OREANDA-NEWS. September 08, 2014. Sergey Litvinenko, Director in PwC Russia’s Automotive Advisory practice, summarised the 1H 2014 results for the domestic automotive market at a PwC Russia press briefing held on August 5, 2014 in Moscow. In addition to an analysis of the current situation in the market and its outlook for the future, Sergey touched upon the highly relevant issue of localisation of production of cars and auto parts.

In the first six months of 2014, passenger car sales in Russia declined by 7% in unit terms and 3% in monetary terms on a year-on-year basis. The underlying market trends in the first half were somewhat uneven, with a moderate decline in sales in 1Q 2014 (with March showing a repeat of the 2013 result) followed by an accelerated drop-off in 2Q. Amid declining sales for lower-end models, the market has continued to see support from the SUV segment, ever-popular among Russian motorists, as well as the high-end luxury segment.

In the first six months of 2014, passenger car sales in Russia declined by 7% in unit terms and 3% in monetary terms on a year-on-year basis. The underlying market trends in the first half were somewhat uneven, with a moderate decline in sales in 1Q 2014 (with March showing a repeat of the 2013 result) followed by an accelerated drop-off in 2Q. Amid declining sales for lower-end models, the market has continued to see support from the SUV segment, ever-popular among Russian motorists, as well as the high-end luxury segment.

Given the slowdown in the Russian economy, with rising inflation and higher interest rates on car loans anticipated this year, Russia’s auto market in 2014 is expected to see a decline in sales, ranging from -12% under the baseline scenario to -8% under the best-case scenario. In the longer term, however, the market is expected to rebound gradually to the 2012 level by 2015-2017, when consumers will likely be looking to trade in cars bought at the sales peak in 2012.

One key competitive advantage that the Russian market enjoys is the localisation of production. According to the 1H 2014 results, 75% of popular foreign car models sold were assembled in Russia.

The current production capacity for passenger cars is 3 million vehicles per year, at an actual capacity utilisation level of 65%. And, according to automakers’ current investment plans, production could reach 3.8 million units by 2020 with an expected capacity utilisation of 70-75%. The localisation schedule and required production volumes are regulated by industrial assembly agreements, under which the major automakers operate.

The period 2018-2020 promises to be an inflection point for the Russian auto market, however, as by then the industrial assembly agreements of most automakers will have expired while the customs regime will no longer offer additional advantages for localised production. In light of this, one of the key challenges facing the auto industry is how to create the conditions necessary to foster economically viable domestic auto manufacturing in Russia in the years after 2020. This could be achieved through increased domestic production and sales volumes, as well as higher levels of localisation and government support.