Carol Thomas, Central & Eastern European Analyst
03 September 2019
03 September 2019
Ford was one of the earliest and most successful investors in post-Soviet Russia, so its announcement earlier this year that it was pulling out of Passenger Car production sent shockwaves through the Russian auto industry, in spite of a poor performance in recent years. When General Motors closed its St Petersburg plant in 2015, this decision appeared to be vindicated as sales in the country slumped by 36% that same year. Ford has attributed its decision partly to unpredictable government regulation and challenging logistics, but the vastly reduced volume potential of the Russian market over the next few years – forecasts have been successively scaled back in recent years – are likely to have played a part, along with limited export prospects.
And yet, as Ford closed two out of its three Russian plants in July 2019 (retaining only Transit Light Commercial Vehicle production at the Elabuga facility), production at two new plants was already getting under way. Mercedes-Benz recently began building models at a new facility near Moscow and aims to boost capacity to 25-30,000 units. Great Wall launched SUV production at its Tula plant in July and aims to boost capacity from an initial 80,000 units to 150,000 in the longer term. Unlike Ford, most other OEMs with a Russian presence have opted to sign Special Investment Contracts or SPICs. Back in 2011, most automakers signed industrial assembly agreements requiring them to commit to capacity expansion and greater localisation, but this happened during an era of optimism about Russia’s market potential. Car sales of 2.7 million were achieved in 2012 and the country was widely tipped to overtake Germany as Europe’s largest market within a couple of years.
The base case forecasts contained in the government’s 2018 ‘Strategy for Automotive Development’ are quite cautious in volume terms and see sales remaining around half a million units below the 2012 peak by 2025. Production forecasts assume that domestic manufacturers will not lose ground in the Russian market and set out ambitious export targets – triple the levels seen in 2017 – which the new SPIC regime is supposed to support.
Our own projections for Russian sales in 2020 and beyond have been trimmed again in recent weeks as fears of a global recession – which would undoubtedly lead to a fall in oil prices – grow. The list of negative influences that are holding back demand is extensive. International sanctions, slow income growth, currency weakness and high interest rates are weighing heavily upon already fragile consumer confidence. Government incentives have been less supportive than hoped and demographic trends are not helpful. It is difficult to see much scope for auto sales to regain their previous peak anytime soon.
Ford’s exit is not expected to impact overall production volumes significantly as most of those lost sales will mainly benefit other domestic manufacturers. However, the issue of overcapacity in Russia remains and the addition of new plants for Mercedes-Benz and Great Wall will only add to the problem. As the global demand outlook becomes increasingly stormy, OEMs may well be looking for cost-cutting options in a period of considerable technological transition, such that further casualties in Russia cannot be ruled out.