Russia car output to soar, but not without risks
Slowing demand could force automakers to export
Russia's auto industry is in danger of sliding into the same overcapacity problem as the rest of Europe, analysts say. The warning comes after contract manufacturer Avtotor Holding became the latest to announce a major investment in Russian auto production.
In November, the company said it has formed a partnership with supplier Magna International Inc. to establish a complex of six assembly plants and 15 parts plants in Russia's Kaliningrad province.
At full capacity in 2018, the complex will produce up to 250,000 vehicles annually. Citing Avtotor Chairman Vladimir Shcherbakov, the Wall Street Journal has estimated that the project will cost $3.2 billion.
Betting on Russia
Manufacturers are betting heavily on Russia after strong growth lifted vehicle sales to an estimated 2.9 million units in 2012. Russia now is Europe's second-largest car market, after Germany.
But it's not at all clear whether Russia's market will continue to grow indefinitely. Industry sales were flat in November, and the Russian market looks like it might stagnate.
"We do not expect a quick return to growth in the coming months," Joerg Schreiber, chairman of the Association of European Businesses' Automobile Manufacturers Committee, said in a statement.
Automakers seem undeterred. In December, Volkswagen Group laid the foundations for a new engine plant next to its assembly plant in Kaluga, 200km southwest of Moscow. The German automaker says its brands will sell half a million vehicles annually in Russia by 2018.
Meanwhile, Russian automaker AvtoVAZ has refurbished part of its Togliatti plant complex to produce up to 350,000 vehicles annually with partner Renault-Nissan.
Ford Motor Co. is expanding, too. The American automaker operates three assembly plants with Russian carmaker Sollers, and the partners plan to open a fourth, a Sollers spokesman told Automotive News Europe.
All these initiatives are starting to add up. According to research firm LMC Automotive, 66 percent of new cars sold in Russia are made locally, and that figure is expected to rise as automakers expand production.
"If everybody puts in capacity they say they might, there could be overcapacity," said Carol Thomas, central and eastern European analyst at LMC Automotive.
The prospect for overcapacity would seem to make Avtotor's joint venture with Magna a risky one, but the partners appear to be lining up clients.
Land Rover and Subaru have signed up to produce cars with Avtotor, reported the Russian business newspaper RBC Daily in November. Avtotor also makes cars for BMW, Kia, Opel and Chevrolet, with production totaling 220,000 vehicles in 2011.
As Avtotor and Magna boost production, they are going to need more locally made components — hence the decision to build 15 parts plants.
That would address a problem raised by the oligarch Oleg Deripaska, owner of GAZ Group, last year. "To be competitive you have to have local component production," he told Automotive News Europe. "Unfortunately it's a long time coming in Russia."
Avtotor's assembly plants build vehicles from semiknockdown kits imported into the country. But the Russian government has ruled that automakers must pay tariffs if their vehicles have insufficient local content.
The government has exempted Avtotor's kits from import duties, but that runs out in 2016, according to LMC.
If Russia's production capacity proves too high for the market, automakers may start exporting more vehicles to the rest of Europe.
That could be a viable tactic for Avtotor, since Kaliningrad's location between Lithuania and Poland would make it easier to ship Avtotor-produced cars to the West.
"We do expect to see exports increasing from Russia," said Michael Gartside, lead analyst for PwC Autofacts. "It's a potential release valve."
Cadillac CTS, SRX and Escalade;
Chevrolet Aveo, Epica, Lacetti, Malibu, Tahoe, Orlando and Captiva;
Opel Astra, Zafira, Meriva, Insignia, Mokka, Antara and Astra ST;
Kia Cee'd, Sportage, Rio, Soul, Carens and Mohave
BMW 3 series, 5 series, 7 series, X1, X3, X5 and X6
You can reach Nick Gibbs at email@example.com.