Automakers Scrambling to Keep Afloat in Volatile Russian Market

Five years ago Russia was forecast by analysts and automakers to become the largest automotive market in Europe.

Those predictions have gone unfulfilled, as the country now is mired in economic and political turmoil that has decimated the automotive industry to the point General Motors, one of the world’s largest vehicle producers, has cut its losses and abandoned the market.

Russian sales industrywide tumbled 39.2% in February, compared with like-2014, to 131,288 units, as the value of the ruble sank and automakers raised prices. Sales last year fell 10.5% to 2.6 million.

That was enough for GM, which on March 18 announced it would cease production in Russia and stop selling cars in the country from its Opel brand, as well as most of its Chevrolet offerings.

“This change in our business model in Russia is part of our global strategy to ensure long-term sustainability in markets where we operate,” GM President Dan Ammann says in a statement. “This decision avoids significant investment into a market that has very challenging long-term prospects.”

Russia’s No.2 automaker last year sold 227,179 units, down 64.7% compared with 2013, according to WardsAuto data. So far this year, sales are off 28.7% to 6,167.

The move by GM was abrupt and not thoroughly thought out, says Warren Browne, president of WP Browne Consulting and one-time point man for GM’s Russian operations.

“I think (the decision) was drastic in that, before you go to the nuclear option, there are a number of steps you can take to mitigate (the negative effects on the market),” he tells WardsAuto. “They went right to the nuclear option, and to me it’s unfortunate.”

Browne says GM could have simply slashed production at its St. Petersburg assembly plant and continued to sell some volume models in Russia. Under GM’s current strategy, only the Chevrolet Corvette, Camaro and Tahoe and Cadillacs will be offered.

The remaining products are niche models, Browne says, adding Cadillac is destined to fail in Russia.

“Russians look to Western Europe to see what they’re driving,” he says. “How in God’s name is (Cadillac) going to be successful in Russia?

“They’re competing against BMW, which makes vehicles locally, and Audi, an extremely tough competitor,” Browne says. “It was tough enough to sell 1,500 Cadillacs (a year) when I was there.”

Should a rebound occur in the next three to five years, as some analysts predict, it would be difficult for GM to reenter the market after alienating the Russian government, as well as its workforce and dealer network.

Kremlin spokesperson Dmitry Peskov tells Reuters GM’s decision was a mistake. “There can be no vacuum in the market. If one company leaves, another one immediately fills the gap.”

Peskov adds the market is poised for a rebound that GM will miss. “And then, unfortunately, this company will be among the losers,” he says.

Other Automakers Staying Put; Some Altering Operations

Other automakers seem hesitant to follow GM’s lead and abandon the market, although many have announced changes to their Russia strategies.

Volkswagen is reducing production in Russia and offering buyouts to workers at its Kaluga plant, according to Bloomberg. The automaker says it won’t extend contracts to some 150 temporary workers and is sending 120 others to Germany for training.

Other employees will be transferred to an engine factory about to open or to a warehouse operation outside Moscow, the news agency reports.

Output at the Kaluga facility, which produces the VW Tiguan, Polo and Skoda Rapid, will be reduced to four days from April to July, and will close for eight days in May. The plant also will switch to a 2-shift schedule in May instead of the typical 3-shift setup.

Nissan is implementing a similar plan by temporarily suspending production at its St. Petersburg plant through the end of March. Like VW, the automaker says it will not extend contracts to temporary workers and has halted hiring.

Nissan’s St. Petersburg plant assembles the X-Trail, Murano, Teana and Pathfinder, while other models are built at operations owned by AvtoVAZ, the Russian automaker in which Nissan and Renault hold a majority stake.

Korean automaker Ssangyong also will temporarily suspend car production in Russia until the currency stabilizes, Reuters reports, adding it halted vehicle shipments to local assembler Sollers in January.

“Ssangyong isn’t leaving the market,” Zoya Kaika, deputy director general of Sollers, says. “The dealer network has things to sell, and the factory has things to produce.”

Toyota in a statement says despite the temporarily unstable market conditions, its Russian strategy will remain unchanged.

The automaker has no plans to cut its staff in Russia or to suspend production at its plant in St. Petersburg. Toyota also plans to continue to produce its Toyota Land Cruiser and Prado vehicles in Vladivostok.

Ford is staying the course in Russia, making no announcements about slashing production or delaying new-model launches.

“We believe the Russian market has significant potential in the longer term. In the short term, however, Russia remains an extremely volatile and challenging market,” a spokesman tells WardsAuto in an email.

“We are working intensively with our partners in the Ford Sollers joint venture in every area of the business to reduce costs, match production to the real demand, manage the difficult pricing environment and limit the financial impact of the current crisis.

“We continue to expand the Ford product portfolio in Russia to fill new segments and tailor vehicles to the unique needs and wants of Russian customers. This will put us in a better position to grow when the market recovers.”

Long-Term Outlook Still Murky

LMC Automotive analyst Carol Thomas says she doesn’t expect any other automakers to exit the Russian market, predicting it’s liable to bounce back by 2017, although not to the levels it previously reached.

Most automakers are staying in long term,” she tells WardsAuto. “There is a risk some of the small operations may disappear and some model programs might well be pulled, because some automakers have a lot of new models going in the next few years.”

Those staying put will have a difficult task holding on until the market rebounds.

Vladimir Mozhenkov, head of the Russian Automobile Dealers Assn., says the devaluation of the ruble is costing automakers about $2,000 per vehicle.

Thomas predicts the Russian market will rise to about 2.75 million units by 2017, but says that growth could be derailed by a number of circumstances, including further political unrest.

“Something like that could lead to further chaos and collapse of the ruble, collapsing (consumer) confidence, and the Russia economy would be hit much harder,” she says. “There are other downward scenarios. Last year the big risk was the chance of war in Russia, but it was the collapse in oil prices more than anything (that caused the auto market to fall).”

Ivan Bonchev, managing partner-EURussia Partners, says the local economy was heading toward a recession even before oil prices tanked.

Bonchev predicted the Russian automotive market would decline 50% this year before the government announced plans to put $425 million toward cutting interest rates on car loans and the purchase of new vehicles by government bodies.

However, he doesn’t expect government intervention to significantly boost sales.

“This is not going to do much,” he tells WardsAuto. “One reason is the ruble devaluation. Practically all car manufacturers increased prices, and those who were intending (to buy a car) bought last year.”

Interest rates remain prohibitively high in Russia, keeping potential car buyers out of the market, Bonchev says. Rates were 17% until the government brought them down to 14%, which he says still is too high.

Lack of credit unavailability has not affected luxury car brands, however. Bonchev says wealthy consumers are unfazed by the economic downturn and spike in interest rates.

“BMW and Mercedes are already in the top 10 in volume sales among all brands,” he says. “Most of the premium brands are performing very well with few exceptions.”

Bonchev predicts the market will rebound in three to four years, depending on what happens with commodity prices.

“The Russian economy is very vulnerable to commodity prices,” he says. “It also depends on how quickly Russia manages to become less dependent on imports. There has been a lot of effort and discussion around that. However, little has been done.”

– with Eugene Gerden in St. Petersburg, Russia

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