Russia Europe's Most Attractive Future Market? Tim Armstrong Director, Emerging Markets

Transcription

1 Russia Europe's Most Attractive Future Market? Tim Armstrong Director, Emerging Markets

2 Presentation Outline Macro Outlook Forecasting Total Industry Volume When does the growth stop? Investment Incentives, WTO, and Production Spending Power and Credit Focus on low-cost cars in Russia How price sensitive are buyers? Consumer spending power how much are people really spending on cars? How big is the low-cost car market size? The rise in the number of low-cost car products What impact will the Chinese have on the market? 2

3 Russia Is the Best Performing Market in the World Almost USA JAPAN GERMANY TURKEY SPAIN INDONESIA KOREA UKRAINE CANADA ARGENTINA IRAN ITALY INDIA BRAZIL RUSSIA CHINA Change in LV Sales and ranked by , Incremental Change in Vehicle Demand Thousands 3

4 The Russian Market Is in a Boom Now in Maximum Growth Phase All Drivers Firing Market driver Commodity prices Exchange Rate Tariff barriers Investment Risk Investment incentives WTO Population dynamics Emissions levels Motorisation rate Consumer spending Credit and finance markets Dealer development Brand competition Automobile prices Product activity +ve X X X X X X X X X X X X -ve X X X 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , January-August 2007 Foreign brand (non-russian) sales growth 66% Sales of New Foreign Brand Cars

5 Russia: From Crisis To Boom Key Indicators Avg GDP Growth (annual in %) Per Capita GDP (market rates in US$) 2,068 4,124 6,925 CPI (annual average in %) RBL/US$ exchange rate (avg.) Total Exports (bop US$ bn) Total External Debt (as % of GDP) Forex Reserves (US$ bn) Fiscal Balance (% of GDP) Average Wage (US$)

6 Domestic Demand Drives Growth, Aided by High Energy Prices 2006 growth bettered 2005 performance at 6.7%. Pace to moderate in 2007 to 6.5% as sliding net exports drag on growth. Domestic demand continues to surge Enterprise profits up strongly, sustaining capital spending boom; rapidly rising real incomes boosting private consumption Aggregate demand has a very substantial import component; Imports outpace exports which face capacity constraints, moderating prices, and a strengthening ruble GDP Consumption Investment (Annual growth in percent) 6

7 Higher Base Oil Price Forecast Brent, US$ per barrel Oil is $15 higher long term than last forecast or around 25% 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 No significant negative shift in segmentation income effects could move segmentation upwards Mar-07 Sep-07 7

8 The Emphasis in Long-term Emerging Markets Forecasting Relies More Heavily on S Shaped Diffusion Curve 8 Saturation? Density Income elasticity of ownership Per capita income Period of maximum income elasticity of vehicle ownership 2 1 Take Off Time 8

9 There are Similarities in S-Curve Development Across Emerging Markets - Stages of Industry Growth Pre take-off: Incomes under c. $3000 $5000 Low incomes, closed financial markets, poor road conditions, low local model quality, public transport system, imports restricted, structural under-supply resolved by waiting lists Take off: commonly around income of $6000 pa Restructuring well underway, incomes rise, access to credit, open to imports, tariff barriers decline, interest rates fall and exchange rates stabilize, investment in road infrastructure, product mix Maturity: can be around $13,000 30,000 pa Market reaching long-term equilibrium as determined by geographical, political, social factors Income Distribution Analysis: Stability Ratio Method e.g. Car sales per household with >$20,000 income, current or ppp adjusted This requires forecasts of number of households by income bands for all emerging markets over the forecast horizon (Source: Global Insight, Consumer Markets Forecast databases) 9

10 Income Take-off Started in 2003 (Number of Households by $US Nominal Income Bracket) Millions of Households H'holds w / Income $150K and over H'holds w / Income $100 to 150K H'holds w / Income $90 to 100K H'holds w / Income $80 to 90K H'holds w / Income $70 to 80K H'holds w / Income $60 to 70K H'holds w / Income $50 to 60K H'holds w / Income $40 to 50K H'holds w / Income $30 to 40K H'holds w / Income $20 to 30K H'holds w / Income $15 to 20K H'holds w / Income $10 to 15K H'holds w / Income $0- to $10k

11 Ratio of Car Sales to Number of Households 40% 35% 30% 25% 20% Ratio of Total Car Sales to Households with $20K Income or More (e.g. 10% of all households with >20k income buy a new car each year ) Brazil Russia UK GERMANY 15% 10% 5% 0% FRANCE ITALY SPAIN 11

12 Russia Is Fast Becoming the Most Attractive Market in Europe Light Vehicle Sales Thousands DEU ITA GBR FRA ESP RUS 12

13 Russian Car Sales by Type Local Production by Foreign Brands Displaces Russian Makes Foreign brand imports Foreign brands made in Russia Russian makes

14 European Brands Are Under-represented in Russia Proportion of Total European Group Sales Made in Russia 2006 and % 50% 40% 30% 20% 10% 0% FIAT GROUP DAIMLER AG BMW PSA VW GROUP PORSCHE RENAULT HONDA SUZUKI FORD GM SAIC TOYOTA AVERAGE MAZDA FUJI HEAVY NISSAN HYUNDAI MITSUBISHI GREAT WALL AVTOVAZ CHERY 14 CHRYSLER LLC

15 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 2005) Everybody joins or switches to Decree 166 by 2006 But applications closed on 15 September 2007 Not applicable to suppliers 15

16 OEMs Are Rushing to Invest in Russia in Special Economic Zones St. Petersburg Kaliningrad Novouralsk Kaluga Moscow Nab. Chelny Izhevsk Taganrog Togliatti Elabuga 16

17 WTO Membership Will Lead to Tariff Reductions in the Long Run CBU Tariffs after WTO Percentages WTO Entry? Tariff level for CBUs % Tariff reduction options WTO Transition period 7 years

18 Many Western OEMs Rush to Get Production Foothold in Russia Car Production by Brand Thousands YUEJIN VW TOYOTA SUZUKI SSANGYONG SKODA RENAULT PEUGEOT NISSAN MITSUBISHI LDV KIA HYUNDAI HUMMER HEBEI ZHONGXING GREAT WALL GEELY FORD FIAT CITROEN CHEVROLET CHERY CADILLAC BMW 18

19 By 2012, Russia Will Be Ranked 4th, Ahead of U.K. RUSSIA 8.6% SPAIN 11.3% _ FRANCE 14.5% _ UNITED KINGDOM 7.4% + ITALY 6.1% _ + GERMANY 27.4% = TURKEY 4,7% = Others 19.9% LV Production in Europe: 24.2 Million Units POLAND 3.2% = = SWEDEN 1.6% BELGIUM 2.3% _ Rest of Europe 5.2% SLOVAKIA 3.3% CZECH REPUBLIC 4% + = 19

20 Russia Car Production by Segment 2007 and 2012 SUV-E SUV-D SUV-C SUV-B MPV-D MPV-C E2 E1 D2 D1 CDV C2 C1 B A Escalade, H2 SX4 Rodius, Cowry Rezzo Doblo Rexton, Sorento, Santa Fe, Kyron Chevy Niva, Captiva, Sportage, Tiggo 5- Series, Teana Camry, 3 Series Mondeo, Sonata, Epica Toyota Small Car Jetta & Octavia Focus, Linea, Spectra, Accent Logan, Nissan 1 litre Thousands 20

21 Spending Power and Credit 21

22 Dollar Wages and Retail Sales Surge Since F US$ wages Real wages F $US Wages (Annual percent change) Real Retail Sales (Annual percent change) 22

23 Credit Is Expanding Fast Car Sales Proportion of Cars Bought With Credit Proportion of Total Sales

24 Features of Credit in Russia Credit is dominated by banks rather than specialised consumer lending institutions Banks have developed direct ties with importers, dealers, and insurance companies Most car loan business occurs around Moscow and St Petersburg Strong potential to unlock credit in the regions Most loans are still denominated in hard currency This will shift towards rouble denominated credit as the importance of the regions increases Terms are getting easier The minimum acceptable salary was reduced in November 2006 to 100,000 roubles 70% of households could potentially qualify Average loan value rose from $10k in 2005 to $12.4k in 2006 Foreign OEMs are moving to set up their own financing arms GM, Ford, Toyota, Nissan, Renault, BMW, and Mercedes Benz are all looking into setting up their own finance networks Mercedes-Benz and BMW will set up their own banking by late 2007 and early 2008 respectively Corporate and fleet sales are growing Influx of foreign companies who prefer foreign brands Ford sold 25% of its cars to corporate buyers in 2005 Risks of a credit crisis are building Fast lending and lack of credit history Risk controls are still to be put in place Exchange rate risk probably not factored in by consumers A credit crunch already occurred during the Russian mini banking crisis in the summer of

25 Growth in Foreign Car Parc, Top 15 Regions in 2006 (% Growth on 2005) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Kanti-Mansi AO Kemrovsky Oblast Cheliabink Oblast Rostov Oblast Novosibirsk Oblast Irkutsk Oblast Krasnoyarsk Krai Svedlovsok Oblast Krasnodarsk Krai Kalinningrad Oblast Primorsky Krai St Petersburg Moscow Oblast Moscow 25

26 Low-Cost Cars in Russia: Is the Market Evolving Too Fast? 26

27 Car Sales by Segment in 2007 US Dollars Proportion of Car Sales Below Each $US Price Level Only E and SUV are price inelastic D is still quite price elastic A segment most price elastic B & C in same price space E SUV D C A B 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 27

28 Consumer Purchasing Power Has Grown Very Fast in Russia US Dollars Russia Car Sales in $US Ranked by Price in 2002, 2005, Thousands Units 28

29 The Proportion of Low Price Cars Is Falling 2500 Car Sales Volume 000s 100% Proportion of Sales Over $20k $11 20k $11k & under 90% 80% 70% 60% 50% 40% 30% 20% 10% %

30 Low-Cost Cars: Prices and Sales 2007 Foreign brands represent 10 out of 18 models sold at $11,000 or under They represent 30% of the 916,000 unit sales volume Only five brands present Daewoo/Chevrolet, Kia, Renault, Chery, H Hafei Brand Model Segment Price $US Volume LADA OKA A LADA RIVA B DAEWOO MATIZ A CHERY SWEET A LADA SAMARA C GAZ VOLGA 3110 D CHEVROLET SPARK A LADA KALINA B CHERY AMULET C DAEWOO NEXIA C CHEVROLET LANOS B LADA 2110 C LADA NIVA SUV-C RENAULT LOGAN B CHEVROLET AVEO B KIA PICANTO A LADA PRIORA C HARBIN HAFEI LOBO A

31 World Car Market Space Is Becoming Crowded Low-Cost Car Competitors GM Matiz/Spark Chevrolet Aveo & Lanos Daewoo Nexia Low-Cost Cars Renault Logan Toyota small car Nissan 1 litre New Ladas Chery Sweet/QQ Chery Amulet Other Chinese VW Polo-based car/concept Up GM Daewoo low-cost car Fiat Linea (higher price) Tata 1 Lakh car (India) Renault Ultra-low-cost car (India) Hyundai Indian car Mitsubishi Low-cost Asia car 31

32 The Logan in Russia Renault brought production at its AvtoFramos plant to full capacity during 2006, when a third shift was added. Production rose to 48,545 units in 2006 In 2007, output will be extended to 80,000 units. In February, it announced a further investment of US$150 million to expand the facility to 160,000 units. This will take place by the middle of 2009 In addition, a second model based on the Logan platform is likely to be launched Local content levels are being increased. In 2006, local content stood at 30%. In 2008, local content will increase to 40% and to 50% by 2009 by expanding the number of local suppliers from 18 to 30 One bodystyle available: sedan Three trim levels Two petrol powertrains Euro 2 emissions standards Prices stretch well above base model 1.4 Authentique $10, Expression $10, Expression $11, Privilege $12, Prestige $13,700 Renault will add 30 dealers to its network during 2008 and In 2007, it had 71 dealers operating 91 outlets 32

33 Here Come the Chinese Chinese Brand Car Sales in Russia Positive Drivers Price competitive 250 Quality rivals or beats Russian brands Explicit export mandate from Chinese government Meet Russian Euro 2 emissions levels Fewer safety requirements in Russia Negative Factors HEBEI ZHONGXING BYD NANJING-MG HARBIN HAFEI Russian government reluctant to grant industrial assembly status under Decree 166 Piecemeal dealer networks with dealers representing several brands Incomes rising rapidly and low-cost cars coming from Western OEMS Lack of brand and residual value could be issue in future GEELY FAW GREAT WALL CHERY

34 Chery Currently producing at Avtotor in Kalinningrad 18,600 units made in H Amulet (A15/Flagcloud) Tiggo Fora (A21) QQ and Kima A1 cars coming by end of 2007 Expansion plans include large scale production with Avtotor Oriental Son (Eastar B11) $21,700 Sweet (QQ3) $7850 Kimo A1 Amulet (Cowin/ A15) $9,390 Fora (A5) $14,390 Tiggo 3 $16,950 34

35 Geely, ZX, Great Wall, Byd Great Wall Peri Coming Great Wall Hover CK1 $21,200 BYD F3 $11,700 Great Wall Florid Coming Geely Otaka $11,000 ZX Landmark $21,250 35

36 Low-Cost (BRICs) Cars in Russia - Summary Smaller market segments are still very price sensitive in Russia There is still a substantial demand for low-ish cost cars Low-cost cars will still sell well but this segment is no longer the potential bonanza it once was Limited overlap in BRICs segmentations Russia is closer to China and moving away from India/Brazil Little scope for Ultra-Low-Cost cars in Russia Spending power is increasing fast Low base price is becoming less important Don t sacrifice functionality or size for a low price Tastes moving up scale from Russian, to Chinese, to Western No longer relevant to target Russian brands The product space is already getting crowded Just low cost is not enough Me too models may fail to attract consumers Differentiate between competitors and within own model Stretch equipment levels above base model Several powertrains and manual/automatic Bodystyle variants will become important 36

37 Car Sales Volumes by Brand Those Offering Low-Cost Cars Will Do Better 800, ,000 LADA CHEVROLET FORD TOYOTA NISSAN HYUNDAI RENAULT DAEWOO MITSUBISHI KIA OPEL 600, , , , , ,

38 Summary Russia is in maximum growth phase now Sales should stabilise around 3.5 million units Investment and wage growth have driven demand OEMs not producing in Russia will lose market share Europeans will remain under-represented Credit expansion has lots more potential but with risks Low-cost cars are still attractive, but will not unlock another explosion in market growth 38

39 Thank You Tim Armstrong Director, Emerging Markets