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. Last Updated: 07/27/2016

Foreign Carmakers Edge Out Domestic Rivals

MTSales of foreign cars, like these at a recent exhibition, account for more than a quarter of the domestic automobile market.
Domestic carmakers have seen their market share slip away in recent years, edged out by competitively priced foreign cars cruising in at full throttle with the help of cheap consumer loans.

Companies -- from the United States' Ford and General Motors to Korea's Daewoo and the Czech Republic's Skoda -- have taken advantage of Russian consumers' disdain for domestic autos and have made significant inroads on their homegrown competition.

Tolyatti-based AvtoVAZ, maker of the ubiquitous Lada and Zhiguli, and Volga maker GAZ, located in Nizhny Novgorod, have said their survival is on the line.

They have trimmed production to battle a glut in supply. But even that, they argue, has been an inadequate counterbalance to low demand for domestically made vehicles, which members of the middle class have increasingly opted against, considering them unreliable.

Foreign carmakers have been quick to take advantage of the weak domestic competition, opening a record number of dealerships last year and increasing sales by 40 percent across the board.

Last year, automakers appealed to the government for help -- and won protective tariff barriers to imports. On average, new foreign cars now face a 25 percent duty, while tariffs on old second-hand imports are set at 35 percent.

This is a significant extra cost, but demand for new and used car imports has risen nonetheless.

Imports grew across the board year on year, accounting for 29 percent of the market, up from 24 percent in 2001. Russian producers' output figures dropped.

Renaissance Capital analyst Natalia Zagvozdina said AvtoVAZ has been most hurt, dropping 7.5 percent to 8 percent in output.

"Russian cars are losing market share by about as much as foreign cars -- used and new -- are gaining it," she said.

AvtoVAZ subtracted a shift from its production schedule at the end of last year to cut back production, while foreign car makers in Russia are doing just the opposite.

"We are reviewing the possibility of adding a second shift, which would allow for considerably more production," Ford Russia president Henrik Nenzen said.

Nenzen said a survey showed that 52 percent of buyers of Ford's new Russian-built Focus models are replacing Russian cars. These customers, then, are first-time buyers of a foreign brand, which represents a shift in demand.

Daewoo and Skoda have been traditional leaders in import sales. Prices on their bargain-priced vehicles have fallen so low as to be within $1,000 of the prices for domestically produced cars, making them even more competitive.

Daewoo sold some 12,418 cars in Russia in 2002, the most of any new car importer. Skoda came in second with new car sales of 9,407. Only three foreign brands, Mercedes, Chevrolet and Fiat, saw sales volume fall last year.

On average, sales of new foreign cars increased by 40 percent in 2002.

Cheap credit has enabled this growing presence, putting once unaffordable foreign cars within the reach of ordinary people.

It has also proven quick to catch on.

Before Ford launched production last summer near St. Petersburg, at Russia's only 100 percent foreign owned auto plant, "less than 10 percent of our customers used credit to finance purchases," Nenzen said, adding that the figure has since grown to 25 percent.

Nenzen expected this trend to continue, following Europe, where 60 percent to 80 percent of purchases are financed on credit.

Car Sales in Russia
Brand20012002% Change
Daewoo10,00012,41824.2
Skoda8,3919,40712.1
Renault5,6068,33748.7
Toyota3,9288,302111.4
Mitsubishi6,0048,16736
Nissan5,2868,02951.9
VW7,2547,9729.9
Peugeot4,2466,98464.5
Ford4,1246,66961.7
Hyundai2,2055,575152.8
Kia3,7275,37944.3
BMW2,6363,79043.8
Volvo2,4022,92921.9
Opel1,4582,86796.6
Audi2,5082,7007.6
Mercedes3,8062,441-35.7
Citroen1,0092,27225.2
Suzuki1,2201,91256.7
Honda8371,34060
Land Rover410839104.6
Chrysler134380183.6
Fiat618356-42.4
Lexus154328113
Chevrolet544275-49.4
Saab14419938.2
Source: company data


Imports of Japanese Toyotas have soared, also thanks to accessible car loans, its representatives said.

Toyota sold 8,302 vehicles in 2002, an increase of 114 percent year on year. "We have a credit program with Raiffeisenbank that has been very successful," said Alexander Bezrukov, a sales manager at Toyota.

In the space of only nine months, Raiffeisenbank, a leading credit lender, has seen demand for car loans increase exponentially. Since April 2002, the bank's automobile lending ballooned from 1 percent to more than 40 percent of its retail loan portfolio, division chief Alexander Koloshenko said. Of the bank's $28 million loans, car credit accounts for $12.2 million.

Used foreign cars make up the majority of imported cars sold due to their quality and competitive pricing.

Of the 550,000 foreign models sold in Russia last year, four-fifths were second-hand and only one-fifth were new models sold through official dealers. Those 110,000 new vehicle sales makes for a relatively miniscule market slice for foreign exporters to fight over.

Russia may be a fast-growing market for new imports, but it remains only a blip on the global sales radar screen. Sales here represent only a small fraction of multinationals' global sales.

GM doubled its annual sales in Russia in 2002, but even that volume is only equivalent to what a single large dealership in the United States sells.

As illustration of this, the Bob Sellers GM dealership in Southfield, Michigan, sold 3,000 cars last year, comparable to the 3,339 GM vehicles sold in the Commonwealth of Independent States.

But GM doesn't expect its CIS numbers to stay at such levels for long. GM CIS general director Heidi McCormick predicted GM sales here would double again this year.

Foreign companies' growing market share has worried Russian carmakers, which have appealed to the State Duma for trade protection. Industry leaders want the government to raise tariffs on used imports more than three years old and to use budget funds to purchase Russian-made cars.

Earlier this month, the Duma sent a draft of these proposals to Prime Minister Mikhail Kasyanov. Two hundred and forty-three deputies -- a majority -- voted in favor of the measures on Jan. 17.

The government, however, dismissed the Duma's appeal.

"State support and another import tariff hike will not save the Russian auto industry; the industry can only be saved by raising the quality of Russian cars," Kommersant quoted government spokesman Alexei Volin as saying.

Volin noted that last year's 10 percent tariff hike on cars more than seven years old, from 25 percent to 35 percent, did little to help the industry.

Lobbyists argue that older cars are a threat to public safety, though privately no one questions the roadworthiness of a 1990 BMW, and even industry insiders admit it is only a pretext for tariffs.

Renaissance's Zagvozdina, too, saw little utility in higher duties. "A new tariff hike would not help Russian producers, it would only cause demand to shift," she said. "Those who wanted to buy an $8,000 used car will get credit and buy, say, a $13,000 Renault," leaving Russian producers out of the loop.

Russian producers face even tougher competition this year. Both Ford and GM are expected to continue dropping prices on popular makes as their domestic production facilities hit full stride.

GM plans to produce 35,000 Chevrolet-Nivas at its Tolyatti factory in 2003. Ford says it will crank out 11,000 Focuses at its plant outside St. Petersburg.

Chevy-Nivas are priced from $8,000 and Ford Focuses from $10,900. Both companies are offering competitive credit plans.