Next week, August 22-28, 2016 Russia will host two major automotive exhibitions: the Moscow International Auto Show (MIAS) and the 20th International Exhibition of Automotive Parts, Components, Car Maintenance Equipment and Products (MIMS Automechanika Moscow). Shortly before these events, we decided to ask the largest Russian automotive companies’ representatives about the sentiments and the business climate in the automotive market. The experts were:
- Vladimir Nikolaevich Mozhenkov – the President of Russian Automobile Dealers Association and a member of board of directors of “AvtoSpetsCentr” GC.
- Artem Zyabin – the head of the expert and analytical department of Avtomir GC.
- Ekaterina Kuptsova – the head of marketing of Jaguar Land Rover of Avilon GC.
According to the Automobile Manufacturers Committee in the Association of European Businesses (AEB), the car market declined by 16.6% in July 2016 in comparing to the same period of 2015. “Despite steady prices, great discounts and the continued support from the government… at the moment there are only a limited number of customers who have the desire and ability to spend money on a new car,” – commented the Chairman of the Committee Joerg Schreiber.
According to “Avtomir” GC, “If the current economic situation and the absence of price shocks, new car sales will decline by 10-15% and reach 1.3-1.4 million cars in Russia by the end of 2016. Many brands have significantly reduced the line of represented models in Russia, and some of the brands deliberately controlled the prices in order to preserve customer loyalty and gain a market share. A decrease of the model range reflects the fact that at the end of the 1st half of 2016, the TOP-25 models took up 60% of all new car sales, while the figure was 51% in 2014.”
Generally, all our experts say about the same in terms of new car sales, highlighting the dependence on the reduced range, increased brands’ prices and the downturn of the Russian economy. However, the dealers remain optimistic, find ways to meet the demand of customers otherwise, open new opportunities and prospects. It is a question of viability for them.
E Vesti: Now, it is a traditional summer slack. But perhaps are there any signs of consumer sentiments improvement, activities in buying new cars? Are there any interesting, previously unobserved moments of optimism that You could share?
Mozhenkov V.N.: I can say the following. If you take the statistics, and the statistics is a stubborn thing, you will see that the sales fell significantly in July 2016 compared to July of the last year. So, the fact remains – the market has been falling for 3½ years. This is not a tendency, but a pattern. We have not yet reached the bottom. We are not even close to it, and it would be nice to do it in the near future. I would really like it. As always, it is a slack in August. I think that August will not bring us any positive developments in this regard.
Now we note any things associated with good news and hopes, to be optimistic nowadays. There are small signs that indicate that demand is changing. This year, the car market is the market of used cars.
The truck market has also slightly increased. This is a tendency. In the past two years, it was falling, and this year we are seeing small growth. This points to a revival, and it cheers us up as well.
I’d like to note one more thing. In the end of the year, in November-December, the Russians are used to give the presents themselves. And the dealers along with importers are preparing for this, I’m sure. They will sell stocks and make interesting price offers. And we would like the demand for new cars to grow by the end of the year. We are hoping, we are the optimists.
Zyabin A.: A growth is possible in the market, when the overall economic situation improves. According to our estimates, when the GDP grows by 1%, the car market will grow by 5-10%. in In this case, the key growth drivers are: the increase of real wages, inflation slowdown and a possible reduction of the key rate of the Central Bank, which will make auto loans affordable.
This period features a high elasticity of demand in the mid-price segment (it means, the sales decline significantly when there is a slight rise in prices). A further increase in prices is inevitable, but it will be more moderate, in accordance with the rate of inflation and cautious behavior of the automakers in the conditions of highly competitive environment.
Now, clients take a balanced approach to the choice of a car. The important factors are the owning cost, including the expenses on maintenance and renewal of insurance policy, the residual value when selling car in future. Today, a part of car owners postpones the purchase, which has led to the increase in the average period of car ownership. But the other turn their attention to the used car market.
Kuptsova E.: Of course, in summer we face with a traditional decline in purchasing power, and in recent years we also should take into account additional factors that affect negatively the new cars sales. The repeated increase in prices by manufacturers due to the current economic situation in the country is an additional reduction factor, and a tendency for the growth of prices for new cars will remain in the car market. There are no obvious reasons for a rush of cutomers in the near future. We can assume that the deferred demand will show itself no sooner than the next year, when consumers feel sure of their financial position.
I can note that, despite the overall decline, there is good news. For instance, Jaguar shows a significant increase in sales. Compared to the same period of the year 2015, in this year the sales have increased by more than 70% in Russia, which is largely due to the launch of Jaguar F-PACE in the market, the brand’s first sporty SUV.
Moreover, the stock of AVILON GC still has the cars of the production year 2015. These cars are sold at the last year’s prices (on the average the prices are by 10-15% less comparing to the prices of the current year). Due to an average car cost about 3.5 – 4 million rubles, it’s a significant difference.
E Vesti: The used car market is feeling much better – the sales are growing. But it was reported that the sales growth slowed down in July. How do you estimate the opportunities of the used car market for the company given the current situation?
V. N. Mozhenkov: A deferred demand for new cars that is being accumulated, it slowly began to spill over into a demand for cars with mileage. It is growing we expect about 5 million used cars to be sold this year. You know, a person had a car for 1.5 million rubles, he used it for 3-5 years. The time came to buy a new one, but the car that was worth 1.5 million, now it worth 2 million rubles. He has no such money, and the man buys a two-year or three-year car, for example, for 1 million rubles. Thus, the buyer is mobile, and he has preserved the quality of life. This tendency also pleases us.
Zyabin A.: In the second half of the summer the market undergoes a slight cooling due to seasonal factors. But in general, the prospects of the used car market are predictable and optimistic in the short term.
In the conditions of the declining new car sales, the used car market is an essential asset for dealers. This support from the state and automakers also help them by offering extra discount on a new car upon trade-in.
In order to keep this situation stable, to provide the customer with the security guarantee of a deal continue and to increase the sales of used cars, the dealers expand the range of services at through the extended warranty insurance on used cars and special credit programs.
At the moment, a unified database of used cars is being created together with the major dealers. It will contain the entire history of a car, starting from the number of owners, accidents, actual mileage and maintenance cases. This will make the market more transparent. (the project is cerried out by ROAD together with Caroperator).
Kuptsova E.: Generally, the sales of used cars by dealerships show a positive trend: the habit of buying cars from the private sellers is happily dying out, the buyers get more accustomed to the culture of a purchase at car holdings. In turn, many manufacturers develop profitable used car sales programs and handover them to their dealer networks.
The seasonality is equally common to both the new and the used cars, and the summer season is not the peak sales. Besides, the prices for the used cars also went up in the background of a high rise in price for the new cars.
The demand for the used cars will grow in the near future. We do not expect a strong surge in buying activity in August, but we can forecast a small increase in autumn.
E Vesti: Please share your view of the situation with car insurance: what is happening to OSAGO and KASKO and what is expected?
Zyabin A.: Increase in the price for car insurance is largely due to the increase in price for spare parts. Perhaps, this issue is not as prevalent on the agenda for the buyer as the rising prices for new cars, but if the client encounters the need for body repair, the spare part prices can unpleasantly surprise him. A penetration of additional types of insurance is expanding. And there is a switching over to a natural form of compensation from the monetary compensation under OSAGO. This allows reducing costs of the insurance companies the level of fraud in this area and partly additional loading of the dealers’ body shops.
Kuptsova E.: KASKO is going through a bad stretch. This is due to a big competition among the broker’s offices and a different pricing. Equally, it touched AVILON as well. Every day we face with the competitors that offer conditions able to meet competition due to the tariff cuts. We negotiate with partners and offer better conditions (for example, the current tariff proposal on all Jaguar Land Rover models together with SK Ingosstrakh).
Thus, the Russian car dealers will have to continue the policy of rethinking their services and make extra efforts. After a while, as “Autoworld” GC warns, the car services will be also put at risk: “A serious challenge of the present time for dealers is an increased unutilised capacity of the dealers’ maintenance shops. In 2015, the decline was not so clear, since the activity of a service bases on cars to the age of 3-5 years. At the same time, the share of warranty cars, which were the main asset for maintenance shops of the authorized dealers until 2015, has been steadily declining. In order to save money, the car owners have to refuse servicing at official dealers before the expiry of the warranty period. In these conditions, the dealers have to do their best to keep the maintenance shops loaded. This will require development and application of tools for attracting the post-warranty cars, the off-side fleet, making gainful offers for customers of service, organization of seasonal promos, etc”.
Vladimir Mozhenkov tells that the positive changes at the state level are desired: “Now, the consumers are tightening their belts. When there is a reduction in consumption, everyone consumes slightly less and this affects all industries and companies. It is necessary to carry out structural changes in the economy, which should lead to an increase in demand. Our automotive industry can produce 3’400’000 cars annually, but the purchasing power will not reach this volume. Today, the buyers can purchase about 1’400’000 cars. Therefore, it is necessary to create development strategy for the country and growth drivers for the Russian economy, to make it possible for people to earn more money, take out available loans for cars, apartments, cottages and so on, to make it possible for businesses to obtain loans for development”.
Who of us would not agree with this? All that is left to do is to wish good luck to our dealerships in their way, especially since the majority of businessmen and citizens of Russia will join them in their wishes.