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On Strategy: The Russian Auto Landscape

The size of Russia’s car market is impressive.

The size of Russia’s car market is impressive. It is among the Top 10 markets in the world and 1.45 million vehicles were sold in the country in 2005. Just as importantly, its forecast growth figures are also impressive. With expected sales growth of around seven percent annually until 2010, Russia places fourth worldwide in terms of growth. Fueling this growth are rising incomes and strong demand for replacement vehicles. This is not surprising considering that 50% of the vehicles are more than 10 years old. But it will be mainly foreign manufacturers that benefit from this growth. Russian OEMs, in contrast, can expect to maintain market position at best if modernization will be achieved. The development of the supplier base is forecast to grow even more dynamically. This will be driven by heightened outsourcing of Russian OEMs, an increase in local content of foreign OEMs, as well as higher environmental and safety standards.

The high level of vertical integration among Russian carmakers has hampered the development of a modern supplier market until now. That is why the Russian supplier market today is hardly competitive when compared internationally. Suppliers are seldom active in the development stage and OEMs use them mostly as an extended workbench. International suppliers have viewed Russia’s local market as attractive only in exceptional cases. The production volumes of international OEMs are still too low and the share of locally engaged components for CKD fittings is too small.

Although it is a low-wage country, Russia has not seen the location of international supplier plants within its borders unlike some neighboring countries. In past years, Europe’s top 20 automotive suppliers have built more than 150 sites in Central and Eastern Europe (CEE). Further relocation from CEE to Russia has not occurred because the cost advantages are minor and transport costs are higher.

However, the conditions that have hindered the creation of a competitive supplier industry in Russia are improving dramatically. According to a study conducted by Roland Berger Strategy Consultants together with the Committee on Eastern European Economic Relations, production of foreign OEMs in Russia will increase more than six-fold over the next 10 years, standing at 157,000 units in 2005. Russian manufacturers’ production levels in contrast will decrease slightly during the same period to around 750,000 units annually.

Spurred by rising incomes and greater desire for comfort and safety, sales of foreign vehicles in Russia have jumped by 50 percent to 606,000 units in 2005. Hyundai alone, as market leader among the foreign manufacturers, has sold more than 85,000 units in 2005, approximately half of which have been assembled by its Russian partner TagAZ. Mitsubishi and Nissan have reached unit sales of 55,000 and 46,000 respectively - sales of this magnitude would also justify local production. Ford, Renault, KIA, BMW and GM already have production facilities or assembly partners in Russia. Toyota wants to produce around 100,000 vehicles locally by 2010. VW has also firm production plans for Russia, DaimlerChrysler is considering to produce locally in Russia as well.

But it is not just the upsurge in production among foreign manufacturers that is inciting the interest of international suppliers. Russian manufacturers too are giving their suppliers more responsibility. Based on the study, the share of work outsourced by Russian OEMs will climb from 26% in 2004 to 43% in 2010. The share of locally made components in foreign vehicles will increase threefold to 36% during the same period. Russian OEMs are increasingly keen to purchase components produced by international suppliers because of greater environmental and safety standards. But customers’ growing demands for comfort and safety also play a role. Components according to international standards already cover around 40% of Russian OEMs’ purchasing volume needs, especially in drivetrain (around 54%) and interiors (around 24%). By 2010, the share of components meeting western standards in Russian vehicles will increase to around 37% from 13% of vehicle value. Because Russian suppliers rarely possess the technologies necessary to fulfill these requirements, the prospects are bright for international suppliers. Based on these developments, the market for original equipment in Russia is expected to grow from EUR 0.9 billion to EUR 5.1 billion between 2004 and 2014. This translates into annual growth of almost 20% over the next 10 years—an impressive feat.

Without doubt, Russia’s automotive sector offers international suppliers considerable growth potential. For sure, the absolute market volume remains comparatively low, but a market entry in Russia today should be considered as a strategic investment—to get in quickly enough to create the conditions that will allow companies to participate successfully in the market growth. The time and manner in which companies settle in Russia needs to take into consideration both the company and the target customers. Entering the market means taking on a calculable entrepreneurial risk. But it is worth it when weighed against the attractive growth and returns potential.

Along with the local market dynamics, Russia may also become a considerable player in the global automotive sector when it comes to exports in the mid-term and long-term. Considering the lack of growth perspectives in many other parts of the world, the automotive and supplier industry should quickly grasp the opportunities offered in Russia.

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