Pulling into the fast lane
A new study identifies how international manufacturers can benefit from the enormous growth potential in the Russian automobile market.
The study, developed by Roland Berger Strategy Consultants, the German Association of the Automotive Industry (VDA) and the German Committee on Eastern Europe Economic Relations draws upon interviews with 55 international and Russian car manufacturers and suppliers as well as with political leaders. The findings highlight how western car manufacturers can benefit from the growth trend in Russia. In the next ten years, the number of new vehicles in Russia will grow by 6% annually and, as the trend shows, more and more Russians are inclined to buy international brands, rather than cars produced by their national car makers. By 2014, the study projects, 60% of newly purchased vehicles will be international brands.
"This trend is the result of a fundamental transformation in the Russian automotive industry," notes Jürgen Reers, Partner in Roland Berger Strategy Consultants Automotive Competence Center. "Market structures, procedures and the cars themselves are being adapted to meet western standards. Especially German and international manufacturers can benefit from this situation because Russian consumers with a rising income want both comfortable and safe cars." But, he warns "manufacturers that want to be successful on the Russian market must be able to develop market specific models with an attractive price tag."
The study, developed by Roland Berger Strategy Consultants, the German Association of the Automotive Industry (VDA) and the German Committee on Eastern Europe Economic Relations draws upon interviews with 55 international and Russian car manufacturers and suppliers as well as with political leaders. The findings highlight how western car manufacturers can benefit from the growth trend in Russia. In the next ten years, the number of new vehicles in Russia will grow by 6% annually and, as the trend shows, more and more Russians are inclined to buy international brands, rather than cars produced by their national car makers. By 2014, the study projects, 60% of newly purchased vehicles will be international brands.
"This trend is the result of a fundamental transformation in the Russian automotive industry," notes Jürgen Reers, Partner in Roland Berger Strategy Consultants Automotive Competence Center. "Market structures, procedures and the cars themselves are being adapted to meet western standards. Especially German and international manufacturers can benefit from this situation because Russian consumers with a rising income want both comfortable and safe cars." But, he warns "manufacturers that want to be successful on the Russian market must be able to develop market specific models with an attractive price tag."
Aside from international manufacturers, suppliers can also benefit from the boom in the automobile market in Russia – and many are already responding to the call from the East: 43% are planning to expand their presence in Russia over the next three years. It is high-time for these changes, the study suggests: while the 20 largest suppliers in the world currently have 150 production facilities in Eastern Europe, only six companies have outlets in Russia. According to the study, car manufacturers look poised to give suppliers a larger share of the cake by increasing their profits from added value creation. This will certainly boost the share of added value of Russian car manufacturers for suppliers, projected to rise from 26% in 2004 to 43% in 2010. For international manufacturers, the already high level of 66% is likely to rise another four percentage points to 70% by 2010. The findings of the study suggest that the expansion of international manufacturers into to Russian market by 2014 will provoke the development of a competitive supply industry.
Modernization of Russian car market
Modernization of Russian car market
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To reap the full benefits of continuously growing demand, Russian manufacturers and suppliers must face the sign of the times and invest in the modernization of their production process and actual products. The study underlines the key role that joint ventures with international firms can play on the road to meeting international standards. In fact, 72% of the companies questioned as part of the survey believe that cooperation with Western firms is essential to the modernization of the Russian automotive supply industry.
Just how necessary this type of change is, is underlined by low individual investment rate in cars in Russia compared to that of international manufacturers: while every car produced in Germany in 2002 carried investment costs of EUR 2,343, Russian manufacturers only invested EUR 465 per car produced. This stands in stark contrast to the figures quoted for other Central and Eastern European economies: in the Czech Republic, EUR 1,922 are invested, while Polish manufacturers spend EUR 1,606. This means that Russian manufacturers are reinvesting less than 1% of their overall sales into research and development, while the international competition invests 5% or more. Should Russian producers be able to move ahead quickly, and realize a full-fledged modernization then Russia will not only become a growth market in terms of sales, but also an attractive location for manufacturers.
Little, however, can be achieved without the right political framework. The study calls for a pragmatic shift in Russian economic policy to guarantee low import duties on automobile components and a more rigid application of technical norms to boost overall product standards. In addition, the security of foreign direct investments in Russia needs to enhanced, either through the creation of investment agencies or special economic areas. As Dr. Klaus Mangold, Head of the East Committee points out "Russian economic policy must step up to the plate and accept these new challenges. The international competitiveness of its automotive industry can be enhanced, providing politicians take urgent action."
If you have questions or comments, please do not hesitate to contact us:
Just how necessary this type of change is, is underlined by low individual investment rate in cars in Russia compared to that of international manufacturers: while every car produced in Germany in 2002 carried investment costs of EUR 2,343, Russian manufacturers only invested EUR 465 per car produced. This stands in stark contrast to the figures quoted for other Central and Eastern European economies: in the Czech Republic, EUR 1,922 are invested, while Polish manufacturers spend EUR 1,606. This means that Russian manufacturers are reinvesting less than 1% of their overall sales into research and development, while the international competition invests 5% or more. Should Russian producers be able to move ahead quickly, and realize a full-fledged modernization then Russia will not only become a growth market in terms of sales, but also an attractive location for manufacturers.
Little, however, can be achieved without the right political framework. The study calls for a pragmatic shift in Russian economic policy to guarantee low import duties on automobile components and a more rigid application of technical norms to boost overall product standards. In addition, the security of foreign direct investments in Russia needs to enhanced, either through the creation of investment agencies or special economic areas. As Dr. Klaus Mangold, Head of the East Committee points out "Russian economic policy must step up to the plate and accept these new challenges. The international competitiveness of its automotive industry can be enhanced, providing politicians take urgent action."
If you have questions or comments, please do not hesitate to contact us:
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