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France-Russia Automotive (Auto Franco-Russe) is an economic newsletter focusing on the development of the Western automotive groups’ business in Russia. France-Russia Automotive is distributed both on paper and electronically. To receive the next issues for a free trial you only need to subscribe on our website: www.autofrancorusse.fr. France-Russia Automotive is published by Agence du Fil SARL Company, whose publications are devoted to the Franco-Russian trade.
In this issue
Russia's impending membership of the WTO is
intriguing Western car manufacturers. What will be the impact of the
expected reduction in customs duties on the market for cars assembled
locally? Fearful of an influx of used cars after the customs barriers
are removed, the Russian government is in the process of setting up new
ones in their place at its borders.
RUSSIA PREPARES FOR THE WTO
Fearing for the future of the local car industry, the Russian government is preparing new customs barriers to replace those that are to be phased out.
Russia's imminent entry into the WTO, the next stage
of which is planned for July 2012, is striking fear into Russian
administrations. They fear above all the disappearance of customs
barriers they had put up in order to favour car assembly at home.
Current duties, 30% for cars and 25% for heavy goods vehicles, will come
down progressively so they no longer exceed 15%. The Russian government
is hoping for a long implementation schedule, up to 7 years, so it can
modify them progressively.
THE RENAULT-NISSAN ALLIANCE’S TAKEOVER OF AVTOVAZ IS ON TRACK
The partners reached a preliminary agreement on the conditions for forming a joint company with the Russian public shareholder.
The Renault-Nissan alliance has come to an agreement on the
control of the Russian manufacturer Avtovaz. Renault currently owns 25% of
Avtovaz, acquired for a little more than $1 billion in 2008. According to the
terms of the preliminary agreement set out in a Letter of Intention Memorandum
of Understanding signed in May 2012, the alliance will create a joint venture
company with the Russian public holding company Russian Technologies (Rosstekhnologii).
The different shareholdings will be distributed in this joint company that will
eventually hold 74.5% of Avotovaz. The alliance will hold 67.13 of the joint
company and will then become the owner of 50.01% of Avotovaz. Renault will
provide $300 million for the operation and Nissan $450 million. The money will
be paid in several stages between now and 2014. It will be used to purchase
missing shares in Avtovaz, currently held by the investment bank Troïka Dialog.
Learn more about Avtovaz, Renault and Nissan in Russia
Avtovaz’s sales grew sharply after the recession with
an increase of 48% in 2010 when the manufacturer sold 523,000 units
largely due to a "scrappage premium" paid by the Russian government.
With the end of this subsidy in mid-2011, sales started to erode with a
drop of 17% in November 2011 compared to November 2010 and 15% down in
December 2011 compared to December 2010. They grew by 11% for the entire
year of 2011 when the average growth in the market was 39%. The
manufacturer nevertheless had sales of €4.37 billion in 2011, an
increase of 27.6% on the previous year. However, this figure was
calculated according to Russian accounting rules that do not always give
a true image of the company's health. The trend towards falling sales
continued in 2012 with a fall of 14% in the first six months and even
18% in June 2012. Apparently, it is time for the manufacturer to update
SUPPLIERS FACE UP TO THE DIFFICULTIES OF THE RUSSIAN MARKET
From a deficiency in human resources to a lack of certain raw materials, suppliers in the Russian market have much to complain about. In addition, the local partners’ methods of working may surprise Western manufacturers.
Many Western manufacturers are coming to Russia and
its available resources are starting to run out. Suppliers shared their
thoughts on this difficult subject at the latest Russian Automated Forum
organised by Adam Smith Conferences in Moscow last Spring.
VW DEMANDS COMPENSATION FROM THE RUSSIAN GOVERNMENT
"With Russia's entry into the WTO, a contradiction will appear between this organisation's rules and those imposed by decree 166 on Western manufacturers in Russia", says Marcus Osegowitsch, General Director of Volkswagen Group Rus. Adopted by the government in 2005, this decree offered exemptions on custom duties for imported components to any manufacturer that committed to setting up a local production plant with conditions on volume and localisation of components. VW invested almost €775 million in its plant in Kalouga to produce 165,000 units a year and €200 million in an assembly partnership with Gaz that was to produce 110,000 units in order to comply with decree 166. Now, VW is asking the Russian government to put in place compensation mechanisms. The "special economic zones" created by the government to attract manufacturers has become another subject of discord. "With their system of special regimes, these zones create a distortion of competition as the same rules do not apply to the entire country", says Marcus Osegowitsch.
GM INCREASES ITS PRODUCTION CAPACITY AND ITS STAFF
"With 243,000 cars sold in 2011, or 84,000 more than in 2010, we are claiming a 9% share of the Russian market" said Jim Bovenzi, President and Managing Director GM Russia & CIS at the Russian Automotive Forum. Its Chevrolet range has been the leading Western brand in the Russian market for five years already. The GM plant in St Petersburg operates 20 hours a day and 6 days a week to supply this market. However, this capacity is still not sufficient and the manufacturer has signed a local assembly agreement with Gaz in order to bring in additional industrial capacity. It has put in place a plan to extend its St Petersburg factory whose capacity should increase from 98,000 units currently to 230,000 units in 2015. Staff will also be increased to 4,000 compared to 2,500 today. This expansion is required to meet the local production requirements of 350,000 units a year planned in its new agreement with the Russian government signed in May 2011 and offers the manufacturer certain customs advantages. In all, the manufacturer plans to invest up to $1 billion in Russia over the next five years. Another agreement has been signed with the assembler Azia Avto in Kazakhstan.
FORD IS INCREASING ITS PRODUCTION SITES
Ford has decided to boost its growth in the Russian market by forming a joint venture with local assembler Sollers. "We were the first to produce in Russia in Vsevolojsk from 2002, but our production capacity is not growing as quickly as demand. We were looking for a partner to increase these and we found one with Sollers" says Ted Cannis, Ford-Sollers’ CEO. According its statistics, the American manufacturer was the second largest in the Russian market with 116,000 cars sold in 2006. However, with the progressive arrival of its competitors, it fell back to ninth with 118,000 cars sold in 2011. It works primarily the C-segment but considers it is not sufficiently involved especially in B and SUV segment where demand is very strong. The joint venture should provide it with new production facilities in Sollers plants in Elabuga and Nabejnie Chelny, two sites located in Tatarstan. The first entity, a 50-50 joint venture should become fully operational at the end of 2014 or at the beginning of 2015. Its capacity should reach 350,000 vehicles a year. The second entity is intended to assemble running gears and should be operational 12 months after the first one according to Ted Cannis. The manufacturer should also be able to install stamping lines on the site. 35% of assembly will be local the first year and should reach 60% in the sixth year of the joint venture. This is a very ambitious forecast for this market. Its partner Sollers has obtained funding of almost $1.2 billion from VEB, a Russian semi-public bank, for this project.
PSA PEUGEOT CITROEN PRIORITISES THE C-SEGMENT FOR LOCAL ASSEMBLY
"The share of first purchases for a car across the entire Russian car market is 37%, much more than in Europe!" noted Bernd Schantz, CEO of PSA Peugeot Citroën Russia, Ukraine and CIS, speaking at the Russian Automotive Forum. According to his analyses, these "newcomers" essentially choose a vehicle in the budget segment from the local models or from the B-segment. When they upgrade, they upgrade to the C-segment. The manufacturer has opted to assemble cars in the C-segment in its Kalouga plant. This plant with a capacity of 120,000 units per year has operated on a partial SKD assembly mode since August 2010. Complete CKD assembly under the Peugeot brand should start in 2012 and Citroen will follow in 2013. The B- segment, intended for first purchases and young drivers, will be supplied with imports. This will also be the case for the higher segment and LCVs. We hope the rouble stays stable. "The variation in the rouble exchange rate is very important for an importer!" underlines Bernd Schantz. The French manufacturer sales reach 60,000 in 2008 before dropping off to 42,000 in 2009 and increasing to 72,000 in 2011. It hopes to reach 90,000 in 2012.
FIAT IS DROPPED BY SBERBANK
Sberbank has decided to defer its participation in the joint venture with Fiat. The Russian public bank was to provide funding for a project for an assembly plant in the region of St Petersburg. The plant was to assemble SUVs under the Jeep brand with a capacity of 120,000 units a year. In addition, the bank was hoping to interest the manufacturer in the abandoned Zil plant in Moscow whose debts it has inherited. Fiat has indeed been looking for a new site to assemble its Ducato LCVs since the end of its partnership with Sollers at the beginning of 2012. A Letter of Intention (Memorandum of Understanding) was signed last February in Turin. The overall budget for these projects was estimated to be €850 million. In exchange for its participation, the Sberbank was demanding up to 20% ownership of the new company. However, in mid June the bank decided to defer its participation "for technical reasons". In Russian administration language, this means that the local partner did not get what it wanted.
MARRIAGE BETWEEN MAZ AND KAMAZ: THE RUSSIAN AND BELARUSIAN GOVERNMENTS GET INVOLVED
The Russian and Belarusian governments seem to have found a solution that will move the merger of Kamaz, a Russian manufacturer of heavy goods vehicles and Maz, its Belarusian equivalent forward. The Belarusian has a large presence in the Russian market where it achieves two thirds of its sales. The two manufacturers are in a merciless price war in the different heavy goods segments. Discussions about possible merger have been in progress for a long time but the partners have not been able to progress. In June 2012, they announced that they had found a format for a common structure called Rosbelavto. The Russian government will provide some or all of the 49.9% share of Kamaz that it holds through a public holding company Rosbelavto whilst the Belarusian government will invest part of Maz that it wholly owns. Parity now needs to be found between the two companies as well as an agreement as to the valuation of their contributions. Kamaz is valued at $1.6 billion and Maz at $1.1 billion. $800 million of this is for the plant and the remainder for its integrated suppliers according to an analysis by Ernst & Young carried out at the request of the parties. Kamaz announced sales of €2.2 billion in 2011 and €1 million of losses. Maz’s results are not made public; the company sells up to 20,000 units per year. If the format of the company seems to meet the requirements of the parties, there is still no agreement on its management. Mr. Lukashenko, the eccentric Belarusian President is not ready to release control of his company. In addition, Kamaz has already opened up its capital to Daimler who owns 11% directly and manages the 4% held by the EBRD and who would like to increase its share. Maz is also linked to a joint venture with Man. Despite this appearance of a new agreement, the two manufacturers are still a long way from an operating partnership.
THE USED CAR MARKET: STRONG POTENTIAL, ARTIFICIALLY DIMINISHED
"The potential for the imported used car market is
very strong. Before the introduction of customs barriers at the end of
2008, these imports reached 530,000 units per year. They fell to 9000 in
2009" remembers Tatiana Arabaji, director of Autobusiness, a local
professional magazine, "but the Russian imported used car market is
today made up of several small players. There are no large-scale players
capable of lobbying. Many importers, small businesses or solopreneurs
use customs clearance methods that can not be talked about publicly.
They do not want to draw attention to themselves". The two used-car
market leaders in Russia are Blue Fish and AAA Auto. The latter is a
Czech company registered in the Netherlands. The two prefer providing
Western vehicles that were originally imported as new by dealerships.
The used car market appears to be more stable than the one for new cars.
During the recession, it fell by less than 20% whereas the new car
market lost 50% according to the firm Autostat.
THE ALL-STEEL TYRE MARKET IS ATTRACTING MICHELIN
"The share of all-steel tires the Russian tyre
market for heavy goods vehicles increased from 1% or 2% in 2000 to
almost 50% in 2011. These tyres are subjected to great ordeals with
slippery roads that are covered with chemical products in winter and
ploughed up in the spring when the snow melts" says Yuri Antipov,
Marketing Director Truck and Industrial tires at Michelin.
THE INCREASE IN SALES FALLS SLIGHTLY IN THE RUSSIAN MARKET
The Russian car market grew by 14% in the first six
months of 2012 with 1,413,769 cars and LCVs sold compared to 1,236,386
for the same period in 2011 according to statistics from the AEB
(Association of European Businesses in Russia, see below). After
reaching 39% for the entire year 2011, the growth in sales is showing
some signs of running out of steam. The trend towards a slowdown is
continuing, growth was no more than 10% in June 2012 compared to June
2011. "We are noticing a slowdown, both for annual results and those
that we calculate month by month. We are waiting to see a consolidation
of results in the second half of the year" says Joerg Schreiber,
Acting Chairman of the AEB Automobile Manufacturers Committee. He wants
to be optimistic, "With more than 272,000 units sold in just the
month of June, the market is showing its best monthly results since July
2008. The total volume of sales for the last six months is also at
record levels for the last four years. We will probably see sales of
more than 2.8 million units for the whole year". Total sales of cars
and LCV were almost 2.9 million units in 2008, 2.1 million of those came
from Western brands. This was probably an absolute record for the
Russian market that has yet to be beaten.
|Learn more about the AEB
The Automobile Manufacturers Committee of the
Association of European Businesses in Russia publishes the monthly
statistics for sales of cars and commercial vehicles, of all
manufacturers, Western and local, operating on Russian territory.
Without distinction, the statistics cover the sales of new vehicles
assembled on-site or imported.
THE NUMBER OF WESTERN CARS VARIES ACCORDING TO REGION
Moscow is a Russian city with more modern cars in relation to its population with 160 cars no more than seven years old per 1,000 inhabitants. 91% of these are of Western origin. These are the conclusions of a study carried out by local insurance company Alphastrakhovanie published in the daily Gazeta.ru. In the Moscow region, outside the capital itself, there are 152 cars less than seven years old for 1,000 inhabitants, 82% of which are of Western origin. If the leader’s spot in the capital is assured, it is not in the following cases. The autonomous region of Khanty-Mansijsk is in third place with 149 cars less than seven years old per 1,000 inhabitants, 77% of which are Western brands. Located in Siberia, this province is entirely devoted to oil and gas extraction which explains the relatively high income levels of its 1.5 million inhabitants. Tatarstan, another autonomous province with an oil godsend, has 138 cars less than seven years old per 1,000 inhabitants. However, only 54% of them are Western brands. The city of St Petersburg has 137 cars less than seven years old per 1,000 inhabitants (one quarter less in its surrounding region) 86% of which are Western brands. The region of Samara has 131 cars less than seven years old per 1,000 inhabitants. Only 49% of these are Western brands although this is not surprising in Avtovaz’s local region. The other regions show performances that are much lower. The national average is 91 cars less than seven years old for 1,000 inhabitants. In all 13 million cars less than seven years old, or 36.5% of the total. 67% of these are Western brands.
Nissan is planning to double the production
capacity of its St Petersburg plant by 2014. The manufacturer is
planning an investment of €167 million to increase its current 50,000
unit capacity to 100,000 units per year. The plant has been operational
since 2009 and assembles Nissan Teana, X-Trail and Murano models. Two
other models including the Qashqai will be added after the extension.
The manufacturer hopes to benefit from an assembly line at Avtovaz from
2013. Nissan will be part of the new financial operation that will give
the Renault-Nissan Alliance control over the main Russian car plant.
Nissan sold 138,827 cars in the Russian market in 2011, a 74% increase
on the previous year.
|$65 billion: the value of the passenger
vehicle and LCV market in Russia in 2011 according to Ernst & Young
and ASM Holding. $57 billion of this is accounted for by sales of
Western brands imported all assembled in Russia.
15%: the maximum amount of customs duty on passenger cars and LCVs imported in 2018 following Russia's joining the WTO. Currently, these duties are 30%. They should fall to 25% after membership and continue to fall progressively in the following years.
109,600 units: the value of new heavy goods vehicles in Russia in 2011 according to Ernst & Young, ASM Holding and LMC Automotive. This market should reach 180,000 units in 2015 according to their estimates.
MIMS - Automechanika : from 27 to 30 August 2012
at Moscow, Expocenter Krasnaya Presnia.
|Interauto : from 28 to 31 August 2012 at Moscow, Crocus Expo.
The 8th International exhibition InterAuto will be held in August 2012 within the frames of the Moscow International Automobile Salon (MIAS).
Autotrans : from 5 to 8 September 2012 at Moscow,
|Autoretail Russia 2012 Forum : from 29
to 31 October
2012 at Moscow.
Organised by the Adam Smith Institute, the event will bring together top executives from both vehicle manufacturers and leading dealerships.
The Russian Automotive
Forum : March 2013 at Moscow.
Tyre and Rubber Expo : from
24 to 27 April 2013, at Moscow, Expocenter.
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|The France-Russia Automotive is published by the Agence du Fil SARL Company. RCS Paris 487 788 051.
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