Analysis: Increased prospects for Chinese companies in Russia's emerging automobile market

Gasgoo.com (Shanghai) - Being the world's sixth largest economy, Russia's recent entry into the World Trade Organization is of great importance. In preparation for admission into the WTO, the country has decreased its average customs tax from 11.7 percent to 7.8 percent. Russia has also promised that it will not unconditionally levy taxes with the aim of blocking imports from other member countries.

However, as far as automobiles are concerned, the country has yet to reduce import taxes, and is currently discussing what steps it should take to encourage trade while protecting local manufacturers. According to previously negotiated agreements, Russia must reduce import taxes on new sedans from 30 percent to 25 percent. That tax level must be maintained for three years, after which it will be reduced 2.5 percent annually until 2019, when it should total 15 percent. Taxes for buses, meanwhile, must be reduced to 10 percent or less.

Despite the relative infancy of the Chinese automobile industry on the world stage, the country's manufacturers have made strong progress in developing markets, which includes Russia. Furthermore, several Chinese manufacturers, such as Great Wall and FAW Group, are specifically targeting their exports towards Russia. In order to better understand the importance of Russia's joining WTO to both China's automobile market and the world's, Gasgoo.com (Chinese) held a week-long, three question survey on the topic, with a total of 1,201 industry experts and analysts participating.

In the first question of the survey, participants were asked whether or not they felt Russia's joining the WTO would be beneficial to Chinese manufacturers. The majority of respondents, 58 percent, agreed with the statement, with only 15 percent opposed. 24 percent remained neutral, saying that there was enough variety between different Chinese manufacturers that it is impossible to make a blanket statement for the entire industry. Three percent were undecided.

Statistics collected by the Association of European Businesses, a group promoting the interests of European companies in Russia, show that sales of Chinese vehicles in Russia have grown dramatically since 2006. In 2007, Chinese car sales in the country reached their maximum volume of 50,500 vehicles. That number fell over the next two years before recovering again in 2010. Ever since then, Chinese vehicle sales have been on the rise, with a total of 33,100 sold over the first half of this year. This year's total sales figure may very well exceed that of 2007's, setting a new record for Chinese manufacturers.

Aside from the aftereffects caused by the global banking crisis, policies aimed at protecting Russia's domestic automobile industry are citied as the key reason why sales of Chinese automobiles in the country fell from 2008 to 2009. At the end of 2007, the Russian government temporarily refused to approve applications from Chinese manufacturers to establish knockdown factories in the country. Two years later the government increased taxes for imported vehicles. There has also been legislation which has raised the minimum standards for imported vehicles. As Chinese manufacturers compete in the low-end of the market, such protectionist policies specifically hindered their progress in the country. Many analysts predict that Russia's entry into the WTO and subsequent reductions to import taxes will greatly help Chinese manufacturers' sales in the country.

However, there are those that warn that, in addition to new opportunities, there will be new challenges for China to face. It is not only Chinese manufacturers that are eyeing the Russian market. Foreign brands account for around 40 percent of the Russian automobile market. Chevrolet is currently the leading foreign brand in the country, followed by Renault and Kia. By comparison, automobile and motorcycle manufacturer Lifan, which is currently the country's top selling Chinese brand, is not even among the 20 best selling foreign brands. As Russia further opens its economy, competition in the country will become even fiercer, which is a challenge that Chinese manufacturers need to face. The importance of market localization will become even greater for prospective manufacturers wanting to succeed in Russia, which is especially tough for relatively young and financially lacking Chinese companies.

There are currently several Chinese manufacturers exporting vehicles to Russia. On the passenger automobile side, Chery, Geely, Great Wall, BYD, BAIC, Lifan, Haima and Foton are all active in the country. Additionally, several Chinese bus manufacturers, including Yutong, ZhongTong, King Long, Ankai and FAW, are also exporting their vehicles to the country. Tax reductions for imported vehicles are expected to most notably affect Chinese bus manufacturers, which can take advantage of the noticeable lack of domestic bus makers.

However, Chinese passenger automobile manufacturers may have a harder time as enterprises from other countries expand in Russia. As the country's automobile industry continues to expand, Russian consumers' demands also continue to rise, which will make it harder for Chinese manufacturers to thrive unless they also develop.

In the second question, participants were asked about the challenges Russia's entry into the WTO poses for Chinese automobile manufacturers. 53 percent of respondents worry that their biggest problem will be increased competition from Western enterprises. 29 percent said that an increased focus on localization will be the largest obstacle for Chinese manufacturers, while 17 percent answered that increased Russian support for domestic companies was the most serious issue.

In the short term, production volumes for domestically manufactured Russian automobiles are expected to decrease following the opening of the country's economy to the WTO. The amount of domestically manufactured sedans is expected to be 58 percent lower in 2014 than it was in 2010. Meanwhile, Russian truck production numbers are expected to be a full 98 percent lower.

According to recent statistics, nine of the top ten performing automobile brands in July were foreign, Russia's Lada being the only domestic brand making the rankings. Domestic manufacturers' market share is predicted to drop to 41 percent in 2014, while that of foreign enterprises is expected to exceed 50 percent. While that means there will be even more opportunities for foreign brands, Western, Japanese and Korean enterprises are widely expected to make the biggest gains. At their peak, Chinese manufacturers controlled just three percent of the Russian import automobile market. Increased investment on the part of Western and Japanese manufacturers will make it even harder for finaciallyweaker Chinese firms to compete.

Furthermore, Chinese manufacturers lack localization experience in foreign markets. As companies from all around the world increase the pace of their development in Russia, good localization, which includes cooperation with local auto part suppliers, expansive dealership networks and strong logistical ability, will become even more crucial. Chinese manufacturers, which still rely on knockdown factories to assemble their products for sales overseas, lack the ability and experience to compete with veteran multinational enterprises.

Government policies aimed to protect domestic manufacturers are also a matter of concern for foreign companies. According to the country's industry development plan, Russia's annual automobile production is expected to reach four million units by 2020. To this end, the government plans to invest 169 billion rubles to boost automobile production. There is no reason to believe that the government will stop protecting domestic manufacturers following the country's entry to the WTO. This may prove especially troublesome for Chinese manufacturers, which will mainly be competing with domestic producers for the same entry-level portion of the market.

Finally, participants were asked to vote for which Chinese manufacturer they believe will gain the most from the Russian automobile market. Great Wall led the charts with 31 percent of the vote. It was followed by Geely, Chery, Lifan and BYD, which gained 19 percent, 17 percent, eight percent and seven percent of participants' votes, respectively.

Great Wall sold a total of 7,044 vehicles in Russia from January to July. That figure is more than the double the 3,156 the Hebei-based manufacturer sold in the country over the first seven months of 2011. Although Great Wall's Russian sales figures are still behind some of its rivals, it is worth noting that its SUV and pickup truck lines face little domestic competition. In the long run, this may prove to be an advantage for Great Wall. By comparison, Chery, Geely and Lifan rely primarily on sedan sales in the country, making them easy targets for domestic manufacturers.

In addition to Great Wall, Chery, Lifan and BYD also saw their Russia-bound sales over double from 2011 to 2012. Due to their time operating in the country, these manufacturers do indeed possess a definite amount of brand recognition among Russian consumers. However, Chinese manufacturers have yet to announce any concrete plans to construct full automobile production factories in the country. On the issue, Sun Zejun, Lifan's representative in Russia, pointed out that Chinese manufacturers primarily compete with domestic manufacturers in the low-end of the market. As such, they are very cautious when approaching the idea of expensive expansion plans.

In conclusion, while the Russian market holds several new opportunities for Chinese manufacturers, it also presents its fair share of challenges.