Being in the car business is tough. All the noise we heard about the Big Three bailout in the United States was just the tip of the iceberg for a troubled global market, as fewer and larger manufacturers scramble to place their bets on the best growth markets - namely Russia and Asia. However, in these shifting economic winds, are we going to see a strategic revision with regard to foreign investment in Russia's car market?
Over the past number of years, most major automotive-related companies
have thrown a lot of money into Russian manufacturing, some even partnering locally such as Canada's Magna (though their arrangement with Basic Element seems to have fallen through). The Ford Motor Company was once proud to be one of the largest foreign automotive investors in Russia, but back in December they also halted production
at one of their major plants. Competitors in Europe have been pushing
hard to establish a presence in Russia as well, with Peugeot expecting
a 20-25% growth in sales in 2009, while Volkswagen got into the game
a little later with a €370 million investment in a huge production
plant in 2007. During the first half of 2008, Pricewaterhousecoopers reported that car sales in Russia jumped 41% to 1.65m cars and spending grew by 64% to a record
$33.8bn.
But with the economic downturn, the crash in the price of oil, and the hemmorhaging of the ruble, is the party over for Russia's automotive market? That's the story that the Wall Street Journal is carrying today, quoting a report from that same PWC market analyst which predicted that Russia would be Europe's largest car market in 2008 (it wasn't). Now they are expecting that the number of new cars sold will shrink by about 2.3 million from 3.2 million in 2008. The weakening of Russia's auto market will naturally have a huge collateral impact on other industries, such as steel - which will further put the pinch on some of the country's formerly most powerful and wealthy business owners (the line for corporate handouts from the state might start to get rowdy).
Nevertheless, even if the market shrinks by half, the WSJ reports, it will be at the size it was only two years ago.
But with the economic downturn, the crash in the price of oil, and the hemmorhaging of the ruble, is the party over for Russia's automotive market? That's the story that the Wall Street Journal is carrying today, quoting a report from that same PWC market analyst which predicted that Russia would be Europe's largest car market in 2008 (it wasn't). Now they are expecting that the number of new cars sold will shrink by about 2.3 million from 3.2 million in 2008. The weakening of Russia's auto market will naturally have a huge collateral impact on other industries, such as steel - which will further put the pinch on some of the country's formerly most powerful and wealthy business owners (the line for corporate handouts from the state might start to get rowdy).
Nevertheless, even if the market shrinks by half, the WSJ reports, it will be at the size it was only two years ago.
It should be pointed-out that the new import duties on foreign-made automobiles are actually in line with a new type of thinking economically which advocates "local markets."
Namely, that production be located geographically where the consumption takes place. While many neo-liberal economists would declare this restrictive that actuality is that it's good for workers.
What's important is that production be local not necessarily that the plant owners be local (e.g. Mercedes making cars in Alabama is fantastic even if Mercedes is a "German" company).
Like most Americans, Russians still prefer a foreign made car all things being equal. Hopefully, foreign brands will set-up local production facilities. General Motors, Opel, just announced a new plant here in Krasnodoar Krai.
The biggest "brake" on auto sales is due to consumer credit rates going sky high recently. There's still tremendous pent-up demand but consumers are in a 'wait and see" mode as a result of interest rates being north of 15%.
I guess the silver lining o the situation is that the slow down in sales will give the government a little more time to improve the road infrastructure. All of us here in Krasnodar are looking forward to the completion of renovations to the Krasnodar-Rostov highway and we're hoping that the Krasnodar to Gilendzhik highway will get under way soon.
PS: American electric car manufacturer, Tesla, is looking for capital to move to phase to of Elon Musk's plan. Perhaps the Russian government will use some of its sovereign fund to lend Tesla the needed capital with the provision that production for Europe and parts of the Middle East be based in Russia.