(Bloomberg) -- A showroom selling Volkswagen AG cars in St. Petersburg, Russia, is buzzing with activity as a couple checks out the Tiguan medium SUV and a sales associate takes calls from potential buyers.
The dealership, one of five around Russia's second-largest city owned by closely held company Wagner, has seen first-half sales surge 40 percent, with some buyers waiting six months for popular models such as VW's Skoda Fabia subcompact, managing director Mikhail Podushko said.
“We are like a barometer of what's happening in the local market,” Podushko said in an interview at his office. “Last August our sales hit rock bottom and this year we have already met our 2010 sales target for some models.”
VW, Ford Motor Co. and Toyota Motor Corp. are increasing output in Russia and rolling out new models, which they'll display at the Moscow auto show starting Wednesday. Russian sales will advance 13 percent in 2010 to 1.7 million vehicles, executives from the three companies said, while deliveries in the rest of Europe are little changed.
Ford is showcasing a face-lifted Mondeo and a four-door Focus. Toyota is premiering the Highlander SUV and showing the Hilux pickup. VW is displaying a new sedan model built specifically for the Russian market and based on the Polo small car.
“Our view of Russia is that it will certainly be the most significant growth market in Europe, and a very significant growth market globally,” Mark Ovenden, Ford's Russia chief, said by phone from Moscow. “Provided the oil price stays strong and the economy continues to improve, we can see the Russian industry driving up toward 2 million units next year.”
Russian car deliveries increased 9 percent in the first seven months of the year and jumped 48 percent in July, spurred by the economic recovery and the government's cash-for-clunkers program, according to the Moscow-based Association of European Businesses. First-half sales in the rest of Europe, the most recent figures available, rose 0.6 percent.
Russia's economy will grow 4 percent in 2010, after last year's contraction of 7.9 percent, the economy ministry forecasts. The improving outlook has spurred a growing number of Russians to say conditions are favorable for making purchases, according to the Federal Statistics Service's most recent survey of consumer confidence.
Irina Makeeva is one of them. Three months ago, Makeeva, a self-described “Citroen addict,” extended her car loan to upgrade her 2006 Citroen C4 from French carmaker PSA/Peugeot-Citroen SA for a newer model with an automatic transmission.
“Things were looking up at work, so it felt like the right time to upgrade,” the 32-year-old telecom company employee said in an interview in St. Petersburg.
Demand for luxury vehicles is even higher. BMW AG, VW's Audi unit and Daimler AG's Mercedes-Benz brand, Russia's top three luxury-auto sellers, posted seven-month deliveries that outstripped volume brands' gains, according to the AEB.
“Luxury carmakers are doing better than the market in Russia, and a host of new products will support demand,” said Thierry Huon, a Paris-based automotive analyst at Exane BNP Paribas. “It's clear that all products from Germany are well-regarded in Russia, and that's especially true for top-end cars.”
The government will spend 10 billion rubles ($323 million) this year on cash incentives for automobile purchases. The four best-selling models through July this year are all Ladas, made by AvtoVAZ, Russia's largest automaker, followed by Renault SA's Logan and Ford's Focus, which the carmakers produce in Russia to avoid import tariffs.
“Growth in the segment of foreign brands produced in Russia is mostly at the expense of falling imports,” Natalia Scherbakova, a Moscow-based partner with PricewaterhouseCoopers LLP's automotive group, said in an Aug. 23 report. “There are positive trends in the market, but they cannot be regarded as evidence of sweeping changes.”
The Russian market, which plunged 49 percent last year, is also tough to predict because the economy remains dependent on raw materials, said David Thomas, Volvo Cars' Russia chief.
“In the five years I've been here, I've never known anybody to forecast the Russian market accurately,” he said, adding that the carmaker will show the new S60 sedan at the Moscow show.
Still, the improving economy is prompting carmakers to increase their Russian production and work force.
Ford, the second-largest U.S. carmaker, recently hired 200 workers at its plant near St. Petersburg where it makes the Focus and Mondeo models. The plant, which now runs two shifts a day, should make almost 80,000 cars this year, up from 42,000 in 2009, Ovenden said.
“We will continue to monitor the economy to make a call about when it would be right to return to full, three-shift production,” he said.
Toyota, which also has a St. Petersburg plant, plans to boost production to 14,000 cars this year from 8,310 cars in 2009, Dirk de Man, Toyota's sales and marketing director for Russia, said. VW, Europe's largest carmaker, is seeking to grow its 7.3 percent share of the market, said Dietmar Korzekwa, head of VW's Russia operations.
“We already changed our outlook for the Russian market a few times this year,” Korzekwa said in e-mailed comments. “Our optimism is growing as orders expand.”
Back at Wagner, customers are putting their names on a waiting list for Wolfsburg-based VW's new Polo sedan, which goes on sale in the coming weeks.
“The interest is very high,” Podushko said. “Customers are ready to spend again and we can feel it.”