Prospects for the Russian automotive market Stanley Root 21 July 2010
Pwc
Contents
1. Market overview 2. Domestic automotive production 3. Effect of stabilisation programmes on the Russian automotive industry 4. Conclusion
Market overview
Results for the first half of 2010 • In the first half of 2010, the passenger car market grew by 3%* in quantitative terms and by 9% in monetary terms against the same period last year. • Growth in the segment of traditional Russian brands was primarily due to the government scrappage scheme. • The biggest growth was seen in the segment of foreign cars produced in Russia, mostly due to the import substitution effect. • Average car price increased by 7%: a stronger rouble and the lack of discount sales (which were common in the first half of 2009) contributed the most to this growth. However, further growth in the average price was restrained by the increasing share of domestic cars and the increased share of cheap foreign cars, both produced domestically and imported. Thousand vehicles
USD billion
1H 2010
1H 2009
Change
1H 2010
1H 2009
Change
Russian brands
240
200
20%
2.2
1.6
38%
Foreign cars produced in Russia
250
190
32%
4.7
2.9
62%
New cars imports
267
345
-23%
7.0
8.2
-15%
Used car imports
6
8
-25%
0.1
0.1
0%
TOTAL
763
743
3%
14.0
12.8
9%
Car category
Sources: АЕB, Goskomstat, GTK, АCМ-holding, Autostat, PwC estimates * The analysis includes used foreign cars and excludes light commercial vehicles. PricewaterhouseCoopers
21 July 2010 Slide 4
Monthly car sales • Recent months' performance may indicate that after a year of stagnation, the market is beginning to recover both in quantitative and monetary terms, largely thanks to government support. • In June 2010, the biggest sales volume since January 2009 was registered.
Car sales in Russia from July 2009 through June 2010 and prior-year comparison, thousand vehicles Pre-crisis period
350 300
First wave of the crisis Effects of government programmes
22 % 4%
11 %
250
-3 %
-10 %
Crisis period
-15 %
200 150 100
-41 %
-50 %
-56 %
-32 %
20 % -61 %
-61 %
-63 % -60 %
-58 %
-53 % -57 %
-51 %
32 %
45 %
-7 % -37 %
-34 %
50 0
Used cars
New foreign cars
Sources: АЕB, Goskomstat, GTK, АCМ-holding, Autostat, PwC estimantes PricewaterhouseCoopers
Russian cars
21 July 2010 Slide 5
Performance of major automotive groups Groups
1H 2010
1H 2009
%
AVTOVAZ
220,774
17,9870
23
GM Group
67,320
83,865
-20
VW Group
55,599
51,801
7
Ford Group
43,514
53,155
-18
TOYOTA Group Hyundai
35,105
41,266
-15
38,549
37,095
4
KIA
45,729
30,606
49
Renault
42,227
36,610
15
Nissan Group
28,933
42,335
-32
GAZ Group
30,009
26,865
12
DAEWOO
32,316
27,642
17
PSA
19,984
23,642
-15
BMW Group
10,143
8,146
25
MercedesBenz
7,675
5,850
45
790,517
767,213
3
• The scrappage scheme boosted demand for traditional Russian brands: AVTOVAZ, GAZ, UAZ. • The purchasing power of the well-to-do recovers more quickly and, as a consequence, premium brand sales are growing faster than the market overall. • The performance of most brands in the middle segment (excluding Korean brands and brands produced locally) is currently worse than the market overall.
… Total
Source: АЕB * Sales figures include sales of light commercial vehicles PricewaterhouseCoopers
21 July 2010 Slide 6
Market segmentation • Pre-crisis growth in the middle segment has given way to a fall in the last year and a half. • The luxury segment and, in particular, the budget segment have increased their shares.
Segment share in quantitative terms, % 70% 60%
65% 61%
63%
56%
33%
39%
50% 40%
36%
32%
30% 20% 10%
3%
4%
3%
5% 0% 1H 2007
1H 2008 Budget
Source: PwC estimates PricewaterhouseCoopers
1H 2009 Middle
1H 2010
Lux
21 July 2010 Slide 7
KIA is one of the most successful brands in the middle segment KIA performed much better than the overall market and the middle segment. Its key success factors are: • new and rapidly changing model lineup; • warranty extended to five years; • adoption of its own car-loan programmes; • active marketing support; • a new common importer brought to the market.
Movement in KIA and middle segment car sales in the first half year, % 60% 40%
49%
53%
49%
20% -9%
0% -20%
1H 2008
1H 2009
1H 2010
-38% -50%
-40% -60% KIA Source: AEB, PwC estimates, public sources PricewaterhouseCoopers
middle 21 July 2010 Slide 8
Waiting lists for cars appearing again Many dealers have found themselves unable to keep up with increasing demand. This has resulted in months-long waiting lists (e.g., the wait for Mercedes-Benz cars may be three months; for Opel and Chevrolet models, up to four months). Waiting lists for the most popular "classic" AVTOVAZ brands and the Renault Logan may exceed half a year in some areas. Key reasons: • Economic turbulence does not allow for more accurate forecasting of future sales. • Local manufacturers are unable to increase production on short notice; this is true of foreign brand producers as well (their production is mostly based on imported assembly kits, which increases the production cycle time). • Logistic and manufacturing restrictions on car imports to Russia and country quotas do not allow for quick increases in output.
Source: public sources
PricewaterhouseCoopers
21 July 2010 Slide 9
Domestic production
Domestic production • The significant increase in the demand for cars in the second quarter enabled car manufacturers to noticeably raise their production output. • Overall growth in the first half of 2010 was around 70% against the first half of 2009. • The actual output of foreign brands is growing somewhat faster than that of traditional Russian brands, even despite the effect of the scrappage scheme. Production of passengers cars in Russia, thousand units 450 400 350 300 250 200 150
393
403 341
331
332
100
123
50
164
136
174
156
4Q 2009
1Q 2010
0
1Q 2008
2Q 2008
3Q 2008
4Q 2008
1Q 2009
2Q 2009
3Q 2009
2Q 2010
Sources: АСМ-holding, Goskomstat, PwC estimates PricewaterhouseCoopers
21 July 2010 Slide 11
Share of cars made in Russia in the total sales volume • Import substitution, customs duties and state programmes aimed at encouraging sales of cars produced in Russia continue to increase the share of domestic production in the market: • 2008 was a turning point for locally assembled cars. Their share, which in both quantitative and monetary terms had been decreasing for several years in a row, has improved significantly to date and reached its highest point in the last eight years; • The share of foreign cars manufactured in Russia, which has been growing constantly in quantitative terms since 2002, exceeded 30% in the first half of 2010. • We believe that there is no reason to expect any change in these trends in the mid-term.
Share of cars made in Russia in the total sales volume, % 70% 60% 50% 40% 30% 20% 10% 0%
33% 26%
1% 2002
4% 2003
8% 2004
9% 2005
14% 2006
16%
2007
18%
2008
2009
1H 2010
Share of cars in quantitative terms (Russian and foreign brands) Share of cars in monetary terms (Russian and foreign brands) Share of foreign brands assembled in Russia (in quantitative terms)
Source: PwC estimates PricewaterhouseCoopers
21 July 2010 Slide 12
Forecast for car production in Russia If there are no wide-scale changes in the market, we expect production to grow over next several years. Key factors facilitating output growth: • Overall improvement in demand for cars due to the aging of Russia's car fleet, low market saturation and an improving macroeconomic environment; • Prolongation of high customs duties; • Carmakers' big investment plans; • Programmes for industry development and government support of demand. Russia’s car production and sales forecast , million vehicles
3.5 3 2.5 2 1.5 1 0.5 0 2007
2008
2009
2010*
2011*
2012*
Production
Sales
2013*
*Autofacts forecast Sources: PwC estimates, АСМ-holding, Autofacts, production includes car export figures PricewaterhouseCoopers
2014*
2015*
2016*
21 July 2010 Slide 13
Global manufacturers' investment plans for Russia As the market recovers, global manufacturers’ activity in Russia is also increasing. • New capacities: • The new PSMA Rus plant, a joint venture of Peugeot Citroёn and Mitsubishi Motors, was launched. The investment was EUR 470m. The plant’s estimated capacity is intended to reach 125 thousand vehicles; • In early 2011 Hyundai will launch a new assembly line in St Petersburg capable of producing up to 150 thousand vehicles annually; • By 2014 Fiat Sollers intends to increase its production capacity in Tatarstan to 300 thousand vehicles annually, and by 2016 it is planned to reach 500 thousand vehicles.
• Model lineup: • Manufacturers are taking a great interest in the budget car segment. In September Volkswagen will begin selling a Polo sedan designed specifically for the Russian market for EUR 10 thousand. Almost all manufacturers operating in Russia have expressed a desire to increase their share of the budget segment, e.g., Hyundai (Verna), Citroёn (C4 modification) and others, who also plan to introduce Russian versions of their budgetclass models to the market.
PricewaterhouseCoopers
21 July 2010 Slide 14
Chinese manufacturers trying to entrench themselves in Russia • In prior years Chinese brands have failed to gain a significant share of the Russian market. In the post-crisis environment, this year we will see another attempt by Chinese manufacturers to enter the Russian market. • Production of the BYD F3 sedan will be launched at TagAz in July 2010. Production of 10,000 vehicles is planned by the year-end. • Haima 3 production will be launched at the Circassian Derways plant in August (subsidiary of FAW Group). Production of 1,500 cars is planned for 2010, up to 7,000 cars in 2011. Currently, the Lifan Breez (7,200 cars planned for 2010) and Geely (plans to produce up to 25,000 cars) are already assembled at the plant. • JAC (Jianghuai Automobile Co.) intends to enter the Russian market in the second half of 2010. There are plans to import the A0 microcar, a hatchback and two models of family crossover utility vehicles. 100% 50% 0% -50%
Chinese brands sales dynamics, by first half-year periods, % 50%
38% -7% 1H 2008
-43% 1H 2009
3% 1H 2010
-48%
-100% Chinese brands
Overall market
Sources: PwC data, open sources PricewaterhouseCoopers
21 July 2010 Slide 15
Effect of stabilisation programmes on the Russian automotive industry
Automotive lending is becoming cheaper and more accessible • Car loan rates decreased significantly against 2009 (it is possible to get a standard car loan for up to five years at a rate of about 14%), and banks are more willingly providing these loans. • Though the share of cars sold on credit has not yet reached the pre-recession level, when every second car was sold on credit, this indicator is seeing significant monthly growth. • In the first half of 2010, about 170,000 applications for government subsidized credits (2/3 refinancing rate) were submitted; of these, 76,000 applications were approved. • More subsidired loans were provided in the period starting from February 2010 than for the whole of 2009. • Many car manufacturers also subsidise car loans (1% to 5% depending on the terms) in cooperation with banks, for instance: • AVTOVAZ via LADA FINANCE – the LADA ON CREDIT programme allows clients to pay reduced interest rates on car loans; • Ford Motor Company and KIA Motors Rus subsidise loan rates for their customers in cooperation with Russian banks. Source: Minpromtorg, PwC data, open sources
PricewaterhouseCoopers
21 July 2010 Slide 17
Governmental support measures: scrappage scheme In general, the scrappage programme is considered to be successful. Based on the results of the first stage, it was decided to double the programme’s scope. • At the beginning of July, 214,000 certificates had been issued and 150,000 cars had been sold (36,000 of them were set aside under preliminary contracts). • Although according to Ministry of Industry and Trade forecasts, all 400,000 certificates will be granted in 2010, in total about 230,000 cars will be sold under the programme. • About 75% of cars sold under the scrappage scheme are AVTOVAZ products. In addition to the federal government, the following state agencies offer their own additional bonuses under the scrappage scheme: • Tatarstan: for Sollers products (Fiat) – RUB 40,000 for a car, RUB 100,000 for a light commercial vehicle. The programme scope is RUB 100 million from Tatarstan government plus RUB 100 million from Sollers; • Ulyanovsk Region: for Sollers products (UAZ) – RUB 70,000 for a car. The programme scope is RUB 25 million from the Ulyanovsk Region Administration plus RUB 10 million from Sollers; • Nizhny Novgorod Region: RUB 50,000 to 100,000 for GAZ products. The scope is RUB 232 million from the Nizhny Novgorod Region Administration. Sources: Minpromtorg data, regional administrations, PwC data
PricewaterhouseCoopers
21 July 2010 Slide 18
Country-by-country comparison • To date, stimulation programmes (scrappage, tax benefits) of automotive industries in many countries have come to a full stop. • Although in general the global automotive industry is growing, certain markets demonstrate different dynamics. Car sales on major markets, millions vehicles, and year-on-year comparisons 9 8 7 17%
6
20%
5 4 3 2
-28%
3%
3%
1
21%
0 Germany
Brasil
USA 1H 2007
1H 2008
China 1H 2009
Russia
UK
1H 2010
Источники: CAAM, Fenabrave, Just-Auto, SMMT, VDA PricewaterhouseCoopers
21 July 2010 Slide 19
Countries where stabilisation measures have ended United States • The scrappage scheme ended in August 2009. In the first half of 2010, car sales went up by more than 17% thanks to record-low interest rates on loans. Germany • The scrappage scheme ended in March 2010. The decrease in car sales in Germany in the first half of 2010 was 29%. Such a considerable decrease may be explained by record sales in 2009. • The current sales level in Germany corresponds to the average level for the period of 2002-2008. UK • The scrappage scheme ended in March 2010. Sales growth for the first half of the year reached 20%. • Sales in the second quarter of 2010 increased by 12% due to the low-base effect. Sales dynamics for the second half of the year will be critical, as the basis for comparison in the second half will be higher thanks to the scrappage scheme. Brazil • Sales stimulation measures (tax on industrial products) came to an end this March. • Sales for May to June 2010 decreased by 15% against 2009 and by 4% against the 2008 level. However, it is possible that as the economy recovers, low interest rates on loans and low market saturation will lead to an increase in sales during the year. China • Sales motivation measures in China, which exceeded all expectations (sales growth in 2009 was 48%), were extended to 2010 in order to avoid a drastic sales decrease. Tax benefits, however, were not extended. • In the first half of the year, sales rose by 19%. This year the growth driver may be sales of cars to the rural population, which is the target of subsidy programme. PricewaterhouseCoopers
21 July 2010 Slide 20
Value of the scrappage scheme in Russia • As part of this programme, the government receives the following main taxes: • VAT; • Payroll tax (contributions to pension, medical and social insurance funds); • Income tax; • Excise tax; • Customs duties (on import of components). • According to the Russian Ministry of Industry and Trade, under this scheme the government receives RUB 1.5 in tax charges on each rouble invested. • At the same time, these calculations imply that none of the cars sold would have been sold had this scheme not been in place (no incremental sales).
PricewaterhouseCoopers
21 July 2010 Slide 21
Scrappage scheme advantages What has been achieved: • Transparent and comprehensive method of supporting the market; • Activities to increase demand in the crisis period and, consequently, provide support to manufactures and dealers; • Removal of the most hazardous vehicles from the car fleet; • Removal of car scrap from the streets.
What else can be achieved with this scheme: • Promote development of a full-fledged car scrappage industry; • Promote manufacture of innovative, safe and 'green' cars (by introducing changes to the scheme's terms and conditions).
PricewaterhouseCoopers
21 July 2010 Slide 22
Incentive schemes: when to end them? Option 1: • when funds allocated for this scheme run out Option 2: • in approximately one year (as in most other countries) Option 3: • when the country’s macroeconomic situation allows the automotive market to stabilise and develop favourably Option 4: • when traditional Russian car manufacturers start generating profit, enabling them to implement plans for further production upgrades Option 5: • when foreign car manufacturers start generating a return on investment and become interested in its increase Option 6: • when Russia sees a robust car scrappage industry established
PricewaterhouseCoopers
21 July 2010 Slide 23
Car sales forecast in 2010 • At the beginning of the year, our optimistic scenario predicted a 15% sales increase in quantitative terms, with total sales of 1.6m cars, while our pessimistic scenario anticipated a decline in sales of about 5%, with total sales of approximately 1.3m cars. • With the scrappage scheme expanding and the macroeconomic situation in the country improving, we believe that the estimated market result will be about 1.6m cars (the upper end of our forecast), if no drastic economic changes take place. • At the same time, a marked increase in June sales may be indicative of changes in market trends. So, for example, in June 2010 sales of KIA grew by 91%, Ford by 115%, Hyundai by 47%, Daewoo by 77%, Toyota by 28%, etc., as compared to the same period a year earlier. Source: PwC estimates
PricewaterhouseCoopers
21 July 2010 Slide 24
Conclusion
Conclusion • It is too early to say that the market will undoubtedly recover. An increase in sales and production of traditional Russian brands was primarily triggered by the government scrappage scheme. Growth in the segment of foreign brands produced in Russia is mostly due to the import substitution effect. There are positive trends in the market, but they cannot be regarded as evidence of sweeping changes. • With current macroeconomic trends set to continue, we believe that the market result in 2010 will be close to our optimistic forecast made at the beginning of the year, reaching a level of about 1.6m cars sold, thanks to successful implementation of state incentives. • In general, car scrappage and interest rate subsidy schemes are being successfully implemented. However, their extension and additional modification must be considered in order for them to have not only short-term, but also long-term strategic effect for the industry’s development.
PricewaterhouseCoopers
21 July 2010 Slide 26
Thank you!
Stanley Root Partner, Automotive Industry Leader This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers jointly to ZAO PricewaterhouseCoopers Audit, PricewaterhouseCoopers Russia B.V. and PricewaterhouseCoopers Commonwealth of Independent States (CIS) Law Offices B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited(PwCIL). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way.
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