Car industry turnaround on loans and government policy

The Russian car market could become the world’s sixth largest by 2020 - with sales of 4 million cars a year. The market grew 77% in the first two months of this year - boosted by a scrap page program and with the economy benefiting from higher oil prices

The sector is looking to recover from a slump in the wake the global financial crisis and subsequent economic downturn which saw car sales in Russia plummet.  But Government steps to underpin Russia’s leading domestic carmaker, Avtovaz, as well as encourage foreign investment in Russian carmaking, coupled with a cash for clunkers programme to encourage sales, have buoyed the industry.Ben Aris, Editor of Business New Europe, says government attempts to turn the industry around have provided a good example of industry policy working well.“It’s a rare example of industry policy, tax break and what have you, designed to promote investment into a particular sector and to develop it. And as such it is hitting all of the governments goals.  To explode the myth, most people say investment into Russia has very low foreign investment – In the car sector every major player in the world is pretty much here, moreover they have just committed themselves to doubling and trebling production. But the factories that are going up in various clusters in Kaluga, in St. Petersburg are producing more and more cars – but for each job that goes to the automotive sector you got another 16 jobs in auxiliary sectors: in components, in services and more.”Ivan Bonchev from Ernst & Young outlines the growth potential and key concerns for the industry.“Indeed the first couple of months were very successful for the Russian automotive market. By the end of the year I expect to have double digit growth on the sector of about 20% year on year. One of the major issues is the overall capacity and potential of the Russian supplier base. The Russian supplier base is one of the key factors that needs to be invested in by both the government and the International automotive community and other related stake holders, because this is what would drive further sustainable growth.”Aleksey Rakhmanov, Director of Auto sector department at Ministry of Industry and Trade, says current growth is likely to keep up the pace.“We have a modest forecast for 2011, due to the fact that the scrappage program will come to its end by September 2011. We still forecast the passenger cars segment to grow by approximately 15%. These are basically two major factors: consumer confidence and the possibility of people to take car loans which than will drive the market.” Andrey Rozhkov, analyst at Metropol, expects a moderate increase of the automarket on the back of bank lending.“I think, we can expect an overall 12-18% year on year growth on the passenger car market. The consumer demand driver –attractive loan conditions – may even become a core engine of industry growth. Car loan conditions in Russia have been always debated and the banking sector experienced a substantial growth of demand for that type of loan before crisis. Of course, banks could not offer such lucrative conditions during the crisis but today we are back to the pre-crisis levels and the stronger the economic environment and government support the more affordable conditions will be offered. Another positive propensity is a variety of opportunities for a customer to purchase car on credit: rather from a bank or from a direct distributor who has established its own car bank specifically for his car brands.”Tatiana Schannikova, Credit specialist at Glav-Avto, says also points to loans as becoming a key sector growth driver.“We have seen a positive upturn in demand for cars and notably for car loans within a range of loan amount between 500 – 800 thousand roubles. Sberbank is still a leader among creditors. People, however, try to squeeze out more out of loan programs not to overpay. Banks on the other side eased their strict rules and criterions. I expect that the demand for auto loans will grow as people began to realize that this type of purchase is more comfortable and does not hit their family budget accidentally.”