Joint study on the russian car market

• Car boom: the number of new cars in Russia is set to rise by 6% p.a. by 2014
• International manufacturers to profit in particular
• Number of foreign suppliers soaring
• Macro-economic conditions the decisive factor

The Russian car market will be one of the fastest-growing vehicle markets in the world in the next ten years.

That is one of the key findings of a joint study by Roland Berger Strategy Consultants, the German Business Eastern Committee and the German Car Industry Association (VDA), to which 55 leading international car companies belong. According to the study, the number of new vehicles in Russia will rise from 1.3 million in 2004 to 2.3 million by 2014. This is equivalent to a growth rate of 6% p.a. International manufacturers will benefit above all: new car imports to Russia will soar from 300,000 a year in 2004 to 700,000 a year in 2014. Over the same period, the number of new foreign cars assembled in Russia will rise from 100,000 to 800,000. Once again, the boom will benefit foreign suppliers: 43% are planning to expand their involvement in Russia over the next three years. How fast the Russian automotive market will fall in line with Western standards depends largely on how the economy performs.

In the first quarter of 2005, the study surveyed 55 international and Russian vehicle manufacturers and suppliers and political decision-makers in face to face interviews and asked them how they saw the Russian automotive sector developing.

Russia: market of the future

After China, Russia is one of the fastest-growing auto markets in the world. Between 2004 and 2014, the study claims, each year will see 100,000 more new vehicles registered than the previous one. The total will rise from 1.3 m new vehicles in 2004 to 2.3 m in 2014 (6% p.a.). More and more Russians are switching to Western car marques: while Russian car makers currently cover 70% of demand, 60% of new cars bought will be manufactured by foreign makers by 2014. Of these, 700,000 will be imported, 800,000 assembled in Russia. The number of Russian new cars, on the other hand, will fall from 900,000 in 2004 to 800,000 in 2014.

"The Russian car industry is on the verge of a major transformation," says Jürgen Reers, Partner at the Automotive Competence Center of Roland Berger Strategy Consultants. "Market structures, processes and, not least, vehicles, will fall in line with Western standards. German and international makers can profit from this particularly. As Russian consumers earn more, they will start expecting more from their cars in terms of comfort and safety. But, even so, if you want to succeed in Russia, you need to have the vehicles the market wants at attractive prices now."

Prospects for suppliers

Automotive suppliers can also benefit from the booming car market in Russia. At present, the top 20 suppliers worldwide have around 150 production sites in Eastern Europe; but there are just six companies with eight locations between them in Russia.

According to the study, car makers will involve their suppliers more in creating value in future. Between 2004 and 2010, suppliers' share in creating value for Russian vehicle makers is set to rise from 26% to 43%. Amongst international car makers, this proportion is already high, at 66%, but even this is set to rise to 70% by 2010.

And international car makers are set to triple their procurement from local suppliers to meet Russian demand. This will send local content soaring from 12% in 2004 to 36% by 2014.

According to the study, as international makers expand in Russia, they will draw a high-performance supplier industry behind them by 2014.

Modernizing Russian car companies

This transformation in the industry also offers new opportunities for Russian car makers and suppliers too. But local car makers and suppliers must rigorously modernize their processes and products. Here, joint ventures with foreign companies offer suppliers an excellent opportunity of locking into international standards quickly. Of the companies surveyed, 72% believe Western companies have to take a stake to modernize the Russian supplier industry. These joint ventures could benefit both sides: Russian suppliers can adopt Western technology, will find themselves integrated in more efficient production processes and can introduce quality management to today's standards. Their international partners will get access to Russian customers, local authorities and existing market structures.

The Russian automotive sector has to modernize across the board. This is evident from the level of investment in Russia compared with other countries. Germany invested EUR 2,343 for every car made in 2002, while Russia invested just EUR 465. Other countries in Eastern Europe also invested much more: the Czech Republic put in EUR 1,922 per vehicle, Poland EUR 1,606, Slovakia EUR 1,190. "While Russian manufacturers spend less than 1% of their sales on research and development, international makers here spend 5% of their sales or more," says Dr. Uwe Kumm, head of Roland Berger Strategy Consultants' office in Moscow.

Russia is catching up fast, though. As the study shows, it is set to establish itself not just as a fast-growing market, but also as an attractive place to produce.

Russian politicians must act

But Russia cannot connect to the world car market unless its economy improves still further. Factors survey respondents mentioned here include reducing import duties on components for assembling vehicles and modules. It also needs to tighten its technical standards up to raise product standards. Russia also needs to attract more foreign investment, through investment agencies or special economic areas, for example.

"Russian economic policy needs to act here," says Dr. Klaus Mangold, Chairman of the German Business Eastern Committee. "It can act quickly to make its domestic automotive industry more competitive long-term. This would boost the Russian economy as a whole."

According to the study, a modern, internationally competitive automotive industry in Russia would create around a million jobs.