Russian Auto Market Now Europe's Largest

Russian Auto Market Now Europe's Largest

Autos July 11, 2008, 2:08PM EST text size: TT
Russian Auto Market Now Europe's Largest
Things have changed since the Soviet days of Ladas and Volgas—the country now sells more cars than Germany and shows no signs of slowing

by Jason Bush

It's a remarkable landmark for Russia's development as a consumer market. According to figures published July 9 by consultancy PricewaterhouseCoopers, Russia recently overtook Germany to become the largest car market in Europe. PwC notes that some 1.645 million new cars were registered in Russia during the first half of 2008, compared with 1.63 million cars in Germany. "The Russian auto market is still witnessing an astonishing growth," the report concludes.

Russia certainly has come a long way since Soviet days. Back then, cars were a luxury enjoyed by a minority who had to wait for years to acquire locally made Ladas and Volgas. It's a very different story now, as Russia's increasingly affluent consumers splash out on new sets of wheels, helped by cheap credit and oil-fueled economic growth. As any visitor to Moscow can tell you, Russian roads are now crammed (and all too often jammed) with vehicles of every description. Nowadays, most of them are of Western or Asian design, from sturdy Renault (RENA.PA) compacts, to chunky Mitsubishis (7211.T) and Chevrolet Jeeps, to high-end Mercedeses (DAI) and BMWs (BMWG.DE).

Perhaps nothing symbolizes the Russian consumer boom of recent years more than the phenomenal growth for cars. PwC notes that during the first six months of this year, unit sales increased by 41% vs. the same period in 2007. Sales of foreign brands have increased even more quickly, by 47%, according to figures published July 10 by the Association of European Businesses (AEB) in Moscow.
Growth Continues to Be Strong

Although rapid growth in auto sales is nothing new, analysts have been taken aback by its continued strength, which has beaten all forecasts. Presenting the results, Stanley Root, leader of PricewaterhouseCoopers' automotive practice in Russia, said: "The latest figures for the Russian car market are the most interesting I've ever seen. …The news is that growth continues as strong as ever." Indeed, growth has actually accelerated since 2007, when car sales were up 35%.

PwC predicts that for 2008 as a whole, the total Russian market will reach between 3.6 million and 3.8 million cars. That compares with just 1.5 million five years ago. Over the same five-year period, the share of foreign models has risen from 38%, to 59% of new car sales. Helped by the growing popularity of pricier foreign brands, the Russian car market is growing even more rapidly in dollar terms, up 64%, to a projected $33.8 billion this year. In comparison, car sales in Western Europe are growing at less than 5% annually.

Little wonder foreign carmakers are rubbing their hands with glee and rushing to set up or expand production in Russia. Many, including Ford (F), Renault, General Motors (GM), and Volkswagen (VOWG.DE), already have plants there. Others, including Nissan (NSANY), Hyundai, Peugeot (PEUP.PA), and Mitsubishi, have factories under construction. A second General Motors factory, in St. Petersburg, is due to open next year.
Next Stage: Auto Components

Meanwhile Renault has recently become partners with Avtovaz (AVAZ.RTS), the largest domestic manufacturer, paying $1 billion in February for a 25% stake (BusinessWeek.com, 2/29/08). Last year, some 440,000 foreign-brand cars were manufactured in Russia, a number that's expected to rise to 2 million by 2012.

It isn't just global car manufacturers who now have their sights set on Russia. The next stage, PwC predicts, is "the emergence of a powerful components industry for foreign brands." Today, most foreign manufacturers in Russia still import the bulk of their parts. Last year, production of car components in Russia for foreign brands was worth only $360 million.

But PwC expects that figure to increase to $1 billion this year—and to as much as $10 billion by 2012. Growth will be driven by the likes of Canadian components giant Magna International (MGA), now partners with Russian automotive tycoon Oleg Deripaska, who invested $1.5 billion to acquire Magna shares last year (BusinessWeek.com, 5/18/07).

The best news, as far as car and component manufacturers are concerned, is that Russia's market may still have plenty more room for growth. PwC predicts new sales will keep rising, reaching 6 million units by 2014, more than double what they were last year. As a result, Russia will account for 30% of the value of all car sales in the so-called BRIC countries (Brazil, Russia, India, and China) over the next eight years. By 2012, analysts at Russian agency Avtostat predict, Russia's car market will be the third largest in the world, behind only the U.S. and China.

Bush is BusinessWeek's Moscow bureau chief .