Editor's note: this article was originally published Jan. 1, 2008. It has not been updated since 2012.
With a consumer car-buying growth rate exceeding China's, automakers and parts suppliers are rushin' to Russia and its vast opportunity for investment amid a steadily expanding national economy and an emerging middle class.
"The Russian market is booming," reports industry analyst Andriy Ivchenko at Frost & Sullivan, a global growth consulting company.
The largest country on Earth, Russia ranks seventh in population with more than 141 million people. From 2006 to 2007, new car sales grew 37 percent, compared to China's 26.5 percent, according to Ivchenko, making Russia Europe's fourth-largest automotive marketplace.
There are 26.8 million vehicles currently on the road in Russia, amounting to 184 cars per 1,000 people. That figure is expected to reach 230 autos per 1,000 by 2010, he says, noting that buyers are more inclined to purchase imported models rather than domestically produced marques.
"Sales for Russian-built vehicles are slipping," Ivchenko points out. "They're very cheap but they have quality issues — which is something they're looking to improve on."
A rusty Russian vehicle stock has people here fed up with breakdowns and eager to buy as family finances improve. "It's a long way to go until everyone will have a vehicle, and that's where the business opportunities come for the cars and the parts," says Ivchenko.
The average age of vehicles is very high, he adds. More than half are more than 10 years old, 27 percent are in the 5- to 10-year-old range, while 22 percent are less than 5 years old.
The governmental welcome mat is officially out in the form of various economic incentive programs for foreign-based OEMs, whether they are importing finished vehicles from North America, Europe and other regions or manufacturing their designs in new Russian plants. Several OEMs have joint ventures with existing domestic producers.
An outside presence
Non-Russian carmakers with a presence here include Ford, General Motors, Chrysler, Nissan, Volkwagen, Renault and Kia. (The first Russian Ford dealership opened in 1907 in St. Petersburg, four years after Henry Ford founded his company in the United States.)
Valentina Matvienko, the governor of St. Petersburg, has dubbed the nation's second-largest city as the "Russian Detroit" based on its burgeoning automotive production.
Ford of Europe is increasing the capacity of its $330 million-plus St. Petersburg Assembly Plant to start building the new Ford Mondeo for the Russian market. Ford was the first foreign automaker to open its own assembly plant in Russia. The Ford Focus has been the best-selling car among non-Russian brands for four consecutive years.
"The Russian car market has experienced tremendous growth over the last several years," says John Fleming, Ford of Europe's president and CEO. "We see consumer demand continuing to rise for stylish cars that offer great driving dynamics — exactly the type of vehicles Ford offers."
General Motors is investing $300 million in its Shushary plant on the outskirts of St. Petersburg, more than doubling initial production goals and complementing GM operations in Togliatti and Kaliningrad. "Russia is our biggest market for Chevrolet in Europe," says Carl-Peter Forster, president of GM-Europe. "Demand continues to grow and we will be in an even better position to meet that demand when Shushary goes on stream in 2008."
In 2006, GM sold more than 132,000 cars in Russia; more than 84 percent were Chevrolets. Nearly 26,000 GM vehicles — 20,805 Chevys — were purchased in the first two months of 2007.
In November, a new Volkswagen plant began production in Kaluga's Grabzevo "techo-park" southwest of Moscow.
"With the start of vehicle assembly at our new plant in Kaluga, the Volkswagen Group has definitively arrived in the emerging Russian market, " says Martin Winterkorn, chairman of Volkswagen Aktiengesellschaft. "Local production of Volkswagen and Skoda brand vehicles in the up-and-coming city of Kaluga now gives us the chance to increasingly profit from rapid growth on Russia's automotive market."
The Kaluga site eventually will have its own rail link, and additional land has been earmarked for locating suppliers near the production facilities.
"Chrysler Russia will continue further development of business in Russia in 2008," says Daria Fomina, spokeswoman for Chrysler Russia. "The plans of the company include opening eight new dealer outlets in the main regions, which will bring the total count in Russia to 29."
The 21 official Chrysler dealerships present in 2007 were cited in large cities such as Moscow, St. Petersburg, Yekaterinburg, Chelyabinsk, Rostov-on-Don, Tolyatti, Perm, Kazan, Omsk, Krasnoyarsk and Tumen.
Meeting demands
"The Russian consumer is changing and becoming more exacting and demanding when choosing a car. The customer in Russia, as well as in other countries, takes into account good value for money, brand value and emotional impression of the vehicle before making a decision to buy," says Daria Fomina, spokeswoman for Chrysler Russia. "The company understands that the Russian customer has stricter demands compared to American consumers, drawing special attention to active and passive safety, comfort and interior trim," she notes. Jeep models are especially popular.
Although sedan designs remain the best sellers, 4x4s account for about 20 percent of the import market, according to Tatjana Natarova, spokeswoman for Nissan Motor RUS.
Russian demand for sport utility vehicles ranks No. 1 among all of Europe, Ivchenko reports. "Severe climate conditions, road quality and sometimes absence of the road itself" are driving SUV sales, he says. "The Russian government is trying to tackle the road surfaces" via massive infrastructural improvements, but this remains a daunting endeavor in a nation stretching across more than 10 time zones that include mountainous and otherwise rugged terrain.
Supplying parts to manufacturers and the aftermarket can bring exceptional business prospects for foreign companies wishing to settle here, says Ivchenko, citing the need for reliable repairs and a growing consumer demand for accessories and enhancements such as custom paint, security systems, audio-visual electronics, lighting and other custom touches.
"There are even specialized 'tuning agencies' where Russian owners can get extra lights to put on their SUVs," Ivchenko explains. "Applying features to a car is popular here."
Russia is ripe for American-style parts stores and repair centers to enter the marketplace; Ivchenko believes you would be best served by forming a joint venture with Russian executives already on the ground here.
"That could be a good source of sales," he suggests. "It is tricky for the foreign companies to be efficient and operate" because of localized cultural and economic factors — to say nothing of the vastly formidable delivery challenges in a country that relies heavily on railroads rather than freeways due to geography and weather.
"You have to take into consideration the logistics," Ivchenko cautions. "There are highways in Russia, but there is no all-year-round connection between East and West Russia."
OEMs are bringing in their respective dealerships, but they can be few and far between in such a vast territory.
Chrysler has inaugurated its pan-European "Privileged Service" offering in Russia to help address the repair concerns of the populace. "The program offers repair of the vehicle directly at the place of breakage," says Fomina. "This efficient roadside assistance does not require additional movement of a vehicle, and saves the owner time." It is available in Moscow, St. Petersburg, Rostov-on-Don, Tolyatti and Perm. "The program coverage is widening as the Chrysler, Jeep and Dodge dealer network grows," she says.
"More repair shops are being built because of the foreign cars coming in," Ivchenko points out, but these enterprises tend to be clustered near major population centers while many Russians live in far-flung regions where demand remains for safe and effective repairers. "The majority of repair shops are 'shadow shops' — not officially licensed. Russia has a large share of the gray market where parts are imported illegally, but this is changing because consumers are seeking quality.
"The consumer perception is changing," Ivchenko concludes. "They prefer to deal less with the shadow repair market."
For business advice...
The U.S. State Department oversees an agency dedicated to assisting American businesses wishing to enter foreign markets:
U.S. Commercial Service
INTERNATIONAL TRADE SHOWS
SHOW: Auto + Automechanika
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Messe Frankfurt RUS O.O.O.
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SHOW: Moscow International Autosalon
