Two Priorities to Build Up Russia’s Auto Industry: Exports and Innovation
The Russian automotive industry has experienced significant ups and downs in the past decade. The domestic car market rebounded strongly after the global financial crisis to become the sixth-largest in the world—2.6 million automobiles (cars and light trucks) sold in 2012. Manufacturers responded by building new plants to expand production.
But the current economic downturn, caused primarily by falling oil prices, has hit hard. In 2015, the industry sold just 1.5 million automobiles, to rank 12th in the world behind such countries as Canada, the UK, and Brazil. (See Exhibit 1.) Today, as a limping economy continues to hold domestic buyers in check, the industry finds itself with far too much production capacity.
We analyzed the factors affecting Russia’s automotive market and developed three potential scenarios. In the most likely of these, the market recovers slowly by 2020 but annual sales still do not exceed 2 million automobiles. This level of sales represents a “new normal” for the industry, and it is far below the industry’s current production capacity. If automakers and component manufacturers are to avoid serious—and prolonged—financial losses, the industry must recalibrate.
Two measures can improve the situation. First, manufacturers should focus on exporting more vehicles to foreign markets, particularly in the Middle East and other developing regions. Second, Russia’s government should foster innovation in high-potential areas such as driver-assistance and connected-car technologies.
Measures to Boost the Industry, and Mixed Results
The automotive sector in Russia is an integral part of the country’s industrial base, generating about 1.2% of the nation’s total GDP from automobile and component manufacturing, sales, and services. Factoring in the supply chains of all subcomponents, which link to steel, plastics, electronics, and several other industries, yields a total economic contribution of 3.6%.
As the Russian market for cars rapidly grew in the years following the global financial crisis, foreign automakers sought to sell to the expanding audience of car buyers in the country. In response to this competition, the Russian government introduced several measures designed to support domestic companies—both OEMs and component manufacturers—and build up the industry.
For example, the government required foreign manufacturers to build their cars locally. A certain percentage of each car sold in the country had to consist of components built in Russia, and that percentage increased over time. But many companies got around these requirements by making large, heavy components in Russia while developing and building higher-value, more technologically advanced components (such as electronics) elsewhere. Other automakers sent nearly completed components to Russia, leaving their Russian plants the simple task of assembling them.
The end result is that Russia’s automotive industry has failed to build up its technical capabilities as the government intended. Russian manufacturers lag behind their peers in both mature and developing markets in areas such as labor productivity. Similarly, spending on R&D is much lower at Russian companies than at their foreign competitors. Today, Avtovaz spends less than 1% of revenue on R&D, compared with the 4% of revenue that most global auto manufacturers devote to R&D.
In addition, the country’s relatively strong rebound from the financial crisis spurred many manufacturers to boost their capacity by opening new plants. Overall capacity in the country reached roughly 3.1 million vehicles a year in 2015, with forecasts projecting that the market would reach an annual figure of up to 4 million automobiles. Since then, however, the Russian economy has slowed considerably, leaving the auto industry with too much production capacity and not enough technical expertise.
Slow Growth Is Likely Through 2020
To see what the next five years could look like, we built a market model by analyzing the factors affecting the Russia automobile market, including oil prices, the dollar-ruble exchange rate, GDP growth, wages, and interest rates (which influence how easily Russian consumers can finance auto purchases). This analysis points to three likely scenarios. (See Exhibit 2.)