Strange Analogies

When one attends the Moscow International Automobile Salon (or MosIAS), it is hard to ignore the similarities between the Russian and the American market, despite the wide disparities between the two countries’ cultures and economies. In both Russia and the United States, the domestic auto manufacturing industry has come to be largely dismissed by significant segments of the country. After having virtually monopolized the market in the past, the domestically based auto makers in each country are now facing tough times as their potential constituents turn to import brands for their quality and innovation. In the face of this heavy competition, the domestic car builders are fighting back -- raising the style and build quality of their offerings -- but these efforts are met with skepticism from the buying public. 

The huge difference between the United States and Russia, however, is that the Russian market is forging to a new sales record every month, while the U.S. market, in 2008, has sagged to one of the poorest sales levels in two decades. Last year the Russian auto industry shot up some 50 percent, which makes it one of the fastest-growing markets in the world. Meanwhile, the U.S. is still the biggest, but it is struggling to maintain its pace, much less get still bigger.

While American OEMs have been taking a beating in the U.S. market, they have been on the forefront of the recent increases in Russia, grabbing significant influence and market share. Ford Motor Company gained an early foothold in the post-Soviet Russian economy, and it has been using that to its advantage ever since. After establishing operations in Russia in 1997, Ford became the first overseas manufacturer to build vehicles in the country. Its St. Petersburg plant was established in 2002 with an annual production volume of 25,000. Soon, production capacity will jump all the way to 125,000 with the addition of the Mondeo to the Focus production line. Domestic production is a very important advantage for Ford in its battle against its rivals in the Russian market since both import duties and logistics favor production close to the customer. And as a country with 11 time zones, Russia’s logistics, as you can imagine, are a major factor.

Certainly the challenges in Russia are many -- a scattered populace, a host of competitors and a surplus of bureaucracy among them -- but the potential rewards are great. This year Russia is quite liable to overtake Germany as the largest light-vehicle market in Europe, and vehicle ownership per capita is still far from American or even Western European levels. This translates to a giant potential upside. In fact, the Russian vehicle market is growing so fast that it has simply zoomed by many facets of the car-buying Americans take for granted. For example, an oddity in the tax laws has made used-vehicle sales by dealers to be a very pricey proposition versus private-party sales, so there are very few used-car dealers. Additionally, because of arcane banking restrictions, credit is much less available in Russia than it is in the U.S. or Western Europe. Last year about one-half of the three million cars sold in Russia were paid for with cash. Leasing of vehicles to private individuals is nearly unheard of. So in spite of some similarities, things are quite different in Russia -- and it is Russia’s car market that is heavily on the rise. Go figure.