An overview of the Russian and CIS automotive industry. February 2012

Transcription

1 An overview of the Russian and CIS automotive industry February 2012

2 Contents Foreword... 1 Russian economy...2 Russia in the global automotive industry... 4 Russian automotive industry... 6 Light vehicle market... 7 Commercial vehicle market Bus market...14 Automotive component market Car loan market Dealership networks Automotive logistics CIS automotive markets Ernst & Young s involvement in the automotive industry...23 Contacts... 24

3 Foreword Dear Reader, The Russian automotive industry experienced a milestone year in Some of the noted happenings and highlights include: Automotive output hit a production record triggered by strong market recovery, production ramp-up plans and new investment in the sector. Sales rose by approximately 40% year on year, almost reaching the pre-crisis level. Sales were driven by pent-up demand, recovery of consumer confidence, credit availability and government incentives. The Russian Government passed an amendment to the industrial assembly legislation leading to a major change of the rules. The change led to a consolidation of the original equipment manufacturer (OEM) sector and emergence of a few significant major alliances of players. The suppliers sector showed a further restructuring and reshaping, leading to new investment opportunities and an increase of the original equipment (OE) share of market. The retail segment has been reshaping through more efficient operations, consolidation and market expansion. Russia has finally been accepted into the World Trade Organization (WTO), which will lead to further changes in the industry and its competitive landscape. It will create more opportunities and challenges for market players. This report outlines our view of the current state of the Russian automotive industry and our outlook for the evolution of this high-growth market in the coming years. We remain positive about the long-term prospects of the Russian automotive industry and believe that the next few years will bring additional significant investment, particularly in the supplier sector. We are eager to share our market experience and assist you in your business activities by means of prudent investment, as well as risk, operational and cost management advisory. Ivan Bonchev Ernst & Young (CIS) B.V. CIS Automotive Leader An overview of the Russian and CIS automotive industry Foreword 1

4 Russian economy In 2011, Russia s gross domestic product (GDP) reached 4.2% in real terms to demonstrate an upward trend and surpass global and European growth rates by 2.7% and 1.5%, respectively. Russia s real GDP growth resulted from the recovery of the labor market, growth of consumption and an increase in investments: According to Rosstat, the unemployment rate in Russia declined by 0.8% for 11 months of 2011 in a year-to-year comparison with Final consumption costs at current prices increased by 13% for three quarters of 2011 compared on a year-to-year basis. According to Russia s balance of payments, direct foreign investment in Russia in the first three quarters of 2011 was up 41% compared to the similar period of Furthermore, 2011 saw an increase in oil prices, which had a positive effect on the trade balance. By the end of 2011, the consumer price index was 6.1%, representing the lowest value since According to the consensus forecast prepared by analytical agencies and by the Ministry for Economic Development of the Russian Federation, the consumer price index is expected to decrease further from This will have a positive effect on real income and consumption growth rates. The year 2011 witnessed a systematic increase in the refinancing rate, which served to curb inflation. At the end of 2011, the refinancing rate was lowered, demonstrating the attempts of the Central Bank of Russia (CBR) to boost economic activity in the country. Nominal GDP and real GDP growth US$ billions 3, % 2,500 2,000 1,500 1, % 1,649 1, % 4.2% 1,485 1,862 2, % 2,298 2, % 4.4% % growth 10% 2,740 8% 6% 4% 3.9% 2% 0% 2% 1,000 4% % E2011 F2012 F2013 F2014 F2015 6% 8% 10% Nominal GDP Real GDP growth E estimate, F forecast Sources: Federal State Statistics Service (Rosstat); Ministry for Economic Development of the Russian Federation; IHS Global Insight; Ernst & Young estimates. 2 An overview of the Russian and CIS automotive industry Russian economy

5 Macroeconomic indicators E2011 F2012 Population, millions Nominal GDP, US$ billions 1, , , , , ,064.9 Nominal GDP, change in % Real GDP, change in % GDP per capita, US$ 9, , , , , ,550.0 Foreign direct investment, US$ billions * n/a Inflation, % Industrial Production Index, % Crude oil, US$ per barrel Real disposable income growth, % Unemployment rate among economically active population, % Average monthly wages, machinery industry, US$ n/a Average monthly wages, all sectors, US$ Exchange rate RUB/US$ (annual average) Exchange rate RUB/euro (annual average) Sources: Federal State Statistics Service (Rosstat); Ministry for Economic Development of the Russian Federation; Central Bank of Russia; IHS Global Insight; The Economist. * Indicator for three quarters of The agreement on Russia s accession to the WTO is planned to be ratified in mid-2012, and Russia will become a full-fledged member of this organization. This being the case, many protectionist measures will be reconsidered. Experts forecast a slowdown in global economic growth in 2012 due to the aggravation of debt problems in certain European countries and the public debt problem in the United States. In view of the rapidly expanding globalization of the world economy and interdependencies existing between various countries, the influence of these factors on the Russian economy cannot be ignored. Therefore, in the medium and long term, acceleration of economic growth in Russia will to a great extent depend on the global economic environment (e.g., the ability of European countries to handle the debt crisis) and country-specific problems (including improvement of the institutional environment aimed at promoting competition, reducing the government s role in the economy, and developing and implementing innovative technologies). An overview of the Russian and CIS automotive industry Russian economy 3

6 Russia in the global automotive industry In 2011, the global automotive industry demonstrated moderate growth rates as compared to the previous year. The Eurozone debt crisis triggered general stagnation in European Union (EU) economies and brought about a more than 1% reduction in the sales of new light vehicles. The March 2011 earthquake in the Pacific Ocean caused a 15% drop in the sales of new light vehicles in Japan, based on the results of Meanwhile, in China, rapid economic growth gave way to moderate growth rates in line with the government s plans to stabilize the rapidly developing economy. This had a chilling effect on the Chinese automotive market, which demonstrated only 5% growth in new car sales in 2011 compared to 33% and 48% in 2010 and 2009, respectively. In 2011, the US market of new light vehicles continued to grow. According to experts, with the current growth rate, sales of light vehicles in the US may exceed the level of In 2012, the growth rates of the global automotive industry are expected to remain low. Developing automotive markets will demonstrate a better pace, while European countries will be forced to take additional steps to resolve their public debt problems. This will significantly limit their ability to stimulate the automotive market through car scrapping programs, which were an important tool of promoting demand in the period from 2008 to Meanwhile, developing economies display a consistently high demand for automobiles. This is due to higher economic growth rates and a considerably lower car density index per 1,000 people as compared to the developed economies. Sales of light vehicles in major markets, thousands of units China US Japan Brazil Germany India Russia France UK Italy CEE* Sources: LMC Automotive (formerly J.D. Power); Ernst & Young estimates. * Central and Eastern Europe (CEE) countries: Bulgaria, Bosnia-Herzegovina, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Poland, Rumania, Serbia, Slovakia, Slovenia, Turkey. F2014 F2013 F2012 E , , , , , ,000 4 An overview of the Russian and CIS automotive industry Russia in the global automotive industry

7 As an emerging market, Russia is still at the stage of accelerated automobile demand recovery following a sales slump of more than 1.5 million units in Light vehicle sales in Russia increased by 39% in 2011 and by 30% in High rates of Russian demand are largely due to the car scrapping program, which was implemented from March 2010 to June 2011, and pent-up demand. Russia s automotive market is the second-largest in Europe, after Germany, and has significant growth potential. The light vehicle density in Russia is 250 cars per 1,000 people compared to more than 500 cars in Germany and more than 640 cars in the US. However, in 2012, the Russian automotive market is expected to experience a slowdown related to the end of the car scrapping program and the leveling of the low base effect 1 due to high sale rates in 2010 and Light vehicle density, 2011 Country Population, millions Light vehicle fleet, millions Vehicle density per 1,000 people US France Germany UK Poland Czech Rep South Korea Russia Ukraine Brazil Turkey China 1, India 1, Sources: IHS Global Insight; Datamonitor; AUTOSTAT research agency; Ernst & Young estimates. 1 Low base effect is the tendency of a small absolute change from a low initial amount during the downturn to be translated into a large percentage change. An overview of the Russian and CIS automotive industry Russia in the global automotive industry 5

8 Russian automotive industry In 2011, the Russian automotive market demonstrated consistent growth, mainly driven by increasing consumer confidence, receding unemployment, available car lending programs, recovery of demand and government support initiatives aimed at boosting the post-crisis development of the vehicle market. Sales of new light (passenger and light commercial) vehicles increased by 39%, and sales of new heavy vehicles increased by 35% as compared to At the same time, production of light vehicles is estimated to have increased by 43% and that of heavy vehicles by 30%. A shift in demand toward budget models is noted, as well as a gradual recovery of demand for premium-class cars. Furthermore, the car scrapping program implemented from March 2010 to June 2011 had a strong positive effect on the 2011 sales dynamics. The rapid expansion of the Russian automotive industry in 2011 resulted from the post-crisis recovery of the Russian economy and government support aimed at stimulating the industry. These factors, being demand-driving on the one hand and production-boosting on the other, contributed to the creation of new production capacities and higher utilization of the existing ones. The government plays a key role in the recovery of the automotive industry. Striving to improve the investment climate and attract direct foreign investment, the government is taking measures to introduce changes to the tax policy, remove administrative barriers, develop infrastructure, simplify customs procedures, provide investment guarantees and co-finance investment projects. One of the more significant events in 2011 was when Russia signed the protocol of accession to the WTO. Russia will become a full-fledged WTO member in mid-2012 following completion of the respective ratification procedures. An important consequence of Russia s accession to the WTO will be a considerable reduction of customs duties on vehicles in , which could result in a certain shift in the demand structure in favor of foreign vehicles and increase their share in overall sales. Last year, the Russian automotive market experienced significant growth across all segments, including production of components and expansion of dealer networks. Russia is noted for a comparatively modest indicator of car density per capita and a rather considerable age of the vehicle fleet. These factors, together with the post-crisis economic recovery, increase in demand and government support initiatives, lead to the conclusion that the Russian automotive market has considerable growth potential, and that the pre-crisis level of sales can be achieved in the medium term. 6 An overview of the Russian and CIS automotive industry Russian automotive industry

9 Light vehicle 2 market In 2011, the Russian light vehicle market continued to grow at a steady pace. The total sales of new light vehicles and light commercial vehicles in 2011 reached 2,653,408 units, which is 39% above the similar indicator of A rapid growth of sales was registered from January to June 2011, when the growth rate was 156% on a year-to-year basis. The second half of the year saw a slight reduction in sales following the end of the car scrapping program 3 ; however, the dynamics against the previous year remained positive. The growth rate for the specified period amounted to 126% on a year-to-year basis. The key drivers of the sales growth include: Recovery of demand Prolongation of the scrapping program Loan interest rate subsidies Availability of car loans Gradual recovery of demand for premium-class cars New light vehicle sales in Russia, thousands of units 3,500 3,000 2,500 2,414 2,897 Optimistic 2011 sales forecasts made by the OEMs and based on stable demand growth in 2010 also contributed to rapid growth in It should be mentioned that Japan s disaster in March 2011 produced a negative effect on sales of Japanese car brands from May 2011 to July However, the influence on the overall dynamics was insignificant. 2,653 2,000 1,904 1,500 1,466 1,000 2 Up to 3.5 tons, with several exceptions reaching the highest range of 6 tons. 3 The car scrapping program lasted from March 2010 to June Sources: Association of European Business (AEB); ASM Holding; AUTOSTAT research agency An overview of the Russian and CIS automotive industry Light vehicle market 7

10 Sales of top foreign brands, units (including Russian-made foreign brands) Chevrolet Hyundai Renault KIA Nissan Toyota Ford Volkswagen Daewoo Mitsubishi Skoda Opel Peugeot Mazda Suzuki Mercedes-Benz Fiat BMW Citroen Audi SsangYong Chance Volvo Honda Lexus Land Rover Subaru Geely Russian brands registered a 12% sales increase in 2011 as compared to 2010 and amounted to 732,311 light vehicles being sold. Key factors contributing to the increase were loan interest rate subsidies and prolongation of the scrapping program until the end of June However, the sales structure displayed a 6% decline in Russian brands compared to 2010: from 34% to 28%. Sales of Russian-made foreign brands increased significantly, exceeding the respective 2010 indicator by 61%. This is primarily attributable to the introduction of a new industrial assembly legislation. Light vehicle market, US$ billions Sources: ASM Holding; Ernst & Young estimates Overall, the light vehicle market generated US$65 billion, 4 demonstrating an increase of 55%. While foreign and Russianmade foreign brands (US$57 billion) accounted for more than 88% of this turnover, Russian brands contributed US$8 billion Source: AEB. 0 50, , , ,000 4 According to the estimates prepared by Ernst & Young. 8 An overview of the Russian and CIS automotive industry Light vehicle market

11 Light vehicle sales, % Light vehicle sales by price segment (US$ thousands), % Foreign brands 26% 28% 34% 34% 8.5% 30.7% 11.4% 56.0% 3.3% 6.6% 10.4% % % 19.3% 46% 32% 22.2% 4.5% < >30 38% 28% Russian brands 2011* Imports of new foreign brands Russian-made foreign brands 34.8% 4.8% Russian brands 20.9% 27.0% 8.0% 34% Sources: ASM Holding; Ernst & Young estimates. *Preliminary estimates. 39.6% 33.5% 31.4% < >15 Sources: AEB; Price-N; Ernst & Young estimates. Market share by brand in terms of volume, % 31% 24% 29% 27% 29% 22% LADA Chevrolet Toyota Nissan 3% 3% 3% 4% % 2% 5% 3% 7% 4% 3% 6% 3% 4% 5% 4% 5% 5% 5% 5% 5% 4% 6% 5% 5% 6% 6% 6% 4% 7% Ford Hyundai Renault KIA Volkswagen Daewoo Mitsubishi Other Sources: AEB; Ernst & Young estimates. An overview of the Russian and CIS automotive industry Light vehicle market 9

12 Light vehicle production breakdown by volume, % 53% 48% 39% % 52% 61% Russian brands Foreign brands Sources: ASM-Holding; Ernst & Young estimates. In 2011, light vehicle production continued to expand, and the 2011 production growth rate was 143% on a year-to-year basis. The growth was largely attributable to an increase in the output of Russian-made foreign cars, which was 154% higher than in Russian brands also demonstrated a slight increase of 6%. All in all, more than 674,000 vehicles of local brands and about 1,053,000 vehicles of foreign brands were manufactured in Russia last year. We have compiled a forecast for the Russian light vehicle market for based on materials and estimates of leading automotive analytical agencies and our market understanding and insights. Changes of import duties as a result of Russia s accession to the WTO* Light vehicles Applied before accession to the WTO Upon accession to the WTO New 30.0% 25.0% 25.0% 25.0% 22.5% 20.0% 17.5% 15.0% Sources: Publicly available sources. * Preliminary arrangements. 10 An overview of the Russian and CIS automotive industry Light vehicle market

13 Key drivers of light vehicle production in the next few years will include: Russian light vehicle production forecast, thousands of units Creation of new production capacity 3,000 Changes in the industrial assembly regime 2,500 Trade policy promoting domestic production Recovery of the Russian economy and, to a lesser extend, the economies of the US and EU Russia s development strategy until 2020 will be aimed at replacing imports with domestic production 2,000 1,500 1, F2012 F2013 F2014 F2015 Russian brands Foreign brands Source: LMC Automotive. Key drivers of light vehicle sales in the next few years will be as follows: Accession to the WTO (in a significant reduction of customs duties on vehicles is expected) Aging vehicle fleet (the average age of vehicles in Russia is 12 years; in Europe it is 7 years) Relatively low light vehicle density as compared to developed automotive markets (250 cars per 1,000 people in Russia vs. 523 cars in France and 643 cars in the US) Increasing number of car lending programs provided by banks jointly with OEMs New light vehicle sales forecast, thousands of units 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2, F2012 F2013 F2014 F2015 Sources: AUTOSTAT research agency; AEB; LMC Automotive; IHS Global Insight; Ernst & Young estimates. We have compiled a forecast for the Russian light vehicle market for , based on materials and estimates of leading automotive analytical agencies and our market understanding. An overview of the Russian and CIS automotive industry Light vehicle market 11

14 Commercial 5 vehicle market In 2011, the Russian commercial vehicle (CV) market continued its recovery on the back of expanding energy and industrial sectors. The sales volume of new commercial vehicles increased by 35% compared to 2010 to exceed 109,600 units, while the output increased by 30%. CV production breakdown by volume, % 11% 89% 18% 82% 16% 84% * Russian brands Foreign brands Sources: ASM Holding; LMC Automotive; Ernst & Young estimates. *Preliminary estimates. Russian brands (GAZ, KAMAZ and others) experienced a significant increase in CV production volumes. Domestic brands still dominate in the structure of CV sales, as they are more affordable for Russian consumers. However, the ratification of the protocol on Russia s accession to the WTO will result in a lowering of import duties on commercial vehicles, which may lead to a notable drop in demand for domestic products and a significant increase in imports of commercial vehicles, especially used commercial vehicles. Besides, given the post-crisis market growth, foreign producers assess the prospects of the Russian CV market as highly favorable. In , Scania and Volvo truck production facilities (assembling Renault trucks as well) were opened in Russia. In 2011, a number of manufacturers confirmed their plans to develop business in Russia: On 11 March 2011, Naberezhnye Chelny hosted an official opening of the joint venture of Daimler and OAO KAMAZ (Mercedes-Benz Trucks Vostok). The first jointly manufactured truck rolled off the production line in September The output was initially planned at 4,500 units per year. German truck producer MAN plans to launch a new CV production facility in St. Petersburg in the first half of The facility is planned to reach its full production capacity (6,000 trucks per year) within the next three years. Dutch truck producer DAF is considering organizing a production facility in Russia with an output of 5,000 6,000 units per year and is now looking for a Russian partner able to organize the assembly of trucks from imported components. DAF is holding negotiations with entrepreneurs from various regions of Russia. No final decision has yet been offered. 5 Medium-duty and heavy commercial vehicles (more than 6 tons weight and, in exceptional cases, more than 3.5 tons). 12 An overview of the Russian and CIS automotive industry Commercial vehicle market

15 Changes of import duties as a result of Russia s accession to the WTO* Applied before accession to the WTO Upon accession to the WTO Commercial vehicles (5-20 tons) New 25% 15% Used, less than 5 years 30% and additional rate of euro 2.2 per 1 sm 3 10% Used, 5 7 years Euro 4.4 per 1 sm 3 10% Used, more than 7 years Euro 4.5 per 1 sm 3 Euro 1 per 1 sm 3 Commercial vehicles (more than 20 tons) New 25% 10% 5% Used, less than 5 years 30% and additional rate of euro 2.2 per 1 sm 3 15% 10% Used, 5 7 years Euro 4.4 per 1 sm 3 15% 10% Used, more than 7 years Euro 4.5 per 1 sm 3 Euro 1 per 1 sm 3 Sources: Publicly available sources. * Preliminary arrangements. According to our market development scenario, sales of commercial vehicles from will grow at a 14% annual rate. The expected growth reflects the general economic recovery in Russia, the need to upgrade the commercial vehicles fleet and the expansion of the lending and leasing markets. CV sales forecast, units 200, , , , , ,000 80,000 60,000 40,000 20, E2011 F2012 F2013 F2014 F2015 Sources: ASM Holding; LMC Automotive; Ernst & Young estimates. An overview of the Russian and CIS automotive industry Commercial vehicle market 13

16 6 Bus market In 2011, sales of new buses in Russia grew by 13% over 2010 and are estimated to have reached more than 15,000 units, while production volume also increased by 13% over It should be noted that the growth rate of the minibus segment slowed down (increase of 8% in 2011 as compared to 10% in 2010), while the bus-on-truckchassis segment shrank by more than 30%. Dynamic of bus/minibus/bus-on-truck-chassis production, thousands of units E2011 Buses on truck chassis Minibuses Buses Sources: ASM Holding; Ministry of Industry and Trade of the Russian Federation; Ernst & Young estimates. In 2011, the share of city buses in production continued to grow and constituted nearly 40%. At the same time, the share of suburb buses decreased to 57% (against 64% in 2009 and 60% in 2010). However, suburb buses still dominate bus production, and the shares of the intercity and tourist bus segments continue to be insignificant: 2.67% and 0.33% of total production volume, respectively. Bus production breakdown by segment, % 3.37% 0.03% 2.67% 0.03% * 36.54% 60.05% 39.97% 57.33% Suburb buses City buses Intercity buses Tourist buses Sources: ASM Holding; Ministry of Industry and Trade of the Russian Federation; Ernst & Young estimates. *Preliminary estimates. 6 Mini buses and buses on truck chassis are excluded unless otherwise stated. 14 An overview of the Russian and CIS automotive industry Bus market

17 The major change that occurred in the Russian bus market structure by origin is the decrease in the share of Russian brands due to the increase in the share of other segments: locally assembled foreign brands and new and used foreign brands. This tendency is supported by the shift in consumer preferences, since their purchasing power increased. We expect the bus market to witness a fairly smooth recovery and to reach pre-crisis production volumes in the next few years. Key drivers of market development will likely be: Need for bus fleet renewal due to a significant existing gap between the standard and actual renewal of the bus fleet Greater availability of credit resources in the context of the general financial situation in the Russian Federation Bus market breakdown by origin, % 12.90% 11.70% 2.90% 6.30% 12.50% * Russian brands New foreign brands Russian-made foreign brands 72.50% 22.40% 58.80% Used foreign brands Source: ASM Holding. *Preliminary estimates. An overview of the Russian and CIS automotive industry Bus market 15

18 Automotive component market The high potential for import substitution related to the growth in foreign car production in the Russian Federation remains one of the main features of the Russian automotive component market. New players are expected to enter the market since many automotive component production segments witness a relatively low level of competition. In addition, the Russian Government is supposed to provide comprehensive support to joint productions of Russian and foreign partners for attracting new technologies to the country. In February 2011, conditions of the industrial assembly legislation in Russia were tightened for the purposes of developing the production localization program and encouraging the modernization of existing production capacities. Currently, the Russian automotive component market is still underdeveloped due to a number of reasons: Underdeveloped network of suppliers, lack of competition and relatively low product quality Lack of innovative technologies that would ensure the competitive advantage of Russian companies Lack of investments in R&D and engineering skills to develop and manufacture new types of components Technological backwardness of the majority of Russian component producers Lack of quality materials for component production; despite the availability of raw materials for producing necessary elements, their production in Russia is at a relatively low level, which forces component producers to buy raw materials on global markets At the same time, industry participants highly appreciate the potential of the Russian market, which can be explained by the following factors: OEMs need high-quality components that satisfy the demands of consumers The Russian Government continues to support the automotive industry through cooperation with international manufacturers, which presupposes increased employment opportunities and technological process upgrading A possibility to create joint ventures between Russian and foreign OEMs assumes sharing risks, immediate access to the Russian market, developing intramarket ties and gaining necessary local experience Different conditions for industrial assembly regimes From 1 February 2011 Before 1 February 2011 New capacities Operating capacities Annual output >300,000 vehicles >350,000 vehicles >25,000 vehicles Investments into production capacities Period of preferential imports of components Obligatory construction or reconstruction Non-obligatory 8 years 7 or 8 years Industrial assembly in Russia is regulated by Decrees Nos. 166 and 566 of the Government of the Russian Federation. New conditions for industrial assembly have become effective on 1 February According to the Ministry of Industry and Trade of the Russian Federation, 341 companies have already signed a memorandum of understanding. Sources: Publicly available sources. Components to be produced in Russia Engineering center availability Motors, transmissions, die-stamped body parts Obligatory Non-obligatory Non-obligatory Localization degree 55% in 5 years 60% in 5 years 30% in 3 years 16 An overview of the Russian and CIS automotive industry Automotive component market

19 We made a forecast of the automotive component market size 7 from 2012 to 2015 based on the projections of leading Russian and international market experts and our market understanding. According to the data of market experts, the average annual growth in automotive component consumption in Russia may be 15% 30% in the medium term. The structure of the Russian automotive component market will change to increase the share of countries with a well-developed automotive industry, where the OE market/aftermarket ratio will be 70%/30%. By 2015, this ratio in the Russian Federation may be 52%/48%. Automotive component market, US$ billions E2011 F2012 F2013 OE market Aftermarket F2014 F2015 Sources: IHS Global Insight; LMC Automotive; AUTOSTAT research agency; Ministry of Industry and Trade of the Russian Federation; data of the market players; Ernst & Young estimates. 7 The automotive component market volume is determined by the amount of the cost of the components necessary for production (OE market) and the cost of components necessary for after-sales car service (aftermarket). An overview of the Russian and CIS automotive industry Automotive component market 17

20 Car loan market The Russian car loan market saw strengthening trends that were in evidence in 2010 and continued to surface in The trends included: Decrease in interest rates Less stringent requirements to borrowers Recovering confidence on capital markets Excessive liquidity These factors, coupled with the state program for subsidizing car loan interest rates (budget allocations totaled RUB2.7 billion), triggered an increase of passenger car credit sales by 51% over The total number of passenger cars sold on credit in 2011 amounted to 900,000 units, accounting for 33% of the total car market in volume terms. It should also be noted that the government-sponsored car lending program launched in 2009 as an anti-crisis measure to support the Russian automotive industry has entered the final stage at this time, and ended at the end of the year (31 December 2011). Once the program was completed (31 December 2011), the segment has seen the growth in average interest rates and significant redistribution of market shares in favor of captive banks owned by global OEMs. Increasingly tight competition will make the majority of universal market players redirect their businesses, which may cut the share of car loans in their portfolios by half within the next five years. Passenger car credit sales in Russia, millions of units and share of total sales Units (million) New car sales New car credit sales Credit sale share of total sales, % Sources: AEB; AUTOSTAT research agency; CBR; Price-N; RosBusinessConsulting (RBC); Association of Russian Automotive Dealers (ROAD); Ernst & Young estimates. Passenger car credit sales in Russia, financial value and share of total value US$ (million) % % % 30.1% Sources: AEB; AUTOSTAT research agency; CBR; Price-N; RBC; ROAD; Ernst & Young estimates % % % New car market Car loans issued Credit sale share of total sales, % % % 33.5% % 40% 30% 20% 10% 0% 40% 30% 20% 10% 0% 18 An overview of the Russian and CIS automotive industry Car loan market

21 Dealership networks In 2011, the Russian automotive retail segment continued to recover; industry turnover was estimated at US$76.5 billion, and the number of operating dealer centers exceeded 4,000 at the end of Currently, the increasing level of competition in Moscow and St. Petersburg, which is related to dealers desire to strengthen their positions in central markets, can be observed together with the recovery of interest toward regions showing that there is a potential for investment activity in the segment. The major Russian players that have been rapidly developing since before 2008 and have managed to restructure their debt and continue their operations are now seeking to expand their geographic network in order to increase their market share and attain additional competitive advantages as the industry develops. In addition, international investors are visibly interested in the industry. At the same time, the Russian market continues to witness a move to a more "mature" business model, which means focusing on other profit centers. Following the trend of creating developed markets, most dealers secure higher profits from decreases in new vehicle sales and increases in used vehicle sales and after-sale services. At present, the dealer business is financed according to the following trends: Dealers seek to build long-term relations with the principal bank. Major market players are cautious about going public. Captive banks are more active in dealer financing and seek to increase their market share. If these trends continue to gain traction, the high potential of the Russian automotive market will trigger further development of dealership networks and possible foreign capital inflow in the medium term. An overview of the Russian and CIS automotive industry Dealership networks 19

22 Automotive logistics In 2011, the Russian light vehicle transportation market continued its growth. The increase in market volumes was due to high growth rates in the Russian automotive market. The share of road transportation rose by 11% due to a decrease in the shares of railroad and shipping transportation and amounted to 81% of total car transportation volume. This is due to relatively low prices for such transportation and problems related to infrastructure development in Russia. While the infrastructure is limited, the use of motor vehicles enables companies to provide door-to-door delivery services and other light-load offerings. However, many companies still utilize multimodal transportation services, such as combined car transportation modes, which include, for instance, transportation by rack cars and railroad container transportation. But the overall increase in vehicle usage has lessened the demand on other offerings. Since the vehicle transportation market depends directly on sales dynamics, it significantly declined as a result of the decrease in light vehicle sales by 49% in It should be noted that due to the crisis, some carriers had to leave the market. However, before the 2008 crisis, logistics providers were active in increasing their capacities, for which purpose they often resorted to credits and leases. Therefore, a drop in demand for transportation services, which was due to lower purchasing power and business activity, resulted in the carriers inability to fulfill their financial obligations. As a result, leased equipment and machinery had to be returned. Large companies, which have ongoing established relations with consumers and a balanced debt burden, held a more stable position during the crisis. A sharp decline in vehicle transportation volumes in resulted in a low base effect that allowed securing high transportation growth rates in 2010 and 2011 after the automotive market began to recover. The automotive logistics segment is influenced by certain constraining and motivating factors. One of the constraining factors is a limited ability to use financial and credit mechanisms for financing working capital and renewing the rolling stock because of its high cost and, as a rule, lack of collateral sufficient for the bank. Other constraining factors include bad road infrastructure, growing fuel prices and potential adverse changes in the economic environment. The growth of vehicle sales, increased length and improved quality of infrastructure and Russia s accession to the WTO are among factors motivating the development of the automotive logistics market. Forecasted growth rates of the Russian automotive market suggest that automotive logistics market volume will also increase. However, growth will be restrained by a number of factors, the most important of them being unstable demand for lease services, increasing fuel prices and low quality of road infrastructure. Structure of the Russian vehicle transportation market by mode of transport, % 13% 2% 5% 5% 9% Road transport 15% * Railroad transport Sea transport Other 70% 81% Sources: Rosstat; publicly available sources; IA CredInform estimates. *Preliminary estimates. 20 An overview of the Russian and CIS automotive industry Automotive logistics

23 CIS automotive markets In 2011, the automotive markets of Belarus, Kazakhstan, Ukraine and Uzbekistan demonstrated an upward trend. Production was also characterized by high growth rates in all countries, except for Uzbekistan, where light vehicle production volumes decreased slightly. Ukraine Ukraine is the second-largest light vehicle market in the CIS. After an 85% decline in 2009, light vehicle production saw a gradual recovery in 2010 and However, pre-crisis production volumes have not been reached yet. In , light vehicle production grew due to increased demand for light vehicles, which is directly dependent on the purchasing power of the population and on economic growth. Historically, demand for vehicles in Ukraine is largely satisfied by domestic production. As a result, production depends largely on domestic market demand. The recovery of demand for light vehicles in Ukraine is underpinned by a low car density per 1,000 people, the high average age of vehicles (about 10 years) and the growing purchasing power index. However, there are certain negative factors that give reason to expect that in the short and medium terms, light vehicle sales in Ukraine will grow slower than in the pre-crisis period. Such factors include increased prices for imported cars, the consequence of introducing higher import duties (an increase from 10% to 25%), high inflation and lower availability of car loans as compared to the pre-crisis period. Kazakhstan Automotive vehicle production in Kazakhstan demonstrated consistent growth in 2010 and 2011 (260% and 112%, respectively), and sales increased by 14% and 31%, respectively, mainly due to the low base effect. Lada cars assembled in Russia and Kazakhstan are sales leaders, securing more than 40% of the market, an indication that consumer preferences are aimed at budget car models. Despite a more than threefold increase, domestic production volumes remain relatively low, and more than 80% of demand for light vehicles in Kazakhstan is satisfied by imports. Amount of light vehicle sales in selected CIS countries (units) E2011 Belarus 36,220 20,754 13,749 16,644 Kazakhstan 44,500 18,853 21,560 28,175 Ukraine 578, , , ,000 Uzbekistan 56,496 59,004 56,500 61,615 Total 716, , , ,434 Sources: IHS Global Insight; LMC Automotive. An overview of the Russian and CIS automotive industry CIS automotive markets 21

24 Belarus In 2011, car sales and production in Belarus increased by 21%. While production volumes continued to grow (an increase of 41% in 2010), sales demonstrated an upward trend for the first time since the beginning of the crisis. Like Kazakhstan, Belarus is predominantly an import market due to underdeveloped domestic automotive vehicle production. Therefore, cancellation of VAT exemptions on car imports and sales can result in an overall growth in retail prices and development of domestic vehicle production. Uzbekistan Uzbekistan remains the largest automotive vehicle producer among the selected countries. It is necessary to mention conflicting trends in the number of manufactured and imported cars in Uzbekistan: in 2011, production decreased by only 0.8% and sales increased by 9.1% over Cars manufactured domestically still dominate in the light vehicle sales structure. Their share varies from 85% to 95%. This situation can be explained by high import duties and excise taxes as well as a ban on providing car loans for the purpose of purchasing an imported car. Amount of light vehicle production in selected CIS countries (units) E2011 Belarus Kazakhstan 3, ,160 6,712 Ukraine 415,487 62,571 79, ,512 Uzbekistan 195, , , ,754 Total 614, , , ,253 Sources: IHS Global Insight; LMC Automotive; ASM Holding. 22 An overview of the Russian and CIS automotive industry CIS automotive markets

25 Ernst & Young s involvement in the automotive industry As a leading professional services provider in the automotive sector, Ernst & Young has been at the forefront in advising on the pressing challenges faced by industry players. Today, we have more than 152,000 people in 140 countries. Ernst & Young s Automotive practice includes more than 7,000 professionals, serving more than 1,500 automotive clients. Our CIS Automotive Group, supported by the network of Ernst & Young s Global Automotive Center, provides consistent and high-quality service to our automotive clients in the CIS. Our clients Globally, Ernst & Young provides assurance, tax, transactions and advisory services to many of the world s leading automotive businesses: Ernst & Young is the leading auditor of the world s largest automotive companies on the 2011 Forbes Global 2000, auditing 24 of 70 automotive companies (34.3%). Ernst & Young is the leading auditor of automotive companies on the 2011 Fortune 1000 in terms of companies audited (33.3%). Ernst & Young is the leading auditor of automotive companies on the 2011 Russell 3000 in terms of companies audited (32.4%). With the opening of our Moscow office in 1989, we were the first professional services organization to establish operations in the CIS. We currently have more than 4,000 people working in 18 offices in eight countries of the CIS. An overview of the Russian and CIS automotive industry Ernst & Young s involvement in the automotive industry 23

26 Contacts Global automotive center Michael Hanley Global Automotive Leader Tel: Jeff Henning Global Automotive Markets Leader Tel: Russia Ivan Bonchev CIS Automotive Leader, Transactions Tel: Alexei Ivanov Assurance Tel: Denis Kamyshev Advisory Tel: Andrei Ignatov Tax Tel: Central Asia Aisulu Narbayeva Tel: Ukraine Dmitriy Litvak Tel: An overview of the Russian and CIS automotive industry Contacts

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28 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit EYGM Limited All Rights Reserved. EYG no. ED0052 How Ernst & Young s Global Automotive Center can help your business The global recession reset the automotive industry landscape. As the industry recovers, automotive companies across the value chain must focus on profitable and sustainable growth, financial and operational stability, investments in new technologies and seizing opportunities in high-growth markets. If you lead an automotive business, you need to anticipate trends, identify implications and make informed decisions that support your business goals. Our Global Automotive Center enables our worldwide network of more than 7,000 industryfocused assurance, tax, transaction and advisory professionals to share powerful insights and deep sector knowledge with businesses like yours. These insights, combined with our technical experience in every major global automotive market, will help you to accelerate strategies and improve performance. Whichever segment of the automotive industry you are in from component suppliers to commercial or light vehicle manufacturers or retailers we can provide the insights you need to realize your potential today and tomorrow. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.