Russian Car Buyers Squeezed But Not Thinking Small

ST. PETERSBURG – Russian consumers suffering in their country’s extended economic recession are delaying vehicle purchases or investing in one relatively costly family car rather than buy several small cars for individual use, experts say.

This trend has confounded predictions the country’s volatile financial situation would mean a return to purchasing less-expensive and smaller models, such as the Ladas driven during the Communist years.

Russian light-vehicle sales in 2015 sales plunged 35.7% from prior-year and were down 14.6% in the year’s first four months compared with prior-year, according to WardsAuto data.

The country’s best-selling cars in the first two months of 2016 were the moderately priced Hyundai Solaris, Lada Granta and Kia Rio, according to Togliatti-based Autostat, an analytics firm.

Their respective manufacturers, Hyundai, AvtoVAZ (in partnership with the Renault-Nissan Alliance) and Kia, combined with Volkswagen to account for 60% of the Russian auto market, Autostat data shows.

Sales of some imported luxury models also have grown despite price increases of up to 35% between September 2014 and February 2016, Autostat says.

Porsche and Lexus were among the handful of brands whose Russian sales improved last year, rising 12.4% and 5.6%, respectively, WardsAuto data shows. Consequently, premium brands’ share of the Russian market rose from 8.4% in 2014 to 10.1% in 2015, according to London-based market research firm Euromonitor.

“The leading premium brands Audi, BMW and Mercedes all outperformed the market” in 2015 with sales declines of 24.6%, 22.6% and 17.0%, respectively, says Neil King, head of automotive industry research and analysis at Euromonitor.

“With limited local production presence, this is more so because wealthier consumers saw investing in luxury cars as a better option than holding on to currency which was rapidly losing its value.”

Safety Sells

Experts note higher-priced vehicles’ popularity also may be credited to consumers’ growing concerns about car safety.

“Until recently, the Russian buyers in the budget segment were quite undemanding about safety systems, so many manufacturers cheapened the models they sold on the Russian market by reducing safety features,” says Svyatoslav Kuchko, a Germany-based analyst at IHS Automotive, a U.S.-owned consultancy.

“For example, they would leave only one airbag in the basic model and opt not to install the electronic stability (control) program,” Kuchko says. “But the attitude towards safety has begun to change in recent years.”

Less willing to compromise on safety and quality, Russians are turning to more expensive cars that meet their growing requirements, regardless of their higher cost and the economic crisis.

Many low-budget choices on the market, with models such as the Uzbekistan-based Ravon and South Korean automaker Daewoo’s Matiz, which cost less than $5,000, have failed to entice consumers in large numbers. In fact, sales of these cars show a steady decline.

According to Autostat, only 1,400 low-cost A-segment cars were sold in Russia in first-quarter 2016, a 40.6% year-on-year decline. The share of A-segment models on the market was more than 2% in 2010-2011 but now makes up just 0.5% of new-vehicle sales, Autostat spokesperson Azat Timerkhanov says.

“Russians started to prefer higher-grade cars, such as the B-(segment) models…and now, along with the SUV segment, are the most popular on the market,” Timerkhanov says. “The country’s economic situation plays a role in this. The majority of people are becoming more pragmatic and recognize that one car per family is enough.

“And so they opt to get a fully equipped family car, even if it costs a little more.”

Used-Car Market Robust

IHS’s Kuchko contends Russians with limited financial resources prefer B-segment cars to less-costly A-segment models from emerging countries such as India and China. And those unable to afford costlier models often turn to the secondhand market before considering new A-segment offerings.

“An ideal type of car for a low-income Russian consumer would be a sedan, classed in the B- or B-plus segment, with an engine capacity of 1.4L-1.6L,” Kuchko says. “The Russian consumer is usually not willing to settle for less, so if he doesn't have sufficient funds to buy a new B-class automobile, he goes to the secondhand market. The offerings of fairly new and affordable cars are sufficiently large there due to the sales boom in 2012-2013.”

As a result, used-car sales have grown in an otherwise bleak market. While new-car sales fell 14.6% year-over-year in the first four months of 2016, WardsAuto data shows, the secondhand market grew 6.1%, according to IHS Automotive.

Euromonitor’s King predicts Russia’s new-car market will begin to recover as soon as 2017, after a further drop of 11% for 2016. Moreover, he expects Russians will start to buy even bigger and more expensive cars once the economy improves.

“I can see SUVs performing especially well. Russia is one of the few markets where their sales haven’t exploded, with their share of the car market actually falling from 37% in 2014 to 35% in 2015,” he says.

“Aside from the global trend of consumers defecting from traditional (sedans) and MPVs to SUVs, there is of course significant pent-up demand in Russia,” King says. “And SUVs lend themselves especially well to the often-poor road conditions in Russia and consumer concerns surrounding safety.”

Little Interest in Little Cars?

Autostat’s Timerkhanov sees the market changing little in coming years. “As now, there will be little demand for A-(segment) automobiles and probably no new models of these cars will be introduced to the market. It is also improbable that there will be an influx of super-cheap cars from India and China since they won’t meet the local safety requirements.”

By contrast, IHS Automotive forecasts sales of B-segment cars, whose base prices currently range from RR400,000-RR500,000 ($6,010 to $7,640), will reach 550,000 units per year by 2020. That would amount to roughly one-third of the country’s 1.6 million LV deliveries in 2015.

And with Russian consumers on limited budgets appearing happy to buy from the secondhand market in coming years, IHS’s Kuchko predicts: “We don’t expect to see significant sales growth in the super-low-budget A-segment. Its sales will grow, but not faster than the market in general, and won’t exceed 10,000 units per year for the next three years.”