General Motors is stopping production in Europe's third largest car market
Russia is the third-largest European car market, but is giving automakers a bumpy ride. The 10% drop in car sales last year paled in comparison that of 2009, when new registrations halved following the financial crisis.
Even so, the optimism that sustained international makers through those earlier troughs appears to be running out. General Motors (GM) has announced plans to end nearly all its production in Russia by the end of this year.
Other car firms appear to be staying put in the hope of tapping into long-term growth. Undoubtedly, though, many will be reviewing their investment plans.
GM is describing its decision as a change in business model. Its plant in St Petersburg will close in mid-2015, while contract manufacturing of Chevrolet vehicles, performed through local manufacturer GAZ, will finish by the year-end.
GM's joint venture with AvtoVAZ, the dominant Russian manufacturer (famous for its Lada cars), will continue, but most of GM's business in Russia will now be done through imports. The focus will turn to the group's premium cars, such as Cadillacs, and Opel, GM's mass-market European badge, will leave Russia altogether.
The company's president, Dan Ammann, says GM's aim is to avoid investing more in a country that has "very challenging long-term prospects". Still, although GM has been sustained by its strength in the US and China over the past few years, its other international operations have also been struggling.
The company is not only retrenching in Russia; it also ended production in Indonesia earlier this year. Opel, in particular, has been loss-making for six years now and, if it is ever to turn itself around, needs to focus investment on the most promising European markets.
Wheels of misfortune
There is no escaping, though, that Russia does not count among those. Despite the dominance of cars made by foreigners (often in joint ventures), the Russian market has steadfastly refused to meet their expectations.
In 2010, for example, Carlos Ghosn, head of Renault-Nissan, was predicting that by 2014 Russian car sales would be around 4m. His company was in the process of buying control of AvtoVAZ, a deal finally completed in 2014. By that point, however, Russian car sales were just under 2.5m - well short of Mr Ghosn's projections.
Russia's decision to annexe Crimea and its continued meddling in Ukraine are the most immediate causes. The resulting international sanctions have seen economic growth stall and the rouble plummet, raising the price of imported cars and car-parts (GM imports most components, intensifying its pain).
The drop in global oil prices has added to Russia's woes. A car scrappage scheme, giving buyers an incentive to trade in older vehicles, managed to halt the sales slump in the last few months of 2014, but has now expired. With the government struggling to repair its budget as tax revenues fall, the programme is unlikely to resume.
As a result, sales in the first two months of 2015 were down 32% year on year, according to Russia's Association of European Businesses, with most vehicles in Russia being sold at a loss. Among the worst performers, Chevrolet sales plummeted by 71% and Opel's by 82%.
Few escaped unscathed, however. The only carmakers to see growth were luxury players such as BMW, Mercedes and Porsche, and mass-market Hyundai, which has become the largest non-Russian producer in the market.
For the rest, the situation is almost as dismal as it is for GM. Renault-Nissan last year slightly expanded its combined market share with AvtoVAZ to 31% of total sales. But Nissan has halted production for the latter half of March. Volkswagen, which suffered a 40% year-on-year sales contraction in January-February, is cutting staff at its plant in Kaluga.
Except for GM, however, even foreign companies with sliding sales figures seem to be staying put. Forced partly by localisation laws, in recent times they have invested heavily in local production (about two-thirds of the parts used in Volkswagen and Renault-Nissan models are Russian-made).
This has helped to shield them from currency risks and made them reluctant to write off their bets. Indeed Ford, with its local partner Sollers, may be positioning itself to take advantage of GM's disappearance. The company intends to step up localised production and offer new models.
The road ahead
Unless the government steps in with new supportive measures, the survivors nonetheless face a bumpy road ahead. Interest rates remain high, having been hiked in response to the economic crisis. This, together with galloping inflation and tumbling incomes, will continue to depress consumer sentiment.
At the same time, lasting weakness in the rouble will make imported cars and inputs for domestic producers much more expensive. As the Russian economy shrinks by a forecast 3.5% in 2015, we expect car sales to drop even more steeply, contracting by over one-fifth to just below 2m.
Beyond this, there is more room for optimism. We expect a recovery in autos demand from 2016. Travel bans and asset freezes for individuals affected by EU sanctions have been extended by six months until September, but we believe the main European sectoral sanctions will be eased in July 2015.
This should eventually feed through into lower financing costs for automakers and some upturn in sentiment among businesses and consumers. Moreover, Russia's well-developed dealer and logistics infrastructure should mean economic growth boost car sales relatively quickly. New registrations will accelerate into 2017, averaging around 8% in 2016-19.
Yet this is a much slower rebound than was seen after the previous recession. Within our forecast period to 2019, sales will not return to their 2008 high of 3.3m, and will struggle to regain even 2012 levels. It is hard to foresee a time when Russia offers carmakers an easy ride.
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