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Russian car boom catches eye of Japan, Germany

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Look at any atlas, and it is plain to see that what is separating Germany from Japan is the world’s largest country, Russia. As a land mass, it is indeed a behemoth, spanning over 10,000 km and eleven time zones.

But due to the recent boom in the Russian automotive market, Japanese and German automakers are finding themselves working side by side.

Germany’s increasing interest in Russia’s car market was highlighted at a conference held May 7 in Frankfurt. Organized by the German Automotive Federation (VDA), the symposium, titled “Strategies for the Automotive Industry in Russia,” attracted some 200 participants.

Also, the Nikkei Automotive Conference in Tokyo will reserve a prominent spot specifically for the Russian auto market in October.

Here in Japan, news has been leaked that Suzuki will build a plant in the St. Petersburg area, with a tentative production capacity of 50,000 units. The plant, tentatively scheduled for launch in 2010, will be the second Japanese plant in the country after Toyota’s plant, which is scheduled to start production as early as winter. Nissan, Isuzu and Mitsubishi Motors have plans to build factories as well.

But Toyota and Suzuki are not the only foreign makers who are putting down roots in the former communist nation. They are part of a crowded list that includes American firms Ford and GM’s Chevrolet, South Korea’s Kia, Hyundai and Daewoo, and European makers Renault, Volkswagen, Fiat and BMW. And let us not forget the Chinese makers, who are also present in the form of Chery, Great Wall and Ssang Yong.

Oil boom’s impact

All in all, the maximum output capacities of plants operated or planned by overseas automakers is approaching 1 million cars per year. Clearly, something is up in mother Russia.

To put matters simply, Russia is experiencing a good old-fashioned oil boom. Its deepening ties with European energy suppliers, along with rising prices of crude oil and other resources, has created a steady stream of revenue. Having gone through a major economic crisis as recently as 1998, the country has made a complete about face and is now prudently stockpiling funds for future rainy days.

It has also been generous with its citizens. Income tax in Russia is levied at an across-the-board rate of 13 percent, making it the lowest of the major industrialized nations. Combined with extremely low utility costs, as well as pent-up demand for goods after decades of state rule, and the deepening thirst for cars comes as no surprise.

Furthermore, car ownership in Russia is still at a relatively low level of less than 20 percent. Compare that with Germany, where it’s over 50 percent, or Japan, which has 44 percent. And the average age of a car in Russia is approaching 10 years, which means many car owners will soon be looking for a replacement. All of these factors add up to a steeply growing market, especially for foreign makes.

In 2002, only 112,000 foreign cars were sold in Russia. This year, the VDA is forecasting that 1,350,000 foreign vehicles will be sold — a 12-fold increase. Conversely, sales of Russian-produced cars have been on a steady decline, from 857,000 in 2002 to a forecast of 750,000 in 2007.

U.S. firms take advantage

The U.S. automakers seem to be making the most of the situation at the moment. Ford and Chevrolet took the No. 1 and No. 2 spots among overseas automakers in 2006, and the two of them command 22 percent of the market for foreign vehicles. Combined, they sold nearly 225,000 cars.

Japanese carmakers have been steadily increasing market share, but surprisingly, German builders are lagging well behind, with Volkswagen only managing to sell 19,000 cars in 2006 for a market share of slightly less than 2 percent. But their planned factory in Yaroslavl should be ready sometime in 2008, and with a capacity of 100,000 units, Volkswagen’s sales figures should move upward shortly thereafter.

Mitsubishi Motors in particular is a company that has profited heavily from the evolving Russian market. In 2006, the company posted its first profits in four years, boosted considerably by strong sales there. Mitsubishi Motors even split Russia off as an independent sales region from the rest of Europe a few weeks ago.

Likewise, Chevrolet and Ford, who have suffered major losses at home, are benefiting strongly from their Russian car sales.

China in good position

One company that is benefiting from the car boom is Rolf Holdings, the largest importer and retailer of foreign auto brands in Russia. The firm also offers countrywide logistic services as well as auto financing, and is on the way to establishing itself as the most important domestic player in the Russian auto market, with links to most makers. Originally the exclusive dealer for Mitsubishi cars, Rolf has since secured rights to other brands, including Hyundai, Ford, Mazda, Audi, Mercedes and — from 2008 onward — Toyota.

But with more than 90 percent of the Russian population still getting by on less than $1,500 per year, the big winners will likely be the Chinese automakers, who can produce cars cheaper than just about everyone else. Although it may take a few years for this to happen, most are convinced that the Chinese will make bigger and bigger gains.

The prevailing economic conditions in Russia are expected to continue, much to the delight of the world’s major carmakers. And with the level of competition intensifying almost daily, there are sure to be winners and losers.

But who will be the biggest winner of them all has never been in doubt: Russian drivers.