Emerging Market Hotspots Positioning for Growth in Russia and the Middle East. Tim Armstrong Director, Emerging Markets

Transcription

1 Emerging Market Hotspots Positioning for Growth in Russia and the Middle East Tim Armstrong Director, Emerging Markets

2 World Light-Vehicle Demand Growth Is Dominated by Emerging Markets FINLAND SINGAPORE SWEDEN BELGIUM CANADA KUWAIT EGYPT UNITED ARAB EMIRATES MALAYSIA DENMARK CHILE VENEZUELA COLOMBIA GERMANY PAKISTAN AUSTRALIA SPAIN ROMANIA MEXICO SAUDI ARABIA ARGENTINA SOUTH AFRICA UKRAINE BRAZIL THAILAND TURKEY IRAN INDIA RUSSIA CHINA ,6 CANADA NETHERLANDS SOUTH AFRICA UNITED KINGDOM UNITED ARAB EMIRATES GREECE VENEZUELA TURKEY SAUDI ARABIA GERMANY POLAND PAKISTAN PHILIPPINES PORTUGAL FRANCE TAIWAN UKRAINE AUSTRALIA MALAYSIA IRAN MEXICO JAPAN THAILAND SOUTH KOREA BRAZIL INDONESIA RUSSIA UNITED STATES INDIA CHINA ,988 4,48 1, 2, 3, 4, 5, Thousands Incremental Change in Vehicle Demand 5 1, 1,5 2, 2,5 3, 3,5 4, 4,5 Thousands Incremental Change in V ehicle Demand

3 Presentation Outline Russia Will the commodity boom continue? How will sales grow, which segments offer the best potential? The investment environment what is driving investment and who is taking up the challenges? Middle East Where are the growth hotspots? U.A.E. and Saudi Arabia Still some potential? Iran Opportunities in a high-risk environment.

4 Russia: Key Features of Economic Growth Real GDP, percent change year-on-year GDP Industry $ Wage Real Wage 'MARCH-7 'MARCH Interest Rate LHS Industrial Production RHS RETAIL SALES % GROWTH Inflation CPI % Percent change year-on-year Retail Sales Growth % Growth

5 Higher Base Oil Price Forecast Brent, US$ per barrel Oil is $1 higher long term than last forecast, or around 2%. Stronger economic outlook. Greater capacity for government fiscal support and wealth diversification. Pump prices low in Russia with low taxation rates little impact at the pump GII MAR-6 Mar-7 No significant shift in segmentation income effects could move segmentation upwards.

6 Longer Term Outlook Lagging Reform Moderates Optimism Driven largely by energy sector, but impressive growth to moderate further on capacity constraints and competitive challenge to manufacturers. Tapping accumulated oil windfall for state investment program to spur growth is seen as alternative to structural reform. Investment boom decelerates as state intervention in private sector grows, reform stagnates. Bank sector reform initiated, but transparency, supervision remain inadequate. Capital flight sustained by doubts over banking system, sanctity of private property. Consumer demand is buoyed by looser fiscal stance as oil windfall tapped for social spending. Putin government lends qualified support to pro-market initiatives, while more statist approach to economic development is evident. Kremlin seen likely to try to dominate other sectors viewed as strategic automotive, metals, and minerals GDP 211 Industrial Output

7 Russia Total LV Market Outlook Forecasts Millions Forecast upgraded as policy and economics improve. Oil price and exchange rate. Government policy decree 166. Components legislation Car LCV Maximum surge in foreign OEM investment Were overly pessimistic on Russian products. Local makes invest in new products.

8 Total Car Demand Growth SUV 195,7 73%+ MPV E2 E1 D2 D1 C2 29 9,44 7,41 1,244 51,279 53,49 Total demand growth 26 11: 684, C1-75,918 B 421, %+ A 6,525-2, -1, 1, 2, 3, 4, 5, Incremental Change in Vehicle Demand

9 Foreign Car Segment Market Shares by Country Origin 211 Total Market SUV MPV E2 E1 D2 D1 C2 C1 B A Chinese European Japanese Korean Other USA % 2% 4% 6% 8% 1%

10 Japanese Car Sales by Segment 26 A B C1 C2 D1 D2 E1 E2 MPV SUV TOYOTA SUZUKI SUBARU NISSAN MITSUBISHI MAZDA LEXUS INFINITI HONDA

11 Emissions Standards, Fuel Types, and Costs Environmental improvements not really considered. Little sign of differential taxation to clean up car parc. Overall plan is to eventually catch up with EU standards. Euro 2 26 Euro 3 January 28? Euro 4 January 21? Euro 5 January 215? Speed of adoption determined by readiness of local industry. Another policy tool to influence competitive landscape. KYOTO protocol ratified Russia can trade in emissions credits, has large quota to use. Russia s CO 2 emissions fell sharply after communism, bottoming in Fell 36% These are rising again. 45% of emissions are from energy, 11% transport. Little indication that CO 2 measures will be adopted on automobiles. Diesel penetration is extremely low: Cars: 27,2 cars in 26 = 1.4% of car sales. Highest rates in SUVs. LCVs: 15,15 in 26 = 6.4% of LCV sales INDIA Petrol Price $/Litre BRAZIL Taxation Base Price CHINA RUSSIA Most common engine sizes: India - < 1 litre Brazil - < 1 litre China litres Russia 1-2 litres

12 Great Deal of OEM Activity St. Petersburg Kaliningrad Kaluga Moscow Nab. Chelny Izhevsk Taganrog Togliatti Elabuga

13 Special Economic Zones In 25, government created six new SEZ of two types: R&D: in Zelenograd, Tomsk, St. Petersburg, and Dubna; Industrial Zones: Elabuga, Lipetsk. Incentives include: Protection from changes in federal tax legislation; Exempted from taxes on property and land; Exempt from VAT and customs duties on imported equipment; Lower taxes on profit and R&D; Reduction of 5% in single social tax; Finance the building of infrastructure; Favourable depreciation coefficients. Ex. St Petersburg Regional Incentives; Property tax reduced from 2.2% to 1.1% for three years (to % for five years for three-billion -ruble investment soon?) Up to 4% reduction in profit tax for three years (to 2% for five years for three-billion-ruble investment soon?) Kaliningrad St Petersburg Kaluga Zelenograd Taganrog Lipetsk Dubna Moscow Nab. Chelny Togliatti Izhevsk Elabuga Tomsk

14 Decree 166 Was the Turning Point in Investment Legislation Decree 135 (since 1998) or similar: Failed to attract widespread investment. Too hard to achieve localisation levels. Switchers: New entrants/adopters: Decree 166 (since 25): Everybody joins or switches to Decree 166 by 26. Applications closed in 26, fears over influx of Chinese production. Not applicable to suppliers.

15 WTO Membership Will Change Incentives and Tariffs in the Long Run Russia s has influence over WTO joining conditions. Russia s government said accession unlikely before end of 27 at the earliest, and the WTO deal was not to be done at any price. Once Russia joins the WTO, a framework to reduce barriers to trade will be set in motion. Incentives: Current incentives likely to be disallowed under WTO so will run only until WTO membership; Existing agreements will run through transition period; This means we are now in a period of maximum investment activity pace will slow down. Tariffs: CBU import duties will be decreased within seven years from the current 25% to 15%; Import duties on used foreign cars will be decreased within seven years from 25% to 2% WTO Entry? WTO Transition period 7 years Tariff Level for CBUs% CBU Tariffs After WTO % Tariff Reduction Options

16 Many Western OEMs Rush to Get Production Foothold in Russia LV Production by Brand Thousands VW TOYOTA SSANGYONG SKODA RENAULT PEUGEOT OPEL NISSAN MITSUBISHI MAHINDRA & MAHINDRA LDV LAND ROVER KIA HYUNDAI HUMMER GREAT WALL FORD FIAT DAEWOO DACIA CITROEN CHEVROLET CHERY CADILLAC BMW

17 Russian Outlook Summary Commodity prices will remain high Growth will slow but the government has the means to insulate the economy from a downturn The biggest challenge is to pick the time when sales growth cools off Focus on SUV and small car segments for best growth Japanese OEMs are well placed for growth Success of Chinese OEMs is uncertain has most impact on Russian brands Environmental legislation remains in its infancy Diesel sales will remain low - growing but from a very small base Investment activity has been stimulated by legislation changes and WTO accession Production will grow very sharply, scale economies will improve and further downwards price pressure will occur The competitive disadvantage from not producing in Russia will grow, although it is not too late

18 Middle East Light-Vehicle Growth Is Led by Iran Light Vehicle Sales 21, 26 & 211 ISRAEL BAHRAIN OMAN QATAR KUWAIT UAE SAUDI ARABIA IRAN Thousands

19 Evolution of Parc & Car Density Forecast Middle East 3 UAE 6 25 Kuwait PARC ('6) PARC ('7) Ownership PARC ('6) PARC ('7) Ownership PARC ('6) PARC ('7) Ownership Car Parc (millions) Car Parc (millions) Car Density (cars per 1, popn) Qatar 5, 45, 4, 35, 3, 25, 2, 15, Bahrain 1, 5, PARC ('6) PARC ('7) Ownership

20 Evolution of Parc & Car Density Forecast Middle East Oman 12 6 Saudi Arabia PARC ('6) PARC ('7) Ownership PARC ('6) PARC ('7) Ownership Car Parc (millions) Car Parc (millions) Car Density (cars per 1, popn) 219 2,, 18,, 16,, Iran Israel 14,, ,, 1,, ,, 6,, 2 1 4,, 1 5 2,, PARC ('6) PARC ('7) Ownership PARC ('6) PARC ('7) Ownership

21 Group Sales Footprint Total Group LV Sales Made in the Middle East % 5 12% 4 1% 8% 3 6% 2 4% 1 2% % SUZUKI BMW ISUZU RENAULT VW GROUP DCX HONDA MAZDA FORD MITSUBISHI NISSAN GM IRAN TOYOTA PSA HYUNDAI FIAT VW GROUP DCX SUZUKI FORD RENAULT BMW HONDA GM Average TOYOTA MAZDA ISUZU NISSAN PORSCHE MITSUBISHI PSA HYUNDAI

22 Total Car Demand 211 GCC+ISR SUV-E SUV-D SUV-C SUV-B PUP-D PUP-C MPV-E MPV-D MPV-C MPV-B F2 F1 E2 E1 D2 D1 C2 C1 B A 5,484 1,241 2,56 21,491 17,687 1, ,46 34,73 5,624 34,311 59,49 14,775 12,373 95,789 85,36 145, ,139 Total demand growth 26 11: 172k 212,564 5, 1, 15, 2, 25,

23 Japanese Car Sales 211 GCC + ISR AVERAGE TOYOTA NISSAN MITSUBISHI MAZDA LEXUS INFINITI HONDA % 2% 4% 6% 8% 1% A B C D E F MPV-B MPV-C MPV-D MPV-E SUV-B SUV-C SUV-D SUV-E

24 UAE, Saudi Arabia Market Features United Arab Emirates Most diversified of all GCC states, economically and population Incomes catching up with the wealthy city-states Construction boom and tourism will expand population Wealth is more evenly divided than in Saudi Arabia One of the most open GCC states wealth can be displayed Car demand will propel ownership to mature market levels Rotating expat community will keep demand for core C & D segments strong Little downsizing pressure from environmental legislation Congestion pressures will increase, pressure on small cars Europeans have a natural advantage in small cars Dollar stronger against the yen, weaker against Euro. Has protected Japanese makers from European competition Increasing number of residents allows local wealth accumulation and drives up the proportion of premium cars Japanese dominance will be maintained but Europeans will be increasingly competitive in the premium and SUV segments Saudi Arabia Poorly diversified economy still relies on oil for 75% of government spending Less able to sustain growth rates now oil production is maximised Population is mostly Saudi Arabian Simmering internal tensions and large young population potentially a burden on the economy Wealth is held by an elite or spread through government spending Far more conservative in expression values Premium weighted towards top of the range Large allocation to used car imports Tensions have limited entry by new OEMs, incumbent sellers can maintain their advantage Less likely to grow than UAE, as wealth is allocated rather than created independently Risk of a downturn is higher than UAE Will remain a developing market for much longer

25 Car and LCV Sales Volumes UAE 25, 3 6 2, , 2 4 1, 15 3 CAR LCV 1 2 5, PARC ('7) Ownership

26 Car and LCV Sales Volumes Saudi Arabia 5, , 4, , 3, , 2, , CAR LCV 4 2 1, 5, PARC ('7) Ownership

27 Iran Has Been the Middle East s Star Performer Car and LCV Sales Millions A very strong industrialisation push by government since 2..8 Over one million light vehicles sold in Car LCV Expansion focused exclusively on passenger cars. Rate of growth has slowed as economy falters and as investment concerns escalate Upwards trend to continue, but many unanswered questions will affect the forecast. Mid-term downturn a possibility.

28 Iran Light-Vehicle Production by Group Thousands VW GROUP SUZUKI SAIPA SAIC RENAULT PSA PROTON 8 NISSAN MITSUBISHI 6 MAZDA MAHINDRA & MAHINDRA 4 KISH KHODRO IRAN KHODRO 2 HYUNDAI FORD FIAT GROUP DAIMLERCHRYSLER DAEWOO CHERY

29 Top-15 Models and Segmentation Changes Light-Vehicle Sales 26 Light-Vehicle Segmentation 26 & 211 LOGAN SIENA MVM11 SEPAND B-SERIES XANTIA 26 SD RIO SAIPA 24 PARS SAMAND 26 PAYKAN PUP PEUGEOT RD 45 PRIDE Thousands SUV-E SUV-D SUV-C PUP-C PUP-B MVAN MPV-D HVAN E1 D1 CDV C2 C1 B A Thousands

30 Iran Vehicle Industry Developments in a High-Risk Environment Government has invested heavily in the automotive industry: Diversify the economy away from oil, clean up car parc, remain politically in touch with ordinary Iranians; High oil revenues and strong government spending will keep the risk of recession low between 26 and 28; Fiscal expansion in 27/8 budget turns contractionary (i.e., grows less than projected GDP): Fuel subsidies to continue, but proposed rationing of fuel will be politically difficult; Government has withdrawn funds from oil stabilisation fund for current expenditure. Government takes more interventionist line on industrial development. Strong commitment to developing independent Iranian industry: Develops its own new powertrain. Iran Khodro opened its first domestic engine plant in February 27; 1.4-litre engine to be used in Samand and possibly extended to other models. New local products - Samand successor, Paykan X11. Higher local content and export requirements expected from foreign investors: Exports rose to 38, units in 26; 26 SD and Logan both have export quota imposed; Samand overseas sales and production being developed. Process of foreign investment has been more cautious. Government responds by keeping production of older models (Kia Pride range) going longer; Key investments proceeding; Pre-orders for Logan (Tondar 9) have been extremely encouraging. Without sanctions, vehicle production will rise, but at a slower pace than the last few years as older models are phased out. Direct industrial sanctions would potentially cripple the industry.

31 Iran Sanctions An Escalating Process U.S. sanctions have been in place for more than a decade. U.S. companies prevented from doing business there. Russia and China have generally been opposed to sanctions against Iran. International efforts by the UN have focused on nuclear programme only. December 26: First round of UN sanctions voted in Resolution Partial arms embargo; Bans the supply of materials and technology that could be used for the nuclear programme; Asset freeze on companies and individuals involved in the programme: 22 Iranian entities (1 government officials and 12 institutions); Travel ban on individuals blocked by Russia. Russia has been opposed to sanctions; Exclusion of the Bushehr light-water nuclear reactor that Iran is currently building with Russian assistance. Result: largely ineffective result with respect to nuclear enrichment. March 27: Resolution 1747 expands UN sanctions; Extends list of asset freeze; 6-day review process. April 27: EU approves new sanctions; Sanctions go further than those approved by UN; Full arms embargo; More people added to travel and asset freeze list.

32 Iran Sanctions Economic Impact Very Limited So Far Iranian government has been unmoved by all international attempts to limit its nuclear programme; Sanctions are a scrap of paper. In their present form, the direct impact of UN sanctions on Iran's economy will be very limited: Given Russian and Chinese apprehensions, the resolution does not involve sanctions against the Iranian economy; No restrictions on cooperation with Iran's oil industry and joint manufacturing projects in automobile and consumer goods products; Such restrictions would have forced many Asian and European firms to cut back their current activities in Iran; There are also no restrictions on Iran's exports of oil or other products; Nor does the resolution prevent Iran from importing gasoline to supplement its insufficient domestic production. But Sanctions will have an adverse effect on investment confidence; The fear of sanctions and a potential military attack have kept Iranian investors nervous for more than three years, and private-sector investment has been stagnant; Iran's stock market has performed poorly in the past 18 months; Iranian investors have moved assets to the United Arab Emirates and other Gulf Cooperation Council (GCC) countries, which carry far fewer political risks; The threat of UN economic sanctions will clearly add to the anxieties of Iranian investors and lead to further stagnation of trade and investment. What will worry investors even more is that the economic pressure on Iran is likely to intensify over time.

33 Iran Vehicle Industry Strategies for Success Iran is a very high risk and potentially very high reward market. Investments are subject to strong political influence: Require long-term relationship building at the highest level. Invest in production to service this market: Imports will remain only a fraction of total demand and are commonly granted to OEMs already producing locally; Commit to high local content; Increasingly, an export quota is being required. High-risk environment favours production of older models: Dual-fuel option (petrol/gas) gives a competitive advantage; No need for diesel. Government chooses market segmentation. Increasingly, B segment cars are being favoured with emphasis on price and utility. Japanese BRICs cars would be very well suited here. LCV market is heavily undersupplied. Japanese OEMs are very strong in this segment. LCV version of BRICs cars? Benchmark against PSA and Renault, but watch out for Chinese. French and Korean OEMs have very strong industrial presence. Close ties with China could change long-term automotive landscape. U.S. sanctions exclude Big Three from participating in this market. Extends to all U.S. made cars.

34 Thank You Tim Armstrong Director, Emerging Markets