Tow for automotive industry

When the sector being in crises for four years will begin to recover?

Optimistic forecasts have failed: the year of 2016 is worse for the Russian automotive industry than expected. In general, the demand on new light vehicles has been decreasing for already four years. Therefore the manufacturers have to raise prices, reduce the presented production range and review output plans.

High prices make the demand recovery difficult. New cars in the Russian market have got up by 7% this year, and a sharp turnabout in prices could take place in 2017. Despite of quite stable rouble rate, the expected rise in price will be above the inflation rate and reach from 4% to 7% according to the different estimates. Growing prices may be caused by two reasons, and low rouble rate is the key one. Even increase in prices sizable for consumers for the past two years (the average price of a new vehicle in Russia has increased approximately by 40% since 2014) didn’t overcome the rates of national currency devaluation which is still incompletely reflected in current prices. The cars will also be more expensive due to expenditures on the implementation of ERA-GLONASS security system which is planned to be commissioned at the beginning of the forthcoming year. First of all, increase in prices, followed by the implementation of the system, will have an impact on public sector in which even very slight changes are considerable for consumers.

State support is vital. According to the state support programs (funding of discounts on new cars at utilization of the old ones or trade-in, soft auto lending and leasing), about 50 bln RUB were totally appropriated from the budget for the market recovery in 2016. As a result, these measures provided almost a half of cumulative sales. Although it didn’t allow to fully compensate the increase in prices on new cars, it is obvious that the situation in the industry would be much more worse without the state support. At the same time, the current supporting programs are petered out and needed to be renewed. The Government has already told about plans on changing their format in order to allow previously disregarded consumers to get the support. This is about special benefits for social workers, programs like “First car”, “OSAGO as a gift” etc. Some programs, such as utilization and trade-in as main expectants, will be annulled. The President of Russia, Vladimir Putin, gave pledge to support the automotive industry in 2017 and the funding will be granted again.

Long-term strategy. Last month the Ministry of industry and trade submitted the strategy of the automotive industry development for approval of the Government. It is suggested to keep the sector potential up to 2018 using all state support tools for creating the necessary level of the enterprises load. In 2018 – 2020 the output of automotive components, investment in research and, and significant increase in export will be accentuated. Before 2025 the competitive environment with export volume of 30 – 50% should be formed, and there will be an opportunity to mold a strategy of technologies rapid development. After reviewing the document, Arkady Dvorkovich, Deputy Prime Minister, qualified it as live and incomplete due to the absence of comprehensive market analyses, specific measures of the sector development, forecast of increase in output and sale. As a result, the presented edition was declared unsatisfactory and sent under development. However it can be stated that foundation of long-term development of the domestic automotive sector has begun.

On the way to recovery. Despite of continuing disruption, the market was able to overcome the shock. According to the analysts, the dynamics of light vehicles sale in Russia may increase due to the number of favorable macroeconomic factors. The experts note the annual inflation slowdown and increase in actual wages, which should promote rise in sales. The stable rouble and further reduction of the Central Bank key rate, due to which auto loans will be more affordable, can be additional support. Speaking about forecasts, the experts are extremely careful with assessments. However there are those who tend to believe in the sector’s recovery, when some market participants expect the continuous slowdown. A number of analysts forecast positive trends in 2017 and the current year will be final in the four-years falling cycle. In spite of the fact that the mass improvement of the situation should not be expected, positive trends and increase in market volumes by about 5% can be counted on. The important role in the market recovery may be played by increase in export of cars assembled in Russia, including foreign branded. According to forecasts, 60 th cars will be exported in the current year, and the market potential allows this figure to be increased to 110 th in 2017. The particular role in the market development belongs to the state support, which should become more targeted, reasoned and focused on specific buying groups.