Russia's automotive market is beginning to heat up the previously closed off economy.
The Russian passenger car market has grown by 20 percent to more than 2 million units sold since 2005, according to a report by Ernst & Young. This news could open the door to parts makers, providing yet another global sourcing option.
The report states that the biggest expansion in the passenger car market occurred in the locally produced foreign brand sector, which experienced an increase of about 80 percent. Before the increase, the locally produced foreign brand sector already had occupied more than 13 percent of the total market.
New imports rose about 60 percent to 750,000 units (39.5 percent of the total market), while the Russian brand segment shrank to 37 percent from 46 percent last year. The share of used imports dropped to below 300,000 units, Ernst & Young reports.
Several automotive players have committed to building plants in the regions.
"The close to 20 new vehicle manufacturing plants (some are near the start of production) have already had a positive impact on the Russian economy," says Ivan Bonchev, senior manager, CIS (Commonwealth of Independent States) Automotive Leader with Ernst & Young, Moscow.
He cites an increased industrial manufacturing index, new jobs, improved work conditions and the development of related infrastructure as notable positive outcomes of the increase in car manufacturing.
Bonchev notes that an anticipated 2 million passenger cars (both foreign and domestic) will be manufactured in Russia by 2010, which will "certainly trigger the development of the automotive component industry as well as the aftermarket, therefore having a multiplier effect."
U.S. parts manufacturers should consider all these factors in order to obtain a share of the growing Russian market.
By volume, Russia is eighth globally and fifth in Europe, according to Ernst & Young, outpacing Spain and Brazil to approach the level of France and Italy.
Yet the Russian automotive industry is nowhere near full capacity. The report shows that in 2005, Russia's population totaled more than 143 million people and the passenger car parc was just over 25 million. This means car density is just 180 per 1,000 people — that leaves a huge potential for growth in this area.
Keith Silver, principal commercial officer with the U.S. Commercial Service in St. Petersburg, Russia, explains there are key areas of growth in Russia, which include the SUV market and high-end vehicles. Additionally, Russia experienced a 45 percent increase in SUV sales from 2005 to 2006. The SUV market is expected to grow 20 to 25 percent annually over the next 3 to 5 years.
The Ford Focus is the No. 1 selling foreign model vehicle in Russia; consumers wanting to drive this car must add their name to a six-month waiting list, Silver notes.
When it comes to the aftermarket, it has been growing dramatically to keep up with the quick replacement needed for the dilapidated Russian car parc: more than 50 percent of the vehicles are 10 years old or older, notes Bonchev. U.S. component manufacturers looking to do business in Russia should understand that while there are opportunities available, they should ask questions and consult with industry experts.
Bonchev explains the market calls for the necessary development of leading technologies that cater to the rapid growth and the localization requirements of OEMs.
