MOSCOW. (Mikhail Khmelyov for RIA Novosti) - What kind of cars are Russians driving these days? What makes will they be buying in several years from now? In the not-so-remote past these questions could have only one answer - most cars on the roads were of Russian make.
They were neither very safe nor particularly comfortable, but the price was right. Over the past several years, Russian car owners have changed their attitudes, and now every fourth car in Russia is of foreign make.
The car market is one of Russia's most dynamic industries. In the past five years, it has grown more than three-fold. In 2001, Russians spent less than nine billion dollars on new cars, whereas the figure for the end of 2006 was about $30 billion. Apart from Russia, only China has such a booming car market.
In quantitative terms, the growth of the Russian market over the same period was more modest - no more than 6.6% a year. But this figure conceals a dramatic change - Russians are giving up old and cheap cars in favor of modern and expensive foreign models. This trend will prevail at least for the next four or five years, experts from PricewaterhouseCoopers predict with confidence.
Russia is two to three times behind other developed countries in terms of car ownership per 1,000 people, but Russians are rapidly reducing this gap. Until recently, most people couldn't afford cars, but now the situation has changed. Economic growth has generated higher incomes and increased consumption. According to the Economist Intelligence Unit, in the past five years, per capita income has been going up at a rate of 8-10% per year. Consumer credits have become a catalyst for even higher growth. Since 2003, the scale of credits for the purchase of cars has increased tenfold.
What is the preferred choice of an average Russian city resident? Fifty-fifty, it is a foreign car with a price tag from $10,000 to $20,000. As distinct from the 1990s, this will be a new car rather than a used foreign model. A change in the customs and tariff regulations on used foreign cars is rapidly reducing their number on the roads. There is still demand for second hand, but now Russians tend to buy used cars which were sold as new in Russia, say, two years ago, rather than drive them from Europe.
Finally, the main difference from the past is that Russian consumers do not care much whether a Ford, Renault, or Hyundai was made in the European Union, South Korea, or at home as long as it conforms to their requirements. This lack of bias holds promise for foreign companies in this country.
A dozen foreign brands are already being assembled in Russia today. Three car assembly plants - Ford in the Leningrad Region, Renault in Moscow and a Chevrolet-producing joint venture with General Motors in Togliatti - are working at full capacity. The Korean Kia and Hyundai are expanding their operation as well. There are several turnkey car plants, including those with Chinese participation, and even more ambitious projects are in the offing.
In 2005, the Russian government launched a program of duty relief to foreign companies interested in starting full-scale production of cars in Russia. The companies commit to invest at least $100 million in the project and turn out more than 25,000 a year. Importantly, the share of Russian spare parts in car assembly must exceed 30% in five years after the start of the project.
The Kremlin's proposal has evoked response from several car industry majors - Toyota, Nissan, Volkswagen, DaimlerChrysler, and General Motors. Russian partners are promoting other famous foreign brands. In addition to car production, they are developing a whole industry of spare parts. In Russia, the Ministry of Industry and Energy, and the Ministry of Economic Development and Trade are the key departments in charge of the car industry. In their assessment, foreign investment on signed contracts alone amounts to two billion dollars. All in all, Russian plants will be turning out 800,000 cars by 2010, or half of all national car production.
Russia's WTO entry may have a strong impact on the prospects of foreign companies on the domestic market. Russia will have to reduce its import duty on new cars from the current 25% to 15% of the car price in seven years. This means the importers will be able to cut down the retail prices by 10%. On the other hand, foreign carmakers in Russia will lose 10% - part of the gain over direct imports. The companies, which are already building their plants in Russia, should be able to recoup their investment before the seven-year period expires. But those companies that have put off their decision to come to Russia may not be able to do so.
The list of foreign companies taking part in the development of the Russian car industry is not likely to become longer. As Russian ministers said more than once, Russia's WTO entry will put an end to all talk of benefits for foreign car makers.
Mikhail Khmelyov is a commentator for Izvestia newspaper.
The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.
