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. Last Updated: 07/27/2016

Foreign Cars Take the Lead in Seller's Market

MTA prospective customer looking at a Ford car at a Moscow dealership. Ford sold more than 115,000 vehicles last year.
New foreign cars last year outsold domestic models for the first time in the country, with Russians spending a total of $32 billion on cars -- $10 billion more than in 2005 -- PricewaterhouseCoopers said in a report Tuesday.

Last year, Russians bought 1 million new foreign cars, both imported and assembled locally, up from 560,000 in 2005, PwC said. Sales of domestic brands dropped 5 percent to 800,000 units. Overall, more than 2 million cars were sold in the country last year, 20 percent up on 2005.

"Foreign brands have grown and grown and grown until 2005, and then leapt forward," report author and PwC partner Stanley Root told journalists. "2006 was the most successful year in the last 15 years."

By 2010, Russia could become Europe's biggest car market after Germany, Root added.

But while the demand for cars continues unabated, poor-quality car components, road congestion, the lack of a transparent used-car market and a nonexistent disposal system for old cars can all dampen growth in the future, PwC said.

Of the new foreign cars sold, 720,000 were imported and 280,000 assembled in the country, increases of 76 percent and 87 percent respectively. In dollar terms, foreign car sales leapt 78 percent to $18.2 billion. Russians spent another $4.4 billion on foreign brands made in the country.

Henrik Nenzen, president for Ford in Russia, said by telephone Tuesday that the growth in sales of foreign brands was in many ways a sign that the government's efforts to lure foreign carmakers to set up local assembly plants was paying off.

The government last year lifted import duties on key car parts in an attempt to get international carmakers to bring production to Russia.

Ford almost doubled sales to 115,985 units, emerging as the country's bestselling foreign carmaker in 2006, according to figures provided by the Association of European Businesses in Russia. At 111,458 vehicles, Chevrolet was second, ahead of Hyundai with 100,685 units.

Growing incomes, more readily available consumer loans and skyrocketing real estate prices have all contributed to the boom. Other reasons are psychological, with Russians now having "a bit more confidence in their future," Root said. "Fewer and fewer people want to spend weekends under their car in a garage," he said in the report.

Car Market Revs Up
Foreign Carmakers2006 Units2005 Units
* Including GM-AvtoVaz
Source: Association of European Businesses in Russia

The growth has been so impressive that foreign carmakers have been jockeying for a position to ensure market share. Japan's Mitsubishi, which had said it was too early to talk of building a plant in Russia, was reported last week as having been in talks with the government over setting up production here.

But PwC cautioned that the country would need to improve the quality of car parts, relieve road congestion, bring a lucrative second-hand car market out of the shadows and introduce a nationally coordinated car-disposal system. These four constraining factors, Root said, would largely define market growth and might eventually slow it down.

"The situation is close to getting out of control," Root said of Moscow's notorious traffic jams. He said he had sold his Volkswagen Passat two months ago. "I finally gave up," he said.

With so many new cars hitting the country's roads, the next big market will be that of used vehicles, Root said. By 2010, that market may total $11 billion, or more than 900,000 cars, he said, basing his figures on an estimate that Russians would sell their foreign-made cars every seven years on average. The number of second-hand foreign cars sold last year dropped 19 percent to 260,000 units, PwC said.

Current legislation, Root said, hampers the growth in used-car sales, with Russian dealers having to pay a value-added tax on an entire car's value. In countries such as Britain, used-car dealers are charged VAT on the profit they make when reselling the car.

In the best-case scenario, sales of new cars may top 3.5 million units by 2015, Root said after the briefing. But if the government doesn't invest in growing the market, new car sales would only reach 2.3 million units, he said.