Russian car market: competition of strategies

20/ 04/ 2006

MOSCOW. (RIA Novosti political commentator Alexander Yurov)

The Russian car market is very attractive - more than 1,500,000 cars are
sold at it every year. Moreover, it keeps growing, and by 2008 this figure
will approach 2,000,000.

So far the Russian carmakers are confidently in the lead in the number of
sales. AvtoVAZ alone sells more than 700,000 cars. Russia has other big
plants - AvtoGAZ and Izhmash, for one. For comparison's sake: altogether the
foreign companies sold in Russia close to 572,000 cars in 2005. However, the
statistics of trade in foreign cars is changing fast. Last year alone the
number of foreign cars brought into Russia increased almost by 50% as
compared with 2004.

Interestingly, these incredible growth rates pale into insignificance when
compared with the plans of the Russian Cabinet of Ministers. Today, the
government is involved in negotiations with 10 major world car producers.
The names of these companies are not disclosed. But the government expects
to sign contracts with them on car assembly in Russia before this year
expires. Under the government-endorsed innovation scenario of Russia's
social and economic development, by 2007-2009 the number of cars made in
this country should grow up to 1,500,000. In other words, the number of cars
manufactured in Russia will at least double.

There is more to it. On the eve of Russia's WTO entry, the authorities are
trying to make the produce of Russian plants more competitive. Managers from
Rosoboronexport (state-owned arms trading firm) have already been involved
in this effort. At the same time, Vheshtorgbank (foreign trade bank) will
give AvtoVAZ credits at a better rate - 1.5%-2% lower than offered by other
Russian banks. Additional funding should support the production of
automobiles in the current price category. Practically all models produced
by the plant are under $10,000. These measures are expected to allow AvtoVAZ
to keep its share in the market up to 2010. What happens next is a question.

The automobile plant has to compete against a diverse flow of foreign cars,
which is not easy. More and more foreign cars have prices, which are close
or even identical to those of Russian models. For example, last year saw the
emergence on the Russian market of the Renault Logan, while this year
started with a record-setting growth in the sales of the Chevrolet Lanos of
Ukrainian make. Bottom-end models of those cars cost less than $10,000. But
both models are pathetically simplistic.

Foreign companies are resorting to other ways of boosting sales in Russia.
All economic methods are good for this purpose. The Renault company has
designed a special model for Russia. But this is not all. Knowing that the
manufacture of cars in Russia is 15% less expensive, Renault has set up a
joint venture with the Moscow City Government for the Logan production --
Avtoframos. It is located in Moscow, the center of the domestic demand for
cars. Sales in the Russian capital are traditionally the highest. This
strategy allows the top managers of Avtoframos to set truly ambitious goal
of producing 200,000 cars a year in two to three years' time.

Ford took a different option. Its managers did not simplify the Focus in the
fight for the Russian consumer. To save on transportation costs, rent and
wages, they built an assembly plant not far from St. Petersburg and the
Russian border. Land is cheaper there and labor is not as expensive as in
Moscow. As a result, the company has received a car with a slightly higher
price tag, but still very popular in Russia. It is planning to turn out
about 60,000 cars at this plant in 2006.

The confident leaders in the sales of foreign cars in Russia - Korean
carmakers - are following the same road. But there is one difference - they
do not build new plants. Almost all Korean companies, which have established
themselves on the Russian market, are using the existing Russian
enterprises. This is the cheapest option. It cost Ford about $150,000 to
launch its production line in Russia, whereas the manufacture of the Korean
SUV Rexton was almost twice cheaper. This is the most promising option for
the Russian specialists as well, including those in the Ministry of Industry
and Energy. The Russian authorities have said more than once that an
alliance with giant foreign carmakers is the only promising option for
domestic car manufacturing. They will help Russian plants to modernize
production, start making modern models, and gradually expand the range of
spare parts of Russian make.

Nevertheless, the Russians are expecting domestic carmakers to boost their
production figures because their share of the market is too big. It is
perfectly obvious that it is impossible to double the car fleet of Russia
without developing traditional domestic assembly plants.