Russian Automotive Industry
Car production in Russia fell by a record 96.7 percent in May. Only 3,720 cars were produced, while in the same period in 2021, around 112,000 units left the factory. Many automakers in the Russian Federation suspended or reduced production volumes, including KamAZ and AvtoVAZ, due to a shortage of imported parts. Many auto brands in Russia have suspended or reduced production volumes. KamAZ and AvtoVAZ also faced problems due to the supply of foreign components.
Assault rifle instead of the newest Lada. This is what the workers of the Lada factory in Izhevsk will produce. Thanks to an agreement with the Kalashnikov armaments concern, workers from the closed Lada factory will find temporary employment in a weapons factory.
Heavily dependent on imported parts, Russia’s car-making industry ground to an almost complete halt. According to reports only one of Russia’s six major foreign-controlled car plants, is still operating. The recovery of the sector would be even harder after the US imposed sanctions on Russian truck-maker Kamaz, which was going to provide the technological basis for a retooling of the giant Avtovaz car plant to produce an updated Chinese version of the Soviet classic model, the Moskvitch. This was a Soviet/Russian automobile brand produced by AZLK from 1946 to 1991 and by OAO Moskvitch from 1991 to 2001. Formerly owned by the Renault-Nissan joint venture, AvtoVaz was sold to the Russian government for one ruble in April.
By the time of the February 2022 invasion of Ukraine, the level of localization of production for the main models - the whole wide range of automotive equipment - was different. The share of foreign components is heterogeneous. In general, the industry is undergoing serious structural changes, as, in fact, the entire economy, the entire industry, associated with a change in the logistics of supplies, primarily with a reorientation to other suppliers. Of course, the car manufacturers will lose the pace of production to a certain extent.
Automakers will be forced to switch to the production of somewhat obsolete models, that is, those that are easier to operate. For example, somewhere they will switch from automatic to manual transmissions, somewhere they will sacrifice already familiar services. But this is a forced measure that will not seriously affect the consumer characteristics of cars. And gradually they will return to the production of those models, the production of which has already been established.
As a result of Western sanctions imposed on Russia, car production in the country fell by 83%, and car sales reached the lowest level in 16 years. Of the 20 car factories that existed in Russia before the invasion of Ukraine, only two remain. One of them is so unprofitable that it switched to a four-day working week. The Russians are doing what they can to prevent the car market from collapsing. There was an idea to resume production of the legendary Volga.
After the Lada Grant brand, which has been deprived of airbags and the Moskvich brand, which has been defunct for more than 20 years, the government is considering bringing the Volga and Pobieda brands back to life, said Denis Manturov, head of the Russian Ministry of Industry and Trade, in an interview with the Russian TV station 17 June 2022. "The Volga, which was discontinued in the 2000s, and the Pobieda, which became the flagship model of the automotive industry in the days of Joseph Stalin, could be produced at the Nizhny Novgorod plant or elsewhere," added Manturov. It has not specified when production may begin.
Russian President Vladimir Putin instructed the government to develop a strategy for the car industry by 1 September that would allow the market to be "saturated" with affordable cars while achieving "technological sovereignty".
After the entry into force of Decree No. 661 of May 25, 2019, a scoring system for assessing the localization of the automotive industry was launched: using data from the EPTS system, it became possible to calculate the localization for each model individually. Each technological operation localized in Russia costs a certain number of points - the more difficult it is, the more points. The maximum number of points for operations for all main types of wheeled vehicles was estimated at around 8800 (according to government decree No. 719 "On confirmation of the production of industrial products in the Russian Federation"). Such an approximate figure was called by the Deputy Minister of Industry and Trade Alexander Morozov.
For example, for welding the body, you can get 400 points, painting the body gives another 500, stamping body parts - up to 300 points, using Russian metal - 200 points, and so on. Violation of supply chains due to sanctions imposed on Russia led to the forced suspension of the work of many automotive enterprises. It turned out to be impossible to deliver the necessary spare parts to Russia for the production of even highly localized passenger and truck models.
Depth of localization is also of the utmost importance when concluding government contracts: in order to be eligible to participate in tenders for public procurement, each candidate model in the category of cars and light commercial vehicles must earn at least a certain number of points. From January 1, 2019 at least 2000, from January 1, 2021 at least 3200, from January 1, 2023 at least 4500, from January 1, 2025 at least 5500 points.
Most of the auto companies that have production in Russia turned out to be in a similar position. The differences are only in the depth of localization and work with partner suppliers. Some still manage to deliver the necessary spare parts and components to Russia. According to market participants, it turned out to be easiest for Chinese manufacturers to work.
However, automakers try not to talk directly about what kind of spare parts are missing. Data on cooperation with suppliers is considered classified information. Even before the outbreak of the pandemic and the supply problems due to the situation in Ukraine, manufacturers were extremely reluctant to report which parts they had to import and from which suppliers. In addition, auto brands that have launched factories in Russia have always tried not to name the depth of localization in percentage terms for each model, limiting themselves to the average percentage for the entire model line. For example, at AvtoVAZ they talk about 85%, at KAMAZ - about 80%. Now, the surveyed auto companies have simply refused to respond to requests from Autonews.ru. But there is still a way to study how localized each model produced in Russia is.
The deepening of localization in the production of cars is one of the most controversial topics between auto brands and the Russian Ministry of Industry and Trade. To convince companies to invest, the Ministry of Industry and Trade developed a strategy that was supposed to lead to a gradual increase in the use of domestic auto components in the production of passenger cars and light commercial vehicles in Russia.
In order to receive bonuses offered by the state, manufacturers must sign special investment contracts (SPICs). In return for deepening production, companies can count on tax cuts at the federal and regional levels, access to government contracts, compensation for export costs, and so on. The list of all benefits is individual for each special investment contract and is also considered classified information, which regularly caused criticism from market participants: they insisted on the transparency of such information.
By 2016 the Russian car market still could not come out of crisis, though the decline was slowing down. The main reasons that weakened sales have not been removed. This primarily involves the general reduction of volumes in the economy, which still has negative dynamics, as well as the decrease in the population's real income. With the country’s economic slump continuing, Russians are spending less on foreign cars. Nine out of 10 leading new cars, in terms of sales, are produced in Russia. The total volume of sales in the Russian car market for 2016 was about 1.3 million units, and Lada was doing better than any other car on the market.
Russian Prime Minister, Dmitry Medvedev, signed a decree in March 2015 on the allocation of 10 billion Rubles for compensation of costs in connection with the production of motor vehicles. It will permit to provide additional load of production capacity in the first quarter of 2015 in the amount of about 110 thousand cars, to keep jobs and employees of enterprises of automotive and related industries. In addition, the relevance of these measures is due to the fact that in 2014 the cost of cars produced in Russia has increased significantly due to increased costs for the purchase imported components for assembly of cars by Russian automakers due to fluctuations of foreign currency exchange rates and high inflation in Russia.
By May 2015 the Russian civil aviation industry would receive the largest amount of state support in comparison to the country’s other machine manufacturers. For example, 28.5 billion rubles ($553 million) had been allocated to support the automotive industry (taking into account the state recycling program as well as programs for preferential car loans and leasing). Supporting the largest manufacturer of freight cars and tanks, Uralvagonzavod, could cost the state 105 billion rubles ($2 billion).
According to a Ministry of Industry and Trade brief prepared for the government, the volume of subsidies allocated in 2012 (3.9 billion rubles) were almost three times lower than the sum approved by the government in August of 2012 (9.8 billion rubles). Analysts attributed the cuts to the Ministry of Finance’s desire to reduce already tight public spending, as well as to the fact that car manufacturers seem to have successfully emerged from the crisis. The government had already approved the substantially larger budget subsidies proposed by the Ministry of Industry and Trade; the Decree on Providing Subsidies to Russian Car Manufacturing Organizations was agreed upon on 13 August 2012. The subsidies were supposed to reach 9.8 billion rubles in 2012, 7.6 billion rubles in 2013, 6.6 billion rubles in 2014 and 5.6 billion rubles in 2015.
The Soviet automotive industry developed on a much smaller scale than its United States counterpart. Although production grew rapidly during the 1970s and 1980s, the industry's close connection with the military made some production data inaccessible. Unlike the United States, where people rely mainly on private automobiles for travel, the Russian population depends overwhelmingly on public transportation. At the time the Soviet Union collapsed, only one-fifth of families had an automobile and one-third had a telephone, as opposed to nearly universal ownership of these items in the United States.
In 2012, for the first time, Russia topped Germany as Europe’s largest car market. With car purchases increasing by 20 percent in Russia this year, the Center of Automotive Management predicted that Russians will buy 3.2 million vehicles during 2012, slightly more than Germany.
Roads reflect a government’s ability to project power and to harness bureaucracy for the common good. According to the World Economic Forum’s Global Competitiveness Report, Russia ranks number 125 out of 139 countries on the quality of its highway infrastructure. Road conditions and driver safety norms differ significantly from those in the United States. As a pedestrian, exercise great care near traffic, as vehicles frequently fail to yield to pedestrians. It is also common for vehicles to drive and park on sidewalks or pedestrian walkways. In some areas of Russia, roads are practically nonexistent.
In rural areas, it is common to find livestock crossing roadways. Construction sites or stranded vehicles are often unmarked by flares or other warning signals. Sometimes cars have only one working headlight and many cars lack taillights. Bicycles seldom have lights or reflectors. Due to these road conditions, be prepared for sudden stops at any time. Some routes have heavy truck and bus traffic, while others have poor or nonexistent shoulders; many are one-way or do not permit left turns. In addition, some of the newer roads have very few restaurants, motels, gas stations, or auto repair shops along their routes.
Open Joint-Stock Company (ASM Holding, OAO) was established in 1991. Its core competencies have descended from economic and engineering units of the USSR Ministry of Automotive and Agricultural Engineering Industry. This inheritance made it feasible to have kept, to restructure conformably to the new situation, and to further replenish a unique industrial database comprehensively defining the state, structure and key economic/ technical characteristics of automotive and agricultural engineering industries in Russia and in a number of other CIS countries hosting production facilities.
As the Russian market opened to imports the few wealthy Russians able to afford imported vehicles opted for new foreign cars. At the same time, imported used cars began to compete with new Russian cars in the rapidly expanding mass market. The financial crisis of 1998 and the significant devaluation of the Russian ruble made imports more expensive and thus provided a stimulus to Russian manufacturers. In 2001, car ownership in Russia - a country of 145 million consumers - grew to 140 vehicles per 1,000 inhabitants, more than double the 1993 rate of 59 cars per 1,000 people. This compared to around 500 cars for every 1,000 Americans.
The auto industry in Russia is centered near the cities of Togliatti in the Samara region and Nizhni Novgorod. The giant AvtoVaz auto plant, one of Russia's largest industrial enterprises, is located in the city of Togliatti. The plant boasts an annual output of 750,000 Lada and Zhiguli models in 2003, approximately three quarters of Russia's car output, and had annual sales of approximately $3 billion. AvtoVaz produces cars in the $3,000 to $6,000 range for the Russian market and exports about 10% of its output to the former Soviet republics. GM's $335 million plant in Togliatti, a joint venture with Russian auto giant Avtovaz and the EBRD, is the largest U.S. investment in Russia outside of the energy sector. The GAZ car plant in Nizhni Novgorod produced around 250,000 Volga sedans and Gazelle light trucks as of 2003. GAZ also had a successful truck division, which it rolled into a 50/50 joint venture with the Italian firm Iveco in late 2002.
GAZ Group is Russia's largest producer of buses, light commercial vehicles (LCVs), medium and heavy trucks, road-construction equipment and heavy diesel engines. In most of these areas, GAZ Group is among the world's top 10 producers. With the acquisition of an assembly line and production license from Chrysler to produce D-class Sibers, GAZ Group is reviving its passenger car capabilities. GAZ Group is comprised of six product-line Divisions: Buses, Trucks, Engines, Light Commercial Vehicles, Passenger Cars, and Road Construction Equipment. GAZ Group plants are located in ten regions of Russia: from Bryansk to Miassa. The most significant of these plants include:
- Gorkovsky Automobile Plant (Nizhny Novgorod) is the largest producer of light commercial vehicles (car groups “GAZel” and “Sobol”), trucks (models “Valday” and “Sadko”), as well as passenger cars (“Volga” and “Siber”) in Russia.
- Pavlovsk Autobus Plant (Pavlovo, Nizhny Novgorod Oblast) is the Russian market leader in small and medium size city-buses, suburban and long-distance transportation.
- Likinsky Bus Plant (Likino-Dulevo, Moscow Oblast) produces LiAZ city-buses (controlling about 60% of Russia’s city-bus market).
- Avtodiesel (Yaroslavl) is the largest producer of heavy diesel engines and power equipment in Russia.
- Ural Automobile Plant (Miass, Chelyabinsk Oblast) is a producer of ‘Ural’ heavy-load off-road trucks.
- Tver Excavator Factory (Tver) is the Russian leader in production of caterpillar and rubber-tire mounted excavators.
In 2006, OAO GAZ implemented the following investment programs: modernizing and increasing production of light-duty commercial trucks, manufacturing Volga automobiles with DaimlerChrysler engine, increasing production of medium-duty urban truck Valday and multipurpose automobile Tigr, adoption of Euro-2 and Euro-3 international environmental standards. GAZ Group is the main investor, with 1.6 billion rubles invested in these projects in 2006. GAZ Group planned to manufacture Chrysler Sebring, Dodge Stratus and Maxus commercial automobiles starting in 2007-2008.
In 2006, GAZ Group has purchased 100% shares of LDV Holdings (producer of light commercial vehicles, the city of Birmingham, Great Britain) from the American Fund Sun Capital. The main product of LDV Holdings is the light commercial vehicle Maxus. At the same time, the design and engineering departments of the Group have obtained access to the newest technologies. They have also acquired the base for developing the new generation of LCVs targeting the Russian and global markets. In accordance with the agreement between GAZ Group and Renault Trucks Company, the production of heavy diesel engines was transferred from Lyon (France) to one of Avtodiesel’s sites in the city of Yaroslavl. Factory equipment for the production of ‘D’ class passenger vehicles on the basis of Jr-41 Sebring/ Stratus platform and the entire license specification were purchased from Chrysler.
The conflict between Far East residents and Moscow over the right-hand drive used cars dates back to the mid-1990s, and has consistently been one of the few social issues that can reliably draw protestors in the Far East. The issue comes to the forefront every few years, with authorities framing disapproval of Japanese imports in various ways. The residents of the Russian Far East hold steadfastly to their conviction that the imports are less expensive and much more reliable than Russian-made alternatives and readily take to the streets when Moscow makes importing autos more difficult.
The problem dates back to 1993, when the Kremlin first made the decision to ban the import and use of right-hand drive Japanese vehicles. The import business at that time was fairly new, and organized crime had muscled aside most of the legitimate dealers. By the early 2000s, the business was mostly legitimate and organized crime had largely lost its role in importing Japanese cars.
In 2006 President Putin first announced plans to establish foreign auto assembly plants in Russia, and attempted to drum up investor support for Lada producer AVTOVAZ. Toyota had been to Primorye in 2003 looking into the possibility of establishing a plant there, but eventually cancelled the project, saying the Russian Far East's market was too small to be profitable. Several plants were eventually set up in Western Russia, but no foreign automobile manufacturer took the plunge in the East.
In late 2008 the federal government announced its decision to increase tariffs for imported cars five years and older by 35 percent. Though the tariffs apply to all imports, the move in fact serves as a practical ban on Japanese used cars. Motorists and car dealers staged numerous rallies to protest the decision. The December 21 rally turned violent and resulted in large-scale detentions by OMON forces sent in from Moscow. The federal government has pointed fingers at several supposed instigators of the unrest, ranging from the CIA to the Soros Fund and the Rotary Club.
In response, Prime Minister Putin announced a program aimed at replacing demand for Japanese used cars with new cars assembled in Russia. The program includes a federal government loan interest subsidy to buyers of new domestically-produced vehicles and a 2 million-ruble subsidy to Russian Railroads to deliver such cars to the Far East. Despite the financial incentives, RFE buyers remained largely indifferent to the Russian-made Ladas, Fords, Chevrolets, KIAs, and Renaults.
One of the main issues automakers are faced in Russia was the 2014 collapse of the ruble, which dropped to 60 rubles per dollar from around 30 rubles less than a year ago. Russia was under pressure from falling oil prices to keep its currency weak in order to pay domestic salaries and benefits (oil is sold in dollars and then converted locally into weaker rubles). The weaker ruble, however, eats into automakers' profits because it dramatically raised the costs of importing components needed to make the cars. domestic parts suppliers were not yet proficient enough to allow carmakers to produce vehicles from 100 percent locally sourced parts.
GM announced on 18 March 2015 that it would shutter its St. Petersburg plant and drastically reduce operations in the country. Under the changes, the company's Opel and Chevrolet brands will all but disappear from the market, leaving only a few well-known niche and luxury brands like the Corvette and Cadillac.
Ford has a joint venture with the Russian carmaker Sollers and its problems may be even worse than GM's. Demand for Ford models like the Focus and Mondeo are off by nearly 80 percent from a year ago. In recent years, the company has pursued an aggressive expansion plan at factories near St. Petersburg and in Tatarstan.
Renault-Nissan, which has a controlling stake in Russia's AvtoVAZ, has sunk billions of dollars in the country. It likely has no choice but to ride out the bad times and wait on an eventual recovery.
On 20 March 2015, the Russian government said it would make subsidies available to automakers worth some 10 billion rubles ($168 million) and come up with incentive programs to encourage people to buy new cars.
Russia will increase the share of exports in the auto industry to 25%, said the Deputy Minister of Industry and Trade, Alexander Morozov during the Russian Automotive Forum in March 2016. According to him, this will lead to the export volume rising to twice what it is now.
According to the Ministry of Industry and Trade, the new priority markets for Russian car sales in 2016 will be Algeria, Iran and Egypt. European countries were also brought up. Russian vehicles will also be sold in Vietnam, India, Mexico and Ethiopia. However, the supply to these nations will definitely be smaller-scale. In a nutshell, 2 500 automobiles will be exported to Vietnam; Ethiopia will be seeing only 400 cars, while Algeria will be supplied with no less than 22 000 Russian-made vehicles.
The main exporters will be the following concerns: AutoVAZ, KAMAZ, UAZ, GAZ. Volksvagen previously revealed its intentions of organizing the export of automobiles made in Russia.
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