www.pwc.ru/automotive Russia s market for new light vehicles: Outlook and analysis Stanley Root 19 January 2012
Contents 1. Global car production overview 2. Overview of the new Russian light vehicles market 3. Prospects for Russia s automotive market 4. Concluding remarks 2
Global car production overview
Light Vehicle Outlook 106 million the number of light vehicles that will likely be produced in 2018 5.3% CAGR for global light vehicle assembly in 2011 2018 83% of growth will be contributed by emerging markets in 2011 2018 Source: Autofacts 4
2011 BRIC Japan and Thailand North America Other EU 2012 Growth of global car production Growth of global car production in 2012 is estimated to be around 7% up from 2011. This is due, to a large extent, to growing demand from China and India, paired with recovery in the United States and global growth of demand for premium brands. Europe s financial problems are likely to cause a decrease in light vehicle production in the EU in 2012. Uncertainty related to the sovereign debt crisis and budget saving measures may also stifle growth. Car production forecast, changes in production by region, 2011-2012, millions of vehicles Contribution to global production growth by region, 2011-2018, % 80 78 1.45 0.86 0.62-0.59 79.1 Asia-Pacific region North America China 40.6% India 13% 76 2.69 EU 74 74.1 South America Brazil 8.3% 72 +5 mln Eastern Europe Russia 5% 70 Middle East and Africa 0% 10% 20% 30% 40% 50% 60% Source: Autofacts 5
Light Vehicle production in BRIC China s assembly growth will exceed the combined growth of the other three BRIC countries. To compete effectively with China, other countries are selecting different strategies such as offering unique products and/or establishing localisation requirements. Growth in light vehicle production in BRIC, 2011 to 2018, millions of vehicles China 15.0 27.9 India 3.4 7.6 Brazil 2.9 5.5 Russia 1.75 3.4 0 5 10 15 20 25 30 2018 2011 Source: Autofacts 6
Global Strategic Alliance 11 out of 15 global strategic alliances have assembly lines in Russia Contribution to global growth of the 15 leading strategic alliances* in 2011-2018, % Toyota R-N VW GM Hyundai Honda Fiat Ford PSA Chery Tata Geely Suzuki Chang'an Mitsubishi 2.9 2.6 2.3 2.0 3.4 3.6 4.3 6.1 6.5 7.5 7.4 7.9 8.5 8.7 9.4 Total contribution to global growth of the 15 leading strategic alliances 83.1% 0% 5% 10% *R-N = Renault-Nissan. Chrysler Group LLC is a part of Fiat strategic alliance Fiat Source: Autofacts 7
Overview of the new Russian light vehicles market
Transformation of Russia s automotive market in the last 20 years Car sales in Russia by segment; 1992, 2002 and 2011; thousands of vehicles stable sales volumes dramatic growth of sales strong growth of sales decline in sales 2011 2002 1992 0 500 1000 1500 2000 2500 thousands of vehicles Russian brands Foreign brands produced in Russia New car imports Used car imports Sources: AEB, Goskomstat, GTK, ASM-Holding, Autostat, estimates 9
Russia s car market A year of recovery Car sales in the main markets, 2010 vs 2011, millions of vehicles 20 18 16 14 12 10 8 6 4 2 0 3% 2010 2011 10% -15% 3% 40% 9% 4% -4% -2% India China Russia Brazil USA UK Germany Japan France Growth in car sales in the main markets, 2011, % -15% Russia USA Germany India Brazil China -2% -4% 4% 3% 2,5% France UK Japan 9% 10% 40% -20% -10% 0% 10% 20% 30% 40% 50% Sources: VDA, SMMT, CAAM, SIAM, estimates 10
Results in Russia for 2011 People bought more and at higher prices In 2011, light vehicle sales grew by 40% in unit terms and by 70% in monetary terms as compared to 2010. This positive market development was driven by the use of a scrappage programme, subsidised loans, the availability of car loans, growth of the national economy and a lower unemployment rate. In the last few months of 2011, the sales of Russian brand cars began to decline due to the end of the scrappage programme. Due to aggressive growth in the domestic production of foreign brands, their sales grew by 70% in unit terms and by 98% in monetary terms. Car category* Number of vehicles, thousands Jan-Dec 2011 Jan-Dec 2010 Change Jan-Dec 2011 USD billion Jan-Dec 2010 Change Russian brands 620 560 11% 6.9 5.2 33% Foreign cars produced in Russia 1040 610 70% 23.7 12.0 98% New car imports 840 610 38% 28.3 17.4 63% TOTAL MARKET 2500* 1780 40% 58.9 34.6 70% *without commercial vehicles Sources: AEB, Goskomstat, GTK, ASM-Holding, Autostat, data 11
Quarterly car sales Approaching pre-crisis levels Over the last two years, the automotive market has been recovering thanks to government support and an increase in demand (including delayed demand). The end of the scrappage programme and the end of the low base effect led to an expected decline in growth rates. Despite generally positive performance, the results of the last three quarters demonstrate this marked decline in growth. Car sales in Russia: July 2008 to December 2011 and prior year comparison by quarter, thousands of vehicles 800 700 600 500 400 300 200 100 0 First wave of the crisis -38% Crisis period Heavy discounting somewhat offsets collapse in demand -54% -55% -47% Discounting phased out -25% 33% 54% Scrappage scheme and subsidised loans help revive the market 42% 28% 3q 2008 4q 2008 1q 2009 2q 2009 3q 2009 4q 2009 1q 2010 2q 2010 3q 2010 4q 2010 1q 2011 2q 2011 3q 2011 4q 2011 66% 73% 24% Sources: АЕB, Goskomstat, GTK, АSМ-Holding, Autostat, estimates New foreign brands Russian brands 12
Recovery in domestic production The significant increase in demand for cars, state incentive programmes and OEM investments in new capacities triggered noticeable growth in output. In 2011, for the first time in history, more than 1.7 million light vehicles were manufactured in Russia, which is 45% more than in 2010. Light vehicle production in Russia by quarter, thousands of vehicles 600 500 400 300 200 100 331 393 403 341 123 164 136 174 156 332 336 378 374 441 445 480 0 1q 2008 2q 2008 3q 2008 4q 2008 1q 2009 2q 2009 3q 2009 4q 2009 1q 2010 2q 2010 3q 2010 4q 2010 1q 2011 2q 2011 3q 2011 4q 2011 2008 2009 2010 2011 Sources: ASM-Holding, Goskomstat, estimates 13
Auto credit market in Russia In 2011, every tenth vehicle in Russia was bought on subsidised credit. Altogether, more than 263 thousand subsidised loans were provided in 2011. In 2012, we expect a rise in car loan rates, especially for those cars that participated in the subsidised credit programme. This will likely have a negative effect on total sales of cars bought on credit. With the end of the subsidised credit programme captive banks and banks that have joint credit programmes with car manufacturers will play a bigger role on the market. Light vehicles sold on credit in Russia, thousands of vehicles 3000 2500 2296 2708 2500 Percentage of cars (in units) sold on credit 2000 1780 1500 1356 1256 1091 1100 1000 637 500 327 0 2007 2008 2009 2010 2011e Sources: Autostat, estimates Total sales Credit sales 2007 47% 2008 46% 2009 24% 2010 36% 2011e 44% 14
Prospects for Russia s automotive market
Drivers of the market Long-term market drivers Russia is a developing country with low personal car ownership but with high growth potential High average age of cars combined with accelerating process of replacement Relatively stable oil prices Foreign investments in organising manufacturing in Russia Joint credit programmes between OEMs and banks, activity of captive banks Short-term market limitations The end of the scrappage programme The end of the subsidised credit programme Exchange rate volatility Instability in the euro zone Major negative factors tend to be short-term, while positive factors tend to be long-term. Negative factors primarily impact the budget segment, while the premium class remains mostly unaffected. 16
WTO obligations Current tariff rate Tariff rates after entering the WTO Final tariff rate New imported cars 30% 25% (unchanged for three years, then, over the following four years decreases by 2.5% per year until it reaches 15%) 15% 3-5 and 5-7 year old used cars 35% 25% +different specific tariff rates (ad valorem tariff stay unchanged for five years, then decreases to 20% over the following two years) 20%+proportional decrease in specific tariff rates 7+ year old used cars between EUR 2.5 and 5.8 per cm 3 between EUR 2.5 and 5.8 per cm 3 (prohibitive specific tariffs stay unchanged) between EUR 2.5 and 5.8 per cm 3 Sources: the official website of the Customs Union Commission, Maxim Medvedkov s interview published on the Ministry of Economic Development website as of 14 November 2011 New imported cars: Decreasing the tariff by 5% brings it back to the pre-crisis level. This will encourage imports, especially of more expensive cars. Used cars less than 7 years old: The effect on the final car cost is positive, however, the volatility of exchange rates may have greater importance. Used cars over 7 years old: Tariffs stay the same (however, according to some sources, there might be a decrease in tariffs for used cars over 7 years old). Sources: The Ministry of Economic Development and Trade 17
WTO and new car assembly rules Decree 166 encourages OEMs in Russia to localise rather than import. This is against the spirit of free trade under WTO. There is an agreement between Russia and the EU stipulating that Russia will compensate the EU if exports of EU car parts to Russia fall as compared to 2010 levels after entering the WTO. However, - localisation is a slow process, so dramatic change in the short-run is unlikely; - local production, especially of foreign brands, will increase demand for components and parts; - in 2010, production was at 1m, but by 2011 production already climbed to 1.7m, leading to a dramatic increase in components imports. 18
Short-term market development Russian brands: in 2010 and 2011, 300,000 vehicles were sold each year under the scrappage programme. Now the programme has ended, which will likely decrease Russian brand cars share in total sales in 2012. Currently, AvtoVAZ is renewing its product line (the Lada Granta and Lada Largus projected production outputs for 2012 are about 140,000 and 30,000, respectively). So far, there are not enough used car imports to significantly influence the Russian market, however, possible changes in tariff rates may affect this. New car imports grew dramatically in 2011. In 2012, we will witness either a slight increase or a slight decrease in new car imports, depending on exchange rates. Sales of foreign cars manufactured in Russia could grow by up to 11% in 2012. 1H 2011, 000 1H 2011, % 2H 2011, 000 2H 2011, % 2011, 000 2011, % 2012, 000, basic % 2012, 000, optimistic Russian brands 310 32% 310-5% 620 11% 450-27% 550-11% Foreign cars produced in Russia New car imports TOTAL MARKET 440 77% 600 66% 1040 70% 1050 +0% 1150 +11% 410 60% 430 22% 840 38% 800-5% 900 +7% 1160 57% 1340 34% 2500 40% 2300-8% 2600 +4% Note: In the table the percentage shows growth from the period of the year before % 19
Short-term market development Passenger car sales, thousands of vehicles Volatility area Assumptions: Market saturation level - 400 GDP level when market saturation will be reached USD 25,000 Estimated year when this GDP level will be reached 2025 Rate of car disposal gradual increase from 4% in 2011 to 6% in 2025 We expect a slow down in the short term, however, in the medium term and long term, the market should return to its average growth rates. 20
Concluding remarks
Concluding remarks In 2011, the light vehicle market demonstrated 40% growth in unit terms thanks to growing consumer confidence, government support programmes and the increased availability of car loans. Thanks to the commissioning of new manufacturing facilities and increased utilisation of existing ones, 2011 became a record year in terms of light vehicle production in Russia. Output reached more than 1.7m vehicles. We expect growth rates to slow down in the coming year, with light vehicle sales (excluding light commercial vehicles) not exceeding 2.6m units in 2012. However, if short-term negative factors persist, sales could fall as low as 2.3m units. Over the past 20 years, Russia s automotive market has changed a lot and in the short term, it is still fairy volatile and unpredictable. In this economy, automotive market players can expect long-term growth but should also be ready to adjust to possible changes. 22
Thank you! Stanley Root Partner Automotive Industry Leader www.pwc.ru/automotive This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation. Unless otherwise provided for by Russian law member-firms of PricewaterhouseCoopers international network of firms, their members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. 2012. All rights reserved. PricewaterhouseCoopers and "" refers jointly to ZAO PricewaterhouseCoopers Audit and PricewaterhouseCoopers Russia B.V. and the company PricewaterhouseCoopers Commonwealth of Independent States (CIS) Law Offices B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited (IL). Each firm is a separate and independent legal entity and is not acting as an agent of IL or any other firm of the network. IL does not provide any services to clients. IL is not responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm in any way. None of the network firms is responsible for actions or failure to act by any other network firm, cannot control professional judgements expressed by any other network firm nor can bind another network firm or IL by any obligation.