The Russian Automotive Market Industry Overview amazonaws com
G LOBAL A UTOMOTIVE C ENTER S PRING 2007
The Russian Automotive Market Industry Overview
2006 was a successful year for the Russian economy, and in particular for the automotive industry. Since the industrial assembly legislation was passed, we have been witnessing a true investment outbreak. It was in 2006 that automotive giants such as Toyota, VW, Nissan, and others decided to establish a manufacturing presence in Russia. Russian OEMs also intensified their manufacturing activities, not only with respect to traditional Russian brands, but also on the basis of license agreements in cooperation with foreign partners. The new automotive manufacturing capacities are expected to reach over 600,000 units/year and by 2010 will increase to 800,000–900,000. The total amount of investment will exceed US$ 2 billion. This is an outstanding achievement in terms of attracting investment and further developing the automotive sector! The market entry of new players and the establishment of new production facilities on the territory of the Russian Federation are prerequisites for the full-scale development of the automotive component industry in Russia. Moreover, the industrial assembly legislation has been extended and is now applicable to supplier manufacturers. In short, in the near future the Russian automotive market will shift to a higher level in its development: from pure assembly to full-fledged automotive manufacturing. Dmitry Levchenkov Deputy Head, Investment Policy Department Ministry of Economic Development and Trade of the Russian Federation
Map of Major Manufacturers in the CIS Russia Kaliningrad4
Vsevolozhsk22 Kaliningrad4
St. Petersburg17
Vsevolozhsk22 St. Petersburg17 Shushary16
Minsk29 Lutsk26 Uzhgorod27
Mogilev30 Zelenograd23 Likino8
Golitsino2
16
Kaluga5
Shushary
Kyiv
Moscow10 Kolomna6
Pavlovo15
Nizhny Novgorod13
Cherkassy24 Kremenchug25
Ulyanovsk21 Naberezhnye Chelny11
Zaporizhie28 Taganrog18
Togliatti/Samara20
Izhevsk3 Elabuga1 Neftekamsk12 Novouralsk14 Miass9
Kurgan7
Tcherkessk19
29
Minsk
Astana Tbilisi
Baku
Ust-Kamenogorsk 31
26
Lutsk Uzhgorod27
Tashkent
Mogilev30
Asaka32
Zelenograd23 Golitsino2 Kaluga5 Kyiv
Likino8
New OEM Projects
Moscow10 Kolomna6 Pavlovo15 Nizhny Novgorod13
Companies / Brands
Cherkassy24 Kremenchug25
Ulyanovsk21 Naberezhnye Chelny11
Zaporizhie28 18
Taganrog
Togliatti/Samara20
Izhevsk3 Elabuga1 Neftekamsk12 Novouralsk14 Miass
9
Kurgan7
Tcherkessk19
Astana
AvtoVAZ–Magna GM* Chery FIAT VW Geely* Renault BYD* BAIC GAZ–DaimlerChrysler PSA* TATA* Great Wall* Toyota Nissan SsangYong GAZ–LDV Isuzu RZGA–Hyundai
Capacity (thousand) 450 230 200 155 115 100 80 70 70 65 60 60 50 50 25 25 20 20 6
Investments (US$ mln.) 1,700 815 150 175 396 50 150 155 115 131 243 150 100 140 219 N/A N/A N/A 120
Source: Company Data * TBD or not confirmed
Tbilisi
1 – Great Wall Motor Co. (Great Wall) Severstal-Auto-Elabuga (FIAT) 2 – GolAZ 3 – IZH-Avto (KIA, LADA, IZH) 4 – Avtotor (GM, BMW, KIA, Chery) 5 – VAG (VW, Škoda) 6 – EvoBus Russland (Mercedes-Benz) 7 – KAVZ 8 – LiAZ 9 – IVECO-UralAZ (IVECO-Ural) UralAZ (Ural, Tata) 10 – Avtoframos (Renault) AMO ZIL (ZIL) 11 – KAMAZ ZMA (SsangYong, OKA) 12 – NefAZ 13 – GAZ (Volga, GAZ, GAZelle, Maxus) OTT (Bogdan, Chevrolet, Isuzu) 14 – AMUr (AMUr, Geely, Tata) 15 – PAZ 16 – Toyota Motor Manufacturing Russia GM (Chevrolet) 17 – Nissan Manufacturing RUS Scania-Peter (Scania) 18 – TagAZ (Hyundai) RZGA (Hyundai, Tata) 19 – AK Derways (DADI) 20 – AvtoVAZ (LADA, 4x4(NIVA) GM-AvtoVAZ (Chevrolet) Vazinterservice (VIS) 21 – UAZ, AMC-Group (BAIC) 22 – Ford Motor Co. (Ford) 23 – VTS Zelenograd (Volvo)
Ukraine 24 25 26 27 28
– – – – –
ChAZ (Bogdan-Isuzu) AvtoKrAZ (KrAZ) LuAZ (LADA, KIA, Hyundai, Bogdan-Isuzu) Eurocar (VAG) UkrAVTO (ZAZ, LADA, GM, Chery, Tata, Dong Feng)
Belarus
Baku
Ust-Kamenogorsk 31
29 – MAZ BelAZ Unison (Samand) 30 – MoAZ
Kazakhstan 31 – Asia Auto (LADA, Škoda)
Uzbekistan 32 – UzDaewooAvto (Daewoo)
Tashkent Source: Company Data
Asaka32
Cars LCVs SUVs
Buses CVs ATVs
Contents Opening Comments
3
The Russian Economy
4
The Russian Automotive Market in a Global Context
6
The Passenger Car Market
8
The Commercial Vehicle Market
15
The Bus Market
17
The Russian Car Buyer
19
Car Financing
20
The Russian Automotive Component Industry
21
Automotive Logistics and Supply Chain
23
The CIS Automotive Market
25
Latest Government Reforms and Investment Incentives
28
Ernst & Young’s Involvement in the Automotive Industry
31
Contacts in Russia
32
Opening Comments 2006 has been another year of outstanding growth for the Russian automotive market. The year will be remembered as a milestone not only in terms of absolute increase in sales numbers, but also with respect to the following: • Record investment in the industry and commitment of several leading automotive players to establish manufacturing facilities in Russia with overall new capacity approaching one million units by 2010 • A continued restructuring by Russian automotive players coupled with several international acquisitions • A clearly intensifying trend of a shift in new car purchases not only toward foreign brands, but also toward a higher price segment • A further aggressive expansion of car dealerships into the regions • Intensifying competition in the car finance market with the appearance of many new players, including OEM banks, as well as attractive credit instruments In this report we present the key automotive market indicators for the last few years and viewpoints of several leading market players, analysts, and Russian government officials. This is just an overview of the latest market developments and automotive statistics, which we believe you might find useful when considering market entry or growth of your business activities in Russia and the CIS. We would be glad to share with you further details of our experience with the automotive sector in Russia to help you enhance the value of your company by means of prudent investment, as well as risk, operational, and cost management advisory.
Emmanuel Quidet Partner, CIS Accounts and Industries Leader Ernst & Young LLC
Alexei Ivanov Partner, CIS Industrial Products Group Leader Ernst & Young LLC
3
THE RUSSIAN ECONOMY
The Russian Economy Despite the stabilization of oil prices, the Russian economy is still booming, supported by stable economic growth and currency, as well as a significant increase in fixed capital investment and foreign direct investment (FDI). Inflation has continued to slow, while the real disposable income of the population, wages, and retail spending have been growing in double digits, considerably outpacing gross domestic product (GDP) growth. The long-awaited bilateral agreement with the US on Russia’s World Trade Organization entry was signed in November 2006, and this year we expect the final accession.
Nominal and Real GDP Growth 1,800
7.3%
8 7.2%
1,600
1,200
7
6.7%
1,400
6.4%
6 5.2%
5.1%
4.5%
4.7%
1,000
4.5%
5
4.8% 4
800 3 600 2
400
1
200 307
346
432
589
763
979
1,074
1,255
1,442
1,635
2001
2002
2003
2004
2005
2006
F2007
F2008
F2009
F2010
0
0 Nominal GDP (US$b)
Real GDP Growth (% y-o-y)
Source: Rosstat, Ministry of Economic Development and Trade of the Russian Federation
The Russian economy continues to exhibit strong economic growth, which registered at close to 7% in 2006. Rapidly growing incomes and the real appreciation of the ruble have energized the Russian consumer, whose spending drove consumption growth close to 12% and made the domestic market much more attractive to investors and businesses. Kristalina Georgieva Director and Resident Representative The World Bank, Moscow, Russia 4
T H E R US S I A N A U TOM O T I V E M A R K E T
Macroeconomic Indicators Indicator
2006
2005
2004
Population (million)
142.8
143.4
144.2
Nominal GDP (US$b)
978.7
763.2
589.0
Real GDP (%)
Key to Abbreviations: AEB Association of European Businesses ATV All-Terrain Vehicle
6.7
6.4
7.2
6,855.8
5,319.4
4,085.5
28,4
12,8
14,8
Industrial Output (US$b)
124.8
120.1
111.4
CV
Commercial Vehicle
Industrial Output (%)
103.9
104.0
107.3
FDI
Foreign Direct Investment
9.0
10.9
11.7
GDP per Capita (US$) FDI (US$b)
Inflation (%) Real Disposable Income (%)
12.0
9.0
10.0
Average Monthly Wage (US$)
395.6
302.0
233.9
US$/RUB
27.1
28.3
28.8
EUR/RUB
34.1
35.2
35.8
Spot Crude (US$/barrel)
64.3
53.4
37.8
CIS Commonwealth of Independent States CKD Complete Knocked-Down
GDP Gross Domestic Product HCV Heavy Commercial Vehicle LCV Light Commercial Vehicle MCV Medium Commercial Vehicle OEM Original Equipment Manufacturer
Source: Rosstat, Ministry of Economic Development and Trade of the Russian Federation
5
T H E R US S I A N A U TOM O T I V E M A R K E T I N A G LO B A L C O N T E X T
The Russian Automotive Market in a Global Context Russia seems to be at the top of the agenda for most global automotive players. North America and Western Europe have been experiencing stagnation in their automotive markets, characterized by sluggish sales, overcapacity, and closure of a number of manufacturing facilities. In contrast, Russia has been enjoying remarkable growth not only in relative terms, but also in absolute numbers, breaking the two-million-unit milestone in 2006. By volume Russia is already eighth globally and fifth in Europe, outpacing big markets such as Spain and Brazil and approaching the level of France and Italy.
Sales of New Passenger Cars in Selected Markets (thousand) US Japan China Germany UK
Russian Market Forecast** Year Sales Total New Foreign Cars 2004 1,284,972 408,200 2005 1,446,525 614,300 2006 1,778,000 1,020,000 F2007 2,092,000 1,382,000 F2008 2,423,000 1,753,000 F2009 2,895,000 2,210,000 F2010 3,385,000 2,700,000
Italy France Russia Spain Brazil
Source: IAA Autostat
India CEE* 0
1,000 F2008
2,000 F2007
3,000 2006
4,000
5,000
6,000
7,000
2005
Source: Global Insight * CEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Turkey ** Not including used cars
6
T H E R US S I A N A U TOM O T I V E M A R K E T
8,000
The market is still far from saturation. Russia has never before seen several consecutive years of a strong national currency (against both the US dollar and the euro), an increasing wealth of the population, and enhanced access to credit opportunities. In addition, the comparatively high age of cars (more than half are over 10 years old) and low car density compared to other emerging economies with growing car markets testify to further growth potential. Following the current growth pattern, by 2010 Russia will more than double its share of the European car parc and become comparable to Europe’s leader, Germany.
2005
Population Passenger (million) Car Parc (million)
Car Density (cars per 1,000 people)
Germany
82.68
45.67
552
UK
59.91
30.67
512
US
451
296.79
133.91
Czech Republic
10.19
3.96
389
Poland
38.49
12.63
328
South Korea
48.61
10.98
226
Russia
143.40
25.46
180
Brazil
181.34
18.13
100
Turkey
71.48
5.29
74
China
1,308.15
13.21
10
India
1,098.95
8.01
7
Source: Global Insight, Rosstat
While traditional vehicle markets like North America, Western Europe, and Japan show slow or even no market growth, new regions like Russia get more and more attention. Russia as part of these new emerging markets will show continuous, dynamic market growth in the coming years. To participate in these positive developments, competent local presence in marketing, sales, development, and production is essential. .. Schoepf Walter Executive Vice President, Sales Original Equipment OOO Robert Bosch 7
THE PASSENGER CAR MARKET
The Passenger Car Market* With over two million units sold, the Russian passenger car market grew by a remarkable 20% from 2005. The greatest expansion was witnessed in the locally produced foreign brand sector with an increase of about 80% and already occupying over 13% of the total market. New imports rose by about 60% to approximately 750,000 units (35.9% of the total market) and almost caught up with the Russian brand segment, which shrank to 37% from 46% last year. The share of used imports dropped by 4% to below 300,000 units.
Passenger Car Market Breakdown 2006
2005
13.9%
2004 14.8%
17.8% 37.0% 46.5%
19.0% 58.1%
26.9%
35.9%
8.0%
13.2% Russian Brands
8.8% Russian-made Foreign Brands
New Imports
Used Imports
Source: Association of European Businesses (AEB), ASM Holding
* Includes sales of both new and used foreign passenger cars, as well as Russian and foreign vehicles produced and sold in Russia
8
T H E R US S I A N A U TOM O T I V E M A R K E T
In money terms, the market amounted to over US$34 billion, a jump of about 36% from 2005. Russians spent more than US$25 billion on new foreign brands (both imports and locally produced), up more than 60%. Russian brand spending remained fairly stable — up 2%, primarily due to the comparative increase in prices.
Car Market (US$, billion) 40
+ 36%*
30
+ 14%*
20
10
0 2004 Russian Cars
2005 New Imports
2006
Used Imports
Source: IAA Autostat * Total growth
2006 was another year of remarkable growth in the foreign passenger car segment. Though the C-segment remains the largest on the Russian market, there have been some significant changes. The improving standard of living and the growth of prosperity contributed to foreign car market development, which motivated people to buy more expensive cars. We witnessed two trends: steady growth of the B-segment and rising interest in the luxury car segment. People are shifting from cheap Russian cars to affordable foreign B- and C-segment cars or cars of local or joint assembly. This year some major foreign manufacturers (including Nissan) chose Russia as the site for local assembly, which means more offers and opportunities for consumers in the future. The emerging credit programs developed and introduced by car manufacturers also facilitate these changes. Toru Saito General Director Nissan Motor RUS 9
THE PASSENGER CAR MARKET
These market dynamics are explained as follows: • From a production perspective: a shift of local capacity from producing Russian brands (IZH and OKA) to full-scale production of foreign brands (KIA and SsangYong), as well as the ramp up of the production facilities of foreign original equipment manufacturers (OEMs) • From a market perspective: the increasing wealth of the Russian consumer, the further liberalization of the credit market, and the increasing competition and variety of foreign brands (geographically, pricewise, and servicewise) as opposed to their Russian counterparts With most global OEMs having announced plans to establish manufacturing facilities in Russia by 2009–2010 (see chart inside the front cover), it is expected that foreign brands produced in Russia will soon outpace the production of Russian brands, reaching close to one million units in 2010.
Passenger Car Production Brand
2006
2005
2004
2006 / 2005
2005 / 2004
Russian Brands LADA1
799,768
780,736
790,948
2.4%
-1.3%
GAZ
51,691
51,765
65,686
-0.1%
-21.2%
UAZ
28,528
29,141
31,136
-2.1%
-6.4%
OKA
16,424
43,335
60,358
-62.1%
-28.2%
IZH
0
5,871
27,930
N/A
-79.0%
269
439
675
-38.7%
-35.0%
896,680
911,287
976,733
-1.6%
-6.7%
Chevrolet2
67,536
53,587
58,424
26.0%
-8.3%
Ford
62,409
33,047
29,700
88.8%
11.3%
Renault
48,545
10,335
477
369.7%
>1,000%
Hyundai
48,397
42,451
30,000
14.0%
41.5%
KIA3
27,951
15,611
11,826
79.0%
32.0%
Chery
12,157
0
0
N/A
N/A
SsangYong
4,528
22
0
>1,000%
N/A
BMW
3,831
2,293
2,449
67.1%
-6.4%
Hummer
465
161
122
188.8%
32.0%
Cadillac
303
228
0
32.9%
N/A
Other4
822
226
164
263.7%
37.8%
Other Total Russian Brands Foreign Brands
Total Foreign Brands TOTAL
276,944
157,961
133,162
75.3%
18.6%
1,173,624
1,069,248
1,109,895
9.8%
-3.7%
Source: ASM Holding, Company Data 1 Production at AvtoVAZ and other OEM plants in Russia
3 Production at IZH-Avto and Avtotor
2 Production at GM-AvtoVAZ and Avtotor
4 Derways, Great Wall, Yuejin, Marshal
10
T H E R US S I A N A U TOM O T I V E M A R K E T
Passenger Car Production Forecast (thousand) 1,200 1,000 800 600 400 200 0 2004
2005
Total Russian Brands
2006
F2007
F2008
F2009
F2010
Total Foreign Brands
Source: IAA Autostat
With a current car density of about 180 cars per 1,000 people and with more than 50% of the car parc more than 10 years old, the Russian market is still far from saturated. Based on the government strategy for developing the automotive sector and the announced plans of foreign OEMs, it is expected that by 2010 the passenger car parc will grow by 25% to reach 30 million units and by 2015 will exceed 40 million units.
Car Parc (million) F2015
F2010
E2006 0
10
20
30
40
50
Source: National Automotive R&D Institute (NAMI)
11
THE PASSENGER CAR MARKET
Asian OEMs clearly dominate the market of new foreign brands (55.6%, not including Chevrolet DAT), although American and European OEMs have been gradually increasing their market share with 22.6% and 19.8% in 2006, up from 20.7% and 16.8% in 2005, respectively.
New Car Import by Origin 2004–2006 2006 2.0%
2005 1.1%
1.5%
1.2% 7.3%
9.8% 6.8%
22.6%
2004
2.0%
0.8%
20.7%
6.5%
1.3% 7.1%
0.2% 23.9% 0.9%
1.0%
1.1% 22.0%
France
1.3%
35.0%
31.6%
Czech Republic
26.2%
Germany Japan
South Korea Sweden
32.2% 25.8%
UK US*
China Other
Source: AEB, ASM Holding * Including GM-DAT and GM-AvtoVAZ sales data
12
7.4%
0.8%
T H E R US S I A N A U TOM O T I V E M A R K E T
0.1%
Sales of Top 25 New Foreign Cars* (thousand) Ford Chevrolet Hyundai Toyota Nissan Renault Mitsubishi Daewoo KIA Mazda
2006 Best Sellers
VW Opel
Model Class A Daewoo Matiz KIA Picanto Chevrolet Spark BYD Flyer II Class B Renault Logan Hyundai Accent Chevrolet Lanos Ford Fusion Class C Ford Focus Mitsubishi Lancer Daewoo Nexia Nissan Almera Class D Toyota Avensis Mazda 6 Nissan Primera Ford Mondeo
Suzuki Honda Peugeot Skoda Citroen Chery Mercedes Volvo Lexus Audi BMW Subaru Land Rover
2006 2006 / 2005 13,448 5,123 2,886 1,694
-37.1% 278.9% 214.4% >1,000%
49,323 38,808 37,215 16,532
598.9% 18.5% >1,000% 142.6%
49,323 46,969 39,678 32,241
106.5% 19.8% 12.8% 47.7%
13,140 12,819 11,142 10,120
52.6% 51.6% 22.0% 67.0%
Model 2006 2006 / 2005 Class E Toyota Camry 18,099 40.7% Audi A6 3,095 31.3% Nissan Teana 2,934 N/A BMW 5-Series 2,636 46.8% Class F Mercedes-Benz S-Class 2,447 148.4% Audi A8 942 13.6% BMW 7-Series 795 -3.4% Lexus LS 318 -0.3% SUV Hyundai Tucson 12,606 120.4% Toyota RAV4 12,030 89.9% Nissan X-Trail 9,933 33.9% Suzuki Grand Vitara 9,159 89.0% 4x4 Toyota LC 100 8,502 60.0% Toyota LC Prado 8,382 88.4% Lexus RX 5,304 72.5% KIA Sorento 4,996 63.0%
Great Wall 0
20 2006
40 2005
60
80
100
120
2004
Source: AEB, ASM Holding * Includes Russian-made foreign brands
13
THE PASSENGER CAR MARKET
In terms of price segmentation, as Russians are becoming more affluent, the previously strongly dominating segment under US$10,000 this year has shrunk to slightly less than 50% and is the only decreasing segment. Consumers are clearly moving to higher price brackets. With respect to absolute numbers of cars sold, the segment under US$10,000 continued to dominate. The highest growth rate — over 85% — was seen in the US$20,000–25,000 segment, followed by the US$10,000–15,000 and the US$25,000–30,000 segments.
Car Consumption per Price Segment 2006
2005
2004 1.6% 1.6%
4.4%
3.4%
8.4%
1.5% 1.3%
3.2% 6.6% 14.9%
5.2% 10.7% 49.2%
13.8%
13.2%
62.9% 79.2%
19.0%
30
(US$, thousand)
Source: AEB, ASM Holding
14
T H E R US S I A N A U TOM O T I V E M A R K E T
The Commercial Vehicle Market* 2006 was very successful for the CV market, with a growth rate of almost 20% compared to more than 2.3% in the previous period. The overall trend toward the decreasing share of the LCV segment (up to 3.5 t.) of the total CV market was reinforced. The HCV segment continued to grow, with KAMAZ being the leading player (over 30%). GAZ remained the dominant player in both the LCV and MCV segments. With respect to foreign brands, in 2006 Isuzu entered the MCV segment.
CV Market Breakdown by Segment 2006 0.3%
2005 0.4%
0.3%
2004 0.2%
0.4%
15.7%
17.6%
14.6% 13.6%
15.7%
15.1% 66.5%
0.4–3.5 t.
68.1%
3.5–10 t.
>10 t.
0.2%
Tractive Units
71.3%
Other
Source: ASM Holding, Company Data
The commercial vehicle market in Russia is following the trend of the passenger car market — foreign MCVs and HCVs are steadily gaining share off CIS makes, and this is going to be reinforced further over the next few years. Lars Corneliusson Managing Director Volvo Vostok * Production
15
T H E C O M M E RC I A L V E H I C L E MARKET
Commercial Vehicle Production* Segment / Brand
2006
2005
2004
2006 / 2005
2005 / 2004
LCVs, Pickups and Vans (0.4–3.5 t.)
157,418
138,560
144,146
13.6%
-3.9%
GAZ
120,879
105,541
102,398
14.5%
3.1%
UAZ
19,258
19,465
18,544
-1.1%
5.0%
IZH
12,267
7,220
13,810
69.9%
-47.7%
VIS
3,379
3,569
2,954
-5.3%
20.8%
ZIL
1,635
2,765
6,440
-40.9%
-57.1%
MCVs (3.5–10 t.)
36,878
32,400
27,316
13.8%
18.6%
GAZ
23,357
20,745
14,645
12.6%
41.7%
Ural**
8,075
6,513
6,063
24.0%
7.4%
ZIL
4,731
4,177
6,605
13.3%
-36.8%
Russian Brands
AMUR
715
965
3
-25.9%
>1,000%
HCVs (>10 t.)
43,131
32,066
29,243
34.5%
9.7%
KAMAZ
42,836
31,988
29,243
33.9%
9.4%
Ural**
295
78
0
278.2%
N/A
Tractive Units
1,050
692
763
51.7%
-9.3%
Ural**
1,050
692
763
51.7%
-9.3%
Other
819
336
356
143.8%
-5.6%
239,296
204,054
201,824
17.3%
1.1%
LCVs, Pickups and Vans (0.4–3.5 t.)
7,674
2,340
123
227.9%
1,802.4%
Hyundai
7,162
2,311
0
209.9%
N/A
505
28
0
>1,000%
N/A
TOTAL Russian Brands Foreign Brands
Yuejin Zhong Xing
7
0
0
N/A
N/A
Great Wall
0
1
0
N/A
N/A
KIA MCVs (3.5–10 t.)
0
0
123
N/A
N/A
671
120
109
459.2%
10.1%
Isuzu
479
0
0
N/A
N/A
TATA
192
120
109
60.0%
10.1%
HCVs (>10 t.)
592
483
300
22.6%
61.0%
Volvo
397
362
210
9.7%
72.4%
Iveco-Ural
195
121
90
61.2%
34.4%
8,937
2,943
532
203.7%
453.2%
248,233
206,997
202,356
19.9%
2.3%
TOTAL Foreign Brands TOTAL Source: ASM Holding, Company Data * Includes chassis ** Ural belongs to GAZ Group
16
T H E R US S I A N A U TOM O T I V E M A R K E T
The Bus Market* Overall bus production in 2006 remained steady, with only a 1.2% increase compared to the strong growth in the passenger and CV markets for the same period. This trend has been present since 2003, after substantial growth for more than five years. Structurewise, the dominant segment of minibuses (led by GAZ) continued to shrink, falling by almost 4% to below 70% of the overall bus market. The other segments are strongly represented by GAZ Group’s Russkie Avtobusy bus division. In terms of units, intercity buses take the lead, followed by city, suburban, and finally tourist, all of them having grown by more than 10%.
Bus Market Breakdown 2006 0.8%
2005
0.5% 0.5%
0.6%
0.2%
2004 0.5%
0.3% 0.1%
18.8%
20.5%
22.4%
4.5%
5.4%
6.5% 69.4%
1.4%
72.9%
Minibuses
Intercity buses
Tourist buses
City buses
Suburban buses
Other
74.9%
Source: ASM Holding, Company Data
* Production
17
THE BUS MARKET
Bus Production Segment / Brand
2006
2005
2004
2006 / 2005
2005 / 2004
Minibuses
54,965
57,209
56,870
-3.9%
0.6%
GAZ
39,520
37,093
39,783
6.5%
-6.8%
UAZ
15,403
20,083
17,037
-23.3%
17.9%
42
33
50
27.3%
-34.0%
City buses
4,966
4,034
3,251
23.1%
24.1%
LiAZ*
3,176
2,842
2,508
11.8%
13.3%
PAZ*
760
332
0
128.9%
N/A
NefAZ
707
662
591
6.8%
12.0%
Volzhanin
318
198
152
60.6%
30.3%
Russian Brands
ZIL
GolAZ*
5
0
0
N/A
N/A
Intercity buses
17,813
16,112
14,344
10.6%
12.3%
PAZ*
14,215
13,721
12,114
3.6%
13.3%
KAVZ*
3,425
2,230
2,073
53.6%
7.6%
NefAZ
173
161
151
7.5%
6.6%
GolAZ*
0
0
6
N/A
N/A
Suburban buses
618
443
232
39.5%
90.9%
NefAZ
335
236
127
41.9%
85.8%
LiAZ*
235
161
87
46.0%
85.1%
GolAZ*
48
46
18
4.3%
155.6%
Tourist buses
368
181
89
103.3%
103.4%
GolAZ*
368
162
87
127.2%
86.2%
0
19
2
N/A
850.0%
NefAZ Other
414
368
1,061
12.5%
-65.3%
79,144
78,347
75,847
1.0%
3.3%
Minibuses
285
196
199
45.4%
-1.5%
Mercedes-Benz
152
115
0
32.2%
N/A
Ford
133
1
0
>1,000%
N/A
TOTAL Russian Brands Foreign Brands
KIA
0
80
199
N/A
-59.8%
City buses
236
191
147
23.6%
29.9%
Scania
236
191
147
23.6%
29.9%
TOTAL Foreign Brands
521
387
346
34.6%
11.8%
79,665
78,734
76,193
1.2%
3.3%
TOTAL
Source: ASM Holding, Company Data * Belongs to GAZ Group’s Russkie Avtobusy bus division
18
T H E R US S I A N A U TOM O T I V E M A R K E T
The Russian Car Buyer When buying a new car, the Russian consumer has traditionally been driven exclusively by price and technical features. As opposed to Europeans, the share of Russian purchasers who take into consideration safety (8%), gasoline consumption (5%), and overall value (including service and insurance and residual value for resale in a few years’ time — 5%) is still minor. This has been emphasized by the notion of a low price and accessibility of spare parts for Russian brands, coupled with a repair-it-yourself mentality. However, the increase in disposable income and credit opportunities, the immediate launch of new car models, and the rapid growth of foreign car dealerships in the regions have already led to a dramatic increase in new foreign car sales from higher price brackets and with more elaborate and reliable features.
The Russian New Car Buyer Characteristic Age Male / Female
Russia
Europe
30
46.7
84% / 16%
69% / 31%
Family Size
3.3
2.8
Married
74%
75%
One-Car Household
33%
42%
Two-Car Household
11%
14%
US$20,800
US$46,300
Average Annual Income First Car Purchase
12%
1%
Retired
4%
21%
Company Cars
48%
33%
Commuting by Car
77%
70%
Source: AEB
19
CAR FINANCING
Car Financing At present, more than 250 banks in Russia offer different car financing schemes. The growth rate of the consumer credit market considerably outpaces car sales growth. While in the US up to 90% of private car sales are financed by credit (80% in Europe), in Russia just over 30% are non-cash sales.
Cars Sold in Credit / Total Car Sales
2006
2005
2004
30–35%
25%
15–20%
Source: Bank Data
The second step has practically been made as well: last year the financial arms of some of the leading OEMs announced that they would set up their banks in Russia.
So far, OEMs and Russian banks have been developing the autocredit market together. Subsidizing annual interest through Russian dealers in cooperation with Russian banks is only the first step to the launch of banks of foreign car brands on the Russian market.
This will likely increase competition, shrink the car loan portfolio of the Russian banks, and further lower loan rates.
The Average Estimated Cost of Autocredits in Banks of Russian and Foreign Origin from 14% from 17%
11–14%
12–14% 14–16%
13.5–17.5% 15.5–19%
11–15% 13–17%
10.5–17.5%
9–9.5%
8%
9–10.5%
10%
12–13.5%
12%
10–12%
11–16.5%
14%
10.5–14% 13–16%
16%
14.5–17%
18%
6% 4% 2% 0%
New Foreign Car Credit
Used Foreign Car Credit
New Domestic Car Credit
Used Domestic Car Credit
Buyback Programs (New Foreign Car)
Leading Foreign Banks US$ / EUR
Russian Banks (Market Leaders) US$ / EUR
Leading Foreign Banks RUB
Russian Banks (Market Leaders) RUB
Express Autocredit
Source: Bank Data
Car loans dramatically reduced elasticity of demand. The Russian consumer can now afford more expensive cars. This shifts demand from lower priced Russian models to more expensive foreign alternatives. We expect that the average price of a sold car will climb 20–30% by 2011. Gairat Salimov Research Analyst, Manufacturing Troika Dialog 20
T H E R US S I A N A U TOM O T I V E M A R K E T
The Russian Automotive Component Industry Based on Ernst & Young's experience, the Russian automotive component industry has traditionally been rather vertically integrated. The level of integration on average was almost 80%, and of the 200 Russian component manufacturers over 95% supply Russian OEMs only. Less than 5% supply Western OEMs or foreign OEMs with manufacturing activities in Russia. Only 1% have export activities. The conventional tier division is still not clearly present. On average, one-quarter of the supplier base is raw material producers and the rest is component manufacturers. In quality terms, Russian automotive companies are still far behind their Western counterparts. The common defect measure according to industry standard ISO 16949 is below 70 parts per million (ppm), compared to the Russian industry average of over 1,000 ppm. Currently, the foreign supplier presence in the country is fairly limited, comprising mostly bulky and lower value-
added component manufacturing which is not critical to large-volume production, i.e., seats, interior components, and bumpers. The foreign suppliers are located adjacent to Russian and foreign OEMs. Russian Government Decree No. 166, regulating localization, welding, and paint-shop requirements, has spurred some new players to follow foreign car CKD assemblers. In addition, in 2006, major tier-one players like Johnson Controls International, Bosch, and Siemens VDO Automotive decided to expand their operations by means of additional joint ventures, acquisitions, or greenfield projects. By 2010 about one million foreign-brand cars will be manufactured in Russia. These numbers will already be sufficient to attract volume-critical component manufacturers, e.g., chassis, clutches, and injection systems.
The arrival of most international OEMs in Russia and the substantial production capacities that are under construction will certainly attract major suppliers to capture a fair share of one of the fastest growing automotive markets globally. Jaron Wiedmaier General Director Continental Tires RUS The Russian Automotive Industry will see significant growth from both Russian OEMs and New Domestics. Driven by growing consumer demand and federal regulations, innovative and flexible suppliers such as Magna are needed to provide a solid basis for this industry sector. Magna is committed to serving all OEMs in Russia, as a reliable and proven source for engineering demand as well as for components and systems supply. .. Hubert Hodl Vice President, Corporate Marketing & Business Development Magna International Europe 21
T H E R US S I A N A U TOM O T I V E COMPONENT INDUSTRY
Selected Automotive Component Suppliers St. Petersburg7
St. Petersburg7
Moscow8 Kaluga5 Orel10
Moscow8
Kursk6 Belgorod1
Ivanovo4
Kaluga5 Orel10
Vladimir14
Kursk6
Ivanovo4 Vladimir14
Nizhny Novgorod9 Cheboksary3 Kazan11
Saratov13 Samara12 Chelyabinsk2
Nizhny Novgorod9 Cheboksary3
Belgorod1
Kazan11 Saratov13 Samara12 Chelyabinsk2
1 2 3 4 5 6 7
Region Belgorod Region Chelyabinsk Region Chuvash Republic Ivanovo Region Kaluga Region Kursk Region Leningrad Region
8 9 10 11 12
Moscow Region Nizhny Novgorod Region Orel Region Republic of Tatarstan Samara Region
13 14
Saratov Region Vladimir Region
Company Soate (Stary Oskol) TREK Elara (Cheboksary), ZEiM-Line (Cheboksary) Avtoagregat (Kineshma) Kaluga Plant of Automotive Electrical Equipment, Siemens VDO Kursk Bearing Company Avtoarmatura, Intercos, Toplivnye Systemy, Nokian Tyres, ThyssenKrupp, Johnson Controls International, Asahi Glass Company, Stadco, Magna Michelin, IHI, Pilkington, Glaveberg Avtotekhnika, Soteks, ZMZ, Lear, Faurecia, ThyssenKrupp, Magna, Glaveberg Orleks Siemens VDO, Stadco, ZF, Cummins Energotekhmash (Zhigulevsk), DSK (Togliatti), Polimerstroymaterialy (Otradnoye), Samaraavtozhgut, Samara Cable Company, Hayes Lemmerz, Tenneco Automotive, Johnson Controls International, Federal Mogul, Delphi, HCC Bosch Automotive AvtoPribor, Osvar (Vyazniki)
Source: Company Data
It is necessary to attract foreign investments for the development of the Russian automotive component industry. As the largest Russian car component producer in the country, SOK Group believes that the right strategy for local companies is to partner with international industry leaders and jointly drive further development through new technologies, know-how, and well-established local presence. Andrei Frolov Vice President SOK Group 22
T H E R US S I A N A U TOM O T I V E M A R K E T
Automotive Logistics and Supply Chain Logistics planning is a very important part of the overall automotive supply chain. Global OEMs are constantly increasing their demand. Together with industry consolidation, the changing relationship between OEMs and suppliers, and global sourcing strategies, this makes the demand more dynamic and complex. The Russian automotive logistics setup is quite different from its American and European counterparts. Despite the large distances that are covered, road remains the dominant means of transport. In the European part of Russia, road transport dominates with about 90% of the total logistics channels. And even though car trailers are made for transport over distances of one to two days from the base, in Russia they cover distances of up to two weeks, leading to a shortage of trailers and a lower expected useful lifetime of the trailer parc. The underestimated car sales boom in 2006 led to a considerable shortage of car trailers. The largest inbound automotive logistics hub for Russia is Finland, covering about 77% of the market. Some more limited traffic goes through Central Asia (Iran and Kazakhstan) and the Far East (imports from China), whereas the bulk of the second-hand imports from Japan and South Korea to Russia are processed at
the Russian Far East ports. Finland covers over 80% of new imports and over 50% of used imports (except for Asian). The Finnish port infrastructure is becoming overburdened, and now OEMs are looking for alternative methods of inbound logistics, such as the Baltic countries, Ukraine, and Turkey. The currently strict customs regulations lead to gray imports (up to 40% through schemes optimized to cut customs duties). The high rates of state monopolist Russian Railways further complicate the enhancement of the rail channel. Russian Railways has ambitious plans to increase its railcar parc almost fourfold to be able to transport more than 1.5 million cars by 2012.
Automotive Logistics Statistics Region
Road
Rail
Railcar Parc (units)
North America
30%
70%
20,000
Average Distance Covered (km) 2,500
Europe
45%
55%
12,000
1,500
Russia
22%
78%
3,000
5,000
Source: Russian Railways, TransGroup AS
23
A U TOM O T I V E L O G I ST I C S A N D S U P P LY C H A I N
24
T H E R US S I A N A U TOM O T I V E M A R K E T
The CIS Automotive Market Of all the CIS countries, Russia is certainly the most populous (over 50% of the CIS population) and has the largest passenger and CV parcs (almost 70% of the CIS total for each). Nevertheless, four of the twelve CIS countries (Ukraine, Kazakhstan, Uzbekistan, and Belarus) are also interesting to look at, as they are all car manufacturers and their markets are substantial enough (about 27% of the total CIS car parc) to warrant attention.
CIS Statistics and Automotive Market Country
Population
Passenger Car Parc 2004
2005
Car Density
CV Parc
2004
2005
2004
2005
Belarus
10,322,151
1,558,000
1,658,300
158.04
168.87
125,400
116,000
Moldova
4,439,502
230,000
229,000
53.94
53.76
9,500
8,400
Russia
143,347,400*
24,208,000
24,709,000
167.99
177.36
5,536,000
5,880,000
Ukraine
48,055,439
5,603,800
5,620,600
118.37
121.85
985,700
1,191,400
Armenia
3,326,448
250,000
250,000
81.82
82.06
120,000
120,000
Azerbaijan
7,830,764
403,960
437,560
48.05
51.56
99,910
102,770
Georgia
4,934,413
255,220
259,000
50.05
51.30
68,590
75,300
Kazakhstan
16,763,795
1,148,750
1,404,620
74.51
76.62
322,720
345,400
Kyrgyzstan
4,892,808
208,000
210,100
40.22
40.08
302,000
299,000
Tajikistan
6,863,752
131,480
152,100
20.97
24.04
56,370
63,000
Turkmenistan
4,775,544
90,000
84,000
18.36
16.88
11,000
11,360
Uzbekistan TOTAL
25,981,647
1,200,000
1,200,000
45.65
44.99
300,000
300,000
281,533,663
35,287,210
36,214,280
125,34
128,63
7,937,190
8,512,630
Source: Euromonitor International, CIA World Factbook * As of 2005
The Ukrainian automotive market has grown 25–30% over the last five years. This trend is expected to continue. The favorable customs policy and regulations encourage the development of automotive manufacturing. The CIS free trade agreement doubles the production potential of the country. ZAZ has been actively taking advantage of these trends and has shown excellent results. Tariel Vasadze Honorary President UkrAVTO Corporation 25
T H E C IS A U T O M O T I V E M A R K E T
Ukraine Ukraine has the second largest economy and car market in the CIS. Following a trend in 2006 similar to Russia, Ukraine enjoyed about 40% growth in the passenger car segment, and about 25% in both CV and bus sales. In terms of production, Ukraine manufactures and / or assembles all ranges of vehicles, the majority being passenger cars. Car output grew by 50% in 2006, reaching a record 250,000 units. CV and bus output also grew at double-digit rates. Two of the largest market players are now looking at expanding abroad, while 2006 witnessed some major investment commitment from Ukrainian automotive players in Poland and Russia. Of the foreign players, VW Group and GM have assembly operations in Ukraine.
Production Passenger Cars
2006
2005
2004
2006 / 2005
2005 / 2004
252,690
167,491
147,602
50.9%
13.5%
CVs
3,741
3,411
2,034
9.7%
67.7%
Buses
2,813
2,456
917
14.5%
167.8% 2005 / 2004
Sales Passenger Cars CVs Buses
2006
2005
2004
2006 / 2005
371,019
265,475
211,940
39.8%
25.3%
34,933
28,231
23,885
23.7%
18.2%
6,944
5,499
3,388
26.3%
62.3%
Source: ASM Holding
Kazakhstan Closely following Ukraine in sales terms is Kazakhstan. The country is enjoying remarkable economic growth and increase in wealth among the population. With respect to car parc it is second after Ukraine. Kazakhstan currently has only one car plant, assembling LADA and Škoda models. Production
2006
2005
2004
2006 / 2005
2005 / 2004
Passenger Cars
4,000
2,365
3,206
69.1%
-26.2%
Sales Passenger Cars CVs
2006
2005
2004
2006 / 2005
2005 / 2004
358,092
237,147
160,000
51.0%
48.2%
1,908
1,339
N/A
42.5%
N/A
Source: Ministry of Finance, Kazakhstan
26
T H E R US S I A N A U TOM O T I V E M A R K E T
Uzbekistan Although Uzbekistan is more populous than Kazakhstan, its car parc and density are much lower, about 10% of the total car parc of all four major countries. In sales terms the market is also quite limited. Nevertheless, GM DAT’s output in Uzbekistan last year grew to over 140,000 units of the Daewoo brand, of which most are exported to other CIS countries. In addition, some other Asian car manufacturers are currently considering the country to set up car, CV, and diesel engine manufacturing. Production Passenger Cars LCVs Sales
2006
2005
2004
2006 / 2005
124,349
89,093
60,575
39.6%
2005 / 2004 47.1%
15,731
11,917
9,495
32.0%
25.5% 2005 / 2004
2006
2005
2004
2006 / 2005
Passenger Cars
44,551
34,872
25,799
27.8%
35.2%
LCVs
15,106
11,389
9,134
32.6%
24.7%
Source: ASM Holding, UzDaewooAvto
Belarus Belarus has the smallest of all four major CIS markets in sales terms. However, it has the highest car density, following closely after Russia. With respect to production, the country is the second largest CV manufacturer in the CIS after Russia. Following previous contracts with Ford to assemble cars (assembly was stopped several years ago), a new manufacturer was set up in 2006 and currently assembles Iranian Samand vehicles (a redesigned version of the Peugeot 405). Production Passenger Cars CVs Buses Sales Passenger Cars CVs
2006
2005
2004
2006 / 2005
36
0
0
N/A
2005 / 2004 N/A
22,922
21,878
21,108
4.8%
3.6%
2,104
938
577
124.3%
62.6% 2005 / 2004
2006
2005
2004
2006 / 2005
10,020
4,900
N/A
104.5%
N/A
N/A
N/A
N/A
153.6%
N/A
Source: ASM Holding
27
L AT E S T G O V E R N M E N T R E F O R M S AND INVESTMENT INCENTIVES
Latest Government Reforms and Investment Incentives Below is an overview of the latest legislative reforms in Russia affecting investment, business development, and operation in the country: Area
Reform Description
Effect in Comparison to Previous Legislation
1. Tax Reform
• Taxpayers with a headcount exceeding 250 should submit tax returns in electronic form (effective 1 January 2008, this relates to taxpayers with a headcount exceeding 100).
• It is required to enter into additional agreement for transmission of electronic forms. • This will lead to a more professional approach to the taxation of companies engaged in specific activity and may have both positive and negative consequences.
• A Special Tax Inspectorate for car manufacturers was established in St. Petersburg. Appropriate tax registration of companies should be performed. • A number of changes have been introduced to Part I of the Tax Code to clarify the procedures for tax audits by the tax authorities. 1.1. Profits Tax
• All research and development expenses may be deducted within a year, regardless of the results of the research and development.
1.2. VAT
• Effective 1 January 2008, the tax period is a quarter for all taxpayers.
1.3. Assets Tax
• Assets under construction that are in operation but without state registration should be included in the tax base.
• This was not stipulated in law, but the tax authorities clarified their position in Letter of the Ministry of Finance No. 03-06-01-02/28 dated 27 June 2006.
1.4. Other
• Unified Social Tax: new tax rates have been established for taxpayers operating in the sphere of information technology.
• While the rates are lower, the requirements to qualify for these new rates are rather strict.
2. Legal Reform
• Water Code was adopted. • Forest Code was adopted. • New antimonopoly law establishes new criteria when prior consent of the antimonopoly authorities is required.
3. Trade Reform
28
• The list of particular activities requiring preliminary licensing was reduced. T H E R US S I A N A U TOM O T I V E M A R K E T
Area
Reform Description
Effect in Comparison to Previous Legislation
4. Customs
• Russian Government Decree No. 566 of 16 September 2006, extends the list of imported car components for factory assembly.
• Import duties on certain car components and materials used in car component production have been reduced two to three times, and often even to zero. The advantage of the Decree is that the factory assembly regime can now be used by car component producers, not only car assembly plants. This will promote development of car component manufacturers and facilitate compliance with localization requirements for car assembly plants.
• New cargo customs and transit declaration forms were introduced on 1 January 2007, as well as rules for filling them out.
• The change was made to bring the procedures into conformity with similar procedures applied by European Union member countries. The new cargo customs and transit declaration forms are in full conformity with the EU Single Administrative Document (SAD).
• In 2006 a revised version of the law “On Customs Tariff” and the related FCS regulations were adopted.
• Changes have been made to the computation procedure, format, and rules for filing customs value declarations, as well as the related customs control procedure. The changes are essentially technical in nature.
• Russian Government Decree No. 718 of 27 November 2006, introduced a new Customs Tariff for Russia effective 1 January 2007.
• The introduction of a new Customs Tariff is technical in nature and does not affect the duty rates that were in effect before it was introduced. However, the Russian Foreign Economic Activity Commodity Classification (FEACC) did change significantly. Changes in the FEACC are mostly the result of changes made to the World Customs Organization Harmonized System.
• FCS Orders No. 750 (9 August 2006) and 1072 (31 October 2006) govern the customs procedures within Special Economic Zones (SEZs).
• The Orders specify requirements for the development, construction, and layout of SEZs and criteria of access to the SEZ area to ensure effective customs control, thus enabling local SEZ bodies and SEZ residents to start operations. Declaration rules for Russian goods placed under the Free Customs Zone regime are set forth based on a single CCD/TD form introduced on 1 January 2007.
• Major companies investing RUB 3 billion over three consecutive years (starting from January 2007) are eligible for relief from property tax and a 4% reduction in the regional part of profits tax for five years.
• There are uncertainties in the law which may hinder its practical application.
5. Local St. Petersburg Tax Legislation
Source: Ernst & Young
29
L AT E S T G O V E R N M E N T R E F O R M S AND INVESTMENT INCENTIVES
Special Economic Zones (SEZs) • Two types of SEZs: R&D and Industrial Manufacturing • Minimum investment level requirement • State investment support • Industrial Manufacturing is applicable to SEZs but with higher localization requirements
• Residents enjoy the following: – Protection from possible changes in federal tax legislation – Free customs zones – Asset tax, land tax, and unified social tax breaks – Favorable depreciation coefficient
Russian SEZs at a Glance Kaliningrad St. Petersburg Kaliningrad St. Petersburg
Zelenograd
Dubna
Moscow Lipetsk
Zelenograd
Elabuga Samara
Dubna
Ekaterinburg
Rostov Tomsk
Novosibirsk
Moscow Lipetsk
Elabuga Samara
Ekaterinburg
Rostov Tomsk
Novosibirsk Source: Ministry of Economic Development and Trade of the Russian Federation Industrial Manufacturing SEZs
R&D SEZs
Through substantial reforms targeting an increase in competitiveness and know-how in the Russian automotive industry in recent years, the government has successfully managed to attract major global players and investment in establishing manufacturing facilities. As a next step, the Automobile Manufacturers Committee and AEB expect to place further emphasis on the development of revised VAT legislation for used vehicles traded in by dealers and on contributing towards improved fuel quality standards. Andreas Romanos CEO Association of European Businesses (AEB) 30
T H E R US S I A N A U TOM O T I V E M A R K E T
Ernst & Young’s Involvement in the Automotive Industry Ernst & Young is a global organization of professionals providing assurance and advisory business services, tax, and transaction advisory services to clients in major marketplaces and industries. Our firm is dedicated to helping its clients identify and capitalize on business opportunities throughout the world.
• We founded a working group (Automotive Task Force) within the Foreign Investment Advisory Council (FIAC) to develop an automotive agenda to support foreign automotive investment in Russia The objectives of the Task Force include the following:
Our Involvement in the CIS Automotive Industry
• Promoting the efficient realization of the objectives of Russian Government Decrees No. 166 and 566 aimed at supporting investment in vehicle manufacturing
Ernst & Young has a strong commitment to the automotive industry, with a focus on forming long-term relationships with the people and organizations that will make this industry grow:
• Assisting in developing a framework to facilitate investment in motor-vehicle components and other supplier activities
• We are vice-chairing the Automotive Components Committee with the Association of European Businesses
• Monitoring the development of the automotive industry, as well as Russia’s Tax and Customs Codes • Enhancing dialogue and cooperation between foreign and Russian OEMs
How Ernst & Young (CIS) B.V. Helps Foreign Automotive Investors in Russia Where to Invest? • Location advisory • Feasibility studies • Development of a business plan • Regional comparison (tax & legal, labor, and utility cost) • Scenario analysis • Financial modeling • Business strategic and real estate valuation
Who Should Investors Partner With? • Partner search (acquisition strategy) • Background check • Partner fit criteria • Partner screening and selection • Due diligence (tax & legal, financial, IT, HR) • IFRS / US GAAP audit • Transaction structuring (tax & legal)
How to Take Advantage of Incentives? • Tax-optimized planning for selecting the legal form of business • Tax-efficient planning for shareholder contributions, financing and transfer pricing • Application of local tax concessions • Equipment import, component import, and customs incentives planning
How to Start a Business? • Assistance in obtaining approval of authorities • Project management (pre-construction and construction) • Immigration assistance, employment structuring, and payroll compliance • Post-merger integration • Reimbursement of startup expenses
For more information please contact Ivan Bonchev, Automotive Segment Leader, at +7 (495) 755-9817. 31
C O N TAC T S
IN
RUSSIA
Emmanuel Quidet Partner, Assurance Ernst & Young LLC CIS Accounts and Industries Leader Tel.: +7 (495) 228-3659 E-mail: [email protected]
Ivan Bonchev Manager, Automotive Segment Leader Ernst & Young LLC Tel.: +7 (495) 755-9817 E-mail: [email protected]
Alexei Ivanov Partner, Assurance Ernst & Young LLC CIS Industrial Products Group Leader Tel.: +7 (495) 228-3661 E-mail: [email protected]
Dmitry Moskovsky Manager, Business Advisory Services Ernst & Young (CIS) B. V. Tel.: +7 (495) 641-2922 E-mail: [email protected]
Reece Jenkins Partner, Tax & Legal Ernst & Young (CIS) B. V. Tel.: +7 (495) 705-9736 E-mail: [email protected]
Oleg Lukianchikov Analyst, Center for Business Knowledge Ernst & Young (CIS) B. V. Industrial Products Group Tel.: +7 (495) 705-9700 E-mail: [email protected]
Paul Murphy Partner, Transaction Advisory Services Ernst & Young (CIS) B. V. Tel.: +7 (495) 705-9708 E-mail: [email protected]
32
T H E R US S I A N A U TOM O T I V E M A R K E T
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Baku Hyatt International Center Hyatt Tower III Izmir Street, 1033 Baku, AZ1065 Tel.: +994 (12) 490-7020 Fax: +994 (12) 490-7017
St. Petersburg White Nights House Business Center Malaya Morskaya Street, 23A St. Petersburg, 190000 Tel.: +7 (812) 703-7800 Fax: +7 (812) 703-7810 Novosibirsk Inskaya Street 54, 2nd floor Novosibirsk, 630102 Tel.: +7 (383) 211-9007 Fax: +7 (383) 211-9008 Ekaterinburg World Trade Center Kuibyshev Street, 44 Ekaterinburg, 620026 Tel.: +7 (343) 379-3510 Fax: +7 (343) 379-3511 Yuzhno-Sakhalinsk Sakhincenter, Office 218 Kommunistichesky Ave., 32 Yuzhno-Sakhalinsk, 693009 Tel.: +7 (4242) 49-9090 Fax: +7 (4242) 49-9411
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Georgia Tbilisi Leselidze Street, 44 Tbilisi, 0105 Tel.: +995 (32) 75-1065 Fax: +995 (32) 75-1066
Astana Kaskad Business Center 6th floor, office 6/1 Kabanbai Batyr Ave., 6/1 Astana, 010000 Tel.: +7 (3172) 58-0400 Fax: +7 (3172) 58-0410 Atyrau Satpaev Street, 19 Office 305 Atyrau, 060011 Tel.: +7 (3122) 99-6099 Fax: +7 (3122) 99-6097
Ukraine Kyiv Khreshchatyk Street, 19A Kyiv, 01001 Tel.: +380 (44) 490-3000 Fax: +380 (44) 490-3030 Donetsk Taras Shevchenko Blvd., 13A Donetsk, 83055 Tel: +380 (62) 340-4770 Fax: +380 (62) 340-4775
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The Russian Automotive Market Industry Overview
2006 was a successful year for the Russian economy, and in particular for the automotive industry. Since the industrial assembly legislation was passed, we have been witnessing a true investment outbreak. It was in 2006 that automotive giants such as Toyota, VW, Nissan, and others decided to establish a manufacturing presence in Russia. Russian OEMs also intensified their manufacturing activities, not only with respect to traditional Russian brands, but also on the basis of license agreements in cooperation with foreign partners. The new automotive manufacturing capacities are expected to reach over 600,000 units/year and by 2010 will increase to 800,000–900,000. The total amount of investment will exceed US$ 2 billion. This is an outstanding achievement in terms of attracting investment and further developing the automotive sector! The market entry of new players and the establishment of new production facilities on the territory of the Russian Federation are prerequisites for the full-scale development of the automotive component industry in Russia. Moreover, the industrial assembly legislation has been extended and is now applicable to supplier manufacturers. In short, in the near future the Russian automotive market will shift to a higher level in its development: from pure assembly to full-fledged automotive manufacturing. Dmitry Levchenkov Deputy Head, Investment Policy Department Ministry of Economic Development and Trade of the Russian Federation
Map of Major Manufacturers in the CIS Russia Kaliningrad4
Vsevolozhsk22 Kaliningrad4
St. Petersburg17
Vsevolozhsk22 St. Petersburg17 Shushary16
Minsk29 Lutsk26 Uzhgorod27
Mogilev30 Zelenograd23 Likino8
Golitsino2
16
Kaluga5
Shushary
Kyiv
Moscow10 Kolomna6
Pavlovo15
Nizhny Novgorod13
Cherkassy24 Kremenchug25
Ulyanovsk21 Naberezhnye Chelny11
Zaporizhie28 Taganrog18
Togliatti/Samara20
Izhevsk3 Elabuga1 Neftekamsk12 Novouralsk14 Miass9
Kurgan7
Tcherkessk19
29
Minsk
Astana Tbilisi
Baku
Ust-Kamenogorsk 31
26
Lutsk Uzhgorod27
Tashkent
Mogilev30
Asaka32
Zelenograd23 Golitsino2 Kaluga5 Kyiv
Likino8
New OEM Projects
Moscow10 Kolomna6 Pavlovo15 Nizhny Novgorod13
Companies / Brands
Cherkassy24 Kremenchug25
Ulyanovsk21 Naberezhnye Chelny11
Zaporizhie28 18
Taganrog
Togliatti/Samara20
Izhevsk3 Elabuga1 Neftekamsk12 Novouralsk14 Miass
9
Kurgan7
Tcherkessk19
Astana
AvtoVAZ–Magna GM* Chery FIAT VW Geely* Renault BYD* BAIC GAZ–DaimlerChrysler PSA* TATA* Great Wall* Toyota Nissan SsangYong GAZ–LDV Isuzu RZGA–Hyundai
Capacity (thousand) 450 230 200 155 115 100 80 70 70 65 60 60 50 50 25 25 20 20 6
Investments (US$ mln.) 1,700 815 150 175 396 50 150 155 115 131 243 150 100 140 219 N/A N/A N/A 120
Source: Company Data * TBD or not confirmed
Tbilisi
1 – Great Wall Motor Co. (Great Wall) Severstal-Auto-Elabuga (FIAT) 2 – GolAZ 3 – IZH-Avto (KIA, LADA, IZH) 4 – Avtotor (GM, BMW, KIA, Chery) 5 – VAG (VW, Škoda) 6 – EvoBus Russland (Mercedes-Benz) 7 – KAVZ 8 – LiAZ 9 – IVECO-UralAZ (IVECO-Ural) UralAZ (Ural, Tata) 10 – Avtoframos (Renault) AMO ZIL (ZIL) 11 – KAMAZ ZMA (SsangYong, OKA) 12 – NefAZ 13 – GAZ (Volga, GAZ, GAZelle, Maxus) OTT (Bogdan, Chevrolet, Isuzu) 14 – AMUr (AMUr, Geely, Tata) 15 – PAZ 16 – Toyota Motor Manufacturing Russia GM (Chevrolet) 17 – Nissan Manufacturing RUS Scania-Peter (Scania) 18 – TagAZ (Hyundai) RZGA (Hyundai, Tata) 19 – AK Derways (DADI) 20 – AvtoVAZ (LADA, 4x4(NIVA) GM-AvtoVAZ (Chevrolet) Vazinterservice (VIS) 21 – UAZ, AMC-Group (BAIC) 22 – Ford Motor Co. (Ford) 23 – VTS Zelenograd (Volvo)
Ukraine 24 25 26 27 28
– – – – –
ChAZ (Bogdan-Isuzu) AvtoKrAZ (KrAZ) LuAZ (LADA, KIA, Hyundai, Bogdan-Isuzu) Eurocar (VAG) UkrAVTO (ZAZ, LADA, GM, Chery, Tata, Dong Feng)
Belarus
Baku
Ust-Kamenogorsk 31
29 – MAZ BelAZ Unison (Samand) 30 – MoAZ
Kazakhstan 31 – Asia Auto (LADA, Škoda)
Uzbekistan 32 – UzDaewooAvto (Daewoo)
Tashkent Source: Company Data
Asaka32
Cars LCVs SUVs
Buses CVs ATVs
Contents Opening Comments
3
The Russian Economy
4
The Russian Automotive Market in a Global Context
6
The Passenger Car Market
8
The Commercial Vehicle Market
15
The Bus Market
17
The Russian Car Buyer
19
Car Financing
20
The Russian Automotive Component Industry
21
Automotive Logistics and Supply Chain
23
The CIS Automotive Market
25
Latest Government Reforms and Investment Incentives
28
Ernst & Young’s Involvement in the Automotive Industry
31
Contacts in Russia
32
Opening Comments 2006 has been another year of outstanding growth for the Russian automotive market. The year will be remembered as a milestone not only in terms of absolute increase in sales numbers, but also with respect to the following: • Record investment in the industry and commitment of several leading automotive players to establish manufacturing facilities in Russia with overall new capacity approaching one million units by 2010 • A continued restructuring by Russian automotive players coupled with several international acquisitions • A clearly intensifying trend of a shift in new car purchases not only toward foreign brands, but also toward a higher price segment • A further aggressive expansion of car dealerships into the regions • Intensifying competition in the car finance market with the appearance of many new players, including OEM banks, as well as attractive credit instruments In this report we present the key automotive market indicators for the last few years and viewpoints of several leading market players, analysts, and Russian government officials. This is just an overview of the latest market developments and automotive statistics, which we believe you might find useful when considering market entry or growth of your business activities in Russia and the CIS. We would be glad to share with you further details of our experience with the automotive sector in Russia to help you enhance the value of your company by means of prudent investment, as well as risk, operational, and cost management advisory.
Emmanuel Quidet Partner, CIS Accounts and Industries Leader Ernst & Young LLC
Alexei Ivanov Partner, CIS Industrial Products Group Leader Ernst & Young LLC
3
THE RUSSIAN ECONOMY
The Russian Economy Despite the stabilization of oil prices, the Russian economy is still booming, supported by stable economic growth and currency, as well as a significant increase in fixed capital investment and foreign direct investment (FDI). Inflation has continued to slow, while the real disposable income of the population, wages, and retail spending have been growing in double digits, considerably outpacing gross domestic product (GDP) growth. The long-awaited bilateral agreement with the US on Russia’s World Trade Organization entry was signed in November 2006, and this year we expect the final accession.
Nominal and Real GDP Growth 1,800
7.3%
8 7.2%
1,600
1,200
7
6.7%
1,400
6.4%
6 5.2%
5.1%
4.5%
4.7%
1,000
4.5%
5
4.8% 4
800 3 600 2
400
1
200 307
346
432
589
763
979
1,074
1,255
1,442
1,635
2001
2002
2003
2004
2005
2006
F2007
F2008
F2009
F2010
0
0 Nominal GDP (US$b)
Real GDP Growth (% y-o-y)
Source: Rosstat, Ministry of Economic Development and Trade of the Russian Federation
The Russian economy continues to exhibit strong economic growth, which registered at close to 7% in 2006. Rapidly growing incomes and the real appreciation of the ruble have energized the Russian consumer, whose spending drove consumption growth close to 12% and made the domestic market much more attractive to investors and businesses. Kristalina Georgieva Director and Resident Representative The World Bank, Moscow, Russia 4
T H E R US S I A N A U TOM O T I V E M A R K E T
Macroeconomic Indicators Indicator
2006
2005
2004
Population (million)
142.8
143.4
144.2
Nominal GDP (US$b)
978.7
763.2
589.0
Real GDP (%)
Key to Abbreviations: AEB Association of European Businesses ATV All-Terrain Vehicle
6.7
6.4
7.2
6,855.8
5,319.4
4,085.5
28,4
12,8
14,8
Industrial Output (US$b)
124.8
120.1
111.4
CV
Commercial Vehicle
Industrial Output (%)
103.9
104.0
107.3
FDI
Foreign Direct Investment
9.0
10.9
11.7
GDP per Capita (US$) FDI (US$b)
Inflation (%) Real Disposable Income (%)
12.0
9.0
10.0
Average Monthly Wage (US$)
395.6
302.0
233.9
US$/RUB
27.1
28.3
28.8
EUR/RUB
34.1
35.2
35.8
Spot Crude (US$/barrel)
64.3
53.4
37.8
CIS Commonwealth of Independent States CKD Complete Knocked-Down
GDP Gross Domestic Product HCV Heavy Commercial Vehicle LCV Light Commercial Vehicle MCV Medium Commercial Vehicle OEM Original Equipment Manufacturer
Source: Rosstat, Ministry of Economic Development and Trade of the Russian Federation
5
T H E R US S I A N A U TOM O T I V E M A R K E T I N A G LO B A L C O N T E X T
The Russian Automotive Market in a Global Context Russia seems to be at the top of the agenda for most global automotive players. North America and Western Europe have been experiencing stagnation in their automotive markets, characterized by sluggish sales, overcapacity, and closure of a number of manufacturing facilities. In contrast, Russia has been enjoying remarkable growth not only in relative terms, but also in absolute numbers, breaking the two-million-unit milestone in 2006. By volume Russia is already eighth globally and fifth in Europe, outpacing big markets such as Spain and Brazil and approaching the level of France and Italy.
Sales of New Passenger Cars in Selected Markets (thousand) US Japan China Germany UK
Russian Market Forecast** Year Sales Total New Foreign Cars 2004 1,284,972 408,200 2005 1,446,525 614,300 2006 1,778,000 1,020,000 F2007 2,092,000 1,382,000 F2008 2,423,000 1,753,000 F2009 2,895,000 2,210,000 F2010 3,385,000 2,700,000
Italy France Russia Spain Brazil
Source: IAA Autostat
India CEE* 0
1,000 F2008
2,000 F2007
3,000 2006
4,000
5,000
6,000
7,000
2005
Source: Global Insight * CEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Turkey ** Not including used cars
6
T H E R US S I A N A U TOM O T I V E M A R K E T
8,000
The market is still far from saturation. Russia has never before seen several consecutive years of a strong national currency (against both the US dollar and the euro), an increasing wealth of the population, and enhanced access to credit opportunities. In addition, the comparatively high age of cars (more than half are over 10 years old) and low car density compared to other emerging economies with growing car markets testify to further growth potential. Following the current growth pattern, by 2010 Russia will more than double its share of the European car parc and become comparable to Europe’s leader, Germany.
2005
Population Passenger (million) Car Parc (million)
Car Density (cars per 1,000 people)
Germany
82.68
45.67
552
UK
59.91
30.67
512
US
451
296.79
133.91
Czech Republic
10.19
3.96
389
Poland
38.49
12.63
328
South Korea
48.61
10.98
226
Russia
143.40
25.46
180
Brazil
181.34
18.13
100
Turkey
71.48
5.29
74
China
1,308.15
13.21
10
India
1,098.95
8.01
7
Source: Global Insight, Rosstat
While traditional vehicle markets like North America, Western Europe, and Japan show slow or even no market growth, new regions like Russia get more and more attention. Russia as part of these new emerging markets will show continuous, dynamic market growth in the coming years. To participate in these positive developments, competent local presence in marketing, sales, development, and production is essential. .. Schoepf Walter Executive Vice President, Sales Original Equipment OOO Robert Bosch 7
THE PASSENGER CAR MARKET
The Passenger Car Market* With over two million units sold, the Russian passenger car market grew by a remarkable 20% from 2005. The greatest expansion was witnessed in the locally produced foreign brand sector with an increase of about 80% and already occupying over 13% of the total market. New imports rose by about 60% to approximately 750,000 units (35.9% of the total market) and almost caught up with the Russian brand segment, which shrank to 37% from 46% last year. The share of used imports dropped by 4% to below 300,000 units.
Passenger Car Market Breakdown 2006
2005
13.9%
2004 14.8%
17.8% 37.0% 46.5%
19.0% 58.1%
26.9%
35.9%
8.0%
13.2% Russian Brands
8.8% Russian-made Foreign Brands
New Imports
Used Imports
Source: Association of European Businesses (AEB), ASM Holding
* Includes sales of both new and used foreign passenger cars, as well as Russian and foreign vehicles produced and sold in Russia
8
T H E R US S I A N A U TOM O T I V E M A R K E T
In money terms, the market amounted to over US$34 billion, a jump of about 36% from 2005. Russians spent more than US$25 billion on new foreign brands (both imports and locally produced), up more than 60%. Russian brand spending remained fairly stable — up 2%, primarily due to the comparative increase in prices.
Car Market (US$, billion) 40
+ 36%*
30
+ 14%*
20
10
0 2004 Russian Cars
2005 New Imports
2006
Used Imports
Source: IAA Autostat * Total growth
2006 was another year of remarkable growth in the foreign passenger car segment. Though the C-segment remains the largest on the Russian market, there have been some significant changes. The improving standard of living and the growth of prosperity contributed to foreign car market development, which motivated people to buy more expensive cars. We witnessed two trends: steady growth of the B-segment and rising interest in the luxury car segment. People are shifting from cheap Russian cars to affordable foreign B- and C-segment cars or cars of local or joint assembly. This year some major foreign manufacturers (including Nissan) chose Russia as the site for local assembly, which means more offers and opportunities for consumers in the future. The emerging credit programs developed and introduced by car manufacturers also facilitate these changes. Toru Saito General Director Nissan Motor RUS 9
THE PASSENGER CAR MARKET
These market dynamics are explained as follows: • From a production perspective: a shift of local capacity from producing Russian brands (IZH and OKA) to full-scale production of foreign brands (KIA and SsangYong), as well as the ramp up of the production facilities of foreign original equipment manufacturers (OEMs) • From a market perspective: the increasing wealth of the Russian consumer, the further liberalization of the credit market, and the increasing competition and variety of foreign brands (geographically, pricewise, and servicewise) as opposed to their Russian counterparts With most global OEMs having announced plans to establish manufacturing facilities in Russia by 2009–2010 (see chart inside the front cover), it is expected that foreign brands produced in Russia will soon outpace the production of Russian brands, reaching close to one million units in 2010.
Passenger Car Production Brand
2006
2005
2004
2006 / 2005
2005 / 2004
Russian Brands LADA1
799,768
780,736
790,948
2.4%
-1.3%
GAZ
51,691
51,765
65,686
-0.1%
-21.2%
UAZ
28,528
29,141
31,136
-2.1%
-6.4%
OKA
16,424
43,335
60,358
-62.1%
-28.2%
IZH
0
5,871
27,930
N/A
-79.0%
269
439
675
-38.7%
-35.0%
896,680
911,287
976,733
-1.6%
-6.7%
Chevrolet2
67,536
53,587
58,424
26.0%
-8.3%
Ford
62,409
33,047
29,700
88.8%
11.3%
Renault
48,545
10,335
477
369.7%
>1,000%
Hyundai
48,397
42,451
30,000
14.0%
41.5%
KIA3
27,951
15,611
11,826
79.0%
32.0%
Chery
12,157
0
0
N/A
N/A
SsangYong
4,528
22
0
>1,000%
N/A
BMW
3,831
2,293
2,449
67.1%
-6.4%
Hummer
465
161
122
188.8%
32.0%
Cadillac
303
228
0
32.9%
N/A
Other4
822
226
164
263.7%
37.8%
Other Total Russian Brands Foreign Brands
Total Foreign Brands TOTAL
276,944
157,961
133,162
75.3%
18.6%
1,173,624
1,069,248
1,109,895
9.8%
-3.7%
Source: ASM Holding, Company Data 1 Production at AvtoVAZ and other OEM plants in Russia
3 Production at IZH-Avto and Avtotor
2 Production at GM-AvtoVAZ and Avtotor
4 Derways, Great Wall, Yuejin, Marshal
10
T H E R US S I A N A U TOM O T I V E M A R K E T
Passenger Car Production Forecast (thousand) 1,200 1,000 800 600 400 200 0 2004
2005
Total Russian Brands
2006
F2007
F2008
F2009
F2010
Total Foreign Brands
Source: IAA Autostat
With a current car density of about 180 cars per 1,000 people and with more than 50% of the car parc more than 10 years old, the Russian market is still far from saturated. Based on the government strategy for developing the automotive sector and the announced plans of foreign OEMs, it is expected that by 2010 the passenger car parc will grow by 25% to reach 30 million units and by 2015 will exceed 40 million units.
Car Parc (million) F2015
F2010
E2006 0
10
20
30
40
50
Source: National Automotive R&D Institute (NAMI)
11
THE PASSENGER CAR MARKET
Asian OEMs clearly dominate the market of new foreign brands (55.6%, not including Chevrolet DAT), although American and European OEMs have been gradually increasing their market share with 22.6% and 19.8% in 2006, up from 20.7% and 16.8% in 2005, respectively.
New Car Import by Origin 2004–2006 2006 2.0%
2005 1.1%
1.5%
1.2% 7.3%
9.8% 6.8%
22.6%
2004
2.0%
0.8%
20.7%
6.5%
1.3% 7.1%
0.2% 23.9% 0.9%
1.0%
1.1% 22.0%
France
1.3%
35.0%
31.6%
Czech Republic
26.2%
Germany Japan
South Korea Sweden
32.2% 25.8%
UK US*
China Other
Source: AEB, ASM Holding * Including GM-DAT and GM-AvtoVAZ sales data
12
7.4%
0.8%
T H E R US S I A N A U TOM O T I V E M A R K E T
0.1%
Sales of Top 25 New Foreign Cars* (thousand) Ford Chevrolet Hyundai Toyota Nissan Renault Mitsubishi Daewoo KIA Mazda
2006 Best Sellers
VW Opel
Model Class A Daewoo Matiz KIA Picanto Chevrolet Spark BYD Flyer II Class B Renault Logan Hyundai Accent Chevrolet Lanos Ford Fusion Class C Ford Focus Mitsubishi Lancer Daewoo Nexia Nissan Almera Class D Toyota Avensis Mazda 6 Nissan Primera Ford Mondeo
Suzuki Honda Peugeot Skoda Citroen Chery Mercedes Volvo Lexus Audi BMW Subaru Land Rover
2006 2006 / 2005 13,448 5,123 2,886 1,694
-37.1% 278.9% 214.4% >1,000%
49,323 38,808 37,215 16,532
598.9% 18.5% >1,000% 142.6%
49,323 46,969 39,678 32,241
106.5% 19.8% 12.8% 47.7%
13,140 12,819 11,142 10,120
52.6% 51.6% 22.0% 67.0%
Model 2006 2006 / 2005 Class E Toyota Camry 18,099 40.7% Audi A6 3,095 31.3% Nissan Teana 2,934 N/A BMW 5-Series 2,636 46.8% Class F Mercedes-Benz S-Class 2,447 148.4% Audi A8 942 13.6% BMW 7-Series 795 -3.4% Lexus LS 318 -0.3% SUV Hyundai Tucson 12,606 120.4% Toyota RAV4 12,030 89.9% Nissan X-Trail 9,933 33.9% Suzuki Grand Vitara 9,159 89.0% 4x4 Toyota LC 100 8,502 60.0% Toyota LC Prado 8,382 88.4% Lexus RX 5,304 72.5% KIA Sorento 4,996 63.0%
Great Wall 0
20 2006
40 2005
60
80
100
120
2004
Source: AEB, ASM Holding * Includes Russian-made foreign brands
13
THE PASSENGER CAR MARKET
In terms of price segmentation, as Russians are becoming more affluent, the previously strongly dominating segment under US$10,000 this year has shrunk to slightly less than 50% and is the only decreasing segment. Consumers are clearly moving to higher price brackets. With respect to absolute numbers of cars sold, the segment under US$10,000 continued to dominate. The highest growth rate — over 85% — was seen in the US$20,000–25,000 segment, followed by the US$10,000–15,000 and the US$25,000–30,000 segments.
Car Consumption per Price Segment 2006
2005
2004 1.6% 1.6%
4.4%
3.4%
8.4%
1.5% 1.3%
3.2% 6.6% 14.9%
5.2% 10.7% 49.2%
13.8%
13.2%
62.9% 79.2%
19.0%
30
(US$, thousand)
Source: AEB, ASM Holding
14
T H E R US S I A N A U TOM O T I V E M A R K E T
The Commercial Vehicle Market* 2006 was very successful for the CV market, with a growth rate of almost 20% compared to more than 2.3% in the previous period. The overall trend toward the decreasing share of the LCV segment (up to 3.5 t.) of the total CV market was reinforced. The HCV segment continued to grow, with KAMAZ being the leading player (over 30%). GAZ remained the dominant player in both the LCV and MCV segments. With respect to foreign brands, in 2006 Isuzu entered the MCV segment.
CV Market Breakdown by Segment 2006 0.3%
2005 0.4%
0.3%
2004 0.2%
0.4%
15.7%
17.6%
14.6% 13.6%
15.7%
15.1% 66.5%
0.4–3.5 t.
68.1%
3.5–10 t.
>10 t.
0.2%
Tractive Units
71.3%
Other
Source: ASM Holding, Company Data
The commercial vehicle market in Russia is following the trend of the passenger car market — foreign MCVs and HCVs are steadily gaining share off CIS makes, and this is going to be reinforced further over the next few years. Lars Corneliusson Managing Director Volvo Vostok * Production
15
T H E C O M M E RC I A L V E H I C L E MARKET
Commercial Vehicle Production* Segment / Brand
2006
2005
2004
2006 / 2005
2005 / 2004
LCVs, Pickups and Vans (0.4–3.5 t.)
157,418
138,560
144,146
13.6%
-3.9%
GAZ
120,879
105,541
102,398
14.5%
3.1%
UAZ
19,258
19,465
18,544
-1.1%
5.0%
IZH
12,267
7,220
13,810
69.9%
-47.7%
VIS
3,379
3,569
2,954
-5.3%
20.8%
ZIL
1,635
2,765
6,440
-40.9%
-57.1%
MCVs (3.5–10 t.)
36,878
32,400
27,316
13.8%
18.6%
GAZ
23,357
20,745
14,645
12.6%
41.7%
Ural**
8,075
6,513
6,063
24.0%
7.4%
ZIL
4,731
4,177
6,605
13.3%
-36.8%
Russian Brands
AMUR
715
965
3
-25.9%
>1,000%
HCVs (>10 t.)
43,131
32,066
29,243
34.5%
9.7%
KAMAZ
42,836
31,988
29,243
33.9%
9.4%
Ural**
295
78
0
278.2%
N/A
Tractive Units
1,050
692
763
51.7%
-9.3%
Ural**
1,050
692
763
51.7%
-9.3%
Other
819
336
356
143.8%
-5.6%
239,296
204,054
201,824
17.3%
1.1%
LCVs, Pickups and Vans (0.4–3.5 t.)
7,674
2,340
123
227.9%
1,802.4%
Hyundai
7,162
2,311
0
209.9%
N/A
505
28
0
>1,000%
N/A
TOTAL Russian Brands Foreign Brands
Yuejin Zhong Xing
7
0
0
N/A
N/A
Great Wall
0
1
0
N/A
N/A
KIA MCVs (3.5–10 t.)
0
0
123
N/A
N/A
671
120
109
459.2%
10.1%
Isuzu
479
0
0
N/A
N/A
TATA
192
120
109
60.0%
10.1%
HCVs (>10 t.)
592
483
300
22.6%
61.0%
Volvo
397
362
210
9.7%
72.4%
Iveco-Ural
195
121
90
61.2%
34.4%
8,937
2,943
532
203.7%
453.2%
248,233
206,997
202,356
19.9%
2.3%
TOTAL Foreign Brands TOTAL Source: ASM Holding, Company Data * Includes chassis ** Ural belongs to GAZ Group
16
T H E R US S I A N A U TOM O T I V E M A R K E T
The Bus Market* Overall bus production in 2006 remained steady, with only a 1.2% increase compared to the strong growth in the passenger and CV markets for the same period. This trend has been present since 2003, after substantial growth for more than five years. Structurewise, the dominant segment of minibuses (led by GAZ) continued to shrink, falling by almost 4% to below 70% of the overall bus market. The other segments are strongly represented by GAZ Group’s Russkie Avtobusy bus division. In terms of units, intercity buses take the lead, followed by city, suburban, and finally tourist, all of them having grown by more than 10%.
Bus Market Breakdown 2006 0.8%
2005
0.5% 0.5%
0.6%
0.2%
2004 0.5%
0.3% 0.1%
18.8%
20.5%
22.4%
4.5%
5.4%
6.5% 69.4%
1.4%
72.9%
Minibuses
Intercity buses
Tourist buses
City buses
Suburban buses
Other
74.9%
Source: ASM Holding, Company Data
* Production
17
THE BUS MARKET
Bus Production Segment / Brand
2006
2005
2004
2006 / 2005
2005 / 2004
Minibuses
54,965
57,209
56,870
-3.9%
0.6%
GAZ
39,520
37,093
39,783
6.5%
-6.8%
UAZ
15,403
20,083
17,037
-23.3%
17.9%
42
33
50
27.3%
-34.0%
City buses
4,966
4,034
3,251
23.1%
24.1%
LiAZ*
3,176
2,842
2,508
11.8%
13.3%
PAZ*
760
332
0
128.9%
N/A
NefAZ
707
662
591
6.8%
12.0%
Volzhanin
318
198
152
60.6%
30.3%
Russian Brands
ZIL
GolAZ*
5
0
0
N/A
N/A
Intercity buses
17,813
16,112
14,344
10.6%
12.3%
PAZ*
14,215
13,721
12,114
3.6%
13.3%
KAVZ*
3,425
2,230
2,073
53.6%
7.6%
NefAZ
173
161
151
7.5%
6.6%
GolAZ*
0
0
6
N/A
N/A
Suburban buses
618
443
232
39.5%
90.9%
NefAZ
335
236
127
41.9%
85.8%
LiAZ*
235
161
87
46.0%
85.1%
GolAZ*
48
46
18
4.3%
155.6%
Tourist buses
368
181
89
103.3%
103.4%
GolAZ*
368
162
87
127.2%
86.2%
0
19
2
N/A
850.0%
NefAZ Other
414
368
1,061
12.5%
-65.3%
79,144
78,347
75,847
1.0%
3.3%
Minibuses
285
196
199
45.4%
-1.5%
Mercedes-Benz
152
115
0
32.2%
N/A
Ford
133
1
0
>1,000%
N/A
TOTAL Russian Brands Foreign Brands
KIA
0
80
199
N/A
-59.8%
City buses
236
191
147
23.6%
29.9%
Scania
236
191
147
23.6%
29.9%
TOTAL Foreign Brands
521
387
346
34.6%
11.8%
79,665
78,734
76,193
1.2%
3.3%
TOTAL
Source: ASM Holding, Company Data * Belongs to GAZ Group’s Russkie Avtobusy bus division
18
T H E R US S I A N A U TOM O T I V E M A R K E T
The Russian Car Buyer When buying a new car, the Russian consumer has traditionally been driven exclusively by price and technical features. As opposed to Europeans, the share of Russian purchasers who take into consideration safety (8%), gasoline consumption (5%), and overall value (including service and insurance and residual value for resale in a few years’ time — 5%) is still minor. This has been emphasized by the notion of a low price and accessibility of spare parts for Russian brands, coupled with a repair-it-yourself mentality. However, the increase in disposable income and credit opportunities, the immediate launch of new car models, and the rapid growth of foreign car dealerships in the regions have already led to a dramatic increase in new foreign car sales from higher price brackets and with more elaborate and reliable features.
The Russian New Car Buyer Characteristic Age Male / Female
Russia
Europe
30
46.7
84% / 16%
69% / 31%
Family Size
3.3
2.8
Married
74%
75%
One-Car Household
33%
42%
Two-Car Household
11%
14%
US$20,800
US$46,300
Average Annual Income First Car Purchase
12%
1%
Retired
4%
21%
Company Cars
48%
33%
Commuting by Car
77%
70%
Source: AEB
19
CAR FINANCING
Car Financing At present, more than 250 banks in Russia offer different car financing schemes. The growth rate of the consumer credit market considerably outpaces car sales growth. While in the US up to 90% of private car sales are financed by credit (80% in Europe), in Russia just over 30% are non-cash sales.
Cars Sold in Credit / Total Car Sales
2006
2005
2004
30–35%
25%
15–20%
Source: Bank Data
The second step has practically been made as well: last year the financial arms of some of the leading OEMs announced that they would set up their banks in Russia.
So far, OEMs and Russian banks have been developing the autocredit market together. Subsidizing annual interest through Russian dealers in cooperation with Russian banks is only the first step to the launch of banks of foreign car brands on the Russian market.
This will likely increase competition, shrink the car loan portfolio of the Russian banks, and further lower loan rates.
The Average Estimated Cost of Autocredits in Banks of Russian and Foreign Origin from 14% from 17%
11–14%
12–14% 14–16%
13.5–17.5% 15.5–19%
11–15% 13–17%
10.5–17.5%
9–9.5%
8%
9–10.5%
10%
12–13.5%
12%
10–12%
11–16.5%
14%
10.5–14% 13–16%
16%
14.5–17%
18%
6% 4% 2% 0%
New Foreign Car Credit
Used Foreign Car Credit
New Domestic Car Credit
Used Domestic Car Credit
Buyback Programs (New Foreign Car)
Leading Foreign Banks US$ / EUR
Russian Banks (Market Leaders) US$ / EUR
Leading Foreign Banks RUB
Russian Banks (Market Leaders) RUB
Express Autocredit
Source: Bank Data
Car loans dramatically reduced elasticity of demand. The Russian consumer can now afford more expensive cars. This shifts demand from lower priced Russian models to more expensive foreign alternatives. We expect that the average price of a sold car will climb 20–30% by 2011. Gairat Salimov Research Analyst, Manufacturing Troika Dialog 20
T H E R US S I A N A U TOM O T I V E M A R K E T
The Russian Automotive Component Industry Based on Ernst & Young's experience, the Russian automotive component industry has traditionally been rather vertically integrated. The level of integration on average was almost 80%, and of the 200 Russian component manufacturers over 95% supply Russian OEMs only. Less than 5% supply Western OEMs or foreign OEMs with manufacturing activities in Russia. Only 1% have export activities. The conventional tier division is still not clearly present. On average, one-quarter of the supplier base is raw material producers and the rest is component manufacturers. In quality terms, Russian automotive companies are still far behind their Western counterparts. The common defect measure according to industry standard ISO 16949 is below 70 parts per million (ppm), compared to the Russian industry average of over 1,000 ppm. Currently, the foreign supplier presence in the country is fairly limited, comprising mostly bulky and lower value-
added component manufacturing which is not critical to large-volume production, i.e., seats, interior components, and bumpers. The foreign suppliers are located adjacent to Russian and foreign OEMs. Russian Government Decree No. 166, regulating localization, welding, and paint-shop requirements, has spurred some new players to follow foreign car CKD assemblers. In addition, in 2006, major tier-one players like Johnson Controls International, Bosch, and Siemens VDO Automotive decided to expand their operations by means of additional joint ventures, acquisitions, or greenfield projects. By 2010 about one million foreign-brand cars will be manufactured in Russia. These numbers will already be sufficient to attract volume-critical component manufacturers, e.g., chassis, clutches, and injection systems.
The arrival of most international OEMs in Russia and the substantial production capacities that are under construction will certainly attract major suppliers to capture a fair share of one of the fastest growing automotive markets globally. Jaron Wiedmaier General Director Continental Tires RUS The Russian Automotive Industry will see significant growth from both Russian OEMs and New Domestics. Driven by growing consumer demand and federal regulations, innovative and flexible suppliers such as Magna are needed to provide a solid basis for this industry sector. Magna is committed to serving all OEMs in Russia, as a reliable and proven source for engineering demand as well as for components and systems supply. .. Hubert Hodl Vice President, Corporate Marketing & Business Development Magna International Europe 21
T H E R US S I A N A U TOM O T I V E COMPONENT INDUSTRY
Selected Automotive Component Suppliers St. Petersburg7
St. Petersburg7
Moscow8 Kaluga5 Orel10
Moscow8
Kursk6 Belgorod1
Ivanovo4
Kaluga5 Orel10
Vladimir14
Kursk6
Ivanovo4 Vladimir14
Nizhny Novgorod9 Cheboksary3 Kazan11
Saratov13 Samara12 Chelyabinsk2
Nizhny Novgorod9 Cheboksary3
Belgorod1
Kazan11 Saratov13 Samara12 Chelyabinsk2
1 2 3 4 5 6 7
Region Belgorod Region Chelyabinsk Region Chuvash Republic Ivanovo Region Kaluga Region Kursk Region Leningrad Region
8 9 10 11 12
Moscow Region Nizhny Novgorod Region Orel Region Republic of Tatarstan Samara Region
13 14
Saratov Region Vladimir Region
Company Soate (Stary Oskol) TREK Elara (Cheboksary), ZEiM-Line (Cheboksary) Avtoagregat (Kineshma) Kaluga Plant of Automotive Electrical Equipment, Siemens VDO Kursk Bearing Company Avtoarmatura, Intercos, Toplivnye Systemy, Nokian Tyres, ThyssenKrupp, Johnson Controls International, Asahi Glass Company, Stadco, Magna Michelin, IHI, Pilkington, Glaveberg Avtotekhnika, Soteks, ZMZ, Lear, Faurecia, ThyssenKrupp, Magna, Glaveberg Orleks Siemens VDO, Stadco, ZF, Cummins Energotekhmash (Zhigulevsk), DSK (Togliatti), Polimerstroymaterialy (Otradnoye), Samaraavtozhgut, Samara Cable Company, Hayes Lemmerz, Tenneco Automotive, Johnson Controls International, Federal Mogul, Delphi, HCC Bosch Automotive AvtoPribor, Osvar (Vyazniki)
Source: Company Data
It is necessary to attract foreign investments for the development of the Russian automotive component industry. As the largest Russian car component producer in the country, SOK Group believes that the right strategy for local companies is to partner with international industry leaders and jointly drive further development through new technologies, know-how, and well-established local presence. Andrei Frolov Vice President SOK Group 22
T H E R US S I A N A U TOM O T I V E M A R K E T
Automotive Logistics and Supply Chain Logistics planning is a very important part of the overall automotive supply chain. Global OEMs are constantly increasing their demand. Together with industry consolidation, the changing relationship between OEMs and suppliers, and global sourcing strategies, this makes the demand more dynamic and complex. The Russian automotive logistics setup is quite different from its American and European counterparts. Despite the large distances that are covered, road remains the dominant means of transport. In the European part of Russia, road transport dominates with about 90% of the total logistics channels. And even though car trailers are made for transport over distances of one to two days from the base, in Russia they cover distances of up to two weeks, leading to a shortage of trailers and a lower expected useful lifetime of the trailer parc. The underestimated car sales boom in 2006 led to a considerable shortage of car trailers. The largest inbound automotive logistics hub for Russia is Finland, covering about 77% of the market. Some more limited traffic goes through Central Asia (Iran and Kazakhstan) and the Far East (imports from China), whereas the bulk of the second-hand imports from Japan and South Korea to Russia are processed at
the Russian Far East ports. Finland covers over 80% of new imports and over 50% of used imports (except for Asian). The Finnish port infrastructure is becoming overburdened, and now OEMs are looking for alternative methods of inbound logistics, such as the Baltic countries, Ukraine, and Turkey. The currently strict customs regulations lead to gray imports (up to 40% through schemes optimized to cut customs duties). The high rates of state monopolist Russian Railways further complicate the enhancement of the rail channel. Russian Railways has ambitious plans to increase its railcar parc almost fourfold to be able to transport more than 1.5 million cars by 2012.
Automotive Logistics Statistics Region
Road
Rail
Railcar Parc (units)
North America
30%
70%
20,000
Average Distance Covered (km) 2,500
Europe
45%
55%
12,000
1,500
Russia
22%
78%
3,000
5,000
Source: Russian Railways, TransGroup AS
23
A U TOM O T I V E L O G I ST I C S A N D S U P P LY C H A I N
24
T H E R US S I A N A U TOM O T I V E M A R K E T
The CIS Automotive Market Of all the CIS countries, Russia is certainly the most populous (over 50% of the CIS population) and has the largest passenger and CV parcs (almost 70% of the CIS total for each). Nevertheless, four of the twelve CIS countries (Ukraine, Kazakhstan, Uzbekistan, and Belarus) are also interesting to look at, as they are all car manufacturers and their markets are substantial enough (about 27% of the total CIS car parc) to warrant attention.
CIS Statistics and Automotive Market Country
Population
Passenger Car Parc 2004
2005
Car Density
CV Parc
2004
2005
2004
2005
Belarus
10,322,151
1,558,000
1,658,300
158.04
168.87
125,400
116,000
Moldova
4,439,502
230,000
229,000
53.94
53.76
9,500
8,400
Russia
143,347,400*
24,208,000
24,709,000
167.99
177.36
5,536,000
5,880,000
Ukraine
48,055,439
5,603,800
5,620,600
118.37
121.85
985,700
1,191,400
Armenia
3,326,448
250,000
250,000
81.82
82.06
120,000
120,000
Azerbaijan
7,830,764
403,960
437,560
48.05
51.56
99,910
102,770
Georgia
4,934,413
255,220
259,000
50.05
51.30
68,590
75,300
Kazakhstan
16,763,795
1,148,750
1,404,620
74.51
76.62
322,720
345,400
Kyrgyzstan
4,892,808
208,000
210,100
40.22
40.08
302,000
299,000
Tajikistan
6,863,752
131,480
152,100
20.97
24.04
56,370
63,000
Turkmenistan
4,775,544
90,000
84,000
18.36
16.88
11,000
11,360
Uzbekistan TOTAL
25,981,647
1,200,000
1,200,000
45.65
44.99
300,000
300,000
281,533,663
35,287,210
36,214,280
125,34
128,63
7,937,190
8,512,630
Source: Euromonitor International, CIA World Factbook * As of 2005
The Ukrainian automotive market has grown 25–30% over the last five years. This trend is expected to continue. The favorable customs policy and regulations encourage the development of automotive manufacturing. The CIS free trade agreement doubles the production potential of the country. ZAZ has been actively taking advantage of these trends and has shown excellent results. Tariel Vasadze Honorary President UkrAVTO Corporation 25
T H E C IS A U T O M O T I V E M A R K E T
Ukraine Ukraine has the second largest economy and car market in the CIS. Following a trend in 2006 similar to Russia, Ukraine enjoyed about 40% growth in the passenger car segment, and about 25% in both CV and bus sales. In terms of production, Ukraine manufactures and / or assembles all ranges of vehicles, the majority being passenger cars. Car output grew by 50% in 2006, reaching a record 250,000 units. CV and bus output also grew at double-digit rates. Two of the largest market players are now looking at expanding abroad, while 2006 witnessed some major investment commitment from Ukrainian automotive players in Poland and Russia. Of the foreign players, VW Group and GM have assembly operations in Ukraine.
Production Passenger Cars
2006
2005
2004
2006 / 2005
2005 / 2004
252,690
167,491
147,602
50.9%
13.5%
CVs
3,741
3,411
2,034
9.7%
67.7%
Buses
2,813
2,456
917
14.5%
167.8% 2005 / 2004
Sales Passenger Cars CVs Buses
2006
2005
2004
2006 / 2005
371,019
265,475
211,940
39.8%
25.3%
34,933
28,231
23,885
23.7%
18.2%
6,944
5,499
3,388
26.3%
62.3%
Source: ASM Holding
Kazakhstan Closely following Ukraine in sales terms is Kazakhstan. The country is enjoying remarkable economic growth and increase in wealth among the population. With respect to car parc it is second after Ukraine. Kazakhstan currently has only one car plant, assembling LADA and Škoda models. Production
2006
2005
2004
2006 / 2005
2005 / 2004
Passenger Cars
4,000
2,365
3,206
69.1%
-26.2%
Sales Passenger Cars CVs
2006
2005
2004
2006 / 2005
2005 / 2004
358,092
237,147
160,000
51.0%
48.2%
1,908
1,339
N/A
42.5%
N/A
Source: Ministry of Finance, Kazakhstan
26
T H E R US S I A N A U TOM O T I V E M A R K E T
Uzbekistan Although Uzbekistan is more populous than Kazakhstan, its car parc and density are much lower, about 10% of the total car parc of all four major countries. In sales terms the market is also quite limited. Nevertheless, GM DAT’s output in Uzbekistan last year grew to over 140,000 units of the Daewoo brand, of which most are exported to other CIS countries. In addition, some other Asian car manufacturers are currently considering the country to set up car, CV, and diesel engine manufacturing. Production Passenger Cars LCVs Sales
2006
2005
2004
2006 / 2005
124,349
89,093
60,575
39.6%
2005 / 2004 47.1%
15,731
11,917
9,495
32.0%
25.5% 2005 / 2004
2006
2005
2004
2006 / 2005
Passenger Cars
44,551
34,872
25,799
27.8%
35.2%
LCVs
15,106
11,389
9,134
32.6%
24.7%
Source: ASM Holding, UzDaewooAvto
Belarus Belarus has the smallest of all four major CIS markets in sales terms. However, it has the highest car density, following closely after Russia. With respect to production, the country is the second largest CV manufacturer in the CIS after Russia. Following previous contracts with Ford to assemble cars (assembly was stopped several years ago), a new manufacturer was set up in 2006 and currently assembles Iranian Samand vehicles (a redesigned version of the Peugeot 405). Production Passenger Cars CVs Buses Sales Passenger Cars CVs
2006
2005
2004
2006 / 2005
36
0
0
N/A
2005 / 2004 N/A
22,922
21,878
21,108
4.8%
3.6%
2,104
938
577
124.3%
62.6% 2005 / 2004
2006
2005
2004
2006 / 2005
10,020
4,900
N/A
104.5%
N/A
N/A
N/A
N/A
153.6%
N/A
Source: ASM Holding
27
L AT E S T G O V E R N M E N T R E F O R M S AND INVESTMENT INCENTIVES
Latest Government Reforms and Investment Incentives Below is an overview of the latest legislative reforms in Russia affecting investment, business development, and operation in the country: Area
Reform Description
Effect in Comparison to Previous Legislation
1. Tax Reform
• Taxpayers with a headcount exceeding 250 should submit tax returns in electronic form (effective 1 January 2008, this relates to taxpayers with a headcount exceeding 100).
• It is required to enter into additional agreement for transmission of electronic forms. • This will lead to a more professional approach to the taxation of companies engaged in specific activity and may have both positive and negative consequences.
• A Special Tax Inspectorate for car manufacturers was established in St. Petersburg. Appropriate tax registration of companies should be performed. • A number of changes have been introduced to Part I of the Tax Code to clarify the procedures for tax audits by the tax authorities. 1.1. Profits Tax
• All research and development expenses may be deducted within a year, regardless of the results of the research and development.
1.2. VAT
• Effective 1 January 2008, the tax period is a quarter for all taxpayers.
1.3. Assets Tax
• Assets under construction that are in operation but without state registration should be included in the tax base.
• This was not stipulated in law, but the tax authorities clarified their position in Letter of the Ministry of Finance No. 03-06-01-02/28 dated 27 June 2006.
1.4. Other
• Unified Social Tax: new tax rates have been established for taxpayers operating in the sphere of information technology.
• While the rates are lower, the requirements to qualify for these new rates are rather strict.
2. Legal Reform
• Water Code was adopted. • Forest Code was adopted. • New antimonopoly law establishes new criteria when prior consent of the antimonopoly authorities is required.
3. Trade Reform
28
• The list of particular activities requiring preliminary licensing was reduced. T H E R US S I A N A U TOM O T I V E M A R K E T
Area
Reform Description
Effect in Comparison to Previous Legislation
4. Customs
• Russian Government Decree No. 566 of 16 September 2006, extends the list of imported car components for factory assembly.
• Import duties on certain car components and materials used in car component production have been reduced two to three times, and often even to zero. The advantage of the Decree is that the factory assembly regime can now be used by car component producers, not only car assembly plants. This will promote development of car component manufacturers and facilitate compliance with localization requirements for car assembly plants.
• New cargo customs and transit declaration forms were introduced on 1 January 2007, as well as rules for filling them out.
• The change was made to bring the procedures into conformity with similar procedures applied by European Union member countries. The new cargo customs and transit declaration forms are in full conformity with the EU Single Administrative Document (SAD).
• In 2006 a revised version of the law “On Customs Tariff” and the related FCS regulations were adopted.
• Changes have been made to the computation procedure, format, and rules for filing customs value declarations, as well as the related customs control procedure. The changes are essentially technical in nature.
• Russian Government Decree No. 718 of 27 November 2006, introduced a new Customs Tariff for Russia effective 1 January 2007.
• The introduction of a new Customs Tariff is technical in nature and does not affect the duty rates that were in effect before it was introduced. However, the Russian Foreign Economic Activity Commodity Classification (FEACC) did change significantly. Changes in the FEACC are mostly the result of changes made to the World Customs Organization Harmonized System.
• FCS Orders No. 750 (9 August 2006) and 1072 (31 October 2006) govern the customs procedures within Special Economic Zones (SEZs).
• The Orders specify requirements for the development, construction, and layout of SEZs and criteria of access to the SEZ area to ensure effective customs control, thus enabling local SEZ bodies and SEZ residents to start operations. Declaration rules for Russian goods placed under the Free Customs Zone regime are set forth based on a single CCD/TD form introduced on 1 January 2007.
• Major companies investing RUB 3 billion over three consecutive years (starting from January 2007) are eligible for relief from property tax and a 4% reduction in the regional part of profits tax for five years.
• There are uncertainties in the law which may hinder its practical application.
5. Local St. Petersburg Tax Legislation
Source: Ernst & Young
29
L AT E S T G O V E R N M E N T R E F O R M S AND INVESTMENT INCENTIVES
Special Economic Zones (SEZs) • Two types of SEZs: R&D and Industrial Manufacturing • Minimum investment level requirement • State investment support • Industrial Manufacturing is applicable to SEZs but with higher localization requirements
• Residents enjoy the following: – Protection from possible changes in federal tax legislation – Free customs zones – Asset tax, land tax, and unified social tax breaks – Favorable depreciation coefficient
Russian SEZs at a Glance Kaliningrad St. Petersburg Kaliningrad St. Petersburg
Zelenograd
Dubna
Moscow Lipetsk
Zelenograd
Elabuga Samara
Dubna
Ekaterinburg
Rostov Tomsk
Novosibirsk
Moscow Lipetsk
Elabuga Samara
Ekaterinburg
Rostov Tomsk
Novosibirsk Source: Ministry of Economic Development and Trade of the Russian Federation Industrial Manufacturing SEZs
R&D SEZs
Through substantial reforms targeting an increase in competitiveness and know-how in the Russian automotive industry in recent years, the government has successfully managed to attract major global players and investment in establishing manufacturing facilities. As a next step, the Automobile Manufacturers Committee and AEB expect to place further emphasis on the development of revised VAT legislation for used vehicles traded in by dealers and on contributing towards improved fuel quality standards. Andreas Romanos CEO Association of European Businesses (AEB) 30
T H E R US S I A N A U TOM O T I V E M A R K E T
Ernst & Young’s Involvement in the Automotive Industry Ernst & Young is a global organization of professionals providing assurance and advisory business services, tax, and transaction advisory services to clients in major marketplaces and industries. Our firm is dedicated to helping its clients identify and capitalize on business opportunities throughout the world.
• We founded a working group (Automotive Task Force) within the Foreign Investment Advisory Council (FIAC) to develop an automotive agenda to support foreign automotive investment in Russia The objectives of the Task Force include the following:
Our Involvement in the CIS Automotive Industry
• Promoting the efficient realization of the objectives of Russian Government Decrees No. 166 and 566 aimed at supporting investment in vehicle manufacturing
Ernst & Young has a strong commitment to the automotive industry, with a focus on forming long-term relationships with the people and organizations that will make this industry grow:
• Assisting in developing a framework to facilitate investment in motor-vehicle components and other supplier activities
• We are vice-chairing the Automotive Components Committee with the Association of European Businesses
• Monitoring the development of the automotive industry, as well as Russia’s Tax and Customs Codes • Enhancing dialogue and cooperation between foreign and Russian OEMs
How Ernst & Young (CIS) B.V. Helps Foreign Automotive Investors in Russia Where to Invest? • Location advisory • Feasibility studies • Development of a business plan • Regional comparison (tax & legal, labor, and utility cost) • Scenario analysis • Financial modeling • Business strategic and real estate valuation
Who Should Investors Partner With? • Partner search (acquisition strategy) • Background check • Partner fit criteria • Partner screening and selection • Due diligence (tax & legal, financial, IT, HR) • IFRS / US GAAP audit • Transaction structuring (tax & legal)
How to Take Advantage of Incentives? • Tax-optimized planning for selecting the legal form of business • Tax-efficient planning for shareholder contributions, financing and transfer pricing • Application of local tax concessions • Equipment import, component import, and customs incentives planning
How to Start a Business? • Assistance in obtaining approval of authorities • Project management (pre-construction and construction) • Immigration assistance, employment structuring, and payroll compliance • Post-merger integration • Reimbursement of startup expenses
For more information please contact Ivan Bonchev, Automotive Segment Leader, at +7 (495) 755-9817. 31
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Emmanuel Quidet Partner, Assurance Ernst & Young LLC CIS Accounts and Industries Leader Tel.: +7 (495) 228-3659 E-mail: [email protected]
Ivan Bonchev Manager, Automotive Segment Leader Ernst & Young LLC Tel.: +7 (495) 755-9817 E-mail: [email protected]
Alexei Ivanov Partner, Assurance Ernst & Young LLC CIS Industrial Products Group Leader Tel.: +7 (495) 228-3661 E-mail: [email protected]
Dmitry Moskovsky Manager, Business Advisory Services Ernst & Young (CIS) B. V. Tel.: +7 (495) 641-2922 E-mail: [email protected]
Reece Jenkins Partner, Tax & Legal Ernst & Young (CIS) B. V. Tel.: +7 (495) 705-9736 E-mail: [email protected]
Oleg Lukianchikov Analyst, Center for Business Knowledge Ernst & Young (CIS) B. V. Industrial Products Group Tel.: +7 (495) 705-9700 E-mail: [email protected]
Paul Murphy Partner, Transaction Advisory Services Ernst & Young (CIS) B. V. Tel.: +7 (495) 705-9708 E-mail: [email protected]
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About Ernst & Young Ernst & Young, a global leader in professional services, is committed to restoring the public’s trust in professional services firms and in the quality of financial reporting. Its 114,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/ perspectives. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited does not provide services to clients. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
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