Banker Igor Skibar remembers his first car, a Soviet-era Lada, as a “nightmare.” Twenty years later he’s moved on to a Volvo XC90 sport-utility vehicle, and this summer he bought a Land Rover Discovery 4 for about 2 million rubles ($62,400). “I need a respectable car to visit clients and travel outside the city,” says Skibar, 41, who lives in the St. Petersburg area. “I earn enough money to do it with ultimate comfort on bad Russian roads.”
A lot has changed since the days when the Soviet Union’s leadership vilified the conspicuous consumption of the West. Fueled by an economy based on Russia’s abundant natural resources, the number of households able to afford luxury goods is set to rise to 13 million by 2025 from 7 million in 2010, according to consultant Capgemini. Such forecasts are prompting high-end carmakers to expand their presence in the country. Volkswagen’s (VOW:GR) Porsche unit plans to double its number of dealers there to 36 over the next six years. Audi is adding showrooms and aiming for 30,000 car deliveries this year, double its 2009 sales. BMW (BMW:GR) will add about 20 outlets by 2018, a third more than today.
Photograph by Valentin Khukhlaev/Itar-tass
Russia is poised to surpass Germany as Europe’s largest auto market by 2014, with sales rising to 3.4 million vehicles, according to the Russian Ministry of Industry and Trade. Thanks to more buyers choosing upscale cars, total revenues for automakers there will increase 19 percent this year, to $75 billion, outpacing the 10 percent gain in the number of vehicles sold, according to Russian market researcher Autostat.
Lada, Russia’s dominant brand, has been largely left out of the move upscale. The only domestic carmaker among the country’s 10 top-selling brands, Lada offers mostly low-end cars such as the Kalina compact and the Niva, a boxy 4X4 that dates from the Leonid Brezhnev era. Lada’s market share fell to 18 percent in the first half, from 24 percent a year earlier.
Renault (RNO:FP), the No. 2 brand in Russia in the first half of the year, and its partner Nissan Motor (NSANY), agreed in May to raise their stake in Lada’s parent, OAO AvtoVAZ (AVAZ:RM), to 74.5 percent, from 25 percent today. The group is pushing for a combined market share of 40 percent by 2015, up from 33 percent last year. The idea is that Lada will anchor the lower end of the lineup while more expensive cars will bear the foreign nameplates.
BMW’s tony Rolls-Royce brand opened a second dealership in Moscow in July, making the Russian capital the second city, after New York, with more than one showroom. “We’re continuing to invest in Russia because we believe in the Russian luxury market’s future growth potential,” says Ian Robertson, who heads sales for BMW.
Porsche is drumming up interest in its sports cars with a road show in Russia to encourage test drives. And Volkswagen’s Bentley Motors is featuring the Continental GT Speed, its fastest model ever, at this month’s Moscow International Automobile Salon. “Russia offers the biggest growth potential for the luxury car segment worldwide,” says Jan-Henrik Lafrentz, Bentley’s finance chief. He expects the brand to double its sales there “in the near future” as it adds showrooms. This summer, Nissan began assembling the Infiniti FX SUV at its St. Petersburg factory, where it also makes the Nissan Murano SUV.
The expansion in Russia marks a sharp contrast to the European Union, where car sales are expected to decline 7 percent this year to their lowest level since 1995, according to the auto industry association ACEA. That’s making a strong presence in Russia more critical for high-end carmakers. “Russia is starting to close the gap for us to Germany and the U.K., volume-wise,” says Doug Speck, sales chief for Volvo Car. He says the company has increased its forecast for Russia three times this year and is targeting sales of more than 20,000 cars there. The brand’s sales surged 50 percent in Russia through June, compared with an 8.2 percent slump in Western Europe, according to industry association data.
The Russian boom is creating opportunities for dealers like Evgeny Voitenkov. The president of St. Petersburg-based Olymp Group, one of the oldest official Mercedes-Benz (DAI:GR) dealers in Russia, added Porsche to his lineup three years ago after the demand for high-end cars remained stable even when the economy contracted. “The number of rich people is growing,” Voitenkov says. “Luxury cars sales will have a bright future in Russia.”