The temperature might finally be warming up after the frigid Russian winter, but the country’s auto industry is suddenly feeling a big chill.
Russia has been the target of increasing sanctions in the wake of its disputed annexation of Ukraine’s Crimean Peninsula and the threat that Russian President Vladimir Putin might send troops into the neighboring country in an expanded land grab. That has led to a flood of capital leaving the country and signs that the crisis could strike hard the Russian economy.
The crisis is causing “uncertainty in the marketplace,” warns consulting firm Accenture.
Ford sent a chilling signal this week when it announced plans to trim 950 jobs at its two Russian plants, including 700 full-timers at its primary facility in St. Petersburg – almost one in five of its employees in the country. The maker is blaming an already weak economy, as well as the weak Russian ruble, but observers warn that this could be just the first sign of a serious setback for the country’s auto industry – especially if the Ukrainian crisis drags on, or rose, escalates.
The Russian automotive market was already showing signs of trouble, sales sliding 5.5% last year, to 2.6 million vehicles. The market actually showed some unexpected momentum as 2014 got underway, but that appears to have been driven by consumer concerns about anticipated price hikes, says consulting firm LMC Automotive.
And even then, not everyone benefited from the early upturn. AvtoVaz, the country’s largest domestic producer, saw demand slip by 19% for the first two months of the year – only slightly less than Ford’s 21% drop.
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Domestic makers have been particularly hard-hit, imports now accounting for 36% of the Russian market, while products assembled in Russia by foreign brands – such as Ford and Nissan – account for another 46%.
But with the ruble tumbling, imports and imported automotive components are rapidly rising in price. And if the ruble slides further due to sanctions and worries about Ukraine, it could seriously worsen the situation. It lost 13% of its value during the past 12 months and was the second-worst-performing currency of major emerging markets during the first quarter of 2014.
While a shooting war in Ukraine would almost certainly worsen the situation, it’s not all doom-and-gloom in the heart of the old Soviet Union. Domestic makers like AvtoVaz actually see a possible silver lining in the ruble’s decline as it could give them a cost advantage against both imported vehicles and manufacturers who depend more heavily on foreign-made parts.
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And more than a few makers are still looking at the long-term potential of a market where the level of automotive ownership on a per capita basis lags far behind that of Western Europe and the United States.
Daimler AG, parent of Mercedes-Benz, already has two joint ventures going in Russia focusing on truck products including the big Sprinter van. And it is apparently talking to a number of potential partners to add a third operation focused on passenger vehicles, it confirmed in a statement,
“We have been looking at the basic parameters and potential of local production of passenger cars in Russia and have held various discussions,” Daimler said.
During the Geneva Motor Show last month, Fiat Chrysler CEO Sergio Marchionne stressed his intent to set up a joint venture for Jeep in Russia, as well.
Even Ford sees a long-term upside. It plans to launch production of the new small SUV, the EcoSport, as well as its commercial Transit van, in Russia this year. And it will add versions of the Focus and Mondeo models a year later.
Plans could change, of course, if there isn’t a full-fledged meltdown of the economy, or if sanctions complete the process of investing in Russia. The next few months could be very revealing.
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