • Taking advantage of temporary relief from customs duty on imported parts for assembly .

Many Russian owned automakers are aggressively modernizing restructuring and retooling to produce components or to assemble cars sold under global brands to face the consumer taste to international maker of automobile in the booming Russian car market increasing in demand is being met by locally produced foreign brands which declining the imports of used cars .

In order to strengthen competition , the EBRD supports the growth of foreign and domestic auto manufacture in Russia also to build and improve the local supply chain , also faster large scale technology and skills transfers EBRD invested in G.M joint venture with Avtovaz IN 2001 '' 140 million = 4.8 billion Rubles '' combined debt and equity investment .

In june 2005 EBRD invested 28.4 million = 500 million Robles for a 20% equity stake in June 2005 Toyota`s st. Petersburg operation.

In late 2006 the bank bought a 10% interest in Volkswagen`s Kaluga plant for 30 million = 1.3 billion Robles And provided a 26 billion Robles syndicated loan facility of which it held 5 billion Robles for its own accounts .

Future of the Car Industry

The claim that the car industry of Russia is a potential source of boasting the economy is visible. In 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 care sales have increased from 800,000 in 1992 to 1.5. million in 2003. With the production of 120 million vehicles in 2005, Russia is the thirteenth biggest producer of the vehicles in the world. Backed by a large economy, there has been a rapid increase in the demand for brand new domestic as well as foreign vehicles.

The automotive industry in industrialized country like Russia 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. Since the opening of the Russian economy and the rise of in Consumer spending, the Central and Eastern Europe have became large sales markets of the automotive industry. Sales soar high with an annual average of 7.3% to 3.4 million units in 2004.

Roland Berger forecasted that by year 2014 as much as 2.3 million new cars will be sold in Russia. With this positive development, Russia is expected to be one of the most growing markets in the world next to China. The study claims that between 2004 and 2014, each year will have 100,000 more new vehicles.

Competitive Pressures and Challenges

Russia clearly has the potential to become a major automotive base in exporting vehicles and components worldwide. Russia has the ample supplies of many of the world's most valued natural resources especially to support a modern industrialized economy.

The growth of Russian automobile industry is superb 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, there is a need to stabilize the economic growth and legal framework in order to take advantage of the country's low labor costs and the size of its economy.

Those business partners who wanted to invest in Russia encountered 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.

It has also a well educated labor force with the sound technical expertise. The only thing that experts or the economists have difficulty to achieve the accurate measurement of the Russian economy because they questioned 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.

Despite of these challenges, transformation in the industry offers new opportunities for Russian carmakers and suppliers. A study conducted by Roland Berger showed that joint ventures with foreign companies offer suppliers an excellent opportunity of looking into international standards. Russian suppliers will become more efficient in production processes and can match up to today's quality standards.

According to Roland Berger survey, Russia can't connect to the world car market unless its economy improves still further. The following considerations should be put to action: reduce import duties on components for assembling vehicles. It should also tighten its technical standards for products. In addition, Russia should attract more foreign investment, through investment agencies.

zones/areas. According to the same study, a modern and international competitive automotive industry in Russia would create around a million jobs.

A key element of the competition in the Russian motor industry is the ability to produce at low - costs - 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 to strive to maintain a fair share in Russian market, while radically expanding into the international market.

The claim that the car industry of Russia is a potential source of boasting the economy is visible. In 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 care sales have increased from 800,000 in 1992 to 1.5. million in 2003. With the production of 120 million vehicles in 2005, Russia has been ranked as the thirteenth largest manufacturer of the vehicles in the world. Backed by a booming economy, there has been a sudden boost in the demand for new brand domestic as well as foreign vehicles.

Since the opening of the Russian economy and the rise of in consumer spending, the Central and Eastern Europe have become major sales markets of the automotive industry. Sales soar high with an annual average of 7.3% to 3.4 million units in 2004.

Roland Berger has a great forecast that by year 2014 as many as 2.3 million new cars will be sold in Russia. and With this positive development, Russia is expected to be one of the most growing markets in the world after China. The study claims that between 2004 and 2014, each year will have 100,000 more new vehicles.

There is a need that Russian automotive sector has to modernize across the board. This is evident from the high level of investment in Russia as compared to other countries.


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

Russian automotive industry is growing at a fast pace and emerging as one of the most competitive and dynamic industries at the world level. Government initiatives and incentives are filliping 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.

We expect that more foreign auto giants will enter the market in 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

If the Russian automobile industry wants to grow beyond mere survival, it has to address some basic issues. These include product development and innovation, controlling fixed costs, improving process quality and product quality, aftermarket management, management of global sales and distribution

With this paper presentation, I may conclude that a great potential automobile industry of Russia is positive. A great impact of automobile industry in Russia will become its share to the world's business venture.


  • Retrieved 2009-11-26.
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