russia automotive 2012

7/31/2019 Russia Automotive 2012

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An overviewo the Russian and CIS

automotive industryFebruary 2012


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ContentsForeword ............................................................................................. 1

Russian economy ..................................................................................2

Russia in the global automotive industry .............................................. 4

Russian automotive industry ................................................................ 6

Light vehicle market ............................................................................ 7

Commercial vehicle market ............................................................... 12

Bus market ........................................................................................14

Automotive component market ......................................................... 16

Car loan market ................................................................................ 18

Dealership networks .......................................................................... 19

Automotive logistics ......................................................................... 20

CIS automotive markets .................................................................... 21

Ernst & Youngs involvement in the automotive industry .....................23

Contacts ........................................................................................... 24


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Dear Reader,

The Russian automotive industry experienced a milestone year in 2011.

Some o the noted happenings and highlights include:

Automotive output hit a production record triggered by strong market recovery,

production ramp-up plans and new investment in the sector.

Sales rose by approximately 40% year on year, almost reaching the pre-crisis level.

Sales were driven by pent-up demand, recovery o consumer condence, credit

availability and government incentives.

The Russian Government passed an amendment to the industrial assembly legislation

leading to a major change o the rules. The change led to a consolidation o the original

equipment manuacturer (OEM) sector and emergence o a ew signicant major

alliances o players.

The suppliers sector showed a urther restructuring and reshaping, leading to new

investment opportunities and an increase o the original equipment (OE) share o

market.

The retail segment has been reshaping through more ecient operations,consolidation and market expansion.

Russia has nally been accepted into the World Trade Organization (WTO), which will

lead to urther changes in the industry and its competitive landscape. It will create

more opportunities and challenges or market players.

This report outlines our view o the current state o the Russian automotive industry

and our outlook or the evolution o this high-growth market in the coming years.

We remain positive about the long-term prospects o the Russian automotive industry

and believe that the next ew years will bring additional signicant investment, particularly

in the supplier sector. We are eager to share our market experience and assist you in your

business activities by means o prudent investment, as well as risk, operational and cost

management advisory.

Foreword

Ivan Bonchev

Ernst & Young (CIS) B.V.

CIS Automotive Leader

An overview o the Russian and CIS automotive industry Foreword |1


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In 2011, Russias gross domestic product

(GDP) reached 4.2% in real terms to

demonstrate an upward trend

and surpass global and European growth

rates by 2.7% and 1.5%, respectively.

Russias real GDP growth resulted rom

the recovery o the labor market,

growth o consumption and an increase

in investments:

According to Rosstat, the

unemployment rate in Russia declined

by 0.8% or 11 months o 2011 in

a year-to-year comparison with 2010.

Final consumption costs at current

prices increased by 13% or three

quarters o 2011 compared on

a year-to-year basis.

According to Russias balance

o payments, direct oreign investment

in Russia in the rst three quarters

o 2011 was up 41% comparedto the similar period o 2010.

Furthermore, 2011 saw an increase

in oil prices, which had a positive eect

on the trade balance. By the end o 2011,

the consumer price index was 6.1%,

representing the lowest value since 1991.

According to the consensus orecast

prepared by analytical agencies and by the

Ministry or Economic Development o the

Russian Federation, the consumer priceindex is expected to decrease urther rom

20122020. This will have a positive eect

on real income and consumption growth

rates.

The year 2011 witnessed a systematic

increase in the renancing rate, which

served to curb infation. At the end o

2011, the renancing rate was lowered,

demonstrating the attempts o the Central

Bank o Russia (CBR) to boost economic

activity in the country.

Nominal GDP and real GDP growth

Sources: Federal State Statistics Service (Rosstat); Ministry or Economic Development o the Russian Federation;IHS Global Insight; Ernst & Young estimates.

Real GDP growth E estimate, F forecastNominal GDP

% growthUS$ billions

0

500

1,000

1,500

2,000

2,500

3,000

F2015F2014F2013F2012E20112010200920082007

10%

8%

6%

4%

2%

0%

2%

4%

6%

8%

10%

1,288

8.4%

1,649

1,229

1,485

1,862

2,065

2,298

2,542

2,740

5.3%

7.9%

3.9%4.2%

3.5%4.1% 4.4% 3.9%

Russian economy

2| An overview o the Russian and CIS automotive industry Russian economy


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The agreement on Russias accession to the

WTO is planned to be ratied in mid-2012,

and Russia will become a ull-fedged

member o this organization. This being the

case, many protectionist measures will be

reconsidered.

Experts orecast a slowdown in global

economic growth in 2012 due to the

aggravation o debt problems in certain

European countries and the public debt

problem in the United States. In view o the

rapidly expanding globalization o the world

economy and interdependencies existing

between various countries, the infuenceo these actors on the Russian economy

cannot be ignored.

Thereore, in the medium and long term,

acceleration o economic growth in Russia

will to a great extent depend on the global

economic environment (e.g., the ability

o European countries to handle the debt

crisis) and country-specic problems

(including improvement o the institutional

environment aimed at promotingcompetition, reducing the governments

role in the economy, and developing and

implementing innovative technologies).

Macroeconomic indicators

2007 2008 2009 2010 E2011 F2012

Population, millions 142.0 141.9 141.9 142.9 142.9 141.9

Nominal GDP, US$ billions 1,301.8 1,659.4 1,221.7 1,486.9 1,817.7 2,064.9

Nominal GDP, change in % 31.6 27.5 26.4 21.7 22.2 13.6

Real GDP, change in % 8.5 5.2 7.8 4.3 4.1 3.6

GDP per capita, US$ 9,167.5 11,694.4 8,609.4 10,404.8 12,719.8 14,550.0

Foreign direct investment, US$ billions 55.1 75.0 36.5 43.3 38.1* n/a

Infation, % 11.9 13.3 8.8 8.8 6.1 6.0

Industrial Production Index, % 6.8 0.6 9.3 8.2 5.6 3.6

Crude oil, US$ per barrel 69.3 94.4 61.1 77.5 105.0 100.0

Real disposable income growth, % 17.2 11.5 3.5 5.2 1.5 4.0

Unemployment rate among economically active

population, % 6.1 6.3 8.4 7.5 6.5 6.3

Average monthly wages, machinery industry, US$ 548.7 696.7 546.7 683.6 725.3 n/a

Average monthly wages, all sectors, US$ 532.2 695.1 586.7 689.7 814.4 924.7

Exchange rate RUB/US$ (annual average) 25.5 24.9 31.8 30.4 29.4 28.6

Exchange rate RUB/euro (annual average) 35.0 36.4 44.2 40.2 40.9 39.1

Sources: Federal State Statistics Service (Rosstat); Ministry or Economic Development o the Russian Federation; Central Bank o Russia; IHS Global Insight; The Economist.

* Indicator or three quarters o 2011.

An overview o the Russian and CIS automotive industry Russian economy |3


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In 2011, the global automotive industry

demonstrated moderate growth rates as

compared to the previous year. The

Eurozone debt crisis triggered general

stagnation in European Union (EU)

economies and brought about a more than

1% reduction in the sales o new light

vehicles. The March 2011 earthquake in

the Pacic Ocean caused a 15% drop in thesales o new light vehicles in Japan, based

on the results o 2010. Meanwhile, in

China, rapid economic growth gave way to

moderate growth rates in line with the

governments plans to stabilize the rapidly

developing economy. This had a chilling

eect on the Chinese automotive market,

which demonstrated only 5% growth in new

car sales in 2011 compared to 33% and 48%

in 2010 and 2009, respectively. In 2011, the

US market o new light vehicles continued to

grow. According to experts, with the currentgrowth rate, sales o light vehicles in the US

may exceed the level o 2008.

In 2012, the growth rates o the global

automotive industry are expected to

remain low. Developing automotive

markets will demonstrate a better pace,

while European countries will be orced to

take additional steps to resolve their public

debt problems. This will signicantly limit

their ability to stimulate the automotive

market through car scrapping programs,

which were an important tool o promotingdemand in the period rom 2008 to 2010.

Meanwhile, developing economies

display a consistently high demand or

automobiles. This is due to higher

economic growth rates and a considerably

lower car density index per 1,000 people

as compared to the developed economies.

Sales o light vehicles in major markets, thousands o units

Sources: LMC Automotive (ormerly J.D. Power); Ernst & Young estimates.

* Central and Eastern Europe (CEE) countries: Bulgaria, Bosnia-Herzegovina, Croatia, Czech Republic, Estonia,Hungary, Latvia, Lithuania, Macedonia, Poland, Rumania, Serbia, Slovakia, Slovenia, Turkey.

F2014

F2013

F2012

E2011

2010

2009

0 50,000 100,000 150,000 200,000 250,000 300,000

CEE*

Italy

UK

France

India

Germany

Brazil

Japan

US

China

Russia

Russia in the global

automotive industry

4| An overview o the Russian and CIS automotive industry Russia in the global automotive industry


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As an emerging market, Russia is still at

the stage o accelerated automobile

demand recovery ollowing a sales slump

o more than 1.5 million units in 2009.

Light vehicle sales in Russia increased by

39% in 2011 and by 30% in 2010. High

rates o Russian demand are largely due to

the car scrapping program, which was

implemented rom March 2010 to June2011, and pent-up demand. Russias

automotive market is the second-largest in

Europe, ater Germany, and has signicant

growth potential. The light vehicle density

in Russia is 250 cars per 1,000 people

compared to more than 500 cars in

Germany and more than 640 cars in the

US. However, in 2012, the Russian

automotive market is expected to

experience a slowdown related to the end

o the car scrapping program and the

leveling o the low base eect

1

due to highsale rates in 2010 and 2011.

1 Low base eect is the tendency o a small absolute change rom a low initial amount during the downturn to be translated into a large percentage change.

Light vehicle density, 2011

CountryPopulation,millions

Light vehicleeet, millions

Vehicledensity per1,000 people

US 313.43 201.41 643

France 60.26 31.54 523

Germany 81.75 42.14 515

UK 62.74 31.87 508

Poland 38.30 17.33 453

Czech Rep. 10.54 4.62 438

South Korea 48.39 14.22 294

Russia 141.84 35.50 250

Ukraine 45.19 7.93 175

Brazil 196.66 26.91 137

Turkey 73.64 7.80 106

China 1,345.95 66.57 49

India 1,241.49 14.02 11

Sources: IHS Global Insight; Datamonitor; AUTOSTAT research agency; Ernst & Young estimates.

An overview o the Russian and CIS automotive industry Russia in the global automotive industry |5


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In 2011, the Russian automotive market

demonstrated consistent growth, mainly

driven by increasing consumer condence,

receding unemployment, available car

lending programs, recovery o demand and

government support initiatives aimed at

boosting the post-crisis development o

the vehicle market. Sales o new light

(passenger and light commercial) vehiclesincreased by 39%, and sales o new heavy

vehicles increased by 35% as compared to

2010. At the same time, production o light

vehicles is estimated to have increased by

43% and that o heavy vehicles by 30%. A

shit in demand toward budget models is

noted, as well as a gradual recovery o

demand or premium-class cars.

Furthermore, the car scrapping program

implemented rom March 2010 to June

2011 had a strong positive eect on the

2011 sales dynamics.

The rapid expansion o the Russian

automotive industry in 2011 resulted rom

the post-crisis recovery o the Russian

economy and government support aimed at

stimulating the industry. These actors,

being demand-driving on the one hand and

production-boosting on the other,

contributed to the creation o new

production capacities and higher utilization

o the existing ones. The government plays

a key role in the recovery o the automotive

industry. Striving to improve the investment

climate and attract direct oreign

investment, the government is taking

measures to introduce changes to the taxpolicy, remove administrative barriers,

develop inrastructure, simpliy customs

procedures, provide investment guarantees

and co-nance investment projects.

One o the more signicant events in 2011

was when Russia signed the protocol o

accession to the WTO. Russia will become a

ull-fedged WTO member in mid-2012

ollowing completion o the respective

ratication procedures. An important

consequence o Russias accession to the

WTO will be a considerable reduction o

customs duties on vehicles in 20122018,

which could result in a certain shit in the

demand structure in avor o oreign

vehicles and increase their share in overall

sales.

Last year, the Russian automotive market

experienced signicant growth across

all segments, including production o

components and expansion o dealer

networks. Russia is noted or a

comparatively modest indicator

o car density per capita and a rather

considerable age o the vehicle feet.

These actors, together with the post-crisiseconomic recovery, increase in demand

and government support initiatives, lead to

the conclusion that the Russian automotive

market has considerable growth potential,

and that the pre-crisis level o sales can be

achieved in the medium term.

Russian automotive

industry

6| An overview o the Russian and CIS automotive industry Russian automotive industry


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In 2011, the Russian light vehicle market

continued to grow at a steady pace.

The total sales o new light vehicles and

light commercial vehicles in 2011 reached

2,653,408 units, which is 39% above the

similar indicator o 2010.

A rapid growth o sales was registered rom

January to June 2011, when the growthrate was 156% on a year-to-year basis.

The second hal o the year saw a slight

reduction in sales ollowing the end

o the car scrapping program3; however,

the dynamics against the previous year

remained positive. The growth rate or

the specied period amounted to 126%

on a year-to-year basis.

The key drivers o the sales growth

include:

Recovery o demand

Prolongation o the scrapping

program

Loan interest rate subsidies

Availability o car loans

Gradual recovery o demand

or premium-class cars

Optimistic 2011 sales orecasts made by

the OEMs and based on stable demand

growth in 2010 also contributed to rapid

growth in 2011.

It should be mentioned that Japans

disaster in March 2011 produced a negative

eect on sales o Japanese car brands rom

May 2011 to July 2011. However, the

infuence on the overall dynamics was

insignicant.

New light vehicle sales in Russia, thousands o units

Sources: Association o European Business (AEB); ASM Holding; AUTOSTAT research agency.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

20112010200920082007

2,414

2,897

1,466

1,904

2,653

Light vehicle

market2

2 Up to 3.5 tons, with several exceptions reaching the

highest range o 6 tons.

3 The car scrapping program lasted rom March 2010

to June 2011.

An overview o the Russian and CIS automotive industry Light vehicle market |7


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Sales o top oreign brands, units(including Russian-made oreign brands)

Source: AEB.

2011

2010

2009

0 50,000 100,000 150,000 200,000

Geely

Subaru

Land Rover

Lexus

Honda

Volvo

Chance

SsangYong

Audi

Citroen

BMW

Fiat

Mercedes-Benz

Suzuki

Mazda

Peugeot

Opel

Skoda

Mitsubishi

Daewoo

Volkswagen

Ford

Toyota

Nissan

KIA

Renault

Hyundai

Chevrolet

Russian brands registered a 12% sales increase in 2011 as compared

to 2010 and amounted to 732,311 light vehicles being sold. Key

actors contributing to the increase were loan interest rate subsidiesand prolongation o the scrapping program until the end o June

2011. However, the sales structure displayed a 6% decline in Russian

brands compared to 2010: rom 34% to 28%. Sales o Russian-made

oreign brands increased signicantly, exceeding the respective 2010

indicator by 61%. This is primarily attributable to the introduction o a

new industrial assembly legislation.

Light vehicle market, US$ billions

Sources: ASM Holding; Ernst & Young estimates.

Overall, the light vehicle market generated US$65 billion,4

demonstrating an increase o 55%. While oreign and Russian-

made oreign brands (US$57 billion) accounted or more than 88%

o this turnover, Russian brands contributed US$8 billion.

0

10

20

30

40

50

60

70

20112010200920082007

47

63

30

42

65

4 According to the estimates prepared by Ernst & Young.

8| An overview o the Russian and CIS automotive industry Light vehicle market


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Light vehicle sales, %

Sources: ASM Holding; Ernst & Young estimates.

*Preliminary estimates.

Russian brands

Imports of new foreign brands

Russian-made foreign brands

2009 2010

2011*

28% 34%

28%

46% 32%

34%

26% 34%

38%

Market share by brand in terms o volume, %

Sources: AEB; Ernst & Young estimates.

LADA

Chevrolet

Ford

Hyundai

Renault

KIA

Toyota

Nissan

Volkswagen

Daewoo

Mitsubishi

Other

24% 27% 22%

7%6%

7%6%

5%4%

5%5%

6%

5% 5%6%

5% 6% 6%5%4%

5%4%

4% 5%

3%4% 3%

3%2% 3%

3%3% 4%

31% 29% 29%

201120102009

Light vehicle sales by price segment (US$ thousands), %

Sources: AEB; Price-N; Ernst & Young estimates.

15

30

Russian brands

Foreign brands

2010 2011

2010 2011

8.5%

20.9%

3.3%

11.4%6.6%

18.5%

10.4%

22.2%

19.3%

8.7%

4.5%

30.7% 56.0%

8.0%

39.6%31.4%

34.8%

33.5%

4.8%

27.0%



12/28

Light vehicle production breakdown by volume, %

Sources: ASM-Holding; Ernst & Young estimates.

In 2011, light vehicle production continued

to expand, and the 2011 production growth

rate was 143% on a year-to-year basis.

The growth was largely attributable to an

increase in the output o Russian-made

oreign cars, which was 154% higher than

in 2010. Russian brands also demonstrated

a slight increase o 6%. All in all, more than

674,000 vehicles o local brands and about

1,053,000 vehicles o oreign brands were

manuactured in Russia last year.

Russian brands Foreign brands

53% 48% 39%

47% 52% 61%

20112009 2010

Changes o import duties as a result o Russias accession to the WTO*

Light vehiclesApplied beore accessionto the WTO

Upon accession to the WTO

2011 2012 2013 2014 2015 2016 2017 2018

New 30.0% 25.0% 25.0% 25.0% 22.5% 20.0% 17.5% 15.0%

Sources: Publicly available sources.

* Preliminary arrangements.

We have compiled a orecast or the

Russian light vehicle market or 201215

based on materials and estimates o

leading automotive analytical agencies and

our market understanding and insights.

10| An overview o the Russian and CIS automotive industry Light vehicle market


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Russian light vehicle production orecast, thousands o units

Source: LMC Automotive.

New light vehicle sales orecast, thousands o units

Sources: AUTOSTAT research agency; AEB; LMC Automotive; IHS Global Insight; Ernst & Young estimates.

We have compiled a orecast or the Russian light vehicle market or 201215, based on materials and estimateso leading automotive analytical agencies and our market understanding.


0

500

1,000

1,500

2,000

2,500

3,000

F2015F2014F2013F20122011

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

F2015F2014F2013F20122011

Key drivers o light vehicle production

in the next ew years will include:

Creation o new production capacity

Changes in the industrial assembly

regime

Trade policy promoting domestic

production

Recovery o the Russian economy

and, to a lesser extend, the economies

o the US and EU

Russias development strategy until

2020 will be aimed at replacing imports

with domestic production

Key drivers o light vehicle sales in the next

ew years will be as ollows:

Accession to the WTO (in 20122018

a signicant reduction o customs

duties on vehicles is expected)

Aging vehicle feet (the average age

o vehicles in Russia is 12 years;

in Europe it is 7 years)

Relatively low light vehicle density as

compared to developed automotive

markets (250 cars per 1,000 people

in Russia vs. 523 cars in France and

643 cars in the US)

Increasing number o car lending

programs provided by banks jointly

with OEMs



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In 2011, the Russian commercial vehicle

(CV) market continued its recovery on the

back o expanding energy and industrial

sectors. The sales volume o new

commercial vehicles increased by 35%

compared to 2010 to exceed 109,600

units, while the output increased by 30%.

CV production breakdown by volume, %

Sources: ASM Holding; LMC Automotive; Ernst & Young estimates.



89% 82% 84%11% 18% 16%

2011*2009 2010

Russian brands (GAZ, KAMAZ and others)

experienced a signicant increase in CV

production volumes. Domestic brands still

dominate in the structure o CV sales, asthey are more aordable or Russian

consumers. However, the ratication o the

protocol on Russias accession to the WTO

will result in a lowering o import duties on

commercial vehicles, which may lead to a

notable drop in demand or domestic

products and a signicant increase in

imports o commercial vehicles, especially

used commercial vehicles.

Besides, given the post-crisis market

growth, oreign producers assess the

prospects o the Russian CV market as

highly avorable. In 20092010, Scania andVolvo truck production acilities (assembling

Renault trucks as well) were opened in

Russia. In 2011, a number o manuacturers

conrmed their plans to develop business

in Russia:

On 11 March 2011, Naberezhnye

Chelny hosted an ocial opening

o the joint venture o Daimler and

OAO KAMAZ (Mercedes-Benz Trucks

Vostok). The rst jointly manuactured

truck rolled o the production line in

September 2011. The output wasinitially planned at 4,500 units per year.

German truck producer MAN plans to

launch a new CV production acility in

St. Petersburg in the rst hal o 2012.

The acility is planned to reach its ullproduction capacity (6,000 trucks per

year) within the next three years.

Dutch truck producer DAF is considering

organizing a production acility in

Russia with an output o 5,0006,000

units per year and is now looking

or a Russian partner able to organize

the assembly o trucks rom imported

components. DAF is holding

negotiations with entrepreneurs rom

various regions o Russia. No nal

decision has yet been oered.

5 Medium-duty and heavy commercial vehicles

(more than 6 tons weight and, in exceptional cases,

more than 3.5 tons).

Commercial

vehicle market5

12| An overview o the Russian and CIS automotive industry Commercial vehicle market


15/28

According to our market development

scenario, sales o commercial vehicles rom

20122015 will grow at a 14% annual rate.

The expected growth refects the generaleconomic recovery in Russia, the need to

upgrade the commercial vehicles feet and

the expansion o the lending and leasing

markets.

CV sales orecast, units

Sources: ASM Holding; LMC Automotive; Ernst & Young estimates.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

F2015F2014F2013F2012E2011201020092008

Changes o import duties as a result o Russias accession to the WTO*

Applied beore accession to the WTO Upon accession to the WTO

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Commercial vehicles (5-20 tons)

New 25% 15%

Used, less than 5 years 30% and additional rate o euro 2.2 per 1 sm3 10%

Used, 57 years Euro 4.4 per 1 sm3 10%

Used, more than 7 years Euro 4.5 per 1 sm

3

Euro 1 per 1 sm

3

Commercial vehicles (more than 20 tons)

New 25% 10% 5%

Used, less than 5 years 30% and additional rate o euro 2.2 per 1 sm3 15% 10%

Used, 57 years Euro 4.4 per 1 sm3 15% 10%

Used, more than 7 years Euro 4.5 per 1 sm3 Euro 1 per 1 sm3


* Preliminary arrangements.

An overview o the Russian and CIS automotive industry Commercial vehicle market |13


16/28

In 2011, sales o new buses in Russia grew

by 13% over 2010 and are estimated to

have reached more than 15,000 units,

while production volume also increased by

13% over 2010. It should be noted that the

growth rate o the minibus segment slowed

down (increase o 8% in 2011 as compared

to 10% in 2010), while the bus-on-truck-

chassis segment shrank by more than 30%.

In 2011, the share o city buses in

production continued to grow and

constituted nearly 40%. At the same time,the share o suburb buses decreased to 57%

(against 64% in 2009 and 60% in 2010).

However, suburb buses still dominate bus

production, and the shares o the intercity

and tourist bus segments continue to be

insignicant: 2.67% and 0.33% o total

production volume, respectively.

Dynamic o bus/minibus/bus-on-truck-chassis production, thousands o units

Sources: ASM Holding; Ministry o Industry and Trade o the Russian Federation; Ernst & Young estimates.

Buses on truck chassis Minibuses Buses

0

10

20

30

40

50

60

70

80

E2011201020092008

20.210.9 13.3 15.0

29.1

16.718.4 19.8

17.8

8.0

13.4 9.4

Bus production breakdown by segment, %

Sources: ASM Holding; Ministry o Industry and Trade o the Russian Federation; Ernst & Young estimates.


Suburb buses

City buses

Intercity buses

Tourist buses

2010

57.33%39.97%60.05%36.54%

2.67%

2011*

0.03%3.37% 0.03%

6 Mini buses and buses on truck chassis are excludedunless otherwise stated.

Bus market6

14| An overview o the Russian and CIS automotive industry Bus market


17/28

We expect the bus market to witness

a airly smooth recovery and to reach

pre-crisis production volumes in the

next ew years. Key drivers o market

development will likely be:

Need or bus feet renewal due to

a signicant existing gap between

the standard and actual renewal

o the bus feet

Greater availability o credit resources

in the context o the general nancial

situation in the Russian Federation

The major change that occurred in the

Russian bus market structure by origin is

the decrease in the share o Russian brands

due to the increase in the share o other

segments: locally assembled oreign

brands and new and used oreign brands.

This tendency is supported by the shit in

consumer preerences, since their

purchasing power increased.

Bus market breakdown by origin, %

Source: ASM Holding.


Russian brands

Russian-madeforeign brands

New foreign brands

Used foreign

brands

2010

58.80%

12.50%

72.50%

11.70%

22.40%

2011*

12.90%

2.90% 6.30%

An overview o the Russian and CIS automotive industry Bus market |15


18/28

The high potential or import substitution

related to the growth in oreign car

production in the Russian Federation

remains one o the main eatures o the

Russian automotive component market.

New players are expected to enter the

market since many automotive component

production segments witness a relatively

low level o competition. In addition, theRussian Government is supposed to

provide comprehensive support to joint

productions o Russian and oreign

partners or attracting new technologies

to the country.

In February 2011, conditions o the

industrial assembly legislation in Russia

were tightened or the purposes o

developing the production localization

program and encouraging the

modernization o existing production

capacities.

Currently, the Russian automotive

component market is still underdeveloped

due to a number o reasons:

Underdeveloped network o suppliers,

lack o competition and relatively low

product quality

Lack o innovative technologies that

would ensure the competitive advantage

o Russian companies

Lack o investments in R&D and

engineering skills to develop and

manuacture new types o components

Technological backwardness o the

majority o Russian component

producers

Lack o quality materials or component

production; despite the availability o

raw materials or producing necessary

elements, their production in Russia

is at a relatively low level, which orces

component producers to buy rawmaterials on global markets

At the same time, industry participants

highly appreciate the potential o the

Russian market, which can be explained

by the ollowing actors:

OEMs need high-quality components

that satisy the demands o consumers

The Russian Government continues to

support the automotive industry

through cooperation with international

manuacturers, which presupposes

increased employment opportunities

and technological process upgrading

A possibility to create joint ventures

between Russian and oreign OEMs

assumes sharing risks, immediate

access to the Russian market,

developing intramarket ties and

gaining necessary local experience

Dierent conditions or industrial assembly regimes

From 1 February 2011 Before 1 February 2011

New capacities Operating capacities

Annual output >300,000 vehicles >350,000 vehicles >25,000 vehicles

Investments intoproduction capacities

Obligatory construction or reconstruction Non-obligatory

Period o preerentialimports o components

8 years 7 or 8 years

Components to beproduced in Russia

Motors, transmissions,die-stamped body parts

Non-obligatory

Engineering centeravailability

Obligatory Non-obligatory

Localization degree 55% in 5 years 60% in 5 years 30% in 3 years

Industrial assembly in Russia is regulated by DecreesNos. 166 and 566 o the Government o the RussianFederation. New conditions or industrial assembly

have become eective on 1 February 2011. Accordingto the Ministry o Industry and Trade o the RussianFederation, 341 companies have already signed amemorandum o understanding.


Automotive

component market

16| An overview o the Russian and CIS automotive industry Automotive component market


19/28

We made a orecast o the automotive

component market size7

rom 2012 to 2015

based on the projections o leading

Russian and international market experts

and our market understanding. According

to the data o market experts, the average

annual growth in automotive component

consumption in Russia may be 15%30%

in the medium term. The structure o theRussian automotive component market will

change to increase the share o countries

with a well-developed automotive industry,

where the OE market/atermarket ratio will

be 70%/30%. By 2015, this ratio in the

Russian Federation may be 52%/48%.

Automotive component market, US$ billions

OE market Aftermarket

0

10

20

30

40

50

60

70

F2015F2014F2013F2012E2011201020092008

10.994.35

11.4417.03

20.49 23.0029.40 30.01

16.79

15.37

17.77

20.52

22.03

28.26

29.3732.51

Sources: IHS Global Insight; LMC Automotive; AUTOSTAT research agency; Ministry o Industry and Tradeo the Russian Federation; data o the market players; Ernst & Young estimates.

7 The automotive component market volume is determined by the amount o the cost o the components necessary or production (OE market) and the cost o components

necessary or ater-sales car service (atermarket).

An overview o the Russian and CIS automotive industry Automotive component market |17


20/28

The Russian car loan market saw

strengthening trends that were

in evidence in 2010 and continued

to surace in 2011. The trends included:

Decrease in interest rates

Less stringent requirements to

borrowers

Recovering condence on capitalmarkets

Excessive liquidity

These actors, coupled with the state

program or subsidizing car loan interest

rates (budget allocations totaled

RUB2.7 billion), triggered an increase

o passenger car credit sales by 51% over

2010. The total number o passenger

cars sold on credit in 2011 amounted

to 900,000 units, accounting or 33%

o the total car market in volume terms.

It should also be noted that the

government-sponsored car lending

program launched in 2009 as an

anti-crisis measure to support the Russian

automotive industry has entered the nal

stage at this time, and ended at the end o

the year (31 December 2011). Once the

program was completed (31 December

2011), the segment has seen the growth in

average interest rates and signicant

redistribution o market shares in avor o

captive banks owned by global OEMs.Increasingly tight competition will make

the majority o universal market players

redirect their businesses, which may cut

the share o car loans in their portolios by

hal within the next ve years.

Passenger car credit sales in Russia, millions o units and share o total sales

Sources: AEB; AUTOSTAT research agency; CBR; Price-N; RosBusinessConsulting (RBC); Association o RussianAutomotive Dealers (ROAD); Ernst & Young estimates.

Passenger car credit sales in Russia, fnancial value and share o total value

Sources: AEB; AUTOSTAT research agency; CBR; Price-N; RBC; ROAD; Ernst & Young estimates.

New car sales New car credit sales Credit sale share of total sales, %

0.0

0.6

1.2

1.8

2.4

3.0

20112010200920082007

0%

10%

20%

30%

40%

50%

2.4

47.5%

2.8

1.5

1.9

2.7

1.21.3

0.40.6

0.9

46.3%

26.4%

30.9%33.4%

Units(million)

New car market Car loans issued Credit sale share of total sales, %

0

20

40

60

80

20112010200920082007

0%

10%

20%

30%

40%

47.0

35.3%

63.1

29.5

42.0

65.0

16.6 19.0

7.813.0

21.8

30.1%

26.6%

30.9% 33.5%

US$(million)

Car loan market

18| An overview o the Russian and CIS automotive industry Car loan market


21/28

In 2011, the Russian automotive retail

segment continued to recover; industry

turnover was estimated at US$76.5 billion,

and the number o operating dealer centers

exceeded 4,000 at the end o 2011.

Currently, the increasing level o

competition in Moscow and St. Petersburg,

which is related to dealers desire tostrengthen their positions in central

markets, can be observed together with the

recovery o interest toward regions

showing that there is a potential or

investment activity in the segment. The

major Russian players that have been

rapidly developing since beore 2008 and

have managed to restructure their debt and

continue their operations are now seeking

to expand their geographic network in

order to increase their market share and

attain additional competitive advantages

as the industry develops. In addition,

international investors are visibly interested

in the industry.

At the same time, the Russian market

continues to witness a move to a more

"mature" business model, which means

ocusing on other prot centers. Following

the trend o creating developed markets,

most dealers secure higher prots

rom decreases in new vehicle sales

and increases in used vehicle sales and

ater-sale services.

At present, the dealer business is nanced

according to the ollowing trends:

Dealers seek to build long-term relations

with the principal bank.

Major market players are cautious about

going public.

Captive banks are more active in dealer

nancing and seek to increase theirmarket share.

I these trends continue to gain traction,

the high potential o the Russian

automotive market will trigger urther

development o dealership networks

and possible oreign capital infow in the

medium term.

Dealership networks

An overview o the Russian and CIS automotive industry Dealership networks |19


22/28

In 2011, the Russian light vehicle

transportation market continued its

growth. The increase in market volumes

was due to high growth rates in the

Russian automotive market. The share o

road transportation rose by 11% due to a

decrease in the shares o railroad and

shipping transportation and amounted to

81% o total car transportation volume.This is due to relatively low prices or such

transportation and problems related to

inrastructure development in Russia.

While the inrastructure is limited, the use

o motor vehicles enables companies to

provide door-to-door delivery services and

other light-load oerings. However, many

companies still utilize multimodal

transportation services, such as combined

car transportation modes, which include,

or instance, transportation by rack cars

and railroad container transportation. Butthe overall increase in vehicle usage has

lessened the demand on other oerings.

Since the vehicle transportation market

depends directly on sales dynamics, it

signicantly declined as a result o the

decrease in light vehicle sales by 49% in

2009. It should be noted that due to the

crisis, some carriers had to leave the market.

However, beore the 2008 crisis, logistics

providers were active in increasing their

capacities, or which purpose they otenresorted to credits and leases. Thereore,

a drop in demand or transportation

services, which was due to lower purchasing

power and business activity, resulted in the

carriers inability to ulll their nancial

obligations. As a result, leased equipment

and machinery had to be returned. Large

companies, which have ongoing established

relations with consumers and a balanced

debt burden, held a more stable position

during the crisis. A sharp decline in vehicle

transportation volumes in 20082009resulted in a low base eect that allowed

securing high transportation growth rates

in 2010 and 2011 ater the automotive

market began to recover.

The automotive logistics segment is

infuenced by certain constraining and

motivating actors. One o the constraining

actors is a limited ability to use nancial

and credit mechanisms or nancing

working capital and renewing the rolling

stock because o its high cost and, as a

rule, lack o collateral sucient or the

bank. Other constraining actors includebad road inrastructure, growing uel prices

and potential adverse changes in the

economic environment. The growth o

vehicle sales, increased length and

improved quality o inrastructure and

Russias accession to the WTO are among

actors motivating the development o the

automotive logistics market.

Forecasted growth rates o the Russian

automotive market suggest that

automotive logistics market volume will

also increase. However, growth will berestrained by a number o actors, the most

important o them being unstable demand

or lease services, increasing uel prices

and low quality o road inrastructure.

Structure o the Russian vehicle transportation market by mode o transport, %

Road transport

Railroad transport

Sea transport

Other

2010

81%

9%

70%

15%

5%

2011*

13%2% 5%

Sources: Rosstat; publicly available sources; IA CredInorm estimates.


Automotive

logistics

20| An overview o the Russian and CIS automotive industry Automotive logistics


23/28

An overview o the Russian and CIS automotive industry CIS automotive markets |21

In 2011, the automotive markets o

Belarus, Kazakhstan, Ukraine and

Uzbekistan demonstrated an upward

trend. Production was also characterized

by high growth rates in all countries,

except or Uzbekistan, where light vehicle

production volumes decreased slightly.

Ukraine

Ukraine is the second-largest light vehicle

market in the CIS. Ater an 85% decline in

2009, light vehicle production saw a

gradual recovery in 2010 and 2011.

However, pre-crisis production volumes

have not been reached yet. In 20102011,

light vehicle production grew due to

increased demand or light vehicles, which

is directly dependent on the purchasing

power o the population and on economic

growth.

Historically, demand or vehicles in Ukraine

is largely satised by domestic production.

As a result, production depends largely on

domestic market demand. The recovery

o demand or light vehicles in Ukraine is

underpinned by a low car density per

1,000 people, the high average age o

vehicles (about 10 years) and the growing

purchasing power index. However, thereare certain negative actors that give

reason to expect that in the short and

medium terms, light vehicle sales in Ukraine

will grow slower than in the pre-crisis

period. Such actors include increased

prices or imported cars, the consequence

o introducing higher import duties

(an increase rom 10% to 25%), high

infation and lower availability o car loans

as compared to the pre-crisis period.

Kazakhstan

Automotive vehicle production in

Kazakhstan demonstrated consistent

growth in 2010 and 2011 (260% and

112%, respectively), and sales increased

by 14% and 31%, respectively, mainly

due to the low base eect. Lada cars

assembled in Russia and Kazakhstan are

sales leaders, securing more than 40% o

the market, an indication that consumer

preerences are aimed at budget car

models. Despite a more than threeold

increase, domestic production volumes

remain relatively low, and more than 80%

o demand or light vehicles in Kazakhstan

is satised by imports.

CIS automotive

markets

Amount o light vehicle sales in selected CIS countries (units)

2008 2009 2010 E2011

Belarus 36,220 20,754 13,749 16,644

Kazakhstan 44,500 18,853 21,560 28,175

Ukraine 578,865 175,111 169,595 218,000

Uzbekistan 56,496 59,004 56,500 61,615

Total 716,081 273,722 261,404 324,434

Sources: IHS Global Insight; LMC Automotive.


24/28

22| An overview o the Russian and CIS automotive industry CIS automotive markets

Belarus

In 2011, car sales and production in

Belarus increased by 21%. While

production volumes continued to grow

(an increase o 41% in 2010), sales

demonstrated an upward trend or the rst

time since the beginning o the crisis. Like

Kazakhstan, Belarus is predominantly animport market due to underdeveloped

domestic automotive vehicle production.

Thereore, cancellation o VAT exemptions

on car imports and sales can result in an

overall growth in retail prices and

development o domestic vehicle

production.

Uzbekistan

Uzbekistan remains the largest automotive

vehicle producer among the selected

countries. It is necessary to mention

conficting trends in the number o

manuactured and imported cars in

Uzbekistan: in 2011, production decreased

by only 0.8% and sales increased by 9.1%over 2010. Cars manuactured domestically

still dominate in the light vehicle sales

structure. Their share varies rom 85% to

95%. This situation can be explained by high

import duties and excise taxes as well as a

ban on providing car loans or the purpose

o purchasing an imported car.

Amount o light vehicle production in selected CIS countries (units)

2008 2009 2010 E2011

Belarus 240 161 227 275

Kazakhstan 3,271 878 3,160 6,712

Ukraine 415,487 62,571 79,073 101,512

Uzbekistan 195,038 205,011 217,533 215,754

Total 614,036 268,621 299,993 324,253

Sources: IHS Global Insight; LMC Automotive; ASM Holding.


25/28

As a leading proessional services provider

in the automotive sector, Ernst & Young

has been at the oreront in advising on the

pressing challenges aced by industry

players.

Today, we have more than 152,000 people

in 140 countries. Ernst & Youngs

Automotive practice includes more than7,000 proessionals, serving more than

1,500 automotive clients.

Our CIS Automotive Group, supported by

the network o Ernst & Youngs Global

Automotive Center, provides consistent

and high-quality service to our automotive

clients in the CIS.

Our clients

Globally, Ernst & Young provides

assurance, tax, transactions and advisory

services to many o the worlds leading

automotive businesses:

Ernst & Young is the leading auditor

o the worlds largest automotive

companies on the 2011 Forbes Global2000, auditing 24 o 70 automotive

companies (34.3%).


o automotive companies on the 2011

Fortune 1000 in terms o companies

audited (33.3%).


o automotive companies on the 2011

Russell 3000 in terms o companies

audited (32.4%).

With the opening o our Moscow oce

in 1989, we were the rst proessional

services organization to establish

operations in the CIS. We currently

have more than 4,000 people working

in 18 oces in eight countries o the CIS.

Ernst & Youngsinvolvement in theautomotive industry

An overview o the Russian and CIS automotive industry Ernst & Youngs involvement in the automotive industry |23


26/28

Contacts

Alexei Ivanov

Assurance

Tel: +7 495 228 3661

[email protected]

Je Henning

Global Automotive Markets Leader

Tel: +1 313 628 8270

[email protected]

Ivan Bonchev

CIS Automotive Leader,

Transactions

Tel: +7 495 755 9817

[email protected]

Michael Hanley

Global Automotive Leader

Tel: +1 313 628 8260

[email protected]

Denis Kamyshev

Advisory

Tel: +7 495 662 9341

[email protected]

Andrei Ignatov

Tax

Tel: +7 495 755 9694

[email protected]

Aisulu Narbayeva

Tel: +7 727 259 8302

[email protected]

Russia

Global automotive center

Central Asia

Ukraine

Dmitriy Litvak

Tel: +380 44 490 3021

[email protected]

24| An overview o the Russian and CIS automotive industry Contacts


27/28


28/28

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction

and advisory services. Worldwide, our 152,000 people are

united by our shared values and an unwavering commitment

to quality. We make a dierence by helping our people, our

clients and our wider communities achieve their potential.

Ernst & Young reers to the global organization o member

irms o Ernst & Young Global Limited, each o which is a

separate legal entity. Ernst & Young Global Limited, a UK

company limited by guarantee, does not provide services to

clients. For more inormation about our organization, please

visit www.ey.com.

2012 EYGM Limited

All Rights Reserved.

EYG no. ED0052

How Ernst & Youngs Global Automotive Center

can help your business

The global recession reset the automotive industry landscape.

As the industry recovers, automotive companies across

the value chain must ocus on proitable and sustainable

growth, inancial and operational stability, investments in new

technologies and seizing opportunities in high-growth markets.

I you lead an automotive business, you need to anticipate

trends, identiy implications and make inormed decisions that

support your business goals. Our Global Automotive Center

enables our worldwide network o more than 7,000 industry-

ocused assurance, tax, transaction and advisory proessionals

to share powerul insights and deep sector knowledge with

businesses like yours. These insights, combined with our

technical experience in every major global automotive market,

will help you to accelerate strategies and improve perormance.

Whichever segment o the automotive industry you are in

rom component suppliers to commercial or light vehicle

manuacturers or retailers we can provide the insights you

need to realize your potential today and tomorrow.

This publication contains inormation in summary orm and is

thereore intended or general guidance only. It is not intended to

be a substitute or detailed research or the exercise o proessional

judgment. Neither EYGM Limited nor any other member o the

global Ernst & Young organization can accept any responsibility

or loss occasioned to any person acting or reraining rom action

as a result o any material in this publication. On any speciic

matter, reerence should be made to the appropriate advisor.

russia automotive 2012

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