BUSINESS

Russia has become Europe's largest automotive market after year on year sales grew 41 percent in the first six months of 2008, according to a survey by PriceWaterhouseCoopers (PWC.) In this period, 1.65 million cars were bought in Russia compared to 1.63 million in Germany, which was previously Europe's largest market.

It is foreign brands that have been driving the expansion, with a 54 percent increase in the number of imports. In contrast, Russian brands only made up a quarter of all the cars sold in Russia according to the PWC report.

"There is a sense of gloom hanging over domestic producers. In the first 10 months of 2007, AvtoVAZ's Russian sales amounted to 542,500 units, up just 2.2 percent year on year," according to a Business Monitor International (BMI) report.

However, this does not represent a crisis for the manufacturing industry as many foreign brands are setting up factories in Russia. Foreign brands being produced in Russia also grew by 41 percent in the first 6 months of this year compared to the same period in 2007.

Despite the growing market, Russia still lags behind Western Europe in terms of cars per person. "In 2007, Russia's car density stood at 228 per 1,000 adults, which is little more than a third of the Western European level. Rising affluence will see Russia catching up," in the next five years, according to the BMI report

In contrast to Russia, the demand for cars has stagnated in the West due to concerns about the economy. On Tuesday, General Motors announced that it was suspending dividends and making cutbacks in America where sales have fallen by 16 percent.

"In other developed countries this market is growing, at best, only slightly each year. The current economic conditions, characterized by high oil prices and the credit crunch, do not facilitate global automotive market development," said Stanley Root the leader of PWC's automotive practice.

Predictions for the Russian market continue to be positive, particularly for global brands. The number of foreign cars produced here is expected to rise from 440,000 to 2 million in 2012. They are also expected to expand into production of components for automobiles.

"The emergence of a powerful components industry for foreign brands" is predicted by the PWC report. Currently the majority of components are imported and the market for production of these is worth $360 million in Russia. However, PWC expect this to rise to $1 billion by the end of the year and $10 billion by 2012.

The used car market is also set for dramatic growth in the next few years according to the PWC report. Root highlighted the problem of ‘double' VAT, which causes dealers to pay tax twice on the same product, but noted that there are plans to amend the law.

This would result in "fast growth in the transparent and civilized sales of used cars through dealerships" he said. Furthermore, this would increase after sales services, a lucrative market for car dealerships in Western Europe. 

By Ed Bentley