The Lada’s New Clothes, or The Far East’s fleeting marriage to Russian cars

4 Sep '09
Oleg Kouzbit, Online News Managing Editor

In March Marchmont reported an unprecedented measure the RF government had taken to wean residents of Russia’s Far East away from Japanese cars. Prime Minister Putin decreed direct $56m subsidies to national rail operator Russian Railways to ship Russian-made cars to the Far Eastern regions for free. The government believes its move will “reconcile” Far East consumers into buying Russian-made vehicles by saving transportation costs which will lower car prices. Six months have passed, and early sales reports seem to prove the March decision was a smart move. According to an authoritative Russian car market expert, agency Avtostat, Russia’s Lada beat Japan’s Toyota in Far Eastern new car sales. But buyers are still gobbling up used cars 30X more than new models, so while Lada has won a victory, it is still losing the war.

Toyota has traditionally been the bestselling brand in Russia’s Far East.

In spite of this, the much less glitzy Lada apparently outsold its classy competitor for the last six months—but only by a modest 33 car difference.

According to Avtostat, 834 new Lada cars were sold between January and June vs. 801 new Toyota cars.

In 2008 it was 2,500 Toyotas vs. 1,800 Ladas.

Nissan was a distant third with just 234 cars sold in the reporting period.

The weaker ruble cushions the market fall

All experts agree that the current financial crisis has helped Russian auto makers increase their share of one of Russia’s most “unpatriotic” car markets. According to Avtostat, the under $6,000 market segment has grown in the Far East from zero to 5% as a result of the ruble devaluation and AvtoVAZ is reaping the benefits.

In the $6,000 to $10,000 segment, sales skyrocketed, in defiance to the economic meltdown, from last year’s 12.6% to a solid 30%, while the $10,000-20,000 segment, on the contrary, has crashed from 44.7% to 25.7%. In other words, the ritzy have given way (most likely temporarily) to the homely, the flavorless, the rustic yet the affordable.

Of course, a crisis can be a wayward ally, Mikhail Pak of the Aton investment firm observes, and it will surely frustrate year-end sales results for both the Lada and the Toyota, not to mention others. But the Russian brand’s freefall is likely to find bottom sooner than with its rivals, the expert feels.

The glamour and disgrace of a duty saga

On the face of it, it is also the RF Government’s much-debated March decision to give national rail operator Russian Railways a $56m subsidy to ship Russian-made cars to the Far East for free that deserves a place of honor at the table of the Lada’s feast.

The move, which was a 180 degree turn from the regional economic havoc that had been caused by the government’s January import duty hike, was hailed by officials, but in expert business circles it didn’t win thunderous applause.

Many felt the decision was “erroneous and knee-jerk”.

On paper, the decision looked logical. It was meant to help Far East residents buy Russian. Of almost 1.25 million passenger cars driven in the region (according to Ernst and Young), more than 80% are right-hand drive (RHD) Japanese cars, Avtostat reports.

Both Prime Minister Putin and the RF Cabinet felt that RHD cars are an “inconvenience” on Russian roads and need to be eliminated. Moreover, the new subsidy was aimed at pushing new car sales instead of used, to keep people employed and the factories humming.

The reality check

Like many best laid plans, after only a few months Russian Railways had to admit the $56m had been wasted; the subsidy has made no tangible difference. No Russian auto maker has a good network of dealerships in the Far East; and customers were sitting tight during the crisis, according to national dealers.

Neither AvtoVAZ nor Sollers – the two that have announced plans to set up a new auto factory in the region – have drawn any closer to implementation.

Alexander Agibalov, managing director of AG Capital, estimates that it will take either of them at least another 18 to 24 months to launch an assembling plant and put together a fledgling sales and servicing system in this far-flung region of Russia.

Wrapped in a mirage?

Hopeful as the Lada’s current success may be, it appears now that it will just make a dent on the long-established market bias towards international, primarily Asian, brands. A major factor is the region’s appetite for used cars.

According to Avtostat, a total of 103,000 vehicles were sold in the region in the first six months of the year, of which only 3,000 were new ones. And in the huge used car segment Toyota was still the undisputable sales leader (56,000 out of 100,000 used cars of all brands sold), followed by the Nissan (12,872 cars), the Mitsubishi (5,994), and the Honda (5,600).

Lada was only fifth with 4,810 cars sold.

While AvtoVAZ can claim its pole position over such famous brands as Mazda, Suzuki, Subaru, Isuzu and Daihatsu, it’s still a little “victory”.

With the used car market segment still 30 times the volume of the new car one, the weakened ruble will only give domestic auto makers a short term fix.
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