Russia’s car market is forecast to slow and possibly decline this year, ending a three-year streak of gains of more than 10 percent and damping market leader Renault SA (RNO)’s efforts to offset slumping demand in Europe.
Renault, which controls Russian brand Lada, was banking on growth in the country after suffering the worst sales decline in Europe last year. With inflation reaching 6.6 percent in 2012 and interest rates rising, those plans may be dashed.
The Russian car market, which is projected to surpass Germany in volume by 2014, has risen to prominence as a developing middle class and vast expanses promise growth. The prospects prompted Renault, Volkswagen AG (VOW), Ford Motor Co. (F) and other carmakers to expand capacity. General Motors Co. (GM) and Russian partner GAZ Group started ramping up production this week of 30,000 Chevrolet Aveos a year, adding more cars jostling for share.
“It’s a very competitive market,” said GAZ Chief Executive Officer Bo Andersson. “There are more than 500 models you can buy. Swedish people like station wagons; in the U.S., people like pickups, SUVs or sedans. Here, people like everything.”
The country was once a backwater for the auto industry. Lada’s parent OAO AvtoVAZ was kept afloat by government handouts in the early 1990s after communism’s collapse. Production was maintained by trading finished cars for parts from suppliers or food and clothing for workers.
By 2008, AvtoVAZ was a prized asset, with Renault beating out GM and Fiat SpA (F) for a 25 percent stake. The French carmaker and alliance partner Nissan Motor Co. (7201) have since agreed to a deal that will give them control of 74.5 percent of the Lada maker.
VW and Ford each run factories capable of producing more than 100,000 vehicles and signed agreements in 2011 to expand.
Still, the market is volatile, suffering a 49 percent plunge in 2009 before rebounding over the past three years. Russian car sales this year are forecast to edge up 2.3 percent after an 11 percent increase to 2.98 million cars and light commercial vehicles in 2012, according to IHS Automotive. A survey by Russia’s Association of European Businesses resulted in a range of expectations between a decline of 5 percent and a gain of 5 percent.
“The outlook for the market in 2013 holds little promise for a quick return to growth at the double-digit rates enjoyed in recent years,” said Joerg Schreiber, chairman of AEB’s auto manufacturers committee.
The Renault-Nissan-Lada group increased 2012 sales 1 percent to 890,433 vehicles as the Renault brand’s 23 percent surge helped offset a 7 percent decline for Lada. The French carmaker’s sales of 189,852 cars in Russia last year amounted to 7.3 percent of its global deliveries.
The performance in Russia contrasted with Renault’s 19 percent plunge to 1.05 million cars in Europe, where industrywide sales fell 7.8 percent. Renault CEO Carlos Ghosn has said the European market may fall 3 percent in 2013 in its sixth straight annual decline.
“Russia is among Renault’s top markets in terms of profitability,” with margins in the 5 percent to 7 percent range, said Florent Couvreur, an analyst at CM-CIC Securities. “A slowdown of the market would have an impact on its activity there.”
Renault is forecast to have posted an operating profit margin of 1.7 percent for 2012, according to analyst estimates compiled by Bloomberg. The Boulogne-Billancourt-based company is scheduled to report 2012 earnings on Feb. 14.
The positive results from Russia helped Renault shares surge 52 percent in 2012, the third-best performance on the Stoxx 600 autos and parts index. Renault is up 8 percent this year, valuing the company at 13 billion euros ($17.6 billion).
The demand drop led Nissan to announce plans to suspend production at its factory in St. Petersburg tomorrow. The Japanese carmaker said last month it may shift to a four-day work week until mid-March. That could take the Renault-Nissan alliance further away from its goal of raising combined market share in Russia to 40 percent by 2015 after falling to 30 percent last year from 33 percent.
The economy’s growth dipped to 3.4 percent last year from 4.3 percent in 2011, its slowest pace since 2009 and missing government targets. Weighing on growth, loan rates have surged to about 10 percent, squeezing average consumers.
“If I cannot give my people competitive interest rates, they cannot buy houses, they cannot buy my products,” said Siegfried Wolf, chairman of OAO Russian Machines, which controls GM partner GAZ.
Eugene Moiseev can attest to that.
“I’m considering using public transport instead of my car” to save money and avoid overcrowded streets, said Moiseev, a 32-year-old newspaper editor from the Moscow region, who owns a 2011 Audi Q5. “Gasoline prices rose too far. In addition, new cars became groundlessly too expensive. A new car purchase is not on the agenda.”
Renault said it is taking the downturn in stride. “We’re still very confident that the Russian market is structurally on an upward trend,” Bruno Ancelin, head of Renault’s Russian operations, said in an interview. “The purchasing power of Russian households is still improving.”
Renault plans to proceed with the start of production of one of its models at AvtoVAZ’s factory in Togliatti in the second half of 2013, the automaker said.
There’s still plenty of potential for growth in Russia. Ownership rates were 233 vehicles per 1,000 inhabitants in 2009, compared with 500 in Germany and 600 in the U.S., according to the World Bank. The car fleet is also aging, with vehicles averaging more than 10 years on the road, said Tatyana Lukhovetskaya, chief managing director of Rolf, one of Russia’s largest auto dealers.
Still, the allure of cars isn’t quite what it was.
“Cars in Russia were long regarded as an investment opportunity,” said Vladimir Bespalov, an analyst at Moscow-based VTB Capital. “Now, given the stabilized bank system, people tend to switch their savings to banks rather than spending it on a new car.”
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