Foreign investment in Russian car market moves up a gear

By bne IntelliNews March 18, 2011

Rachel Morarjee in Moscow -

Global carmakers spent February speeding into Russia, as investors from Asia, Europe and the US raced to beat tightened limits on imports. The deal looks mutually beneficial: Russia gets the international expertise and technology to help drive its modernisation; the automakers get easier access to a market forecast to become Europe's biggest in the next four years.

The Russian consumer should also benefit. "Russia is a very big market and that is why foreign companies are flocking in. More competition will mean lower prices for consumers," and thus more sales, says Alexander Kazbegi, transport analyst at Renaissance Capital.

As the March 31 deadline approached, the US' Ford and General Motors, Germany's Volkswagen and Japan's Toyota announced investments of over $1bn to boost local production and stake a claim to markets ranging from St Petersburg to the Pacific Rim port of Vladivostock. Alexey Rakhmanov of the Ministry of Industry and Trade said in late February that more applications from foreign manufacturers were expected.

The race was started by changes to the tax code that came into effect on March 1. Under the new rules, carmakers may import components with 0-3% duty in return for investment agreements to build at least 300,000 cars locally per year. Previously, auto companies could avoid punitive tax rates on parts by producing 25,000 cars in country, so some had moved to build assembly lines in Russia, but made little further commitment. The latest batch of deals has seen the global brands teaming up with domestic producers to boost production.

Experts say that the new rules will give the Russian car industry a big fillip, boosting the technological know-how of Russian partners in the ventures. Production should be 60% localised within six years as auto-part makers also set up shop in Russia to supply the car factories. "International car makers are pretty excited, because they forecast significant growth in car sales in the next decade. We expect that car sales will recover to pre-crisis levels by 2013," says Mikhail Ganelin, transport analyst at Troika Dialog.

Local partners

Russian carmaker Sollers and Ford pledged on February 18 to invest $1.4bn in a new assembly and distribution partnership by 2020. The investors hope to see Ford's market share double within five years. The deal halted Sollers' negotiations with Italy's Fiat, although the Italian automaker has reiterated it intends to hit the magic number of 300,000 locally produced cars, and is now mulling whether to go it alone or to launch a joint venture with another company.

Sollers has its fingers in other pies. Toyota will become the first Japanese company to build cars in Russia's Far East after unveiling plans for a JV with Japanese trading house Mitsui and Sollers to begin production in 2012. Toyota will supply the car parts and Sollers the manufacturing facilities to build over 300,000 Toyota-brand vehicles annually, while Mitsui will use the Trans-Siberian railway to transport the cars for sale across Russia.

France's car maker Renault may also build a plant in Khabarovsk, according to the regional government's website.

Meanwhile, General Motors has announced it will dramatically expand production in Russia to at least 350,000 vehicles a year, having signed deals for Gaz to build Chevrolets in Nizhniy Novgorod and with Avtovor to expand production in Kalinigrad, in addition to operating its own plant in St Petersburg.

Also in bed with Gaz is Volkswagen, which has teamed up with the Russian company to make 300,000 VW and Skoda cars annually. The companies are hammering out the final details of the deal.

The reason the government's push has proved so successful is that Russia's car market is the fastest growing in Europe. In 2008, it briefly pulled level with that of Germany's - the continent's biggest - as it sold 2.9m cars, before retreating as the crisis battered the economy. As the recovery continues, observers predict it will overtake Germany's before 2015. Russian Industry and Trade Ministry officials are forecasting double-digit growth for new passenger car and light commercial vehicle sales in Russia this year, with sales of 2.19m cars predicted - a rise of 14.8% on 2010.

And there's an added potential bonus. Russia is not only a huge market itself, but can be used by foreign carmakers as a launch pad for sales over a wider region. "It's a platform for capturing the Commonwealth of Independent States and parts of the Eastern European market," says Troika's Ganelin.

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