Russia becomes biggest car market in Europe

By bne IntelliNews September 3, 2008

Ben Aris in Berlin -

Russia officially became the largest car market in Europe this summer, leaving long-time leader Germany in the dust.

The point was underlined at the first-ever Moscow Automobile Salon (MIAS-2008) in August, which drew a huge crowd of international manufacturers who, keen to build on burgeoning Russian sales, debuted 50 new cars specifically designed for the Russian market. For many producers, Russia is their fastest-growing market and for America's Ford, it's the only profitable market in its portfolio.

Russia passed Germany as the biggest car market in Europe in July after sales jumped 41% to 1.65m cars as spending on cars grew 64% to a record $33.8bn between January and July, according to PricewaterhouseCoopers. This is just ahead of the 1.6m cars sold in Germany over the same period.

And the Russian market is continuing to grow and will easily beat last year's outstanding 57% growth rate, increasing the total value of the market to $53.5bn. In terms of the number of total cars on the road, the market up was also up by over a third to 2.75m cars for the full year in 2007, says Renaissance Capital.

However, it seems that that rate of growth has started to slow and a pinch on the consumer sector is bound to make itself felt. Most of the leading foreign manufacturers selling in Russia expect to see sales up by well over a third, although Ford's market share is clearly starting to mature at about 5% of the total.

Not such a steal anymore

Car sales have also gone upmarket. It used to be that a Russian who wanted a foreign-made car would take the train to Berlin, nick one and drive it home. The problem was so bad that German carmaker Mercedes - the favourite target - gave the Russian police force millions of dollars to crack down on car thefts. At the same time, a legitimate shuttle-trade sprung up of poor Russians travelling to Western Europe and Scandinavia to buy second-hand cars to sell on the Russian market, which accounted for the lion's share of foreign-made car sales.

But thanks to a combination of rising wages and consumer credits, the fastest growing segment has been new imports, where the average growth rate has almost been 70% over the past five years.

Domestic and foreign-made car sales are now running neck and neck in terms of number of units sold and the foreign-branded car sales will probably take the lead by the end of this year with an increase to 1.838m units by the end of 2008 from around 1.6m units in 2007, according to Alexei Rakhmanov, head of the Ministry of Economic Development and Trade's automotive industry department. However, the value of imported foreign-made cars already passed the value of domestic sales last year, reaching 61% of the total market value, up from a mere 17% in 2001.

The balance will be redressed a little by the growing production of foreign-brand cars made on Russian soil. With a "Detroitsky" being built in the suburbs of St Petersburg and a few other locations, the share of Russian-made, foreign-brand cars has also been growing to make up 14% of the total market, or 453,940 cars, by the end of 2007, from nothing in 2001. This trend will continue to grow fast, as construction on many of the northern factories only really got going last year and most will come online in the next few years.

Indeed, foreign carmakers will overtake the domestic producers in terms of "made in Russia" labels in about four years, to make 1.6m cars annually at their Russian assembly plants, Martin Jahn, the general director of German carmaker Volkswagen Group's Russian subsidiary, said during the Moscow International Auto Show.

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