Russian auto industry struggling with challenges in volatile market

April 13, 2015
OEMs and suppliers are remaining cautiously optimistic that the Russian automotive marketplace will eventually recover despite being rocked by a plunging ruble and a “bloodbath” of plummeting vehicle sales.

OEMs and suppliers are remaining cautiously optimistic that the Russian automotive marketplace will eventually recover despite being rocked by a plunging ruble and a “bloodbath” of plummeting vehicle sales. Its economy continues to be pummeled by a series of serious setbacks that include free-falling oil prices and tough sanctions from the U.S. and other Western nations over Russia’s incursion into Ukraine.

Drastic production reductions and layoffs have been implemented amid January’s 24 percent drop in overall new car sales followed by a devastating 38 percent decline in February. Some manufacturers have upped vehicle pricing as they attempt to stay the course after years of routing heavy investments into Russia’s automotive sector.

“We believe the Russian market likely has significant potential in the longer term. In the short term, however, it remains an extremely volatile and challenging market,” says John Gardiner, director of news operations for Ford of Europe.

“It’s important to remember that even today Russia is one of the largest markets in terms of vehicle sales in Europe – currently No. 5, down from No. 3 at the end of 2014 – with the potential to be the largest in Europe at some point in the future. So, it’s important to maintain a strong presence in the country,” he tells Aftermarket Business World.

“This is why we’ve continued to invest to expand the Ford portfolio in Russia to fill new segments and deliver vehicles tailored to meet the needs and wants of Russian customers,” says Gardiner.

“For example, last year Ford Sollers announced that it would launch six new vehicles in Russia over the following 18 months, and to-date out of the six – EcoSport, Transit, Focus, Mondeo, Mustang and Fiesta – we have launched the EcoSport and Transit. This positive product momentum will put us in a better position to thrive when the market recovers,” he says.

“Given this,” Gardiner elaborates, “we’ve been working intensively with our partners in the Ford Sollers Joint Venture in every area of the business to reduce costs, match production to the real demand, manage the difficult pricing environment, and to limit the financial impact of the current crisis – and we’re continuing to work with them on a daily basis to manage the situation and take the necessary action to respond to circumstances.”

Russia’s dire monetary situation has been in crisis mode for months on end, prompting Renault Nissan CEO Carlos Ghosn to declare in an interview aired on the BBC that “when the ruble sinks it’s a bloodbath for everybody. It’s red ink, people are losing money – all car manufacturers are losing money.”

In March the Associated Press moved a dispatch under the headline of “Russian auto market collapsing, but luxury cars still a must.” As mid-level models were posting sales drops of in the neighborhood of 75 percent to 85 percent, the piece noted that more than a few Russians are still purchasing high-end vehicles as coveted status symbols.

Reflecting this mindset, the AP account quoted CEO Tatiana Lukavetskaya of Rolf, a key car dealership in Moscow and St. Petersburg: “Russians can allow themselves to rent a room in a shared flat on the fifth floor of a Khrushchev-era apartment building, live very poorly, but still drive an Audi,” she observed. “That’s because everyone sees how I drive, but no one sees how I live.”

Cost of ownership

A recent analysis from PriceWaterhouseCoopers forecasts that the rising new car prices seen in late 2014 will continue into 2015, leading to “a negative impact on market behavior.”

“Against this background,” according to Sergey Litvinenko, PwC’s Russian automotive director and the study’s lead author, “car owners and potential buyers have now begun to pay more attention not only to the car’s brand and road performance, but also to the cost of owning it. Moreover, some consumers are even considering whether they can afford a specific car model, or whether it has now become an unaffordable luxury that’s beyond their means.”

Litvinenko goes on to point out that “the sales decline expected in 2015 might prompt some auto brands to abandon the Russian market altogether. At greatest risk are those automakers with relatively small sales volumes in Russia as compared to global sales for the same makes and models. In the current situation, those automakers with a high degree of manufacturing localization in Russia, mainly domestic Russian automakers, have found themselves in a more advantageous position.”

Less-expensive local production and sourcing is seen as augmenting supportive policies initiated by a government already reeling from nationwide economic distress. “Moreover, 2015 may see a fundamental shake-up of the market in favor of Russian brands, as well as those manufacturers with a balanced, consistent business development strategy for the Russian market,” says Litvinenko.

“More than 70 percent of the vehicles we sell in Russia are built there – a number we plan to increase to 90 percent by 2016,” says Nissan spokeswoman Sara Jenkins. “Russia is a key market for Nissan, and despite the current operating environment this has not changed. We have strong foundations, but due to external factors, like other manufacturers, we are course-correcting as appropriate.”

“The situation in Russia definitely is a problem – not only for us, but also for the whole car industry,” echoes General Motors spokesman Ulrich Weber.

“We have reacted to the difficult market environment at an early stage,” he reports. “We realigned our Russian operations, named a new president for GM Russia and increased our prices. We have scheduled a shutdown period at the plant in St. Petersburg given the new situation in the market. We do not expect the market to recover in 2015 and are monitoring the further development very closely.”

“The volatile economic situation has affected all areas of the industry, including parts and service at our dealerships. For example, used car sales also were down 22 percent in February,” says Ford’s Gardiner.

Sales of aftermarket accessories have been impacted as well. “Russians like to personalize their vehicles as much as anyone else around the world, but again this area has been affected by the volatile economic situation,” he says.

“We source parts from numerous suppliers, but it’s important to note that more than 40 percent of our parts are sourced locally, and we will reach the target of 60 percent by 2018,” says Gardiner.

“EcoSport went into production in Naberezhnie Chelny late last year, and 30 major components are being sourced from 24 local suppliers in Russia,” he says. “We also believe in the potential for greater localization of content given the competencies and capacities available in Russia – and especially in Tatarstan with its solid vehicle component supplier infrastructure – and we’ll be accelerating our local content provision in the upcoming months.”

Ongoing engagement

Aiming to attract the higher-end market, Hyundai went ahead with plans to open its first overseas Hyundai Motorstudio showroom in January 2015.

Located on prestigious Noviy Arbat Street in Moscow, the goal is to “create a unique experience that will realize the company’s Modern Premium brand direction,” says Executive Vice President WonHong Cho. Five zones are highlighted within the structure – Event Space, Car Gallery, Brand Collection, Library and Café.

The gallery is a major design element, featuring a heart-shaped staircase from the first to the second floor, which can also serve as an amphitheater. Two screens allow visitors to view pre-recorded video content, and an example of Hyundai’s best-selling model in Russia, the Solaris, hangs from a nearby wall.

“Built with exquisite attention to detail,” according to the automaker, the amenities include “rigorously trained consultants,” called gurus, who are on hand to assist in navigating the various offerings: “The ongoing engagement of visitors at Hyundai Motorstudio Moscow will allow the company to continue to bring to life the car culture of tomorrow and today.”

Subscribe to Aftermarket Business World and receive articles like this every month….absolutely free. Click here.

Sponsored Recommendations

ZEUS+: The Cutting-Edge Diagnostic Solution for Smart, Fast, and Efficient Auto Repairs

The new ZEUS+ simplifies your diagnostic process and guides you through the right repair, avoiding unnecessary steps along the way. It gives you the software coverage, processing...

Diagnostic Pre- and Post-scan Reports are Solid Gold for Profitability

The following article highlights the significance of pre-scans and post-scans, particularly with Snap-on scan tools, showcasing their efficiency in diagnosing issues and preventing...

Unlock Precision and Certainty: TRITON-D10 Webinar Training for Advanced Vehicle Diagnostics

The TRITON-D10 lets you dig deep into the systems of a vehicle and evaluate performance with comparative data, systematically eliminating the unnecessary to provide you with only...

APOLLO-D9: Trustworthy Diagnostics for Precision Repairs

The APOLLO-D9 provides the diagnostic information and resources you need to get the job done. No more hunting through forums or endlessly searching to find the right answers. ...

Voice Your Opinion!

To join the conversation, and become an exclusive member of Vehicle Service Pros, create an account today!