MOSCOW -- South Korea's Hyundai Motor and its affiliate Kia Motors are using the decline of Russia's car industry to boost market share, turning the screw on Renault-Nissan's beleaguered Russian venture AvtoVAZ.
Hyundai and Kia are maintaining production levels and keeping prices low during Russia's economic downturn, which has seen car sales fall by half from their peak of almost 3 million a year in 2012-13, seeking to reap rewards when sales pick up.
Their strategy has been helped by the struggles of AvtoVAZ, the once-dominant player in Russia. It has been hit harder by the market decline and failed to shake the stigma of its Soviet-era Lada brand, still viewed by many Russians as a cut below foreign cars.
"I'm biased against the domestic car industry," said Victoria Andreeva, a 28-year-old PR manager in Moscow who bought a Hyundai Solaris last year. "I still remember the car I learnt to drive on, after turning the wheel there were calluses on my palms."
This persistent stigma, and the strong challenge from Hyundai and Kia, have piled pressure on Renault. It sunk $1 billion into AvtoVAZ in 2008 for an initial 25 percent stake, hoping to replicate its success with Dacia in Romania and transform Lada into a big budget European brand. It has since written down its investment by 70 percent.
Hyundai holds a 34 percent stake in Kia, which it acquired at the height of the Asian financial crisis in 1998, while Renault is now the majority owner of AvtoVAZ with its Japanese alliance partner Nissan.
Battered by an economic crisis fueled by lower oil prices and Western sanctions over Ukraine, car sales in Russia fell 36 percent last year as cash-strapped consumers held back from expensive purchases. But Hyundai and Kia sales only fell 10 and 16 percent respectively, according to the Association of European Businesses (AEB) industry group. Their combined market share has doubled since 2012 to about 20 percent.
By contrast, the combined market share of AvtoVAZ and Renault-Nissan has held at around 30 percent since 2012. Gains by Renault-Nissan have been offset by sliding AvtoVAZ sales, which plunged 31 percent last year.
In the first five months of this year, Lada remained Russia's top-selling brand with sales of 102,124 vehicles, down 11 percent, according to AEB data. Kia was the No. 2 brand with a volume of 56,986, down 9 percent. Hyundai was No. 3 with sales of 52,333, down 22 percent. The total market fell by 15 percent to 548,119 units.
A Hyundai Motor spokesman said it planned to launch new products and increase production in Russia to protect profits while expanding its market share.
Hyundai Vice President Zayong Koo said in late April the carmaker would "try to gain the upper hand in Russia when the market recovers by continuously carrying out a strategy of expanding market share".
Renault and AvtoVAZ declined to comment.
The South Korean carmakers' strategy of using an economic downturn to expand market share and emerge as winners when sales pick up has worked before, notably in the U.S.
Hyundai was the only major carmaker that increased U.S. sales during a 2009 market slump. It emerged with a company record market share of 5.1 percent in 2011 when sales recovered.
"During the economic downturn, Hyundai attracted dealers from struggling rival Ford Motor, which helped them strengthen," said Ko Tae-bong, an auto analyst at Seoul-based Hi Investment & Securities. "Hyundai's contrarian management strategy is the major reason behind its global success so far," he said.
The two carmakers are now well placed to do the same in Russia having invested in local production and won a reputation with consumers for providing cheap, reliable cars.
They have trumped other foreign carmakers, helped by Hyundai's plant in Russia which produces all of the country's best-selling Hyundai Solaris cars and Kia Rio models.
This has helped the Korean companies undercut rivals such as Volkswagen Group, whose reliance on costly imported parts has forced them to hike prices to offset the devaluation of the ruble.
The price of a Kia Rio - Russia's third most-popular car so far this year after the Solaris and AvtoVAZ's Lada Granta - rose 11 percent in 2015 compared with a 24-percent jump in average Russian car prices since late 2014.
Hyundai and Kia may also be prepared to squeeze profit margins to maintain sales.
Their Russian factory ran at full capacity last year to churn out 229,500 vehicles, according to Hyundai's regulatory filing, at a time when many manufacturers were cutting production and waning demand prompted U.S. General Motors Co to quit the market.
In their battle with AvtoVAZ on the Russian mass-market, Hyundai and Kia have benefited from the poor reputation still plaguing the Lada brand.
Hyundai, together with Kia, recorded a 12 percent fall in first-quarter net profit this year, partly due to its exposure to struggling emerging markets including Russia. AvtoVAZ made a net loss of 8.6 billion rubles ($130 million).
Founded as a state producer in the 1960s, AvtoVAZ is still known around the world for its box-like Soviet-era cars, despite significant improvements in build quality.
Ladas are generally priced lower than similar-range cars from the Korean manufacturers - Lada Granta prices start from 313,900 rubles, for example, compared with the Solaris and Rio which both start at just over 500,000 rubles.
"We understand that when you are talking about Lada then you can't sell at the same price as Volkswagen or even Hyundai, you don't have the same brand strength," AvtoVAZ CEO Nicolas Maure told Russia's Vedomosti newspaper on Tuesday.
But the budget pricing has not prevented AvtoVAZ from slowly leaching market share during the downturn; it had a 16.8 percent share last year, still making it the single biggest player, but that was down from 18.3 percent in 2012. While Russians may have less disposable income, they would rather spend more for a foreign brand when making big-ticket purchases, analysts say.
"Russian consumers generally see Kia and Hyundai as being a cut above Lada products despite the fact Lada are doing very well with their product line and improving them," said IHS analyst Tim Urquhart.
"It was a communist car and a communist brand. Russia is becoming, like every other developed economy, an aspirational, brand-conscious consumer economy. Whereas Lada still harks back to the old days."
Urquhart said Renault's success with Romanian brand Dacia did not mean it would produce similar results in Russia. "Dacia didn't have the same legacy issues as Lada," he said. "They can't really repeat the trick with AvtoVAZ."