Graham Stack in Berlin -
Russia's automotive industry is beset by foreign competition - with one major exception: Russian truck producers posted annual sales growth averaging 20% in 2006 and 2007, as foreign companies make little inroads into the market.
"A boom with double-digit growth rates has been there for a number of years now - admittedly from a low base - but it's definitely set to continue," argues Gennady Sukhanov, automotive sector analyst at Troika Dialog.
Domestic demand is behind the boom. "In monetary terms, the Russian truck market grew by 68% in 2006 and around 50% in 2007," says Eduard Faritov of Renaissance Capital. As such, it outstrips even the rapid growth of the passenger car market, fired by the consumption boom that is gripping Russia.
The truck market benefits indirectly from the consumption boom - since the construction industry is one of its chief customers, and housing development, shopping malls, entertainment complexes and office blocks are springing up all over Russia. But construction is not just powered by the consumer boom, but also by the massive state-supported infrastructure programme, which will see, as investment bank UBS put it, "Russia turning into one gigantic building site over the next decade."
Truck makers also benefit directly from the commodities boom. "As exploration and exploitation of raw materials expands further and further, trucks are required in large quantities for transport," explains Faritov. Whether mining, drilling or logging, trucks do the dirty work.
Some truck producers also stand to gain from the swelling military budget. For instance, heavy truck producer KamAz is an important supplier of trucks to the military.
That said, one classic customer of truck producers is still extremely underdeveloped in Russia - but growing rapidly. "The trucking sector is greatly under-consolidated and accounts for only 3% of freight," says Faritov. "But it is growing by 30% per year." Rail still dominates freight transport, due to the precarious state of Russia's roads.
An additional factor boosting demand is the advanced age of the Russian commercial vehicle fleet. Trust investment bank calls the age structure of Russian trucks "catastrophic," with new trucks comprising only 14.2% of the fleet, and 60% of the fleet over 10 years old, thus needing replacement in the immediate future.
So demand for trucks will continue to surge. And Russian truck producers are largely untroubled by the major headache of car producers - foreign competition.
"Russian manufacturers still dominate the market. Trucks and buses are ordinarily bought by companies rather than individuals, and companies choose not the most modern or beautiful vehicles but the most inexpensive and maintainable, which are typically Russian brands," writes Trust investment bank in a newly released report on the Russian automotive industry.
"Russian producers enjoy two major advantages over foreign companies," explains Sukhanov. "Firstly there is the price advantage over imports of 30-40%. About 25% of this comes from import tariffs. Secondly, crucially, domestic producers have a service network covering all over Russia."
"Trucks are a cost of ownership play," confirms Faritov. "It's a question of installed service capacity, the number of shops, and the speed of supplying spare parts." Russian trucks are thus not only cheaper than foreign imports, they are also cheaper to maintain over their lifetime. Moreover, Russian trucks, intended as they are for Soviet planners for industrial and military use, and not just for the population, are far more reliable than their smaller brethren.
As a result, despite the explosion in demand, and the strengthening ruble, from 2005 to 2006 the share of imported trucks on the market rose only fractionally from 20.3% to 21.4%. On the passenger vehicle market, by contrast, Russian-made and imported vehicles respectively accounted for 50% of vehicles sold. Excluding foreign companies with facilities in Russia, Russian brands took only 38% of market share.
So Russian truck manufacturers still rule the roost. But will they keep up with demand?
Sukhanov sees surplus capacity still available. KamAz, the heavy and mid-size truck giant from Tatarstan, in Soviet times boasted production capacity of 150,000 trucks per year. Currently, the plant produces around 50,000. Nevertheless, Faritov sees KamAz as "pretty much limited in its capacities."
While most production remains based on Soviet-era models, competition is certainly hotting up between Russian producers, as each moves into market segments formerly the preserve of rivals. "The Soviet system was for individual producers to occupy very specialized market niches," explains Sukhanov. "KamAz produced exclusively heavy trucks, ZIL mid-sized trucks, and so on. Now what is happening is that they are diversifying into each others' niches."
GAZ, based in Nizhny Novgorod and part of Oleg Deripaska's Russian Vehicles holding, is diversifying from light commercial vehicles into mid-size trucks, and KamAz doing the same from its heavy vehicle segment. This constitutes a relatively cheap way of introducing new models, and satisfying demand.
However, there are signs that this idyllic situation of booming demand and little foreign competition may not hold forever. Foreign truck producers are slowly tuning in to the Russian market, and looking to set up production facilities.
KamAz, for one, may be worried about Volvo's arrival in Russia with a first greenfield project in the heavy vehicle segment. Volvo already has a 7.4% market share in the heavy truck segment, still admittedly tiny compared with KamAz's 33.5%. However, Volvo announced in April plans for production facilities in the town of Kaluga, near Moscow, slated for completion in 2009. The new facilities will have annual capacity for 10,000 Volvo trucks and 5,000 Renault per year. Volvo and Renault have between them 48 authorised service centres across Russia.
"KamAz has largely relied on internal resources for funding up till now," says Sukhanov. But not coincidentally, this year the plant's management expressed support for an IPO in 2008, combined with privatization of the Russian Federation's 34% stake in the plant, to raise funds for investment. But the decision-making process is bogged down.
"Basically, the decision-taking process is very long," Sukhanov explains the wrangling over the KamAz stake. "It's bureaucracy. And there is no clear agreement on strategy." The regional government of Tatarstan wants to keep its hand on the plant, while federal policymakers have repeatedly advocated forming some sort of national automotive corporation incorporating AvtoVAZ and KamAz, despite a lack of any evident synergies between the plants.
Privately-owned set-ups, such as Oleg Deripaska's GAZ, or Alexei Mordashov's Severstal-Avto, have been more alert to the threat of foreign competition, and the potential of partnerships with foreign companies. Severstal-Avto has a joint venture with Japan's Isuzu to build light trucks in Ulyanovsk.
GAZ will launch production of Maxus vans and minibuses in Nizhny Novgorod in 2008. Maxus is the brand of British automotive maker LDV in 2006, acquired by GAZ in 2006. GAZ is facing increased competition in the light commercial vehicle segment from the TagAz plant in Tagan Rog that assembles Hyundai Porters.
Negotiations over Russia's accession to the World Trade Union could prove to be a more serious party-pooper than greenfield production facilities, given the current approximately 25% import tariffs on trucks.
However, Russia's accession to the WTO has been postponed so often that analysts have now started to discount it. And, says Faritov, "if it ever actually happens, then the Ministry of Economic Development and Trade will not allow tariffs to be dropped over night. There will be a transitional period, probably of five years."
So over the medium term, nothing looks likely to put the brakes on Russia's truck makers. Whereas Russian car producers, such as AvtoVAZ, are "destined to die out," according to Faritov, truck producers have woken up to a new life by the building surge that is reshaping the country - and epitomized by the grandiose plans for the Sochi Winter Olympics in 2014.
The Winter Olympics, not the WTO, will likely shape the future of Russia's truck makers.
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