The Russian Automotive Market
G LOBAL A UTOMOTIVE C ENTER M ARCH 2005
The Russian Automotive Market Industry Overview
3
Contents Opening Comments
2
Automotive Production in Russia
3
The Passenger Car Market
3
The Bus Market
6
The Truck Market
7
Russia Within the Global Automotive Market
8
Foreign Brands Produced in Russia
11
Foreign Car Sales
14
Consumer Trends & Prospects
18
Government Reforms
20
Ernst & Young’s Involvment in the Automotive Industry
24
Solutions for the Issues that Matter
24
Global Automotive Center
26
Contacts in Russia
28
1
O P E N I NG C OMMENTS
Opening Comments Russia belongs to the fastest growing emerging automotive markets. While demand for quality new vehicles in the country continues to surpass optimistic forecasts, domestic manufacturers are heading towards saturation of production capacity. But car consumers are more selective and price sensitive than ever. Attractive automotive credit conditions, competitive warranty packages, and comfortable after sales service now belong to the basic toolset of any foreign car dealer striving for success throughout the country. In this report we present key market indicators gathered over the last three years. This is just a glimpse of what we can do for you while you consider market entry or expansion of business activities in Russia. We hope you find the following information insightful, and welcome you to share your most challenging questions on this exciting business environment with us.
Emmanuel Quidet Partner Head of the Industrial Products Group
2
T H E R US S I A N A U TOM O T I V E M A R K E T
Automotive Production in Russia The Passenger Car Market The Russian passenger car market is estimated at 1.76 million vehicles in 2004, up 10.5 percent year on year1. While the import of used cars accounts for less then 20 percent of overall consumption, the production of foreign car makers more than tripled, to over 133,000 units, which represents 7.5 percent of overall Russian car market in 2004. Passenger Car Market Compared 2004
2003
18.0%
19.1%
2002
24.4%
55.4%
29.2%
59.9% 12.3%
6.9%
63.1%
7.5% 3.4% Russian Production
Foreign Production*
0.7% Import New Cars
Import Used Cars
Source: ASM Holding, Autoreview, Autoizvestia, Ernst & Young estimates * Includes production by foreign legal entities, joint ventures, and production by Russian entities with foreign assembly licenes
1 Includes
overall import and domestic production figures. In 2004, approximately 110,000 cars produced in Russia were exported to other emerging markets.
3
A U TOM O T I V E P RO D U C T I ON I N R US S I A
Despite strong growth in new car imports, Russia’s car production in 2004 rose almost 10 percent compared to the previous year. Taken on its own, production by Russian manufacturers rose 2.1 percent to over 976,000 units2. Currently, Russia’s automotive production capacity runs at approximately 90 percent of overall production capacity.
Russian car prices soared by 15 percent on average in 2004, matching base prices of several of the foreign models sold in Russia, some of which are now produced in the country.
Passenger Car Production 2002–2004 (units) Company
City
2004
2003
2002
AvtoVAZ Togliatti IZH-Avto Izhevsk GAZ Nizhny Novgorod GM-AvtoVAZ Togliatti KamAZ Naberezhny Chelny UAZ Ulyanovsk TagAZ Taganrog Ford Motor Co. Vsevolozhsk Avtotor Kaliningrad Others TOTAL
717,985 82,687 65,686 57,737 41,207 31,136 30,000 29,703 14,525 39,292 1,109,958
699,889 78,497 56,783 21,839 40,016 32,748 5,896 16,261 8,415 49,684 1,010,028
703,040 65,751 65,648 323 38,743 33,648 2,490 2,474 5,713 62,231 980,061
2003/2004 Change in % 2.6 5.3 15.7 164.4 3.0 -4.9 408.8 82.7 72.6 -20.9 9.9
Source: ASM Holding
2 Does
4
not include Chevy Niva and Viva production.
T H E R US S I A N A U TOM O T I V E M A R K E T
2002/2003 Change in % -0.4 19.4 -13.5 6,661.3 3.3 -2.7 136.8 557.3 47.3 -20.2 3.1
Passenger Car Production in Russia 1994–2004
954,381
968,092
1,020,515
980,061
1,009,585
1996
839,487
1995
985,284
867,693
600,000
835,104
800,000
797,924
1,000,000
1999
2000
2001
2002
2003
1,103,852
Units 1,200,000
400,000 200,000 0
1994
1997
1998
2004
Source: ASM Holding
5
A U TOM O T I V E P RO D U C T I ON I N R US S I A
The Bus Market Bus production in Russia remained practically unchanged in 2004 compared to the previous year, in which clear growth was tangible in the larger bus segments (city, intercity buses). The minibus sector, which account on its own for approximately 50 percent of total Russian bus output, went down over 15 percent. Scania-Peter, the only foreign bus producer in Russia, raised production to 147 Intercity buses, a growth of 56 percent compared to 2003.
Bus Production 2002–2004 (units)* Company
City
2004
2003
2002
GAZ Nizhny Novgorod UAZ Ulyanovsk PAZ Pavlovo KAvZ Kurgan LiAZ Likino NefAZ Neftekamsk RUSIKAR (Tushino-Avto) Moscow Scania-Peter Saint Petersburg GolAZ Golitsino Others TOTAL
31,522 17,037 12,114 2,073 1,844 968 664 147 104 9,736 76,209
36,299 21,553 11,323 1,607 1,674 726 544 94 129 2,629 76,578
32,229 18,898 10,358 1,239 1,561 481 683 28 61 1,770 67,308
2003/2004 Change in % -13.2 -21.0 7.0 29.0 10.2 33.3 22.1 56.4 -19.4 270.3 -0.5
Source: ASM Holding *Includes production of minibuses
6
T H E R US S I A N A U TOM O T I V E M A R K E T
2002/2003 Change in % 12.6 14.0 9.3 29.7 7.2 50.9 -20.4 235.7 111.5 48.5 13.8
The Truck Market Truck production in Russia went up 3.9 percent year on year to over 202,200 units. The light truck segment accounts for approximately 80 percent of overall truck production, with GAZ as the leading manufacturer. KAMAZ, holding the strongest market share in the heavy truck segment, raised output by 20.7 percent year on year to over 29,200 vehicles in 2004. Truck Production 2002–2004 (units)* Company GAZ KAMAZ UAZ IZH-Avto AMO ZIL UralAZ Others TOTAL
City
2004
2003
2002
Nizhny Novgorod Naberezhny Chelny Ulyanovsk Izhevsk Moscow Miass
117,043 29,243 18,528 13,810 12,867 6,826 3,895 202,212
108,317 24,228 22,596 15,717 13,061 5,994 4,638 194,551
100,258 20,055 16,934 12,485 11,810 8,589 4,119 174,250
2003/2004 Change in % 8.1 20.7 -18.0 -12.1 -1.5 13.9 -16.0 3.9
2002/2003 Change in % 8.0 20.8 33.4 25.9 10.6 -30.2 12.6 11.7
Source: ASM Holding *Includes production of light trucks
7
R US S I A W I T H I N T H E G LO B A L A U TOM O T I V E M A R K E T
Russia Within the Global Automotive Market According to the World Bank, Russia’s car fleet per 1,000 people stands at 147. However, Moscow alone, with over 10 million inhabitants, has approximately 260 cars per 1,000 people, which is slightly higher than the Polish car density per 1,000 people.
Russia’s automotive industry is still highly vertically integrated. The country’s most urgent concern is to create an attractive investment climate for foreign suppliers while protecting the Russian supplier industry, which is currently undergoing significant changes.
Almost 50 percent of Russia’s car fleet is over ten years of age.
GNI per Capita (US$) vs. Passenger Cars (per 1,000 people) 40,000 Gross National Income (GNI) per Capita (US$)
USA
35,000 Denmark
30,000 UK
Austria
25,000
Finland Ireland
20,000
France
Italy
Spain
15,000 South Korea
10,000 Mexico
5,000 China
0 0
India
Hungary
Argentina
Turkey
Brasil
Russia
50
100
150
Poland
Czech Republic
Slovakia Moscow
200
250
300
Estonia
350
400
Passenger Cars (per 1,000 people) Source: World Bank, The Little Green Book 2004, Atlas Method, Ernst & Young estimates
8
Germany
T H E R US S I A N A U TOM O T I V E M A R K E T
450
500
550
Supplier’s Worldwide Manufactoring Involvement in Emerging Markets Brand
Main Product Range
Borg Warner
Powertrain Components
Bosch
Automotive Equipment
Cummins
Engines
Delphi
Integrated Systems and Modules
Eaton
Fluid Power and Electrical Systems
Faurecia
Modules for Light Vehicules
Johnson Controls Seats, Interior Trim, Batteries Hella
Lighting, Electronics
Lear
Automotive Interior Solutions
Tenneco
Exhaust Systems
Valeo
Engines and Engines Parts
Visteon
Modules and Components
Brazil
China
India
• • • • • • • • • • • •
• • • • • • • • • • •
• • • • • • • • • • •
Mexico Poland
• • • • • • • • • • • •
• • • • • • • • • • •
Russia
• • • •* • •
Thailand
• • •
* Technical assistance Source: Ernst & Young, company’s own data
The 15 Largest Vehicle Producing Countries* Country USA
Production Production in 2004 in 2003
Change in %
12.15
11.84
2.6%
Japan
9.91
9.99
-0.8%
China
5.34
4.01
33.2%
Germany
4.94
5.02
-1.6%
South Korea
3.62
3.12
16.0%
France
3.61
3.56
1.4%
Spain
2.83
2.96
-4.4%
Canada
2.62
2.52
4.0%
UK
1.87
1.83
2.2% 10.6%
Brasil
1.77
1.60
Mexico
1.41
1.50
-6.0%
India
1.41
1.02
38.2%
Russia
1.21
1.17
3.4%
Italy
1.19
1.29
-7.8%
Thailand
0.95
0.74
28.4%
While international suppliers learn how to adapt to the needs of smaller markets in order to remain competitive within the global automotive environment, Russian suppliers must improve quality and productivity, and adapt to the needs of those foreign OEMs with current or planned manufacturing activities in Russia. This context raises the possibility of potential cooperation agreements in Russia’s automotive industry.
* Production in millions Source: OE Industry Review 2004, J.D. Power and Associates
9
R US S I A W I T H I N T H E G LO B A L A U TOM O T I V E M A R K E T
OEM’s Worldwide Involvement in Emerging Markets BMW Group BMW DaimlerChrysler Chrysler Mercedes Mitsubishi Fiat Group Fiat IVECO Ford Group Ford Mazda Volvo GM Group GM Daewoo* Opel Subaru Suzuki Honda Group Honda Hyundai Group Hyundai Kia PSA Group Citroen Peugeot Renault-Nissan Nissan Renault Toyota Group Toyota VAG Audi Skoda VW
Brasil
China
India
Mexico
•
•
•
•
• • •
• • •
•
• •
• •
• •
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• •
•
• • •
•
• •
•
• • • • •
•
•
•
•
• •
• •
• •
• •
•
• •
• •
•
• •
•
•
•
•
•
• • •
•
•
•
•
Poland
Russia
Thailand
•
• •
• •
• •
•
•
•
• • •
• •
• •
•
•
• • •
•
Source: company's own data, Ernst & Young * As of January 1, 2005 all Daewoo cars exported by GM-Daewoo are branded as Chevrolet. The Daewoo brand name is allowed to be used only in South Korea, Poland, Romania, and Uzbekistan.
10
•
T H E R US S I A N A U TOM O T I V E M A R K E T
•
Foreign Brands Produced in Russia Avtoframos Company Profile
Model
Established: 1997 Symbol*
Location: Moscow
Production Begin Renault 1998
Production in 2004 517
Targeted production capacity: 120,000 Type of investment: JV – brownfield Planned production: Renault Logan
Total production
517
* Production cancelled
AVTOTOR Company Profile
Model
Type of investment: 100% brownfield Planned production: BMW 3-Series (E-90)
Production in 2004
Kia
Established: 1997 Production capacity: 60,000 (2 plants)
Production Begin
Rio Sportage Magentis Carnival K2700 II/ 3000S/ 3600 II*
2000 1998 2001 2000 2003
5,646 2,489 1,905 995 123 11,357
2003 1999 2004
1,620 714 115 2,449
2004 2004
451 269 720
2004
122 122 14,648
BMW 5-Series (E-60) 3-Series (E-46) 7-Series (E-65)* Chevrolet Tahoe Trail Blazer HUMMER H2 Total production * Production cancelled
11
F OR E I G N B R A N D S P RO D U C E D I N R US S I A
Ford Motor Co. Company Profile
Model
Established: 2002 Focus
Location: Vsevolozhsk
Production Begin Ford 2002
Production in 2004 29,703
Production capacity: 100,000 Type of investment: 100% greenfield Planned production: Ford Focus II
Total production
29,703
GM-AvtoVAZ Model
Company Profile Established: 2001 Location: Samara Production capacity: 100,000 Type of investment: JV – greenfield
Niva Viva
Production Begin Chevrolet 2002 2004
Total production
Production in 2004 55,150 288 55,438
IVECO-UralAz Company Profile
Model
Established: 1994 Location: Chelyabinsk region
IVECO-Ural-6329
Production Begin Iveco 1997
Production in 2004 92
Production capacity: 3,000 Type of investment: JV
Total production
92
IZH-Avto Company Profile
Model
Production in 2004
2004
592
Kia
Established: 2003 Location: Izhevsk
Production Begin
Spectra
Production capacity: 60,000 Type of investment: 100% brownfield
12
Total production
T H E R US S I A N A U TOM O T I V E M A R K E T
592
Scania-Peter Model
Company Profile Established: 2000 Location: Saint Petersburg Production capacity: 200 Type of investment: 100% greenfield
Citybus OmniLink Intercity OmniLine
Production Begin Scania 2002 2004
Total production
Production in 2004 145 1 146
ScanTat Alabuga Company Profile
Model
Established: 2000 Location: Elabuga (Tatarstan)
Bars
Production Begin Scania 2000
Production in 2004 25
Production capacity: < 500 Type of investment: JV – brownfield
Total production
25
TagAZ Company Profile
Model
Established: 1997 Location: Taganrog Production capacity: 120,000
Accent Sonata
Production Begin Hyundai 2001 2004
Production in 2004 20,777 6,591
Type of investment: 100% brownfield Planned production: Hyundai Porter
Total production
27,368
Volvo-Vostok Company Profile
Model
Established: 2003 Production capacity: < 500
FM12 FH
Type of investment: JV
Total production
Location: Zelenograd
Production Begin Volvo 2003 n.a.
Production in 2004 220 n.a. 220
13
F OR E I G N C A R S A L E S
Foreign Car Sales Sales of Foreign New Cars from Major Automotive Brands Hyundai* Toyota Ford* Daewoo Mitsubishi Nissan Kia* Renault*
2004 Best Sellers
Opel
Class A Daewoo Matiz Kia Picanto Suzuki Wagon R+ Class B Hyundai Accent Hyundai Getz Kia Rio Class C Ford Focus Daewoo Nexia Mitsubishi Lancer Class D Nissan Primera Toyota Avensis Hyundai Sonata
Mazda Peugeot Volkswagen Suzuki Honda Skoda Volvo BMW* Citroen Audi
Class E Toyota Camry BMW 5-Series Audi A6 Class F Mercedes S-Classe Audi A8 BMW 7-Series SUV Toyota RAV4 Nissan X-Trail Mitsubishi Outlander 4x4 Toyota Land Cruiser 100 Toyota Land Cruiser Prado Suzuki Grand Vitara/XL7
Mercedes 0
10,000
20,000 2004
30,000
40,000
2003
Source: Autoreview, Autoizvestia *Includes Russian production
14
T H E R US S I A N A U TOM O T I V E M A R K E T
50,000
60,000
Foreign car sales soared to almost 340,000 units in Russia in 2004, up 72.2 percent year on year. Russia’s relatively low customs duties (25 percent ad valorem) on imported complete built units (CBU) ensure consumer satisfaction, but have not yet prompted other
original equipment manufacturers (OEM) to begin manufacturing activities in the country. And the commitment of further OEMs in Russia would act as a catalyst for the development of the industry.
New Car Import by Country 2002–2004 2003
2004 1.6% 2.6%
3.8%
2002
4.6%
4.3%
8.0%
8.6% 12.0%
8.6%
26.6% 35.8%
37.3%
15.9%
12.8%
12.0%
13.4% 29.9%
20.3%
17.6% 17.7% 6.6%
Japan South Korea
USA Germany
France Czech Republic
Others
Source: Ernst & Young
Russia ranks twelfth among the top countries producing vehicles worldwide.
15
F OR E I G N C A R S A L E S
Customs Duties on a US$ 10,000 Imported New Car by Country EU Russia South Africa China Mexico India Brazil Vietnam 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Total wholesale price includes all customs payments, excise and offsetable VAT. For this example a new vehicle with CIF value of $ 10,000; 1,600 cc gasoline engine; the country of origin is Japan; Commodity Classification Code 8703 23 was selected. Simulation as of September 1, 2004. Source: State regulatory documents of the respective countries, Ernst & Young
Presence of Foreign Brand Dealerships in Russia Moscow St. Petersburg Sverdlovsk District (Ekaterinburg) Republic of Tatarstan (Kazan, Elabuga, Nab. Chelny) Rostov District (Rostov-na-Donu) Samara District (Samara, Togliatti) Permsk District (Perm) Krasnodarsk Region (Krasnodar, Novorossiisk, Sochi) Tumensk District (Tumen, Nishnevartovsk, Surgut)
242 75 34 24 23 20 18 15 12
Source: Auto Market of Russia, 2003
16
T H E R US S I A N A U TOM O T I V E M A R K E T
Map of European Part of Russia Kaliningrad4 Kaliningrad Vsevolozhsk St. Petersburg
Vsevolozhsk17 St. Petersburg13
Minsk Zelenograd Golitsino Likino Moscow
Kyiv
Pavlovo
Elabuga
Nizhny Novgorod Ulyanovsk
Naberezhnye Chelny Taganrog
Izhevsk Neftekamsk
Togliatti Miass Kurgan
Tbilisi
Astana
Baku
Minsk Zelenograd18 Golitsino
2
Likino6 Moscow8
Kyiv
Pavlovo12
Nizhny Novgorod11 Ulyanovsk16
Izhevsk3
Naberezhnye Chelny9 Taganrog14
Elabuga1
Neftekamsk10
Togliatti15 Miass7 Kurgan5
Astana
Tbilisi 1 2 3 4 5 6 7
– – – – – – –
ScanTat Alabuga (city, intercity buses) GolAZ (city, intercity, suburban, tourist buses) IZH-Avto (cars, LCVs) Avtotor (cars, SUVs, 4X4) KAVZ (suburban buses) LiAZ (city, intercity buses) IVECO-UralAZ (trucks), UralAZ (trucks) 8 – AMO ZIL (cars, light trucks, trucks), Avtoframos (cars) RUSIKAR (city, intercity, suburban, tourist buses)
9 – 10 – 11 – 12 – 13 – 14 – 15 –
KAMAZ (cars, trucks) NefAZ (all-terrain, city, suburban buses, trucks) GAZ (cars, mini buses, LCVs, trucks) PAZ (city, intercity, suburban buses) Scania-Peter (city, intercity buses) TagAZ (cars, LCVs) AvtoVAZ (cars, SUVs, LCVs) GM-AvtoVAZ (cars, SUVs) 16 – UAZ (4X4, LCVs) 17 – Ford Motor Co. (cars) 18 – Volvo-Vostok (trucks)
Source: company's own data, Ernst & Young
17
C ON S U M E R T R E N D S & P ROSPECTS
Consumer Trends & Prospects Analysts continue to underestimate the Russian car consumption appetite. Slow, but nonetheless tangible, success of foreign dealerships in the regions is a clear barometer of the rising purchasing power of Russians. But everywhere, in the capital as well as in the regions, car consumers are demanding and price sensitive. Often the choice of one make or another is made based on additional options inluded in the base price.
Russia’s car industry is estimated at US$ 22.858 billion in 2004 as compared to approximately US$ 13 billion the previous year. Purchase of Russian cars (excluding foreign brands produced in Russia) accounted for US$ 7.377 billion, up 54 percent compared to 2003.
Car Consumption per Price Segment (in €) 2004
2003
1.1%
1.6%
35.4%
19.5%
40.7% < 10,000
1.6% 5.7%
5.5%
7.7% 15.1%
2002
34.2%
39.2% 10,000–20,000
20,000–40,000
28.3%
19.3%
45.0% 40,000–80,000
> 80,000
Note: the foregoing diagrams illustrate the number of vehicles sold per segment category according to nominal base prices. A vehicle with a base price in a lower price segment may end up in a higher price segment due to the purchase of options that significantly change the vehicle’s price. Chevy Niva and Viva sales not included. Source: Ernst &Young, based on sales results provided by Autoreview
18
T H E R US S I A N A U TOM O T I V E M A R K E T
Purchase of foreign cars (excluding foreign brands produced in Russia) accounted for US$ 7.769 billion in 2004.
The average price for foreign cars purchased on the Russian territory has changed as such:
Average Price per Car (in US$)
Cars produced in Russia Imported new cars
2004
2003
2002
7,800 31,600
5,000 22,500
4,150 17,300
2003/2004 Change in % 56 40
2002/2003 Change in % 22 30
Source: Avtoizvestia * Includes most foreign vehicles produced in Russia
The ability to quickly adapt to the needs of emerging markets is listed among the key challenges of several automotive manufacturers and suppliers. It is a crucial aspect of strengthening global competitiveness in an increasingly tight market while securing manufacturing activities in home countries.
19
G OV E R N M E N T R E FOR M S
Government Reforms Overview of Recent Reforms in Russia Below is an overview of major reforms implemented within the last three years. Tax Reform • Profit tax legislation: beneficial deductibility rules and nominal rate of 24 percent • Personal income tax rate of 13 percent for residents3 • Standard VAT rate of 18 percent. Leveling down to 13 or 16 percent In discussion • Regional tax exemptions are possible (Kursk, Leningrad region, Nizhny Novgorod, Novgorod) • Reduction of profit tax rate from 24 percent to 20 percent In discussion • Restriction of profit tax benefits provided by local authorities (ensures compliance with local rules and regulations from day one)
Legal Reform • Improvement of minority shareholder rights. Extension of competence areas at shareholder meetings, as well as improvement of dividend controls, directorship, and financing methods • Corporate law: introduction of a new order (One Window principle) for company registration with the local authorities by the Ministry of Taxes and Levies. Interested parties are permitted to obtain all the information about a company from the registering authority • Registration also required for an entrepreneur as a physical body • The establishment and annulment of a commercial organization has to be permitted by the Antimonopoly Ministry • Law on consumer protection: introduction of liability to the vehicle importer New*
• Reform of payroll taxes 3A
resident must be present in Russia for at least 183 days a calendar year * Since January 2005
20
T H E R US S I A N A U TOM O T I V E M A R K E T
• Currency control law. Restricted currency operations among residents and non-residents
• Liberalization of the capital market: free convertibility of the ruble by the year 2007
• Introduction of a housing code designed to stabilize the legal environment surrounding the real estate sector New*
• Liberalization of access by foreign insurers to the Russian market
Trade Reform • Establishment of a free market space covering the territories of Russia, Belarus, Ukraine and Kazakhstan • Abolishment of licenses required for leasing. A foreign court can be assigned for cross-border-leasing contracts. Leasing payments can be made in foreign currency
Banking and Finance Reform • Implementation of a deposit insurance system to secure the stability of the banking sector and the rights of individual depositors New* • Tightening of anti-laundering legislation to provide more transparency in payment processes New* • Implementation of an institution for tracking the credit records of borrowers New*
* Since January 2005
21
G OV E R N M E N T R E FOR M S
Land Reform • Possibility for foreigners to purchase land in Russia (with the exception of certain classes of land, i.e., agricultural land and areas near military bases, etc.) • Russian regions now permitted to decide some questions concerning land located within their territories • Introduction of several measures on residential and town planning codes, and land transfer New* Customs Duties Reform • New Russian Customs Code (Since January 1, 2004). Introduced simplified procedures for importers • Customs clearance fee based on the customs value of the imported goods New* • Customs tariff groups on automotive parts at 5 percent, 10 percent, 15 percent, and 20 percent • Introduction of a flat import tariff on automotive parts at between 3 percent and 5 percent ad valorem In discussion • Introduction of pre-shipment inspection In discussion
* Since January 2005
22
T H E R US S I A N A U TOM O T I V E M A R K E T
• Introduction of a list describing documents to be included in customs declarations • Declaration review period reduced from 10 days to 3 days (delays must be explained by authorities) • Specific simplified procedures established for certain categories of importers (Green Channel) • Customs authorities empowered to ensure protection of intellectual property • Introduction of optional means for customs payments: bank guarantee, lien, or appointment of third person • New options for legal action against the customs authorities • Reduction of customs check points throughout the country as an effort to counter gray imports and corruption
Key to Abbreviations CBU: Complete Built Unit CKD: Complete Knocked Down JV: Joint Venture LCV: Light Commercial Vehicle OEM: Original Equipment Manufacturer SKD: Semi-Knocked Down
Import • Increased import customs duties on used cars, especially those over seven years of age Export • No export customs duties currently apply to automotive industry products
Other Duty Reduction Programs • In-kind contributions and fixed assets imported as in-kind contributions to the charter capital of a company with foreign investments are free from customs duties and VAT • Deferral of customs payments up to 34 months with respect to fixed assets owned by a foreign leasing company and rented and imported by a Russian legal entity. This deferral is interest free and based on the step-bystep application of customs regimes for temporary import and release into free circulation
The obtaining of customs and tax privileges is a rather complex procedure requiring careful planning and preparations. 23
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
E&Y Involvement in the Automotive Industry Ernst & Young – Solutions for the Issues that Matter In Russia as in the rest of the world, Ernst & Young has a strong team of automotive specialists. Ernst & Young provides its automotive clients with audit and assurance services; advises them on corporate and personal tax matters; helps them with
legal issues and explains the particularities of the local legislation; offers financial solutions and due diligence services; and provides valuable market insight and business development strategies to make a success of operations in the CIS.
Frequently Asked Question
Key Competence Area
Is it worth entering the market yet?
• Feasibility study • Market (niche) dynamics scenario analysis • Risks and key success factors analysis
What are the current incentives favorable to foreign engagements in Russia?
• Tax incentive planning • Evaluation of target management and planning • Strategic analysis of key competitive advantages and weaknesses
How can we best take advantage of the Russian tax system?
• Tax customs and VAT review planning
What is the involvement of our competitors?
• Market research • Sensitivity analysis
24
T H E R US S I A N A U TOM O T I V E M A R K E T
Frequently Asked Question
Key Competence Area
Do we need a Russian partner?
• Partner fit criteria • Partner screening and selection • Timeframe
Is the partner we are targeting the right choice for us? Does he have the right permits and licenses for our business?
• IAS and US GAAP Audit • Financial and commercial due diligence • Background check • Legal due diligence
What is best: green- or brownfield investment?
• Financial modeling • Tax incentives planning • Business processes modeling
In which region should we open an office?
• Partner search • Business valuation • Analysis of business environment in specific regions
How do we value our investment?
• Business strategic valuation • Financial modeling • Scenario analysis
How can we get a "head start" while integrating companies, people, processes, and technologies?
• IT due diligence • Human Capital • Business processes alignment
25
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
Global Automotive Center Ernst & Young has redefined professional services for the automotive industry with a highly focused and integrated approach. Our dedicated teams of seasoned industry professionals – with comprehensive OEM and supplier experience – conceive, develop, and help clients implement high-quality, high impact solutions. Please contact one of our area leaders for further details. Global Leadership
Argentina
France
Jock Lennox Global IP Leader (UK) Tel.: 44 [0]20 7951 0374
Benjamin Harriague Tel.: 54 (11) 4318-1520
Gilles Puissochet Tel.: 33 (1) 55-61-09-63
Australia
Marc Stoessel Tel.: 33 (1) 46-93-66-26
Michael Hanley Global Automotive (US) Tel.: 1 (248) 457-3914 Steven Blackman European Automotive (UK) Tel.: 44 [0]20 7951 2918
Operations Gerard Langlais Global IP (US) Tel.: 1 (401) 457-3772 Stefan Schulze European Automotive (Germany) Tel.: 49 (6196) 996 28002
Sean Balding Tel.: 61 (3) 9288-8535
Germany Belgium Rudi Braes Tel.: 32 (03) 270-12 35
Peter Fuss Tel.: 49 (6196) 996-27446
Brazil
Stefan Schulze Tel.: 49 (6196) 996-28002
Luiz Frazao Tel.: 55 (11) 3523-5212
Italy
Canada
Salvatore Florena Tel.: 39 (06) 3247515-653
Dana Tunks Tel.: 1 (416) 941-1762
China Clive Saunderson Tel.: 86 (10) 8518-8324
Luigi Ragusa Tel.: 39 (02) 80669-712
Japan Yoshinobu Shimizu Tel.: 81 (3) 3503-1122
Anthony Wu Tel.: 852 2846-9866
Malaysia
Denmark
Habib Abdul Tel.: 60 (3) 2087-4102
Ole Neerup Tel.: 45 3587-2503 26
T H E R US S I A N A U TOM O T I V E M A R K E T
Mexico
Spain
United Kingdom
Fausto Sandoval Tel.: 52 (555) 283-1471
Jordi Olle Palou Tel.: 34 933-663-704
Steven Blackman Tel.: 44 [0] 20 7951-2918
Netherlands
Sweden
Warmolt Prins Tel.: 31 (40) 260-2210
Jan Birgerson Tel.: 46 58-286-3343
Jock Lennox Tel.: 44 [0] 20 7951-0374
Norway
Sven-Arne Gardh Tel.: 46 31-63-78-43
Michael Hanley Tel.: 1 (248) 457-3914
Switzerland
Gerard Langlais Tel.: 1 (401) 457-3772
US Rolf Berge Tel.: 47 24-00-23-56
Singapore Shyan Yan Ho Tel.: 65 6428 7261
Yves Vontobel Tel.: 41 (58) 286-3346
Venezuela Taiwan
South Korea Tae-Ho Hong Tel.: 82 (2) 3787-6690
Charles Lai Tel.: 886 (2) 2720-4000
Jesus Figueroa Tel.: 58 (241) 823-79-59
27
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
Contacts in Russia Emmanuel Quidet Partner, Audit Head of Industrial Products Tel.: 7 (095) 938-6659 E-mail: [email protected] Reece Jenkins Partner, Corporate Tax Tel.: 7 (095) 705-9736 E-mail: [email protected] Paul Murphy Partner, Transaction Advisory Services Tel.: 7 (095) 705-9708 E-mail: [email protected]
28
Dmitry Tetiouchev Senior Manager, Legal Tel.: 7 (095) 755-9691 E-mail: [email protected] Jean-Francois Tremblay Manager, Automotive Segment Leader Tel.: 7 (095) 755-9692 E-mail: [email protected] Oleg V. Lukianchikov Analyst, Center for Business Knowledge (CBK), Industrial Products Group Tel.: 7 (095) 705-9700 E-mail: [email protected]
T H E R US S I A N A U TOM O T I V E M A R K E T
The foregoing does not constitute formal advice. Ernst & Young does not guarantee the accuracy, adequacy, or completeness of any information and shall not be liable in any manner for any error or omission of the results obtained from use of this material.
No part of this report may be reproduced or used in any form (graphic, electronic, or mechanical, including photocopying, recording, typing or information storage and retrieval systems) without the permission of the copyright holder – Ernst & Young (CIS) Limited. For permission, please contact the Automotive Group at Ernst & Young, Moscow. 29
Russia
Azerbaijan
Kazakhstan
Moscow Sadovnicheskaya Nab., 77, bld. 1 Moscow, 115035 Tel.: 7 (095) 705-9700 7 (095) 755-9700 Fax: 7 (095) 755-9701
Baku Hyatt International Center Hyatt Tower III Izmir Street, 1033 Baku, AZ1065 Tel.: 994 (12) 490-7020 Fax: 994 (12) 490-7017
Almaty Furmanov Street, 240 G Almaty, 050059 Tel.: 7 (3272) 58-5960 Fax: 7 (3272) 58-5961
St. Petersburg White Nights House Business Center Malaya Morskaya Street, 23A St. Petersburg, 190000 Tel.: 7 (812) 103-7800 Fax: 7 (812) 103-7810 Novosibirsk Inskaya Street 54, 2nd floor Novosibirsk, 630102 Tel.: 7 (3832) 11-9007 Fax: 7 (3832) 11-9008 Ekaterinburg World Trade Center Kuibyshev Street, 44 Ekaterinburg, 620026 Tel.: 7 (343) 379-3510 Fax: 7 (343) 379-3511 Yuzhno-Sakhalinsk Prospect Mira, 149 Office 103 Yuzhno-Sakhalinsk, 693007 Tel.: 7 (4242) 49-9090 Fax: 7 (4242) 49-9411
E R N ST
&
Y O U NG
© 2005 Ernst & Young. All Rights Reserved. Ernst & Young is a registered trademark.
Belarus Minsk Voronyanskogo Street, 7A Office 709 Minsk, 220039 Tel.: 375 (17) 228-1221 Fax: 375 (17) 228-1222
Georgia Tbilisi Leselidze Street, 44 Tbilisi, 0105 Tel.: 995 (32) 75-1065 Fax: 995 (32) 75-1066
Astana Hotel Okan InterContinental Astana 7th floor, office 711 Abai Street, 113 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
Uzbekistan Tashkent Inconel Business Center 3rd floor Pushkin Street, 75 Tashkent, 700000 Tel.: 998 (71) 120-6482 Fax: 998 (71) 120-6483
www.ey.com
The Russian Automotive Market Industry Overview
3
Contents Opening Comments
2
Automotive Production in Russia
3
The Passenger Car Market
3
The Bus Market
6
The Truck Market
7
Russia Within the Global Automotive Market
8
Foreign Brands Produced in Russia
11
Foreign Car Sales
14
Consumer Trends & Prospects
18
Government Reforms
20
Ernst & Young’s Involvment in the Automotive Industry
24
Solutions for the Issues that Matter
24
Global Automotive Center
26
Contacts in Russia
28
1
O P E N I NG C OMMENTS
Opening Comments Russia belongs to the fastest growing emerging automotive markets. While demand for quality new vehicles in the country continues to surpass optimistic forecasts, domestic manufacturers are heading towards saturation of production capacity. But car consumers are more selective and price sensitive than ever. Attractive automotive credit conditions, competitive warranty packages, and comfortable after sales service now belong to the basic toolset of any foreign car dealer striving for success throughout the country. In this report we present key market indicators gathered over the last three years. This is just a glimpse of what we can do for you while you consider market entry or expansion of business activities in Russia. We hope you find the following information insightful, and welcome you to share your most challenging questions on this exciting business environment with us.
Emmanuel Quidet Partner Head of the Industrial Products Group
2
T H E R US S I A N A U TOM O T I V E M A R K E T
Automotive Production in Russia The Passenger Car Market The Russian passenger car market is estimated at 1.76 million vehicles in 2004, up 10.5 percent year on year1. While the import of used cars accounts for less then 20 percent of overall consumption, the production of foreign car makers more than tripled, to over 133,000 units, which represents 7.5 percent of overall Russian car market in 2004. Passenger Car Market Compared 2004
2003
18.0%
19.1%
2002
24.4%
55.4%
29.2%
59.9% 12.3%
6.9%
63.1%
7.5% 3.4% Russian Production
Foreign Production*
0.7% Import New Cars
Import Used Cars
Source: ASM Holding, Autoreview, Autoizvestia, Ernst & Young estimates * Includes production by foreign legal entities, joint ventures, and production by Russian entities with foreign assembly licenes
1 Includes
overall import and domestic production figures. In 2004, approximately 110,000 cars produced in Russia were exported to other emerging markets.
3
A U TOM O T I V E P RO D U C T I ON I N R US S I A
Despite strong growth in new car imports, Russia’s car production in 2004 rose almost 10 percent compared to the previous year. Taken on its own, production by Russian manufacturers rose 2.1 percent to over 976,000 units2. Currently, Russia’s automotive production capacity runs at approximately 90 percent of overall production capacity.
Russian car prices soared by 15 percent on average in 2004, matching base prices of several of the foreign models sold in Russia, some of which are now produced in the country.
Passenger Car Production 2002–2004 (units) Company
City
2004
2003
2002
AvtoVAZ Togliatti IZH-Avto Izhevsk GAZ Nizhny Novgorod GM-AvtoVAZ Togliatti KamAZ Naberezhny Chelny UAZ Ulyanovsk TagAZ Taganrog Ford Motor Co. Vsevolozhsk Avtotor Kaliningrad Others TOTAL
717,985 82,687 65,686 57,737 41,207 31,136 30,000 29,703 14,525 39,292 1,109,958
699,889 78,497 56,783 21,839 40,016 32,748 5,896 16,261 8,415 49,684 1,010,028
703,040 65,751 65,648 323 38,743 33,648 2,490 2,474 5,713 62,231 980,061
2003/2004 Change in % 2.6 5.3 15.7 164.4 3.0 -4.9 408.8 82.7 72.6 -20.9 9.9
Source: ASM Holding
2 Does
4
not include Chevy Niva and Viva production.
T H E R US S I A N A U TOM O T I V E M A R K E T
2002/2003 Change in % -0.4 19.4 -13.5 6,661.3 3.3 -2.7 136.8 557.3 47.3 -20.2 3.1
Passenger Car Production in Russia 1994–2004
954,381
968,092
1,020,515
980,061
1,009,585
1996
839,487
1995
985,284
867,693
600,000
835,104
800,000
797,924
1,000,000
1999
2000
2001
2002
2003
1,103,852
Units 1,200,000
400,000 200,000 0
1994
1997
1998
2004
Source: ASM Holding
5
A U TOM O T I V E P RO D U C T I ON I N R US S I A
The Bus Market Bus production in Russia remained practically unchanged in 2004 compared to the previous year, in which clear growth was tangible in the larger bus segments (city, intercity buses). The minibus sector, which account on its own for approximately 50 percent of total Russian bus output, went down over 15 percent. Scania-Peter, the only foreign bus producer in Russia, raised production to 147 Intercity buses, a growth of 56 percent compared to 2003.
Bus Production 2002–2004 (units)* Company
City
2004
2003
2002
GAZ Nizhny Novgorod UAZ Ulyanovsk PAZ Pavlovo KAvZ Kurgan LiAZ Likino NefAZ Neftekamsk RUSIKAR (Tushino-Avto) Moscow Scania-Peter Saint Petersburg GolAZ Golitsino Others TOTAL
31,522 17,037 12,114 2,073 1,844 968 664 147 104 9,736 76,209
36,299 21,553 11,323 1,607 1,674 726 544 94 129 2,629 76,578
32,229 18,898 10,358 1,239 1,561 481 683 28 61 1,770 67,308
2003/2004 Change in % -13.2 -21.0 7.0 29.0 10.2 33.3 22.1 56.4 -19.4 270.3 -0.5
Source: ASM Holding *Includes production of minibuses
6
T H E R US S I A N A U TOM O T I V E M A R K E T
2002/2003 Change in % 12.6 14.0 9.3 29.7 7.2 50.9 -20.4 235.7 111.5 48.5 13.8
The Truck Market Truck production in Russia went up 3.9 percent year on year to over 202,200 units. The light truck segment accounts for approximately 80 percent of overall truck production, with GAZ as the leading manufacturer. KAMAZ, holding the strongest market share in the heavy truck segment, raised output by 20.7 percent year on year to over 29,200 vehicles in 2004. Truck Production 2002–2004 (units)* Company GAZ KAMAZ UAZ IZH-Avto AMO ZIL UralAZ Others TOTAL
City
2004
2003
2002
Nizhny Novgorod Naberezhny Chelny Ulyanovsk Izhevsk Moscow Miass
117,043 29,243 18,528 13,810 12,867 6,826 3,895 202,212
108,317 24,228 22,596 15,717 13,061 5,994 4,638 194,551
100,258 20,055 16,934 12,485 11,810 8,589 4,119 174,250
2003/2004 Change in % 8.1 20.7 -18.0 -12.1 -1.5 13.9 -16.0 3.9
2002/2003 Change in % 8.0 20.8 33.4 25.9 10.6 -30.2 12.6 11.7
Source: ASM Holding *Includes production of light trucks
7
R US S I A W I T H I N T H E G LO B A L A U TOM O T I V E M A R K E T
Russia Within the Global Automotive Market According to the World Bank, Russia’s car fleet per 1,000 people stands at 147. However, Moscow alone, with over 10 million inhabitants, has approximately 260 cars per 1,000 people, which is slightly higher than the Polish car density per 1,000 people.
Russia’s automotive industry is still highly vertically integrated. The country’s most urgent concern is to create an attractive investment climate for foreign suppliers while protecting the Russian supplier industry, which is currently undergoing significant changes.
Almost 50 percent of Russia’s car fleet is over ten years of age.
GNI per Capita (US$) vs. Passenger Cars (per 1,000 people) 40,000 Gross National Income (GNI) per Capita (US$)
USA
35,000 Denmark
30,000 UK
Austria
25,000
Finland Ireland
20,000
France
Italy
Spain
15,000 South Korea
10,000 Mexico
5,000 China
0 0
India
Hungary
Argentina
Turkey
Brasil
Russia
50
100
150
Poland
Czech Republic
Slovakia Moscow
200
250
300
Estonia
350
400
Passenger Cars (per 1,000 people) Source: World Bank, The Little Green Book 2004, Atlas Method, Ernst & Young estimates
8
Germany
T H E R US S I A N A U TOM O T I V E M A R K E T
450
500
550
Supplier’s Worldwide Manufactoring Involvement in Emerging Markets Brand
Main Product Range
Borg Warner
Powertrain Components
Bosch
Automotive Equipment
Cummins
Engines
Delphi
Integrated Systems and Modules
Eaton
Fluid Power and Electrical Systems
Faurecia
Modules for Light Vehicules
Johnson Controls Seats, Interior Trim, Batteries Hella
Lighting, Electronics
Lear
Automotive Interior Solutions
Tenneco
Exhaust Systems
Valeo
Engines and Engines Parts
Visteon
Modules and Components
Brazil
China
India
• • • • • • • • • • • •
• • • • • • • • • • •
• • • • • • • • • • •
Mexico Poland
• • • • • • • • • • • •
• • • • • • • • • • •
Russia
• • • •* • •
Thailand
• • •
* Technical assistance Source: Ernst & Young, company’s own data
The 15 Largest Vehicle Producing Countries* Country USA
Production Production in 2004 in 2003
Change in %
12.15
11.84
2.6%
Japan
9.91
9.99
-0.8%
China
5.34
4.01
33.2%
Germany
4.94
5.02
-1.6%
South Korea
3.62
3.12
16.0%
France
3.61
3.56
1.4%
Spain
2.83
2.96
-4.4%
Canada
2.62
2.52
4.0%
UK
1.87
1.83
2.2% 10.6%
Brasil
1.77
1.60
Mexico
1.41
1.50
-6.0%
India
1.41
1.02
38.2%
Russia
1.21
1.17
3.4%
Italy
1.19
1.29
-7.8%
Thailand
0.95
0.74
28.4%
While international suppliers learn how to adapt to the needs of smaller markets in order to remain competitive within the global automotive environment, Russian suppliers must improve quality and productivity, and adapt to the needs of those foreign OEMs with current or planned manufacturing activities in Russia. This context raises the possibility of potential cooperation agreements in Russia’s automotive industry.
* Production in millions Source: OE Industry Review 2004, J.D. Power and Associates
9
R US S I A W I T H I N T H E G LO B A L A U TOM O T I V E M A R K E T
OEM’s Worldwide Involvement in Emerging Markets BMW Group BMW DaimlerChrysler Chrysler Mercedes Mitsubishi Fiat Group Fiat IVECO Ford Group Ford Mazda Volvo GM Group GM Daewoo* Opel Subaru Suzuki Honda Group Honda Hyundai Group Hyundai Kia PSA Group Citroen Peugeot Renault-Nissan Nissan Renault Toyota Group Toyota VAG Audi Skoda VW
Brasil
China
India
Mexico
•
•
•
•
• • •
• • •
•
• •
• •
• •
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• •
•
• • •
•
• •
•
• • • • •
•
•
•
•
• •
• •
• •
• •
•
• •
• •
•
• •
•
•
•
•
•
• • •
•
•
•
•
Poland
Russia
Thailand
•
• •
• •
• •
•
•
•
• • •
• •
• •
•
•
• • •
•
Source: company's own data, Ernst & Young * As of January 1, 2005 all Daewoo cars exported by GM-Daewoo are branded as Chevrolet. The Daewoo brand name is allowed to be used only in South Korea, Poland, Romania, and Uzbekistan.
10
•
T H E R US S I A N A U TOM O T I V E M A R K E T
•
Foreign Brands Produced in Russia Avtoframos Company Profile
Model
Established: 1997 Symbol*
Location: Moscow
Production Begin Renault 1998
Production in 2004 517
Targeted production capacity: 120,000 Type of investment: JV – brownfield Planned production: Renault Logan
Total production
517
* Production cancelled
AVTOTOR Company Profile
Model
Type of investment: 100% brownfield Planned production: BMW 3-Series (E-90)
Production in 2004
Kia
Established: 1997 Production capacity: 60,000 (2 plants)
Production Begin
Rio Sportage Magentis Carnival K2700 II/ 3000S/ 3600 II*
2000 1998 2001 2000 2003
5,646 2,489 1,905 995 123 11,357
2003 1999 2004
1,620 714 115 2,449
2004 2004
451 269 720
2004
122 122 14,648
BMW 5-Series (E-60) 3-Series (E-46) 7-Series (E-65)* Chevrolet Tahoe Trail Blazer HUMMER H2 Total production * Production cancelled
11
F OR E I G N B R A N D S P RO D U C E D I N R US S I A
Ford Motor Co. Company Profile
Model
Established: 2002 Focus
Location: Vsevolozhsk
Production Begin Ford 2002
Production in 2004 29,703
Production capacity: 100,000 Type of investment: 100% greenfield Planned production: Ford Focus II
Total production
29,703
GM-AvtoVAZ Model
Company Profile Established: 2001 Location: Samara Production capacity: 100,000 Type of investment: JV – greenfield
Niva Viva
Production Begin Chevrolet 2002 2004
Total production
Production in 2004 55,150 288 55,438
IVECO-UralAz Company Profile
Model
Established: 1994 Location: Chelyabinsk region
IVECO-Ural-6329
Production Begin Iveco 1997
Production in 2004 92
Production capacity: 3,000 Type of investment: JV
Total production
92
IZH-Avto Company Profile
Model
Production in 2004
2004
592
Kia
Established: 2003 Location: Izhevsk
Production Begin
Spectra
Production capacity: 60,000 Type of investment: 100% brownfield
12
Total production
T H E R US S I A N A U TOM O T I V E M A R K E T
592
Scania-Peter Model
Company Profile Established: 2000 Location: Saint Petersburg Production capacity: 200 Type of investment: 100% greenfield
Citybus OmniLink Intercity OmniLine
Production Begin Scania 2002 2004
Total production
Production in 2004 145 1 146
ScanTat Alabuga Company Profile
Model
Established: 2000 Location: Elabuga (Tatarstan)
Bars
Production Begin Scania 2000
Production in 2004 25
Production capacity: < 500 Type of investment: JV – brownfield
Total production
25
TagAZ Company Profile
Model
Established: 1997 Location: Taganrog Production capacity: 120,000
Accent Sonata
Production Begin Hyundai 2001 2004
Production in 2004 20,777 6,591
Type of investment: 100% brownfield Planned production: Hyundai Porter
Total production
27,368
Volvo-Vostok Company Profile
Model
Established: 2003 Production capacity: < 500
FM12 FH
Type of investment: JV
Total production
Location: Zelenograd
Production Begin Volvo 2003 n.a.
Production in 2004 220 n.a. 220
13
F OR E I G N C A R S A L E S
Foreign Car Sales Sales of Foreign New Cars from Major Automotive Brands Hyundai* Toyota Ford* Daewoo Mitsubishi Nissan Kia* Renault*
2004 Best Sellers
Opel
Class A Daewoo Matiz Kia Picanto Suzuki Wagon R+ Class B Hyundai Accent Hyundai Getz Kia Rio Class C Ford Focus Daewoo Nexia Mitsubishi Lancer Class D Nissan Primera Toyota Avensis Hyundai Sonata
Mazda Peugeot Volkswagen Suzuki Honda Skoda Volvo BMW* Citroen Audi
Class E Toyota Camry BMW 5-Series Audi A6 Class F Mercedes S-Classe Audi A8 BMW 7-Series SUV Toyota RAV4 Nissan X-Trail Mitsubishi Outlander 4x4 Toyota Land Cruiser 100 Toyota Land Cruiser Prado Suzuki Grand Vitara/XL7
Mercedes 0
10,000
20,000 2004
30,000
40,000
2003
Source: Autoreview, Autoizvestia *Includes Russian production
14
T H E R US S I A N A U TOM O T I V E M A R K E T
50,000
60,000
Foreign car sales soared to almost 340,000 units in Russia in 2004, up 72.2 percent year on year. Russia’s relatively low customs duties (25 percent ad valorem) on imported complete built units (CBU) ensure consumer satisfaction, but have not yet prompted other
original equipment manufacturers (OEM) to begin manufacturing activities in the country. And the commitment of further OEMs in Russia would act as a catalyst for the development of the industry.
New Car Import by Country 2002–2004 2003
2004 1.6% 2.6%
3.8%
2002
4.6%
4.3%
8.0%
8.6% 12.0%
8.6%
26.6% 35.8%
37.3%
15.9%
12.8%
12.0%
13.4% 29.9%
20.3%
17.6% 17.7% 6.6%
Japan South Korea
USA Germany
France Czech Republic
Others
Source: Ernst & Young
Russia ranks twelfth among the top countries producing vehicles worldwide.
15
F OR E I G N C A R S A L E S
Customs Duties on a US$ 10,000 Imported New Car by Country EU Russia South Africa China Mexico India Brazil Vietnam 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Total wholesale price includes all customs payments, excise and offsetable VAT. For this example a new vehicle with CIF value of $ 10,000; 1,600 cc gasoline engine; the country of origin is Japan; Commodity Classification Code 8703 23 was selected. Simulation as of September 1, 2004. Source: State regulatory documents of the respective countries, Ernst & Young
Presence of Foreign Brand Dealerships in Russia Moscow St. Petersburg Sverdlovsk District (Ekaterinburg) Republic of Tatarstan (Kazan, Elabuga, Nab. Chelny) Rostov District (Rostov-na-Donu) Samara District (Samara, Togliatti) Permsk District (Perm) Krasnodarsk Region (Krasnodar, Novorossiisk, Sochi) Tumensk District (Tumen, Nishnevartovsk, Surgut)
242 75 34 24 23 20 18 15 12
Source: Auto Market of Russia, 2003
16
T H E R US S I A N A U TOM O T I V E M A R K E T
Map of European Part of Russia Kaliningrad4 Kaliningrad Vsevolozhsk St. Petersburg
Vsevolozhsk17 St. Petersburg13
Minsk Zelenograd Golitsino Likino Moscow
Kyiv
Pavlovo
Elabuga
Nizhny Novgorod Ulyanovsk
Naberezhnye Chelny Taganrog
Izhevsk Neftekamsk
Togliatti Miass Kurgan
Tbilisi
Astana
Baku
Minsk Zelenograd18 Golitsino
2
Likino6 Moscow8
Kyiv
Pavlovo12
Nizhny Novgorod11 Ulyanovsk16
Izhevsk3
Naberezhnye Chelny9 Taganrog14
Elabuga1
Neftekamsk10
Togliatti15 Miass7 Kurgan5
Astana
Tbilisi 1 2 3 4 5 6 7
– – – – – – –
ScanTat Alabuga (city, intercity buses) GolAZ (city, intercity, suburban, tourist buses) IZH-Avto (cars, LCVs) Avtotor (cars, SUVs, 4X4) KAVZ (suburban buses) LiAZ (city, intercity buses) IVECO-UralAZ (trucks), UralAZ (trucks) 8 – AMO ZIL (cars, light trucks, trucks), Avtoframos (cars) RUSIKAR (city, intercity, suburban, tourist buses)
9 – 10 – 11 – 12 – 13 – 14 – 15 –
KAMAZ (cars, trucks) NefAZ (all-terrain, city, suburban buses, trucks) GAZ (cars, mini buses, LCVs, trucks) PAZ (city, intercity, suburban buses) Scania-Peter (city, intercity buses) TagAZ (cars, LCVs) AvtoVAZ (cars, SUVs, LCVs) GM-AvtoVAZ (cars, SUVs) 16 – UAZ (4X4, LCVs) 17 – Ford Motor Co. (cars) 18 – Volvo-Vostok (trucks)
Source: company's own data, Ernst & Young
17
C ON S U M E R T R E N D S & P ROSPECTS
Consumer Trends & Prospects Analysts continue to underestimate the Russian car consumption appetite. Slow, but nonetheless tangible, success of foreign dealerships in the regions is a clear barometer of the rising purchasing power of Russians. But everywhere, in the capital as well as in the regions, car consumers are demanding and price sensitive. Often the choice of one make or another is made based on additional options inluded in the base price.
Russia’s car industry is estimated at US$ 22.858 billion in 2004 as compared to approximately US$ 13 billion the previous year. Purchase of Russian cars (excluding foreign brands produced in Russia) accounted for US$ 7.377 billion, up 54 percent compared to 2003.
Car Consumption per Price Segment (in €) 2004
2003
1.1%
1.6%
35.4%
19.5%
40.7% < 10,000
1.6% 5.7%
5.5%
7.7% 15.1%
2002
34.2%
39.2% 10,000–20,000
20,000–40,000
28.3%
19.3%
45.0% 40,000–80,000
> 80,000
Note: the foregoing diagrams illustrate the number of vehicles sold per segment category according to nominal base prices. A vehicle with a base price in a lower price segment may end up in a higher price segment due to the purchase of options that significantly change the vehicle’s price. Chevy Niva and Viva sales not included. Source: Ernst &Young, based on sales results provided by Autoreview
18
T H E R US S I A N A U TOM O T I V E M A R K E T
Purchase of foreign cars (excluding foreign brands produced in Russia) accounted for US$ 7.769 billion in 2004.
The average price for foreign cars purchased on the Russian territory has changed as such:
Average Price per Car (in US$)
Cars produced in Russia Imported new cars
2004
2003
2002
7,800 31,600
5,000 22,500
4,150 17,300
2003/2004 Change in % 56 40
2002/2003 Change in % 22 30
Source: Avtoizvestia * Includes most foreign vehicles produced in Russia
The ability to quickly adapt to the needs of emerging markets is listed among the key challenges of several automotive manufacturers and suppliers. It is a crucial aspect of strengthening global competitiveness in an increasingly tight market while securing manufacturing activities in home countries.
19
G OV E R N M E N T R E FOR M S
Government Reforms Overview of Recent Reforms in Russia Below is an overview of major reforms implemented within the last three years. Tax Reform • Profit tax legislation: beneficial deductibility rules and nominal rate of 24 percent • Personal income tax rate of 13 percent for residents3 • Standard VAT rate of 18 percent. Leveling down to 13 or 16 percent In discussion • Regional tax exemptions are possible (Kursk, Leningrad region, Nizhny Novgorod, Novgorod) • Reduction of profit tax rate from 24 percent to 20 percent In discussion • Restriction of profit tax benefits provided by local authorities (ensures compliance with local rules and regulations from day one)
Legal Reform • Improvement of minority shareholder rights. Extension of competence areas at shareholder meetings, as well as improvement of dividend controls, directorship, and financing methods • Corporate law: introduction of a new order (One Window principle) for company registration with the local authorities by the Ministry of Taxes and Levies. Interested parties are permitted to obtain all the information about a company from the registering authority • Registration also required for an entrepreneur as a physical body • The establishment and annulment of a commercial organization has to be permitted by the Antimonopoly Ministry • Law on consumer protection: introduction of liability to the vehicle importer New*
• Reform of payroll taxes 3A
resident must be present in Russia for at least 183 days a calendar year * Since January 2005
20
T H E R US S I A N A U TOM O T I V E M A R K E T
• Currency control law. Restricted currency operations among residents and non-residents
• Liberalization of the capital market: free convertibility of the ruble by the year 2007
• Introduction of a housing code designed to stabilize the legal environment surrounding the real estate sector New*
• Liberalization of access by foreign insurers to the Russian market
Trade Reform • Establishment of a free market space covering the territories of Russia, Belarus, Ukraine and Kazakhstan • Abolishment of licenses required for leasing. A foreign court can be assigned for cross-border-leasing contracts. Leasing payments can be made in foreign currency
Banking and Finance Reform • Implementation of a deposit insurance system to secure the stability of the banking sector and the rights of individual depositors New* • Tightening of anti-laundering legislation to provide more transparency in payment processes New* • Implementation of an institution for tracking the credit records of borrowers New*
* Since January 2005
21
G OV E R N M E N T R E FOR M S
Land Reform • Possibility for foreigners to purchase land in Russia (with the exception of certain classes of land, i.e., agricultural land and areas near military bases, etc.) • Russian regions now permitted to decide some questions concerning land located within their territories • Introduction of several measures on residential and town planning codes, and land transfer New* Customs Duties Reform • New Russian Customs Code (Since January 1, 2004). Introduced simplified procedures for importers • Customs clearance fee based on the customs value of the imported goods New* • Customs tariff groups on automotive parts at 5 percent, 10 percent, 15 percent, and 20 percent • Introduction of a flat import tariff on automotive parts at between 3 percent and 5 percent ad valorem In discussion • Introduction of pre-shipment inspection In discussion
* Since January 2005
22
T H E R US S I A N A U TOM O T I V E M A R K E T
• Introduction of a list describing documents to be included in customs declarations • Declaration review period reduced from 10 days to 3 days (delays must be explained by authorities) • Specific simplified procedures established for certain categories of importers (Green Channel) • Customs authorities empowered to ensure protection of intellectual property • Introduction of optional means for customs payments: bank guarantee, lien, or appointment of third person • New options for legal action against the customs authorities • Reduction of customs check points throughout the country as an effort to counter gray imports and corruption
Key to Abbreviations CBU: Complete Built Unit CKD: Complete Knocked Down JV: Joint Venture LCV: Light Commercial Vehicle OEM: Original Equipment Manufacturer SKD: Semi-Knocked Down
Import • Increased import customs duties on used cars, especially those over seven years of age Export • No export customs duties currently apply to automotive industry products
Other Duty Reduction Programs • In-kind contributions and fixed assets imported as in-kind contributions to the charter capital of a company with foreign investments are free from customs duties and VAT • Deferral of customs payments up to 34 months with respect to fixed assets owned by a foreign leasing company and rented and imported by a Russian legal entity. This deferral is interest free and based on the step-bystep application of customs regimes for temporary import and release into free circulation
The obtaining of customs and tax privileges is a rather complex procedure requiring careful planning and preparations. 23
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
E&Y Involvement in the Automotive Industry Ernst & Young – Solutions for the Issues that Matter In Russia as in the rest of the world, Ernst & Young has a strong team of automotive specialists. Ernst & Young provides its automotive clients with audit and assurance services; advises them on corporate and personal tax matters; helps them with
legal issues and explains the particularities of the local legislation; offers financial solutions and due diligence services; and provides valuable market insight and business development strategies to make a success of operations in the CIS.
Frequently Asked Question
Key Competence Area
Is it worth entering the market yet?
• Feasibility study • Market (niche) dynamics scenario analysis • Risks and key success factors analysis
What are the current incentives favorable to foreign engagements in Russia?
• Tax incentive planning • Evaluation of target management and planning • Strategic analysis of key competitive advantages and weaknesses
How can we best take advantage of the Russian tax system?
• Tax customs and VAT review planning
What is the involvement of our competitors?
• Market research • Sensitivity analysis
24
T H E R US S I A N A U TOM O T I V E M A R K E T
Frequently Asked Question
Key Competence Area
Do we need a Russian partner?
• Partner fit criteria • Partner screening and selection • Timeframe
Is the partner we are targeting the right choice for us? Does he have the right permits and licenses for our business?
• IAS and US GAAP Audit • Financial and commercial due diligence • Background check • Legal due diligence
What is best: green- or brownfield investment?
• Financial modeling • Tax incentives planning • Business processes modeling
In which region should we open an office?
• Partner search • Business valuation • Analysis of business environment in specific regions
How do we value our investment?
• Business strategic valuation • Financial modeling • Scenario analysis
How can we get a "head start" while integrating companies, people, processes, and technologies?
• IT due diligence • Human Capital • Business processes alignment
25
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
Global Automotive Center Ernst & Young has redefined professional services for the automotive industry with a highly focused and integrated approach. Our dedicated teams of seasoned industry professionals – with comprehensive OEM and supplier experience – conceive, develop, and help clients implement high-quality, high impact solutions. Please contact one of our area leaders for further details. Global Leadership
Argentina
France
Jock Lennox Global IP Leader (UK) Tel.: 44 [0]20 7951 0374
Benjamin Harriague Tel.: 54 (11) 4318-1520
Gilles Puissochet Tel.: 33 (1) 55-61-09-63
Australia
Marc Stoessel Tel.: 33 (1) 46-93-66-26
Michael Hanley Global Automotive (US) Tel.: 1 (248) 457-3914 Steven Blackman European Automotive (UK) Tel.: 44 [0]20 7951 2918
Operations Gerard Langlais Global IP (US) Tel.: 1 (401) 457-3772 Stefan Schulze European Automotive (Germany) Tel.: 49 (6196) 996 28002
Sean Balding Tel.: 61 (3) 9288-8535
Germany Belgium Rudi Braes Tel.: 32 (03) 270-12 35
Peter Fuss Tel.: 49 (6196) 996-27446
Brazil
Stefan Schulze Tel.: 49 (6196) 996-28002
Luiz Frazao Tel.: 55 (11) 3523-5212
Italy
Canada
Salvatore Florena Tel.: 39 (06) 3247515-653
Dana Tunks Tel.: 1 (416) 941-1762
China Clive Saunderson Tel.: 86 (10) 8518-8324
Luigi Ragusa Tel.: 39 (02) 80669-712
Japan Yoshinobu Shimizu Tel.: 81 (3) 3503-1122
Anthony Wu Tel.: 852 2846-9866
Malaysia
Denmark
Habib Abdul Tel.: 60 (3) 2087-4102
Ole Neerup Tel.: 45 3587-2503 26
T H E R US S I A N A U TOM O T I V E M A R K E T
Mexico
Spain
United Kingdom
Fausto Sandoval Tel.: 52 (555) 283-1471
Jordi Olle Palou Tel.: 34 933-663-704
Steven Blackman Tel.: 44 [0] 20 7951-2918
Netherlands
Sweden
Warmolt Prins Tel.: 31 (40) 260-2210
Jan Birgerson Tel.: 46 58-286-3343
Jock Lennox Tel.: 44 [0] 20 7951-0374
Norway
Sven-Arne Gardh Tel.: 46 31-63-78-43
Michael Hanley Tel.: 1 (248) 457-3914
Switzerland
Gerard Langlais Tel.: 1 (401) 457-3772
US Rolf Berge Tel.: 47 24-00-23-56
Singapore Shyan Yan Ho Tel.: 65 6428 7261
Yves Vontobel Tel.: 41 (58) 286-3346
Venezuela Taiwan
South Korea Tae-Ho Hong Tel.: 82 (2) 3787-6690
Charles Lai Tel.: 886 (2) 2720-4000
Jesus Figueroa Tel.: 58 (241) 823-79-59
27
E R N ST & Y O U NG I N VOLV E M E N T I N T H E A U TOM O T I V E I N D UST RY
Contacts in Russia Emmanuel Quidet Partner, Audit Head of Industrial Products Tel.: 7 (095) 938-6659 E-mail: [email protected] Reece Jenkins Partner, Corporate Tax Tel.: 7 (095) 705-9736 E-mail: [email protected] Paul Murphy Partner, Transaction Advisory Services Tel.: 7 (095) 705-9708 E-mail: [email protected]
28
Dmitry Tetiouchev Senior Manager, Legal Tel.: 7 (095) 755-9691 E-mail: [email protected] Jean-Francois Tremblay Manager, Automotive Segment Leader Tel.: 7 (095) 755-9692 E-mail: [email protected] Oleg V. Lukianchikov Analyst, Center for Business Knowledge (CBK), Industrial Products Group Tel.: 7 (095) 705-9700 E-mail: [email protected]
T H E R US S I A N A U TOM O T I V E M A R K E T
The foregoing does not constitute formal advice. Ernst & Young does not guarantee the accuracy, adequacy, or completeness of any information and shall not be liable in any manner for any error or omission of the results obtained from use of this material.
No part of this report may be reproduced or used in any form (graphic, electronic, or mechanical, including photocopying, recording, typing or information storage and retrieval systems) without the permission of the copyright holder – Ernst & Young (CIS) Limited. For permission, please contact the Automotive Group at Ernst & Young, Moscow. 29
Russia
Azerbaijan
Kazakhstan
Moscow Sadovnicheskaya Nab., 77, bld. 1 Moscow, 115035 Tel.: 7 (095) 705-9700 7 (095) 755-9700 Fax: 7 (095) 755-9701
Baku Hyatt International Center Hyatt Tower III Izmir Street, 1033 Baku, AZ1065 Tel.: 994 (12) 490-7020 Fax: 994 (12) 490-7017
Almaty Furmanov Street, 240 G Almaty, 050059 Tel.: 7 (3272) 58-5960 Fax: 7 (3272) 58-5961
St. Petersburg White Nights House Business Center Malaya Morskaya Street, 23A St. Petersburg, 190000 Tel.: 7 (812) 103-7800 Fax: 7 (812) 103-7810 Novosibirsk Inskaya Street 54, 2nd floor Novosibirsk, 630102 Tel.: 7 (3832) 11-9007 Fax: 7 (3832) 11-9008 Ekaterinburg World Trade Center Kuibyshev Street, 44 Ekaterinburg, 620026 Tel.: 7 (343) 379-3510 Fax: 7 (343) 379-3511 Yuzhno-Sakhalinsk Prospect Mira, 149 Office 103 Yuzhno-Sakhalinsk, 693007 Tel.: 7 (4242) 49-9090 Fax: 7 (4242) 49-9411
E R N ST
&
Y O U NG
© 2005 Ernst & Young. All Rights Reserved. Ernst & Young is a registered trademark.
Belarus Minsk Voronyanskogo Street, 7A Office 709 Minsk, 220039 Tel.: 375 (17) 228-1221 Fax: 375 (17) 228-1222
Georgia Tbilisi Leselidze Street, 44 Tbilisi, 0105 Tel.: 995 (32) 75-1065 Fax: 995 (32) 75-1066
Astana Hotel Okan InterContinental Astana 7th floor, office 711 Abai Street, 113 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
Uzbekistan Tashkent Inconel Business Center 3rd floor Pushkin Street, 75 Tashkent, 700000 Tel.: 998 (71) 120-6482 Fax: 998 (71) 120-6483
www.ey.com
