Car Sales Continue to Rocket, Prices Rise

24.06.2008 (16:27) | St.Petersburg Times

Car sales in Russia continue to soar, having reached a record 855,000 vehicles so far this year, including both imported and domestically-produced models.

From January to May this year, the Ford Focus, Chevrolet Lacetti and Renault Logan models became Russia’s bestsellers, according to statistics from the European Business Association. Sales in May 2008 rose by 42 percent compared to May 2007.

The demand for cars continues to grow on developing markets and will not slow down soon, according to Ian Henderson, portfolio manager of JP Morgan Natural Resources Fund. Russia’s growing wealth is fuelling the demand for automobiles, he said.

There are currently 260 car owners per 1,000 people in Russia, and if the trend in sales persists, Western Europe will be overtaken in two years’ time. The United States, with a rate of 900 cars per 1,000 people, is set to be left behind in another two years.

But the market is unlikely to double or even triple in volume in the near future, said Sevastian Kozitsyn, an analyst at Broker Credit Service. “A lack of good roads and high gasoline prices already influence the level of demand for cars. Besides, it will take 10 years to put the road network in order and fuel is unlikely to become cheaper as the oil traders in Russia keep their eyes on world prices,” he said.

The Russian carmaker AvtoVAZ is set to announce a new increase in prices, Vedomosti newspaper cited a representative of the company as saying last week. On average, the cost will increase by 1.46 percent. For example, to buy a Niva — an off-road four-wheel drive and the most popular model — will cost an additional $200 to the current $10,000 price tag.

This will be the third leap in prices since the beginning of 2008. In January, AvtoVAZ responded to the new Euro-3 ecological standard that came into force in Russia with a 1.87 percent rise, and added a further one percent this May, bringing the total price increase this year to 4.4 percent.

Yelena Andronova, supplies manager at the Rostokino-Lada dealership, notes that AvtoVAZ has never previously increased prices so often within such a short period of time. “This is not final, as a new hike on the Lada car series is expected this fall,” she said. AvtoVAZ officials explained the summer rise as being the result of a planned salary increase and growing expenses on raw materials such as metals.

While domestic carmakers are surviving by raising prices, the numerous competitors from abroad are not rushing to change their prices tags and continue to conquer the market, earning the North West the label of the “Russian Detroit.”

One of the pioneers of the car making industry, Ford opened a plant in Vsevolozhsk in the Leningrad Oblast in 2002, and in addition to 75,000 Focuses manufactured annually, now intends to launch the Mondeo in September, when the price will be announced. Wolfgang Sneider, Vice President of Ford Europe, confirmed that the company is expanding the plant to reach a projected capacity of 125,000 cars a year. “We are also increasing imports as the Russian car market reports constant growth,” he said. Investment into the construction and expansion of the plant has totaled $230 million.

During the St. Petersburg International Economic Forum earlier this month, the Korean carmaker Huyndai laid the first stone in its new plant that is due to manufacture 100,000 cars a year when it opens in early 2011.

On Nov. 5 one of the world’s biggest carmakers, General Motors, is aiming to penetrate the Russian market further with the opening of its second plant in St. Petersburg, into which it has invested $300 million and which will produce 70,000 cars a year, including the Chevrolet Captiva. GM’s first plant opened in 2007.

Japan’s Suzuki and Nissan are also in the process of building plants that are due to open next year, meaning new competitors for Toyota Motors, which has manufactured cars in Shushary on St. Petersburg’s outskirts since 2005.

Finland’s Valmet Automative, a Porsche contractor that assembles the Porsche Boxter and Cayman, is also negotiating the possibility of opening a branch in Russia’s North West.

Although the Russian car market, which is worth more than $22 billion per year, is witnessing stable and serious growth, cars will never become cheaper, says Konstantin Romanov, a machine construction industry analyst at Finam company. “But the rate of price increases may slow down if import duties on new cars also decrease. But in my opinion, the chances are minimal, as this will never happen within the next five years.”

Carmakers are able to balance car prices against their subsequent expenses if there is competition on the market, said Kirill Tachennikov, a machine construction industry analyst at Otkrytie financial company. “Prices will grow annually by a maximum 10 percent, if the competition rate grows.”

As soon as there are 300 to 350 cars per 1,000 people, Russians will see a decline in the automobile hype, Tachennikov said. Sales rates will then slow down to a more stable 15 to 20 percent, and 2009 may be the year that the sellers’ market will become a buyers’ market, with more bargains and discounts and fewer crowds desperate for a new car, he said.

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