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American Car Makers Bet Billions on Russia’s Car Boom

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James Brooke

September 04, 2012

MOSCOW — Russian-made cars used to conjure up images of boxy, broken down Ladas. Now car sales are jumping and foreign car makers are investing billions.

This week, Moscow’s International Motor Show is supplying plenty of glitz. But behind the hoopla, the real excitement is that Russia is on its way to become one of the world’s top five car markets.

With sales jumping in Russia, and slumping in Europe this year, Russia is projected to displace Germany in 2014 as Europe’s largest car market. That would make Russia the world’s fourth largest car market - after China, the United States and Japan, according to the research group Euromonitor.

Russia finally joined the World Trade Organization last month. Now car companies are racing to boost production before import tariffs start dropping.

Each of the American big three automakers - Ford, GM and Chrysler - plans to invest $1 billion in car factories in Russia.

“We were the first ones in here 10 years ago, and we’ve built over 500,000 vehicles here,” says Ted Cannis, president of the Ford Sollers joint venture in Russia. “This is a key, core place in Russia. And we see a huge potential for Ford.”

A few stands away, James Bovenzi, GM’s president for Russia, says GM’s plan is to double its Russia production over the next five years.

“GM values the Russian market,” Bovenzi says. “We see it as one of the big growing markets in the world.”

To generate buzz in Russia, GM invited Henry Kissinger to their plant expansion ceremony last June in St. Petersburg.

With car sales up 14 percent in Russia so far this year, dealers are struggling to meet demand.

At a brand new Chrysler dealership on Moscow’s beltway, John Stech, Chrysler Russia CEO, talks about the demand.

“We've brought completely refreshed vehicles, all new vehicles, onto the Russian market,” he said, while visiting the dealership for the first time. “And they really resonate with the Russian customers. For a while we couldn't get enough. Now we have a better supply, and we see this really in the activity in our dealers."

And there is room for growth. There is about one car for every four Russians - about half the average for Western Europe and the United States.

Chris Weafer, strategist for Troika Dialog, says Russian consumers have money in their pockets.

"It is one of the fastest growing consumer markets in the world,” he says. “And that’s coming on the back of very strong disposable income growth - about $8,000 this year, rising to a projected $12,000 in about 4 or 5 years time. So people have more money to spend on consumer goods."

Bernard Sucher, a long-term American investor and sometime Russia critic, comes from Detroit, home of the Big Three American manufacturers. The Motor City native is impressed by what is happening in Russia.

“They`ve done a pretty good job in encouraging global producers and suppliers of addressing Russian markets in terms favorable for foreign players, but at the same time promising that Russia will retain substantial manufacturing capacities itself,” Sucher says. “It`s a good story. It’s a win-win story. And we would like to see more of that.”

Now, with all the new cars hitting the streets, Russia’s challenge is to build parking - and roads.

James Brooke

A foreign correspondent who has reported from five continents, Brooke, known universally as Jim, is the Voice of America bureau chief for Russia and former Soviet Union countries. From his base in Moscow, Jim roams Russia and Russia’s southern neighbors.

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by: Worry from: U.S.

September 05, 2012 4:55 PM

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I wonder how long the enthusiasm will last. The annual income level seems a bit high at $8000, but let's assume it is correct. If we divide that figure by 12 and round it up, we are looking at $667 a month in income. Next, let's assume that car sell for $15,000. The monthly payments on that car if it were financed without interest(not reality)for five years, the payments would be $250. If we actually included realistic finance charges to the monthly payment, it would easily exceed 40% of the buyer's income. I do not think that an average Russian, assuming sanity, would even consider such vehicles. One could imagine a "Russian Repo" reality show if this whole thing ever took off.

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by: Yoshi from: Sapporo

September 05, 2012 10:21 PM

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Excuse me, this is my misreading due to not good English comprehension. Is $8000 per year not total income but disposable income?

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